Evertec Inc (EVTC) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the EVERTEC second quarter 2013 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Luis Cabrera, Senior Vice President and Head of Investor Relations. Please go ahead, sir.

Thank you, operator and good afternoon, everyone. Welcome to EVERTEC's second quarter 2013 earnings call. I'm Luis Cabrera, Senior Vice President, Treasurer, Head of Investors 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. A replay of this call will be available until Wednesday August 14, 2013. Access information for the replay is listed in today's financial press release, which is available on our website 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 August 7, 2013.

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 reflect our current expectations only and we undertake no obligations to update any statements to reflect events that appear after this call. Please refer to the final prospectus for our initial public offering on Form 424B4 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 net income per share. Reconciliations to GAAP measures and certain additional information 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. Peter?

Thank you, Luis. Thanks, everyone, for joining us today. I am very pleased with our second-quarter results and remain excited about the breadth of opportunities available us to continue to build shareholder value. Of course, our success would not be possible without our great Management team and all of EVERTEC's 1,700 employees. I want to thank each of them personally for their dedication and continued hard work towards making EVERTEC the leading full-service transaction processor in Latin America and the Caribbean.

For the second quarter our, revenue and adjusted EBITDA grew 6%. Our adjusted EBITDA margin increased to 48.7% and our adjusted net income grew a very strong 39%. Overall, our solid results for the second quarter of 2013 demonstrate both the value of our business model and the continued execution of our strategic growth plan. We continue to expand the depth and breadth of our customer partnerships across our broad Latin American footprint and are happy to report significant progress on a number of strategic initiatives, some of which I will discuss with you in just a moment. I am also pleased to announce that our Board of Directors has approved a regular quarterly cash dividend of $0.10 per share. Our initiation of a quarterly dividend underscores EVERTEC's significant free cash flow generation, strong balance sheet, and the ability to sustain predictable long-term growth with low incremental capital requirements. It also reflects the confidence that our Management team and Board have in our long-term growth prospects as well as our commitment to maximizing total shareholder value. As you may have seen, we have posted a supplemental slide to our Investor Relations website that further highlights our rationale behind the initiation and some key figures that Juan will walk you through later on call.

Now onto some highlights from the quarter and some recent Corporate developments. First, our merchant-acquiring business returned to a more normalized level of growth in the second quarter, as we lap the Durbin related impacts we had discussed with you on our first call. For the second quarter, merchant acquiring grew 7% driven primarily by volume growth. Next, I'd like to go through some of our recent Corporate developments, which underscores EVERTEC's ability to execute on its growth strategy. I am very excited to announce that just this past week we received a TPP1 license from MasterCard to begin sponsoring customers in Mexico, Panama and Costa Rica. In fact, we already have customers where we can begin utilizing this license. We believe EVERTEC is the first transaction processor in Latin America to receive a TPP1 license and this represents the first step in being able to provide our customers with both issuing and acquiring services. As I discussed with you in the past, a key part of EVERTEC's growth strategy is to continue to penetrate and gain share in Latin America by leveraging our suite of end-to-end processing solutions and this development is reflective of our success and momentum.

I'm also pleased to announce the significant expansion of a business relation with one of our existing bank clients. This bank, which has been an important client of ours for more than 15 years, recently chose EVERTEC to provide a set of services we will be providing to them from one country to eight additional countries over Latin America. This significant expansion of the existing business relation not only reflects our ability to penetrate and cross sell our existing client base but also the value of our ability to deliver these types of services throughout Latin America. Lastly, we will begin offering dynamic currency conversion services to our client base in Costa Rica beginning in early 2014. Our introduction of DCC into the Costa Rican market underscores EVERTEC's commitment to continue to introduce new, differentiated products and services to our customers, helping them provide an improved experience to their own customers. Finally, we continue to experience strong growth in our markets outside of Puerto Rico. More specifically, we experienced revenue growth in the mid teens outside of Puerto Rico, as we continue to penetrate and gain share in these markets.

As we look to the second half of 2013 and beyond, we remain focused on our strategic growth initiatives of penetrating and gaining share in our core markets, across all of our products and services, expanding into new geographies, leveraging our assets and capabilities to drive innovation, entering new vertical markets, and creating merchant acquiring alliances and joint ventures across Latin America.

Now, before I turn the call over to Juan Jose, I as you probably read today, I was appointed to EVERTEC's Board of Directors. I want to thank the Board members for their confidence in me and I look forward to working with them for the mutual benefit of the Company and our shareholders. Also on behalf of the entire Board of Directors, I want to thank Felix Vilamil for his many contributions both as a Director and as EVERTEC's former Chief Executive Officer. It was Felix's leadership that helped to build EVERTEC into the market leader in Latin America. I thank him for his support, leadership and partnership, and all of us at EVERTEC wish him well.

