EVERTEC Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

There are 10 speakers on the call.

Operator

Good afternoon, everyone, and welcome to the EVERTEC's First Quarter 2023 Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the call over to Kevin Hunt of Investor Relations. Please go ahead.

Speaker 1

Thank you and good afternoon. With me today are Max Schuessler, our President and Chief Executive Officer and Joaquin Castrillo, our Chief Financial Officer. Before we begin, I would like to remind everyone that this call may contain forward looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent periodic SEC report. During today's call, management will provide certain information that will constitute non GAAP financial measures under Certain additional information are also included in today's earnings release and related supplemental slides, which are available in the Investor Relations section of our company website at www atevertechinc.com. I'll now hand over the call to Mac.

Speaker 2

Thank you and good afternoon everyone. We delivered strong first quarter results which On today's call, I will start with some highlights from the quarter and then we'll turn it over to Joaquin, who will provide further details on our Q1 results as well as an update to our expectations for the rest of the year, which includes raising our guidance for 2023. Before I begin with a summary of our financial results, I would like to highlight that we are revising our adjusted EBITDA calculation to exclude the effect of non cash unrealized gains and losses from This will better present the overall financial performance of our core business and facilitate comparison with industry peers, while also aligning to our credit agreement definition of adjusted EBITDA. This change will also translate to changes in our adjusted net income and adjusted EPS metrics. For clarity and comparability, we have recast prior period numbers to conform to this revised calculation.

Speaker 2

Beginning on Slide 4, total revenue was approximately $160,000,000 for the Q1, an increase of 6% compared to the Q1 of 2022. Adjusted EBITDA was approximately $67,000,000 a decrease of 8% when compared with a prior year recast amount of $73,000,000 Adjusted EBITDA margin was 42% in line with our expectations and adjusted earnings per share was $0.69 an increase of 5% from the prior year quarter's recast adjusted EPS of $0.66 We generated operating cash flow of $55,000,000 and we returned approximately $10,000,000 to our shareholders through dividends and share repurchases. Additionally, our liquidity remains strong at $368,000,000 as of March 31. Moving on to our Puerto Rico update on Slide 5. We experienced strong growth in both merchant acquiring and payment processing, with business solutions down as expected due to the impact of the Popular transaction.

Speaker 2

Merchant Acquiring revenue was up 13% year over year, driven by sales volume increases, mix of cards and pricing initiatives. Payments Puerto Rico was up 21% year over year with strength coming from POS processing as transactions grew 11% year over year ATH Movil, which continues to drive growth for the segment, as well as contribution from the small acquisition completed last year and that will anniversary Q2. Our Business Solutions segment revenue was down 11% year over year as expected due primarily to the business sold as part of the Popular transaction. We We are pleased to announce that we've extended our issuing relationship with Oriental for an additional 7 years, which provides further proof of the strength of the ATH network with key institutions on the island. Oriental has been a long term partner of the ATH network, one of the top 3 financial institutions in Puerto Rico and will now continue to issue ATH branded cards through 2030.

Speaker 2

With this extension, we have now extended issuing relationships over the medium term with the top 3 banks in Puerto Rico. Finally, a few comments on the macro environment in Puerto Rico. While the overall backdrop remains positive, the economic data has clearly begun to moderate on many fronts. The unemployment rate remained at 6% in the Q1, still at the lowest level in decades, but largely unchanged from the Q4 of 2022. The economic activity index has begun to moderate with an increase in January of less than 1% and a reduction in February of approximately 20 basis points when compared to the prior year.

Speaker 2

On a positive note, travel and tourism continue to recover with total airline passengers up 9.3% year over year in March. But on the negative side, auto sales in the month of March were down 4% from a year ago. So while we remain optimistic about our own business, We are not assuming significant tailwinds from the overall economy. Turning now to Latin America on Slide 6. LATAM revenue was up 23% year over year in the quarter.

Speaker 2

We continue to experience strong organic growth and revenue contribution from the BBR acquisition completed in the Q3 of last year. In this quarter, we also had a partial contribution from the PaySmart acquisition that we announced in February. I'm also pleased to announce Another key business win with an important partner in LATAM that further strengthens our strategy in the region. We have expanded our relationship with MercadoLibre to process their issuance of credit cards in Mexico. Recall that we currently process debit cards for MELI in Mexico and more recently in Chile.

