Good afternoon, and welcome to the EVERTEC Incorporated Fourth Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is also being recorded.

And at this time, I'd like to turn the conference call over to Ms. Kay Sharpton, Vice President of Investor Relations. Ma'am, you may begin..

Thank you, and good afternoon. With me today are Mac Schuessler, our President and Chief Executive Officer; and Joaquín Castrillo, our Chief Financial Officer. A replay of this call will be available until Wednesday, February 27.

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 February 20.

Please note there is a presentation that accompanies this conference call and is accessible in the Investor Relations section of our website. 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.

Reconciliations to GAAP measures and certain additional information are also included in today's earnings release and supplemental slides. I'll now turn the call over to Mac..

Thanks, Kay, and good afternoon, everyone. Thank you for joining us on today’s call. Our record fourth quarter and full-year results in 2018 reflect the resiliency of Puerto Rico and our solid execution both here and throughout Latin America.

I'll cover some of the quarter highlights as well as provide you with an update on recent developments, and then comment on our strategies for growth in 2019 and beyond. Beginning on Slide 4, we have our summary of our 2018 results.

Total revenue was approximately $454 million, up 11% compared to 2017, which exceeded the top end of our most recent guidance and well exceeded our initial expectations for the year. We generated adjusted earnings per share of $1.84, an increase of 25%. We also generated significant operating cash flow of $173 million.

This included a one-time benefit in Q4 related to $1.8 million in connection with a federal program for companies affected by Hurricane Maria who retained employees immediately following the storm.

We resumed our dividend midway through the year and repurchased stock in the fourth quarter, resulting in the return of approximately $17 million to our shareholders with $10 million in stock buybacks and $7 million in dividends. Now I'd like to give you some more specific updates for our businesses on Slide 5.

First, we are pleased with the continued strong revenues in the quarter. Puerto Rico and the Caribbean grew approximately 23% as we lap the post hurricane results, with transaction growth of approximately 47%, offset by an average ticket decline of 6% as we begin to see average ticket normalize.

The team executed well in the quarter, and I'll talk about some of the wind in a moment, but before I do that, I would like to briefly mention some of the positive exposure Puerto Rico received at the start of the year.

While the impact of the hurricanes in 2017 were devastating, 2019 kicked off with renewed interest in the island, including the New York Times listing Puerto Rico as the number one travel destination, the three-week local run of Hamilton, Jimmy Fallon Show featuring Puerto Rico, and the recent 30-member House delegation visit.

We hope that this additional exposure will create a lift in tourism, further investment on the island, and additional congressional aid. As a side note, EVERTEC was a proud sponsor of the Hamilton event featuring Lin Manuel himself.

While the timing of federal funds in 2019 remains unclear, the certified PROMESA plan projects federal and private insurance flows [ph] of $82 billion over the next 15 years with approximately $13 billion to be distributed in 2019. Just a few days ago, I released the first $1.5 billion in reconstruction funds.

Further, the judicial approval of the COFINA restructuring is an important step for Puerto Rico to address its debt problem.

Although the impact to our business from the various federal funds will vary from year-to-year depending on the type of funding, we believe the federal relief funds and the progress made to address the island’s debt will have a positive impact on the overall economy of Puerto Rico.

Moving to Slide 6, I'd like to comment on some of our business highlights and how these wins relate to our overall strategy to maintain and grow our business.

While we have a dominant position in Puerto Rico in the Merchant and Payment segments through our price and service, we will continue to invest in innovation to defend our market share and margin as well as expand the overall market.

As evidence of our commitment, we are pleased that we retained all of our top 40 merchants and topping off the year, we won the largest worldwide franchisee of McDonald's that serves over 65 restaurants in Puerto Rico. As it relates to innovation, we recently launched our integrated pay at the table solution for our clients.

This integrated solution improves our client’s efficiencies by speeding up the payment process, increasing the number of tables that can be served, and streamlining the payment reconciliation process. Largely as a result of this new product, we signed a 3-year renewal with one of Puerto Rico's largest casual dining enterprises.

International Restaurant Services, which franchises a number of brands, such as Chili's, Macaroni Grill and PF Chang's.

Additionally, during the year, we successfully launched Pvot, a dynamic cloud-based point-of-sale system for the SMB market, which integrates processing payments with additional business management tools such as inventory management, reporting and business intelligence, as well as integration options for other back-office software.

With our local service capabilities, integration support for our clients and planned further enhancements, we believe this will be a competitive offering in the regions we have a presence. Recently, we not only launched this in Puerto Rico, but in Tortola at the U.S. Virgin Islands as well.

Additionally, we are pleased with the pilot of our ATH Movil solution for e-commerce websites and mobile applications that we launched in the fourth quarter with the largest gas station chain in Puerto Rico, Puma, and the largest supermarket chain as well, Econo.

In 2019, we will continue to seek opportunities to leverage our technology platforms and operating scale to deliver value-added solutions to our customers and partners.

While there will be investment costs associated with these new innovations, we expect to offset these investments with new avenues for growth and continued leveraging of our infrastructure.

For example, we can now leverage our regional workforce across our multiple locations to recruit the most cost-effective and productive talent possible to deliver our services. We believe this strategy will allow us to optimize our overall company margins over time.

Turning to Slide 7, I'd like to review our recent wins in Business Solutions and also discuss our opportunities in the segment. First, assisting the government of Puerto Rico is a priority for us.

