Evertec Inc (EVTC) 2012 Q3 法說會逐字稿

Good morning. My name is Clinton and I'll be your conference operator today. At this time I'd like to welcome everyone to the EVERTEC 2012 Third Quarter Earnings call. At this time, all participants are in a listen-only mode and we will conduct a question and answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes as well. Thank you. Mr. Luis Cabrera, you may now begin your conference.

Thank you, operator and good morning, everyone. Welcome to the third quarter 2012 Earnings Call. I'm Luis Cabrera, Senior Vice-President, Treasurer, and Head of Investor Relations and Corporate Development for EVERTEC. With me today is Peter Harrington, our President and Chief Executive Officer, Juan Jose Roman, Executive Vice-President and Chief Financial Officer, and Mike Vizcarondo, Executive Vice-President, Head of the Merchant Acquiring Business and the ATH network.

A replay of this call will be available through November 27, 2012. Access information for the replay is listed in today's financial press release, which is available through our website at www.evertecinc.com, under the Investors Relations tab. As a reminder, this call may not be taped or otherwise reproduced without EVERTEC's prior consent. For those listening to the replay, this call was held and recorded on November 13, 2012.

Before we begin, I would like to remind everyone that this call may contain forward-looking statements, as they are 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, November 13, 2012, reflect our current expectations only and we undertake no obligation to update any statement to reflect the events that occur after this call.

Please refer to our Annual Report on Form 10-K for the year-ended December 31, 2011, which was filed with the Securities and Exchange Commission on March 27, 2012, and in other reports we file with the SEC from time to time for factors that could cause 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 the SEC rules, such as adjusted EBIDTA.

Certain information and reconciliations to GAAP measures required to be disclosed about these non-GAAP measures are also included in today's earnings press release. With that, we'll begin by turning the call over to Peter Harrington, our President and Chief Executive Officer.

Thank you, Luis and good morning everyone. Before reviewing the highlights of what was another quarter of continued growth, let me say how pleased I am that earlier this month, we received a 15-year tax grant from the Government of Puerto Rico. Under the grant, EVERTEC will benefit from a reduced income tax rate of 4% on its data processing activities in Puerto Rico, which represented approximately 80% of its fiscal year 2011 revenues. In addition, EVERTEC will also benefit from a 90% and 60% exemption on property and municipal taxes for the life of the grant.

Accordingly, we believe this grant structurally enhances our advantaged tax position and free cash flow profile, enabling continued investment in our leading technology platform and growth of our transaction processing business, both locally and in international markets. We greatly appreciate the Government of Puerto Rico's continued partnership, as we continue to grow our leading transaction processing business in the Caribbean and Latin America and are pleased to be part of the Island's continued economic development.

For the quarter ended September 30th, 2012, our total revenues increased 3%, primarily due to higher realized net margin in our Merchant Acquiring segment, and an increase in volume of transactions and services in our Payment Processing segment. We continue to see double digit growth in our revenues in Latin America, which is our fastest growing region and primary growth area.

Going forward, we expect EVERTEC's growth in Latin America will continue to come from both continued organic expansion and strategic acquisitions and we remain focused on serving our clients, and driving profitability and customer service enhancements through our ongoing optimization of our operations and organizational structure.

With that, I'll turn the call over to Juan Jose for the financial details of the quarter.

Thank you, Peter and good morning, everyone. For the third quarter of 2012, total revenues increased $2.8 million or 3% to $83.8 million, compared to $81 million in the third quarter of 2011. Looking at the underlying segments -- Merchant Acquiring segment net revenues increased by $2.2 million or 15%. The Payment Processing segment revenues increased by $1.1 million or by 5%, and the Business Solutions segment revenues decreased by $500,000 or 1%.

The increase in the Merchant Acquiring segment net revenues was primarily driven by higher realized net margins. Revenue growth in the Payment Processing segment was principally driven by an increase in volume and accounts on file, while the decrease in the Business Solutions segment revenue was primarily due to lower demand for certain IT consulting services.

Total operating costs and expenses, excluding depreciation and amortization decreased by $400,000 or 1% to $47.8 million for the quarter ended September 30, 2012, compared to $48.2 million for the same period in 2011. The improvement was primarily due to a reduction in certain expenses, as a result of the Company's continued cost control measures, partially offset by an increase in professional services to support business growth and higher costs of sales associated with increases in total revenues.

Total operating costs and expenses, excluding depreciation and amortization as a percentage of total revenues, decreased by approximately 248 basis points to 57% from 59.5% in the prior period. Non-operating expenses for the quarter ended September 30, 2012, were $14.4 million, a decrease of $8.7 million as compared to $23.1 million for the same period in 2011. The decrease was primarily the result of a $13.2 million reduction in other expenses, partially offset by a $3.4 million increase in interest expense.