Speaker 2

We expect this new business to ramp over the next few quarters with a more meaningful contribution in 2024 and beyond. Finally, aligned with our focus on capital deployment, pleased to have welcomed Alberto Lopez Gaffney as Executive Vice President of Corporate Development. Alberto joined us in March and his hiring further demonstrates our commitment to our strategic Objective of continuing to diversify the company and execute on M and A as a key driver of both growth and diversification. With that, I will now turn it over to Joaquin to provide a more in-depth look at our Q1 results and our increased outlook for 2023.

Speaker 3

Thank you, Mac, and good afternoon, everyone. Turning to Slide 8, you will see the consolidated first quarter results for EVERTEC. Total revenue for the Q1 was 159,800,000 Across most payment segments, both in Puerto Rico and LatAm, driven primarily by increasing transaction volumes and the contribution of 3 small acquisitions completed over the past Partially offset by the revenue sold as part of the Vovilar transaction. Adjusted EBITDA for the quarter was 67,100,000 A decrease of approximately 8% from $72,700,000 in the prior year as recast. As Mark mentioned, beginning with this quarter, we have modified our definition of adjusted EBITDA to exclude the impact of non cash on realized gains and losses related to foreign currency remeasurement.

Speaker 3

This will better present the overall financial performance of our core business and facilitate comparison with industry peers, while also aligning to our credit agreement definition adjusted EBITDA. This change will also translate to changes in our adjusted net income and adjusted EPS metrics. We have recast results from prior periods to conform to this new presentation and you can find those details in our press release. All of my comments about growth rates are based on the recast numbers from prior periods. Adjusted EBITDA margin was 42%, A 640 basis point decrease compared to the prior year.

Speaker 3

The decrease in margin reflects the impact of the Popular transaction that we have discussed on previous calls, Higher personnel costs as well as higher expenses related to acquisitions. Adjusted net income for the quarter was $45,600,000 a decrease of approximately 5% as compared to the prior year, primarily reflecting the lower adjusted EBITDA, partially offset by a lower than expected Tax rate. Our adjusted effective tax rate in the quarter was 9.5%, reflecting benefits in certain jurisdictions that will likely be given back in future quarters. We continue to expect the tax rate for the full year to range from 16% to 17%. Adjusted EPS was $0.69 for the quarter, an increase of approximately 5% compared to the prior year, With the increase being driven by a lower share count as a result of the shares received and retired in consideration for assets sold as part of the Popular transaction and our share repurchase activity throughout 2022.

Speaker 3

Moving on to Slide 9, I will now cover our segment results starting with Merchant Acquiring. In the Q1, merchant acquiring net revenue increased approximately 13% year over year to approximately 40,300,000 This increase was driven primarily by strong sales volume growth, mainly in the 1st 2 months of the quarter and moderating as we exited the month of March. We saw increased sales volume across most categories, in part attributed to new merchant adds and strong organic growth. We also benefited from the effect of pricing initiatives, most of which were put in place throughout last year that improved our overall spread. We also expect moderation in our spread growth as we begin to anniversary some of these initiatives throughout the rest of the year.

Speaker 3

Adjusted EBITDA for the segment was $15,600,000 down approximately 9%. Adjusted EBITDA margin was 38.7%, down approximately 9 20 basis points as compared to last year, reflecting the impact of the revenue share implemented As part of the Popular transaction, as well as some higher processing costs from the payments Puerto Rico segment, as we continue to see a declining average ticket transaction when compared to last year. On Slide 10, you will see the results for the Payment Services, Puerto Rico and the Caribbean segment. Revenue for the segment in the Q1 was $48,400,000 up approximately 21%, driven by strong transaction growth and the contribution from the tuck in acquisition completed in the Q2 of last year. POS transactions were up 11% from prior year and aligning to the trends observed in merchant acquiring, where the 1st 2 months of the quarter were very And starting to moderate as we exited the month of March.