In addition to the two wins we announced last quarter, we recently signed a new contract with the Puerto Rico Department of Education for technology consulting projects. As one of our largest customers in the segment, we will continue to focus on ways to assist the Puerto Rico government to be more effective and efficient.

I'm also pleased to announce that we extended our contract with Santander Puerto Rico, which is our second largest Business Solutions banking client. These two wins are great examples of our continued ability to compete and win new business in this segment through competitive pricing and a unique value proposition.

Looking forward, we will continue to focus on strengthening our relationship with Banco Popular as well as other clients in the segment and would expect to benefit from continued market consolidation. Moving on to Latin America on Slide 8. In 2018, we more than doubled our segment revenue and EBITDA as compared to our results just three years ago.

Results in Q4 were strong, driven by high-single-digit organic growth and one-time intercompany revenue between Puerto Rico and LatAm as we began to cross-sell the PayGroup acquired products and process transactions from the island, partially offset by some anticipated client attrition.

Regarding client attrition, I'm very pleased that Banco Atlantida in Honduras, who had previously notified us they were leaving, has not only renewed their contract, but also expanded their relationship, doubling their previous contract value.

Additionally, we signed a term license agreement for our risk management product with E-Global, one of the top providers of switching services in Mexico and who serves the two biggest financial institutions in the country.

Turning to Slide 9, I'd like to review the opportunities in Latin America and why we are excited about the potential evolution of these markets. Latin America presents a significant opportunity for growth given its low penetration of card volumes as well as its growing middle-class.

We continue to see positive trends in cash-to-card conversion and an increase in online presence and smartphone usage, which will continue to fuel growth at mobility payments. There's also increasing card utilization driven by the growth and number of merchants authorized to accept cards.

That said, many of the countries are still largely dominated by monopolies or duopolies for Payment Processing, and these are often owned by the local banks. This environment, however, is evolving primarily due to three pressures. First, there's regulatory pressure.

For example, in Argentina, the government mandated that the local bank-owned processor, Prisma be divested. Prisma recently announced a 51% sale to add international and the shareholder banks have three years to divest the remaining 49%.

We hope the regulatory pressure will extend to other countries in Latin America as this will create an opportunity for new entrants or partnerships. Second, there are competitive pressures. Banks in Latin American markets are now looking for new partners in order to differentiate their service offering from other banks.

An example of this is the recent Santander Chile announcement to not renew its contract with Transbank, the sole acquire processor in that market. Third, the evolution in technology in the payments space, which is still in development of stage in many markets in Latin America, creates additional pressure for the markets to change.

Brazil is one of the first payment markets to open in Latin America, which has resulted in new entrants introducing innovative solutions for digital banking, smart POS devices and other mobile technologies that have started to fuel the growth of e-payments in the markets.

We believe our innovation, such as our Pvot solution, will be key to being selected as a partner of choice as other markets in Latin America open. Turning to Slide 10.

Our strategy in Latin America is driven by developing a strong local client base for acquisitions such as Processa and PayGroup that have expanded our geography as well as our product offering.

We are shifting more of our products from a licensing model to a processing model to provide recurring revenue that will hopefully grow in the transaction trends in the region. We have created a cloud-based version of our risk management product that is operating in multiple countries.

During 2019 and into 2020, we are further localizing additional payment products, specifically in Costa Rica, Mexico, Colombia and Chile. We have over 800 employees outside of Puerto Rico. And with our local leadership in Spanish-speaking developers, we can provide customized solutions developed specifically for each client and market.

Furthermore, with the completed refinancing of our debt, we have additional capacity on our increased revolver of $125 million as well as cash on hand and strong free cash flow anticipated for 2019 to grow our business.

We believe we are uniquely positioned to take advantage of opportunities throughout Latin America as the pressure from regulators, the competitive environment and new technologies over these markets. And in 2019, due to our recently completed rebranding effort, we are operating under one brand to solidify our identity in the market.

As we close out an impressive year in 2018, I am also proud of our recent inclusion in the Bloomberg Gender-Equality Index, which distinguishes companies committed to transparency and gender reporting and advancing women's equality. At EVERTEC, one of core values is diversity.

We believe that diversity provides the key ingredient for successful innovation and a high-performing workforce. I want to thank all of our dedicated team members for their commitment throughout 2018 and for building a strong foundation for growth into 2019 and beyond. With that, I’ll now turn the call over to Joaquin..

Thank you, Mac, and good afternoon, everyone. I'll begin with a review of our consolidated fourth quarter and full-year 2018 results and then review each segment in greater detail. Turning to Slide 13.

Total revenue for the fourth quarter of 2018 was $118.2 million, up 19% compared to $99.6 million in the prior year and reflects the growth over the post-hurricane impacted results last year and increased transaction and sales volumes in Puerto Rico resulting from post-hurricane recovery activity as well as growth in our Latin America business.

Adjusted EBITDA for the quarter was $52.6 million, an increase of 42% from $37 million in the prior year. Adjusted EBITDA margin was 44.5%, and this represents a 730 basis point increase in our adjusted EBITDA margin compared to the prior year.

The increase year-over-year is primarily attributable to the growth over last year's Hurricane impacted results as well as an impairment charge taken in prior year fourth quarter of $5 million.

We were also favorably impacted by $1.5 million of foreign currency exchange mostly related to remeasurement of assets and liabilities as compared to prior year.

