Evertec Inc (EVTC) 2015 Q3 法說會逐字稿

Greetings and welcome to the EVERTEC third-quarter 2015 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder this conference is being recorded.

I would now like to turn the conference over to your host Mr. Alan Cohen, Executive Vice President and Head of IR. Thank you, you may begin.

Welcome to the EVERTEC third-quarter 2015 earnings call. With me today are Mac Schuessler, our President and Chief Executive Officer, and Peter Smith, our Chief Financial Officer. A replay of this call will be available until Thursday, November 12, access information for the replay is listed in today's financial release, which is available on the website under the investors relations tab.

As a reminder, this call may neither be recorded nor otherwise reproduced without EVERTEC's prior written consent. For those listening to the replay, this call was held on November 4.

Please note there is a presentation that accompanies this conference call and it is accessible in the IR section of our website. As well as by the link provided in the press release earlier today.

Before we begin, I would 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 statement 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 net income per share. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides.

I will now hand over the call to Mac.

Thank you, Alan, and good afternoon, everyone. Thanks for joining us on today's call.

Since our last earnings call, we've accomplished quite a bit, including solid financial results, two announced transactions, and several key organizational changes. I'll cover each of these in more detail and then provide you with an update on our Latin America business, as well as an update on recent developments here in Puerto Rico.

Beginning on slide 4, we have a summary of our Q3 results. Total revenue was $92.8 million, an increase of 4% compared with the third quarter of 2014, which was slightly ahead of our expectations.

We generated adjusted EBITDA of $46 million, an increase of 3%. And adjusted net income per share of $0.42, an increase of 5%. Both of these were inline with our expectations. We returned approximately $33 million to our shareholders this quarter through a $25 million stock buyback and our $8 million quarterly dividend.

Turning to slide 5, we provide a summary of the planned acquisition of Processa, which is a diversified Colombian payment company headquartered in Bogota. As previously disclosed, we've entered into an agreement to buy 65% of Processa for a purchase price of approximately $5.7 million at the current exchange rate. The deal now provides us with a business platform to expand upon in the Colombian market.

Processa offers a wide variety of payment services including; processing for card issuers, financial institutions, and merchants. Its clients include Grupo Exito, one of Colombia's largest retailers with approximately 550 stores; several financial institutions, including Banco de Bogota and Bancamia; and two of the top social funds administrators, Cafam and Compensar. Compensar, the current majority owner and Columbia's second biggest social fund administrator, were attained a 35% ownership stake.

Under the Bank Holding Company Act, Banco Popular is required to submit an application on our behalf to the federal banking authorities. The application has been submitted for approval and we are still targeting a close date for the end of November.

Moving to slide 6, we are pleased to announce that, as of October 31, we've agreed to extend and expand our business relationship with First Bank for a term of 10 years. First Bank is the second largest commercial bank on the island and has over $12 billion in assets, 54 branches in Puerto Rico, 12 branches in the Virgin Islands, and 10 in Florida. This transaction is an example of how our unique commitment to the island resonates well with the business community and demonstrates that opportunities remain for EVERTEC in Puerto Rico.

Now pleased turn to slide 7 for a few more details about the organizational changes we announced earlier in the quarter. I'm delighted to be joined today by Peter Smith, our new CFO. He has been here about eight weeks and he brings significant industry knowledge, as well as financial strategy and governance experience.

Peter has relocated his family here to Puerto Rico and is settling into his new home. Which is actually just around the corner from the shoe stores.

In addition to Peter, we announced a number of other internal organizational changes. We now have three senior business leaders, two in Puerto Rico, and one for outside of Puerto Rico, who are solely focused on working with our key customers. Ensuring the satisfaction of our existing clients while accelerated the addition of new business.

We created distinct IT and operational areas that are clearly focused on and report into our major business lines. At the same time, we centralized oversight for critical technology and compliance areas under our Chief Operating Officer to ensure that we manage standards and leverage capabilities where appropriate.

We have also made organizational changes in Latin America that I'll review in more detail in a moment. I'm pleased to say that our leadership team is now in place and I'm confident that these changes will improve our customer focus and accountability across the entire organization.

Now I'd like to turn to a discussion of our Latin American business on slide 8. The first priority with LATAM was to run it with a dedicated and experienced management team. As previously announced, LATAM is now led by a talented and seasoned President, Mariana Goldvarg, who is solely focused on our growth outside of Puerto Rico. Additionally during the recent quarter, Mariana added CIO who was a number two executive in one of the largest card processors in Columbia and hired a new head of account management, whom we recruited from one of our largest international competitors.