Speaker 3

ATH Movils, specifically the business app, continues to drive important growth for the segment with Adjusted EBITDA for the segment was $27,900,000 or approximately 17% compared to last year. Adjusted EBITDA margin was 57.6 percent, down 220 basis points as compared to last year. The margin decline was due to an increase in provisions for operational losses and higher professional fees, partially offset by leverage from the strong revenue growth. On Slide 11, you will see the results for our Payment Services LatAm segment. Revenue for the segment in the Q1 was $35,300,000 up approximately 23% as compared to last year.

Speaker 3

We continue to see strong organic growth with existing customers across the region, complemented by the addition of both the BBR acquisition completed in the Q3 of last year and a small contribution from the PaySmart acquisition that we announced in late February. Adjusted EBITDA for the segment was 10 point $4,000,000 and adjusted EBITDA margin was 29.3%, down approximately 410 basis points as compared to last year, due primarily to higher personnel costs, which is a function of increased headcount both organic and via acquisitions and also higher salaries due in part to foreign currency fluctuations On Slide 12, you will find the results for the Business Solutions segment. Business Solutions revenue for the Q1 was down approximately 11% to $55,700,000 and aligned with our expectations. The decline is mainly a result of a tough comparable quarter in the prior year that wasn't impacted by the effects of the Popular transaction that closed during the Q3, mainly the revenue sold and the effect of CPI. For the quarter, adjusted EBITDA was $22,400,000 and adjusted EBITDA margin was 40.2%, down approximately 7 10 basis points as compared to last year.

Speaker 3

The adjusted EBITDA margin decrease was primarily driven by the impacts from the Popular transaction, which include the effects of revenue sold, which were of higher margin, as well as higher operational costs driven by supplies for our printing business, which have been impacted by inflation. Moving to Slide 13, you will see a summary of corporate and other. Our first quarter adjusted EBITDA was a negative $9,100,000 a decrease of approximately 21% compared to prior year. Our adjusted EBITDA as a percentage of total revenue was 5.7%, up slightly when compared to the prior year. Moving on to our cash flow overview on Slide 14.

Speaker 3

Our beginning cash balance was approximately $216,000,000 including restricted cash of approximately 18 Net cash provided by operating activities was $55,000,000 a nearly $30,000,000 decrease compared to the prior year, mainly as a result Of lower net income and fluctuations in working capital as we paid down certain accrued liabilities. Capital expenditures were approximately 13,000,000 And we continue to anticipate approximately $70,000,000 of CapEx for the full year 2023. We paid down the outstanding balance on our revolving of $20,000,000 approximately $5,000,000 in long term debt payments and $6,000,000 in withholding taxes on share based compensation, which resulted in a total net debt decrease of approximately $31,000,000 We paid cash dividends of $3,000,000 and we repurchased approximately 188,000 shares of common stock at an average price of $33.35 for a total of approximately $6,000,000 We have approximately $72,000,000 available for future use under the company's share repurchase program. Our ending cash balance as of March 31 was $193,000,000 and this included approximately $19,000,000 of restricted cash. Additionally, we recently announced another $0.05 dividend to be paid on June 2 to shareholders of record as of May 1.

Speaker 3

Moving to Slide 15, you will find a summary of our debt as of March 31. Our quarter ending net debt was approximately $236,000,000 comprised of approximately $174,000,000 of unrestricted cash And approximately $410,000,000 of total short term borrowings and long term debt. Our weighted average interest rate was 5.3%. Our net debt to trailing 12 month adjusted EBITDA was approximately 0.9 times. As of March 31, total liquidity was approximately $368,000,000 This balance excludes restricted cash and includes the available borrowing capacity under our revolver.

Speaker 3

Moving to Slide 16, I will now provide you with an update to our 2023 outlook as well as some comments on the remainder of the year. Given our Q1 results and additional visibility, we are raising our guidance and now 4% to 5.4 percent and continue to expect adjusted EBITDA margin to range between 42% to 43%. We now expect adjusted earnings per share of $2.59 to $2.68 On a GAAP basis, earnings per share is anticipated to be between $1.80 to $1.90 We had a strong Q1 driven by better than expected performance from our Puerto Rico payment segments. And even though some of the drivers of this growth are Expected throughout the remainder of the year, we are considering some moderation over the next few quarters given the trends observed during the month of March and and what we have seen through April. In terms of adjusted earnings per share, we are also anticipating that our non GAAP effective tax rate is expected to come back to more normalized levels over the remaining quarters and we continue to anticipate our full year non GAAP effective tax rate to range between 16% 17%.

