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Customers Limited today announced a five-year ATM managed service agreement with Bank of Queensland Limited under which you will provide full end-to-end maintenance and support for around 100 off-branch BOQ ATMs and an additional 300-plus terminals that will migrate from the existing Customers fleet. You expect the deal to generate an incremental uplift in EBITDA of $5 million to $6 million over its five-year life. What assumptions underlie this forecast and how does the deal differ structurally from your previous re-branding deals with banks?

MD Tim Wildash
That EBITDA increment is net of the existing contribution from these terminals.

This is a landmark deal for Customers. Whilst boosting revenues and providing us with a revenue stream based on a set fee for service, the agreement diversifies our income away from transaction-based revenue, which accounts for some 98 percent of our revenue today. This has been a clear objective of our growth initiatives.

Furthermore, the agreement moves us into ATM outsourcing for financial institutions, with fixed service revenues. This business model is fundamentally different from any of our previous branding agreements with BOQ or other banks, and more scalable.

I am delighted that in a very short period of time Customers has, in partnership with Hyosung, established a proposition for Australia’s financial intuitions that has been validated through today’s announcement, and provides a unique platform for the future growth of our company.

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What was the process by which BOQ selected Customers to provide this managed ATM service?

CFO Peter Campigli
It was a competitive tender process conducted nationally. The decision to select Customers was based on the reliability of the Hyosung machines, which is proven in overseas markets such as the US, our flexibility, our commercial approach as a service provider and our competitiveness.

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Under the BOQ agreement over 300 of Customers’ existing machines, including more than 180 at BP Australia-owned and operated petrol stations, will become fully serviced BOQ machines, operating under the rediATM brand. How will the operating cost base of these machines differ from your typical machines? To what extent are you able to manage costs under the deal such as merchant rebates?

MD Tim Wildash
We’ll provide a turnkey outsourced solution including maintenance, support and cash-in-transit services for these machines, and all service costs are fully reflected in the pricing of the contract.

The deal also provides for the extension of our contract with BP Corporate until 2016, moving from the previous expiry of 2013. We’re also renegotiating agreements with merchants at the other sites which are part of the agreement. For BP and the other merchants involved, the ability for around 8 million cardholders in Australia to use their ATMs at no direct charge is seen as a wonderful commercial advantage for their businesses. We don’t expect any significant pressure on merchant rebates for ATMs included in this agreement.

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You’ve indicated you will be deploying new Nautilus Hyosung Monimax 5600 ATMs at all the sites under the BOQ agreement. What level of capex will be required and how will Customers fund it?

CFO Peter Campigli
The contract requires capex of between $5 million to $5.5 million over the next 12 months. Our options for funding are either out of cash flow or increasing current borrowings. We intend to use the latter for this contract, for further sales to financial institutions and for our New Zealand ATM roll-out. Discussion with our bankers has been very positive. We’re very comfortable with expanding our capex in this area given our contract is with a major bank and fully costed.

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You’ve said the BOQ agreement is the first major milestone in your diversification and growth journey. What is the potential market for supplying similar ATM services to financial institutions and how important is the BOQ deal for Customers’ competitive position in the market?

MD Tim Wildash
We’re now in the position to earn significant revenue from the financial institutions market in Australia. We started on a course to reach this position approximately three years ago, and an important step was the signing of our contract with Nautilus Hyosung of Korea 18 months ago. Hyosung is a world leader in ’self-service banking’ machines, with the fastest growth globally in ATMs for financial institutions over the last five years.

We estimate that at least 50 percent of all bank ATMs in Australia today operate under a fully outsourced model similar to the one we’ve agreed with BOQ, while the remainder operate under a hybrid model in which for example the bank may own the ATM and outsource its day-to-day servicing.

Our contract with BOQ demonstrates our ability to make the transition from providing services to pubs, smaller retailers and clubs around Australia to providing outsourced services to blue-chip corporates and augurs well for our ability to secure new long term contracts in the near future.

We’re extremely pleased with our progress and the interest shown to date from several institutions in our outsourced proposition for the Australian market. Whilst we are mindful of the long lead times involved in working with larger institutions, the early signs are very positive, reinforcing the potential value of our proposition to Australia’s banking sector.

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On 19 May, Customers provided a trading update, indicating that net profit before tax (PBT) in the current year ending June 2011 would be in the range of $16 million to $18 million, compared with $24.8 million last year, and consensus at the time of $23.5 million. Given you’ve continued to experience year on year revenue growth in the current second half, the guidance suggested a material increase in costs in the second half. What were the reasons for this and to what extent are the costs one-offs?

MD Tim Wildash
Bailment facility costs aside, there have been no material unexpected increases in costs in the second half relating to our core ATM business. Rather, as we’ve said previously, we’ve been working hard to win managed service contracts in the financial institutions space, and pursuing other growth initiatives such as developing pre-paid debit cards, which have been extremely successful for the likes of Cardtronics in the US and DirectCash in Canada. We’ll have total costs of roughly $3.2 million relating to these initiatives for the year, whilst revenue won’t start coming through until next financial year.

