Q3 2020 Cardtronics PLC Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Cart Tronox Thirdquarter Twenty-twenty earnings conference call at this time I'll participant lines on a listen only mode. After the speaker's presentation there'll be a question and answer session.
That's a question during the session you'll need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would not like to hand, the conference over to your speaker today, Brad Conradt. Thank you. Please go ahead Sir.
Thank you good afternoon, and welcome to Cardtronics third quarter 2020 conference call.
On the call today, we had in West Chief Executive Officer, and Gary for Chief Financial Officer.
Start with prepared remarks, and then take questions before we begin a cautionary statement regarding forward looking information during.
During the course of this call we will make certain forward looking statements regarding future events results or.
Any forward looking statements made on this call are subject to risks and uncertainties, including but not limited to events market conditions and other risks and uncertainties that could cause actual results to differ materially.
Please refer to our earnings release in a report filed with the SEC, including our form 10-K for the year ended December 31st 2019.
Anybody or form tend to use this year.
Which describe forward looking statements and risk factors and other events that could impact future results.
Other factors that could affect our business.
The statements on this call are made as of the date of this call and are based on current information and maybe outdated at the time of any replace this call.
Mm no obligation to update any forward looking statements made today to reflect events or circumstances that exist. After the date on which date are 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 to the nearest GAAP measure is.
Is included in the earnings release issue. This afternoon in available on our website.
We've also posted supplemental investor materials regarding the quarterly results along with additional information on the mess relations page of our website at Cardtronics Dot com.
We will make reference to some of the pages in this earning supplement during the course of today's call but.
With that I'll turn the call over to it.
Alright, Thank you Brad Frisbee with you today and I look forward to sharing some recent developments that are transforming several key aspects of our business.
The key messages are likely convey today are as follows.
First the business continues to recover from the impacts from the pandemic and we are executing on our growth strategy.
As evidenced by today's announcements F eyes, and syntax of all sizes are partnering with cardtronics to deliver both inefficient cast solution.
And a physical brand presence by leveraging are unparalleled network and platform.
We believe we are well positioned to benefit from the secular trend for F eyes, and syntax to leverage common infrastructure to serve their customers cash needs second our investments in technology are paying dividends by opening new business opportunities and driving down costs.
We have taken control over our future product flexibility by controlling and integrating the hardware software and processing capabilities.
We believe this result in accelerated product development margin expansion capital efficiency and greater free cash flow conversion going for.
And third speaking of cashflow, the free cash flow generated by this business is strong and we expect this to grow over time as we continue to evolve Cardtronics. Our recent investments have fundamentally changed the capital profile of the business and consequently, the free cash flow conversion has improved significantly.
Now, let me start with a brief recap of the results for the quarter revenues for the quarter or 279 billion and adjusted EBITDA with 72 million all our third quarter results were down versus prior year due to the continued impacts from the pandemic. The results were up significantly on a sequential basis from the second quarter as we saw.
Continuing recovery across our markets.
R U S business recovered to nearly flat year over year on ATM operating revenues as you can see on page five of the supplement we saw a continued recovery of our same store transactions, which are actually up 1% for the quarter and the U S.
We also deployed nearly 700, new Acm's Casey stores during the quarter and experienced continued sequential revenue growth in our managed services and surcharge free categories.
Outside the U S are businesses continue to be more impacted by various local restrictions that have been implemented as a result of the pandemic.
As a reminder, we also have more exposure to travel tourism and leisure and the market's outside of the U S.
People that will eventually travel again, and we will lead to upside opportunity for us.
The third quarter results allowed us to generate strong adjusted free cash flow for the quarter of $56 million, which was up from $48 million and the prior year free cash flow has been a consistent focus for us as we prudently deploy capital it's fairly remarkable that on our current valuation basis are free cash flow yield is over.
18%.
If you look at our cash flows over time is reflected on page 11 in the supplement we have consistently delivered solid free cashflows year in year out that has continued this year in spite of the impact of the pandemic I'll come back to this in a few minutes, but we are optimistic that we can continue to grow our free cash flows.
Through growth and lower capital intensity, as we gain market share and leverage our recent transformative investments.
I've talked extensively about the dynamics and consumer banking over the past several quarters and we continue to see signs of accelerating digital transformation within the past few weeks several large banks announced plans to significantly reduce their branch footprints some of them by as much as 20% as banks continue to pull back on there.
Physical infrastructure many of them are leveraging our network and platform to continue to provide convenient and cost effective cast services to their customers.
Our solutions capabilities are valuable to not only small community banks and Fintech startups, but also the largest banks in the country.
During the quarter, we continued our growth within Tech partners. We recently established a relationship with China Ah leading syntax built on protecting its members in helping them get ahead. We're pleased that China has chosen to join are all point network at Atm's at select U S retailers to broaden the scope of convenient and surcharge free cash.
Yes that will be available to its members and the kind of a year.
We also established a relationship with credit Karma, the consumer technology platform with more than 100 million members in the US Canada in the UK. We're pleased that credit Karma has also chosen to join are all point network to broaden the scope of convenient and surcharge free cash access available to its members. Additionally.
<unk>, we established relationships or <unk> in central payments.
Also both joined all all point to broaden their services for their customers.
The team has done a terrific job of building on a recent successes of expanding with syntax, which will likely drive future transaction growth with these digital partners.
I'll point has definitely become the partner choice with the digital operators and built on a strong reputation among our growing base of 1200 issuers driving all for these relationships continue to serve as strong proof points that are convenient on demand network and nationwide footprint provide that.
Surcharge free solution that syntax and <unk> and consumers one.
We continue to see strong growth in transaction volume from our Fintech partners as reflected on page nine of the earnings supplement Q3 transactions involving these partners are up over 200% since the beginning of the year Phanteks now recognize that convenient secure and surcharge free access to cash remains very.
Important to their customers and critical to their customer engagement and growth plans.
Increasingly we're seeing a trend from larger banks to leverage our platform and look for ways to reduce costs or grow more cost effectively are managed service solution for operating Htm's continues to gain market traction and now increasingly with larger financial institutions.