We have also promoted some of our strong internal talent into leadership positions. Now that we have new leadership in LATAM we have better visibility into our opportunities and challenges, which puts us in a much better position to execute on our objectives.

While we are pleased that the LATAM business delivered double-digit growth in the third quarter, this growth rate is not reflective of the performance we are anticipating in the near term. The future success of our organic growth is predicated on our account management function, which we recently introduced to the business. The team is working to retain customers who have previously informed us of their intentions to leave, but have not yet migrated, and is also actively building a pipeline of new prospects.

Given the nature of our business, both the parting and incoming clients take time to convert. Therefore next year will continue to be a transitional year for LATAM business. However with a new team in place EVERTEC is uniquely positioned to re-accelerate the growth of our business over time.

Now turning to slide 9, I'll review recent developments in Puerto Rico. As we discussed last quarter, the government increased the local sales tax from 7% to 11.5% effective July 1. It applies to approximately half of our merchant sales volume. During the quarter we saw transaction volume up 5% year over year despite the 4.5% increase in sales tax. We continue to monitor any impact the increase sales tax and the overall uncertainty in Puerto Rico may have on consumer spending.

Turning to more recent developments, there are both headwinds and tailwind's for our business. Let me discuss two headwinds. First, ever year, effective October 1, a significant portion of our business with Banco Popular is repriced based on the September consumer price index. The CPI starting in the fourth quarter is much lower than we've experienced in the past.

Second, also effective October 1, the government implemented a business-to-business tax of 4%. This tax will be charged on much of the goods and services we purchase from our vendors. Both of these items will have a negative impact for the remainder of this year and into next. Peter will provide more detail on both items later in the call.

As for tailwind's, in addition to our First Bank announcement, several legislative opportunities continue to emerge in Puerto Rico. Recently passed legislation will require most licensed professionals, such as doctors and certain other professionals, to provide an electronic payment option to their customers.

Additionally there's pending legislation that may require all consumer businesses above a certain annual revenue threshold to provide electronic payment options to their customers. We are evaluating our opportunity to expand and service these merchants, as previously most only offered cash as a payment alternative. Both trends should continue to accelerate the conversion of cash to cards in Puerto Rico.

On slide 10 we have listed several of the areas where we've been focused since the beginning of the year and discussed on previous calls. I'd like to review where we stand on each.

First we said we'd focus the right leaders on key priorities. We now have a world class team in place executing on our key objectives. We also said we'd focus on corporate development and we now have one deal pending regulatory approval and a few potential opportunities in the pipeline. We promised to focus on executing well in Puerto Rico and join the expansion of our relationship with First Bank in the performance in our local payments business. I feel confident we have our eye on the ball.

We will continue to focus on executing well within this challenging environment. We committed to accelerating growth in Latin America and we now have a leadership team in place with that focus. At the end of the year, we will also own a platform to leverage in our second largest target market, Columbia. And finally we said we would devaluate our internal capabilities which we have partially completed and which informed much of our recent restructuring. We will finalize this work in 2016.

In summary, our focus in 2015 has been to transition from an IT department of a bank to professional, technology, and processing company. And I'm delighted with the progress we have made to date. I'm energized at the prospects ahead and thank the EVERTEC team for their hard work.

With that, I will now turn the call over to Peter.

Thank you, Mac, and good afternoon, everyone. I'll provide a detailed review of our third-quarter results and our year-to-date performance and then conclude by updating with our financial outlook for 2015.

Turning to slide 12, you will see the third-quarter and nine-month period second revenue details in the same for the total company. Total revenue for the third quarter of 2015 was $92.8 million up 4% compared to $88.9 million in the prior year. Total revenue for the nine months year to date was $277.4 million and also up 4% year over year. We are encouraged by our year-to-date performance and the resiliency of a business given the challenging macro conditions in Puerto Rico.

With respect to segment mix, merchant acquiring net revenue increased 8% year over year to $20.8 million driven primarily by sales volume growth. A portion of the increase reflects the impact of the net 4% sales tax increase that went into effect July 1. We estimate that the sales tax increase added 1 to 2 percentage points of growth. The overall sales volume increase we experienced was partially offset by lower volumes for gas station and utilities driven by the ongoing year-over-year decline in oil prices.

For the nine-month period, merchant acquiring grew 6% reflecting primarily the growth related to the continued payment migration from cash to card transactions and the factors I just referenced. Payment processing increased 6% in the third quarter to $27.5 million, up from $25.8 million in the prior-year period. revenue growth in this quarter was primarily driven by an increase in our ATH debit market volume and increased accounts percent on file and related transaction growth within our card product business.

