Evertec Inc (EVTC) 2016 Q1 法說會逐字稿

Good afternoon and welcome to the EVERTEC, Inc. first quarter 2016 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Kay Sharpton of Investor Relations. Please go ahead.

Welcome to the EVERTEC first quarter 2016 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 Wednesday, May 18. Access information for the replay is listed in today's financial release, which is available on our website under the Investor 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 May 11.

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 via the link provided in the release earlier today.

Before I begin, I'd like to remind everyone that all financial results described in this presentation should be considered preliminary and unaudited. As previously disclosed, the Company was unable to timely file its 2015 annual report on Form 10-K for the year ended December 31, 2015, due to a restatement that is in process. The restatement will also delay the Company's 2016 first quarter report on Form 10-Q. The referenced preliminary information has been prepared by the Company's management and has not undergone the complete review of the Company's outside auditors that is customary for the quarterly results. The preliminary information represents the Company's good faith belief as to the Company's results for the period presented.

Additionally, this call may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements about our expectations for future performance are subject to known and unknown risks and uncertainties. EVERTEC cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflect our current expectations only and we undertake no obligation to update any statements to reflect the events that occur after this call. Please refer to the Company's most recent annual report on Form 10-K filed with the Securities and Exchange Commission for factors that could cause our actual results to differ materially from any forward-looking statements.

During today's call, management will provide certain information that will constitute non-GAAP financial measures under SEC rules, such as adjusted EBITDA, adjusted net income, and adjusted earnings per share. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides. I'll now turn the call over to Mac.

Thank you, Kay, and good afternoon, everyone. Kay Sharpton has joined the EVERTEC team as Head of Investor Relations. I've had the pleasure of working with her in the past and am confident her Investor Relations experience and background in the industry will be an asset to us as we move forward. Again, welcome to the team, Kay.

We are pleased with our preliminary first quarter results, as we exceeded our expectations in a challenging environment. I'll cover some of the quarter's highlights and provide you with an update on recent developments.

Beginning on slide 4, we have a summary of our Q1 results. Total revenue was approximately $95.5 million, an increase of 5% compared to the first quarter of 2015. We generated adjusted earnings per share of $0.41, an increase of 8%. We generated significant free cash flow and returned approximately $10 million to our shareholders through approximately $2.5 million in stock buybacks and $7.5 million in dividends. While we were limited in our ability to repurchase shares in the quarter due to the restatement, I am pleased that we continued to generate strong cash flow, enhancing our ability to resume share repurchases once we have satisfied our reporting requirements, which Peter will speak to later on this call.

On slide 5 is the summary of the Latin America results. As previously disclosed on March 1, we completed the acquisition of 65% of Processa for approximately $6 million. Processa offers a wide variety of payment services, including processing for card issuers, financial institutions and merchants in Colombia. Compensar, Colombia's second largest social fund administrator, retained its 35% ownership stake in the Company. We include one month of results from Processa in the quarter, and those results were consistent with our expectations. We are excited about the Processa deal, as it provides us with a platform to expand upon in the Colombian market, one of the largest payment markets in LatAm.

Excluding Processa, Latin America generated single digit revenue growth in the first quarter, which reflects some impact of anticipated client migrations. Importantly, the LatAm team is working hard to retain customers and continues to improve our pipeline of new prospects, and we expect to announce some wins as we progress throughout the year.

On slide 6 is an update on Puerto Rico. We have executed well in Puerto Rico in a challenging environment and continue to see the benefits from the expansion of our relationship with First Bank. Additionally, we experienced card payment transaction growth of approximately 4% in the quarter.

Unfortunately, there's currently no resolution to the Puerto Rico fiscal situation. In addition to the debt payment default announced earlier this month, the Puerto Rican government is closely managing its payments to ensure that essential services are maintained on the island. Given our status with the government and the essential services we provide, we continue to see our government receivables pay consistent with our past experience.

