Good morning and welcome to the EVO Payments First Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ed O'Hare, Senior Vice President of Investor Relations for EVO. Please go ahead..

Good morning and welcome to EVO Payments' First Quarter Earnings Conference Call. This call is being webcast today, and a replay will be available through the investor relations section of EVO's website shortly after the completion of this call.

Please note that some of the information you will hear during our discussion today will consist of forward-looking statements. These forward-looking statements are based on currently available information, and actual results may differ materially from the views expressed in these statements.

For additional information on factors that may cause our actual results to differ from the views expressed in any forward-looking statements made today, please refer to our earnings release; and the risk factors discussed in our periodic reports filed with the SEC, including our most recent 10-K, which is available on our website.

In an effort to provide additional information to investors, today's discussion also includes certain non-GAAP financial measures. An explanation and reconciliation of these non-GAAP financial measures to their nearest GAAP financial measures can be found in our earnings release available on our investor website.

Today, we will discuss our first quarter 2019 performance. Joining me on the call today is Jim Kelly, Chief Executive Officer; Kevin Hodges, Chief Financial Officer; Darren Wilson, President, International; and Brendan Tansill, President, North America. Now I will turn the call over to Jim Kelly..

Thank you, Ed. And good morning and welcome to EVO's First Quarter Earnings Call, where we will review our results for the quarter; and provide updates on our business performance, our integrations, our new bank partnership in Poland and our recently announced acquisition in Mexico.

For the quarter, constant currency adjusted revenue grew at 10% and constant currency adjusted EBITDA grew at 13%. Our results reflect the timing of the Easter holiday in the current year, as compared to the prior year, specifically given the adverse impact on revenue growth in our largest international markets Mexico, Poland, Spain and Ireland.

Beginning with our European segment, I'll start with an update on our performance in the U.K. and in Ireland. In the U.K., we are primarily focused on ISV relationships, while in Ireland our sales are driven by leveraging our long-term partnership with the Bank of Ireland.

Together, these businesses generated approximately 1,600 new merchants per month, with ISV merchants representing approximately 20% of new business in the U.K. As a reminder, these were startup markets for EVO that began in early 2015, and our performance is largely the result of our strong sales effort and partnership strategies.

In Ireland, our e-commerce business continues to gain traction in the market via our Snap platform. Our platform is the single integration point for all our products and services, now including e-commerce capabilities.

Since we began offering this product in Ireland last year, we now have over 1,000 merchants, including SMEs, large domestic and multinational companies. In addition, our recent Way2Pay acquisition currently supports over 100 primary and secondary schools in Ireland, with an opportunity of more than 4,000 schools countrywide.

We are also expanding the Way2Pay platform to target Irish sports clubs and U.K.-based schools and clubs, both of which represent a large addressable market. By year-end, we expect to launch Way2Pay into all EVO markets via Snap. In the U.K., revenue growth is driven by our relationship with ISVs.

Over the last 18 months, we have added over 25 ISVs in the market and signed over 4,000 new merchant locations. Additionally, utilizing ClearONE's ISV integrations, we are already launching the platform capabilities directly into the U.K. while we continue to finish ClearONE's integration to Snap. Turning to our largest European market.

Poland continues to perform as expected after considering the Easter holiday timing, the annualization of the initial year of the cashless program and a commission refund. The Polish business remains focused on accelerating its Tech-enabled division, with a heavy emphasis on e-commerce to complement our very strong Direct division.

Additionally, this quarter, we signed an agreement with the government to install over 2,000 terminals in its police vehicles to enable electronic payments for traffic and other citations. Finally, Spain also had a solid start to the year after considering the Easter holiday timing.

Spain's growth is driven by its core bank referral business, direct sales efforts and tech-enabled sales. Liberbank continues to perform as expected. Santander continues to show solid new referral growth. However, these are somewhat being impacted by the ongoing efforts by the bank to integrate and consolidate the Popular branches.

The Tech-enabled division performed very well and is a catalyst for accelerated growth. Additionally, the ClearONE gateway continues to exceed expectations in terms of the number of new relationships on the platform.

The platform now boards over 300 new merchants on the system each month and represents an opportunity to now offer acquiring solutions directly to these merchants. As I mentioned earlier, while the integration to Snap is still pending, ClearONE's technology solution has already been extended to the U.K.

We remain very optimistic about the ongoing benefits of ClearONE's capabilities, its product offerings, strong market reputation and our ability to leverage the acquisition beyond the Spanish market. Turning now to North America. In the Tech-enabled division, our U.S. ISV business unit grew in the mid-teens for the quarter.

