Cardtronics plc
Q3 2014 Earnings Call Transcript

Published: 30 Oct 2014

[Operator:]

Good day, ladies and gentlemen, 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. (Operator Instructions) As a reminder, this conference call is being recorded. I’d now introduce your host for today’s conference Phillip Chin, EVP Corporate Development and Strategy. You may begin.

[Phillip Chin:]

Thanks, good afternoon, and welcome to Cardtronics Third Quarter Conference Call. On the call today we have Steve Rathgaber, Chief Executive Officer; and Chris Brewster, Chief Financial Officer. Steve will start off with an overview of our third quarter results, followed by Chris with additional details on our performance. We will then open it up for Q&A. 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, performance may differ materially. Any forward-looking statements are based on current information only and we assume no obligation to update these statements. 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 this afternoon. With that I turn the call over to Steve.

[Steven Rathgaber:]

Thank you, Phil, and welcome, everyone. First, let me take a moment to acknowledge Phil Chin and his expanded role with Cardtronics. Phil as you may know is our EVP of Corporate Development and Strategy. We have asked Phil to take on the additional role of Investor Relations for Cardtronics. Given his background in investment banking and his current roles in strategy in M&A we thought he was the perfect candidate to broaden our investor relations capabilities. He will work closely with Chris and I on all IR matters and be another available resource for investor discussions. Moving on to earnings, I’m pleased to report that Cardtronics has closed another strong quarter. The growth story continues with our 22nd consecutive quarter of double-digit adjusted EPS growth. Key results compared to the third quarter of 2013 include revenue growth of 16%, adjusted EBITDA growth of 13% and adjusted earnings per share growth of 16%. It has been a busy and productive quarter and let me focus on a few highlights. We delivered on unit growth with sequential additions of almost 1,680 company owned and major account managed services ATMs in the quarter, proving the quality of our pipelines which continue to remain strong across multiple countries. We delivered several new marquee account sales with the addition of American Express as a user of our Allpoint services and discover as a branding partner at more than 300 of our ATMs. And we supplemented this with additional branding deals for eight clients with about 200 more sites. For financial institution and retail clients, we continue to roll out our Siteline Enterprise Data Warehouse offering. We presented a case-study at the recent PayThink conference on our renewed branding partnership with BBVA with our branded ATMs at a well-known grocery store chain in Texas. Using Siteline to compared activity at these newly branded ATMs prior to branding and after branding we observed the following. The number of BBVA cardholders using the ATMs increased five-fold in five months. First time BBVA users of these ATMs increased 300% and the number of repeat users increased by more than 1300%. Overall, frequency of ATM use from all these new participants increased by 30% at these grocery locations. These results demonstrate the demand for cash access by BBVA cardholders that was not being fully met by their braches. And we delivered a larger set of data to BBVA that gave them new sights into their cardholders’ behaviors on a highly segmented basis. This is one example of the differentiated sophisticated value that Cardtronics is bringing to our FI partners. We continue to enjoy the reactions we get form clients each time we show them Siteline information. It is always a wow moment. Cardtronics is the only ATM operator to have this kind of enterprise data warehouse. We are constantly improving our ability to use it as a tool to plan marketing campaigns with our retail and FI clients to drive more sales and more loyalty for our customers. In 2014, we have so far deployed more than 60 distinct marketing campaigns across 14 retailers in more than 10,000 ATMs. As we continue to enhance our skills and demonstrate real value to our customers we believe the benefits to our shareholders will be substantial. But there are additional steps in our strategy to create value for our clients beyond ordinary cash dispensing. We now have operating an early pilot testing, our new ALLTM product. Now, I wouldn’t call ALLTM our Apple Pay, although it does leverage the mobile phone. I would however call it the next installment in a family of products designed to deliver more value for the retailer, the consumer, and the financial institution. Our ALLTM pilot with Fresh & Easy in the Phoenix market includes a display of in-store promotional office on a large digital screen atop the ATM, as well as delivery of these promotions to consumers through a mobile app. Early results are encouraging with coupon redemptions delivering benefits to consumers who use the ATMs and to our retail partner Fresh & Easy through expanded in-store spend. The ALLTM is Cardtronics’ version of bringing together and digital or mobile access like no one else in the market is doing today. Others focus on converting form-factors of plastic credit-cards to digits in mobile wallets. Other payment industry players work to increase the expense of payments to retailers by driving more credit-card transactions and by adding yet another third-party hand in the transaction till for a piece of