We are monitoring the government situation closely. If the government ceases or delays paying its non-essential (technical difficulty), there may be ripple effects, such as business values or further unemployment, that could negatively the island's economic activity. While we continue to work hard to find opportunities for our Company, it is imperative that the government finds a resolution to its [fiscal] problems to avoid broader impacts to the economy. Thus far, our transactions and business have been resilient to the fiscal situation. Our April transactions have continued the trend we experienced in Q1, which is encouraging.

Regarding the Department of Justice review, we have recently responded to the request for information and we expect them to review our responses over the next several months. It is a confidential process, but we will keep you updated if there are any new developments we can share. Our view remains that we operate in a highly competitive industry with large global companies, as well as local competitors. Accordingly, we will continue to compete for business every day as we go through this process.

Turning to slide 7. As we continue to improve our organization, I want to update you on several recent items. I am delighted to announce a new addition to our organization to further drive revenue through product and marketing initiatives. Guillermo Rospigliosi will lead our product management, marketing and innovation teams. Previously he was with Visa for 10 years, most recently as Chief Risk Officer in Latin America, and prior to that he was Managing Director of Latin America for Visa's Cyber Source division.

This quarter we also launched our new corporate values focused on creating a high performance culture and celebrating our first-ever annual recognition of our top performers at the New York Stock Exchange on March 11. Through these initiatives, we are building an even more engaged workforce. Through these efforts and our investments in the business to drive service and innovation, I am confident in our future success. With that, I will now turn the call over to Peter.

Thank you, Mac, and good afternoon, everyone. Before I begin my comments on the quarter, I want to give you an update on our restatement process.

We are working diligently to complete the restatement of our 2013 and 2014 financials that will allow us to file our 2015 Form 10-K and the Q1 2016 Form 10-Q. We are working with a plan to complete these filings before May 30, which is an important date that I will cover later when I review the amendment to our credit facility that was negotiated in the quarter. I'll now provide a review of our preliminary unaudited first quarter results and then update our financial outlook for 2016.

Turning to slide 9, you will see the first quarter segment revenue details and the total company revenue. Total revenue for the first quarter of 2016 was $95.5 million, up 5% compared to $91.3 million in the prior year. We had a positive impact of one extra day in the quarter related to the Leap Year effect, as well as approximately one month of contribution from Processa, partially offset by the shift in the Easter holiday. Easter fell in March this year and was in April last year. Unlike the US, many businesses close during the holiday in Puerto Rico, having a negative effect on Payment Processing.

With respect to the segment mix, in the first quarter merchant acquiring net revenue increased 14% year-over-year to approximately $23 million, primarily driven by our expanded First Bank merchant business. Payment Processing revenue in the first quarter was $27 million, an increase of approximately 2%. Increases in our ATH debit network and card processing volume and one month of revenue contribution from the Processa acquisition were partially offset by the revenue shift associated with the First Bank agreement that is now reported in the Merchant segment. Payment Processing growth was also reduced by the terminated government lottery tax program in the fourth quarter of 2015.

Transaction growth in Puerto Rico was resilient, with payment transactions growing approximately 4% year-over-year for the quarter, continuing the trend we experienced in 2015. In April, we have seen this 3% to 5% trend continue, but we remain cautious given the fiscal situation.

Business Solutions Q1 revenue increased 2%, to $45.6 million, and included the one-time benefit of revenue related to several completed IT consulting projects. We continue to experience growth in our core banking business, driven by new services and volume increases related to bank consolidation activity in Puerto Rico, which we will analyze in the second quarter of 2016. This growth was partially offset by year-over-year decreases in item and cash processing and hardware revenues. We expect these decreases to continue throughout the year.