Point of sale transactions in Puerto Rico increased by approximately 5% during the quarter, as compared to last year continuing the trend we have experienced in 2015. For the nine-month period, payment processing grew 4% to $80.6 million driven by the same causal and partially offset by lower revenues from electronic benefit transfer card processing business.

Business solutions grew 2% to $44.5 million in Q3 driven mainly by growth in our core banking business for new services and volume increases in existing services primarily driven by bank consolidation activity in Puerto Rico. This growth was partially offset by a year-over-year decrease in IT consulting services principally attributable to a major project that was delivered in Q3 2014. For the nine-month period, business solutions grew 2% to $134.7 million reflecting the growth in our core banking services partially offset by lower item processing and IT consulting services revenue.

Moving to the next slide, number 13, you will find a reconciliation of our adjusted EBITDA for the third-quarter and nine-month periods. The adjustments to EBITDA in the third quarter of 2015 included a $5.7 million charge for severance payments primarily in connection with the voluntary retirement initiative provided to and accepted by certain employees.

We expect a savings payback period of 1.5 years on the severance paid related to this initiative. Otherwise the adjustments included are typical adjustment for share based compensation, Popular merger-related costs, including transaction and other one-time fees, and the elimination of non-cash equity method income.

Adjusted EBITDA for the quarter was $46 million, an increase of 3% from $44.5 million in the prior year. Adjusted EBITDA margin was 49.6%, a decrease of 50 basis points as compared to the prior year. Our Q3 adjusted EBITDA growth and our adjusted EBITDA margin percentage were impacted by certain notable items that I'll review in more detail on the next slide. For the nine-month period, adjusted EBITDA grew 3% to $138.8 million at a 50.1% margin, which was also down 50 basis points from 2014.

Moving to slide 14, you will see a year-over-year adjusted EBITDA margin bridge for Q3, which highlights certain significant items that affected our adjusted EBITDA margin in the third quarter. Starting from the left column, the bridge begins with the adjusted EBITDA margin in the third quarter of 50.1% and, moving to the right, we benefited approximately 100 basis points from the increase in revenue and the favorable margin mix of payment related growth in the third quarter of 2015.

This positive margin impact was offset by three items; first, 2014 results included certain nonrecurring favorable vendor credits that drove a benefit of approximately 70 basis points. Second, we wrote off a bad debt this quarter where there was a contract renewal involved, which impacted us approximately 40 basis points. Third, we increased investment related to card issuing product initiative in this reduced margins approximately 40 basis points.

We anticipate this growth investment to continue. The combined impact of these items resulted in adjusted EBITDA margin of 49.6 for the third quarter of 2015.

We continue to have significant operating leverage across our existing platforms and businesses. The focus is to drive incremental business in volumes through these platforms while we pursue additional growth opportunities.

Moving to slide 15, adjusted net income in the third quarter was $32.4 million, up 3% from $31.4 million in the prior year. Adjusted net income reflects lower cash interest expense which declined $400,000 versus the prior-year period to $5.1 million.

Interest declined due to a lower outstanding debt balance and a reduced interest rate due to a reduction of 25 basis points on our credit facility from the lower leverage ratio. The interest savings were partially offset by a decrease in earnings from our investment in the Dominican Republic.

Our effective tax rate in the third quarter was 11.2% and was a little higher this quarter due to a slight change in the mix of taxable income between Puerto Rico, which is taxed at a significantly lower rate, and our non-Puerto Rico taxable income. Cash taxes in the quarter were $1 million compared to $300,000 in Q3 of 2014. The year-to-date effective tax rate was 10.3%.

Adjusted net income per diluted share increased 5% to $0.42 from $0.40. Year-to-date adjusted net income was $96.8 million, up 1% in adjusted diluted earnings per share was a $1.25, up 3% from a $1.21.

Moving on to our cash flow overview for the nine-months on slide 16. Net cash provided by operating activities in the nine-months was approximately $123 million, a significant year-over-year increase driven primarily by working capital improvements.

At this time I'd like to provide you with the general update on the status of our receivables with the Puerto Rican government insofar as it impacted our working capital performance and because obviously we are carefully monitoring the fiscal situation and its potential impact on our business. Our receivable with the Puerto Rico government at September 30 was $16.2 million, which is down from approximately $21 million from the beginning of the year and down approximately $1 million from our ending Q2 balance. As a reminder, we do not hold any credit of the government.