The variance in other expenses was primarily driven by a $14.2 million non-recurring expense related to the voluntary retirement program, or VRP, in the third quarter of 2011. The higher interest expense was the result of the issuance of additional debt in May 2012. Income tax expense for the quarter ended September 30, 2012 amounted to $500,000 compared to an income tax benefit of $5.1 million for the corresponding 2011 period.

The income tax expense for the 2012 third quarter relate to income before taxes generated by our international operations. The income tax benefit for the 2011 period was the result of a loss before income taxes primarily associated with the aforementioned VRP expense.

Designed to promote economic development in Puerto Rico, the aforementioned grant covers EVERTEC's data processing activity in Puerto Rico and subjects EVERTEC to customary commitments, conditions and representations. The more significant commitment includes -- maintaining at least, 700 employees in EVERTEC's Puerto Rico data processing operations; and investing at least $200 million in Puerto Rico during the second term of the grant.

In exchange, EVERTEC will benefit from a reduced income tax rate of 4% on its data processing operations, as well as 90% and 60% exemption on property and municipal taxes related respectively as provided by the tax incentive act.

Since the grant was received after the quarter end, and needs to be proactive to January 1, 2012, our fourth quarter will reflect adjustments in income tax expense, to account for the reduction in taxes retroactively to January. The property and municipal tax rate reductions will be reflected in the second half of next year, since such taxes are based on fiscal years ended in June.

While our adjusted EBIDTA for the quarter ended September 30, 2012 was $38.4 million, an increase of $700,000 or 2%, compared to $37.7 million for the same period in 2011. The increase was primarily due to higher revenues and a slight decrease in cash expenses. With that, I will now turn the call over to Luis, who will discuss EVERTEC's balance sheet and liquidity.

Thank you, Juan. We continue to enjoy a strong balance sheet. As of September 30, 2012, we reported $49.5 million of unrestricted cash, and $745.5 million of total debt, which represents a total net debt of $696 million.

As of September 30, our total net debt to adjusted last twelve months of EBIDTA ratio was 4.4 and our liquidity stood at $98.8 million. This includes the $49.5 million in unrestricted cash on our balance sheet plus $49.3 million of available capacity on our revolving line of credit. Our senior secured credit agreement required us to maintain a maximum senior secured leverage ratio no higher than 3.85. As of September 30, 2012, this ratio stood at 2.82 so we are comfortably within the requirements.

With that, we'll open up the call, for your questions. Operator, please provide us the instructions.

Thank you. (Operator Instructions) And your first question comes from the line of Ed Tai of Third Avenue Management. Please proceed.

Yes, thanks for the results. Just curious, did you guys buy back any bonds this quarter?

No, we did not purchase any bonds or made any voluntary repayments.

Got you. And just one quick follow-up. Can you give me an update on what your current restricted payment basket is for another potential dividend?

As you know, the credit agreement establishes that in order to confirm the amount, we have to wait for the whole year. We have not finished the year, so cannot precise right now what the amount will be.

Okay, thank you.

Thank you. Again, ladies and gentlemen, if you wish to ask a question, please press star, one. And your next question is from the line of Adam Tuckman of Goldentree Asset Management. Please proceed.

Hi guys. Just curious, I noticed in the third quarter we saw a little bit of a deceleration in growth on both the top-line and EBIDTA. And I'm just wondering if you can comment on how we should be thinking about the business on a going forward basis. Is this a more normalized type run rate, now that we've kind of lapse the last year's worth of year over year growth and merger synergies?

I think the best way to look at it going forward is that we don't see this as an ongoing trend. We certainly see that both in the fourth quarter and going forward that the business will continue to grow, both on the top and the bottom line as it has in the past.

Some of this was just kind of timing issues as well as some pullback on some of the normal IT expenditures that you would see here in Puerto Rico. Probably related more to the election and the change in the governments that takes place at this time of year. But certainly we don't see that as a trend going forward.

Okay, something closer to mid to high single digits is possible, versus what we saw in this quarter.

I would agree, yes.

And then congrats on the tax element, that's a terrific outcome.

Thanks.

Thank you. At this time, there are no further questions. I'd like to now turn the call over to Mr. Harrington for his closing remarks.

I want to thank you all for joining us on our call today, and for your ongoing support of EVERTEC. We are very excited about the continued growth of EVERTEC's leading technology platform and look forward to updating you again when we report the fourth quarter and year-end results. Operator, you may now end the call.

This concludes the 2012 EVERTEC Group LLC third quarter earnings conference call.