We now support ISVs that span over 50 unique vertical markets across our combined dealer and direct ISV networks in the U.S. While today our ISV business is heavily concentrated in hospitality, our objective is to further diversify toward supporting software solutions in high-growth verticals with still low penetration.

To that end, we are sourcing new ISV relationships and looking to acquire gateway integration companies, as we did with Sterling and Notice. Our B2B business unit continues to be the fastest-growing component of our U.S. Tech-enabled division, demonstrating very strong double-digit growth for the quarter.

We are now cross-selling, acquiring services to Notice's software customers and are offering Notice's gateway solutions to our core B2B customers. We have also successfully launched an Oracle ERP solution with new B2B customers and see additional opportunities regarding other ERP solutions. Turning now to Mexico.

Revenue growth was again in line with our expectations after considering the impact of the Easter holiday. In the first quarter, we added customers in key verticals such as health care, government, education and hospitality as a result of our strong alliances with Citibank and Sabadell.

We also added a large national retail merchant with over 100 locations and a large insurance company, again thanks to our bank relationships and our strong internal sales efforts. As stated on the last call, we launched our global e-commerce platform into Mexico earlier this year to offer end-to-end solutions for our customers.

Next, I'd like to provide an update on the ongoing integration work, the new bank relationships and our recently announced acquisition in Mexico. In the first quarter, we migrated another portion of the Santander portfolio from the national processor to our Polish platform. We anticipate the remaining merchants will be largely migrated by year-end.

The Liberbank migration should begin during the second half of this year and be completed the first half of 2020. The German systems and back-office migration previously discussed on the third quarter earnings call is on schedule and should be completed by year-end. The savings associated with that integration have been reflected in our 2019 guidance.

Finally, the work to migrate our Mexican back-end systems to our U.S. platform remains on track, with testing likely to occur by year-end and the migration to begin in the second half of 2020. Next, I'd like to discuss our new bank partnership in Poland.

Postbank is a Polish national retail bank with a focus in small cities and towns, which also complements our PKO footprint. We were selected as their partner through a competitive process whereby our capabilities stood out to successfully displace the incumbent.

This new relationship offers us 1,000 locations from which to market our products and services. The incumbent acquirer owns the back book of merchants' contracts, so like in our Irish business when it began, we will be starting fresh with the new bank relationship.

However, we have the opportunity to target its existing merchant base of 11,000 merchants. And then finally, in Mexico we recently signed an agreement to acquire certain assets of SF Systems, an ISV integrator similar to ClearONE.

We currently have merchants whose ISV POS systems are connected through their gateway and will now have direct control over the platform to accelerate integrated growth in the market. SF Systems is currently integrated with some of the largest POS providers in the country, including Micros, Simphony and OPERA.

The platform is also integrated to support smaller ISVs, which are the fastest-growing part of the integrated market. Like Notice -- excuse me, like Snap, Notice, ClearONE and Way2Pay, SF Systems accelerates our speed to market for integrated payments in Mexico.

We will integrate SF Systems into our Snap platform as we have done with our other integrated acquisitions, giving our U.S. and European ISVs access to the Mexican market. Overall, we are very pleased with our results. And Kevin now will cover the financials in more detail.

Kevin?.

Thank you, Jim. And good morning, everyone. As Jim mentioned, EVO delivered a strong quarter of top and bottom line growth. For the first quarter, adjusted revenue excluding the Traditional division grew 13% on an adjusted currency-neutral basis, with acquisitions contributing to five percentage points of that growth.

FX negatively impacted revenue by 480 basis points in the quarter, as anticipated. Based on the current FX rates, most of the adverse FX impact, compared to 2018, occurs in the first half of 2019, although the euro and the Polish zloty continued to weaken versus the prior year.

As Jim previously mentioned, Q1 growth rates were likely impacted further because of the Easter holiday timing, particularly in Mexico, Spain, Poland and Ireland. As a reminder, EVO adopted ASC 606 on January 1, 2019. Our revenue is now reported net of card network fees, which were $23.9 million in the first quarter.

We are reporting adjusted revenue excluding this deduction to aid in comparability with 2018. In the first quarter, we continued to deliver currency-neutral adjusted revenue growth in our largest international markets, including Poland at 20%, Spain at 9%, the Irish and U.K. market at 25% and Mexico at 7%.