In terms of collections, I would characterize our experience thus far as normal. We have followed our normal processes and have received payments within customary time frames. Notwithstanding we remain cautious and are actively monitoring our receivables accordingly.

As a Puerto Rican Company, we are most aligned and passionate when it comes to delivering progressive essential technology and solutions to the government of Puerto Rico. We had a solid operating cash generation this quarter and are very satisfied with our nine-month operating cash flow generation.

Moving along, capital expenditures have totaled approximately $27.4 million year to date. We now project that our capital expenditures for the year will be between $33 million and $35 million. CapEx will exceed our previous full-year guidance of $30 million as we invested in approximately $4 million in hardware and software directly related to certain long-term service contracts executed in the year. We expect these additional assets in contracts to deliver sustained cash flow returns comfortably in excess of our cost of capital.

Year to date the Company has made $21 million in principle debt payments on our credit facilities. Additionally there has been an approximate $8 million increase in restricted cash.

Year to date we have paid cash dividends of $23 million and announced today another $0.10 dividend to be paid on December 4, 2015, to shareholders of record as of November 16, 2015. In the quarter, we actively repurchased our stock and for the nine months we have repurchased approximately 35 million of common stock, leaving the Company with a total of 40 million available for future use under the Company's share repurchase program. Our ending cash balance at September 30 was $40.4 million.

Moving to slide 17, we provide summary of our debt. The slide reflects the quarter ending net debt position of approximate we $635 million comprised of the just mentioned $40.4 million of unrestricted cash, and approximately $675 million of total short-term borrowings and long-term debt. Our weighted average interest rate was 2.95% and our net debt to adjusted trailing 12 month adjusted EBITDA was 3.4 times. As of September 30, total liquidity, which includes unrestricted cash and available borrowing capacity under our revolver, was approximately $122 million.

Finally, regarding our 2015 financial outlook on slide 18, we are updating our outlook based on our year-to-date results and our expectations for Q4. We expect revenue to be at the top end of our previous range of $368 million and $372 million and have narrowed the range to $370 million to $372 million for growth of 2.5% to 3%. Adjusted EBITDA growth has been revised from between 3% and 4% to a range of 1.2% to 2% in 2015. Our previous adjusted diluted earnings per share guidance of $1.68 to $1.72 has been narrowed to $1.68 to $1.69.

As Mac mentioned we have certain headwinds impacting Q4. We had four items; first, we expect reduced Latin American growth due to projected client migration. Second, a significant portion of our business was repriced pursuant to a contractual CPI increase effective October 1. This year the CPI adjustment was a negative 4 basis points compared to a positive 166 basis points last year.

Third, we've experienced modest deceleration in payment transaction volumes from August to October. And fourth, we are observing the 4% business-to-business tax that went into effect October 1. We estimate the business-to-business tax will reduce our adjusted EBITDA approximately $0.5 million. All of these items are considered in our guidance.

These headwinds will be partially offset by the addition of First Bank's recently expanded services that commenced in Q4. For further clarification in our guidance we have neither included any estimates for the process of transaction nor factored in any potential exhausionist impacts related to the Puerto Rico fiscal situation.

In summary, while we consciously monitor and wait for the resolution of the Puerto Rico fiscal situation, we are pleased and encouraged by our progress that's evidence by the announced transactions, the ongoing resilience of the Puerto Rican consumer, and the performance of our business model under the circumstances.

We will now open the call for questions. Operator please go ahead.

I would like to turn the floor back to Alan to comment on the mistake on the slides, Alan.

Thank you, operator.

It had come to our attention that slides 14 and 16 were corrupted upon transfer. Our apologies. There will be a corrected version of the presentation available on our site under the investor relations tab very shortly.

Operator, we'll now open the call for questions.

Thank you.

(Operator Instructions)

Bryan Keane Deutsche Bank.

Hi guys, this is Evan Boyle on for Bryan.

Just some clarity on the bridge for the adjusted EBITDA margin. I heard that the value the 70 basis point the 40 and 40, but how many of those are one-time and then how many of those are going to be recurring? It sounds like just increased investment might be recurring

That's correct.

And then so if we look, -- sorry go ahead.

The prior vendor credits and the bad debt are one-time and the investment is recurring

Then if we look into 4Q for the adjusted EBITDA, can you size the magnitude of the increase investments in that quarter just given that we now have investments as well as the B2B tax reduction? And then are there any of those other difficult comparison in the fourth quarter 2014 that also impact the margin in 4Q this year?