Last year, we initiated a relationship with U S Bank to brand approximately 80 atm's in Charlotte and we're thrilled to report that we are now expanding this partnership with our first managed services agreement with USA will own and operate about 70 off branch Atms. We're excited about our growing partnership with U S Bank.
As we continue to earn their trust to further build and expand on this relationship.
Additionally, building, where our partnership in Canada, we have significantly expanded our relationship with Scotiabank in Mexico, where we are adding an additional 200 atm's that we will manage for them. These deployments are and process now and are expected to be completed by the end of the year.
We have also agreed to operate an additional 200 atm's for Scotia in 2021. This is helping drive the branch transformation strategy as they look to optimize their footprint and deliver superior service for their customers.
Beyond these relationships. We also entered into numerous other branding all point and maintenance services arrangements this past quarter with both new and existing partners.
Our value proposition continues to resonate with a wide variety of that buys including national regional and community issuers F. Eyes are looking to grow strategically, but also optimize their costs and customer offerings. Our portfolio of solutions can help them with both their growth and costs optimization initiatives.
Now moving onto our international segments with.
With the exception of South Africa, our businesses outside of the U S have been more impacted have been slower to recover then R. U S. Business. This is partly attributable to the nature of the ATM locations, but also attributable to the tighter restrictions in different markets.
And our second largest market. The UK same store transactions are down in percentage terms and the low to mid thirties range versus the prior year, while our cash dispensed amounts are only down in the teens on a per ATM basis.
Cash continues to demonstrate resilience despite the recent lockdowns.
In a report published earlier this month link said that in April people still through about 1 billion pounds a week from Atms in August this rose by 50% 215 billion pounds per week.
With our broad network and coverage of atm's in premium locations, we continue to benefit from the strength of the cash economy in the UK.
In addition to the UK government and the payment services regulator have launched programs indicate there could be legislation in the next parliament protecting access to cash.
As the Uk's largest employer cardtronics as well positioned to capture the incremental volume as the market in the UK recovers and travel eventually resumes. We believe that are integrated platform and leading national footprint in the UK will result in new solutions to serve the payments ecosystem.
Meanwhile, our business in South Africa continues to accelerate September was a record month for installations in our volumes an average transaction value are ahead of those reported in the first quarter of 2020.
Earlier this year I mentioned, a significant milestone achievement for Cardtronics, the development of our own proprietary ATM operating software.
We're excited about this advancement in our company Ah refer you to page 10 in the supplement this technology now live on over 15000 of our atm's in the U S is transforming our business in two important ways.
One that has unlocked new growth opportunities and to us improve.
Capital intensity of the business.
We expect this technology to be deployed on nearly 20000 atm's by the end of the year, representing more than half of our U S owned ATM footprint.
This proprietary ATM software developed in house includes a suite of ATM applications that provides us greater control and speed to market, while enhancing functionality and improve security.
This bundle of applications that we refer to as the nyos, we platform enables us to quickly integrate and scale mobile solutions and other products.
By leveraging an integrated mobile API and our new ACM application, we are effectively creating a gateway that significantly expands that transactional capabilities of the ATM potentially.
Potentially including things like Bill paid prepaid or even crypto currency and other financial transactions.
Our new suite of applications also allows us to provide our partners with detailed analytics into how their customers engaged with our Atms, enabling near real time marketing engagement opportunities and protecting the entire experience all with best in class security embedded directly into the software set.
The newest we platform is delivering enhanced operational and financial control over our ATM estate on a remote basis and we are already starting to realize lower operating costs through fewer physical maintenance visits lower software maintenance costs enhanced uptime.
In addition, this platform allows us to gain more control over our capital investments whether it is a software change along the lines of Windows too Ah network change like <unk> or compliance related change our capital costs are expected to be lower as we can update our atm's remotely without involvement from third parties.
We think this enhanced software platform delivers a step change in our ATM evolution, we're rolling the software out initially in the U S and Canada and plan to expand the deployment globally, starting with our second largest market in the UK next year.
In summary, it was a solid quarter across our enterprise in light of the ongoing negative impacts to our transactions from the pandemic.
This is highlighted by strong operational execution strong free cash flows and expanded new business with financial institutions and Fintech partners.
Now in spite of the continued rhetoric that we all here cash remains a large and very important portion of the payments ecosystem and the economy's, where we operate.
Consumers trust cash and value is unique attribute that reliability security and privacy.
Now for the facts cash in circulation in the U S achieved a major milestone surpassing two trillion dollars in August and up over 14% for the third quarter versus the prior year.
As reflected on page eight hour dispense levels of the U S were up 13% for the quarter versus prior year.
The state is further supported by recent direct to consumer research by the fed.
And javelin and Mercator, which all indicate that consumers desire for an interest in using cash has not changed during the pandemic and payment choice is highly value.
And another another interesting stat.
Said recently placed in order for 2021 paper currency production that calls for a 30% to 65% increase and note production versus 2020.
This is a clear testament to the expected increase in the use of cash by the Federal Reserve Bank.
All of this also reflects how critical caches for our most vulnerable segments of the population, particularly during this pandemic.
There is a good reminder, that are nationwide cash infrastructure has never been more important than it is today for this large and growing segment of cash dependent consumers many of whom are either under our unbanked.
It gives our employees and myths pride by deliberate on our purpose is a company, which is provided inconvenient safe and reliable cash access and the communities reserve.
I will now turn the call over to Gary for additional details in the quarter look towards the fourth quarter.
Thank you Ed I will start with a quick recap of a financial performance in the third quarter, followed by a discussion of our balance sheet and liquidity before moving on to what we are currently experiencing and what could happen over the next few months.
The comparative financial metrics provided on a constant currency basis to neutralize the slight currency tailwind we experienced during the quarter.
The COVID-19 pandemic and the related restrictions on consumers continue to impact us during the third quarter.
Total revenues of $279 4 million were down 21% for the quarter adjusted EBITDA of $71.9 million was down 19%.
Adopted EBITDA margin with 25, 7%.
I'd like to highlight that during the quarter, we recognized 11 $8 million of net UK business right recoveries you might remember that on our last earnings call I mentioned, the recent legal decision by the Supreme Court in the United Kingdom, removing business rates in England, and Wales, effectively a form of property tax for certain Atms.