Speaker 3

We have not considered any additional share repurchases as part of our outlook. In terms of the segments, We now expect our merchant acquiring revenue to grow in the mid single digits. We expect our payments Processing Puerto Rico segment to grow in the high single digits and expect year over year growth to slow down starting in the second quarter as we anniversary the tuck in acquisition completed last year. We continue to anticipate our payments lab am segment to grow in the mid High teens for the full year with a strong second quarter, but we'll see year over year growth slow down in the 3rd quarter as anniversary the BBR acquisition completed last year. In Business Solutions, we are expecting a low to mid single digit reset for the full year With the Q2 resembling our Q1 and turning to positive growth in the second half of the year as we anniversary the Popular transaction in the Q3.

Speaker 3

In summary, we are pleased with our results in the Q1 and the trends we see in the business. We look forward to hopefully seeing you in person at our coming conferences in the coming months. Operator, please go ahead and open the line for questions.

Operator

We will now begin the question and answer session. Our first question will come from Vasu Gholdyal with KBW. Please go ahead.

Speaker 4

Hi, thanks for taking my questions. I guess the first question, can you talk a little bit about the change in quarterly cadence that you saw from Jan, Feb to March and then relative to March where April trends are tracking, just to give us a sense for like the magnitude of Moderation?

Speaker 3

Sure. Hi, Vasuloso. This is Joaquin. I'll just kind of sales volume. So we started January in the high single digit range and we exited March in close to the 4% sales volume growth range.

Speaker 3

April is trending similar to March. And so that's kind of the level of decline that we saw on a sequential basis.

Speaker 4

Got it. And then, just I got the comment on the pricing initiative still helping growth. Do you have you disclosed sort of when We might see those lap and sort of impact the growth rate this year?

Speaker 3

We implemented these throughout the year last year, but I would say that most of the pricing initiatives Took place between Q2 and Q3. And so we will probably start to see those lab in the second half of Q2 and throughout Q3.

Speaker 4

Got it. And then one quick one for you, Mac. I know you've talked about M and A as being a strategic priority for you. Any update on whether you were seeing valuations adjust to a level where you think the probability of actually completing a larger size deal maybe increasing? And then I guess if you could also give us an update on what the pipeline looks like today, any indication on whether that has increased as FinTechs is struggling more and sort of the complexion of size of deals in the pipeline.

Speaker 4

Thank you.

Speaker 2

Sure. So yes, thanks Vasu. As we announced earlier, we hired a new EVP So Ron Iria, who was actually the CFO of Despegar, which basically is Expedia of Latin America. He has a lot of M and A and investment and banking experience And we're excited to onboard them in March. What I would say is valuations are starting to move a little bit, I wouldn't say there's complete capitulation because even the public markets have bounced back up.

Speaker 2

So hopefully during the back half, we'll continue to see pricing settle. As far as the pipeline, we have a pretty active pipeline that we're going through different opportunities across the region. We are deals that are similarly sized to what we've executed in the past and frankly some deals that potentially could be larger as well.

Speaker 4

Super helpful. And if I can squeeze in one last one.

Speaker 3

Sure.

Speaker 4

Any knock on effects from everything that's gone on in the U. S. Banking industry and the term You've seen here any knock on effects from that in any part of your business?

Speaker 2

No, we I mean, we haven't seen effect. And in fact, the local banks, A couple of

Speaker 3

them have

Speaker 2

already announced earnings and they had great quarters. And so we've been sort of insulated from that.

Operator

Great. Thank you. Our next question comes from Nate Svensson with Deutsche Bank. Please go ahead.

Speaker 5

Hi, guys. Congrats on the results. Just wanted to ask a few more follow-up questions on the macro situation In Puerto Rico, so you talked about lower ticket sizes in your prepared remarks. I know at your last update you had mentioned inflation being 6% in Puerto Rico. So just wondering your thoughts on the trends for inflation through the remainder of the year.