Moving on to the next slide, number 10, you will find a reconciliation of our adjusted EBITDA detailing our adjustments to EBITDA. Notably, we incurred severance costs related to planned cost actions that we took in the quarter and incremental costs related to the Processa transaction and the restatement. We currently estimate the cost of the restatement to range from $5 million to $7 million, assuming a pre-May 30 filing, and this includes the consent fee for the credit facility amendment. These costs are anticipated to have a cash impact in the second quarter.

Adjusted EBITDA for the quarter was $46 million, an increase of 1% from $45.7 million in the prior year. Adjusted EBITDA margin was 48.2%, and this represents a 180-basis point decline to our adjusted EBITDA margin compared to last year. Our Q1 adjusted EBITDA growth and our adjusted EBITDA margin percentage are explained in more detail on the next slide.

Moving to slide 11, you will see a year-over-year adjusted EBITDA margin bridge for Q1. Starting from the left column, the bridge begins with the adjusted EBITDA margin in the first quarter of 2015 of 50%. Moving to the right, first, we benefited approximately 60 basis points from a favorable revenue mix. Second, investment expense increased year-over-year approximately 110 basis points, primarily due to incremental investment expense in Latin America and our card processing product initiatives. We expect these investments to continue.

Third, we were impacted by unusually high health insurance expense in the quarter related to specific claims. These claims impacted our margin by approximately 70 basis points. The business-to-business tax and other operating taxes continued to impact us by approximately 60 basis points. As an update, the VAT tax that was intended to replace the B2B tax in April has been extended to the end of June and will impact the second quarter. The combined impact of these referenced items results in an adjusted EBITDA margin of 48.2% for the first quarter.

Moving to slide 12. Adjusted net income in the first quarter was $31.1 million, an increase of approximately 6% from $29.4 million in the prior year. We benefited from approximately $300,000 in interest savings, driven by a lower outstanding debt balance and a reduced interest rate.

Our effective tax rate in the first quarter was 8.5%, as compared to 10.5% in Q1 of 2015, and was primarily lower due to the tax planning initiatives that we completed in the fourth quarter 2015 that reduced non Puerto Rico taxable income. Adjusted net income also now reflects the impact of non controlling interest associated with the Processa acquisition. Q1 adjusted earnings per diluted share was $0.41, an increase of 8% from $0.38 in the prior year and reflects the benefit of a lower diluted share count.

Moving on to our cash flow overview for the quarter, on slide 13. Net cash provided by operating activities was approximately $30 million, a 1% year-over-year increase, and this amount includes the impact of severance payments in the quarter. There has been an approximate $3 million decrease in restricted cash, as we substituted $3 million of our unused revolver to satisfy the card network cash collateral requirement related to our card processing business.

Moving along, the Processa acquisition was approximately $6 million in US dollars and capital expenditures totaled approximately $3 million. We expect CapEx to increase throughout the year and continue to plan for CapEx to be approximately $35 million to $40 million for the year.

Next, the Company made $7 million in principal debt payments and payments on our short-term facilities. And finally, during the quarter we paid cash dividends to stockholders of approximately $7.5 million and we repurchased approximately $2.5 million of common stock, for a total of $10 million returned to our shareholders.

We continue to have approximately $117.5 million available for future use under the Company's share repurchase program. We announced today another $0.10 dividend to be paid on June 10, 2016, to shareholders of record as of May 23, 2016. Our ending cash balance at March 31 was $36 million, an increase of approximately $7 million from our 2015 year-end balance.

At this time, I'd like to provide you with an update on the status of our government receivables. Our receivable at March 31 was $18 million, which is slightly down from the balance at the end of 2015 and down approximately $5 million from our ending Q1 balance in 2015. The receivable balance as of April 30 is relatively unchanged from March. Given the government debt situation, we continue to monitor our receivables diligently.

Moving to slide 14, we provide a summary of our debt. This slide reflects a quarter ending net debt position of approximately $631 million, comprised of the just mentioned $36 million of unrestricted cash and approximately $667 million of short-term borrowings and long-term debt.

