EVERTEC, Inc. (EVTC) Q3 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the EVERTEC's 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's 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 our Web site 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 November 4th. Please note, there is a presentation that accompanies this conference call, and it is accessible in the IR section of our Web site, as well as via 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 statement 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 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 evenings 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 American business, as well as an update on the 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 in line 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 Columbian payment company headquartered in Bogota. As previously disclosed, we have 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 Columbian markets. Processa offers a wide variety of payment services, including processing for card issuers, financial institutions, and merchants. Its clients include Grupo Exito, one of Columbia's largest retailers, with approximately 550 stores, several financial institutions, including Banco de Bogota and Bancamia, and two of the top social fund administrators, Cafam and Compensar. Compensar, the current majority owner in Columbia, the second biggest social fund administer, will retain 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're still targeting our close date for the end of November. Moving to Slide 6, we are pleased to announce that, as of October 31st, we've agreed to extend and expand our business relationship with FirstBank for a term of 10 years. FirstBank 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 will with the business community, and demonstrates that opportunities remain for EVERTEC in Puerto Rico. Now, please 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 had relocated his family here to Puerto Rico, and is settling in to 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 accelerating 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 of 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'll review in more detail in a moment. I'm pleased to say that our leadership team is now in place. And I am 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 a CIO who was the number two executive at one of the largest card processors in Columbia, and hired a new head of account management. So we recruited from one of our largest international competitors. We've 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 team. 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 departing and incoming clients take time to convert. Therefore, next year will continue to be a transitional year for our LATAM business. However, with the 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 1st. 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 increased sales tax and the overall uncertainty in Puerto Rico may have on consumer spending. Turning to more recent developments, there are both headwinds and tailwinds for our business. Let me discuss two headwinds. First, every year, effective October 1st, 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 1st, 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 the next. Peter will provide more detail on both items later in the call. As per tailwinds, in addition to our FirstBank announcement, several legislative opportunities continue to emerge in Puerto Rico. Recently passed legislation will required most licensed professionals, such as doctors and certain other professionals to provide an electronic payment option to their customers. Additionally, there is pending legislation that may require all consumer businesses above a certain annual revenue threshold to provide an electronic payment option 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've looked at 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 FirstBank, and the performance, and 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'd evaluate our internal capabilities, which we've 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 a professional, technology, and processing company. And I am delighted with the progress we have made to date. I'm energized by 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 question 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 months 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 our 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% sale tax increase that went into effect July 1st. We estimate that the sales tax increase added one to two 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 months period, merchant acquiring grew 6% reflecting primarily the growth related to the continued payment migration from cash to card transaction, 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 network volumes, and increased accounts on file, and related transaction growth within our card products business. Point of sale transactions in Puerto Rico increased approximately 5% during the quarter as compared to last year, continuing the trend we have experienced in 2015. For the nine months period payment processing grew 4%, to 80.6 million, driven by the same casual and partially offset by lower revenues from our 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 from 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 of 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 a year-and-a-half on the severance paid related to this initiative. Otherwise, the adjustments included are typical adjustments 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 will 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 margins in the third quarter. Starting from the left column, the bridge begins with the adjusted EBITDA margins in the third quarter, of 50.1%. And moving to the right, we benefitted approximately a 100 basis points from the increase in revenue, and the favorable market mix of payment related growth in the third quarter of 2015. This positive margin impact was offset by three items. First, 2014's results included certain non-recurring 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 a card issuing product initiative, and this reduced margins approximately 40 basis points. We anticipate this growth investment to continue. The combined impact of these items result 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 and 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 to 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%, and adjusted diluted earnings per share was $1.25, up 3%, from $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 a general update on the status of our receivable with the Puerto Rican government, in so far 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 30th 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 timeframes. 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 and central 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 months 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 and 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 principal 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 30th was 40.4 million. Moving to Slide 17, we provide summary of our debt. This slide reflects the quarter-ending net debt position of approximately 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 30th, 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 $168 to $1.69. As Mac mentioned, we had certain headwinds impacting Q4. We have four items. First, we expect reduced Latin American growth due to projected client migrations. Second, a significant portion of our business was repriced pursuant to a contractual CPI increase, effective October 1st. This year, the CPI adjustment was a negative 4 basis points compared to a positive 166 basis points last year. Third, we have experienced a modest deceleration on payment transaction volumes from August to October. And fourth, we are absorbing the 4% business-to-business tax that went into effect October 1st. We estimate the business-to-business tax will reduce adjusted EBITDA approximately 500,000. All of these items are considered in our guidance. These headwinds will be partially offset by the addition of FirstBank's recently expanded services that commence in Q4. For further clarification in our guidance, we have neither included any estimates for the Processa transaction nor factored in any potential exhausionist [ph] impacts related to the Puerto Rico fiscal situation. In summary, while we cautiously monitor, and wait for the resolution of the Puerto Rico fiscal situation, we are pleased and encouraged by our progress, that's evidenced 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 has 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 will now open the call for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] our first question comes from the line of Brian Keane with Deutsche Bank. Please proceed with your question.

