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Customers Limited today reported net profit of $11.6 million for the first half ended December 2010, up 2 percent from the previous corresponding period. EBITDA was $23.7 million, down 9 percent, with cost increases outstripping the 6 percent growth in revenue to $62.8 million. Achieving the consensus EBITDA forecast for the current year ending June 2011 of $52 million, up 9 percent, would require a return to EBITDA growth in the second half. Is this achievable in the current environment?

MD Tim Wildash
In the first half we were plagued by some of the most severe weather conditions this country has experienced. Relentless wet weather along the east coast resulted in the cancellation of numerous weekend events and functions where, or near where, convenience ATMs are typically deployed.

In the current second half, we’ve had some impact from the Queensland floods but it hasn’t been material. We had damage to around 30 machines, all of which were insured, and although we had no activity in the flooded areas for a period, that was offset in part by higher activity levels in other areas where people required cash for immediate needs.

In the first half, we had only one full month’s benefit from transaction fee increases that took effect through November. Our December results, even with the negative effect of Christmas falling on a Saturday and softness in retail, were healthy due to the fee increases and this positive impact has continued.

Generally our business is marginally stronger in the first half compared with the second, however we’re optimistic that with price rises and other initiatives we’ll see a reversal of this and accordingly earnings growth in the current half.

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The increase in costs primarily reflected growth in ATM network expenses, which totalled $27.9 million, up 14 percent. What percentage of your ATM fleet has seen an increase in rebates, what percentage of large contracts has had rebate arrangements renewed over the last 12 months and to what extent is pressure for larger rebates expected to be ongoing?

MD Tim Wildash
Rebates have been under some pressure for a couple of years and we expect that to continue for several more. Pressure comes from the level of rebates offered by other ATM providers and from merchant expectations.

We’ve taken the initiative of upgrading all our large contracts over the last 18 months. We’ll continue to look at the fleet commercially and make decisions that are right for the long-term security of the business, which may include some further rebate rises. We’re the lowest cost operator in the industry, which provides us with some margin protection despite rebate rises.

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Customers’ revenue growth in the first half reflected an increase of 4 percent in the average number of ATMs to 5,705 machines and an 8 percent increase in average revenue per transaction, partly offset by a 2 percent fall in total transaction numbers. The average number of transactions per ATM fell by 6 percent. How much of the fall is attributable to “one-off” factors such as unfavourable weather and how much to cyclical factors such as weak consumer sentiment? Did transaction fee increases contribute to the fall?

MD Tim Wildash
The unseasonable weather undoubtedly affected these volumes, with weaker consumer sentiment and rising interest rates also having an impact. ABS data tells us that sales volumes in the cafes, restaurants and takeaway segment fell away 4.7 percent in the December 2010 quarter, which must have a flow-on effect on demand at our terminals. The impact of fee increases has been very minor.

In regard to our volumes per terminal, ATM equipment is half the price of two years ago, with lower running costs, meaning we’re able to target sites today that wouldn’t have been profitable two years ago: we’d expect ATM transaction volumes per machine to continue to come down as we expand the fleet, but profitability should be maintained.

We’re also looking at different ways of increasing transaction volumes at individual ATMs. We recently fitted 100 machines with surrounds that increase their size and improve their in-store visibility. Transactions at those ATMs increased in the vicinity of 10 percent. We’ve also run some ATM promotions where for example, ATM users get a free cup of coffee. Transactions at these machines have increased a couple of percent at little cost to us. These results have encouraged us to look at further promotions and “surround” refurbishments going forward.

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What portion of your fleet now charges fees of more than $2 per transaction and what is your strategy with regard to further fee increases?

MD Tim Wildash
Towards the later part of the first half we implemented further pricing changes. These now cover a material portion of the fleet. Our fees generally range from $1.50 to $2.50. Our two major competitors have increased their fees to $2.50 and $2.40. We believe our current pricing fairly reflects the cost of service provision and value of the service we provide to millions of Australians. We’re comfortable with our pricing for the time being, however we’ll continue to monitor site costs, taking into account the environment we operate in and our merchant requirements.

