Kay Sharpton - Vice President-Investor Relations Morgan Schuessler - President and Chief Executive Officer Peter Smith - Chief Financial Officer.

Robert Napoli - William Blair Tien-Tsin Huang - JPMorgan James Schneider - Goldman Sachs John Davis - Stifel, Nicolaus & Co., Inc. Vasundhara Govil - Morgan Stanley George Mihalos - Cowen & Company.

Good afternoon, everyone, and welcome to EVERTEC’s Third Quarter 2017 Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the call over to Kay Sharpton, Vice President of Investor Relations. Please go ahead..

Thank you, and good afternoon. With me today are Mac Schuessler, our President and Chief Executive Officer; and Peter Smith, our Chief Financial Officer. A replay of this call will be available until Tuesday, November 14.

Access information for the replay is listed in today's financial release, which is available on our website under the Investor Relations section of evertecinc.com. For those listening to the replay, this call was held on November 7.

Please note, there is a presentation that accompanies this conference call, and it's accessible in the Investor Relations section of our website as well. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements about our expectations for future performance are subject to known and unknown risks and uncertainties. EVERTEC cautions that these statements are not guarantees of future performance.

All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statements to reflect the events that occur after this call.

Please refer to the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission for factors that could cause our actual results to differ materially from any forward-looking statements.

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. I will now hand the call over to Mac..

Thanks, Kay, and good afternoon, everyone. Thank you for joining us on today's call. As many of you know, Puerto Rico has been manhandled for almost three years, and the pain that Hurricanes Irma and Maria have caused the Islands residents touches me very deeply.

It has been heartwarming to witness the hard work and resiliency of my colleagues, our clients, and partners, and others on the Island and everyone has come together to address the many challenges we all face. I’ll review the impact of both Hurricane Irma and Maria and our team’s strong response on Slide 4.

On September 7, Hurricane Irma directly hit the Virgin Islands and a Merchant Acquiring business there was significantly impacted. On September 20, Hurricane Maria further impacted the Virgin Islands and devastated Puerto Rico.

Maria was the strongest hurricane to make landfall in 85 years and power and telecommunications in the Island was severely damaged. I am incredibly proud that through a sound planning and our team's diligent efforts EVERTEC service was uninterrupted during both of these hurricanes and in the aftermath.

Although clients did lose telecommunications and power, our processing capabilities never cease to operate. Following the immediate impact of the storm, our first priority was caring for the needs of our clients and our employees. Due to the scarcity of life essentials, our employees need special help to enable them to work.

There was a shortage of gas, so it was hard to get to work. Schools were closed so there was no place for their children and lines for food, water and cash were hours long.

Through internal initiatives and with the help of our partners, we were able to provide daycare, water, food and expedite the provision of gas by taking care of our employees they were able to take care of our clients, delivering unparalleled service on the Island.

As various customers grapple with their own power, telecommunications and infrastructure issues, we were able to – relocating the payroll function, distribution call center, and meeting facilities into our offices. EVERTEC stood as a company that others could count on when their own facilities were inoperable.

Appreciating the criticality of cash access in the absence of electricity, the communications, we worked with our clients and have reestablished many ATMs for people to withdraw money. Currently, our largest client Banco Popular has over 60% of their ATMs and 80% of their branches operational. We are pleased that we were able to help.

However, given the slow pace at which power is being restored, we have also participated and are leading in various initiatives to help merchants accept electronic payments and resemble minimal operations as soon as possible.

We are supporting small and medium sized merchants to get back in business with replacement, point-of-sale devices as well as wireless POS devices where there is limited telecommunication. We have also provided our ATH mobile business application free of charge until the end of the year.

Additionally, during the quarter, we announced our donation of $1 million toward disaster relief. This fund is primarily divided into supporting our colleagues who have suffered substantial losses, supporting the Unidos Por Puerto Rico public charity as well as supporting Popular’s campaign called Embracing Puerto Rico.

One of the more effective initiatives that Unidos Por Puerto Rico announced yesterday to supply 2,000 generators to small businesses, where we anticipate restoration of power will take some time. We are very proud of what we have accomplished and our efforts continue.

Our performance also provides a testament to the differentiation of our business continuity capabilities. We demonstrated that we provide a unique value on the Island as we were able to deliver continuous services to our customers throughout the storm and its ongoing aftermath.