Sequentially, our overall margin was impacted by high corporate expenses as a result of planned corporate initiatives, higher revenues from low margin lines of business and contractual one-time obligations and other expenses that negatively impacted our margin for Q4.

Adjusted net income in the quarter was $34.5 million, an increase of 95% as compared to the prior year on $0.46 on a per share basis, an increase of 92%. That increase primarily reflects of the higher adjusted EBITDA, a lower tax rate in the quarter as compared to last year, partially offset by higher cash interest expense.

For the full-year, total revenue was $453.9 million and was up 11% year-over-year. Adjusted EBITDA was $212.5 million, an increase of 19% with an adjusted EBITDA margin of 46.8%, up 310 basis points as compared to prior year. Adjusted net income was $137.2 million up 28% and adjusted earnings per share was $1.84 up approximately 25% year-over-year.

Our full-year non-GAAP tax rate was 12.4% as compared to 12.3% in the prior year. Moving on to Slide 14, I'll now cover our segment results starting with Merchant Acquiring. In the fourth quarter, net revenue increased 42% year-over-year to approximately $25.8 million.

The revenue increase was due to increased volumes as compared to last year's Hurricane impacted results as well as increased spending related to post hurricane recovery activities and included a significant increase in electronic benefit cards volumes.

Our average ticket declined year-over-year as well as sequentially, moving toward more of normal levels as compared to last year. Transaction remained strong and spread was also up relative to last year, which was driven by very high the average ticket and dominated by low spread merchant mix of larger retailers and EBT.

Spread, now reflecting more balanced distribution of volumes between merchants more aligned with pre-hurricane periods. Adjusted EBITDA for the segment was $12.1 million and adjusted EBITDA margin was 46.8%, up approximately 410 basis points as compared to last year, primarily as a result of the increased revenue.

For the full-year, Merchant Acquiring was up approximately 16% year-over-year and $99.7 million reflecting the growth over last year's hurricane impacted results. Adjusted EBITDA for the Merchant segment for the full-year was $46.5 million up 24% have adjusted EBITDA margin was 46.7% up 300 basis points as compared to last year.

On Slide 15 are the results for Payment Services, Puerto Rico and Caribbean segment. Revenue in the fourth quarter in the segment was $30 million up approximately as compared to last year primarily due to the Hurricane impacts.

Transaction also reflected significant growth as compared to the Hurricane impacted quarter resulting in year-over-year growth of 47%. We saw January 2019 transaction volumes grow approximately 10% and January 2018 was still negatively impacted by the Hurricane. Adjusted EBITDA for the segment was $20.2 million up 148% and adjusted EBITDA was 67.4%.

Adjusted EBITDA benefited from increased revenue growth over last year's hurricanes as well as the impairment charge that I mentioned earlier. For the full-year, the segment revenue grew 12% to$114.1 million due primarily by the growth over last year’s Hurricane results.

Adjusted EBITDA for the full-year was $75.1 million, up 28% and adjusted EBITDA margin was 65.8%, up 820 basis points as compared to last year, primarily due to the Hurricane and last year’s impairment charge. On Slide 16, you will find the results for Payment Services in Latin America.

Revenue in the fourth quarter in the segment was $22.4 million, up approximately 16% as compared to last year.

This growth was driven primarily by high single-digit organic growth and intercompany services and license sales, a portion of which is one-time to the Puerto Rico Payment segment of approximately $2.3 million as we continue to progress in our licensing to processing initiatives in key regions.

This was partially offset by planned attrition of approximately $1 million.

Adjusted EBITDA for the segment was $9.4 million, and adjusted EBITDA margin was 42%, up significantly as compared to last year primarily due to intercompany services and license sales to Puerto Rico, previously mentioned and an FX gain we benefited from as a result of remeasurement of assets and liabilities in non-functional currency.

Adjusting for the intercompany transaction and FX gain, margins for the quarter would have been consistent with prior quarter margins. For the full-year, the segment grew 29% to $80.9 million, driven primarily by the full-year benefit of the PayGroup acquisition and was also impacted by the intercompany transaction to Puerto Rico.

Adjusted EBITDA for the full-year was $27.7 million and adjusted EBITDA margin was 34.3%, up 630 basis points compared to last year and was also benefited from the intercompany transaction to Puerto Rico. Moving to Slide 17. Business Solutions revenue in the fourth quarter increased 12% to $51.6 million.

We benefited from the CPI increase on the Banco Popular MSA as well as increased hardware and software sales, an increase in almost revenue category as compared to last year's hurricane impacted results.

Adjusted EBITDA for the segment was $19.8 million and adjusted EBITDA margin was 38%, down 810 basis points as compared to last year due to increases in lower margin revenues such as hardware and software sales and was also impacted by mostly non-recurring expenses of approximately $2.1 million, including contractual obligations and other expenses.

For the year, Business Solutions grew 5% to $197.6 million. Full-year adjusted EBITDA for the segment was $87.8 million, up 1% and adjusted EBITDA margin was 44.4%, down 150 basis points year-over-year. Moving to Slide 18. You will see a summary of our corporate expense.

Our fourth quarter corporate and other expense was $8.8 million, a year-over-year increase of 92%. That increase primarily reflects of the higher expenses related to projects completed in the fourth quarter. For the full-year, corporate and other expense was $24.7 million, just about even with prior year as a percent of revenue as we have anticipated.