As mentioned earlier, growth rates in these markets were likely impacted by the timing of the Easter holiday. Also in the quarter, Raiffeisenbank, which had been a partner in Poland for the last three years, sold the bank to BNP Paribas; and we will no longer receive referrals from this bank.

Going forward, we expect our new relationship with Postbank to more than offset the loss of referrals from Raiffeisen. Additionally, in Poland one of our larger customers was acquired and migrated processing faster than expected, which will adversely impact growth for the balance of the year.

Growth will also be impacted, beginning in Q2, by the annualization of several large merchants that we added in 2018. On a currency-neutral basis, adjusted EBITDA increased 13% to $30.6 million. Currency-neutral adjusted EBITDA margin increased 43 basis points compared to the prior year period or 128 basis points excluding new public company costs.

Looking at our North America segment. First quarter adjusted revenue excluding the Traditional division increased 12% over the prior year period on a currency-neutral basis, with acquisitions contributing to seven percentage points of that growth. Within the segment, our U.S.

Tech-enabled adjusted revenue increased 11% compared to the prior year period and represents half of U.S. adjusted revenue. Our U.S. Direct and Traditional divisions adjusted revenue grew 7%, which reflects low single-digit organic revenue growth in the Direct division, the Federated buyout and expected declines in the Traditional division.

On a currency-neutral basis, our adjusted revenue per transaction in North America increased 2% in the quarter, which reflects the growth in our ISV and B2B business units, slightly offset by the impact of large merchants in Mexico who have recently been growing faster than our smaller merchants.

Our B2B business unit has merchants with high average ticket sizes compared to the average retail merchant, increasing the revenue per transaction for the segments. Segment profit for the quarter was $22.7 million, an increase of 9% on a currency-neutral basis.

North America segment profit margin improved 36 basis points to 28.9% in the quarter due to our revenue growth and ongoing operating efficiencies. Turning to Europe; we saw strong performance out of this segment as well.

Segment adjusted revenue in the quarter grew 14% over the prior year period on a currency-neutral basis despite the negative impact of the Easter holiday timing.

In the first quarter, our adjusted revenue per transaction in Europe declined 3% due to the growing number of large merchants performing well in the market and lower DCC take rates, which will annualize in Q4.

We saw first quarter European tech-enabled transactions grow 17% versus the prior year, driven by our sales in Poland, Spain, Ireland and the U.K. The Tech-enabled division now represents 21% of European adjusted revenue. Segment profit for the quarter was $14 million, an increase of 28% on a currency-neutral basis.

For the quarter, segment profit margin was 24.7%, an increase of 272 basis points compared with the prior year due to lower head count and operating expenses as we continued to consolidate back-office functions across Europe, coupled with the previously mentioned commission refund. Turning to our corporate expenses.

Adjusted corporate expenses grew $1.6 million to $6.1 million for the quarter, compared to the prior year period, primarily due to new public company costs. Expenses related to operations as a public company largely began in Q2 2018, and the company is continuing to make investments in this area during 2019.

Pro forma adjusted net income was $6.5 million for the quarter, reflecting growth of 91%. On a reported basis, consolidated net loss was $19 million for the quarter. Reflecting adjustments described in our press release and all share classes, pro forma adjusted net income per share was $0.08.

At the end of the quarter, our basic share count was 26.4 million, which represents the weighted average Class A common stock outstanding. Including all share classes and dilutive securities, we had 83.3 million shares outstanding.

In April, we successfully completed a follow-on offering of 5.75 million shares of Class A common stock including five million shares sold by existing shareholders and 750,000 new shares. Net proceeds from the new share issuance of approximately $19 million were used to pay down existing debt on our credit facility.

In the first quarter, we spent $6.5 million in capital expenditures, of which 71% was for point-of-sale terminals in our international markets. CapEx declined 24% versus the prior year period, as we annualized the terminal investments made in the prior year to support the cashless initiative in Poland and the timing of other purchases last year.

We ended the quarter with net leverage of 4.5x last 12 months adjusted EBITDA. After the debt paydown from our April follow-on offering, net leverage is now 4.3x last 12 months adjusted EBITDA. Interest expense declined 24% in the quarter compared to the prior year period.

Free cash flow, described as adjusted EBITDA less capital expenditures, less net interest expense, was $13.2 million, an increase of 152% over the prior year period. And finally, based on our Q1 performance and outlook for the remainder of the year, we are providing an update to our 2019 guidance.

We now expect reported revenue, with the impact of ASC 606, to range from $496 million to $505 million. On an adjusted basis adding back the impact of ASC 606, we now expect revenue to range from $601 million to $610 million, for the growth of 6% to 8% over 2018.