Speaker 5

Do you expect ticket sizes to continue decreasing? And then you also mentioned travel and leisure being up 9% in March. Just wondering, is that in line with your expectations? And then do you Can you share what your sort of travel assumption that you have baked into your current 2023 guidance?

Speaker 3

So yes, I'll try to break that up into a few pieces and if I I will say that in terms of travel and leisure, we don't necessarily have A specific expectation from Interimol, I will say the reason for that is that in general, right, tourism for Puerto Rico is only about 5% to 8% of total GDP contribution. So it's not a huge factor in just the general macroeconomic environment. Obviously, it's something that we track and it's important in the sense of volume from specific verticals, but it's not a huge driver to our In terms of average ticket sizes, this is something that we've been calling out for a few quarters. We know Given the stimulus that we saw, the stimulus effect on consumption over the past couple of years, average tickets really got to a level That were higher than usual. Inflation has kind of kept them or kept the average ticket a little bit higher than what we expected For a longer period of time, but we continue to have an expectation that average ticket will slowly come back to normalization and that is part of the guidance that we've put forth.

Speaker 3

What was the That we've put forth. What was the other question? I'm sorry.

Speaker 5

No, I think you touched on it, but that also makes me think. I know last quarter you had Highlighted that the funds coming into Puerto Rico were expected to be flat in 2023 versus 20 22. Is that still

Speaker 2

the case?

Speaker 3

We continue to expect that to be the case. That's correct.

Speaker 5

Got it. Got it. And then just for my follow-up, wondering if you can give a little more color on the expanded relationship with Auto Libre, obviously sounds like very exciting moving beyond just the debit. So maybe you can talk about how material your current partnership with Nelly is, What the new business entails and kind of how significant you think the new relationship can be to the LatAm business going forward?

Speaker 2

Yes. So this is Mac. I mean, look, MercadoLibre is probably the best brand, particularly e commerce brand in the region. So the testament that they do business they started with a debit card business in Mexico, Then we picked up their debit card business in Chile. And now that they're doing credit with us in Mexico, it's good from perspective that it's great reputationally as well.

Speaker 2

The credit cards are being issued to both consumers and merchants to conduct business. And I don't know if you want to add anything on the materiality.

Speaker 3

No, we haven't broken on the materiality. What we have said in the past though is Both of these, let's say, our debit relationship and the credit relationship now with MercadoLibre have really started from the ground up in terms of issuance. So these are businesses that need a little bit of time to ramp up and actually build up the portfolio so it becomes more meaningful to the overall business. Having said that, they have been contributors to the growth that we're seeing organically in our Latin America segment. And exceeded our forecast, right?

Speaker 2

They exceeded our forecast, both of those. So we're optimistic.

Speaker 5

Super helpful. Thanks guys and congrats again.

Speaker 3

Thank you. Thank you.

Operator

Our next question comes from Bob Napoli with William Blair. Please go ahead.

Speaker 6

Thank you. Good afternoon. Question, so Mac, Joaquin, you've become more active now that the deal with Banco Popular is completed on the M and A front. How are the deals done that you've completed so far? How are the integrations going?

Speaker 6

I mean, are you feeling confident? Are these as you look at future deals that You kind of have that M and A machine and the integration working well?

Speaker 2

Yes. So Bob, I would say generally, if you look at The deals we've done over time, the biggest marquee brands that we've discussed and announced are on those new platforms. So if you look at Mercado Libre, Santander Chile, they're both running and Santander do Uruguay, they're running on intellectual property that we acquired and we integrated that well. We were able to bring up Customers changing it from a licensing model to a processing model. If you look at Grupo Evolve, the 2nd largest bank in Colombia, They're running on the e commerce gateway that we purchased.

Speaker 2

So we think we've done a good job buying things at the right valuation, things where we had revenue synergies and we're able We always do a postmortem and we learn from those to make sure that we continue to improve on each and every acquisition because each is different, right? It may be a different country, different type of Again, sometimes we're pivoting the model from licensing to processing. But in aggregate, I think we've been very pleased. From time to time, there are mistakes that we make that we correct we're very I try to do that in an agile way. But so far, we think we've done a good job buying stuff at the right price and then integrating them and getting Synergies.