As a consequence of our experience and accomplishments, we now have an even stronger relationship with our clients, partners and employees. Now, I'll cover some of the quarter’s financial highlights and provide you with an update on recent developments beginning on Slide 5. Total revenue was $103 million, an increase of 9% compared to 2016.

High margin revenues were impacted approximately $5 million to $6 million by the hurricanes. We delivered adjusted earnings per common share of $0.33, a decrease of 20% compared to last year. Year-to-date, we have generated significant cash flow and it returned over $29 million to our shareholders.

This quarter we did not repurchase any stock, but returned cash to our shareholders were approximately $7 million in dividends. Our Board has recently voted to temporarily suspend the dividend until average tax business conditions stabilize in Puerto Rico.

Additionally, the Board extended our current share repurchase program that was scheduled to expire on December 31, 2017 to December 31, 2020 in order to enable capital allocation flexibility. Now I'd like to give you some more specific updates on our business on Slide 6. First, we have solid revenue performance prior to the hurricane.

Prior to the storms, we experienced payment processing transactions similar to Q2 of approximately 89% growth. In the 10 days of the quarter after hurricane Maria, Payment volumes to last in 10% of our normal volume resulting in a negative 1% transaction growth in the quarter and 5% revenue growth in Puerto Rico.

Turning to Latin America, Q3 revenue including the impact of our PayGroup acquisition was up year-over-year. However, excluding the acquisition revenue was modestly below last year primarily due to our hardware sales as well as client attrition. The PayGroup integration is progressing well and the teams are working together.

We continue to be excited about the product solutions that are part of this acquisition and the opportunity to cross market things to our customers.

Regarding recent events, we have seen progressive improvement in October and this past week in Puerto Rico, we have experience approximately 70% of our prior transaction levels in consumer spending still arrived.

We are seeing some progress in overall conditions although the challenge is enormous and there remains a lot of work to restore the best service. The timing of restoration of these basis services will directly affect our business recovery timeframe. Immigration to the U.S.

in spite of the wake of Maria and further immigration from Puerto Rico remains one of our top concerns. Immigration estimates are anywhere from 200,000 to 500,000 people over the next two years.

The PROMESA board has authorized the government to reallocate $1 billion to address the emergency and we would anticipate that the PROMESA board and the government will revise the 10-year plan. Pima is assisting with repair and reconstruction of electric power system.

Congress has already approved a relief package that includes over $4.5 million in loans to improve the Puerto Rican government liquidity position. Interest payout and federal funds are estimated to exceed $25 billion. All of these contributions are likely to have beneficial impact of the economy.

In summary, we have executed an extremely challenging condition and are passionate about rebuilding Puerto Rico.

Maria’s impact and conditions of Puerto Rico will be a financial headwind in the near-term, but we believe that our response to strengthen our position on the Island and we remain committed to our long-term strategy of unique Latin American-focused Payments business. With that, I’ll now turn the call over to Peter..

Thank you, Mac, and good afternoon, everyone. Before I review our results, I’d like to provide some further insights on the impact of hurricanes Irma and Maria to EVERTEC. There are three infrastructure service elements necessary for a business to operate and ultimately process and electronic payment, power, telecommunications and water.

The hurricanes impacted all three of these elements in the power infrastructure damage was catastrophic. While there has been some gradual progress approximately 60% of the Island remains about electrical power now. In the final 10 days of September, power generation was less than 10% in an October on average power generation was approximately 20%.

In September and October majority of customers electrical power generation tended to be hospitals and other critical service providers are fortunate business is located nearby the institutions. In the absence of power from the electrical grid businesses must use generators to furnish power if they can afford it.

Many businesses remain closed in Puerto Rico and we do not yet have clear visibility as to how many businesses will come back on line or when they will resume operation. Until this past weekend, EVERTEC was power without interruption by its diesel generators.

To expeditiously get power of this past week end, we needed to make and made special arrangements with the power authority to directly pay the third party contractor to accelerate our connection to the grid. It costs us approximately one month's worth of diesel expense.

Telecommunications, which requires power, is also necessary to process electronic payments and many businesses continue to struggle with connectivity access and service quality. Many operating merchants has also steered their customers to use cash as a consequence. Water too is needed to sustain healthy workplace conditions.