We have been pleased with the speed at which we've been recovering amounts owed to us and anticipate recovering a slightly higher amount in queue for.
It just being out these UK business right recovery, we delivered adjusted EBITDA of approximately $60 million for the quarter, which is up nearly 30% sequentially from $47 million in the second quarter. This.
This sequential improvement is mostly attributable to approve transactions across all of our regions relative to the second quarter.
Partially offset by suspension of the temporary compensation expense savings measures, we put in place in queue too.
Even with the suspension of compensation related cost control management measures and excluding the business right recoveries, we deliberated adjusted EBITDA margin of 21.5% up from 20% in queue too.
These strong margins and the underlying business along with the UK business right recoveries and a networking capital benefit driven in part by an $8 million income tax refund. We received during the quarter drove adjusted free cash flow to $56 million.
Allowing us to reduce net debt by 53 million compared to the end of June.
To round out our key consolidated performance metrics adjusted EPS was 49 cents for the quarter up sequentially from 13 fence in queue, too, but down compared to 79 cents in Q3 last year.
The decline and adjusted EPS compared to Q3 last year was driven by the decline in EBITDA and higher interest expense.
Looking at our financial results by segment North America remains the most resilient as revenue and adjusted EBITDA, we'll both down 15% year over year.
During the quarter would continue to strengthen our bank branding and surcharge free offerings, plus new ATM deployment, we almost returned to flat on the top line for the quarter in our core you at ATM operating business.
While our smaller businesses in Canada, and Mexico, and our merchant processing businesses continue to recover more slowly and we're each down over 30% for the quarter.
Canada, Mexico, both have a much higher percentage of casino and leisure oriented atm's compared to the U S and many of these atm's remained non-operating or operating on a very limited basis.
For the third quarter U S same store withdrawal transactions increased 1% as shown in the earnings supplement on page five this measure of same store transaction is more aligned with the metric that we reported prior to the pandemic and illustrates the trend at our transacting company owned Atms.
To compare ability purposes, we have also shown the covid adjusted Same-store metric, which we provided since March and with a negative 3% for Q3 as a reminder, this lower same store metric includes temporarily non transacting ATM to illustrate the impact of temporary pandemic related site.
<unk> on our us business.
As illustrated on page seven of the earnings supplement or bank branding and surcharge free network revenues almost all of which are in North America continue to grow and we're up 8% year over year in the third quarter.
This growth continues to be driven by new and existing EFI partners and are expanding list of Fintech partners.
We have a relatively high percentage of variable costs and our north America's segment. This.
This dynamic along with focused cost savings and growth from new and existing partners on our network drove a solid adjusted EBITDA result in light of the lower transaction based revenues.
We were able to keep our North America, adjusted EBITDA margin flat compared to Q3 last year at 26% as growth and a higher margin revenue categories, such as bank branding and surcharge free along with continued cost controls delivered a solid margin result in light of the overall transaction and revenue declines.
Are Europe and Africa segment saw the steepest revenue decline down 35%, while EBITDA was down 20% from Q3 last year.
The transaction decline rates improved sequentially from Q2 as shown on page six of the earning supplement the largest component of this segment is our UK business, which was down about 33% on same store transaction volume, which was a solid improvement from the 50% decline in queue too.
However, as we've seen across many geography's. The UK has recently implemented more restrictions in new guidance on social gatherings, and recently seen the transaction decline rate flattened out and the low to mid 30% range.
We continue to see a significant decline in our cross border revenues in this segment as travel and tourism remains very limited.
Our high margin cross border revenues were down $11 million in this segment compared to the prior year Q.
Q3, adjusted EBITDA in Europe, and Africa segment with positively impacted by the previously mentioned UK business right recoveries of $11.8 million.
And our smallest segment at approximately 7% of revenues, Australia, New Zealand revenue declined 25% from Q3 2019.
While EBITDA declined 37%.
The travel tourism and leisure sectors were hit, particularly hard in this segment throughout Q3.
However transactions across location type steadily improved during the quarter.
Moving to liquidity in the balance sheet on page 12 of the earning supplement at the end of the third quarter. We had total gross debt outstanding of $914 million and had unrestricted cash of $263 million, resulting in net debt of approximately $651 million as it.
A reminder, we have $160 million principal amount outstanding on our remaining convertible notes, which mature on December 1st we.
We plan to settle the remaining notes with cash on hand.
With over 250 million of or unrestricted cash and zero outstanding on our $600 million revolving credit facility. We have substantial liquidity and we also expect to continue to generate strong cash flows in the foreseeable future.
Net debt outstanding of $651 million at the end of Q3 was down 53 million sequentially from the end of queue to our net leverage ratio as defined in the revolving credit facility was two six times at the end of Q3 improved from two seven times at the end of Q2, we continue to have.
Didn't headroom under a revolver covenants.
Moving on to capital expenditures year to date, our capital expenditures were 61 million down 32% from $90 million during the first nine months of 2019.
We believe that the recent trends in capital expenditures reflected material decrease in the capital intensity of the business.
These improvements are driven by technology enhancements, such as our sweet platform and operational improvements that we implemented prior to and during the pandemic to.
To be clear, we are not compromising growth through this rebates lining of capital requirements to highlight this point further we expect to purchase 3000, more Atms and in 2019 despite.
Despite spending significantly less than capex this year.
As Ed previously mentioned across the company, we have prioritized delivering strong free cash flow.
Looking at page 11 of the supplement you can clearly see that in the results. These last few years and with our improvements in technology and a focus on enhancing our operational and strategic outsourcing our strategic sourcing efforts, we have driven down the capital intensity of the business.
For many years Capex was 10% to 12% of revenues.
In 2019, Capex was 9% of revenues, while Capex has been 8% of revenues over the last 12 months.
Even with revenue being impacted by the pandemic.
At our Investor day back in March 2019, and our medium term outlook, we estimated annual capex to approximate 8% to 10% of revenues.
Due to the previously mentioned technology improvements an enhanced strategic sourcing we now expect annual capex to approximate 7% of revenues over the medium term.
As we navigate through this pandemic, we have not provided formal guidance. However, we feel it is important to be as transparent as possible as to what we are currently experiencing and our expectations for the remainder of the year.