We expect FX headwinds for the remainder of 2019 to be approximately 350 basis points, with the Q2 impact expected to be 420 points. However, as previously stated, we expect the unfavorable impacts from FX to be stronger in the first half of 2019.

Therefore, on a currency-neutral basis, we now expect adjusted revenue to grow 10% to 12% compared to 2018 results. Adjusted EBITDA is now expected to be in a range of $159 million and $163 million, reflecting growth of 7% to 10% over 2018 adjusted EBITDA or 11% to 14% on a currency-neutral basis.

Adjusted EBITDA margin is now expected to range from 26.5% to 26.7%, reflecting expansion of 40 to 60 basis points over 2018 currency-neutral adjusted EBITDA margin.

We expect lower margin expansion in Q2 compared to Q1 but expect greater margin expansion in the second half of the year as we annualize public company costs and benefit from the back-office consolidations and migrations.

Net loss per share attributable to EVO on a GAAP basis is now expected to be $0.29 to $0.23 compared to a net loss per share attributable to EVO of $0.70 in 2018. Pro forma adjusted net income per share is now expected to be in the range of $0.55 to $0.58, reflecting growth of 12% to 18% on a currency-neutral basis.

These numbers are calculated based on an updated pro forma share count of 84 million shares, which includes all share classes. We now expect capital expenditures to be in the range from $45 million to $50 million, with 60% being comprised of point-of-sale terminals.

Our updated outlook does not consider the pending EuroBic and SF Systems acquisitions or additional share issuances. I will now turn the call back over to Jim.

Jim?.

Thanks, Kevin. I will now turn the call over to the operator to begin our question-and-answer session.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Ramsey El Assal with Barclays. Your line is open..

This is actually Ben Budish on for Ramsey. I wanted to ask about your ISV business in the U.K. and more, I guess, on the content of just acquiring in general. I think a lot of people look at the Europe as being a couple innings behind the U.S. And it seems that you guys are having some success there.

I guess, could you comment maybe more broadly on how big is the opportunity in the U.K., Europe? How penetrated are those markets? How does the U.K.

compare to the continent?.

Good morning, thank you. I would agree. I think we're than a couple innings behind in terms of the impact to the business. The European market is still very bank-centric. It's still very terminal-centric. So the successes -- when we started in the U.K. about 18 months to two years ago, it was really a startup specifically in the ISV space.

And that's why we're seeing such great growth, because our entire group there is -- will be focused on growing that segment of the market, as opposed to supporting institutions, but it's not just limited to that market. The Spanish market as well, we've seen very significant growth.

As we mentioned on the last call, our acquisition of ClearONE accelerated our interconnectivity to ISVs across the Spanish market, which we've now been able to export into the U.K. market. We see the same opportunity in Poland. It's just early innings, to use your analogy, relative to the United States, but I think it'll gain traction quickly..

And if I can get one more. Could you maybe give some color on just the cadence of M&A contributions throughout the year? I know there's Federated but a number of others. I guess, when do things start to lap? And when can we expect more of a -- like a normalized growth rate? Or normalized to reflect organic..

Well, so Federated was last year. Federated was a business that we already owned part of. It was part of kind of original EVO, going back into early mid-2000s. So we acquired that in October, the beginning of October, so it would lap in October, but I think, with us, we've made over 20 acquisitions in the last five years.

So I think, each year, you're going to have some cadence. Some will be -- to use your baseball analogy, some will be singles and doubles, and then you'll see the odd triple or maybe even larger than that. And that will come periodic.

It's -- I mean it's a big part of what we do across all our regions as we look for opportunities to expand our distribution in the existing markets and into new markets, but at the same time, in all of Kevin's comments and mine, we call out FX and we call out acquisitions so you get a sense of what the organic growth rates of each of the markets look like..

Thank you. And our next question comes from Tien-tsin Huang with JP Morgan. Your line is open..

Thanks, good morning. Just wanted to ask on the second quarter growth, maybe get some help on that, versus the first quarter with the Easter shift impact and the loss of Raiffeisen and some tough comps. I think a large client rolling off and other things.

Just how do you expect 2Q to shape up on revenue versus Q1?.

I'll start, then I'll let Kevin continue. So as we called out in the script and, I think, you saw with other companies that have an international footprint, in particular we're in Ireland, Poland, Mexico, Spain. Mexico is almost off sort of an entire week's during the holiday last year. It ended on the 30th, 31st; and this year, it was mid-April.