the purchased ticket. Our goals with our offerings are simple and focused on the needs of our constituents. They include driving sales to retailers and being able to prove it, providing consumers with not only the most convenient ATM access but the most valuable ATM experience available. They get more than cash, they get savings and delivering value to financial institutions with an off-branch foot print that provides every FI the opportunity to offer their customers, the most convenient and the most valuable ATM access, which is somewhat counter-intuitively is accompanied by additional debit card spend at the point of sale. We simply want to strengthen ties between the consumer, or retailers and our FI partners. We were also busy in the quarter harvesting our acquisition pipeline and that work bore fruit in this current quarter with the closing of Welch ATM and the pending close next week of SSG, a subsidiary of the Co-op Group. Each of these acquisitions is a key milestone in our global and diversification strategies. Welch delivers an additional 26,000 merchant-owned and company-owned ATMs, 7,000 of these are company-owned. And when added to our 30,000 US-owned terminal fleet, our company-owned ATM footprint provides more than three times the location convenience to consumers far more than any single financial institution does from the branch placement model. In fact, our 37,000 owned ATM locations in the U.S. provide more discrete locations than the nation's top three finance institutions combined. And we believe, convenience is a critical value for today’s consumer. But as important as the locations are, Welch also provides additional ATM expertise in critical areas with a quality management team and staff. Jeff Hewitt and his team are talented industry professionals, and we’re counting on their sales capabilities with the medium and smaller FIs to supercharge our branding model. Time will tell, but we’re bullish on our ability to brand many more location with a variety of FIs in a variety of local markets. The SSG acquisition is also multidimensional and it benefits to Cardtronics. We get an opportunity to optimize the efficiency of our historical investments in cash and transit and ATM maintenance. And our expanding relationship with the Co-op Group delivers a seven-year exclusive agreement to operate more than 1,800 high volume ATMs starting in January 2016, plus we get immediate access to more than 500 locations in their stores today do not carry an ATM. We diversify revenue globally and increase our scale and execution capabilities in the UK. As we sit today, I'm confident in declaring that no one can provide the quality of service, the breadth of convenient locations, and the low cost of operations that Cardtronics can. As evidence of this, in September, Cardtronics UK achieved two noteworthy milestones. The first was a transaction volume record of more than 1 million withdrawals for a single day. On a recent September Friday, approximately 16% of all consumers in the UK, who used an ATM somewhere other than their own bank, did so at a Cardtronics ATM. Additionally, September was a record month for installations with 250 ATMs in the UK alone. We’re proud of our progress in the UK and we like our pipeline in our current markets there. As we think about continued growth from our European division, you can also expect Cardtronics to enter an additional European market in the first quarter next year. But no company gets the benefit from tailwinds alone. We also have headwinds to face each year. In the last two weeks, our largest branding partner Chase communicated to us that they will not be renewing their branding agreements with us. This will result in some unanticipated headwinds for 2015 as many of their agreements expire at the end of 2014. We do expect near-term grow over challenges resulting in some negative impact on our 2015 results. The exact impact is unknown to us at this time because of a variety of factors like retention of cardholders willing to pay a convenience fee. The best current thinking is they will have essentially no impact on 2014 revenues and profits, and that the impact for 2015 revenues is expected to be less than 1% of total revenues for that year. Gross profit impact is still being estimated, but best current thinking puts that at less than 1.5%. But Clouds have silver linings, and it is noteworthy that the terms and conditions of this 11-year old agreement were not designed for today’s environment. So the loss while regrettable, is a loss of one of our least profitable and most constricting branding deals. And with these high-quality locations now in play, I see upside ahead, as we fill these sites with our new strategic model. Finally, I would like to address the 8-K filing we issued last week. Mike Clinard, our President, Global Operations has announced that he is leaving Cardtronics in the first quarter of 2015 to pursue the next chapter in his life and career. Mike joined Cardtronics when they were two ATMs, and he laid the foundation for what Cardtronics has become today. And he would, of course, tell you that it was not him, but the team. But his ethics, passion, and commitment to excellence have been significant drivers in creating what is now the global leader in ATM delivery and deployment. I cannot thank him enough for the impact he has had on our business and on our lives. The team at Cardtronics will miss him, even as we work extra hard to make sure that you, the shareholders do not. And now, I’ll turn it over to Chris Brewster, our CFO, to provide a bit more color on the numbers.