Aced on recent transaction trends and commercial wins and execution.
Are current estimate for our fourth quarter as an adjusted EBITDA amount, excluding UK business right recoveries similar to the $60 million, we experienced in the third quarter.
Ordinarily Q4 is seasonally weaker than Q3, and while we have seen some recent new unit and branding growth. Some of this growth may be offset by seasonal factors and in some cases re tightening of social restrictions.
This estimate does not assume any further significant lockdowns beyond what we've recently seen.
And on the other hand, we are not assuming any significant loosening of social restrictions across our geographies.
Based on the additional business rates that we have already received in October along with reasonable assumptions of continued recoveries, we could see business right recoveries in queue for in the 15 to 20 million dollar range, which would put us at a total adjusted EBITDA number of about $75 million to $80 million for the fourth quarter.
As I mentioned earlier in the year re renegotiated an extended several contracts in North America on slightly different terms, which caused a portion of the revenues related to these contracts to convert from a gross revenue recognition basis to a net basis.
This change is expected to cause a $6 million revenue reduction in queue for.
But no reduction to EBITDA.
This change could cause up to $20 million revenue impact in 2021, and again no impact to EBITDA.
At about $75 million to $80 million in queue for adjusted EBITDA and taking into consideration the change in revenue recognition that I just mentioned, we'd expected adjusted EBITDA margin approaching 30%.
Turning to Capex, we now expect to spend approximately $90 million in capital expenditures for the full year 2020.
This would approximate 8% of revenues and would be waited about equally between growth capex and maintenance and infrastructure Capex.
We expect to see continued solid free cash flow in Q4 and could end the year with net debt of approximately 620 million.
Which would bring us back down towards the upper end of our previously stated target leverage range of two to two five times.
I'd like to take a moment to highlight a strong free cash flow generation, even during the worst of the pandemic, we managed to continue to generate free cash flow and pay down debt.
Highlighted on page 12 of the supplement since the beginning of 2018, we've generated $678 million and adjusted net cash provided by operating activities.
We've invested $293 million this amount back into the business.
The remaining balance of $385 million and adjusted free cash flow has allowed us to decrease decrease net debt by 258 million repurchased $67 million worth of shares and complete small acquisitions or other financing activities.
Are strong cash generation provides a lot of flexibility going forward and between already contracted new business and are growing business opportunities, we're positioning ourselves for growth in 2021 and beyond.
Let me conclude by saying that the company is well positioned both financially and strategically to not only whether this pandemic, but to emerge even stronger we are encouraged by our new business winds favorable market dynamics in our recent investments in technology that are helping create new growth levers and lower capital and operating costs. The.
The business has proven to be resilient and we are excited about the opportunities ahead now let me turn it back to Ed for some final thoughts. Thank you Gary.
Let me summarize today by emphasizing our conviction in this business and our plans for growth.
First the business continues to recover from the pandemic and we continue to execute on new business, we find ourselves a rare tipping point, where pundits questioned the long term prospects for cash.
This in turn actually leads to an acceleration of our business growth plans as far as the leverage are unique surcharged free network and to outsourcing platform.
When looking through the lens of digital transformation, we believe or at the beginning of a secular trend and Cardtronics is the optimal partner for <unk> of all sizes syntax and premier retailers.
Again, we believe this is a significant market opportunity for us whereby we own about 10% of the atm's in the United States, but only have a three 5% share of transactions and a 15 billion dollar market in the U S.
Second our technology investments are delivering value, we have enabled new product capabilities and have fundamentally improved our operating and capital expense profile.
These capabilities will deliver speed to market for enhancements and new products margin expansion and Capex efficiency.
And third this business simply delivers consistent and durable cash flows today, we are trading at an 18% free cash flow yield we control a greater share of our revenues than ever before and have improved our free cash flow conversion.
We are well positioned to grow as the momentum from digital transformation and new products accelerates.
Operator will now turn the call over for you for some Q&A.
Thank you Sir as a reminder to ask a question you'll need to press star one on your telephone. So withdraw your question press the pound key please limit yourself to one question and one follow up again that is star one to ask a question.
<unk>, what we compiled the Q&A roster.
And our first question comes from Ramsey Allosaur Barclays. Your line is now open.
Hi, guys. Thanks, a lot for taking my question and congratulations on another solid quarter here.
You gave us a good sense about the rest of this year could you help us think through 2021 modeling out 2021 any thoughts for example on the current EBITDA consensus at about $275 million and 21.
Thanks, Thanks Ramsey.
Let me turn it over to Gary who to start off on that one okay.
Ramsey I don't have a crystal ball, obviously, but.
Then we'll officially give guidance in in February late February probably but based on current trends of where we are excluding out those business rates Q3, we did $60 million EBITDA as you can tell we just discussed approximately $60 million EBITDA for Q4, if you annualize that you should be right around 252.
Hundred $40 million adjusted EBITDA. However, our aspiration, obviously is to get probably up to 310, which is what we did close to in 2019, but obviously that had about 50 million in cross border.
Revenues in it and that's very high margin, so we'd really need to see international markets recover soon for that to happen, but a few consensus you mentioned seems to sort of be right in the middle of those two numbers. So considering we've got new business already contracted we plan to keep closing in the business and the pipeline. We obviously continue to focus on operating efficiencies.
So with all of that and assuming we get somewhat of a recovery later in the year next year.
That consensus number seems reasonable to me.
Yeah, I mean, that's I agree I mean that assumes.
Some moderate recovery, but that would be in the back half of the year and obviously.
Cross border pick up.
Would be.
Provide more confidence to that but thank is gary sand somewhere in the middle.
There, which is currently close to consensus.
Great that's super helpful. Thanks.
My follow up is basically on the competitive environment in general maybe in the context of the pandemic come in are you seeing smaller.
Tim deploy ears pull back or disappear I guess, how do you expect the marketplace to look kind of when the dust settles, let's say next year and.
And just you know the impact of the virus on your competitors.
Sure.
So obviously, we'll know in hindsight.
Next year, we look back and see who is left.
A lot of the the markets that are smaller smaller merchant single locations have been some of the places I've been most hit.
Sure some smaller operators operate.
