Evertec Inc (EVTC) 2016 Q2 法說會逐字稿

Welcome to the EVERTEC second-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, Vice President of Investor Relations. Please, go ahead.

Welcome to the EVERTEC second-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 Thursday, August 4. 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 be neither be recorded nor otherwise reproduced without EVERTEC's prior written consent. For those listening to the replay, this call was held on July 28.

Please note, there is a presentation that accompanies this conference call and is accessible in the IR section of our website, as well as via the link provided in the earnings release earlier today. Before we begin, I'd 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. 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 on May 26, 2016 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. Reconciliation to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides. Also note that the completion of the filing of the 2015 10-K and restated historical financial results, we've provided in the earnings release, a supplemental schedule reconciling the quarterly non-GAAP results to the most comparable GAAP results for 2014 and 2015. I'll now turn the call over to Mac.

Thanks, Kay. Good afternoon to everyone. We are pleased to announce our second-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 the quarter. Total revenue was approximately $97.7 million, an increase of 5% compared to the second quarter of 2015. We delivered adjusted earnings per share of $0.43, an increase of 7%.

We generated significant free cash flow and returned approximately $21 million to our shareholders through stock buybacks and dividends. On May 26, we completed our restatement and filed both our 2015 10-K and our first-quarter 2016 10-Q, satisfying the credit agreement waiver requirements, which allowed us to return to our share repurchase activity. I want to thank Peter, his team and our auditors for their hard work in completing the restatement before May 31.

On slide 5 is an update on Puerto Rico. As you know, President Obama signed the Puerto Rico Oversight Management and Economics Stability Act, or PROMESA, into law on June 30. PROMESA provides a framework to address the Puerto Rican debt crisis. A US nominated federal oversight board of seven voting members, ultimately appointed by President Obama should be in place by September 1. The oversight board will further include the governor of Puerto Rico as a non-voting member.

Working with the Puerto Rico government, the oversight board has broad powers to ensure that financial plans and balanced budgets are achieved with a goal of attaining stability and access to capital markets at reasonable rates. PROMESA automatically stays all litigation and other actions against Puerto Rico, it's agency and public companies to collect claims against them. The stay will remain in effect until February 15, 2017, but may be extended. The law also exempts Puerto Rico from regulations issued by the Secretary of Labor relating to overtime rates for certain employees for the time being.

Additionally, the bill establishes an economic task force to evaluate potential federal impediments that inhibit the growth of the Puerto Rican economy. Between September 1 and September 15 of this year, the eight-member task force, which has already been put in place and includes two Puerto Rican members of Congress, will provide a status update to Congress on the most urgent needs for consideration. Not later than December 31, the task force will issue a report with recommended changes to existing laws. Importantly, PROMESA provides that the oversight board may if consultation with the governor, ensure the prompt and efficient payment of taxes through electronic reporting, payment and auditing technologies.

As for EVERTEC, we believe there will be opportunities to assist the government on progressive technology projects and electronic payment initiatives. While we are optimistic that this legislation is a constructive step forward, this is just the first step in a longer journey to economic recovery for Puerto Rico. Although, we believe there will be austerity measures and reduced government spending as a result of PROMESA, we are hopeful that the removal of uncertainty will begin to encourage investment and provide economic stimulus over the long term.

Moving on to slide 6, I'd like to focus on our business highlights in the quarter. Puerto Rico remains a challenging environment, but I am pleased with the team's execution. Revenue grew approximately 1% and was impacted by the previously terminated government contract and other revenue mix shifts that Peter will review. Card payment transaction growth was approximately 5% in the quarter, consistent with prior trends. There were three new business events in the quarter that I would like to highlight.

First, through a competitive process, we were able to win a new contract with Oriental Bank. This will replace our existing contract with them and while there are changes in the accounting that Peter will comment on later, this is again, an example of how our service levels on the island resonate well with the local business community. Second, as we anticipated, we signed a contract with the Puerto Rican government, supporting the delivery of their new tax solution, which will benefit our third quarter.

