openbriefing.com
Customers Limited reported net profit after tax of $18.8 million for the year ended June 2011, in line with the previous year of $18.6 million. Underlying EBITDA (excluding costs related to the financial institution (FI) and New Zealand initiatives of $2.7 million and $0.7 million respectively) was $47.6 million, down 1 percent from the previous year. Consensus EBITDA for the current year ending June 2012 is around $45 million. How does this compare with your view of the earnings outlook?

CFO Peter Campigli
We expect our 2012 earnings may come in a little above the consensus, but this will depend on our various strategic initiatives and of course on the ongoing macro economic environment. With our New Zealand initiative we expect the business to begin generating a profit by early 2013.

We expect our FI initiative, and the Bank of Queensland contract specifically, to make a positive but marginal contribution to earnings in 2012. Under the Bank of Queensland contract we’re replacing a number of ATMs in our fleet with new machines and most importantly, migrating them from transaction-based fees to a fee-for-service model. Once the machines are installed and operating, monthly billing commences, so the timing of this process impacts revenue flow. We expect the roll-out to be completed by this calendar year end.

While we’re very pleased with the progress of our strategic initiatives, there are elements of the implementation timing that we don’t have direct control over.

openbriefing.com
Revenue rose 6.3 percent from the previous year to $124.4 million, benefiting from transaction fee increases rolled out over 2011 which resulted in a 7.5 percent increase in average revenue per transaction. What is the expected contribution of these fee increases to 2012 revenue and what is the outlook for further transaction fee increases across the network?

CFO Peter Campigli
The level of any change in average fees in 2012 is likely to be less than that in 2011, given we introduced broad fee increases across the fleet in October last year.

Across this year, some sites are likely to have fee reviews. Our fee changes are always based on commercial decisions, acknowledging that any movements have to be sustainable for the business, our merchants and cardholders.

openbriefing.com
Average transactions per ATM declined approximately 3 percent at those ATM terminals that transacted across both 2010 and 2011. To what degree does this decline suggest any shift in consumer behaviour, including towards other forms of payment, and to what degree does it reflect one-off weather events and the impact of branding changes?

MD Tim Wildash
These numbers are an indicator of our approach to maximizing site opportunities rather than of changing consumer behaviour! If we have a good quality site with high transaction volumes, it’s common for us to put another ATM nearby. This may reduce the number of transactions at the first machine, but the overall impact is to increase transactions (in total across the two machines) and protect our sites from competitors.

That said, over the last 14 months our transaction volumes were hit by a perfect storm of challenging economic conditions, the worst wet weather in 110 years, and a rapid increase in fuel prices. These three factors impacted our transactions in 2011, while branding changes also played a role. There’s also been a shift towards other forms of payment, but only at the margin.

openbriefing.com
Underlying ATM network expenses (excluding $186,000 related to the New Zealand initiative) increased by $7.5 million, up 15.3 percent on the back of a 4 percent increase in the average ATM fleet size. Transaction based payments were up 19 percent, accounting for $5.4 million of the cost increase, driven primarily by an increase in merchant rebates. Are you seeing continuing pressure for higher rebates? How are rebate costs expected to trend over 2012?

MD Tim Wildash
Rebate pressure over the last five to six months, and particularly over the last quarter, has slowed somewhat. When Direct Charging was first introduced we had roughly 12 new competitors and pressure for higher rebates intensified. The number of those players we still consider exert any sort of competitive pressure has declined as the smaller operators find themselves financially challenged.

CFO Peter Campigli
The slowing pressure on rebates isn’t reflected in the 2011 numbers but will become more apparent over 2012 with around 11 percent of our total contracts up for renewal. We expect the rate of increase in rebates to slow going forward but the impact on our costs will be more gradual given only a portion of our fleet contracts comes up for renewal each year.

openbriefing.com
Also contributing to increased ATM network expenses were higher bailment expenses, up $0.9 million due to a rise in interest rates, and higher communication and cash servicing expenses. What steps are you taking to address higher network costs?

CFO Peter Campigli
We’re providing cash servicing of machines at more sites, and the rise in interest rates is also reflected in these costs. Maintenance costs have come down and given the increasing number of Hyosung ATMs in the network, and their better maintenance profile, we expect to see further improvements here.

We’re also in the process of changing the communication composition of the network. This is an ongoing exercise to achieve optimum communications performance and cost across the network. As we work through a changeover from a traditional landline network to wireless communication for many machines, there’s some temporary duplication in communication services and costs, which we expect to see end over 2012.

openbriefing.com
Transactions per ATM across the entire fleet were down 5.6 percent compared with 2010, with newer ATM sites experiencing lower transaction volumes compared with established sites. What is your ability to leverage cost savings from further expansion of your ATM network and to continue to profitably increase your fleet size?

CFO Peter Campigli
The cost of ATMs has come down, maintenance costs continue to come down, and we expect to see communication costs coming down in future. Under a direct charge environment, as relevant costs decrease we can profitably place an ATM in a venue that does less transactions, where it might not have been profitable a year or two ago. So we can continue to profitably increase the size of the fleet, even as we deploy to lower transacting sites and transactions per ATM come down.

openbriefing.com
The NZ initiative generated a loss of $0.7 million in 2011, and you have plans to move to 100 percent ownership of NZATM and ramp up ATM deployment over 2012. What is the expected cost of these plans and when is this business expected to make a positive contribution to earnings?