So it could be issues, there, but frankly, where we really operate in our our bread and butter, a very large leap retail partnerships.
Significant size scale.
And product solutions that we bring forth with surcharge free and other solution store traffic growth.
We are kind of one and and alone there.
And continue to see opportunities like the what we announced this past quarter.
Or about a quarter ago with with Casey's in <unk> in Canada. So.
Very strong about that.
On the on the <unk> side of the business frankly, most of the competition there is the status quo.
Meeting with financial institutions, and talking about their needs and we're able to bring forward a solution and have a kind of a solution sale with them in conversation about what they're looking for whether it's market growth.
Cost efficiencies improving their efficiency ratio and we have multiple solutions to bring forward, whether that's on demand with surcharge free marketing through branding managed services driving other efficiencies and we're the only ones who kind of bring for that full suite of solutions to help them in their business.
<unk>.
That's super helpful. Thanks, so much.
Thanks Randy.
Thank you and our next question comes from similar home Wells Fargo. Your line is now open.
Alright, Thank you and good afternoon.
First question is about.
The syntax side and obviously, the new logo with time.
I guess I'm, just sort of curious as you.
Pursue these types of contracts and come to these arrangements.
Your perspective.
How to position.
Hello product for all pointed et cetera has it been altered or evolved.
And then just also curious.
About the plans have these new partners syntax.
In terms of their marketing to their customer base and really getting the activity across the network I know you poor kalat, what's your banks in the last year to to to sort of promote that awareness and I wonder if they're going to sort of compare and contrast.
Two different constituents, there and then I had a follow up.
Sure.
Good afternoon.
You know.
It's really it's really interesting because we have clearly through all point of become the partner of choice with Defentect community.
And really their distribution partner as they've learned about the importance of.
Cash and having surcharge free access to cash is convenient conveniently located like through our network of leading retailers.
We've become that distribution partner with them.
For a lot of reasons and it comes back to that convenient network. The fact that we can customize and tailor the experience at ATM, because we own the network, we own the ATM and we on the processing platform and can Taylor.
Relationship and experience for them.
So to the latter other part of your question about does this inform about other solutions going forward absolutely.
We have some very some excellent partnerships tight relationships there just like we do with traditional financial institutions.
But where are some of the <unk> want to do some customized solutions for.
Their customers to to engage with them, we can partner with them to do that.
And that's also ties back into.
Why we're really excited about rolling out the neo sweet.
Solution and platform.
Because that allows gives us much more flexibility much more control to tailor some of those things going going forward.
Great and then my follow up was about the bank side. We're obviously some nice activity air as you pointed out banks are I think more focused on.
Changing the physical footprint. They have is there anything about the business model.
In terms of staff home.
Maybe it would touch the capital intensity I'm not sure. If this really momentum continues to build.
It could walk like 24 to 36 month window, there's a lot of opportunity around the managed services outsourcing that kind of stuff.
There anything we should think about in terms of making that happen if it really work to accelerate.
And what you are saying.
Looking around the model that you would have to do to make sure you could.
If there was a pretty big acceleration in demand from the bank community.
Sure well Fortunately, that's what we've been hard at work on over the last couple of years, which gets back to that investments in the technology and having.
The proprietary solutions with neo.
As well as changing the operations integrating our platforms. We've been very focused on as we talked about back or investor day of integrating are different flap platforms, making sure the scalability of that bringing on both surcharged free solutions as well as managed services, we're seeing managed service.
Continuing to pick up having wins each quarter on that the pipeline on managed services continues to grow.
Initially it was more more community the mid market banks mid size announcements to the largest banks in the country.
And frankly the world.
Coming on to that and I agree that we believe that's going to continue to grow and accelerate I.
I think the other grill, you differentiator there for us as a security.
Where we've invested heavily in both technology and info Sac and we have a terrific info SEC team on having the security embedded into our platform I think it's very important with these financial institutions, we will continue to invest in that.
Just a final comment there is the scale, where we gave our outlook. We expect the key drivers of our growth has won the surcharge free network probably be about half of our growth.
Going forward over the medium term.
Which scales very nicely.
<unk> services, probably a quarter of it.
That could even be even a higher percentage potentially.
Potentially.
But we also implied a fair amount of margin expansion, which we've been delivering on.
We were exceeding on that through the end of 2019 through the third quarter of the fourth quarter accelerating even the first quarter accelerating even more with even more margin expansion and organic revenue growth pre covid. So there's really nothing to say of about what would be.
Significantly different other than continue to scale the business for that opportunity that we see building each quarter.
Great. That's very helpful. Thank you very much.
Thank you and thank you.
And our next question comes from Peter Heckman from Davidson. Your line is not open.
Hey, good afternoon, and thanks for taking the question.
Wanted to know if there's a way that you can help us quantify over the last several quarters, you've announced the number of deals but.
Try and quantify the backlog of ATM agreements like the Ktel some of the others.
Give us an idea of how many atm's, you have yet to deploy or foot markets and in that same vein. Similarly on branding how many atm's D. A contract for branding, but haven't actually rolled that branding out yet and so that we may not be seeing the revenue and the model.
Sure, let me I'll start with that.
Turn it over to Gary to do.
Other ads.
Let me start with the second part of that around branding.
And that usually branding arrangements were also or coming on to all point is a fairly.
Can be a fairly short cycle for for those so I would say that the backlog.
Is is not not tremendous on that front managed services can take longer.
Where you would see more of a build overtime and then that is just nice durable fixed revenue that builds under under longer term contracts we.
We do have a fair number of units.
Four.
And the the warehouses that are being staged going out some of the full function that will be going out into the market.
Later, this year and into the first quarter.
And clearly as I mentioned earlier, both cases and so these those rolling out in the U S. As.
As well as continuing rollout more in South Africa with the last point is.
Right now.
Things are so murky from the market because of the pandemic where are you still have capacity, that's mothballs hibernate it lack of traffic lack of consumers moving around.
Have atm's or just sitting there some of them were just D. Cash are in hibernation. They will come back on as a travel comes back up so it's kind of hard to say hey, Here's something you should just count on as you think about over the next few quarters until we get two more normalcy. Eventually this will pass.