Moving on to our year-to-date cash flow overview on Slide 19. Net cash provided by operating activities was approximately $173 million or a $27 million increase as compared to the prior year.

Capital expenditures were approximately $41 million and include some additional spend related to innovation and product development initiatives in Puerto Rico and LatAm.

Next, our change related to financing activities of approximately $88 million resulted from our Term Loan A repayment that matured in April, our debt repayments and our financing transactions we shall comment on in a moment.

And finally, we paid cash dividends to stockholders of approximately $7 million and repurchased approximately $10 million of common stock for a total of approximately $17 million return to our shareholders for the year. We have approximately $62 million available for future use under the company's share repurchase program.

Our ending cash balance as of December 31 was $87 million, including approximately $17 million in restricted cash. Moving to Slide 20, before I review our debt as of December 31, I'd like to comment on a refinancing that was completed in November.

We now have a senior secured credit facility that consists of $125 million, 5-year revolver, $220 million of 5-year Term Loan A and $325 million 6-year Term Loan B. The rate as of December 31 on our revolver on Term Loan A is LIBOR plus 225 basis points, a 25 basis point reduction from our previous revolver and Term Loan A.

Term Loan B rate is LIBOR plus 350, a 100 basis point increase from our previous Term Loan B. We are pleased with the increased revolver capacity from $65 million to $125 million, giving us additional capital flexibility. Our monthly leverage ratio remained at 4.25x and this steps down to 4x in October 2020.

As a reminder, we currently have a swap in place for $200 million or approximately 37% of our debt at a rate of approximately 5.4%, which terminates in April 2020. Additionally, we entered into a forward swap of $250 million or approximately 45% of our debt that will become effective April 2020 at a rate of approximately 6.4%.

For 2019, we anticipate our cash interest will increase approximately $3 million as a result of the refinancing. Now on to a summary of our debt. Our year ending net debt position was approximately $475 million comprised of the $70 million of unrestricted cash and approximately $545 million of total short-term borrowings and long-term debt.

Our weighted average interest rate was approximately 5.2%. Our net debt to trailing 12-month adjusted EBITDA was 2.3x, reflecting a $60 million cap on cash in accordance with our credit facility. As of December 31, total liquidity, which excludes restricted cash and includes the available barrowing capacity, was $168 million.

Moving to Slide 21, I will now provide you with our 2019 outlook. We expect revenue to be in a range of $464 million to $476 million, representing growth of 2% to 5%. Our adjusted earnings per share outlook of $1.80 to $1.90 represents a range of minus 2% to plus 3% as compared to the adjusted earnings per share in 2018 of $1.84.

On a GAAP basis, earnings per share is anticipated to be between $1.26 to $1.36. I will now highlight some of the key underlying assumptions and uncertainty that we have analyzed and planned for. EBT incremental funds are expected to continue through March 31.

Once the incremental EBT funding is reduced to normal levels, we would expect the negative impact to our merchant and Payment Services in Puerto Rico and the Caribbean segments in the last three quarters of the year.

While the PROMESA plan assumes $13 billion will be received in the current fiscal year, actual distribution continues to be slow, and it's still unclear how quickly the funds will be released. The timing of these funds is key to Puerto Rico being able to grow on the rate suggested by the fiscal plan.

Furthermore, 2018 benefited from direct funding to consumers through private insurance claims, FEMA funds and EBT. Going forward, the funds expected to be received are netting for restructuring efforts, which are not direct to consumers. And although positive, we are not expecting the same impact to our business.

Additionally, the fiscal plan also calls for structural response to the government to achieve sustainable growth. Given these three factors timing, type of funds and government reforms, we have some modest growth in the last three quarters of 2019.

Moving to the segments, we project mid-single-digit growth in Merchant Acquiring, driven by continued strong volume growth in the first quarter, offset by negative impact of determination of post-hurricane extraordinary EBT funding.

Average ticket is anticipated to continue to decline to pre-hurricane levels, and we anticipate a relatively flat spread for the majority of the year. Our Payment Services, Puerto Rico and Caribbean segment revenue is also anticipated to grow mid-single digits and we will continue to benefit from ATH Movil and ATH Movil Business.

Our Latin America payment segment is anticipated to be high single-digit organic growth, offset by $3 million to $5 million of anticipated client attrition resulting in flat to slightly positive growth for the segment.

As a reminder, a portion of our revenue is still driven by license sales in 2019 rather than recurring revenues and therefore, maybe uneven throughout the year.

And finally, the Business Solution segment revenue growth is anticipated to grow low- to mid-single digits reflecting the tailwinds from the CPI increase and recent new contracts partially offset by continued decline from cash and item processing.

Regarding corporate expenses, we would expect this to approximate 2018 levels as a percentage of revenue. All these items are considering our guidance and combined, we believe will generate adjusted EBITDA margins in a range of 46% to 47% or approximately an even basis with our adjusted EBITDA margin year-over-year.

No FX gains or losses have been included in our outlook. These represented a positive impact in 2018 of approximately $2.5 million. On a quarterly basis, we anticipate Q1 revenues and margins to be somewhat stronger than the rest of the year given the easier comp versus Q1 of prior year that were still recovering from hurricane impact.

We expect the rest of the quarters to be relatively even. Our operating depreciation and amortization is anticipated to increase to approximately $32 million, up $2.3 million primarily reflecting increased depreciation related to new projects that will be going into production during the year.