[Chris Brewster:]

Thank you, Steve. Steve related the headline to you just in brief, revenues up 16% in the quarter, adjusted EBITDA up 13%, and adjusted net income per share at $0.64, up 16%. And what I would like to spend a few minutes during is take you behind the numbers and give you some perspective on what helped us generate those results. First thing I would say is, we did cycle on the Cardpoint UK acquisition in August of this year, so total revenue growth rate was down a little bit from what you saw in the two previous quarters, but not shabby certainly at 16%. Of that 16 points of revenue growth, acquisitions contributed 7%, currency changes contributed about 1%, and our constant currency organic revenue growth was 8%, so squarely in our targeted high single-digit range. That 8% of organic growth consisted of a 1% contribution from growth in our equipment sales business and 7% growth from our core ATM operating revenues. Factors that contributed to that latter result include the following. First, solid growth in the European region, where organic growth was about 8% for the quarter, primarily as a result of new merchant contract wins over the course of this – the last few quarters. Secondly, revenues in our Canadian business grew at more than 20%. In that case, as a result of some new merchant contract and branding contract wins in that geographic segment. Our U.S. business was also solid, driven largely by growth with our existing merchants, where we had strong unit count growth with several of our large merchant partners. Average unit count in the U.S. company-owned business with major merchants was up by about 1,500 units, or about 5% in the quarter this year versus last year. Finally, while our U.S. same-store transaction growth was up about a 0.5% in the quarter, our U.S. same-store revenues were up about 2% driven principally by growth in Allpoint transactions and growth in our bank branding revenues. And I think this further illustrates the fact that, Cardtronics has multiple pathways to drive revenue growth over time. Turning to gross margins, you’ll notice in our earnings release that we provided you both with a GAAP view and an adjusted view of margins for the quarter. And the reason we did that was because of an issue in the quarter last year, where we reported about $9 million charge for retroactive property taxes in the UK. If you exclude this one-time item from the prior-year period, consolidated gross margins for the quarter were up slightly at 33.7% this year versus 33.6% in the quarter last year. However, growth in our low margin equipment business drove consolidated margins down a bit in the quarter by about 40 basis points and incremental interest rate swap expense related to hedges that became effective this year cost us about 100 basis points of gross margin or put in different way, the core business was able to offset all of that margin pressure and actually grow margin slightly, and this is reflective of our ability to leverage scale and realize synergies on acquisitions. SG&A expense as a percent of sales was up a bit from 9.2% last year to 10.4% this year. We – as you know, we’ve made significant investments over the last year in our enterprise growth function and in our IT and finance functions. We’ll begin to cycle on many of these investments and are expecting more flattish SG&A costs as a percent of revenue as we move forward. Further down the P&L, interest expense was about flat year-over-year, although there were a number of moving parts within that line. First, we took advantage of favorable credit markets and completed the $250 million private placement of 5.8% coupon bonds in July. These new bonds allowed us to retire the 8.25% bonds that we had outstanding previously, but that was not able to be accomplished until early September. So we had two bond issues outstanding in part of July and for all of August. Also, through the new $250 million bond offering, we essentially substantially prefunded the Welch acquisition, which didn’t close until early October. As a result, we had well over $100 million of extra cash on hand for a couple of months and we suffered the incremental interest expense associated with that. That cost us about $1.3 million, or about $0.02 of adjusted earnings per share in the quarter. That extra cost is now behind us, and I'm happy to – certainly happy to – about the fact that, we did go to market when we did, because I think the 5.8% interest rate that we achieved was a fine outcome for the company. Adjusted earnings per share came in at $0.64 for the quarter, up 16% from the same period last year. Without that extra $0.02 of temporary interest expense, EPS would have been up 20% in the quarter. Turning briefly to the balance sheet, our ratio of net debt outstanding to trailing 12-month adjusted EBITDA at September 30, was 1.1 to 1. Total debt outstanding was $542 million, and we had $141 million of cash on the balance sheet as of September 30. However, we closed the Welch acquisition in early October, and we'll close on the Sunwin acquisition next week. So what's probably more relevant to you is, where we will be after that second transaction closes – the Sunwin transaction next year. We will have used up our excess cash. We'll have about $125 million drawn on our $375 million bank revolver and our ratio of net debt to pro forma EBITDA will be around 2.4 to 1. So I think, it’s fair to say that, we continue to be positioned with moderate leverage and with plenty of liquidity and excess to capital for additional growth investment opportunities. So now I would like to turn to the 2014 guidance, and I'll quickly run through our updated expectations for the key financial measures. These figures do include the expected contribution from the Welch and Sunwin acquisitions. We're now expecting revenues to range from $1.04 billion to $1.05 billion. We're expecting a full-year gross profit margin of approximately 33.0%. To get into the detail of that, I expect Welch and Sunwin to contribute together about $30 million in revenues in the fourth quarter. However, Welch and Sunwin aren’t expected to be significantly added to adjusted earnings per share in the quarter since they will be just in the door and we will not have had any significant time to harvest the expected synergies in their first quarter out of the starting gate with us. The Sunwin business will come in the door with gross margins that are quite a bit below our corporate run rate. Margins in the high single-digit range at the gross margin line, which is the main factor in reducing our expected full-year corporate gross margin percentage slightly from the nine-month result of 33.3% to the 33.0% that we expect for the full year. The primary margin and benefit from the Sunwin acquisition will materialize as we integrate their ATM cash delivery and maintenance operations with our own over time and most particularly as we take over the ATMs in around 1,800 Co-op Food stores in the UK, which we're contracted to do in January of 2016. The Welch acquisition is expected to come in the door – has come in the door with gross margins and EBITDA margins that are similar to our corporate averages. However, we expect bottom line margins at Welch to be below our corporate average in the near-term because of higher depreciation expense as a percent of sales in that operation. On the adjusted EBITDA measure, as we move further down the P&L, we're expecting $251 million to $253 million. We expect depreciation expense of about $78 million, cash interest expense of about $200.5 million, and full-year adjusted net income per diluted share to be in the range of $2.31 to $2.34, and that’s based on having approximately $44.9 million diluted shares outstanding. We are leaving our capital expenditure guidance unchanged with a range of $100 million to $110 million for the year. So that’s it for 2014 guidance. With regard to 2015, we're not planning to provide 2015 guidance now as we have not completed our very detailed budgeting and planning exercise yet for next. So as we usually do, we're going to defer 2015 guidance until we complete those processes and can provide you with a very complete and well-grounded picture, which we expect to be able to do on our fourth quarter earnings call in early February. So, operator, with that, we would now like to open the call up for any questions that our listeners may have.