Limited or no water access has been an issue for many businesses seeking to reopen. While our Payments business has improved steadily from the bottom baseline of the storm until these basic services are fully restored we expect our Payments business to be negatively impacted.

Accelerated immigration as a consequence of Maria also presents a challenge for us. As we need cardholders to generate transactions and to the extent cardholders emigrate to the U.S. or elsewhere this negatively impact us.

In terms of the direct impact of the hurricanes on our business it's important to differentiate our Merchant Acquiring and Payments revenue, which is based on Payment card transaction from a Business Solutions revenue, which is contrastingly driven by relatively fixed driver such as core banking deposit accounts and fixed hosting fees.

As you would expect, our two most impacted businesses are merchant acquiring in our Payments business in Puerto Rico, including the ATH card network. These payments businesses also operate on a fixed cost base and produce very high margins. I’ll now to provide a review of our third quarter 2017 results.

Turning to Slide 8, you will see the third quarter 2017 revenue for the total company in our segment revenue details. Total revenue for the third quarter of 2017 was $102.7 million, up 9% compared to $94.5 million in the prior year.

As Matt mentioned, the estimated Q3 impact of the storm was a reduction of $5 million to $6 million of high margin revenue primarily caused by Maria.

Year-to-date, total revenue was $307.5 million and was up 7% year-over-year with respect to the second mix in the third quarter Merchant Acquiring net revenue decreased 2% year-over-year to approximately $21.6 million.

Prior to the hurricanes, revenue growth was impacted positively by sales volume growth driven by the ongoing cash to card conversion trend, government payments and increased gas volumes and other and ancillary fees.

Average ticket and other merchant mix, was similar to Q2 and Merchant segment revenue growth in the quarter through the first two months was approximately 7%. In the 10 days post hurricane Maria, our overall average sales volume is more than 90% off the prior year bringing the quarter's revenue growth to a negative 2%.

Moving on to the nine months results, Merchant Acquiring was down approximately 1% year-over-year to $67.5 million due to a customer contract change in the first half of the year as well as the impact of the hurricanes in the third quarter. Payment processing revenue in the third quarter was $34 million, up approximately 24% as compared to last year.

Revenue growth was driven primarily due to our acquisition of PayGroup, which contributed approximately $5 million and which was partially offset by Maria’s impact.

While ATM withdrawals were high on approved range basis and dollar amount basis, only approximately 25% of the branches we serve were in operation in the quarter due to the challenges I referenced.

Prior to Maria, our transactions were similar to our year-to-date trend of approximately 9% growth, but in the final 10 days of September were off more than 90% versus the prior year. As a consequence, transaction growth for the quarter was a negative 1%.

In October transactions were down 55% compared to the prior year, but in the final week of the month we are down approximately 40%. For the nine months period, Payment Processing grew 15% to $95 million driven by the merchant customer contract change in the first half of 2017 and the PayGroup acquisition in the third quarter.

Business Solutions revenue in the third quarter increased 5% to $47 million. We continue to benefit from the Accuprint acquisition which contributed more than half of this growth as well as increased revenue related to core banking, offset by some declines in network services related to hurricane impacts.

For the nine months period Business Solutions grew 6% to $145 million reflecting the growth related to the same drivers. Moving to the next Slide, number 9. You'll find reconciliation of our adjusted EBITDA.

We incurred share-based compensation and other compensation expense of approximately $2.3 million and approximately $1 million in transaction costs primarily related to the PayGroup acquisition.

Additionally, in the quarter we reported a $12.8 million charge for an exit activity pertaining to a third-party software solution that is no longer commercially viable.

The total reflects an impairment charge of approximately $6.5 million for a software asset and the further charges for approximately $6.3 million for related ongoing contractual fees. Adjusted EBITDA for the quarter was $41.7 million, a decrease of 8% from $45.1 million in the prior year.

Adjusted EBITDA margin was 40.6% and this represents 720 basis point declines in our adjusted EBITDA margin compared to the prior year. The margin is explained in more detail in the next slide. Year-to-date adjusted EBITDA was $141 million, an increase of 1%. Moving to Slide 10, you’ll see a year-over-year adjusted EBITDA margin bridge for Q3.

Starting from the left column, the bridge begins with the adjusted EBITDA margin in the third quarter of 2016 of 47.8%. Moving to the right, we are impacted negatively with revenue mix shifts of approximately 620 basis points, primarily due to the hurricanes as well as the addition of PayGroup which operates at a lower margin.