As I referenced, our cash interest expense is anticipated to increase in 2019 by approximately $3 million based on impact of our new debt facilities. Our non-GAAP effective tax rate is anticipated to be approximately 13%.

The guidance reflects approximately flat average diluted shares of approximately 74.4 million, which we assume that we would repurchase shares to offset any dilution related to long-term incentive compensation.

Our capital expenditures for 2019 are anticipated to be in a range of $40 million to $45 million and reflect our ongoing investment in technology, localization of our products in Latin America and investments in transitioning our licensing model in LatAm to a processing model. Turning to Slide 22, I'd like to review our capital deployment strategy.

We continue to focus on growth investments internally as well as through M&A. Our maintenance level of capital expenditures is approximately $25 million and our investment for growth this year will be approximately $15 million to $20 million.

We anticipate keeping our leverage ratio within 2x to 3x our adjusted EBITDA, which allows us to use current cash flow or our upside revolver for acquisitions as opportunities arise.

Most potential acquisition targets in the regions we are actively looking into reach up to $100 million and can be executed within our current capital structure and available capacity. We carefully evaluate our decision opportunities based on strategic fit and risk adjustment returns and also comply these returns to other available uses of capital.

We plan to continue our dividends to shareholders. And as excess cash is available, we would repurchase shares on our current share repurchase program. In summary, we executed well during this extraordinary year and delivered strong cash generation.

As we continue to focus on our innovation and opportunity in Puerto Rico and expanding our LatAm business, we look forward to updating you on our progress. We'll now open the call for questions. Operator, please go ahead and open the line..

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] Our first question today comes from Bob Napoli from William Blair. Please go ahead with your question..

Thank you. Good afternoon, Mac, Joaquin, and Kay. Appreciate the question. Just on your guidance for next year. This company generates a lot of cash obviously, and the share count, you’re not really reducing the share count and you're not paying down debt.

So in your model, you're building a lot of cash, which I guess, obviously gives you a lot of flexibility for M&A.

Is that the right assumption?.

Hi Bob. It’s Joaquin. So as we’ve kind of detailed in the prepared remarks, we are investing for growth. So we're looking on both internally as we go through some of our products and move our LatAm products from licensing to processing, as well as externally through M&A.

So yes, the answer is we are looking first at M&A, and we've been consistent in how we pay down our debt, which is through the normal scheduled pay-downs. And we have our dividend, and any excess cash, then we apply to share repurchases..

But you don’t have that in your model, the share repurchases?.

No. In our model, as we've said what we consider is basically leveling out the dilution from our long-term incentive plan at this point..

Okay. And then in the revenue guidance, which is essentially in lineas are the margins in line with our expectations.

The EBT program, what is the effect when that EBT program runs off? So you're assuming that that benefit runs off, but the PROMESA funds $13 billion, you're assuming that there's no effect on the economy, you're not getting any benefit from the additional stimulus if you would..

So to answer the first part of your question as it relates to EBT, that represents a percentage of growth to our Merchant Acquiring segment and into next year as it relates to the funding. I don't think that -- no impact is what we're considering. What we're seeing is timing is key in being able to keep the momentum of growth that we've seen.

And at this point, what we know is that the disbursement of these funds has been slower than expected, and as such, we've considered a slow down in terms of growth in transactions because of that timing of funds..

Yes. Hey Bob, this is Mac. So let me just give you a little bit more color. So the $1.2 billion that came in last year, that’s coming out in 2019. There's no subsequent funding. That flows straight through the EBT program and direct through our merchants.

Now there is talk within Congress about funding an incremental $600 million, but that has not been approved. It's still up in the air and it's still for debate. So that's an example of where some programs as to whether or not they'll get funded at all or still being debated by Congress.

There are some programs which have been funded and that are now making it to the island once the government proves they have the right processes in place, like the $1.5 billion, and those types of funding we've already modeled into the business.

So there is, I mean, as we've said on the last call and on this call, there's a significant volume of economic stimulus that's going to pass through the island. But the timing is the piece that is the most uncertain at this point. But specifically, to your $1.2 billion question on EBT, we have forecasted that to go away.

But again, there is a request up there to add another $600 million, but it has not has been approved..

Great, thank you. Appreciate it..

Our next question comes from Vasu Govil from KBW. Please go ahead with your question..

Hi. Thanks for taking my question. I guess first just a follow-up, Mac, it seems like you're saying that what you have modeled into your guidance in terms of fiscal stimulus is only what's been approved so far versus the $13 billion that's expected.

Is that the right way to think about it? And if there were more approvals that could potentially be upside versus the guide?.

Yes. I'll let Joaquin answer that. I mean, we have modeled some significant economic stimulus. But again, it's complicated because of the timing of that, but I'll let Joaquin talk specifically to the model..

Right, Vasu. So the type of funding that's coming through, as we said, is very different to the funding that we saw in 2018, which is going directly to the consumers.

The funding that we're expecting, which is earmarked for reconstruction funding, you're going to go to corporations and companies that are here in Puerto Rico actually doing their reconstruction work.

Obviously, the expectation is that that would increase the labor force and that would, at the end of the day, have more people being able to spend and then get that reflected into our numbers. But it's a [ph ]very different impact. And again, at this point, the timing is something that is uncertain.

We’ve obviously factored some growth into our model considering some of this delay in funding, but an actual number of what the impact of that is not specific..