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Andrew Jeffrey of SunTrust. Your line is open.

[Andrew Jeffrey:]

Hi, good afternoon, guys. Thanks for taking the question. I guess, Steve, I'll start with Chase and the branding deal there. Could you – forgive me, if I missed it. Could you mention how many machines Chase had branded and kind of what the timeframe would be for rebranding those ATMs?

[Steven Rathgaber:]

We didn’t say that specifically, but they are all our largest branding partner in terms of the number of machines branded, no they aren’t actually not a larger branding partner, I take that back. Citi is with the 7-11, right?

[Chris Brewster:]

That’s right.

[Steven Rathgaber:]

So, they are our second largest branding partner. But there is a – the contracts largely expire, not completely at the end of this year December 31, and we would be working to fill up those site as quickly as we can. What I would say, Andrew, is that, the nature of how we fill them up is likely to be different. And the point that, obviously, it’s regrettable when you lose a piece of business, but the point that I find great optimism in is the fact that, we can now with the way we are deploying capabilities at ATMs turn these ATMs into our current strategic model versus a model that was much more constrained. So said it differently, fewer ATM brands could be equally – fewer ATMs branded could be equally or more profitable in terms of the way we see the future unfolding and in terms of the way we deliver value to the retailer. But that’s not the same as answering when I will have all of those sites rebranded, but obviously, we will keep you posted as time marches on. It is one of the reasons we are excited to have Welch, because they give us an opportunity to work the lower end of the market, as well as our traditional experience at the higher end of the market for bringing in branding customers. And we are delighted at the timing that they revived in, and they look at this kind of opportunity as a huge opportunity to move quickly on. So we will keep you posted, but can't really say more than that at this point.