Second, we were negatively impacted from foreign currency losses of approximately 20 basis points. Third, operating taxes and other operating expense increases were approximately 60 basis points. Lastly, we’re impacted by increased information security and compliance expenses that drove approximately 30 basis points.

The combined impact of these referenced items resulted in an adjusted EBITDA margin for the third quarter of 2017 of 40.6%. Moving to Slide 11.

Adjusted net income in the quarter was $24 million, a decrease of 20% as compared to the prior year and the decrease primarily reflects lower adjusted EBITDA, higher interest and depreciation expense and a higher tax rate as compared to the last year.

Our effective tax rate for adjusted net income in the quarter was approximately 10.5% and higher primarily due to the different mix of taxable income resulting from the hurricanes. It also was above our prior year tax rate of 7.7% which included discrete items that benefited the rate.

We continue to expect our 2017 tax rate to be in a range of 10% to 10.5% for the year. Q3 adjusted earnings per common share was $0.33, a decrease of 20% reflecting the lower adjusted net income. Year-to-date adjusted net income was $89 million down 4% and adjusted earnings per common share was $1.22 down approximately 2% from the prior year.

Moving to our year-to-date cash flow overview on Slide 12, net cash provided by operating activities was approximately $108 million or $16 million decrease as compared to the prior year.

We had an approximately $2 million increase in our restricted cash, our acquisition of PayGroup was approximately $43 million, capital expenditures year-to-date were approximately $24 million.

Next, we paid approximately $15 million in principal debt payments offset by an approximately $3 million increase in short-term borrowings, resulting in a total net debt decrease of approximately $13 million.

And finally, we have paid cash dividends to stockholders of approximately $21.8 million and repurchased approximately $7.7 million of common stock for a total of $29 million returned to our shareholders year-to-date.

We have approximately $72 million available for future use under the Company's share repurchase program, and our Board just authorized an extension of our current share repurchase program which was scheduled to expire on December 31, 2017 to December 31, 2020.

This three-year extension provides us with continued capital allocation flexibility after Puerto Rico’s stabilizes. Our ending cash balance as of June 30 was $48 million. Moving to Slide 13, you will find a summary of our debt as of September 30, 2017.

Our quarter ending net debt position was approximately $603 million, comprised of the $48 million of unrestricted cash and approximately $651 million of total short-term borrowings and long-term debt. Our weighted-average interest rate was approximately 3.75%.

Our net debt to trailing 12-month adjusted EBITDA was 3.4 times, reflecting the credit agreement which limits the cash applied in the net debt calculation to $25 million. As of September 30, total liquidity, which excludes restricted cash and includes the available borrowing capacity under our existing revolver, was $111 million.

At this time, I'd like to provide you with an update on the status of our government receivables. Our government receivable at September 30 was approximately $13.5 million, which is down approximately $4.5 million from the balance at the end of 2016.

At the end of October, our balance was approximately $15 million as many government agencies remained closed due to the infrastructure service challenges I covered. It is unclear what the impact the storm will have under government contract over time, but at this time our expectation is that they will remain unaffected.

We believe that our service during and after the storm response in ongoing commitment to the restoration of government services as a whole highlight the value that EVERTEC can provide and we aspired to turn the goodwill earned and to increase future business. Moving to Slide 14, I'll now provide an update on our 2017 guidance.

Our estimated hurricane impact for our total 2017 revenue is between $15 million and $20 million depending on the speed with which reliable power and telecom is restored, the magnitude and timing of business failures, payment mix and other factors.

We estimate that we will cover a range of 70% to 75% of our transaction based revenues in the fourth quarter. Our merchant acquiring sales volume in October was approximate 50% less than the prior year. While our merchant sales volume has recovered to approximately 70% of the prior level in the past week.

The sales volume continues to reflect a significantly higher average ticket as consumers make emergency payments or stock up due to products scarcity and uncertainty. The merchant mix of payments volume has been primarily skewed to national retailers’ gas stations and supermarkets, which on the disadvantages to EVERTEC from a net revenue perspective.

Based on these conditions in our latest assumptions, we are lowering our revenue guidance for the year to range of $393 million to $401 million; previously it was $411 million to $417 million representing a range of 1% to 3% over last year.

