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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.

Thank you, and good afternoon. With me today are Mac 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 in 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 SEC rules such as adjusted EBITDA, adjusted net income and adjusted earnings per common share. Reconciliation to GAAP measures and 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.evertecinc.com. I'll now hand over the call to Mac.

[Operator Instructions] Our first question will come from Vasu Govil with KBW.

Got it. And then one quick one for you, Mac. I know you've talked about M&A as being a strategic priority for you. Any update on whether you were seeing valuations just to a level where you think the probability of actually completing a larger size deal may be 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 are struggling more and sort of the complexion of size of the deals in the pipeline?

Sure. So yes, thanks, Vasu. As we announced earlier, we hired a new EVP to run the area, who was actually the CFO of Despegar, which basically is Expedia of Latin America. He has a lot of M&A and investment and banking experience, and we're excited to onboard them in March. What I would say is are starting to move a little bit, but I wouldn't say there's complete capitulation because even the public markets have bounced back up. 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 looking at deals that are similarly sized to what we've executed in the past, and frankly, some deals that potentially could be larger as well.

Super helpful. And if I can squeeze in one last one. Are you knock on that from everything that's gone on in the U.S. banking industry and the turmoil or you didn't hear any knock-on effects from that in any part of your business?

No. We -- I mean, we haven't seen an effect. And in fact, the local banks, a couple of them have already announced earnings and they had great quarters. And so we've been sort of insulated from that.

Our next question comes from [indiscernible] with Deutsche Bank.

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

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

Our next question comes from Bob Napoli with William Blair.

So Mac, Joaquin, you become more active now that the deal with Banco Popular is completed on the M&A front, how are the deals done that you've completed so far? How are the integrations going? I mean are you feeling confident are the -- as you look at future deals that you kind of have that M&A machine and the integration working well.

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 in Santa Derry -- they're running on intellectual property that we acquired, and we integrated that well. We were able to bring up new customers, changing it from a licensing model to a processing model. If you look at Grupo Aval, the second largest bank in Colombia, they're running on the e-commerce gateway that we purchase. So we think we've done a good job of buying things at the right valuation things where we had revenue synergies and we were able to expand our business. 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 technology. 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 and 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 it and getting the synergies. As we look forward, we hope to do more M&A. So that's why we're -- we have a new leader. I mean the 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 -- how I've stacked my direct report team, but also bringing in an additional leader in building out that team and because that's going to be a big focus.

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

You mean in terms of every segment specifically or you...

Are you 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.

Our next question comes from Jamie Friedman with Susquehanna.

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 four months in, but any kind of bigger picture takeaways about what you've seen so far?

From the business, the strength of the 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, look, but that's been the biggest surprise. Other than that, I think we're executing very well. And like I said, we're very focused on M&A, but the strength of the consumer has surprised I think the entire industry.

Our next question comes from John Davis with Raymond James.

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

Okay. That's helpful. And then, Mac, obviously, we've talked a lot about capital allocation so far on this call in M&A, hired new Head of Corp Dev. But just -- we're almost a year from the BPOP transaction, which kind of frees you up, if you will. Where are you willing to take leverage? How big of a deal or kind of are you willing to do? You've done a bunch of nice tuck-ins throughout your time at EVERTEC. But 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.

Look, I mean, we would look at 3 to 4x 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 the deal we have one, but we are looking at that are more sizable than in the past.

Okay. Great. And then last one for me. Just any update on Chile. Obviously, you made a net in that market a few years ago. We had COVID. Just curious kind of how that partnership is going SP-2 Any color there?

Yes. I mean, look, Santander Chile was the first major deal that created a lot of excitement at the company because we had bought Petro or pay group, and then we turned it into 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. Chile is a market we love, right? We -- 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 is 1 of our largest markets outside of Puerto Rico, and it's performed well. .

Our next question comes from James Walker with Morgan Stanley.

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 you view revenue? And then on the cost side as well, what leverage do you have to pull to protect margins? Just how should we think about that?

I mean, look, the one thing Puerto Rico is a bit of a unique market. One is 40% of the population against federal subsidies. And those typically don't go away if you get a recession. In fact, those could increase. So then you had the opportunity for the continued funding coming in from the Feds from the hurricane and the pandemic. And that's still some sub-people size that at about another $50 billion, right? And that's what some of the banks have said they anticipate as well. So that does create some type of insulation against a recession because those are federal funds that would be less likely to be impacted. . From a cost perspective, look, we -- if you look at what we've done with 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 to continue to look at labor arbitrage between our different locations, and we'll continue to look for opportunities with our vendors.

[Operator Instructions] Our next question is a follow-up from Bob Napoli with William Blair.

Appreciate it. I just wanted to follow up on PaySmart/Brazil, 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 1 acquisition in Brazil. Do you have a broader Brazil strategy? And how is PayeSmart looking early days, but just broadly your thoughts around getting a lot bigger potentially in Brazil.

Great question, Bob. So as you know, we've had a 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. 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. And 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 it do in Brazil.

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

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 make sense both commercially and from an operating perspective that would make sense for us. So we'll look at products, we will look to expand into geographies in a larger way, like you mentioned, potentially in Brazil. 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.

This concludes our question-and-answer session. I would like to turn the conference back over to Mac Schuessler for any closing remarks.

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