Understood. And then just on the transaction growth, say, I've got sort of the 47% growth in the quarter, but a decline in average ticket.

Could you maybe give us how that sort of trended through the quarter? So October, November, December because I know like the comps were easy initially and then maybe what trends you've seen in Jan, Feb so far? Thank you very much..

Sure. So in terms of how that trended from a transaction perspective, as we were closer to the hurricane, of course in the month of October was almost 130% growth year-over-year because obviously there was no power, no communication, so very limited electronic transaction growth. That trended towards 17% for the quarter.

So that’s how we get to the 47% that we had mentioned. As we look into January, we’re looking at approximately 10%, now [indiscernible] January was still somewhat impacted by the hurricane. We saw that pick up and start to get more normalized in the months of February and March..

Got it. Thank you very much. .

Thanks, Vasu..

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

Thank you very much for taking my question. I know you’ve talked about a little bit, but I'm hoping you can expound a little bit on your plans for OpEx in the coming year and years.

Just kind of what you're seeing both competitively from an opportunity perspective that's kind of pushing you to look at that, I mean, particularly because your revenue seems about it as we have targeted. But the profitability seems to be a little bit directed more towards investment and looking for additional opportunities.

So just looking for additional color, where you’re seeing incremental opportunity from that investment?.

Yes. I’ll answer that and let Joaquin finish it off. I mean, we are investing in Puerto Rico both in ATH Movil and some other innovations. We think that it's going to help us maintain our margin and our market share here and hopefully, open up some of the markets. And so we are making investments in that.

We think we'll be successful in the marketplace by winning new business when we do that, as we talked about on the call. We also think that those innovations are going to be very interesting as some of the markets open up in Latin America. So the Pvot solution that we talked about, that type of solution is not in many South American countries.

And when we talk – Candace for partnerships, they find that a very interesting product because those market tend to be less mature. So we’re investing in that side of the house on the innovation piece for the merchant business and the ATH business.

Secondly if you look at our business in Latin America, we're also investing and localizing the platform that we purchased for Processa. So that's part of the expense you'll see as well. And we're specifically localizing that product in markets where we have a presence and where we have clients, where we have good prospects.

So we're localizing it in Colombia, Mexico, Costa Rica and Chile. So that's how you think about the OpEx.

We're investing not because really, a market trend of competitiveness from a pricing perspective, but we're investing because we see an opportunity to expand the market in Puerto Rico and maintain our margin here and also open up new markets in Latin America, at least it's an investment for growth.

Joaquin, I don't know if you want to add anything or....

No, I think, you've covered it. I mean, we are focused on innovation and trying to position ourselves in Latin America with these products and moving from a licensing model to a processing model and trying to convert that into a more recurring base of revenue into the future..

Let me add one more thing. We are very – and we did it last year at the beginning of the year we try to make sure we are very efficient on our expenses. We do you feel like now that we have regional employee base that were able to leverage employee across the region, that comment is on early in the call.

So that we can find the most cost effective and efficient employees or workforce so that we can manage the cost on the expense side as well. And that's something we're very active and doing this year is moving work around to be more cost effective..

And just following up on that and cover the other comments you made.

One, as you make improvements to the platform, et cetera, how applicable and transportable is that to other markets and new markets that you may have an opportunity to enter down the road?.

Well a couple of things, I'd say. First up, you get around these markets there's usually one or two players. So as they look for an alternative, we may be one of the only or one of the few alternatives because people haven't historically done this and created this capability in market.

As far as the amount of work it takes to report from market-to-market it really depends on the product. The risk monitoring product tends to be more similar from market-to-market there's not a lot of localization, regulations that are required to change that product. So we already have a cloud-based product that we can port from market-to-market.

On some of the, let's say the acquiring platform, you've got to integrate it to local networks. You may have a local tax regime, there's that are unique like certain types of loans and payment features that you've got to add.

So really depends on the product, but we are trying as we make this investment to at least even though does it require a more significant component of localization. We are trying to make sure that we put it in an operating model that can easily scale or more easily scale as we bring it to new markets..

That's great. Thank you so much. .

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

Hey, good afternoon, guys. Okay just wanted to touch a little bit further on Bob's question.

What are the underlying assumptions in Puerto Rico spending kind of 1Q versus the rest of the year and how is that relative to what it was for the full-year understanding there we’re some a lot of variability in 2018, just trying to get a sense for the spending trends that you're embedded in guidance..

I mean again, when we look at 2018, 2018 was a very erotic year in terms of the spend, we had a lot of reconstruction work coming into the island, people staying for extended period of times here just working on – bringing of electrical system the mitigation system. We have the additional EBT funding coming through and that's about $1.2 billion.

We had private insurance claims that were also flowing through the economy and specific FEMA funds that we're going to people affected by the hurricane. All of those which are part of the fiscal plans a$13 billion expected in fiscal 2018, went through the economy in the previous year.

I'll be looking to 2019, there's an expectation for an additional $12 billion to $13 billion.

Now, if you look at the composition of those funds, the type of funding is different that the funds are going for again, reconstruction work and very specific types of work that's going to be done by corporations or companies coming into island to basically spend that money.

What we've seen is that those funds are now subject to additional bureaucracy that's making the deployment slower than what we would've expected.