This change reflects the impact of our year-to-date performance and the benefit of the PayGroup acquisition partially offset by the expected post hurricane impact in the fourth quarter.

Regarding margins, we anticipate that the hurricane revenue impact will largely flow through to EBITDA in the fourth quarter and our adjusted EBITDA margin will be in a range of 43.5% to 44.5% for the year.

Our adjusted earnings per common share outlook has been revised to $1.40 to $1.50, which represents a range of negative 16% to negative 10% as compared to $1.67 in 2016. Regarding 2018, visibility is not clear at this time and it is preliminary to provide guidance.

The recovery in Puerto Rico is changing daily and it is difficult to predict the timing extent of the recovery. We don't yet have a good perspective on the extent or the impact of business insurance proceeds, total, federal release stimulus or Maria related immigration.

While Maria essentially ripped up the script, fiscal crisis remains and premises implementation will resume with the government working on a new fiscal plan. Other more clear business impacts in 2018 include our estimated Latin America client migration of $5 million to $7 million of high margin revenue, which remains unchanged.

From a margin perspective, these losses will only be partially offset by the incremental six months of revenue from the PayGroup acquisition, which contributes that a lower margin.

We also benefit from the September CPI measure announced on October 18, which was 2.23% and this will add revenue in the Business Solutions and Payment segment as provided under the Popular or Master Service agreement.

Regarding our liquidity, debt compliance and capital allocation until we have better visibility will be cautious with our cash as we monitor recovery. We currently plan to keep cash on hand or paydown debt as we determine prudent until our Puerto Rico business sufficiently stabilizes.

Based on the outlook of 2017 and it continued sustain recovery in the first quarter of 2018. We plan to retire the $28 million Term Loan A on April 30, 2018 with our cash on hand and existing revolver facility. We will cautiously manage our capital expenditures in the temporary suspension of the dividend that sits our working capital and liquidity.

In summary, we executed well during this extraordinary period, but Hurricane Maria has had significant impact. We're going to be cautious as we manage through the uncertainties of the recovery period while remaining focused on stabilizing our Puerto Rico business and expanding our Latin American business.

We look forward to updating you on our progress. We will now open the call for questions. Operator, please go ahead and open the line..

We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Bob Napoli of William Blair. Please go ahead..

Thank you. First congratulations for holding up and doing all you've done through this. As we've been all then thinking about you guys. I know it's been very tough and so appreciate what you guys have done down there.

Secondly, I just want to say, just getting into the business, I was a little bit unclear, the numbers came out actually a little bit better than what we were hoping for the trends, the rebound sounds a little bit stronger, but I'm not I was a little bit confused I think you had said transactions were down 40% at one point versus you had recovered to 70% of transaction levels.

I wasn’t sure so are you down 40% or 30% currently in…?.

Yes, Peter, you’ll take that..

Yes, hi, Bob. Thank you very much for the nice words. With respect to the trends, so we were off 55% in October. We bounced back in the final week of October to 40% and then as Mac had alluded in the last week, we’re up to 30%, so hopefully that clarifies your question..

So I mean do you think we've that that 30% is represents a trough and that you continue to gradually recover from there. I know it's difficult but them and if it seems to be on a decent trend..

Yes, Bob so the piece has been so unpredictable in Puerto Rico is primarily the energy problem and the pace which energy has come back to the Island.

Their projections that some areas of the Island may not come back into the spring, and that’s one of the reasons we launched within it is for Puerto Rico, moving 2000 generators to small business is their.

So that being unknown, but I would tell you the recovery in San Juan has improved, but even San Juan, their parts – San Juan that still don’t have power, building [indiscernible]. So it’s too unpredictable, it's too uncertain is what I would say, so we don't want to get ahead of ourselves.

But there is progress, but the power situation is going to take some time..

And I'll just add to that Bob. We've seen this trend it varies from week-to-week, but on the whole the moving average is positive and so we've factored that kind of growing to 80% by the end of the quarter, and our logic is that as continued power restored on the Island that that will benefit more merchants.

What we've seen up to this point is a lot of spending supermarkets, gas stations; emergency spending and we'd like to see a broader footprint across our merchant base as they come back on line..

Thank you. Then why you're trying to get Puerto Rico back and doing everything and obviously, a lot on your plate there.

But outside of Puerto Rico, can you – I mean are you going to be investing over the next few quarters and trying to continue to grow outside of Puerto Rico and how is PayGroup performing versus your expectations?.