So there are expectations or we will see an uplift relative to what we would have seen in the prior year because of that relative to what we've experienced in this quarter.

I think, in terms of the customer rolling off in Poland, it was a business that was acquired by -- it was acquired by another company, and that company is a competitor of ours in Poland. So periodically, we're going to see those headwinds when we're dealing with large merchants, but the business otherwise in Poland continues to be strong.

To more of the specifics for the quarter, I don't know, Kevin, if you want to add something..

Yes. And I think the -- what you're going to see in Poland impacting us for the rest of the year, not so much the Raiffeisen agreement. Jim talked about we've got Postbank that's now coming online. It's really going to be, as Jim mentioned, that larger customer that was acquired and migrated off a little bit faster than anticipated..

Specific to Raiffeisen; we acquired Raiffeisen in two markets. The expectation when we bought it several years ago was we were going to be pan-European, and then there was a management change within Raiffeisen and a change in strategy. But we didn't give up the 7,500 merchants that we currently have with the bank.

They have a non-solicit, so they can't solicit these merchants. It was unfortunate the bank ultimately got acquired, but we knew that there was a risk of that when we originally acquired it. And the new relationship that we happened to sign at the end of -- or I guess it was last week we announced it. That would more than make up for new production.

So I'm not expecting that that's going to be a driver to performance -- or underperformance in Poland..

So the book stays with you. All right, good to know, that's helpful. The -- just my quick follow-up, the -- Jim, you mentioned buying gateway integration companies like Notice. Just curious how, what kind of assets are out there.

At ETA TRANSACT, with that event -- I mean it sounds like there's a lot of activity going on in the ISV space and the integrated space. Just curious how available these assets are to you and if they fit, etcetera..

the shift from paper to plastic; e-commerce, very strong market. And I think this will help us because this got us integrated to Micros, Simphony. And they have a number of integrations that would have taken us quite some time to get everybody's attention to integrate to Snap.

And this is why we just simply have to take SFS and integrate that directly to Snap that we have -- which is already in Mexico and we have connectively. So I think you'll see us continue to do this.

These are small, so it's not like we're buying companies that are material in terms of the impact to revenue initially, but what it does is it gives us connectivity, as I said, to these ISVs, which will drive organic growth which is really where we're ultimately focused on..

Thank you. And our next question comes from Bryan Keane with Deutsche Bank. Your line is open..

This is Mahesh Dass on for Bryan.

Could you just update us on the progress on the EuroBic acquisition? Are we still on track for a summer close? And can you give us an idea of how large of an opportunity that is, how long it maybe will take to pull through?.

Sure. So we actually met with the regulators recently. It's on track, but this is not something -- I'm not sure if it's happened yet in Portugal prior, and so this is a new process for the regulators. There -- initially is there's a carve-out of the business by the bank, which has to get approved by the regulator.

And then we have to get approval to acquire our interest, which is over 50% interest, yes, in the transaction. So I think initially we thought maybe be ready by the beginning of the summer. I think now we've updated that to the summer, which I guess runs all the way till September. It's not in our hands. It's entirely in the regulator's hands.

I can say from a reference standpoint, I know this goes back to a more difficult time in Europe, but it took upwards to 9, 10 months to have the first deal done in Spain or Banco Popular; so we're optimistic.

We're providing whatever information, as is the bank, to be able to get the transaction closed, but at this time the best we can estimate is the summer time period. In terms of size, this is roughly 15,000 to 20,000 merchants.

It's a business that's been growing, at least historically from what we've seen, above 10%, which is a strong growth rate for that region. And it's predominantly focused on SME. It's not one of the big bank players in the marketplace. In terms of the financial impact, we'll update our guidance with those numbers once we have the transaction closed..

Okay, good. And then one more, just on PSD2. It's kind of been since January since the initiative has been put in place.

Anything, any updates or anything that you're seeing there in terms of the competition or any opportunities as a result of the directive?.

We have Darren with us again, so I'll let Darren take the call since it's his market..

Thanks, Jim. No, there's nothing significant in terms of landscape changes of market behaviors, competitive activity or otherwise. I think everybody is watching and learning and mainly focusing on the compliance side of the agenda rather than the ASP -- AISP.

There are some developments in the open banking arena starting, but that's very much the transparency of data between bank account reporting rather than any material new entrants in the market taking any acquiring strategies or development..

Thank you. And our next question comes from Jim Schneider with Goldman Sachs. Your line is open. Jim, please check your mute button. Okay. It looks like we lost him. Our next question comes from Bob Napoli with William Blair. Your line is open..