And we will get back to where people are getting back out and getting back out in the communities and feeling safer in that time I think we probably give you more of a future pipeline yes.
Obviously, we're also taking ATM down so on a net basis, because we're trying to optimize the network in the UK in another region. So you would actually could see declines in numbers of atm's, but we're also net it would be would be an addition.
Got it got it all right and then just.
Another question.
I haven't had a chance to review the 10-Q, although I know it's out.
Just the.
Have you changed your estimate of what the potential total future recoveries could be from the UK.
Tax issue, if I remember correctly I thought you said something like 45 $50 million in a prior filing.
Yeah that was the only difference is.
It grows vs. Net what you saw last quarter was a gross number and then what we put in there now is a net number so.
So that we weren't quite sure last quarter with the net numbers sort of percentage to be we got a little bit more comfortable with a net number. So the number you see now we recovered 11, eight plus I believe the 30% to $31 million is the remainder left so that's a net number then that's the total amount that that it could be.
Not not we don't know really what all will will come back on yet assuming will recover.
Got it thank you very much.
Thanks.
Yep.
Thank you and our next question comes from game you pressed Filipino from Barrington Research. Your line is now open.
Hey, good afternoon, everyone.
Yeah.
Yeah could you send texts that you've signed and.
Do they offer a debit card to every one of their account holders I'm trying to get an idea of what is the uptake from these account holders on taking the debit card and then do you have any any way to measure what their usage is b b, a traditional brick and mortar bank issuing these debit cards Realpoint network.
Yeah, and a great great question.
No all their members do not have debit cards.
On there.
The first part.
As we as I pointed out earlier.
They have the volume we've seen there it has grown significantly from the beginning of the year, where our volume now is up 200%.
From from July and what we've seen is even throughout this pandemic.
Month over month volume growth and better engagement some of their customers and we see this or cost traditional <unk> as well because each each group.
Different groups of.
People in their customer profile, but we'll see some that are just heavy engagement. What we do see this different with the fend tax is there are highly engaged with their customers.
[noise] awareness awareness of Hey, Here's where you go to all point.
On the locators search and encouraging people to use that because it surcharge free and helping them save save money. So we do see a lot more engagement and we've seen many of these syntax growing rapidly.
So as they grow cards.
Then, we obviously have see more opportunity and volume onto the network and there are also driving more and more engagement.
So it's.
Three way partnership when we have more accounts more debit card holders and more engagement.
Thank you thank.
Thank you Gary.
Thank you.
And our next question comes from Andrew Jeffrey from Truest Securities you're lying is not open.
Hey, guys can afternoon. Thanks for taking that question good afternoon.
So just as a matter of trying to understand because I think you've often a little more disclosure. This call and then you have in the past about.
Tourist markets Cross border markets can you quantify how much revenue in maybe in 19 2019 terms how much revenue was in.
Not only in Europe in cross border markets tourist revenue, but also I think Kerry you mentioned, Mexico, and Canada are under sort of disproportionate pressure in North America.
Trying to gauge.
How much revenue might be sort of shutting and at this point.
Well, what what we've said in the past is the cross border piece of that was about 4% of revenues and I think this year under normal circumstances, we've been taught.
Tracking towards five.
When you look at what we were talking about I think the other part of your question is probably about 10% of revenues.
Were impacted because of being in the tourist market, maybe cruise ships things like that or.
Even just leisure activities themselves not necessarily travel.
10% and it also goes back to what we mentioned a couple of quarters ago. After the onset of the pandemic as we learn a lot of different things.
And about how our network really with the over 80% of it.
And Ah central locations, but about 10% of our revenues were highly tied to travel entertainment leisure it could be a cruise ship could be a amusement park could be a casino, but also cross border transactions represent a total of about 10% of revenue exposure.
And is it safe to assume that's higher than corporate average margin.
An aggregate.
I would say, it's safe to say cross border trade.
<unk> transaction opportunities like a DCC is much higher.
Then corporate average.
Some locations.
Where.
Like a a casino where it's a very captive consumer right there would be lower than system average.
Okay.
And then as a follow up.
It's kind of an unfair question, but.
What about.
[laughter].
Just.
Is my disclosure.
Stock does training what appears to be kind of a shelley from cash multiple relative to any kind of it.
Metric.
And I think you've done a really nice job.
Managing to free cash flow and panting through pandemic and everything else. What can you, possibly do just spitballing, maybe you could change to narratives.
[laughter].
Going back on June.
Yeah, the unfair part.
We continue to execute we're.
Outline, where we're going what we've been doing.
We talked about getting back to organic grew.
Growth.
Two years ago and.
And delivering on that in 2019, accelerating and the organic growth 2019, and accelerating even more so through.
January and February frankly, it for the first two months of of.
Of 2020 or organic growth consolidated was over 8%.
And very strong double digit EBITDA growth. So we we've been hitting on all cylinders and executing and Meanwhile, continuing to grow more cash flow.
Where team about hidden singles and doubles every day and executing and delivering consistency in performance and growth in free cash flow.
We've invested in new products and solutions will be rolling out those new products overtime here that broaden <unk>.
<unk> our market I think people want to see and like we've been doing a growing opportunity with financial institutions, which is clearly happening and we're executing on that.
And also now evaluating other things that broaden our total addressable market into other transaction opportunities that we can leverage onto our platform because what are we have we.
We have scale operating efficiencies that scale abroad network key convenient locations and a very valuable digital physical location that can be a multi function.
Gateway.
And there'll be more more to come on those type of things. Meanwhile, hidden singles and doubles and growing free cash flow I mean.
You started off on that Andrew.
We're sitting here today.
With a over 18% free cash flow.
Yield.
On an investment opportunity.
Yeah.
Okay I appreciate it thanks.
Thank you.
And thank you.
And the next question comes from Bob Naples, with William and Blair.
Good afternoon.
Thank you.
Guys.
Just as you look at all.
2021 can you give any thoughts his proudly on what you expect out of the revenue growth that'll bank panting and surcharge fee network revenues.
Gary walk through our earlier based on.
I think it was ramsey's.
A question just about thoughts on there.
I guess, Bob I'd go back to the Investor day.
Where we looked at the growth.
The company going forward over them that medium term outlook.