Third, we are encouraged about the potential for new business, as a result of the recent legislation that became effective on June 15, requiring merchants with revenue greater than $50,000 to offer an electronic payment option. We are pleased to see an uptick on POS rentals as a result of this legislation; however, it is still too early to predict the impact of additional volume, as we expect these to be smaller low-volume merchants. Overall though, we are encouraged to see regulation that is supportive of electronic filing more payments in Puerto Rico. Finally, we believe there will be further opportunities for the changes in the Puerto Rico economy and the enactment of PROMESA to leverage EVERTEC's scale in support of the island.

Turning to our Latin America results on slide 7, revenue growth was significant, with a benefit of the percent to acquisition, as well as a favorable year-over-year comparison. After considering these items on a comparable basis, Latin America generated low double-digit revenue growth and outperformed our expectations. We also have a number of client migrations that have been pushed out to a later date. On a recent trip to Costa Rica and Colombia, I met with customers and noticed two observations. First, our integration of Processa is going well. We expect to be able to leverage our position in Columbia to further grow this business in years to come. There is enthusiasm in the market about what Processa will be able to deliver with the backing of EVERTEC.

Second, we have received positive feedback from our customers on our new account management structure. We continue to work on our customer service and won't be satisfied until we have delivered on our vision of Excellence In Innovation the customer experience. Regarding new business, I'm pleased to announce the LatAm team was able to sign a new contract in Honduras, Davivienda, as well as renew an existing contract in Costa Rica. While the dollar amount of the new business is not material, we are pleased that Davivienda, the third-largest bank headquartered in Columbia, expanded its relationship with us in the competitive process. We continue to focus on other proposals in our pipeline to build our business in the region.

Turning to slide 8, you may have noticed our new branding in the presentation. This new logo, image and slogan is meant to position the new and better EVERTEC. The tagline was changed from transaction solutions simplified to technology that speaks your language. We want our customers to know that significant change is underway with a new executive team, new investments and renewed commitment to service. To our shareholders, this new branding translates into a focus on growth. Lastly, regarding that focus on growth, our corporate developing team continues to focus on M&A opportunities. As always, we will update you with the specific information when appropriate. With that, I'll now turn over the call to Peter.

Thank you, Mac. Good afternoon, everyone. Before I begin my comments on the quarter, I want to note that with the completion of the restatement and the filings of our 2015 Form 10-K and the Q1 2016 Form 10-Q on May 26, we satisfied the required compliance conditions of our credit facility waiver amendment and avoided further potential interest rate increases to our facility. I want to thank my team and our auditors for their diligent efforts. Additionally, we hosted our shareholder meeting this morning here in Puerto Rico, with all proposals receiving overwhelming shareholder support. I will now provide a review of our second-quarter results and then update our financial outlook for 2016.

Turning to slide 10. You will see the second quarter and six-month revenue for the total Company in our segment revenue details. Total revenue for the second quarter of 2016 was $97.7 million, up 5% compared to $93.4 million in the prior year. We had a positive impact from the inclusion of the Q4 2015 expanded FirstBank relationship, as well as a full quarter of contribution from the Processa acquisition in Q1. Total revenue for the six-months year-to-date was $193.2 million and up 4% year-over-year. With respect to the segment mix in the second quarter, merchant acquiring net revenue increased 10% year-over-year to approximately $23.3 million, driven by our expanded FirstBank merchant acquiring relationship.

This growth was partially offset by a shift of revenue in the quarter from the merchant acquiring segment to payment processing segment, reflecting a new contracting arrangement with Oriental Bank that closed in the last month of the quarter. Specifically, Oriental sought to take more control over the contracting with their merchants and shift to a transaction processing arrangement. As a consequence, the scope of merchant acquiring work we performed has reduced, but we are pleased to have won their business in a competitive process and look forward to our continued relationship.

As we experience in Q1, sales volume growth was impacted by lower average ticket, primarily related to gas prices as well as other merchant mix shifts. Also as a reminder, in the second quarter last year, we experienced stronger consumer spending in advance of the sales tax increase to 11.5%. For the six-month period, merchant acquiring grew 12% year-over-year to $46.2 million. Payment processing revenue in the second quarter was $28.2 million, an increase of approximately 5%. Revenue growth was driven primarily by increases in our ATH debit network and card processing volume, Processa revenue and the Oriental contract change that I referenced.