First with respect to the investment, you can expect a similar 40 basis point impact into the Q4. And then, secondly, to help you with the quarter, as you look by segment, we could expect the merchant acquiring revenue to be approximately high single digits driven in part by the First Bank transaction. And secondly, on payments, we expect to have low single digits as that's impacted by the lower expected transaction growth, as well as the reduced Latin American volume and the contract repriced that we referenced

Got it. And then if you could --

Excuse me once more. And then on business solutions, we expect to be flat to down slightly because of the contract re-price and a tough comparable where last year we had approximately $1 million more in hardware sales then we expect this quarter or this next quarter.

Got it.

And the last one for me is -- you mentioned a deceleration in transactions that's kind of impacting the guide. Can you size kind of the magnitude of the deceleration that you've seen thus far? And then I'll turn it back to the queue.

Yes. As we referenced from August to October, we've seen a modest decline in about 1 to 2 percentage points down from what we've been experiencing that being 5%. It oscillates weekly so it's very difficult for us to track a certain number on it, but we've projected that, that same volume being between 3% and 4% for the remainder of Q4.

Great, thanks.

Our next question comes James Snyder Goldman Sachs.

This is Jordan on for Jim.

Can you just provide some color around payment trends you are seeing within Puerto Rico? In particular, if you could provide some color around same-store sales versus credit and debit volumes, and anything else you want to highlight as the economy continues to be under pressure? That would be helpful.

Yes, so at this point we don't disclose at that level. The information we gave you we've seen a slight deceleration in October, but we don't break it out by debit and credit at this point

Okay. And just one more if I may. To the extent that things get worse from a macro standpoint in Puerto Rico, can you quantify any spending levers at your disposal that would help cushion any impact to earnings? Thank you.

Yes, let me just sort of give you my view then I'll hand it Peter for a second. So when you think about what's going on in Puerto Rico, it's really hard to predict nobody has got a crystal ball, so we don't want to get into that business. Just indicators on this call we did want to talk about was specifically the receivables are performing normal. They are actually a little bit better. So that's a good indicator.

We did mention that on the last call our government business and what we believe the exposure to be and that remains the same. And we are monitoring impact of consumers, but they have been resilient in this type of economy. Over time we think it's going to be part of the solution with the government. But then as it relates to levers I'll sort of hand that to Peter and you can address that.

Yes, I would just add a bit to what Mac said there. We are looking opportunistically at some of the disruption caused by the economy and we think we can grow market share to offset some of those impacts. With respect to the levers, we are managing our business and our P&L as you'd expect and we are trying to reduce our cost structure. We are in the throes of our 2016 planning and we do this as a matter of course, so we will be looking at that. That includes all vendors and other aspects of our cost structure

Yes let me continue with that theme that, Peter mentioned a good point again about First Bank Doral earlier in the year, and so there is an opportunity for us to consolidate because have the levers of scale. And, as far as expenses, as Peter mentioned, we are managing those we think very well. We have the voluntary reduction that we talked about earlier, that Peter referenced. So we are actively managing the expenses in this environment to make sure we maintain our margin and to consolidate the top line opportunities where we can.

Thanks.

Thank you George Mihalos with Cowen.

Great. Thanks for taking my question, guys.

Wanted to start off -- I know you said that the non-Puerto Rico business or the LATAM business was up double digit. Was hoping maybe could give us a more direct number just for sort of parsing what Puerto Rico grew versus the part that is non Puerto Rico? And should we still be thinking kind of 85% versus 15% for the non-LAT the non Puerto Rico mix?

I'll let Peter answer the specific mix. But to give you a little more color George on the Latin America business. This quarter grew 12% and what we're trying to make sure that we, you know caution you, is that, that was a bit of an anomaly because we had two one timers on projects; one around E&B, the other around migrating the customer. So that's what drove us against double digits.

We're confident we will get the growth quarter to quarter where we want it to be. We've just implemented a new account management team as we referenced in the earlier material. And the intent of that team is to try and keep accounts, cross sell because we did have some accounts that were had cancelled in the past because we didn't have account management function. And so we may see the impact of that in the future because it takes awhile for accounts to migrate off. But again we have a group trying to manage that and keep what we can.

And then we've also -- we're building a pipeline that we're pretty optimistic about. But as we win that business it takes awhile to win the business and then to actually implement. So into 2016, we do think that you will see a little bit more volatility and probably more like you've seen this quarter would be more of anomalies seeing more single digit as we head into 2016. And then later in 2016 moving into 2017, we think we will get it, the growth rate where we want it to be.

As far as the exact mix between Puerto Rico and LATAM, I hand that to Peter.