Hi guys, this is Evan Boyle on for Brian. Just some clarity on the bridge for the adjusted EBITDA margin; I heard that the value, the 70 basis points, 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 the increased investment might be recurring.

That's correct.

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

Yes, the prior year 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 increased investments in that quarter, just given that we now have the investments as well as the B2B tax reduction? And then, are there any other difficult compares in the fourth quarter of '14 that also impacts the margin in 4Q of this year?

First, with respect to the investments, you can expect a similar 40 basis point impact into Q4. And then, secondly, to help you with the quarter as you look by segments. We could expect the merchant acquiring revenue to be approximately high single digits, driven in part by the FirstBank 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 reprice 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 reprice, and the tough comparable where last year we had approximately 1 million more in hardware sales than 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 the magnitude of the deceleration that you've seen thus far? And then that's it. I'll turn it back to the queue.

Yes, so from -- as we referenced, from August to October we've seen a modest decline. Been about one to two 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 same volume being between 3% and 4% for the remainder of Q4.

Great. Thanks.

Thank you. Our next question comes from the line of Jim Schneider with Goldman Sachs. Please proceed with your question.

Hi, this is Jordan on for Jim. Can you just provide some color around payment trends you're seeing within Puerto Rico? In particular, if you could provide some color around same-store sales versus credit, versus debit volumes, and anything else that 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 that we gave you, we've seen a slight deceleration in October. But we don’t break it out by debt and credit at this point.

Okay. And then 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 your earnings? Thank you.

Yes, let me just give you my view, and then I'll hand it to Peter for a second. So when you think about what's going on in Puerto Rico it's really hard to predict, nobody's got a crystal ball, so we don’t want to get into that business. To the indicators on this call we did want to talk about was specifically the receivables are performing normal. They're actually a little bit better. So that's a good indicator. We'd mentioned that on the call, our government business, and what we believe the exposure to be. And that remains the same. And we are monitoring impact to the consumer, but they've 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 hand that to Peter, and you can address that.

Yes, I'll 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 expect. And we're trying to reduce our cost structure. We're in the throes of our 2016 planning, and we do this as a matter of course. So we'll be looking at that. That includes all vendors, and other aspects for cost structure.

Yes, let me just continue with that theme. That Peter mentioned a good point again about FirstBank Doral earlier in the year, and so there's an opportunity for us to consolidate because we had the leverage and the scale. And as far as expenses, as Peter mentioned, we are managing as we thing very well. We had the voluntary reduction that we talked about earlier, that Peter referenced. So we're actively managing the expenses in this environment to make sure we maintain our margin, and to consolidate the top line opportunities where we gain.

Thanks.

Thank you. Our next question comes from the line of George Mihalos with Cowen. Please proceed with your question.

Great. Thanks for taking my question, guys. I 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 you can 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?

So I'll let Peter answer the specific mix, but just to give you a little more color, George, on the Latin America business. This quarter, it grew 12%. And what we're trying to make sure that we caution you is that that was a bit of an anomaly, because we had two one-timers on projects. One around EMV, the other around migrating a customer, and so, that's what drove us against double digits. We're confident we'll get the growth quarter-to-quarter where we want it to be. We've just implemented a new account management team, as we've referenced in the earlier material. And the intent of our team is to try and keep accounts cross sell, because we had to have some accounts that were -- that 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 a while for accounts to migrate all. 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 a while to win the business, and then to actually implement it. So into '16, we do think that you'll see a little bit more volatility, and probably more like you've seen this quarter, would be more of anomaly, and see more single digit as we head into '16. And then later '16, and moving into '17 we think we'll get the growth rate where we want it to be. As far as the exact mix between Puerto Rico and LATAM, I'll 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, and sort of the repricing the contract there. Should we be thinking that this flattish 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. Yes, it starts October 1st. So it just repriced October 1st '15, and that pricing will carry through to the end of September up to '16. And that's -- Banco Popular is a big piece of our business, and the majority of the business solutions segment of our business.