Additionally, our LatAm revenue growth was strong due to a favorable comparison in the prior year, which had a delayed contract renewal that reduced revenue. This revenue growth was partially offset by the segment revenue shift associated with the change in the FirstBank agreement and the terminated government lottery tax program, both of which occurred in Q4 2015. As Mac mentioned, we closed on the new government tax program contract. It is expected to be a contributor in the third quarter. Additionally, as we touched on, we have experienced delays in the anticipated client attrition in LatAm. We continue our efforts to retain these clients and now expect the majority of the attrition to impact us in late 2016 and 2017.

In the quarter, transaction growth in Puerto Rico continued its trend with payment transactions growing approximately 5% year-over-year for the quarter and the trend remained steady in July. For the six-month period, payment processing grew 4% to $55.1 million, driven by these same reasons I previously mentioned. Business solutions Q2 revenue increased 2% to $46.2 million.

We experienced growth in our core banking business and in hardware sales, which was approximately $0.5 million more than last year. This growth was partially offset by year-over-year decreases in item and cash processing, as well as reduced IT services. In the prior year, IT services revenues were elevated by work related to the Doral conversion. For the six-month period, business solutions grew 1% and $91.0 million, reflecting the growth in our core banking services partially offset by lower item processing and IT services.

Moving on to the next slide number 11, you'll find a reconciliation of our adjusted EBITDA, detailing our adjustments to EBITDA. In terms of impacts related to the restatement, we incurred incremental expense of $2.3 million and otherwise had our typical adjustments for restructuring and severance and share-based compensation. Total restatement cash expenditures were approximately $6 million. Calling GAAP, the lender consent fee of approximately $3.5 million is required to be deferred and amortized as interest expense over the life of the facility.

Adjusted EBITDA for the quarter was $48.8 million, an increase of 4% from $47 million in the prior year. Adjusted EBITDA margin was 50%. This represents a 30 basis point decline in our adjusted EBITDA margin compared to the prior year. Our Q2 adjusted EBITDA growth and our adjusted EBITDA margin percentage are explained in more detail on the next side. Year-to-date, adjusted EBITDA was $94.9 million, an increase of 2%.

Moving to slide 12, you will see a year-over-year adjusted EBITDA margin bridge for Q2. Starting from the left column, the bridge begins with the adjusted EBITDA margin in the second quarter of 2015 of 50.3%. Moving to the right, we first benefited approximately 80 basis points from a favorable revenue mix. Second, we had a favorable impact of approximately 40 basis points, due to an unusually high health insurance expense in the prior year's second quarter related to a specific claim.

Third, investment expense increased year-over-year approximately 80 basis points primarily due to incremental investment expense related to our Latin America growth initiatives as well as expenses related to corporate development. We expect these investments to continue. Fourth, the business-to-business tax and other operating expense headwinds impacted us by approximately 70 basis points. As an update, the VAT tax, that was legislated to replace the business-to-business tax in April, was ultimately not implemented into law.

Instead, the status quo of 4% business-to-business tax was permanently extended by the Puerto Rico Congress. As a result, we will incur a year-over-year expense impact of approximately $500,000 in Q3. As a reminder, this B2B tax will anniversary in Q4. Additionally, in 2016 and in the future, we no longer receive an expense offset related to maintenance expense reimbursements provided for in the Popular merger agreement, which impacted us approximately 30 basis points. The combined impact of these referenced items resulted in an adjusted EBITDA margin of 50% for the second quarter of 2016.

Moving to slide 13, adjusted net income in the second quarter was $32 million, an increase of approximately 4% from $30.9 million in the prior year. Our effective tax rate in the second quarter was 12.2% and includes the impact of some discrete tax items in the quarter that increased the rate. For the year-to-date period, we had an effective tax rate of 10.6%. We now anticipate an effective tax rate for the full year to be at the higher end of our previously expected range of 8.5% to 10%, primarily due to the Processa acquisition and the impact of these discreet items in the quarter.

Q2 adjusted earnings per diluted share was $0.43, an increase of 7% from $0.40 in the prior year and reflected the benefit of a lower diluted share count as a result of our share repurchase program. Year-to-date, adjusted net income was $63 million, up 6%. Adjusted diluted earnings per share was $0.84, up 10% from $0.76. It is also important to note that the restatement lowered our full-year 2015 adjusted earnings per share $0.02 from $1.61 to $1.59. Our comparisons reflect these restated amounts, which are all available in the release.