Yes, so as Mac referenced, Latin America was up 12% and then Puerto Rico was up approximately 3.5%.

Okay, great, appreciate that color.

And then, Peter, talking about -- I think you made some comments about the business solutions segment in sort of the repricing of the contract there. Should we be thinking that sort of this flatish rate of growth is going to be in the cards over the next several quarters now given the headwind that that presents?

Yes. I think that's a good way to look at it.

It starts October 1, so it just re-priced October 1, 2015, and that pricing will carrying through to the end of September 2016. And that, you know the Banc of Popular is a big piece of our business and a majority of the business solutions segment of our business.

Okay, thank you.

Bob Napoli, William Blair.

Thank you.

I guess looking at the growth rate of merchant acquiring you won a new contract, were expanded with First Bank. As you move into 2016, do you still would you expect to maintain merchant acquiring growth in the high-single digits and payment processing I guess in those low to mid-single digits for 16 on a trend basis, is that reasonable?

First off, Bob, let me give you a little more color on the First Bank deal because we're pretty excited about that. As you know Processa is the first acquisition this company made since it has gone public. First Bank is the first merchant acquiring deal that we've done since the company's gone public. So we're quite excited about this.

It is, we bought the merchant contract of First Bank and we did the processing for First Bank in Puerto Rico but now we actually own the contract. And we actually did not have a business in the Virgin Islands, which is a meaningful part of the business that's part of this deal as well. That's the good news. And then we did factoring it into Q4 and help offset some other headwinds.

And I'll hand it Peter to sort of address specifically your question.

Yes George we are not providing 2016 guidance. We are in the middle of our planning. We'll update you next quarter excuse me, Bob, we'll do that next quarter as we've, you know I just alluded to, we are seeing the high single digits and expect that to continue in Q4 and the low single digits in the payment segment.

There's no reason why that -- there's nothing out there that turned January 1 that you should see a significant change or is there any pricing or anything that would cause a significant change that you know of in those trends?

Let me -- so, I think a couple of things. One is it's hard because we are in the planning process. We do have the legislation where the government has said that doctors offices, attorneys have to cut cards now, which is new legislation. It's a couple months old. It's also potentially going to be a pack that any business that brings over $125,000 is the current legislation, will have to accept cards.

So we don't know yet what the impact of that could be. It's a bit early to say what the puts and takes are, but there's a lot of movement I think on the regulatory front. And then we do have to factor in the impact of First Bank.

Yes, but to answer your question we don't have a known item.

No there's nothing --

No there is nothing generating for us where we feel this way (multiple speakers).

Then mix wise, I mean those two segments are your highest margin segments. The merchants -- the business solutions your lowest margin segment. Should we start to see a little bit of operating leverage coming through? Understanding that your investing for growth, would you expect to start to see little bit of operating leverage over the next year or two or do you, at this point, are you looking to really drive up the growth rate and maybe invest for a bit heavier?

We're evaluating our investments as part of our plan. And additionally on the growth we would expect to get some leverage on those businesses but the questions that we are dealing with in our planning is how much to reinvest to pursue other growth initiatives in Latin America.

Yes, Bob, I think we've said this before, we are really focused on growth and we don't want to sacrifice cutting expenses in order to sacrifice growth rates that we see these territories and these regions. So the first priority will be to grow and try to maintain our margins. And everything we can put through Puerto Rico and get some scale we will, but the focus is going to be growth.

Then last question, Mac, what do you feel like the long-term growth rate should be for this business? I mean, you have brought on a lot of new talent. I mean you've not even been there a year yet, but at this point are you getting a feel for what you kind of think the long-term growth rate for the business what the potential is?

You always at the toughest questions.

What I would say is we're still thinking through that. If you think about a big chunk of our business was Popular and that the pricing is flat for year and that does a significant dynamic of our business. However, if you look at the deals we're doing. I mean Colombia is the second-largest been speaking market in all of Latin America and, in fact, most of our business right now is in Central America if you look at our Latin America business. Columbia GDP is bigger than all of Central America.

So long-term I think we're entering some really exciting markets, but you have to look at the entire mix of business that we have. And we are still thinking through that trying to figure out what these deals look like. So we don't have a firm -- I mean we have a strategy and a thesis around what the business should look like and the pieces we want to pull together, but getting long-term guidance is not a place where we are at right now.

Great, thank you.

Thanks, Bob.

Sara Gubins, Bank of America Merrill Lynch.

Thank you. Do you plan to continue to absorb the business-to-business tax that you mentioned?