Okay, thank you.

Thank you. Our next question comes from the line of Bob Napoli with William Blair. Please proceed with your question.

Thank you. I guess looking at the growth rate of merchant acquiring, you won a new contract, were expanded with FirstBank. 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, Bob, let me give you a little more color on the FirstBank deal because we're pretty excite about this. As you know, Processa is the first acquisition this company has made which has gone public. FirstBank is the first merchant acquiring deal that we've done since the company has gone public. So we're quite excited about this. It is -- we bought the merchant contracts of FirstBank. And we did the processing for our FirstBank in Puerto Rico, but now we actually own the contract. And we actually did not have their business in the Virgin Islands, which is a meaningful part of their business. That's part of this deal as well. So that's the good news. And then, it is factored into Q4. It helps to offset some other headwinds. And I'll hand it to Peter, to address specifically your question.

Yes, George -- we're not providing '16 guidance. We're in the middle of our planning. We'll update you next question. Excuse me, Bob. We'll do that next quarter. As I just alluded to, we are seeing the high single digits, and expect that to continue in Q2, and the low single digits in the payment segment.

There's no reason why that -- there's nothing out there that, turn January 1st, 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?

I think there's a couple of things. One is the target, because we are in the planning process. We do have the legislation where the government has said that doctors' offices, attorneys have to accept cards now, which is new legislation. It's a couple of months old. It's also potentially going to be a path that any business that makes 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. So 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 FirstBank.

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

No, there's nothing generating for us where we feel this way…

And 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're dealing with in our planning is how much to reinvest to pursue other growth initiatives in Latin America.

Yes, and that means -- Bob, I think we've said this before is, we are really focused on growth. And we don’t want to sacrifice cutting expenses in order to sacrifice growth rates that we see in 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've 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 think the long-term growth rate for the business, what the potential is?

Bob, you always ask me the toughest questions. What I would say is that we're still thinking through that. If you think about a big chunk of our business was Popular, and that the pricing is flat per year. And that that's a significant dynamic of our business. However, if you look at the deal we're doing -- I mean, Columbia is the second largest Spanish 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 American 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're 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 giving long-term guidance is not a place where we're at right now.

Great, thank you.

Thanks Bob.

Thank you. Our next question comes from the line of Sara Gubins with Bank of America Merrill Lynch. Please proceed with your question.

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 are you…

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 that we should think about as being a permanent tax, and therefore continues to impact you negatively next year?

The absorption was referencing Q4, because it's 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's supposed to be superseded by a back-tax, which may have different impacts to our company. So we're look 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 could absorb versus how much we could offset.

Okay, great. And then -- so it sounds like on the receivables from the government, that's 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's suggesting to you 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 is going to pay their bills and deal with the debt issues. This will be something that we monitor closely and are concerned about. What I would tell you is if we look at the indicators, as you repeated -- I mean, they are paying as well. They're actually paying us better than they have in the past. We are a critical vendor. We run their tax systems. So they've got to run our systems in order to collect the taxes to pay all 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 -- first of all, this is something that won't be ambiguous for long.

And I'll just add that, as I mentioned, we've seen really business as usual. We're 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.

Thank you. Our next question comes from the line of Chris Brendler with Stifel. Please proceed with your question.

Hi, thanks. Good evening, and thanks for taking my questions. This is going to be a tough question, but let's just 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 and issue-related or just macro stress or maybe a combination of both? Thanks.

It would be a bit of conjecture on our part to know exactly what's causing this 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 digits -- I'm sorry, low -- so, yes, both single digits. It's still relatively healthy in the market that we're in. And what we're trying to do on these calls is give you a sense of the latest data that we have given the debt situation. But it would be a conjecture for us to spend a lot of time trying to tell you exactly how it's going to impact the customer.

Right, there are many moving -- yes, many moving parts, Chris. And we analyze that weekly. The only other thing dynamic that is now coming in part into place is new legislation with respect doctors, and the like, as well as potential future legislation to offer electronic payments for certain merchants over a certain revenue volume. 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 a 100 basis point potential benefit, or 500 potential, how big is that opportunity?