Moving on to our year-to-date cash flow overview on slide 14. Net cash provided by operating activities was approximately $69 million, a decrease of $7.3 million year-over-year. This primarily reflects the impact of the restatement related expenses, settlement timing and other working capital timing differences. There has been an approximate $4 million decrease in restricted cash, as we substituted $4 million of our unused revolver to satisfy a card network cash collateral requirement related to our card processing business. Next, the Processa acquisition was approximately $6 million in US dollars as we had indicated in Q1.

Capital expenditures year-to-date were approximately $19 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 a total of approximately $10 million in principal debt payments, $3.6 million for the credit waiver amendment fee, offset by $3 million increase in short-term borrowings. Finally, year-to-date, we paid cash dividends to our stockholders of approximately $15 million and repurchased approximately $15.6 million of common stock for a total of nearly $31 million returned to shareholders.

We have approximately $104 million available for future use, under the Company's share repurchase program. We announced today another $0.10 dividend to be paid on September 2, 2016 to shareholders of record as of August 9, 2016. Our ending cash balance at June 30 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 June 30 was approximately $20 million, which is up $1.7 million from the balances at the end of 2015. Given the government debt situation and the introduction of PROMESA, we continue to monitor our receivables accordingly.

Moving to slide 15, we provide a summary of our debt. This slide reflects a quarter ending net debt position of approximately $632 million, comprised as I just mentioned $36 million of unrestricted cash and approximately $668 million of total short-term borrowings and long-term debt. Our weighted average interest rate was approximately 3%. Our net debt to trailing 12-month adjusted EBITDA was approximately 3.4 times. As of June 30, total liquidity, which includes unrestricted cash and available borrowing capacity under our existing revolver, was approximately $112 million.

Moving to slide 16, I will now provide an update on our 2016 guidance. We are increasing our guidance ranges on revenue and adjusted earnings per share, primarily due to the positive results in the second quarter, partially offset by the impact of the business-to-business tax that I referenced earlier. We now expect revenue to be in a range of $382 million to $388 million, representing growth of 2% to 4%. Regarding the revenue growth in the second half of the year, the Oriental contract change that I discussed earlier removes approximately 1% of revenue growth. Our adjusted diluted earnings per share guidance of $1.61 to $1.67 represents a growth range of 1% to 5%.

While we experienced a higher adjusted EBITDA margin in Q2, we don't expect that to sustain given the ongoing investment we're making in the business as well as the expense headwinds that I discussed earlier. Thus, our EBITDA margin guidance of 48% to 49% remains unchanged. In summary, we are pleased with the operating performance in the quarter and in the first half of the year. While we remain cautious as we monitor the Puerto Rico economic situation, we remain focused on the execution of our annual goals and strategic initiatives. We will now open the call for questions. Operator, please go ahead and open the line.

(Operator Instructions)

George Mihalos, Cowen and Company.

I wanted to start off with -- if we look at the higher revenue outlook you have, the higher guidance in revenue for the year, is that entirely due to the timing of some of the deconversions getting pushed out? Or is there anything else that would have impacted it as well?

George, it's Peter. It's a combination. It's the contribution of Processa, which is performing very well and it also includes the delay that you referenced.

Okay, great. Just back of the envelope, if we look at Puerto Rico versus international, did Puerto Rico grow in aggregate somewhere around 3%? Is my math right there? Or --

No, George, it is incorrect. It is 1%. We were -- it was 1% down for a few reasons. In particular, we had a difficult comparable last year, we had Doral, right, which added a bunch of revenue. We had a bit of a spike in our merchant business related to the transition to the new sales tax. Then, we just had a slight deceleration in volume that we called out here with respect to the lower average ticket and the merchant mix that we experienced in the quarter.

Okay. Just last question for me, as it relates to the First Data deal with Banco Columbia, any thoughts around that?

George, it's Mac. Yes. First Data and Banco Columbia have had an issue in their relationship for the past, probably three years. So it wasn't a surprise for us to see them extend that merchant acquiring -- into merchant acquiring. I actually met with the Banco Columbia when I was there maybe six weeks ago. We -- it was obvious they were entertaining this process well before we bought Processa, so we weren't surprised by that.