Good morning. Obviously, been a busy morning juggling calls in the industry..

Yes. Many calls at the same time..

At least we had ours on file first, so....

Okay, there we go. Just would like an update on your view of the -- where you see strength and weakness from a macro perspective today. I mean you're in some interesting markets. And a lot of different opinions on the macro economy. I was hoping you could maybe give some update on strengths and weaknesses from a macro perspective..

Yes, I can -- I'll do it very cursory on that, and I'll let Brendan and Darren to cover North America and Europe more specifically. I get a lot of feedback from the organization from sales, ops, etcetera. And I don't hear anyone saying to me that it's a factor of economy in terms of challenges in the marketplace.

So I think this isn't a view of all of '19 or '20, but from our standpoint, we sit in 50 markets that the economy still seems to be robust. We're still seeing opportunities to sign merchants in mature markets like the North America or the U.S. in particular and then internationally. So it's not something from a feedback standpoint that we're seeing.

I don't know that I can quote comp store sales because I'd have to go market by market and that gets a little bit more cumbersome, but I'll see if Brendan has any comments to that.

Brendan?.

I mean my comments in the western hemisphere will be more specific to the various matters of which we compete with in payments. So in the U.S. we continue to see a share shift, a migration from -- to terminals with integrated point-of-sale solutions. We continue to feel really good about our positioning in what we've termed tech-enabled payments.

We've now introduced our European gateway proposition to the U.S. market, effective as of the first week of April.

And we continue to see gains in ISV as point of sale and then, of course, in B2B as well, where -- our Notice acquisition and the theory that supported that acquisition of integrations to ERPs being a viable way to go to market with larger corporates.

That's a strategy that we continue to feel good about, and that's a trend that we don't see ending anytime in the foreseeable future. In Mexico the trends are, again, relatively unchanged. We see a regulator that's committed to eradicating what they've termed the black economy.

The motivations out there is, of course, tax collections, but we feel really well positioned there with the certification of that same European gateway now to the Mexican platform and the certification of our Snap technology to the Mexican platform as well.

We now have the ability to port our European and American ISV partners to the Mexican market and provide an in-house Internet processing solution where we control the entire end-to-end service delivery. So there once again the theory is more around cash-to-plastic conversion, much more so obviously than the U.S.

and Canada, but there's also the same trend of the migration from terminals to integrated point-of-sale solutions and to the Internet.

Darren?.

Similar story to Brendan essentially in that, without going through market by market, we can continue to see the trends in omnichannel, digital, e-commerce growing significantly through Europe. Overall, we're continuing to see average transaction values holding up and ticking up, which is kind of reinforcing a stable inflation environment.

Probably the biggest unknown in Europe essentially at the minute obviously is Brexit, and it is an unknown. The story evolves. I think the strong hypothesis is that neither the U.K. nor Europe want a no-deal situation, so the delay to the end of October is giving time to allow some form of deal to be brokered.

But obviously our footprint predominantly is based out of the U.K. in terms of Germany, Spain, Poland, etcetera, so we're well positioned for kind of a growing shift from -- or potential shift from the U.K. into Europe, anyway, in terms of domicile of businesses and companies headquartering to remain on Europe rather than the U.K.

So we're well protected there and well protected from a licensing perspective as well. So I think that's probably the biggest unknown, but on a macro basis at the moment, all the trends are generally ticking positive..

Thank you. Appreciate it..

Thank you. And our question comes from Jim Schneider with Goldman Sachs. Your line is open..

Good morning, thanks for taking my question. Sorry, I got cut before.

Maybe you could just give us a little bit of an update on the kind of the turnaround in your kind of traditional markets and when you'd kind of expect the headwinds there to subside and maybe update us on anything you're doing at a strategic level in North America outside of the ISV space to kind of bolster that growth..

I think the only market that we've talked about and in terms of fixing or improving performance was around our Direct business. What we refer to as our Traditional business is kind of the legacy EVO business that was here. That largely reflects agents and ISO as kind of the old "feet on the street" model.

Most of which -- these people have moved on from this as a career or sold their businesses. And so we really have a legacy business that they can't move that runs off. And that's a double-digit-declining business in a -- to approximate what attrition would look like in the marketplace.

The other component of the business that had been declining which is growing which in -- domestically or in U.S. was our Direct business. And we've seen it's in the positive, so it's growing. It's in the black, but it still has some room for improvement, and we're expecting that to continue to prove -- improve.