Yes. So what I would say is I mean we’re still focused on Latin America. We closed on the deal and actually brought that business in during the quarter. We have good management in the region and that continues to be focus for the Company and the hurricane does not change that..

I agree with that everything Mac said clearly and as we look at capital and growth projects we're very diligent in normal course valuing them and we don't anticipate changing our view of that, but obviously we're monitoring the business and the recovery here in Puerto Rico as we ultimately make investments..

Can you say what PayGroup, what the growth rate is at PayGroup, the revenue growth rate and the EBITDA margins?.

What we say is it’s in line with what we expected for the year, but we're not commenting on growth rates. We've really combined it with our Latin America business and really treating as one, as Mac said joined the teams and so forth and products across shifts in selling and initiatives like that.

So we'll be looking at it holistically as Latin America business as we move forward..

Yes.

The exciting part is there's some overlap between customers where we give the synergies to cross sell products and their Walmart, Claro and some of the customers at Panama, so we're building those plants now and we're looking at sort of product strategy whether the best products to sell between those customers and so that’s the work we're doing right now..

Great. Thank you. Appreciate it..

Thank you..

The next question will come from Tien-Tsin Huang of JPMorgan. Please go ahead..

Thank you. Obviously, wishing everyone has affected a speedy recovery here.

I guess just understand maybe from you Mac just how everything that's happening, how that changes your strategic focus on the company is the high level question there in terms of how your prioritizing investments, the expense priorities you appetite to do deals et cetera, how are you approaching it now?.

Yes. So really hasn't changed sort of our strategy and our approach. What I would say, we said we're very focused on Puerto Rico. This is our home market and it’s important to protect it. I would say the storm really positioned us well with our customers. They now completely understand why it's important to have a strong EVERTEC on the Island.

They were able to utilize our facilities during the storm. They were able to – our staff actually went to some of the largest merchants and did multiple terminals to see which sell provider worked and on some of the grocery stores, and the bank branches we installed satellite, so they can actually operate.

So what I would say is the Puerto Rico piece of our business continues to be important and I think it really strengthen our value proposition with our customers. Outside of Puerto Rico, we will continue to focus on Latin America as I addressed Bob’s question. On the M&A front, PayGroup is a big acquisition for us.

It substantially increases our footprint. It substantially broadens our product portfolio, so that is sort of our immediate focus from an M&A perspective..

Got it. So given what you said there, I mean does this change you think the appetite for banks in the region I should say to outsource EVERTEC.

Your uptime was there, obviously that’s impressive for all the reasons you just stated, but does this changed the appetite in you mind and maybe the time table for decisions?.

In Puerto Rico or outside of Puerto Rico?.

I would say outside – just in the region in the Lat Am region, Central America region..

Yes. I don’t think this is materially changed, our customers outside of Puerto Rico their view of company. What I would say in Puerto Rico, I think, again the local banks probably the government merchants this is an opportunity that they understand we're the most dependable, reliable and strongest on the Island.

Outside of Puerto Rico, I don't think it really has a material impact on their perception..

Okay. It makes sense. Thank you so much..

Okay, thanks..

The next question will come from Jim Schneider of Goldman Sachs. Please go ahead..

Good afternoon and thanks for taking my question. First of all, let me say our thoughts are with everyone in the region.

I guess maybe to start off, can you maybe just provide another way of asking out some more color on your best estimate of how many of your merchants perhaps are sort of damaged and you would expect to be the recover at some point verses cases where merchants are entirely destroyed and reconstruction is necessary and might take longer to get to recovery point in a merchant acquired business?.

Yes. Let me give you my view and then I'll hand it to Peter for some numbers. The biggest issue has been unless the physical impact to the merchant has been more the outage of power and water and the things that are necessary to run a business, so that's been the biggest impact.

The question for us is, how long can those businesses afford to be out of business before that individual of that small business owner decides to migrate? So that's something that we're going to have to track over the past since the hurricane it's been estimated maybe 100,000 people left the Island.

It’s not unimaginable if some of those are small business owners. So that's what we've got to track over the coming months. But the biggest impact on the businesses has been left physical damage to their locations, but more the lack of infrastructure..

As we've seen, we've seen more and more merchants come back on line as power is restored, but ultimately we don't have a clear sight with respect to 2018 or beyond and how many will actually restore.