The business-to-business tax, to make sure I understand your question, Sara, are you asking whether we have plans to offset it or -- ?

Yes you talked about, so when you talked about the various headwinds that caused you to lower the EBITDA guidance, one of the things that you mentioned was absorbing the 4% B2B tax.

Is there anything that you can do from a pricing perspective or anything else to try to offset that or is that just something we should think about as kind of being a permanent tax and therefore underneath it impact you negatively next year?

We're -- the absorption was referencing Q4 because it's kind of quick and upon us here, we are looking at ways to try to offset it, it's significant. And then the other thing that's important to acknowledge is that the B2B tax is a temporary measure that's in place until April when it is supposed to be superseded by a fat tax, which may have different impacts to our company.

So we are looking at, as part of our planning exercise, addressing the cost including this tax and we'll relay that to you as part of our guidance as to how much we can absorb versus how much we could offset.

Okay, great.

And then -- so it sounds like on the receivables from the government that has been pretty stable so far, but there are some more concerns that the government may be running out of cash in relatively short order. Are you getting increasingly concerned about the receivables or does it -- is there anything that suggested to that that may become more of an issue in the near term?

Until the ambiguity is lifted and it's clear on how the government's going to pay their bills and deal with the debt issues, it'll be something that we monitor closely and are concerned about. What I will tell you is if we look at the indicators as you've repeated, they are paying us well they're actual paying us better than they have in the past. We are a critical vendor. We run the tax system, so they have to run our systems in order to collect the taxes to pay the creditors. We run the judicial system.

So I would say it's always going to be ambiguous until the debt situation is cleared up, but we're monitoring it closely we feel good about where we are today. But this is -- we don't have a crystal ball. This is something that will be ambiguous for a while.

And I'll just add that, as I mentioned, we've seen it really business as usual. We are collecting, and delivering, and communicating under the same exact ways as before. In fact we've been paid a little faster due to our collection efforts.

Great, thank you.

Chris Brendler, Stiflel.

Hi, thanks. Good evening, thanks for taking my questions.

This is going to be a tough question, but let's just give it a try anyway. Any sense for some of the slowdown you're projecting from a high-level in Puerto Rico? Is it more tax and government initiative related or just macro stress or maybe combination of both? Thanks.

Well a bit of conjecture on our part to know exactly what is causing the slowdown. But because of the tax there may be some movement to e-commerce. But it seems that you're still seeing growth in a very tough market, so even despite the tax low single-digit, I mean, I'm sorry low, yes low-single digits, it's still relatively healthy in the market that we are in.

And what we're trying to do on these calls is give you a sense of the latest data that we have give you a sense of the latest data that we have given the debt situation. But it would be conjecture for us to spend a lot of time to tell you exactly how it's going to impact the consumer.

Right. There are many moving parts, Chris, and we analyze that weekly. The only other thing dynamic that is now coming in part into play is this new legislation with respect to doctors and the like, as well as potential future legislation to offer electronic payments for certain merchants over certain revenue volume. And that could have a positive impact to potentially offset other things. So there's just many different variables that have to be considered here.

Great.

On the medical professionals and their requirement for cards, I didn't catch it, is there any sizing on that? Are you talking about 100 basis point potential benefit, or 500 potential, how big is that opportunity?

Right now we don't have a number to provide. So we're not giving any kind of view on that.

Okay.

Separate question, just as you take your pulse on M&A I was sort of struck by 2020 last week just how hot payment still is. It's good for I guess if you're in the right sector but if you're trying to buy something it maybe tough. What are you seeing on the M&A front right now?

Yes, so again, we're pretty excited Processa again the first deal done since going public. It has created a lot of interest, and what I would say it's between that deal and between some of the talents that we've hired into the organization, we're seeing a lot of excitement in the marketplace, and a lot of interest in doing business with EVERTEC. Not only on the customer side, but also on the deal side.

The guy that we've hired to run M&A for us is very active. We have separate costs we are looking at in the pipeline and, as demonstrated with Processa deal, some of these are very small and some of the big, our big competitors wouldn't even have visibility to them. So we feel like that there's a growing and healthy pipeline. But we won't talk about deals until as we do on Processa we have one to talk about.

Awesome, thanks, guys.

(Operator Instructions)

Tien-tsin Huang JPMorgan.

Okay, guys, this is Stephanie Davis on for Tien-tsin.

Could you talk a bit about any impact or change you've seen in consumer confidence versus your prior view just given the deceleration in payment volumes in the tax in the macro?