Our weighted average interest rate was approximately 3% and our net debt to trailing 12-month adjusted EBITDA was 3.4 times. As of March 31, total liquidity, which includes unrestricted cash and available borrowing capacity under our revolver, was $125 million.

I will now provide some details on the credit facility amendments I referenced earlier. As we announced on April 14, in connection with the restatement we amended our credit facility to temporarily waive certain covenants, the most significant of which provides for an extension of the financial reporting deadlines for our 2015 Form 10-K and 2016 Q1 Form 10-Q to September 15, 2016. As consideration for the extension, we paid a consent fee of approximately $4 million.

In the event that the 10-K and 10-Q are not filed by May 30, 2016, the amendment provides for a permanent 50-basis point increase in the interest rate applicable to the loans under the credit facility. If we miss this deadline and fail to file by July 15, 2016, we would incur a further 25-basis point increase and the result would be a combined permanent 75-basis point increase.

Additionally, there is a condition in the amendment that suspends our stock repurchase program until the amendment conditions are satisfied. Although there can be no assurance until it is complete and our filings are made, we're working diligently on the restatement and have a plan to complete this work prior to May 30, which would leave the interest rate on the facility unchanged and get us back in compliance.

Moving to slide 15, I will now provide an update on our 2016 guidance. We are raising our guidance ranges on revenue and adjusted earnings per share to reflect our favorable results in Q1, as well as our completed acquisition of Processa. We now expect revenue to be in a range of $378 million to $385 million, representing growth of 1% to 3%. Our adjusted diluted earnings per share guidance of $1.59 to $1.66 represents a range of negative 1% to 3%. We now expect margins to trend lower, towards the mid point or lower portion of the 48% to 49% guided range as a consequence of our Processa acquisition, which operates at lower overall margins, and the continuation of the B2B tax I referenced.

Also, as I mentioned last quarter and as a reminder, in 2016 we no longer receive an expense offset of approximately $1.5 million related to maintenance expense reimbursements provided for in the Popular merger agreement, and this begins to fully impact us in the second quarter and for the remainder of the year.

We are also closely monitoring two potential incremental regulatory headwinds that could impact us negatively. The first is a proposed permanent extension of the B2B tax and the second is the proposed change to the Fair Labor Standards Act that could change requirements to pay overtime in Puerto Rico. The latter could significantly increase wages across Puerto Rico, given average wages on the island are significantly lower than the US mainland, and thus more employees would fall into the scope of the proposed change to the Act. Our guidance does not reflect the enactment of either of these laws. Also, for clarification, the guidance assumes the completion of the restatement prior to May 30.

In summary, we are pleased with the operating performance in the first quarter and the closing of Processa. While we cautiously monitor the unfolding resolution of the Puerto Rico debt situation, we remain focused on the execution of our annual goals and our strategic initiatives. We will now open the call for questions. Operator, please go ahead.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

And our first question will come from George Mihalos of Cowen. Please go ahead.

Thanks, guys, and nice start to the year. Wanted to ask on the guidance, the $5 million increase to the revenue range that you're looking at, is that roughly $2 million or so coming from Processa or can you parse that out for us?

Hello, George, it's Peter Smith. The majority of that is Processa.

The majority of the $5 million?

That's correct, yes.

Okay. And then just a little bit of housekeeping. It looks like, by my math, based on the 6% growth rate in LatAm, that Puerto Rico grew about 4% or so. Is my math right in the quarter?

That's correct, George.

Okay. And you had called out, I think, some one-time or nonrecurring work in Business Solutions. Can you parse that out for us? And it sounds like that will continue in 2Q before tapering off?

Well, just in our Business Solutions segment, we're continuously performing consulting projects, in large part for Banco Popular. This quarter we had two significant projects complete. The revenue related to the projects generally can be a bit lumpy, depending on the revenue recognition that's particular to each arrangement. To answer your question, as we move forward, our pipeline has been relatively strong with Banco Popular, but again, it's the revenue recognition that will dictate which quarter will experience similar one-time amounts like this.