With that, I'll turn the call over to Juan, who will discuss our financial results in greater detail and also discuss our outlook.

Thank you, Peter and good afternoon, everyone. As Peter described earlier, EVERTEC generated solid results in the second quarter ended June 30, 2013. We again delivered very strong adjusted net income growth driven by revenue growth across all of our business segments, continued adjusted EBITDA margin expansion, and the positive impacts of our debt refinancing, which we completed in April.

Now, starting with our revenues, on a consolidated basis across our three segments, total revenues for the second quarter increased 6% to $89.2 million, compared to $84 million in the second quarter of 2012. Looking at the underlying segments, our merchant acquiring business net revenues grew 7% to $18.2 million. Revenue growth in the quarter was driven primarily by higher transaction volumes. As Peter mentioned, we returned to a more normalized revenue growth rate in merchant acquiring this quarter and we're very pleased with the performance. Payment processing segment revenues increased by 2% to $24.3 million versus $23.8 million in the prior year. As we noted in today's earnings release, the payment processing revenue growth comparison this quarter was impact by a one-time nonrecurring item in the second quarter of 2012. Normalizing for the one-time benefit in the second quarter of 2012, revenues in this segment grew 6% in Q2 2013 versus the prior year. Finally, the business solutions segment revenues increased by 7% to $46.7 million, which was driven by an increase in our product sales and higher demand of our services.

Now, moving to the expense side of our income statement, our cost of revenues, excluding depreciation and amortization, were $42.3 million for the second quarter, representing an increase of $2.4 million or 6% as compared to the corresponding 2012 period. The growth in our cost of revenues was primarily due to an increase in product sales of $2 million within our business solutions segment and a non-cash, share-based compensation expense of $1.8 million associated with the vesting of all of our Tranche B and C stock options as a result of our IPO. These increases were partially offset by a decrease of $1.4 million in professional service costs. Total selling, general and administrative expenses were $12.1 million for the quarter, representing an increase of $3.7 million as compared to the corresponding 2012 period. The increase in our selling, general and administrative expense was primarily due to a non-cash, share-based compensation expense of $3.1 million related to the vesting of all Tranche B and C stock options, which I just explained.

Income from operations for the three months ended June 30, 2013 was $16.9 million representing a decrease of 7% as compared to the corresponding 2012 period. The decrease in income from operations was the result of the extraordinary non-cash expense related to the vesting of our stock options totaling $4.9 million. Excluding these expense, operating income would have increased by $3.7 million or 20%. Total non-operating expenses for the quarter were $86.9 million, representing an increase of $65.8 million as compared to the corresponding 2012 period. The increase in non-operating expenses was primarily driven by $58.5 million related to the refinancing of our debt and $16.7 million related to the termination of the consulting agreement with Apollo and Popular, partially offset by a decrease of $3.5 million in interest expense as a result of the debt refinancing during the quarter.

We recorded an income tax benefit of approximately $5 million in the second quarter of 2013. On a cash basis, our income tax expense was approximately $1 million. The tax benefit for the second quarter was mostly attributable to a loss before taxes as a result of the extraordinary transactions discussed above related to the refinancing, contract cancellation and vesting of the stock options. Adjusted EBITDA for the quarter ended June 30, 2013 was $43.4 million, an increase of $2.5 million or 6% as compared to $40.9 million in the corresponding 2012 period. The increase in adjusted EBITDA was primarily due to growth in revenues. Our adjusted EBITDA margin improved by 20 basis points to 48.7% from 48.5% in the prior year as a result of the operating leverage in the business and continued focus on cost control initiatives. Adjusted net income was $28.9 million or $0.35 per diluted share for the quarter ended June 30, 2013, representing an increase of 39% from $20.7 million in the corresponding 2012 period. The increase in adjusted net income was primarily driven by the same factors impacting adjusted EBITDA and lower pro forma cash interest expense as a result of the refinancing we completed in April.

Please note that for comparability purposes, adjusted net income per diluted share calculations assume that, on a pro forma basis, the Company completed the fore-mentioned debt refinancing on January 1, 2013. Please reference the reconciliation tables provided in today's earnings release for additional information.

As Peter mentioned, we are pleased to announce today the initiation of a regular quarterly dividend. As part of the this announcement, we have provided a supplemental slide on our website that highlights our rationale and certain key figures that I would like to spend a few minutes walking you through. First, I would like to highlight EVERTEC's significant free cash flow generation. As you can see by the slide, EVERTEC generates in excess of $105 million of distributable free cash flow on an annual basis. Distributable free cash flow is calculated as our adjusted EBITDA net regular capital expenditures, cash taxes, cash interest expense and demand amortization on our debt. Or in essence, it is our excess cash available for the strategic investments, deleveraging on our returns to shareholders.