Speaker 2

As we look forward, we hope to do more M and A. So that's why we're we have a new leader. I mean, team that did it in the past has done a fantastic job. It's just we want to do now more over a shorter period of time. So we put More emphasis both of my time when I look at how I've stacked my direct report team, but also bringing in an additional leader And building out that team and because that's going to be a big focus.

Speaker 6

Thanks. And then the Good growth in Payment Services, Puerto Rico, also Latin America. How much was the inorganic A portion of that, can you give some color on what the acquisitions have added?

Speaker 3

You mean in terms of every Segment specifically or you want to

Speaker 6

Well, I don't know. However you want to give it, I guess. If you want to give a broad like The inorganic revenue growth in the quarter or something like that would be helpful.

Speaker 2

Yes, we don't break that out. So we do have that playing in some of the numbers. We've got it in Puerto Rico and to your point in LatAm. We would say the organic growth rate is healthy, But we don't break that out separately.

Speaker 3

Correct. What I would say, Bob, right, we try to give some additional highlights as per the prepared remarks kind of help at least with the cadence, in Puerto Rico, we did acquire or completed destocking in Q2. So we are expecting a Slow down right in the year over year growth just because we're anniversarying that. And you can see that we're still expecting high single digit growth in that second part of the year. So you can kind of back into More or less what that's going to be on a go forward basis without M and A.

Speaker 3

And in Latin America, I know it's a little bit more convoluted because we do have 2 acquisitions flowing through them. But the most meaningful one, which is the one we acquired in Chile last year, we will anniversary in the Q3. So we are expecting somewhat of a slowdown to what we are seeing today from a year over year growth perspective as we anniversary that in Q3 and still expecting high teens Growth, right, for the full year, which you can also kind of back into more or less what the impact would be.

Speaker 6

Thanks. And just lastly, sneak one in, on the other partnerships, the Citibanamex and the SumUp. I think SumUp is a really interesting Partner, great partner there as well. Can you give any color on how those partnerships are adding to growth or If they're being successful.

Speaker 3

Yes. So I'll start with SumUp, which was the one we announced last quarter. Similar to MercadoLibre, Bob, We are very excited about some of. 1, it has similar aspects to Magalha in terms of their regional presence, but In the same manner, similar in that this is a brand new portfolio we're not acquiring or let's say going to an existing business where we can migrate A portfolio of cards or transactions and get profitability ramped up very quickly. This is something that needs to grow into a more meaningful part of the But it certainly has ZECARA statistics to be that.

Speaker 3

In the case of Citi Panamax, we continue to work with Citi Across multiple countries in the region, they're trying to get that product sold. As we've said in the past, they are using our Technology at the back end, what they are kind of leading this in terms of getting in front of clients and selling. Yes, because on the

Speaker 2

city of Animax, you have to get The customer up and then you have to get their vendors up. So it's sort of a It

Speaker 3

has been also a slightly longer sales process because of the nature of the product that's been sold.

Speaker 7

Thank you.

Operator

Our next question comes from Jamie Friedman with Susquehanna. Please go ahead.

Speaker 7

Hi, congrats on a good start to the year. Mac, I'm just Wondering at a high level what so far has surprised you that you didn't expect? I know we're only 4 months in, but Yes. Any kind of bigger picture takeaways about what you've seen so far?

Speaker 2

From the business, the strength of consumer, I think, has surprised everybody. I mean, if you look at vis a vis, you look at some of our peers' beat, so I think the strength of the consumer has been surprising, not only through Q1 earnings season, but just in general, if you look, but that's been the biggest surprise. Other than that, I think we're executing very well. Like I said, we are very focused on M and A, but the strength of the consumer has surprised I think the entire industry.

Speaker 3

Okay. And then just as

Speaker 7

my follow-up, Joaquin, sometimes you enumerate the quarters or the period of comparison That so we can get the modeling right. So can you just remind us last year, was there anything in the Q2 or the second half? I know there's a lot, but if you

Speaker 3

could just remind

Speaker 7

us About when some of those things were, if you can think of it off the top of your head, I think that would be helpful as we try and kind of clean up the model. Thank you.