And what we've modeled into our guidance is basically a range where we have a modest slowdown of growth after Q1 given the EBT additional funding coming away or average ticket continuing to decline as it tries to assimilate to what we're pre-hurricane levels.

As well as – the thinking back to our payment processing segment due to the processing of transactions. And that's how we thought it would..

Okay.

So if I were to suffice to say that it's likely going to be below 2018 levels, but probably above historic levels as far as spending growth for the full-year, taking away kind of the quarterly cadence? Is that a reasonable assumptions as far as the underlying spending trends that are embedded in guidance?.

Yes. That's reasonable..

Okay. Mac, I just want to touch on international expansion. I think this is the most kind of bullish you sounded on it in a while, specifically with Prisma and Transbank in Chile, but also on M&A, it feels like that those opportunities in Chile for example, potentially it would be more of a partnership JV model.

So maybe talk a little bit about that opportunity versus more traditional M&A where you would buy and how you decide whether or not the partner which is probably less capital intensive versus going out and spending cut out to $100 million on something as you look at to expand in Latin America and South America?.

Yes. Let me explain a little bit because we did approach sort of explaining the opportunity and our capabilities a bit differently with this call. I've always been optimistic about the LatAm opportunity.

This call we wanted really, because as I spent more time with investors, we realized explaining the opportunity in more depth, explaining the changes in the market because some of these people aren't as visible even though it is public, and then explaining our competencies and capabilities.

So that it was very deliberate to help investors understand that part of the story. I will say I am more enthusiastic as time progresses because of two reasons. One is we do see more movement in the market over the last, call it six months than we have before because of these two business in two major markets.

And I'm also more upbeat because I feel today we have a better footprint than we did three years ago and we have much better products. So I am pretty optimistic about the market's opening, but again, it's like Puerto Rico funding, we can't impact the timing and our position with that.

So what I would tell you is in these markets, the Prisma deal was forced by the regulators and that is going to create an opportunity for those banks to look for alternatives now.

And then the Transbank deal is when any bank chooses to leave, it creates disruption across the entire market and opportunities for us to potentially partner with multiple banks or different banks within that country.

So it could be – the nice thing about EVERTEC is some of these financial institutions we already have a relationship with, with our fraud product. So we could sell the fraud products. We could also be a processor, so we could be a processor for their acquiring business or we may try and JV on the Merchant Acquiring side.

So we're very flexible in the model that we could create for the key partners in each of these markets. But again, the big challenge for us is the timing of these markets, but the movement in these two specific markets most recently are encouraging..

Okay. Great. And last one for me, any update on ATH Movil, either monetization efforts there or how it's trended. I think you gave some impressive stats of over 1 million users last quarter. So just curious, I think you started charging for it in the fourth quarter.

How that's going? Is it still seeing pretty significant growth there? Any color you could provide would be great..

Sure. So we're not breaking it out separately, because it's a specific product, we don't report product revenue. What I would tell you is ATH Movil continues to be a very effective tool for us to increase the value of the ATH network. We are now getting recurring revenue off of it because we monetize that last year.

So that innovation along with some of the other things that we've done like pay at the table, has helped us reduce some business and secure some of the largest accounts on the island. And Pvot, I mean, it's early days now, but we do feel like that that's going to be a good product for the SMB market. It's underserved today.

So I would say across all of these innovations, we feel good about what the opportunities they are providing in Puerto Rico..

Thanks guys..

Our next question comes from George Mihalos from Cowen. Please go ahead with your question..

Hey guys, thanks. Thanks for taking my questions. Maybe to kind of start off on some of the prior questions as it relates to the LatAm segment. Mac, I think you said $3 million to $5 million of grow over from some of these deconversions.

Just curious your sense about maybe being able to do somewhat better than that given the positive news you had this quarter.

And then I also just want to make sure the mid single-digit growth that, or excuse me, the high single-digit growth that you were targeting ex the deconversions, does that include some additional new wins in there or is that just based on the current book of business that you have now?.

Yes. So what I would say is we're very pleased with the retention that we accomplished and it was a meaningful account for that segment and we were able to double the business. Again, given the timing or the time that's gone by, we think it's not highly probable that we will continue to retain more of those trading businesses.

But as I said, two years ago, when we start talking about that, we will continue to – that will continue to be our focus. And if not keep them, find out the products that we can sell to them. On the organic growth rate, I'll let Joaquin answer what actually was in that number..

So what I would say, George is ex-attrition. What we're targeting is a high single-digit to low double-digit. Obviously, we’re now in additional regions and our expectation is to always grow at least at the rate that the market grows. And so that's more or less where we're at..

And that's the reason, as you know, George, to move from a licensing to a processing model because then we grow with a transaction growth in that market, and that's going to be more reflective what the market trend is..

Great. Okay, that makes sense. I just wanted to ask on the Pvot product, which sounds very interesting. Maybe you can kind of share in terms of the demand trends and the pricing related to that. I would assume that the discount rates there are somewhat higher than what you would have traditionally seen..

Yes. I would tell you is, it’s early days, but we're very pleased with the initial launch. Most or many of them, a meaningful number of the business that we are putting on that product are competitive takeaways. So that's a very interesting fact. And it is more profitable than a standalone POS because we're charging a similar margin at a higher cost.

So – and I would also say, this is a market where we believe that the fact we can bring local capabilities, we can integrate it to local networks as we rollout new products, we'll be able to localize the taxing. And then as we offer local service and implementation, I mean, some of these merchants are like a music store.