[Andrew Jeffrey:]

Okay. And – but I assume your – the revenue impact that you cited less than 1% of revenue assumes some timeline for initial rebranding, is that a reasonable expectation?

[Steven Rathgaber:]

Yes.

[Andrew Jeffrey:]

Okay.

[Chris Brewster:]

Yes.

[Andrew Jeffrey:]

And on the American Express Allpoint deal, what are the characteristics of that? Is that going to be mostly cash advanced business, or is it for the serve product, and how does that compare with the traditionals at a community bank branding deals you’ve done or the Allpoint deals you’ve done in the past?

[Steven Rathgaber:]

So it is a deal that has – is for certain subset of Amex card, so it’s not like, their credit cards are involved, that is not the issue. But they do have certain programs that they do with partners in the prepaid space and in the serve space, and I would put this participation in that family of product. So it is not – you shouldn’t think of it as cash advantage, you should think of it as traditional sort of card.

[Andrew Jeffrey:]

Got it. Okay, that’s helpful. And then one last one, if I may, Chris, could you just comment, it sounds like your U.S. same machine transaction growth picked up a little bit in the quarter compared to what it was in the last couple of quarters. Could you just comment on foreign ATM fees and how you think those are trending and how they might impact that metric going forward?

[Chris Brewster:]

Well, I have to almost stretch a point a bit to say that it picked up a bit. It may have picked up about 0.1 percentage point or something like that. And so, I'm not one to stretch that 0.1% that far.

[Andrew Jeffrey:]

You can leave that to the sell-side, I guess.

[Chris Brewster:]

All right. I'll do that. The – I mean that is – that’s our best judgment at this point, Andrew, is that, we are being impacted by the fact that that many banks, particularly the very large banks have increased their foreign fees over the last a little while here, in some cases, putting foreign fees in place on accounts that didn’t have them in the past or in other cases, raising them. And we – although, we can't sort of directly prove it, if you will, intuitively, we believe that that’s having an impact on us.

[Andrew Jeffrey:]

Okay. And no change in those trends that continue to be – you didn't see those fees go up?

[Chris Brewster:]

Well, I'm – I think there might be some evidence that we're starting to see a plateau.

[Andrew Jeffrey:]

Okay.

[Chris Brewster:]

But I guess, the prudent person would continue to kind of watch that space for further detail.

[Steven Rathgaber:]

We do track everybody's fees in the top banks, so I could almost recite to you who charges lot for what sort of thing. And one wonders, how much more space there can be there quite frankly.

[Andrew Jeffrey:]

Right.

[Steven Rathgaber:]

This is one of these unintended consequence of all other bank fees being targeted by the various oversight organizations. This one nobody seem to be watching, so it has tended to flow to the left a year or two up, but impossible to know what the banks will do.

[Andrew Jeffrey:]

Okay, perfect. Thanks, appreciate it.

[Steven Rathgaber:]

I think, I might add quickly, Andrew, that, it may be a manifestation of – there are various manifestations of the cost pressures that are impacting banks, some of which work to our advantage and some don’t. I mean, foreign fees don’t particularly work through our advantage, branch closings do. And there is certainly a trend in bank branch closings as well. And we think our software that we've invested in, in terms of allowing multiple banks to effectively enjoy a branding experience at a single ATM, we think this is sort of a perfect time for that to become more and more valuable for folks as those branch closings do pickup.

[Operator:]

Thank you. Our next question comes from Ramsey Al-Essal of Jefferies. Your line is open.

[Ramsey Al-Essal:]

Hi, guys. On – back on Chase momentarily, what was the reason they sort of gave for pulling back here, just like Bank of America with Valera, just sort of deemed non-core at this point, and they are sort of pulling back in general, or did they give any type of reason that you can share as to why this is happening?