They need power obviously, they need telecom and then some of them need insurance proceeds from damage relief with respect to their facilities and businesses, and so that's really important for us to measure as we go forward.

What we really moderating is the transactions coming on where this impacts us as a business is in our net spread that we make with respect to merchant acquiring as the retailers that are in business right now tend to be the larger ones gas stations, supermarkets and that has a disadvantage impact or net revenue..

I would also say we also have 15,000 federal employees on the Island, spending money at hotels, at restaurants and grocery stores, so that's some of the temporary impact as well and it’s heard to know that temporary impact, how long will that last. And then what we're saying what is that versus what is the domestic..

So we’d look at the time when all the power is restored and then perhaps a month or two after that I think would be a good point to look at in terms what is actually staying in place..

That's very helpful color. Thank you. And then maybe as a follow-up for the solutions business, can you give us the color around the government contract was helpful, can you give us a little bit of a sense of the overall solutions business.

How much of that business is kind of a fixed price outsourcing contract if you will that aren't necessarily volume dependent, just to get a sense of how much of that business is kind of very stable and unlikely to change as long as you're able to maintain up time across your service delivery?.

Yes. Sure Jim. I think what I can do is give you a bigger picture answer with respect to all our business and transactions and business solutions as part of that.

As you look at our business approximately 80% of it’s in Puerto Rico and approximately 40% of that is based on transactions with merchant acquiring almost all tenant fund transactions and payments largely dependent on that.

Business solutions as less reliant on transactions where we do require transactions with respect to ancillary services that complement our core banking operations or service, but it's relatively minor compared to the other two component as I mentioned..

Helpful. Thank you. Thanks so much and good luck with recovery..

Thank you..

The next question will come from John Davis of Stifel. Please go ahead..

Hey. Good afternoon, guys. Also my thoughts down your way.

Maybe Peter quickly, let’s just touch on liquidity, where do you stand today, what kind of free cash flow expectation kind of baked in your guidance for 4Q? Just trying to get a comfort level obviously I think suspending a dividend is something that's proven at this point, but just trying to kind of understand dynamics of where you guys stand from a liquidity standpoint?.

Yes, thanks, John. So a this time we don't see a liquidity issue. We're being cautious as we explained under these extraordinary circumstances that we're operating under and the lack of immediate visibility. We feel confident that we have cash. We have a confident within our covenants as they stand today.

We are also very mindful of the $28 million that we have to pay in April 18 to retire the DOA that's due them.

And as we monitor our business, we're going to be prudent with our expense management and what we hope to see is a sound recovery is to we come back and then we'll revisit that the situation with the dividend with the board defer to their decision making..

Okay, that’s helpful. Maybe talk a little bit about the percentage of spend that’s in the metro areas, obviously I think you said back to 70% today, hopefully be back by to 80% by the end of the year as far as total transaction volume.

But just more broadly what percentage of your spend on the Island is concentrated kind of in the metro areas versus some of the areas that may not get power until the spring?.

John, I don't have that that statistic in front of me. But it's safe to say that lots of people were driving to the metro area and go shopping because it was – what was available and so the entire situation was skewed from that perspective.

I think all residents would prefer to shop locally for convenience reasons and that would be our expectation as power restored across the Island and businesses are able to reopen. Supermarkets have been restored pretty effectively and so that that is regional and different now..

Yes, what I would add is a lot of the spending particularly the grocery spending and the weekly spending is done at oftentimes large locations and large grocers.

Those often have a generator, so many of those have come back online even if they're in of an area that doesn't have power yet, and they're able – because it is the private industry distribution is back up and running. So people are getting groceries on the shelves.

So now there are some that were hard hit and they haven't been out able to remember that tends to be exception. So John in this – lookout that aren't going to get power for some time, it's going to be the smaller establishment that haven’t afford it – don't have the ability to buy generators.

And again that's one of the reasons some of the not-for-profits are trying to get generators in their hands..

All right, any idea on timing, I think it’s in the 2000 generators that you guys are trying to distribute on the Island.

Is that something that’s ongoing now, planned for later this year, just anything there?.

That was announced yesterday about latest Puerto Rico, which is one of the largest not for profits on the Island. We took delivery 250 yesterday doesn’t start distributing those on Wednesday.