I do think long term what this means for the market in Columbia is that banks are making decisions to go outside of the existing model of the processes that are in that country. They're looking for different alternatives. I think long term, this provides an opportunity for EVERTEC and Processa as banks look for different solutions. But the deal with Banco Columbia was sort of in formation well before we did our Processa deal. We had a relevant presence in the country.

Okay. Thank you.

Jim Schneider, Goldman Sachs.

I was wondering if you could maybe just comments on the overall kind of consumer spending environment you see in Puerto Rico? It would appear from the volume numbers that things aren't really any slower. If anything, are getting maybe slightly better if you strip out all the merchant mix and other spread issues. Can you maybe comment on, realizing that you can't really see the future that far out, what the overall consumer spending environment is? Is there any reason to believe that things will get worse from here rather than better?

This is Mac, I'll address it just from a qualitative perspective. Then let Peter answer from a numbers perspective. What I would say is, as we've said on previous calls, the real fiscal issue in Puerto Rico has been with the government. We are hopeful now that PROMESA provides a way for the government to work through that issue.

In the past, we haven't seen a significant impact to retail spend because, again, this has been a government -- a debt issue. As PROMESA comes in and has to make some tough decisions and we look at our austerity measures to cut back from government spending, it's unclear just how that will impact the economy. But right now, we haven't seen it in retail spend.

Yes. What I would just add to what Mac has said is that what has been impacting us is the lower average ticket. Transactions have held steady at 5%. Then we've experienced a lower mix, which generates lower revenue. As we have looked at the rest of the year, consistent with how we've looked at it at the beginning of the year and last quarter, we still have to continue to project a little decline as we do expect some of the measures that are taking place in the year to lower sales a bit as we go forward. We view that as just being cautiously prudent.

That's helpful. Then maybe as a follow-up, to the extent that you do get some revenue growth sustaining into 2017 and you feel better about the overall backdrop stabilizing, can you maybe talk about some of the investment initiatives you are thinking about as you start to get a little bit more leeway on the OpEx side and re-rank your top three priorities in terms of if you had an extra few million dollars here and there, what do you spend it on?

As we've discussed, we are spending a bit more CapEx. We are focused very much on Latin America and the product set that we have there, that's where the bulk of our investment and focus is, is going in terms of investment. With respect to Puerto Rico, we are looking to be opportunistic as we've discussed before, looking at opportunities as things are challenged on the island and we can take advantage of our scale. To the extent we see something that is attractive and that capacity, that will warrant some investment for us. Other than that, it is just the maintenance capital that we are continuously spending. Really, those are the areas that have a focus from an investment perspective.

Right. That's helpful, thanks very much.

Vasu Govil, Morgan Stanley.

First, could you help us break down the revenue contribution from Processa, as part of the FirstBank deal, during the quarter?

Yes. I will provide just generally what the contributions are. Together, they represent the bulk of our growth, first. First Banks performance has continued to be very strong, consistent with what we had last quarter and approximately 14%. If you look at it in terms of contributions through the merchant segment, we had a shift in Oriental and then the shift as we've described before, in the pricing and sales mix, that we have that has impacted the overall net revenue for merchant.

With respect to Processa, the revenue is consistent with what we talked about last quarter. So if you look at our guidance flip that we did last quarter, it is slightly better than that as I indicated. We are very happy with the performance thus far. It's split roughly 80/20 between the payment segment and business solutions as well.

This is Mac. I would just say on both of those, just to reiterate, we are very pleased with the performance of both of those portfolios and the businesses.

Great. That's very helpful. I guess it's too early for 2017 guidance, but just wanted to get your preliminary thoughts there. Based on what you are seeing in the macro environment, the progress you have made in Latin America, do you think there's potential for meaningful revenue acceleration in the next year? Or do you think that is unlikely in the absence of any meaningful M&A deals?

No. My view is 2017 it's premature to talk about. We've got to see what PROMESA's going to focus on. What -- how that will impact Puerto Rico in our view on that. We've also got to take a look at, as we've talked about, LatAm over performed in the quarter. Part of that is because some of those excess of accounts will occur in 2017. So it's premature to really -- to give you any sort of visibility in 2017, it would be disingenuous.