Yes, I do want to emphasize, the deceleration we are seeing is slight. I mean it is not -- again, it's still growing low single digits, which I think is pretty healthy, so I do want to reemphasize that. But we are emphasizing it given the ambiguity that sort of a trend were seeing. But that's the key indicator we have right now.

I don't know, Peter, you want to add anything?

No I'd echo what Mac said, you still see buzzing activity throughout Puerto Rico, people spending money. Just been a modest down tick from what we've had experienced up till at the end of Q2.

How much of that do you think could be seasonality versus an attribution to reaction to the new tax which, added one or two points in the past quarter?

It's a, look we lost it, if we knew for certain we'd love to give you that type of view. What I would tell you is Seraphina opened on, in Puerto Rico and it's busy all the time right, you know Seraphina. It's difficult for us to tell and we've just seen it in one month, one or two months where we have seen it tick down one or two percentage points. And so I think as we observe the trend for a longer period of time, we'll have a more informed view.

And we're just letting you know what we did in terms of our projected for Q4 really that's what were trying to share.

All right, understood.

One follow up from me. Could you give us an update in your business solutions business and any kind of trends or delays you might be seeing in your project-based business given some recent peer results?

I wouldn't say that we have any delays at all. We're still actively working with Banc of Popular as we ordinarily do. We are impacted by the CPI mechanism in the contract that we referenced. We are still engaged on new projects with the government and our other corporate enterprises that the group solutions. So there really isn't a change.

Yes, I think status quo nothing really new per se.

All right, thank you, that's it for me.

Great, thank you.

We do have a follow-up Bob Napoli William Blair.

But, did you guys say what the revenue run rate is Processa or the growth rate for that business?

We did not. I mean we haven't closed yet and that information is not publicly available.

Okay and then the First Bank deal, the amount of revenue you expect to get?

We're not disclosing that at this point.

Okay. And then you also mentioned that you have some clients that are de-converting. What's the -- what is, can you give me some feel for why that happened and what the revenue, lost revenues is going to be, in what markets that is?

I want to be very careful because of the competitive nature of the question We want to give you visibility into what that means from a growth perspective. What I would say is we didn't do a good job of managing accounts, making sure that we understood their issues, getting in front of them, cross-selling them, telling us. We simply did not have a function that did that effectively. We now have that in place, so we are getting underneath these issues.

So our concern is 2016 -- and then, as we have said on previous calls, we didn't do a good enough building a pipeline with meaningfully sounds businesses. So I don't want to go country by country or coop specific accounts because some of those we are in the process of trying to save. But I would say is it will put a damper on getting it to double-digit growth next year those two phenomenas.

Anything we signed towards the end of this year, early next year, is going to take a while to migrate on our platforms. And some of those losses we haven't seen the impact to our numbers to date, so when we add business it will be offset by some of those losses.

So that the key point is just to get you a sense for Latin America is not where I want it yet. We have a fantastic team, and I hope you guys will have the opportunity to meet that team in the future. So I'm highly confident in our ability just like in Puerto Rico. I mean who would've thought we would have done Processa and First Bank, I mean I've been in the job formally for six months and because we have a great team here focused on the ball in Puerto Rico we now have that same team in Latin America, but we need to give them time to make the improvements that are necessary and then deal with the dynamics of our business around migrations.

Thanks. And then just on capital expenditures, the $33 million you're spending this year, it's like a 8%, 9% of revenue. What is the, what should the CapEx run rate be over the next few years and where should CapEx be able to moderate into the mid-single digits or to have a lot of projects that you're building that you need to support the growth at a going to keep that CapEx at a high-level?

Of it is premature to predict out in the future Bob, but the way we approach it is, we want to look in and find as many growth investments that we can that are going to deliver solid returns, cash returns in excess of our cost of capital. We had a couple come up during the year, which we'd expect people want us to, to pursue which we did and we are very happy with that. And we will be monitoring that We're obviously looking at the total CapEx spend very carefully as part of next year and then we'll give you some more color with respect to 16 and then and beyond potentially.

So then on the next call you're going to give, you look to give full-year 2016 guidance and some detail?

That's our current plan, yes.

Thank you, I'd like to turn the call back over to Mac for closing comments.

Okay, great. Thank you, everyone.

As Al mentioned, we have a corrected version of the presentation is now available on our website. We apologize for the mistake, but hope you appreciate the additional level of information we are providing through the call to help you better understand the business that you've invested in. I want to think everyone once again for joining us today look forward to meeting and spending time with you in the coming months and everyone have a great evening operator you can close the call now thank you.

This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.