MD Tim Wildash
We haven’t yet determined when we’ll move to 100 percent ownership of NZATM, but we expect it to be toward the end of the 2012 calendar year. The total cost of acquiring the 52.25 percent of the business we don’t already own, plus the investment in the ATM roll-out, will be roughly A$18 million. That funding will come from our existing facilities and has already been approved by our banks.

This is a wonderful business opportunity for us: the New Zealand market has only two approved independent deployers and the business is very synergistic with our operations here in Australia, using a lot of our existing infrastructure and expertise. We expect New Zealand to start contributing to earnings in the 2013 financial year.

openbriefing.com
The FI initiative generated a loss before tax of $3.1 million in 2011, with wage and salary costs of $2.2 million. What are the expected on-going costs of this initiative and when do you expect to break even in FI? Will further substantial capex be required to get the business to break even?

MD Tim Wildash
We expect to break even in FI this financial year. We’re extremely happy with the progress we’ve made, for example winning the managed ATM services agreement with Bank of Queensland, and with our pipeline for the next 18 months. All capex in FI from now on will be backed by gilt-edged contracts with banks or major corporates and the full cost of that capex will be incorporated into five-year contracts with those organisations.

Our costs in FI in 2011 included “start-up” costs to develop world class capabilities in financial institution software and connectivity. We had to employ consultants and acquire internationally supported software that would allow us to negotiate with the banks at their level. Those capabilities are now essentially in-house.

CFO Peter Campigli
Going forward, we see FI having a cost base of $1 million to $1.5 million. Any cost increases will be incremental; the key infrastructure is now in place.

openbriefing.com
As well as New Zealand and FI, you’ve also flagged ongoing work on a payment cards initiative. When do you expect to start generating revenue from this initiative and what is the potential market?

MD Tim Wildash
We’ve been working on our payment cards initiative over the past two years and expect to launch our first pre-paid debit card soon with a significant client. We’re particularly excited about pre-paid debit cards, which are experiencing significant growth globally. In the US these cards represent about 40 percent of the pre-paid cards market. In Australia, some 3 million cards have already been issued, and VISA is seeing annual growth in the order of 25 percent in its pre-paid debit cards here.

The cards have a number of advantages for consumers. They provide a way for you to manage your finances; they provide security – if there’s fraud relating to the card any loss is limited to the money on the card; they enable you to provide money to friends, family or children securely; and they offer a means to protect your identity when you purchase online, preventing fraud.

For us, the cards provide a further opportunity to diversify our revenue streams, giving us potential access to both transaction-based and non-transaction-based revenue.

openbriefing.com
As at the end of June 2011, Customers had net debt of $28.2 million, down from $30.6 million a year earlier, with gearing of 20 percent, up from 16 percent. Debt levels benefited from improved cash flow and a step reduction in capex from the previous year to $13.6 million. What is the outlook for capex and gearing over 2012?

CFO Peter Campigli
The most appropriate way to look at capex is on a segment basis. Our core convenience ATM segment has seen capex come down somewhat, and going forward we’d see stay-in-business capex in the segment of $7 million to $8 million per annum. Capex in 2012 will include an additional $2.7 million for a major communications upgrade.

In the New Zealand segment, as Tim mentioned earlier, we expect capex to be quite substantial – around $5 - $6 million or so is likely to be required for the purchase and installation of ATMs in that market during the 2012 financial period. In FI, the more success we have, the more capex we’ll make in the area. Our preferred model in FI is one where we own the ATMs and manage, maintain and service them for a monthly fee. That fee is structured to give us an appropriate return on investment.

Our gearing is very conservative and the board has set a gearing limit of around 30 percent. Depending on our success in the FI space, that target may have to be revisited.

openbriefing.com
Customers has announced a final unfranked dividend of 2 cents per share, bringing the full year dividend to 5 cents, versus 8 cents in 2010. What is the outlook for dividends in the current year and when do you expect to be able to pay franked dividends?

CFO Peter Campigli
Historically we’ve indicated we’d pay out 50 percent of earnings as dividends, but in 2011 we were constrained by a number of factors, including the potential capital needs of the strategic initiatives we’ve launched. The level of the final dividend reflects these factors.

In respect to franking, we’ve now used our remaining tax losses and this year we expect to be a tax-paying corporate citizen which will allow us to start generating franking credits.

openbriefing.com
Thank you Tim and Peter.

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

DISCLAIMER: Orient Capital Pty Ltd has taken all reasonable care in publishing the information contained in this Open Briefing®; furthermore, the entirety of this Open Briefing® has been approved for release to the market by the participating company. It is information given in a summary form and does not purport to be complete. The information contained is not intended to be used as the basis for making any investment decision and you are solely responsible for any use you choose to make of the information. We strongly advise that you seek independent professional advice before making any investment decisions. Orient Capital Pty Ltd is not responsible for any consequences of the use you make of the information, including any loss or damage you or a third party might suffer as a result of that use.