I agree with Mac. (multiple speakers)

I appreciate that.

We're focused on our planning, obviously and looking at all aspects of Latin America, including the pipeline and so forth. All that is going to ultimately come out in our guidance.

Got it. Thanks a lot.

Bob Napoli, William Blair.

Bryan Keane, Deutsche Bank.

This is Ashish Sabadra calling on behalf of Bryan Keane. I had a question around Oriental Bank. You mentioned that they wanted to gain control over their acquiring business. I was just wondering if you could provide some more clarity on what drove that decision? Just a follow-up on that would be, how should we think about -- look, you mentioned that shifted the revenue from acquiring to payment processing, but did you also get a one-time benefit in the quarter? How should we think about that benefit from Oriental Bank and payment processing going forward?

This is Mac, I will talk a little bit about Oriental's strategy. What I would say is, they wanted to get closer to the merchant relationship and actually own the sale and the relationship more intensely. What I'm very proud of is that this demonstrates that EVERTEC, we're not just a pure play merchant acquirer and that we're able to provide whatever solution the customer so desires. So that fact that they changed their model, we were able to adapt. It also demonstrates, as we've constantly said, this is a very competitive environment. I can tell you we are competing with some of the biggest names in the industry that you would know. We still won that business. We're very pleased to keep them as a customer. I don't know, Peter, if you want to add anything on the (multiple speakers) --

Yes. I would add, first, there was no one-time fee associated with the transition to -- in the contract. Mac summed it up very well, the reason for the change, as we look forward as we indicated it's about a 1% decline in our overall revenue. Just for clarification, on the merchant segment, it is about a 6% to 7% decline in terms of overall merchant revenue. So hopefully that is helpful.

Yes. Thanks for that clarity. Then second question on PROMESA, thanks for providing a lot of color on that front. But just looking at the two aspects, one is the government austerity, could that affect your government revenues? How we should think about it? Then the deal wins that you talked about for regular electronic payments, as well as more projects coming on, would that be more a 2017 event?

So, let me just -- So when we talk about the government austerity, I think that is more related to -- you've got the largest employer on the island, so are they going to have to make cuts from an employment perspective? It's less related to the technology investments, because (inaudible) they're going to have to invest in new technology to automate the tax systems to better automate the current government.

Our focus during this period -- I cannot predict what the impact would be because this is uncharted territory; however, if you look at the past, this has been a tough situation, we've been able to navigate well. During this period, we're going to focus on three things. One is, we will continue and part of PROMESA is actually ensuring that they do automate the tax programs. They do automate payments. They're demonstrating that with legislation today.

So a part of our strategy, or the first part would be helping the government in those efforts. I think we are well-positioned to do that because often we're the incumbent. When we do automate these programs, we create jobs in Puerto Rico at EVERTEC, which is good for Puerto Rico. The second piece is continued consolidation on the island. So, as we've seen in the past, with Doral and with other banks, as -- if the Company continues to contract, we'll benefit from that. So during this period, over the next coming years, we think we'll be a beneficiary of that.

Then the third is we'll obtain a focus on putting more payments -- transactions through our systems. We talked earlier about it on the call, about the legislation that was passed that merchants over $50,000 now have to have a form of electronic payment as an option. So those are the types of programs that we believe will put more payments transactions through EVERTEC. So, the way we think about it is, what's going to be our strategy during this period? It's going to be focusing on those three areas. We can't speculate exactly what PROMESA's going to do. Frankly, the members of that committee haven't even been named yet. But we do have a strategy of how we're going to operate in this environment.

The only thing I would add to Mac's comments there would be that with respect to the majority of our significant contracts, we have reviewed them. They are subject to fiscal funding clauses, which are natural and occur in most governments and certainly things that we deal with for years here at EVERTEC. But the significant contracts have been renewed.

Thanks for the color. Good results. Congrats.

Okay. Thank you.

Sara Gubins, Bank of America, Merrill Lynch.

Should the hardware benefit that you've got in business solutions continue or was there anything one-off in nature around that?

Yes. Hi, Sarah. So, just as a general goal of our, we'll take hardware opportunities that are opportunistic and don't really seek to them. This one was, really, I would say more of a one-off, a situation in the Dominican Republic, where we actually had a client and we wanted to have a hardware as part of their overall managed service that we provide. So we accommodated that. That's what that transaction represents.