Okay. And then two quick ones. Mac, you sounded a lot more encouraged about the pipeline of new business. Maybe you could elaborate on that. And then should we assume after the filings that you will be an active repurchaser of your stock again? Thank you.

Thanks, George. It's Mac. On the pipeline, we're definitely encouraged that we're making good progress, not only in trying to retain some of the accounts we've talked about in the past, but also building the pipeline for new business. We don't have anything to announce on this call. So I think you'll see throughout the year, this is a place we're going to be focused on making progress.

And as far as the repurchase, what I would say is the window will be back open once the restatement is completed.

I'd just add that we'll follow our capital allocation methodology, where we're going for growth investments first with our free cash flow and then returning excess cash flow through our dividend and share repurchases, once that window is open.

Thank you.

Thanks, George.

And our next question will come from Vasu Govil of Morgan Stanley. Please go ahead.

Hello. Thanks for taking my he question. Just quickly first, I think Mac, you said that you thought that the quarter did better than your expectations, despite a challenging environment. Can you talk about where did you see the strength? Was it mostly Puerto Rico or your other geographies in Latin America? And it sounds like the guidance change was only for Processa and not for the better performance in the quarter. So can you just talk us through whether you're just taking a conservative view or is there just seasonality in the business going forward from here?

What I would say is Puerto Rico performed well, given the quarter. As I said earlier, it's an ambiguous situation, with the government now being careful about who they can pay. So I do think we were delighted with the first quarter, the metrics, and as we said in April, that was consistent, as well. This is an unchartered territory for many executives. So I think it's performing consistent with the past, which I think is good news for now.

And then just adding, with respect to the full year on Processa is the majority of the revenue variance in the uptick in the guidance. And then with respect to the rest, we are seeing some of the profits that we've carried forward from Q1 and project out adding to the bottom line, as well.

Got it. And I just quickly wanted to revisit the tax breaks that you guys have in Puerto Rico. Any risk of those getting pulled completely or reduced, given the continued stress that the government is in?

We have not heard any mention of any revocation of the tax grants of the type that we have. So we're unaware of any intent or potential action to do that.

I would just add to that, that there's two issues with Puerto Rico. One is the government debt and the second is job creation. So the second component is pretty well-known, I think, by the politicians, both here and in DC and by the local business community. So I'm optimistic that job creation will continue. It will be important, which will make those tax credits important. We can't predict the future, but job creation and economic stimulus is going to be important for Puerto Rico going forward.

Great. Thank you very much.

Our next question will come from Bob Napoli of William Blair. Please go ahead.

Thank you. The growth, you had 14% revenue growth in Merchant Acquiring with the addition of First Bank. How much did First Bank add to that and do you expect Merchant Acquiring, at this point, understanding the caution you have around Puerto Rico, but on the current trends is that a reasonable run rate of revenue growth in Merchant Acquiring?

Bob, 13% of the 14% was First Bank.

Okay.

And with respect to the overall growth rate that we experienced volumes, sales volume is tracking a couple points below the transaction volumes that we're seeing. And we are seeing a lower average ticket and a less advantageous revenue mix, and those are really what are driving the growth in Merchant Acquiring. As we move forward, as we've cautioned, we have projected a bit of a tail off in volume throughout the year that we don't expect to see the 14% repeat for the rest of the year.

And Bob, this is Mac. Again, the government is -- they're trying to really focus on critical vendors now. They've announced a plan that non-critical vendors, they may he slow payments. So it is very difficult for us to predict what the trending's going to look like over the rest of the year. I think we tried to put guidance out there that assumes either way a little bit of variance. But we've got to see what happens over the coming months.

Okay. And then you talked about pipeline of potential new clients. What about the bank partnerships or acquisitions, anything on that front that you've been able to build into a pipeline of potential investments?