As we have discussed before, our free cash flow profile is differentiated by our profitability margins, advantage tax structure, low debt costs and the ability to drive continued strong growth with minimal capital expenditures. Our decision to implement this regular quarterly dividend will not have any impact on our strategic initiatives and ability to continue to deliver strong growth and financial results. Second, EVERTEC has a strong balance sheet with significant liquidity that provides us with meaningful financial flexibility. As of June 30, 2013 we had approximately $120 million of available liquidity comprised of a $100 million undrawn revolver and $20 million of balance sheet cash. We have, and we continue to be committed to maintaining strong liquidity and deleveraging in line with our peers over the medium to long term. Third, I would like to underscore EVERTEC's commitment to maximizing shareholder value. Our initiation of a regular quarterly dividend and consistent strong financial performance is a reflection of this focus and we appreciate the continued support of our shareholders.

On the right-hand side of the page, you will see the details of our first quarterly dividend. The amount is $0.10 per common share and will be payable on September 6, 2013 to shareholders of record at the closing of business on August 19, 2013. On an annualized basis, the dividend represents a yield of approximately 1.6% based on our August 6, 2013 closing share price.

Now, quickly into our guidance, we are reiterating our 2013 outlook that we provided on our last quarterly call of revenue growth of 6% to 7%, adjusted EBITDA growth of 8% to 10%, and adjusted net income growth greater than adjusted EBITDA.

Operator, we will now open up the call for questions.

(Operator Instructions)

Julio Quinteros, Goldman Sachs.

Congratulations. Good start here. Wanted to just go back to the contribution from some of the international segments outside of Puerto Rico itself. You talked a little bit about the mid-teens growth. What is the actual contribution right now? Maybe help us prioritize which countries you would expect to come online first, as we think about the next couple of quarters here?

Well, I think what's driving the growth is predominately our POS and our card processing side of the business. We're seeing that in most of the markets, but as we've said before, that relates really to the business that we sold last year. That's continuing to drive it as well, as we said before, just the cash-to-card conversion on the current footprint that we have. As far as -- we're still focused on Columbia. Until we get Columbia up and running and fully driving revenue, then we'll focus on what the next market we'll go into. Like we said on road show, our analysis would say that it's probably going to be either Chile or Peru next.

Okay. In terms of contribution, I think you said was mid teens in terms of growth, but what is the percentage of revenue contribution this quarter?

I will turn that over to Juan.

It's about the same as last year, it's around 15/85, Puerto Rico 85%, outside 15%.

Great. Thank you.

George Mihalos, Credit Suisse.

This is Allison Jordan in for George. I have a question on your opportunity to launch the dynamic currency conversion services in Costa Rica. Can you let us know maybe how big you think that opportunity can be, and what other countries you're looking to implement that in?

We think it's a business -- obviously, it depends on the market. It's really tailored towards the T&E business because when you really get the value is from the foreign card holders in country. There is some decent T&E or tourist related business in Costa Rica. That's what we're going to be focused on first, with both the ATM and POS. I don't have a specific number for what we see it as. Then, you'd have to look at the countries where it's not US dollar and where there is a sizable tourist industry. That's where the best benefit will come from. So, probably a market like potentially the Dominican Republic makes sense. Not so much Panama, because they're US dollar obviously, but some of the other Caribbean markets where there is a high level of tourism.

Great. Thank you.

Sara Gubins, Bank of America Merrill Lynch.

A question about the dividend. Is the thinking that you would raise the payout ratio over time, or are you thinking about 30% as a longer-term target?

No, our dividend basically today -- the amount that we decided is a process. It's a dynamic process that Management underwent through to determine how much it will be. We don't have a preset ratio. So, as I said it will be a dynamic process where we will continue with our Board discussing our growth strategies and any dividends going forward.

Okay. Separately, could you talk about the factors that would drive accelerating adjusted EBITDA growth in the second half in order to get to the 8% to 10% growth targets for the year?

Sure. We certainly expect, obviously, the payment businesses to continue to accelerate their growth. Obviously, those are at higher margins as we said before. On top of that, clearly in the fourth quarter with the holidays, we're going to see considerable growth in that in the payment related businesses again, which we believe will continue to drive higher EBITDA growth. We certainly feel very comfortable that we'll end up, for the year, within the 8% to 10% range that we gave you.

Great. Last question, could you provide some more color on the revenue growth that you're seeing in business solutions? We generally think of this as the slower and the steadier segment, but it's actually been growing faster than some of the other segments this year.

Yes. We've been very happy about that. I think when you look at business solutions as we've said, not a lot, but a significant amount of the revenue is project related revenue and it's technology spend. What we've seen is the timing of that changes every year. What we've seen this year is we saw more of that in the first half of the year. Right now, we expect the business to operate more in line with our expectations for the remainder of the year. Again, the qualification would be, these types of projects, the timing is sometimes hard to estimate as to what quarter they'll fall into. I think we've been very fortunate that we've seen increased technology spend by corporates and the financial institutions in the first half. We hope that continues, obviously, into the second half. We're comfortable that it will probably exceeded what we expected it for the year, but we don't see today that it will continue to run at the current run rates.