Okay, thanks. Then could you give us an update on the operational strategy that you've talked about in prior calls, where you're trying to focus on improving your efficiency in service?

In Latin America, specifically?

My sense is that it was in Puerto Rico, specifically.

Yes. We've been very focused across all of the geographies on better managing the accounts that we have and the relationships that we have. The fact that in Latin America, we weren't effective with that in the past is why we put a team in place. So what I would say is, you could tell by the win with Oriental. You could tell with the win by Davivienda. We're doing a much better job at managing these relationships and renewing them and extending them.

Okay great. Do you still have a way to go on that? Or have you reached service levels that you're now happy with?

I would say, in Puerto Rico, we have very good levels in LatAm. We're continuing to -- the feedback I've gotten from the client is they are very happy with the account management piece. But I would say I'm still not satisfied until I see the wins to demonstrate that they are creating results, financial results.

Great, thanks. Then just last question, you've talked about it in response to a number of questions. But could you maybe just give us an outline of what you are expecting by segment for the full year for revenue trends, given a pretty broad range of moving pieces?

Yes. We do have quite a few moving pieces, I think, with respect to just giving precision on the segment guidance, we'll not do that. I think we've described what is going on in the merchant area with the puts and takes around Oriental in particular. The only thing I'd remind you of is that we have the FirstBank, which has driven the most of our growth and anniversaries November 1. So those -- you can put those two together to kind of drive that. Then with respect to the payment segment, obviously, we are benefiting from Processa. That has been a full quarter of that. We do have the government contract that is coming on. I want to call that out. That's going into the business solutions segment as well. So, those I think are more significant moving parts. Hopefully, that's helpful, Sara.

All right. Thank you.

John Davis, Stifel Nicolaus.

Peter, maybe one quick one. Just as we think about guidance in the second half of this year, you expect a little bit of acceleration of growth in Puerto Rico from the 1% and maybe a little bit of decel from the lower double-digits in LatAm. Just trying to think about on island versus off island growth in the back half.

I think that's correct. As we look forward, we have -- as we've discussed, modeled out a bit of decline in the sales volume in Puerto Rico. Then as you indicated, we do expect to have some of the attrition in the back half of the year hitting us in Latin America. So I think you got it right.

Okay, perfect. Then, Mac, does First Data's entry into the secondary LatAm markets have any impact on your strategy or M&A plans? Or maybe just broadly talk about the competitive landscape in the smaller Latin America markets?

I'm sorry, you said First Data's entry?

Yes.

Yes. So, First Data is already in the market, so we compete with them everyday in Central America. They've been in Columbia for quite some time, particularly in the issuing business. So I really -- it doesn't change how we operate. I don't think it changes the opportunity for us. As I mentioned earlier, I think, really what you're going to find in some of these markets, Colombia, Mexico, they're really changing and that the banks are looking for alternatives beyond what they have in marketplace today.

Right now, they're primarily doing business with -- everybody is doing business with the same processor. They're looking for opportunities to differentiate themselves. So, Banco Columbia, I know the senior guys there, it's a great bank. I would love to have that business. But generally, what I would say is there are other opportunities there. I think this is a sign of good things to come versus an issue.

Okay. Then finally, I'm assuming though -- but any update or comments on the DOJ investigation? Any ideas on timing?

No, our position remains the same. We haven't -- we have no reason to believe otherwise. We think this is a very competitive market. We compete for business every day. Oriental is a great example. We don't have a timeline from the government. But as soon as we have an update, we will let you know.

Okay. Thanks, guys.

Thanks.

Tien-tsin Huang, JPMorgan.

Mac, the Oriental -- that deal, I'm wondering, is that a -- can we interpret that at all to be a secular change in terms of banks wanting to be more, full direct acquiring -- I guess, what I'm trying to get at is could that open up the opportunity to maybe serve as consortias down the road, if they want to break up to be more direct acquiring and control things themselves? I'm just trying to read between the lines, what else that could mean, if that makes sense?

So, what I would say is, Puerto Rico is a more mature market, like the US than some of the other markets in Latin America. So I don't think it is indicative necessarily of anything going on in LatAm. I would say -- I wouldn't over-read, what I would say is, Oriental, is a great bank that is really trying to compete through differentiating and getting closer to their customers because they don't -- that is sort of their focus.