I would say we continue to be very focused on M&A, as we've said on multiple calls, and we have somebody dedicated to that effort. We don't want to make the mistake of the past of talking about those types of deals until we're ready to close on them. But it continues to be a focus for the Company.

And what types of deals are you looking for? Has that changed at all?

It hasn't changed from what we said in the past. The size would be anywhere from Processa to maybe $50 million on the high end. But we'll look for opportunities to expand our footprint, like Processa did. We're looking for opportunities to expand our technology and product capabilities, and we would also look for leverage and scale opportunities in markets where we already exist, if there's something that's affordable where we can roll it into our existing operations. Those are the three types of things we'd look for, sort of the view, profiles really haven't changed.

Okay. Then just last question, you hired this gentleman from Visa to lead management marketing innovation. Is there a specific area of his expertise you're looking for him to add to? And have you been able to maintain the other key executives in your organization?

Yes, we have. We have been able to retain those that we think are critical to the growth of the business. Guillermo brings a regional experience across -- he ran Cyber Source, which was the e-commerce division of Visa. He's also got risk experience. But what we really want to do is get someone who can take a look at our products across all of our different geographies to make sure we're maximizing the revenue potential in each country of those products, make sure that we're more focused on marketing, so that we can bundle the products together, win the full piece of business, put more discipline around those different areas, which we haven't done in the past. And given his experience in the industry and across the region, he's Peruvian, and he's got his MBA, so he's got great academic experience, as well, I think he's going to be a good add to the management.

Thank you.

Our next question will come from Bryan Keane of Deutsche Bank. Please go ahead.

Hello, guys. Just first wanted to ask on First Bank, how many points of growth did that contribute to the quarter? And then second, when does that contract anniversary? It sounds like it anniversaries already, so the second quarter growth rate will drop as a result, just wanted to make sure I got that timing correct.

Hello, Bryan, it's Peter. So the first quarter contribution was 13% of First Bank, and it will anniversary in Q4.

What about total revenue?

I think you can derive that math.

We can just calculate it out. But you've mentioned that Merchant should drop, the growth rate should drop, and if it doesn't anniversary for another couple quarters, I guess I'm just trying to figure out why we wouldn't --

Yes, just to help clarify, we are projecting sales volume to go down, in part just by lower average ticket, as we've discussed, and just what we see will be a bit of a squeeze naturally coming from the fiscal situation, and we're just being cautious in the outer quarters.

And you're seeing that already or you're just planning to be conservative in case that happens?

We're planning.

What we said, Bryan, is that April was somewhat consistent with the first quarter. But again, we do know the government, which is the largest vendor on the island, is prioritizing payments and withholding payments to some vendors. At least that's what they're publicly saying. So it's very difficult to assess the impact, but invariably it is, by far, the largest vendor on the island. We are anticipating that it could impact the volumes.

I got it. That helps clarify the Merchant segment.

And I think it's important to recognize, too, that many of these resolutions for the debt situation have austerity measures in place. So that may, as well, if you look a fiscal control board, that's going to be put in place to make sure that they control government spending. Now how that plays out is difficult to model. But that's what we are trying to anticipate cautiously.

That's helpful. And finally from me, looking at the potential two regulatory changes that you mentioned, Peter, you said that's not built into guidance. If those things do get enacted, what kind of impact would it have on the model? Thanks so much.

Bryan, they're both -- the B2B is fairly straightforward. It's impacting us about $0.5 million a quarter. The Labor Act is much more difficult. It requires the facts and circumstances analysis of what employees do, and it's very uncertain what form the law's going to come out in. So we really don't have an accurate way of modeling that.

But on the first one, on the B2B tax, that's already embedded in guidance for the full year anyway, it's just that if it continues going forward.

No, it's embedded for Q2. We had originally thought, as the law originally had it being replaced by the VAT tax in April, that it would expire. But it was extended in Q2.

And we didn't think, it was legislation.