No. Right now we don’t have a number to provide. So we're not giving any type of view on that.

Okay. And separate question, just as you're taking your pulse on M&A, I mean -- 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 may be tough. What are you seeing on the M&A front right now?

Yes, so again, I mean we're pretty excited. Processa is, again, the first deal that the company has done since going public. It's created a lot of interest. What I would say is, between that deal and between some of the talent that we've hired into the organization, we're seeing a lot of excitement in the marketplace, and 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, very active. We have stuff we're constantly looking at in the pipeline, and as demonstrated with Processa deal, some of these are very, very small. And some of the big -- our big competitors wouldn’t even have visibility to them. We feel like that there is a growing and healthy pipeline. But we won't talk about deals until, as we did on Processa, we have one to talk about.

Awesome, thanks, guys.

Thank you. [Operator Instructions] Our next question comes from the line of Tien-tsin Huang with JPMorgan. Please proceed with your question.

Hi 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 views, just given the deceleration in payment volumes, the new tax in the macro?

Yes, I do want to emphasize. The deceleration we're 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 that's sort of a tread we're seeing. But that's the key indicator we have right now. I don’t know if, Peter, you want to add anything.

No, I'd echo what Mac said. You still see buzzing activity throughout Puerto Rico, people spending money. It's just been a modest downtick from what we had experienced up until the end of Q2.

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

Look, we'd love to -- if we knew for certain we'd love to give you that type of view. What I would tell you is Seraphina opened in Puerto Rico, and it's busy all the time, you know Seraphina. So it's difficult for us to tell. And we've just seen it in one month, one or two months where we've 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 will have a more informed view.

And we're just letting you know what we did in terms of our projection for Q4. Really, that's what we're trying to share.

All right, understood. And one follow-up from me, could you give us an update in your business solutions business in 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 Banco Popular, as we ordinarily do. We are impacted by the CPI mechanism in the contract that we referenced. We're still engaged on new projects with the government, and our other corporate enterprises, that the group solutions. So there isn’t a change.

Yes, I would say why nothing really new.

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

Thank you.

Thank you. We do have a follow-up question coming from the line of Bob Napoli with William Blair. Please proceed with your [technical difficulty].

But, did you guys say what the revenue run rate is for 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 FirstBank 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 revenue is going to be, in what markets that is?

Yes -- I mean I want to be very careful because of the competitive nature of the question. And we want to give you visibility into what that means from a growth perspective. What I would say is, we didn’t in view do a good job of managing accounts. Making sure that we understood their issues, getting in front of them, cross selling them, telling us -- I mean, we simply did not have a function that did that effectively. We now have that in place, so we're getting underneath these issues. So our concern, in 2016 -- and then, as we've said on previous calls, we didn’t do a good enough job building with pipeline with meaningfully sized businesses. So I don’t want to go country by country or call specific accounts, because some of those we're in the process of trying to save, but what I would say is it'll put a damper on getting it to double-digit growth next year that's too phenomenal. Anything we sign towards the end of this year, early next year is going to take a while to migrate on to our platforms. And some of those losses, we haven't seen the impact to our numbers to date. So when we add business it'll be offset by some of those losses. So that's the key point, is just to get you sense for -- Latin America is not where I want it yet. I mean, we have a fantastic team. I hope you guy 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'd have done Processa and FirstBank within -- I've been in the job formally for six months. And it's because we have a great team here, focused on the ball in Puerto Rico. We now have that same team in Latin American, 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 -- it was at like 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 growths at a going to keep that CapEx at a high-level?

I think it's premature to predict out in the future, Bob. But the way we approach it is we want to look, and find as many growth investments as we can there to deliver solid returns, cash returns in excess of our cost to capital. We had a couple come up during the year, which we'd expect people want us to purse, which we did. And we're very happy with that. And we'll 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 beyond potentially.

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

Yes. That's our current plan, yes.

Okay, thank you.

Thanks, Bob.

Thank you.

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

Thank you everyone. As Alan mentioned, we've got a corrected version of the presentation is now available on our Web site. We apologize for the mistake, but hope you appreciate the additional -- level of information we're providing through the call to help you better understand the business that you've invested in. I want to thank 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.