Speaker 3

Sure. I'll kind of go through some of the key ones that we called out. And as I just mentioned to Bob, we will The talking acquisition that we did in Puerto Rico in the Q2, that's in the payments Puerto Rico segment. I would say that in the Latin America segment, we will anniversary the BBR acquisition in Chile in the Q3. So that's an important item for that segment.

Speaker 3

And then in Business Solutions, we have the Popular transaction Impacting the Q3 mostly, right, where we had the sale of assets plus we also had the CPI credit And most of the impacts related to that will flow through Business Solutions, although we do have a small piece that flows through payments Puerto Rico. I would say that the Q1, as we said last year, is a much cleaner quarter. And if you look at what we just reported for Q1, it assimilates to What we said at the end of Q4 that Q4 is a good baseline as to what we expected for 2023.

Speaker 7

Perfect. Thank you. I'll jump back in the queue.

Speaker 3

Thank you.

Operator

Our next question comes from John Davis with Raymond James. Please go ahead.

Speaker 8

Hey, good afternoon guys. Mac, you just said kind of the Zoomers held up better to start the year. But if I look at the guide, you guys raised a little bit less than the beat in the Q1. So just curious Versus 3 months ago, kind of how do you think about macro and kind of your guide? And is there more conservatism baked in the back half of the year?

Speaker 8

Just any sort of macro commentary would be helpful.

Speaker 3

So I'll start, John, and maybe Mac can just chime in. What I would say Look, we're certainly surprised by the strength of the consumer and it was mostly reflected, as I mentioned, in the 1st 2 months of the quarter, where It really started off really strong. We have seen that kind of taper down to more of what we expected when we started the year Coming, kind of getting out of March and into April. So we're certainly looking at those trends and taking that into consideration as we model the rest of the year. I would say that if you look at our guidance for the full year, it still considers, right, a positive economic backdrop for us to be able to perform at that level.

Speaker 3

As Mike just said, we continue to operate very well. And while that strength of the consumer is something that we need to continue to monitor closely because inflation is still high, Rates are still high and we have this declining trend that we saw during the Q1.

Speaker 2

Yes. As consumers exhaust the excess cash from the Feds and as rates stay high, Take the effect that the Fed wanted to take, we do believe the back half is going to be weaker than the first half.

Speaker 8

Okay. That's helpful. And then Mac, obviously, we've talked a lot about capital allocation so far on this call and M and Hired new head of corp dev, but just we're almost a year from the VPOP transaction, which kind of freed you up, if you will. Where are you willing to take leverage? How big of a deal or kind of you willing to do?

Speaker 8

You've done a bunch of nice tuck ins Throughout your time at EVERTEC, we're just curious like what the appetite is to do a bigger deal and where you would take leverage given that we're now under a turn On leverage?

Speaker 2

Look, I mean, we would look at 3 to 4 times for the right deal. We do want to be very cautious, I think, back to one of the previous questions to make sure, the bigger the deal, the higher the conviction and the more the execution risk, and we're very aware of that. But we would do a larger deal. We are looking at some things that are larger than we have in the past. I mean, look, we can't talk about a deal till we have one, We are looking at things that are more sizable than in the past.

Speaker 8

Okay, great. And then last one for me. Just Any update on Chile? Obviously, you made an interest in that market a few years ago. We had COVID.

Speaker 8

Just curious kind of how that partnership is going, Any color there?

Speaker 2

Yes. I mean, look, Santander Chile was the 1st major deal that created a lot of excitement at the company because we had bought PayTrue or PayGroup and then we turned it into a processing business and brought up the most successful bank in Chile. The partnership is going incredibly well. They've significantly exceeded their expectations. And as you know so well that they expanded into Uruguay with us.

Speaker 2

Chile is a market we love, right? We've because of this business and because of our legacy business that we purchased there, it's a sizable market for us when you look at the whole company. One of our largest markets outside of Puerto Rico and it's performed well.