Right. And now just to clarify, there's proposal to keep it permanent and that's what we called out as a risk.

I got it. Helpful. Thanks so much.

The next question will come from Tien-tsin Huang of JPMorgan. Please go ahead.

Good afternoon. Thanks for the slides. It's really helpful. Processa, from here, what's the growth profile there and what's the plan to accelerate growth there? Is it penetrating existing or finding new partners? What's the go forward plan?

So Processa -- and I'll let Peter talk a little bit about some of the details -- but it grows faster than the rest of our business, so we like the general growth metrics as a standalone business. It doesn't have the same margins, because it's a smaller business. But we'll be very focused on continuing to try to grow that business. There are products that we have that they don't have and vice versa, so we think that there's going to be synergies in that way. They have a strong Rolodex of clients. In fact, the largest retailer is a client, the largest social funds administrator, and most of the banks.

So the ability to grow that business faster with investments and with some of our capabilities out of EVERTEC are some of the things we're very focused on as we integrate that business. But like I said, the business, even as a standalone payments business, is pretty attractive. And I don't know, Peter, if you want to add anything.

I'd just add for clarification, 80% of Processa's in our Payments Processing segment and 20% is in the Business Solutions segment. It's growing just about low double digits, and we're very optimistic about the complementary things we can do with it for the Company.

Good. That's helpful. Colombia with -- I know the FX has been all over the place there -- I'm curious, forgive me if it's a question that's not relevant, but just how does that impact the business at all in terms of billing and FX and translation if at any, if at all?

Well, the majority of all our resources will be in Colombia in the same denominated currency. So the profits will be there to offset any of the decline, should that continue.

Understood. So there's a match there. On the margin bridge, my last question, the margin bridge, the 110 bps of investment expense, sounds like that was planned and consistent. But is the return on investment that we should expect there, the new wins, is that what that is driving for, or is that more of a catch-up in spend? Can you elaborate? Thanks.

I'll just speak generally. We're investing in Latin America with a new management team. We've made some technology investments to make sure we have some of the best products in the market. So that's been the majority of it. And I don't know, Peter?

Yes, we wouldn't make those investments if we didn't expect to get a higher return than their cost, in excess of our cost of capital.

Okay. So not necessarily a catch-up. So going forward, I'm assuming that's probably in the run rate, but do you have good line of sight in how much you need to spend beyond, say, 2017, 2018, 2019, at this stage, or is it still in discovery mode? Your investment plans?

We're still developing plans in certain countries and that will dictate the amount of investment that we're going to make. As we've talked about, we had to make investments to improve some of our products for the markets, and that's really what this represents.

Okay. Good to know. Thank you.

And our next question will be from Sara Gubins of Bank of America-Merrill Lynch. Please go ahead.

Hello. Thank you. Has the restatement process put a pause on M&A activity in the near term or have you been able to continue looking and continuing conversations with potential targets?

No, the restatement hasn't really impacted our interactions with our customers or M&A prospects.

Okay. And then should we expect further severance?

We will continuously manage our cost structure. We're not planning any particular actions that we would project for you right now, but we're always looking at our cost structure as we move forward and then if there's anything meaningful, we'd let you know.

Okay. And then in terms of the impact of the sales tax, do you have any sense of what the impact has been on consumer spending? And have you seen any behavioral change in merchants where they might be shifting back to cash at all from electronic payments to perhaps try to avoid the higher sales tax?

I don't think we've really seen that as a trend. Like I said, when we publish the numbers, we give you the volumes and the trends. So it hasn't had a significant impact.

I'd just add that you would think there would be natural behavior perhaps to do that. And the other element that we are concerned about with respect to the sales tax would be the impact of e-commerce, where people could go to e-commerce and try to potentially avoid the sales tax.

Okay. But you're not seeing anything so far?

No. We've shared the volumes and it's been holding up --

It's been consistent.

Okay. Thank you.