Great. Thank you.

Brian King, Deutsche Bank.

This is Ashish calling on behalf of Brian King. Peter, congratulations on being nominated as a Director. Quick question around the recent judge ruling on the flawed implementation of Durbin Amendment. Obviously, it's going to be a long-drawn process, or it could be a long drawn process, but I was wondering if the ruling does hold, will that benefit your merchant-acquiring business, if you had any initial thoughts on it? What could be any impact if any to your ATH network?

First I would say, yes, -- my first thought would be -- we'll have no impact in 2013. I don't think they'll get this sorted out that quickly. It's early days to understand what will actually come out of it, but I would say if it's going to have any impact, I would suspect it's going to have some positive impact in the merchant and acquiring business for a short period, as obviously the interchange would go down. In that business we will eventually pass it on, but certainly there may be some short-term positive benefit. Other than that, from an ATH perspective, we would see it neutral at the end of the day. The piece they're talking about, the sig debit, to us is going to definitely be neutral. It doesn't matter which. We'd pass it to either one. Our revenue doesn't get affected. That's more for Visa or MasterCard.

That's great. On the merchant segment, that segment definitely the revenue accelerated from the first quarter. In addition to lapping of, or annual setting of those merchant contracts, can you also talk about how you're partnership or alliance with Oriental is coming along and how that's helping growth in that particular segment?

Yes. In the second quarter it had a small impact from a growth perspective. We expect it to have a bigger impact as we go forward in the year, as we continue to bring those merchants that were BBDA merchants, after they were acquired by Oriental onto our platform. Today we're running the Oriental part of the business and that's working fine and it's helping, but we expect it will continue to add value to us as we go through the rest of the year.

That's great. So, we could expect revenue growth to improve both in the payment processing as that one-time headwind -- or as you anniversary that one-time non-recurring headwind, and then on the merchant site, you expect some additional contribution from the alliance? Would that be fair?

That would be fair. Yes.

Thanks.

Smitti Srethapramote, Morgan Stanley.

Regarding the third-party processor license that you just received in the three countries that you talked about, can you talk about when you'll be able to start generating revenues in those countries?

Yes. We generate revenue, obviously, in those countries today. As we've said, we've always been focused on the tier two and tier three banks. What I'm excited about with this license is to be able to use that to continue to bring value to that segment of the business. So, we'll be able to sponsor them where they won't have to get their own principal license to MasterCard. We have a couple of banks already that we know we can use that license for. Now again, we're going to have to implement them onto the platform and like any other card or POS business, that will take some time. We'll see the revenue in 2014.

Got it. Are there any other similar type of licenses that you're currently applying for, whether inside or outside of the three countries that you talked about?

I think the obvious question would be, we're going to go knock on the guys on the other side of street next. We're going to look to expand that license to be able to directly acquire. This, I think, was the right first step and we're very excited to get the first step done. Now, one, to try to expand it beyond just was the countries and secondly to add to it.

Great. Thank you.

(Operator Instructions)

John Williams, UBS.

Couple of quick ones. First, as we look at the margin seasonality within the three businesses, it looks like your back towards starting what looked like a 2011 cadence through the year. I just wanted to make sure that's the right way to think about it, really for the three segments as we go forward? Secondly, on the transaction growth within the segments, to the extent that you can give us volume or transaction, these are growth rates or numbers that would be helpful just for modeling purposes? Thanks.

In the most of our business, you're right. In the second half, we will see an increase in our transaction, in our payment businesses, in both merchant acquiring and payments. That incremental revenue, bring very little or non-incremental costs. So, yes, in the second half, we will see not only higher revenues, it will accelerate our revenues, but most important, it will accelerate our margins even faster because in those two businesses as a reminder, is where we have the most significant margins. Business solution is also, as it grows, it accelerates margins, especially as Peter mentioned, if we have certain projects that we complete you will see not only the accelerated revenue growth but also it will add to our margins.

Okay. To the extent that you can give us merchant acquiring volume growth and transaction growth within payment processing, I know it's a driver in a lot of our models, and so whether it's a percentage or an actual number, if you could give that that would helpful? Thanks.

Okay. We're still working on that.

Okay.

That does conclude our question-and-answer session at this time. I'll turn the call back over to Peter Harrington, President and CEO, for any final or concluding remarks.

Okay. Just want to finish by saying thank you very much for your support. We are here very excited first and foremost about implementing the dividend and secondly about the things that we're doing today that's continuing to drive momentum in the business. We look forward to speaking to you after the third quarter.

Everyone, that does conclude our conference call for today. Thank you all for your participation.