Speaker 8

Okay. Appreciate all the color. Thanks guys.

Speaker 3

Thanks John.

Operator

Our next question comes from James Faucette with Morgan Stanley. Please go ahead.

Speaker 9

Hey, guys. This is Jeff Goldstein on for James. Just on the slowing volume trends you called out, can you expand on if there are particular where that is most pronounced. Is there anything notable to call out by vertical? Maybe just some more color around those trends would be helpful.

Speaker 3

Sure. I'll give you what we have visibility to, right? This is mostly in the Puerto Rico segment. So that's where we're Kind of seeing these very good first half of the quarter and then moderating to kind of the exit of March April. And I wouldn't say it's in any specific vertical.

Speaker 3

The truth is we did see strength across all verticals. We did see the average ticket pretty much come down also in all verticals. So there isn't any one Things that I could call out and say is the main factor or the main, let's say, vertical that's starting to Moderate. I would say that it's a general comment at this point. That's how we're seeing it.

Speaker 9

Okay, got it. And then recession resilience continues to be a popular topic. So maybe you can remind us in a potential recession, how protected Revenue and then on the cost side as well, what levers do you have to pull to protect margins? Just how should we think about that?

Speaker 2

I mean, look, the one thing Puerto Rico is a bit of a unique market. One is 40% of the population gets federal subsidies and those typically don't go away if you recession, in fact, those could increase. So then you add the opportunity for the continued funding coming in from the Feds from the hurricane and the pandemic. And that's still some people size that is about another $50,000,000,000 right? And that's what some of the banks have said they anticipate as well.

Speaker 2

So that does create some type of insulation against against a recession because those are federal funds that would be less likely to be impacted. From a cost perspective, look, if you look at what we've Our margins over time not only in Puerto Rico, but in Latin America, we're very focused on managing our margins and we still have the ability

Operator

Our next question is a follow-up from Ben Napoli with William Blair. Please go ahead.

Speaker 6

Thank you. Appreciate it. I just want to follow-up on PaySmartBrazil, I guess, if you would. I mean, Brazil is Obviously, a massive market. There's a lot of players down there and you don't just make one acquisition in Brazil.

Speaker 6

Do you have A broader Brazil strategy, and how is PaySmart looking early days, But just broadly your thoughts around getting a lot bigger potentially in Brazil?

Speaker 2

Great question, Bob. So as you know, we've had Small business in Brazil when we bought PayGroup. PaySmart actually gives us an issuing business there with some great customers. Brazil, we believe is an important market. It's a significant portion of Latin America in general.

Speaker 2

It's by far the largest market. It is a market that we're interested in if we can find the right opportunities. So we like the market. We do think you've got to buy the right asset. You've got to have a good local team and you've got to be able to differentiate yourself.

Speaker 2

So far, we've been able to do that with small acquisitions and we'll continue to look at the market. And if we can find something bigger that where we feel like we have a differentiated advantage and We can manage it better or create some synergies by combining it, we would absolutely do a deal in Brazil.

Speaker 6

Thanks. And then just on the what you're looking at from an M and A perspective, anything, should we expect more of the same? Are there other areas or other you'd like to acquire, just any thoughts on the types of businesses or if we could see technology acquisitions?

Speaker 2

Yes. So Bob, we are thinking very broadly. We're looking at our franchise and what strategic advantages we have in the region from both The existing customer set that we have and what additional products could we sell them, the infrastructure that we have and how could we leverage that infrastructure to run other products more cost effectively. So we're looking at adjacent businesses that we think makes sense both commercially and from an operating perspective that would make sense for us. So we'll look at products, we would look to expand into Geographies in a larger way, like you mentioned, potentially Brazil.

Speaker 2

But we want to make sure that being part of EVERTEC makes the target A better company and create value, but we are looking wide as adjacencies as well.

Speaker 6

Thank you.

Speaker 2

Thanks, Bob.

Operator

This concludes our question and answer session. I would like to turn Conference back over to Matt Shusler for any closing remarks.

Speaker 2

I just want to thank everyone for joining the call today and we look forward to seeing you over coming months at different conferences. Thank you. Good night.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
EVERTEC Q1 2023
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