As I've said in the past through the balance of this year, we have a new management team in place, actually just added someone on the operations side.

And I think -- the performance there; our acquisition with Federated, which has been going well since the acquisition, I think those things will conspire to continue to drive the improvement in the market -- I mean, in the business, but relative to the market, I'm not expecting this to be more than a single-digit, mid-single-digit grower.

I don't see this ever getting to the double digit just given the characteristics; the mix shift, as Brendan mentioned earlier, in the U.S. market. This is not a growth area aligned with something like the ISVs. In terms of strategic, I go back to again what Brendan mentioned earlier.

Domestically, if you're specific to domestic, we're very excited about the B2B space. There's a lot of white space in that space where companies have not -- manufacturers have not historically used their ERP infrastructure as a way to accept payments.

And we are seeing a good traction in that space, and we'll -- I think you'll continue to see us invest. Then if we were to spend strategically, it -- as we did with Notice, I think this is an area that we will continue to invest in domestically. And then beyond that is to move the capabilities.

Since it's connected to the same platform, that's connected to all our infrastructure, Snap. We'll be looking to export that to Europe and to Mexico and then other markets that we end up in over time..

That's helpful. Sorry, I misspoke. I meant Direct and I didn't mean Traditional earlier.

And then just as we think about the pace of margin expansion in the back half, you talked about that being stronger, but can you maybe give us a sense of what are some of the operational things you're doing that's kind of driving that just beyond the kind of the natural FX pressures normalizing in the back half?.

Yes. I think there's two ways to grow margin. One is just the organic growth of the company. We try to get as much of our costs to be fixed as possible so, as we add more transactions, those transactions are, generally speaking, as profitable as the one prior, but they become incrementally more profitable because of the fixed structure of the company.

So we own our processing across all markets. We're now pairing a variable expense to process the transaction. And that's the primary way of growing in that. And when we went public and we were explaining EVO to the marketplace, that's the 50 to 75 basis points that we're expecting.

What you saw in the fourth quarter and I think you'll see again in the future, at some juncture, is kind of that stair -- step up in margin. And that generally comes from making an acquisition. Repricing the book for lossmaking merchants is the most -- a quicker, effective near-term way of changing a margin outlook.

And the other is integration of infrastructure. So as I mentioned on the call, Germany, we've gone for a number of years, but it was low on the priority list. It's only gone up on the priority list.

And we've integrated, which means the capabilities of a stand-alone German office are now integrated in -- a big part of it is integrated into Poland because we have a model out of Europe, kind of hub and spoke, where Poland is the infrastructure, the back office.

And each of the countries are more like satellites in terms of sales and direct customer service. The other would be relative to Mexico. So there is an outsourced relationship still with Mexico. While we own the infrastructure, it is processed through a third-party processor that is partially owned by the bank that we're aligned with.

So as we integrate that infrastructure, what is today out -- a spend goes away because we're placing the processing over infrastructures that we've already paid for. And in those instances, and we have a number of them that we're working on, you'll see a -- more of an outsized increase to margin improvement..

Thank you..

Thank you. And our next question comes from Ken Sikorsky with Autonomous Research. Your line is open..

Thanks a lot. I was just curious if you can comment on how comfortable you are running at over 4x leverage. That just seems that this is above your target leverage level, and you continue to buy different assets.

So is there any specific time line to get that leverage down to the 2x to 3x range?.

All right, sure. Good morning. So, if -- I assume you've been watching us from the beginning. So when we came -- just before we came public, we were 6x leveraged. And this is the business, as I mentioned earlier, that made over 20 acquisitions over a relatively short time period. So we largely did it off the balance sheet of the company.

We as the original shareholders of the company also contributed capital over the course of the last part of the IPO over the course of, say, five years. So as we became, as we went public, one of the initial objectives was to pay down that debt, so we took it initially from 6.2x to -- what was it at the IPO, 5x.

Kevin?.

Yes, just under 5x..

Just under 5x. And what we gave was long-term guidance of the 2x to 3x, which is a reasonable range for the marketplace, but it wasn't something that we were -- or I was saying that we're going to be there in the first 12 months. And we're only just coming up on 12 months as a public company.

As Kevin said, we'll -- slightly by -- at least where we are today, it's about 4.5x. And by the end of the year, we'll probably be down at 4x or slightly under 4x. So the company, as all our space, generates a significant amount of free cash flow.

As you noticed, in the first quarter, our CapEx spending was down about 25%, and a big part of that CapEx spend decline was around terminal spend.