I don't think it implies anything else about the other banks here, because the FirstBank deal is a 10-year deal, Popular is, we've still got another eight or nine years on that. So I don't think it implies anything about additional changes to this market. Like I said a couple times on the call, I think what it does indicate is they are very, very pleased with the service we provide. They still want us to be their back office. But I don't think it indicates anything about how the market and the other changes in this market.

Okay. No, that answers it well. Thanks for that. Just in terms of that change to a processing deal only, is there any offset in costs, that we can consider given the change?

Yes. We sustained roughly the same margin but obviously we are doing less work. So there is less profit that we make. As we called out, there is a revenue impact of about 1% on the Company.

Okay, understood. Then, just -- I guess I'll jump off the line, but I always ask that question. Just BPOP or Banco Popular and further IT spendings, sort of given this environment. Any change there in terms of visibility or predictability of that business?

What I would say is, I think with all the changes that going on in Puerto Rico, there are opportunities for Banco Popular to do more work from the government as well on some of the banking services side. Again, if some bankers choose to exit or are forced to exit the market, I think, Popular will be the beneficiary of that. So it's not easy to predict, a lot of it's recurring and it is predictable. But as far as the incremental, I'm optimistic that, again, as they're change is in Puerto Rico, they'll be the beneficiary of those changes and subsequently, we will be as well.

Yes. As I indicated last call, we have a very active schedule of work that we are performing with them collaboratively. That is still unchanged.

It makes sense. Thanks for that.

Thanks, Tien.

(Operator Instructions)

Bob Napoli, William Blair.

I'm not sure what answer you'd give me, but I don't think it's -- the pipeline of business both organically and inorganically. If you could give -- I know you don't want to over promise, but I was just wondering what the opportunities are? As you sit here today, Mac, and from when you came on board, are you seeing as many opportunities for new business organically and inorganically, as you thought you would? Or is a pipeline building? Or maybe if you can just give some color on organic and inorganic pipeline? What types of things are out there, would be helpful.

Sure. Yes. (inaudible), Bob. So what I would say is on the M&A front, the inorganic side, we are very pleased that we are constantly looking at opportunities and they exist in the region. I think we have a unique visibility into that pipeline. But a pipeline doesn't equal a deal. So we won't really talk about or get you excited about something until we have something to get excited about. But there are opportunities in the region is probably the best way to put it. Several of those opportunities are visible to us.

On the organic side, I would say the underlying trends in Latin America as far as the rise of middle class and the adoption of electronic payments is very healthy. Once we get past the issue of these migrating accounts and then are able to add new business, I think we will get the organic growth where we need it to be. What is happening is, we're over performing a bit this year because some of the migrations we anticipated are getting pushed out a bit. So, that's that phenomenon, but I think, I'm very pleased with our region in which we operate. I think there are opportunities both organically and inorganically.

Okay. The migrating accounts, any chance that they won't migrate? Or is that just timing?

I'm smiling because, they're not gone until they are gone. That's what I tell my team. But these are accounts that have made a strong indication that they contemplated over this in some time, because we were not managing them effectively from an account management perspective. So this is going to be a real impact. But we are going to work very, very hard at retaining them the best that we can. But right now, we've given -- we didn't have the function in place -- we will see some migration. But we're continuing to try and save what we can. If we save something significant, we will let you know.

Then last question, you added another key piece to your team during the quarter, a gentleman from Visa. Is your team complete at this point? Or are there other key hires you're looking at? Or opportunities to hire talented people to add to your senior team? Or is the team set?

Yes. The team is set. The last thing I wanted to do was get someone to help manage the product and marketing function. That was if I looked at the strategic hires that I needed to make, it's [cort bev]. It was someone to run LatAm, and the team underneath that. It was the CFO. Then it was product and marketing. So as far as strategic hires, it really helped us focus on our strategic initiatives, we're finished.

Great. Thank you.

All right. Thanks, Bob.

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

Again, thank you for joining the call. We are pleased with the results. I hope in the coming months, I look forward to seeing each of you as we travel to different locations. We look forward to keeping you updated on our results. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.