[Steven Rathgaber:]

Well, it’s difficult for us to comment on Chase's decisions for what they do. Having said that, I think that individual super large banks have agendas to manage to, that might have things to do with things like efficiency ratios. There might be expense control issues that are challenges. And I think that when you look at any of the top tier banks, it is difficult – extremely difficult to extract a pattern from any of these decisions. I think we have a singular circumstance here, it’s our understanding that it is not a record at Cardtronics, but more broadly an issue with what they are doing with some of our premise relationships that they have broadly with the few exceptions I don’t expect to see them move away from airports or certain other locations, but it is not just the Cardtronics issue, it’s our understanding. But it’s just difficult to explain other than if one looks at efficiency ratios and things of that nature, you might get some insights. But that’s answered by Chase, not by Cardtronics.

[Ramsey Al-Essal:]

Okay, fair enough. You guys have announced some nice deal wins in terms of incremental ATMs, there is also the co-op, 500 locations you mentioned that you can sort of target at this point. How is the implementation going across your backlog? You still feel confident about getting a lot of the stuff rolled out in the near to medium-term or can you comment a little bit on that?

[Steven Rathgaber:]

I think, we talked about the third quarter push through in terms of conversion and that was substantial a very strong quarter. And we think that the pipeline for conversion is good, we expect that the fourth quarter will continue to be active, allowing our ways for holiday free sort of areas for moving around in certain retail environments. So you always have to put that caution on the fourth quarter. But we think, we'll exit the fourth quarter with a nice pipeline of conversion activity, and I know, we are entering the fourth quarter with a nice pipeline of conversion activity. So it’s business as usual in those respects.

[Ramsey Al-Essal:]

Okay. Last one from me is on the closing of the Welch deal, I noticed you guys put out in the press release on, FDC approval of the deal. Is your size, your growing scale in the U.S., is that something that’s been picked upon by any regulators looking at these larger deals, maybe has there been any change in term there versus previously or they just business as usual?

[Steven Rathgaber:]

Again, difficult to explain what goes on in other's mind? But I would say is that, while our size matters, I don’t think we encountered anything on toward. So it’s in the unique market, and I think our size caused a little more investigation into some of those market attributes. But when you look at our transaction share, when you look at our ATM share relative to all the ATMs in the United States, when you look at how businesses won or lost in these things with certain bank relationships. I think, it was reasonable to conclude that we don’t, in fact, represent something disproportionate in what we consider our market.

[Ramsey Al-Essal:]

Got it. That’s great, guys. That’s all from me. Thank you.

[Steven Rathgaber:]

Thank you.

[Operator:]

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

[Robert Napoli:]

Thank you. Good afternoon. On the acquisitions – the SSG acquisition is a bit different, the security – cash security maybe some thoughts on what I would imagine that’s a low margin business that could bring down margins in 2015, in the fourth quarter? And what are – what strategies are around that, how can you capitalize half of that piece of the business?

[Steven Rathgaber:]

Well, let me take, Bob, the first – the last part of your question, and I'll let Chris talk margin stuff. But I think there is an opportunity, so I described to you in the remarks today that 16% of the UK population that did an ATM transaction on this particular Friday in September, used their Cardtronics ATM. 16% of the population not including on bank transaction activity just to be clear. That is a remarkable statement of scale and a remarkable statement of scope and size and penetration and the breadth of our fleet. And the – one of the banks this acquisition does is gives us an opportunity to optimize investments we've already made in cash and transit and ATM maintenance groups and all the rest. So I would think of it in terms of two stages. One is optimization of the services we provide and optimization to find very much as core efficiency. And the second, I would put into a bucket for the time being of just creative opportunities in the future on what to do with these assets to create additional shareholder value. And – but to your point in the short-term, there is some margin drag, but I'll let Chris get into that for a bit here.

[Chris Brewster:]

Well, I will put it this way, Bob. If we simply did the acquisition and then did nothing with it if you will in terms of nothing to integrate or otherwise take advantage of the opportunity. But just did the acquisition and did nothing with it. It would dilute our margins by – our gross margins by a little bit less than a percentage point, but that’s obviously not the intent. We – part of the reason certainly why we did this series of transactions is the fact that we're also very interested in being the operator of the ATMs in the Co-op Food stores, which is yet to come. And the other thing we may see in the future in the UK is an ability to begin to build a managed services business in that geography, operating – in one form or another operating ATMs on behalf of others and having a truly significant now operation that provides ATM maintenance and ATM cash transportation services along with what we already do in terms of providing installation services, transaction processing, all of the monitoring and uptime management and general program management. It’s a pretty powerful offering and we will literally be doing just about everything except manufacturing hardware which we have no intention of doing. But it really makes us a one-stop shop in a pretty powerful way for servicing out of branch ATMs and that in itself may lead to some business opportunity.