And we had a number of initiatives last year, the cashless program in Poland; and as we make acquisitions like Liberbank, there's always a number of terminals that are out of compliance that we have to replace.

So we had a number of factors that drove up cash spend in the last couple of years that I think will slow down and enable us to have more free cash flow to pay down debt. And when we get to 2x to 3x, we weren't specific as to a time frame, but in terms of our leverage, I don't think it's out of line with our strategy..

No, it makes sense. And you mentioned that you had some pressure on your DCC take rates. I was just wondering if you could disclose the overall revenue exposure to DCC and then maybe just comment on why the rates are declining there..

If you recall, last year, we got a number of questions from people like yourself as well. There was a lot of attention in Europe around DCC. And I think it just heightened the attention in that market. And it was, I think, initially expected there'll be some regulation coming out of the EU.

That did not happen, but I'm assuming that has -- had had some impact on the rate at which people are using DCC. Beyond that, nothing else has really changed in our businesses, maybe some travel patterns because you have to have an international card in your market to be able to take advantage of a DCC transaction.

I think in one of our markets, in particular the -- in the Polish market, the business that was acquired happened to -- for us -- was based at airports. So as you well know, people from all over the world travel through these airports, in Poland in particular. And as we lost that customer, our DCC will be impacted as a result.

But nothing more than that..

And if I can just sneak one more; what was the contribution from acquisitions just in the North American segment?.

Just acquisitions in North America?.

Yes, just from the quarter..

Yes. It was about 7% in -- just for North America. And it's primarily the Federated acquisition. As Jim mentioned earlier, that's going to annualize Q4 this year. The smaller ones really weren't that material to the growth rates..

Yes. Notice had already annualized..

But the -- sort of it was seven points off of the 8% growth in the quarter in North America..

It -- I'm sorry. It's....

Just because North America grew 8%. So you're saying it was seven points of contribution..

No, it wasn't -- it's not the -- of the 8%, it's not -- 7% isn't the total. So what we said earlier in the call, so total company grew -- ex Traditional grew 13%. five percentage points of that was related to the acquisitions, mostly Federated.

Some of that's coming from some of the European deals, but if we look at sort of within the North America segments -- so just kind of given rounding and everything else. So we've got just under seven percentage points related to -- with the Q1 impact of Federated.

And then you've got a couple points of just normal organic growth, but then you're going to see the impact of the Mexico holiday. That's going to impact primarily the Mexican market..

Okay, all right, thanks a lot guys. Appreciate it..

Thank you. And our last question comes from Juliet [ph] with State Street. Your line is open..

This is Jennifer. Thanks for taking my question. So I have two. The first is around the operational side.

So when you're talking about your consolidation of the back office, can you perhaps shed any light on the impacts of costs for restructuring?.

The cost for restructuring typically is around personnel. So it's exiting personnel that are duplicative to the consolidation. So if we had two offices that had common services, as we exited 1, then we would take a charge that would be reflected in the financials for the severance related to those people that would be exiting..

And do you perhaps have a material number for that for the first quarter?.

I noted, in the quarter, I mean, we did consolidate some offices as of the fourth quarter. And every quarter, there's probably some come out of that, but I don't know that one specifically. We could probably take that after. And it would be otherwise in the press release..

And the second is around you spoke about Mexico and delivering front-to-end technology solutions with any time delivery.

Do you think we could just elaborate a bit more on that? Is it, firstly, easy to do that across the region? Or is this something new? Can you -- as a company to market, to deliver this service?.

Could you speak -- it was just somewhat muted. Could you just repeat the first part of that question again? Your question is around migration....

Well, you spoke about the front-end delivery of technology services to Mexico. I was wondering if you could elaborate more on that..

Okay. I'll let Brendan take that..

I think what you're asking is around the SF Systems acquisition that we announced earlier this week. And SF Systems today is integrated to the processing platform in Mexico. We've been working with SF Systems now for a number of years.

I think what Jim was specifying was, by redirecting that integration from the processing infrastructure to EVO Snap, we would have the ability to export the integrations of SF Systems to our other markets in which we operate around the world, but SF Systems today is already integrated to our processing infrastructure.

We've been working with the business for a number of years. It already provides services to many of our large national accounts within the Mexico market. And it enhances the stickiness of some of our most important customer relationships, which I think now cements our ability to provide, one, end-to-end technology solutions.

And two, it solidifies the relationship for the foreseeable future..

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to Mr. Jim Kelly for any closing remarks..

So thank you all for joining us this morning and your continued interest in EVO. Thank you, operator..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day..