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Customers booked a pre-tax loss of $1.3 million for the Financial Institutions (FI) reporting segment. What is the outlook for FI earnings and can you comment on the expected returns given your substantial investment in specialist financial institution machines in recent periods?

MD Tim Wildash
We’ve made a substantial investment in FI infrastructure and personnel, including in technical integration and business development capability. This provides us with a base we can leverage going forward. We’re delighted with the success of our on-going relationship with Hyosung, and are optimistic about the future contribution of the relationship to our business.

We’ve already had success and expect that to continue, albeit on a larger scale in partnership with Hyosung. It’s likely our FI operations will break even within a relatively short period of time and within the next year we or so expect FI to start to be a significant contributor to our earnings.

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The New Zealand segment reported a pre-tax loss of $179,000, versus a loss of $51,000 in the previous corresponding period. You’ve recently as yesterday announced the launch of a full network roll-out in New Zealand. What level of investment will be required to reach critical mass in this market and what are the expected returns given the smaller population than Australia and a market unused to an independent ATM provider?

MD Tim Wildash
We’ve taken a very conservative view of the expected usage per machine; given New Zealand is a market with a high level of EFTPOS usage but without experience of an independent ATM network. With existing terminals and signed contracts ready for deployment, we would expect to reach 1,000 contracts relatively quickly. Our New Zealand business model is designed to benefit from the synergies available from leveraging the cost base of our existing Australian operations.

CEO Peter Campigli
We estimate a total capital requirement of around AUD20 million to acquire the remaining 65.75 percent of NZATM that we don’t already own and to provide the ATMs required under the contracts. Around AUD7 million of the AUD20 million will be allocated for the purchase and deployment of ATMs.

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Customers booked net cash flow from operations of $24.1 million in the first half, down from $25.5 million. After capex of $6.9 million, down from $10.7 million, free cash flow was $15.8 million, up from $14.7 million. Given your accelerated spend on ATMs in 2010, what is the outlook for capex and free cash flow going forward?

CEO Peter Campigli
In a normal year, we’d expect to spend $10 million to $11 million on our ATMs to sustain business as usual. That includes ATM transportation and installation costs, the cost of installing the surround, the communications fit-out and other ancillary costs. The spending above that level relates to our strategic growth initiatives, including building our capabilities in financial institution ATM services and expanding into New Zealand.

Going forward free cash flow will remain positive, albeit impacted by our spend on strategic initiatives.

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Can you comment on the progress during the first half on the strategic growth initiatives? What level of funds will be invested in these initiatives in the current year and when will there be a material contribution to earnings?

MD Tim Wildash
I’m very pleased to say that the strategic plan we released 18 months ago is now a reality. We will soon be commencing full deployment of ATMs in New Zealand. We’re gaining traction with our financial institution initiatives, although we know this will take time. We’ve completed three acquisitions at very good prices, with further acquisitions under consideration.

This year we’re hoping to reach break even on specific initiatives such as New Zealand and financial institution services. From next year we’d expect positive earnings contributions.

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How might Customers’ growth plans be impacted if the Australian Greens’ proposed legislation limiting ATM fees to the actual cost of service is adopted?

MD Tim Wildash
It is our understanding, the legislation is unlikely to be passed as neither of the major parties is intending to support it. Also, given the bill relates only to the ATM fees charged by banks, even if it was successful, we don’t think it would have a material impact on our business.

It’s also important to note that the Reserve Bank of Australia and the Department of Treasury regard the recent reforms in the ATM fee regime as a major success in terms of making fees much more transparent and saving consumers money: two thirds of all ATM transactions (“own bank” transactions) are now free for cardholders. So, even though there’s some vocal criticism of “foreign” transaction fees in the popular press, there’s little other support or rationale for changing the current system.

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As at the end of December 2010, Customers had net debt of $35.9 million, up from $30.6 million six months earlier. Is the current balance sheet capacity adequate for the growth opportunities you’re now seeing?

CEO Peter Campigli
Our current gearing is conservative and there is significant scope for us to increase our borrowings to fund our growth should the need arise.

openbriefing.com
Thank you Tim and Peter.

For more information on Customers, visit www.customersatm.com.au or call Rohan Martin, Manager Corporate Affairs, on +61 3 9090 4745

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