[Steven Rathgaber:]

And it works just with the size of the country in terms of pulling all that stuff together. It’s not something that we’d try to do in the U.S.

[Robert Napoli:]

Thank you. You mentioned a new market in Europe. It’s the – would it be in Western Europe and would you do it through acquisition? Is there a platform acquisition to go into the market or is this that you expect to do this in a de novo basis?

[Steven Rathgaber:]

I think we’ve been working over the past quarter to build out some capability. I would call it on a de novo basis. And I think you’ll see us, like I say, enter that market in the early part of the first quarter next year and we’re excited about it. We think you guys will be too.

[Robert Napoli:]

And I mean, is that the expectation to go into many different European markets. It seems like being in a lot of different markets really helps build dynamic currency conversion, revenues and you get higher interchange revenues cross-border, things such as that?

[Steven Rathgaber:]

Yes, I mean, the reason for the European division. We just don’t talk about the UK and Germany alone. The reason for the European division is to basically grow in that space. We got as you know a very talented team over in the UK that is managing the European theater for us. And we see growth. We see an opportunity, in selected countries, not everyone but certain markets are more prime than others, but we see an opportunity to grow and we’re going to seize that opportunity. We’re going to grow within countries and we’re going grow into new countries. That’s what we’ve done recently and that’s what we’ll continue to do.

[Robert Napoli:]

All right, thank you.

[Operator:]

Thank you. Our next question comes from Michael Grondahl of Piper Jaffray. Your line is open.

[Michael Grondahl:]

Yes, thanks, guys. The first question, just with your Allpoint network, could you guys comment on the transaction growth you’re seeing there year-over-year in sort of the customer growth?

[Chris Brewster:]

The Allpoint transactions on our terminals, Mike, were up about 9% year-over-year. We’re not seeing the sort of double-digit growth rates that we saw in the earlier days of the adoption of prepaid cards but nonetheless seeing high single-digit growth. And that’s a stat I have at my fingertips. I don’t have at my fingertips the total number of Allpoint financial institutions at this point.

[Michael Grondahl:]

Okay. And then maybe just secondly, I think the last call or two, you guys have commented about three or four regional banks that were sort of testing or experimenting with $3.5 or $4 surcharge fees. Have you seen any other updates there or what are you kind of seeing on that pricing situation?

[Steven Rathgaber:]

About what you said, we do have a relatively comprehensive list of what everybody seems to be doing that we just sample from time-to-time and we see no retreat from those higher prices and we see an increase in those prices, marginally, it’s not gone from four banks to 400 but we are seeing the ceiling being pushed gradually. And we think that that’s a good thing for us. It enhances the value of Allpoint, it enhances, creates a new ceiling for us to follow with. But again, we don’t seek to be a leader in that space we like sort of the follower role there and we also think though that there is an opportunity over the next year or two to do some modest incrementing on the surcharge line. Not looking to do those dollar leaps, but certainly modest increases could be possible.

[Michael Grondahl:]

Okay. And then maybe just lastly for Chris, Chris, do you think – how do you think about your tax rate going forward, as you’re getting more earnings from overseas, the UK? Can you see that trend down at all next year, sort of, what are your some preliminary thoughts?

[Chris Brewster:]

I’m going to turn that one over to Brad Conrad, our Chief Accounting officer.

[Brad Conrad:]

Yes, hey, Mike. I think there is a potential for that, but we’re using in our non-GAAP earnings measures a rate that we expect to be reflective of our long-term cash taxes across our geographies is currently at 32% so a little bit lower than our GAAP tax rate which I think was about 37% for the quarter. And I think the GAAP tax rate and the non-GAAP tax rate will be relatively close next year but probably still in the low 30s.

[Michael Grondahl:]

Okay. Thank you.

[Steven Rathgaber:]

You’re welcome.

[Operator:]

Thank you. (Operator Instructions) I’m not showing any further questions in queue. I’d like to turn the call back over to Steve Rathgaber for any further remarks.

[Steven Rathgaber:]

All right, well, we just want to say thank you everyone for your interest in Cardtronics and we’ll talk to you soon. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.