Our next question will be from John Davis of Stifel. Please go ahead.

Good afternoon, guys. I guess first, Peter, I was wondering if you could maybe parse out what guidance implies for PR transaction growth. I know it was 4% in the quarter. You said it's been consistent so far in April. But you also said you expect or are bracing for some sort of slowdown. Is that low single digit, assuming it still stays positive? Any type of directional color would be helpful.

Yes. We have modeled out 2% to 3%. And additionally, as we've mentioned, we've also done some modeling on the sales volume and the impact which, again, is just sort of following in tandem.

Okay. And then a quick, easy one. Leap year pretty much offset Easter, those pretty much a wash. Is that fair to think about it that way?

I think so, yes. Easter here is, just so you're aware, it's Good Friday and Easter, because a lot of businesses are closed during those two holidays.

Okay. And maybe could you help us think about -- I think you guys did a nice job breaking out government receivables. Do you have any idea of what percent of your receivables are for what you would consider non-mission critical percentage of what they could potentially slow pay you on while continuing to pay you on the more mission critical stuff?

We look at it generally from the revenue perspective, and that would be about 10% of our government revenue, which equates to about 1% to 2% of our overall revenue.

Okay. And lastly, maybe one for you, Mac. On DOJ, appreciate your comments. And obviously, this is a little bit tough to talk about, but any sense for how long -- do they have a deadline to reply to your comments or any idea when we could potentially get resolution?

No, unfortunately not. Like I said on the beginning of the call, our view has not changed around our position and we've responded to their questions. So we're hopeful that they'll move expeditiously. But we haven't been given any type of time line.

Okay. And last one from me. Just on the credit agreement amendment, does that forbid you from doing M&A? I appreciate it hasn't stopped you from having conversations, but let's just say worst case scenario you don't file by May 30, does it forbid you from doing M&A, just like buybacks, or is that not written in the agreement?

We're constrained just by the general leverage conditions within the facility, but there's nothing specific to the amendment that addressed it. Except for buybacks, which we mentioned in the script.

Except for the buybacks that he mentioned earlier.

Okay. Perfect. Thanks, guys.

(Operator Instructions)

Your next question will be from Jim Schneider of Goldman Sachs. Please go ahead.

This is Jordan on for Jim. Can you provide some color on payment trends in Puerto Rico? In particular, what are you seeing in regards to same store sales, credit versus debit volumes, any other things you'd like to highlight here would be very helpful?

I think beyond what we've said on the call earlier about what we're seeing in our volumes, we don't break out the volumes as you've described. I don't know if you --

I'd just add that on the island, debit is the predominant transaction type and we think our metric that we're providing, the 4%, is the most meaningful metric that reflects the transaction activity.

Got it. And in light of the increasingly challenging environment in Puerto Rico, how many government contracts within Business Solutions might be at risk of deferral or cancellation in 2017 -- 2016, rather? Thank you.

Like we've said earlier, most of what we do for the government's mission critical. Probably about, Peter said a bit earlier, 10% of our revenue is government. The majority of that we consider -- almost half of that is federally funded. I would say of it, 90% is we consider mission critical, so 10% we might describe as discretionary. So if you look at our total revenue base, our view on what's discretionary would be anywhere from 1% to 2%, not much above that. What they would choose to cancel and how they would view that, we haven't been informed of any cancellations around those other services. But that's what we would consider most likely at risk, if they went in that direction.

That's really helpful. Thanks so much.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to Mac Schuessler for any closing remarks.

Thanks again for joining the call today. As we said earlier, we're pleased with the quarter. We are cautious about Puerto Rico and we'll continue to monitor the situation here. And as we've done in the past, I think, try and provide opportunities for our Company and our investors, even in this challenging market. We look forward to seeing you guys in the future. Thank you.

Ladies and gentlemen, the conference has now concluded. Thank you for you attending today's presentation. You may now disconnect.