I mean you maybe a music teacher. This is actually one of our merchant is a musician that teaches music lessons and sales instruments.

Using a PC or technology to upload all of these inventories not his expertise, but us being here on the island and being able to provide you with that capability is providing a value-add that we think is unique to EVERTEC.

So again its early days, but we are finding there's demand for the product and we are finding the way that we deliver the service. And the localization is very unique..

Thanks, guys..

[Operator Instructions] Our next question comes from Bryan Keane from Deutsche Bank. Please go ahead with your question..

Yes. Hi, guys. Just a couple of clarifications on the guidance. Joaquin, maybe you can just help with the cadence of revenue by quarter. It sounds like the first quarter will be the strongest and then it decelerates throughout the year.

Is that right?.

That’s correct. We are expecting Q1 to be slightly stronger quarter. We're expecting the rest of the quarter as to behave relatively how they behaved in the current year. Now I'll just remind everybody, we do have still a piece of revenue in LatAm that's license based. So it can't get a little lumpy as it relates to LatAm.

And we have the attrition that we called out, which we are not necessarily expecting. I know in the past, we've called out accelerating to the end of the year. We don't expect that to necessarily be the case of this year..

Okay, that’s helpful. And so what does that mean then for I know it's hard to say normalized revenue base by segment. But taking out some of the EBT funding and some of the natural stimulus, is there a way to think about the segments by kind of a normalized growth rate? I think the Latin America region sounds like its high single-digit.

But just trying to think about the Merchant Acquiring and then the Payment Services, PR and Caribbean segments just what they would look like kind of if you didn’t have stimulus and that’s kind of where we're going, it sounds like, after we get post the EBT funding?.

I mean, what I would say Bryan is, there's out of puts and takes that are going into these numbers today and many different factors that we called out that and provide for more uncertainty than what we would like to have in terms of what we would expect into the future.

So today, what we are seeing is obviously the impact of funding coming off of 2018 and assumptions just based on the delays of federal funding, specifically to 2019..

But Bryan, again when I add – because I just want to make sure I heard the question right. I mean, PROMESA has certified budget with the Governor. And the funding is about $82 billion. And that's going to be over multi-years. So this is going to be a phenomenon that occurs in Puerto Rico.

I think the estimate is 10 – 15 years, but the majority within the first four, right? And I think the challenge is going to be the timing of those funds and it's not – maybe the smoothness of those funds, but this is not going to be just the 2019 phenomenon.

The large volumes I think north of $10 billion per year is going to occur for at least the next four years. Again, this is not EVERTEC view, this is PROMESA who has been place by Congress, they're view along with the governor..

I will just add that nothing plan has expectations for just overall Puerto Rico economy growth that go hand-in-hand with structural reform to the government. I mean that reform doesn't take place. The numbers within that plan are very different. So that's another key factor that needs to be considered when we're looking at this in a longer-term..

And that is on the PROMESA website if you want to see how the government, but the PROMESA and the governor has forego Exhibit 8, I believe in the PROMESA plan..

Yes. I know that's good clarification. Just trying to think about the difference between the EBT funding directly to the consumer versus the PROMESA plan, which is to the businesses which will, foster down to the consumer so trying to think about it. But let me, my last question is just on margins.

Margins, the guidance is kind of for flattish margins I know we talked about some investments and a little bit of client attrition, but is there a way to think about what a normalized margin should you be able to get margin increases on a year-over-year basis exing out some of these one-time factors?.

I mean, what we're looking in LatAm and what we’re trying to do in LatAm, we’re trying to move from a licensing model to a processing model with that in mind, right? Trying to leverage our scale and actually grow margin.

And what I would say today, our focus is on innovation and trying to get these products to the level that we need to actually be able to execute on that strategy.

And so it's definitely a focus and we're always focused on trying to look for ways to expand margin and reduce costs, but today, as we do have some additional cost that's making our margin flattish..

I mean the Puerto Rico margin, a lot of our investments this year to maintain that margin, when we already have pretty healthy margins in Puerto Rico. If you look at the LatAm segment, they're lower margins, 10 to 15 percentage points over time. As we have a couple of years, we make that investment hopefully we can expand those markets.

So I really think I would think about a margins across two different places. I would think about Puerto Rico, the hope is that we can maintain margins through investment because we have best in industry. And then I would think about LatAm that as we make these investments, as we grow the business.

Every new customer that we bring on one of these platforms that we've localized should come in at a higher incremental margin bringing up the overall margins.

But that's going to take time, the other thing that I mentioned earlier on the call was in managing the overall company margin, we are looking at how do you use leverage of workforce across the locations now.

So we have a couple of hundred employees in Chile, a couple of hundred in Columbia, a couple of hundred in Costa Rica, over a thousand in Puerto Rico. So we now have the ability to move calls to move processing work, paperwork, those types of things across the region to try and blend out the best margin possible at the corporate level.

So managing the operational efficiency is something that we've become more focused on as well..

Got it. All right. Thanks for the color..

Thanks Bryan..

And ladies and gentlemen, at this time I’m showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks. .

So I want to thank everybody for joining the call today. We appreciate your continued interest in the Company. And Joaquin and I look forward to seeing you over the couple of months. Operator, you can close the call..

Ladies and gentlemen, that does conclude today's conference call. And thank you for attending today's presentation. You may now disconnect your lines..