This is an EVERTEC I mean we're involved on the Board, but it is private industry, distributing those first to the small retailers that actually sell groceries and provide to extend benefits and other small businesses. But we're going to start delivering those generators this week, and then we'll have a 1,000 on the Island this week.

And then next week or early the following week, we'll have another 1,000..

Okay, great. Thanks guys..

The next question will come from Vasu Govil of Morgan Stanley. Please go ahead..

Hi, thanks for taking my question and really appreciate your guys doing earnings on an – in such a timely fashion given the challenges you've got everything down there? Just quickly can you talk a little bit about your exposure to the stores and industry, I'm guessing that's probably one of the worst impacted? And then also if you could give us a sense of what your mix of business is when you think about small versus large merchant?.

Yes, so as far as the tourism business is relatively small, I mean we have restaurants. We have a few hotels, but that's not the lion share of our business. We have a very large domestic business with the groceries, the gasoline so a domestic business.

And then as far as the smaller merchants, we were of course the larger merchants are coming back faster, which does typically have a lower spread.

And then Peter if you want to add anything?.

Yes, our general concentration traditionally has been with small merchants and as Mac alluded what we seen is large merchants are the ones that are open now, so that mix is going to change and we'll have a better understanding after all the powers restored..

That’s helpful.

And then just on the cost side, are there any offsets in the near-term until the situation gets restored to normal? Are there any cost offsets or efficiencies that you think you can drive in the business near-term to sort of help the profitability for the next few quarters?.

Yes. So our business as you aware operates at a high margin. We leverage fixed cost, infrastructure and workforce here. We can do modest efficiency improvement over time, but large low hanging fruit is not in the cost structure. So we would be working on that normal course, but I just don't anticipate having a large available cost offset..

Got it.

And just one last one going back to the Business Solutions segment, I know you guys – that wasn't impacted much from the hurricanes, but is there a potential that you could have issues connecting receivables not just from the government, but from the corporate as well over there given devastation across the economy?.

Yes. Well I’ll touch just a bit more on the thoughts went into our guidance. So as we look at the hurricane impact, if you look at it by segment, it’s essentially 60% that we attributed to the Merchant segment which has been the most impacted 30% to the Payments segment and then 10% to Business Solutions.

Business Solutions is really more of a timing issue where we have available consultants who are unable to work on the businesses because they're not opened where projects are delayed because of the infrastructure. With respect to your question and accounts receivable, we monitor that very carefully.

We have done a good job as you can see with the government. That’s our largest client and we'll be monitoring that very careful. To date, we haven't seen any issues..

Great. Thank you very much..

Thanks Vasu..

The next question will come from George Mihalos of Cowen. Please go ahead..

Good afternoon, guys. And let me add my best wishes as well to a – for a speedy recovery.

Mac, I just wanted to ask, obviously there are a lot of – it's a fluid situation, a lot of moving parts here, but when you look at some of the priorities prior to the hurricanes hitting again the integration of PayGroup kind of building out more of the sort of the international business outside of Puerto Rico and some of the traction over there? Does that now get sort of pushed out given the situation on the ground in Puerto Rico and the support you're looking to provide to your customers there?.

This hurricane for a month was definitely took all of our focus from a management perspective. But I would say going forward, we are still equally as focused on Latin America.

I think the PayGroup team they spent time just this past week with the folks in Costa Rica, which is our legacy business to work through the product set, to work through the marketing piece. So we're equally focused on that now that we're past stabilizing at least our business after the hurricane..

Okay.

And then as mentioned again sort of the $5 million to $7 million of revenue that's going to be migrating off from those accounts that are still slated to deconvert? Are you thinking any differently around that both in terms of timing and maybe some more of the goodwill given your performance in such a challenging environment that maybe you're more at now to maybe keep some of those from migrating?.

No, our view has not changed on the $5 million to $7 million on what was previously announced..

Okay.

And the time line are still the same based on what you can see right?.

Yes. In fact, we’ve had more meetings with those customers getting more precise timing in those conversations.

So we think those gates and amounts as best reflected as we can?.

Okay. Thanks guys. Best of luck..

Thanks George..

Thank you. End of Q&A.

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

Yes. Again, I just want to say that I am incredibly proud of my colleagues during the last several weeks after the hurricane. I want to thank everybody on the call for their well whishes as we recovered our business. Thanks for joining the call. We look forward to see you at conferences in the coming months..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day..