As you’re also aware, we’re continuing to expand our network in New Zealand, where we’ve signed all but one bank to give their cardholders access to an independent network and we’re optimistic the remaining institution will agree to provide access in the near future. We now consider ourselves to be the controlling partner in the New Zealand network, and accordingly we’ll have to consolidate losses of roughly $1 million from those operations for the 2011 financial year. But we expect to soon commence rolling out over 100 machines a month in New Zealand and we’re very satisfied with the business model we have in place there.

Adding back this $4.2 million to the upper range of our guidance, gives us normalised PBT of circa $22 million for the 2011 fiscal year. We’re reasonably happy with this result given that across Australia five of the last 12 months were either the wettest or second wettest since at least 1900, whilst consumer sentiment has been significantly dented by high fuel prices, interest rate rises and other factors.

Other than our bailment facility costs, which have risen in line with interest rates, all other costs have been maintained in line with budget or lowered. Costs we can control are under control; factors we can’t control have hurt us.

CFO Peter Campigli
By way of example, there’s 30 percent more head count in this organisation now than 12 months ago. That’s come from putting in place the expertise and infrastructure the growth initiatives require: we’ve built up our technology group, which now has 17 people, up from five people 12 months ago, plus introduced our own internal audit and HR capabilities. We’ve also had costs related to things like ISO accreditation, which is a requirement for securing work with financial institutions and other major corporates.

Of the $3.2 million growth-related expenses, in the range of $2 million relates to infrastructure and is one-off, while around $1.2 million will be ongoing. We believe this money is being wisely spent because the skill set for our growth initiatives in financial institutions, pre-paid cards and related offerings is a different skill set from running a convenience ATM network. We’ve got that skill set on payroll now.

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If you exclude costs relating to the growth initiatives and New Zealand, projected PBT for the current year would appear to be down at least 10 percent versus last year. Within Customers’ core ATM business, what have been the trends in transaction fees and transaction volumes and to what extent have these been driven by structural as opposed to cyclical factors?

MD Tim Wildash
As of the current second half, we’ve increased transaction fees above $2 on over 50 percent of transactions across our fleet. Aggregate transaction volumes for the first four months of the half were flat compared with the previous corresponding period, which we think is a sound performance given the number of negative external factors we’ve had to contend with.

This year’s wet weather has been a major issue. When the weather is wet, school sports are called off, the country races are called off and people stay away from tourist strips like Bondi Beach in Sydney and Acland Street in Melbourne. They stay at home or flock to the major shopping centres, where it’s dry and comfortable, and where the banks tend to have their ATMs. We’re generally not represented at those major shopping facilities. We’re represented at the tourist strips, the bars, the pubs and entertainment places.

We believe this move to major shopping centers and people not leaving home has been partly misrepresented as a structural change in the demand for foreign ATM services. We think it’s more related to significant cyclical factors such as unprecedented wet weather as already outlined and weaker consumer sentiment.

Direct Charging, introduced by the Reserve Bank in 2009, has been highly successful in providing greater transparency about ATM fees to cardholders, and has certainly prompted an element of structural change in the way a percentage of cardholders now obtain cash. That being said, we believe the changes in ATM usage since the introduction of Direct Charging validate our strategy to pursue initiatives such as managed ATM services, mobile phone top-ups, and prepaid cards to drive increased and more diverse revenue streams from our terminals.

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Last year Customers booked operating cash flow of about $48 million, but free cash flow was around $24 million, reflecting relatively heavy capex of $24 million. Given more subdued earnings and the capex needs under the BOQ agreement, what is the outlook for free cash flow this year and next? Will you be in a position to maintain dividends at or above last year’s level of 8 cents per share?

MD Tim Wildash
Our capex won’t impact our ability to pay a final dividend, which the board has already committed to, or impact our dividend policy, which remains unchanged. Capex for the 10 months to date is around $10 million which includes spending on growth initiatives such as the New Zealand roll-out and machines for the financial institutions initiative. We expect total capex to be $12.5 million to $13 million this financial year, freeing up additional cash flow compared to the previous corresponding period.

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Will the ongoing changes in your underlying market and competitive forces, along with potential regulatory changes relating to ATM fees, impact Customers’ ability to pursue its longer term growth plans?

MD Tim Wildash
Our current strategy for growth – diversifying our revenue streams, introducing new products and better leveraging our core asset base – is the path we embarked on just under three years ago. Changes in our underlying market only reinforce that we are on the right track with this strategy. We’re now about to see revenue from our ATM outsourcing service initiatives; our ATMs are offering more to cardholders and merchants alike; we have initiatives in planning such as pre-paid debit cards which will serve a fast evolving market; and our New Zealand roll-out is gaining momentum.

We are confident sensible minds will prevail and that any potential changes to the regulatory environment won’t interfere with independent ATM operators to any material extent.

We’re an aggressive, financially strong player in a market where many of our smaller competitors are structurally weak. We’re investing in new applications and world-class technology, and we’re very confident about the future

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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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