And we sit here today actually more confident about that than we were a year and a half ago.
What we've experienced and what we've learned in that growth in the surcharge free solutions being all point and.
And Brandon and that'd be in about half of the growth.
And seeing the organic growth there in addition to the managed services.
So we feel quite good about that we just need to get past this period with the pandemic the uncertainty martinez of that and getting people back out.
And executing on what we saw as I mentioned earlier with these changes.
And the market I believe serves as a catalyst to that same thesis and the differences now we've been executing on that thesis and we've seen that accelerate.
So that's I mean, I'm trying to remember put me in Boston Aesir like high shingles.
Per cent of your growth so you're.
You are looking for double digit growth bank painting, and surcharge sweet well we talked about.
On the Investor Day, then in that outlook that also again, we talked about earlier was a organic revenue growth of 3% to 5%.
And seven to nine EBITDA growth and now we've dialed down the improve the cash flow conversion on a capex side.
And at three to five organic revenue over the long term.
Was really driven by the surcharge free and managed services and in particular that surcharge free growth scales nicely.
Yeah.
Thank you too why do you think the U K is so much less resilient in the U S.
Well it really comes back to a couple of different things.
First you know our location to different we do have more exposure there in the United Kingdom relative to the U S. More travel more tourists locations I mean, frankly could London I mean in the UK is a highly tourists.
Location. So we've been impacted that's our largest DCC market in the world.
So that's been more impacted as a result of that too to the EBITDA. So that's nice upside when travel and tourism comes back up the other real big driver.
Is it's been much tighter in terms of the restrictions.
Through the shelter in place throughout the periods since the onset of the pandemic, whereas in the United States, It's really manage at the state and local level and the municipalities where there may be a shelter in place directive.
Where we might see a tightening in one community, but a loose season and another which is why it's been so dynamic for us and the U S as markets evolve and change in the UK they locked down.
Obviously.
Through through the pandemic restrictions have been across the country with some easing on that and now going back down into tightening in certain parts of the country. So it's been much more restrictive.
On that which is also had a greater impact on commuting.
A lot of commuting going into London has impacted the day to day habits, but eventually.
These things will change and come back around.
Going back to another question on that though also.
Previous we've seen the market.
Capacity coming out of the market.
So as things come back around.
We believe well position as activity resumed fix back up because there's less ATM capacity in the marketplace.
And then last question just chime as a real nice signing.
It's really good really good business.
No I'm very fast, but the revenue for the you are getting right now from the <unk>.
Some very big growth numbers and can you give any and is that all showing up in the.
The seal point in the surcharge free line item.
The ones, who are partnered with us.
Through all point are are in the surcharge free.
That category with a bang for any surcharged free networks plus interchange we receive interchange predominantly through all point.
And the interchange lie also shows up in a couple of different areas and yes.
At that grows with their growth.
So there.
The number of signs here.
Most of those were also partnering with the other.
Large network.
Yeah.
Some do.
Some do.
I am not sure.
Specifically.
They are are various ones are on that but as evidenced by the growth here the coverage.
Clearly all point has become via the partner of choice and it also comes back again to the question of why is that.
It goes back to that customizable experience, where we own the ATM, we on the network we own.
The processing capabilities. So we can customize that experience and also we are purely a retail based network.
That other network you mentioned most of that's bank to bank, so they would be sending there.
For the most part their customers to their competition versus with with all point, you're going to wear your customers already our wishes.
Final shopping places and most convenient locations in the United States.
Thank you I appreciate it thank.
Thank you thanks, Bob.
Thank you.
And our next question comes from Kartik meta from North Coast Research. Your line is now open.
Hi, gentlemen, calm.
Curious I was wondering in the past you've been kind enough to kind of give.
It could trends for a month to just to get an idea of what's happening when you gave to September 17th.
Up debate update to gave kind of Ah.
And update their eyes went to what was happening in September I'm wondering if you could provide.
What you're seeing in terms of October.
You are saying on the same store trends.
Yeah.
<unk> actions or just just.
Yeah, same store trends or a transaction trends.
What you're seeing in October versus what you saw in September.
The same accelerating decelerating whatever the case may be yeah. So as I mentioned in my script that in the UK. For example, we sort of Leblon out in the downtown 30 low to mid thirties.
In the in the U S.
Similar to what we discussed on the call for the quarter sort of flattening out there I wouldn't say, it's accelerating right now, but flattening out right now that's why when we were given the queue for estimates, we said assuming current trends et cetera, no major.
Release in population movement and no major Lockdowns, just kind of where things are now.
Yeah, it looks at whereas curious that where we exited the U S being.
Roughly flat on a year over year basis, and we have periods. It's dynamic it goes off it goes down.
We can week basis.
And then just one last question and you kind of alluded to that in.
In the previous answer I'm wondering are the UK Lockdowns I know they've started kind of new Lockdowns I don't know how extensive they are is that are you seeing any impact yet on the business or is it just too early to see anything.
I think Gary just said, but what we know right now with what we've seen.
Staying in that.
Low to mid thirties on a year over year basis.
At that level and it's been that way for a little while Carter literally up until yesterday.
Okay low to mid 30%.
Perfect well I appreciate it thank you very much.
Thank you.
And our next question comes from Steve Comrie from G. Research. Your line is now open.
Good evening if.
If I could start with the Capex on slide 11, I. Appreciate it you expect to purchase 3000 Malaysians in 2020 versus 2019, despite spending significantly less maybe just to contextualize. This could you give us what the total amount purchase and either year was and I know Gary you mentioned that a lot of the savings.
Better sourcing, but I was wondering if you'd give us like more a little more tangible detail as to what exactly is costing us or what you guys aren't spending on.
Well.
Remember when we're acquiring machine there at all different price points too so you've always got to take that into consideration.
And in prior years, we had other things going on so I mentioned that.
When we look at Capex going forward. It is kind of 50 50 between Grove and maintenance and infrastructure in prior years, we had ERP systems going in et cetera, So that would have increased.
Maintenance and infrastructure portion. So that's one of the reasons why obviously.
We've done a lot of work and sort of taken advantage of our global network that some that hadn't been done previous years and we've just started working into it recently so across the board when we're purchasing I mean, we're doing it on a global basis now.
It already mentioned the neo sweet and all the technology, that's assisting so it's not one thing it's multiple things altogether that are that are helping to drive that.
Okay I appreciate that and then.
On the on the debt.
About settling that convert with cash in the fourth quarter. Once you get kind of pass costs. The fourth quarter get passed to convert would you expect to continue to pay down debt and how do you think about other other cashews priorities in the pecking order.
Yeah, I'll start no possible to add obviously, that's a board decision versus mind, but.
I would think in the near term our focus is to get into that range that two to five times that we mentioned.
I think.
Be closed on the edge by by the end of the year I'm, hoping we're inside of it.
Keep keep continuing to progress and then at that point I think we'll have to start thinking about things once we get into the range, but we still have a little ways to go there as a board discussion and we will be discussing that with with the board upcoming.
Means in the future. The important part is the business is generating a lot of free cash flow very durable and even through a pandemic.
Demonstrated very strong consistent free cash flow generation, which just gives a lot of confidence.
And the confidence that we have in the outlook in the business and we're on the doorstep of being back into that range and gives us a lot of option and we'll be back more to talk about that.
Okay. Thank you very much.
Thank you.
And our next question comes from Reggie Smith, and J P. Morgan you.
Your line is now open.
Good evening. Thanks for taking my question most of them have been hit I had one point of clarification and you may have mentioned this but I wanted to make sure looking at.
Being a supplement you kind of break out.
I believe it's called other ATM expenses and that was down considerably sequentially and I was curious I believe that's that tax rebate issue.
In the UK, but I wanted to verify that and then I guess, maybe get a little clarity it sounds like you're expecting a similar maybe a slightly larger gonna fit.
Next quarter.
Just clarity on that would be helpful.
So just to be clear you were talking about the other expenses and the ATM operating expenses, one going from 18 to three.
Yeah that one yeah. So so that is that is the UK business rates would have flown through those lines before.
And this year obviously it is it is it reverse expense if you think about it so that that's that's one of the reasons.
Right and so when you talked about the fourth quarter, you gave kind of a $60 million EBITDA baseline, but then you you grow setup for something that.
That does that.
Exactly range. So so so just to recap in Q3, we had EBITDA of close to 72 million and close to $12 million of that was this UK business right recovery. So the base underlying business generated $60 million in adjusted eat.
And what I had said is I think we're expecting in queue for to run a similar right on the underlying business, which is 60, but we expect to recover even a little bit more of the business of the business of UK business right. So more like 15 to 20, so that would be a total EBITDA of 75 to 80.
Got it is that is that as you think about 21 does that go away or.
No new thing.
That was the question was asked earlier this week.
We have 11 eight in the books right.
And then you'll see in the queue that we said there'll be another approximately 30 million.
His remaining so we got to the top end of that range of 20, we would still have another 10, and that's assuming we collect everything.
And but as I mentioned in my script that.
So far we've been having a really good luck with the recovery so.
Oh that would be.
But not not not counting yeah yeah.
Sure and then and then one last question you guys are kind of.
It's been asked.
And get a few times, but not really explicitly but I hate to talk about the free.
Free cash flow yield in the business I hear that if we cancel it conversions improving.
You bought back 67 million stock previously knives are you trying to clean your balance sheet out with that.
Ignoring the board just.
Between us five here on the call.
How do you how do you guys like if it were up to you I mean I'm looking at the stock price.
Thinking about things that can improve inherited let's make a share repurchase and even maybe management purchase of stock would would probably go a long way to.
Uhm.
To show a sign of confidence I'm gonna leave that there and let you, let's you guys respond to it yeah sure. So.
Both Gary and I have been a buyers and the stock obviously room blackouts.
But from a repurchase standpoint clearly.
We've been there before pre pandemic, we had an ongoing stock repurchase.
Opportunistic basis.
So obviously the board has had that comfort.
Consistently deleveraged back into that range as I mentioned earlier, we are on the doorstep on that we will review various.
Alternatives, which could include repurchases could include dividends could include other things, obviously, we looked at a lot of different things.
Think there's a consistent track record their focus.
On delivering that and to focus on the shareholder value creation and right now as you point out and as I said before we're sitting here with an 18% free cash flow yield.
With with good confidence, even though we are still in.
Pandemic, but we've demonstrated this business has demonstrated the consistency in the durability.
Sitting here now also a better visibility and control of our revenues and free cash flow conversion. So we look forward to talking about that at the board.
But also backer with investors and.
And keeping you updated.
Sure perfect. If I can sneak one last question bothered asked earlier about the U K and I was just curious.
So it sounds like this is definitely a little more toys in there and that's.
Something had snapped back, but if we would've compare that to New York would you say the trends in the UK a similar to what you see in New York City.
Or would they even be different is there between the two because that would imagine.
New York, probably looks and feels a lot like the UK, but I wasn't sure.
New York.
Earlier in the pandemic.
Interesting you raised New York, So like New York I go back to pre pandemic.
Period in the first quarter.
And the the end of last year and go in in the first quarter.
Contrary to what some alleged in the market concern with.
Tap rolling out at the subway and concerns around what that can mean that was one of our strongest markets in the country.
I mean literally one of the strongest markets with a growth we've seen and why is that because partnering with a core financial institutions partnering with them Branning locations, joining all point in serving those customers needs and the growth. We saw that are key retail partnerships and New York is one of our strongest ones then obviously with the pandemic.
It went to one of the worst ones and the shelter in place that's come back around and see it can be we have weeks, where it's very very attractive. So that's that's come back.
Quite considerably.
UK has been different different market, obviously with.
With a commuting issues.
There and also the tighter restrictions.
It has it has been more more impacted there.
And then also with the travel coming into what was it anticipate historically there into London.
From a tourism standpoint.
But we would expect that to come back around as well New York has been very dynamic periods recovered some periods down so it's been dynamic.
Got it okay. Thank you thank.
Thanks Reggie.
And thank you I would now like to turn the call back over to Ed West Chief Executive Officer for closing remarks, alright.
All right well, we just thank you very much. Thank you for your interest in the company and we look forward to keeping you posted and updated.
And speaking to you next quarter and have a great day. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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