EVERTEC, Inc. (EVTC) Q2 2016 Earnings Report, Transcript and Summary

Good day and welcome to the EVERTEC Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [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's 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 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 it is accessible in the IR section of our website, 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 statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements about our expectations for future performance are subject to known and unknown risks and uncertainties. EVERTEC cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statements to reflect the events that occur after this call. Please refer to the Company’s most recent Annual Report on Form 10-K filed 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. Reconciliations 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 and 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 and good afternoon 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 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 through 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 a Puerto Rico Oversight Management and Economic Stability Act or PROMESA into law on June 30. PROMESA provides a framework to address the Puerto Rican debt crisis. The US nominated federal oversight board of 7 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 the financial plans and balanced budgets are achieved with the goal of attaining stability and access to capital markets at reasonable rates. PROMESA automatically stays all litigation and other actions against Puerto Rico, if agencies and public companies to collect [ph] claims against them. The stay will remain in effect until February 15, 2017 but may be extended. The law also exempts Puerto Rico from regulation 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 inhabit the growth of the Puerto Rican economy. Between September 1 and September 15 of this year, the 8-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 report with recommended changes to existing laws. Importantly PROMESA provides that oversight board may in consultation with the governor ensure 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'm 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. Our 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 contact 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're 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 we are encouraged to see regulation that is important of electronic buy [ph] and more payments in Puerto Rico. Finally we believe there will be further opportunities with the changes in the Puerto Rico economy and the enactment of PROMESA to leverage average scale [ph] in support of the island. Turning to our Latin America results on Slide 7. Revenue growth was significant with the benefit of the Processa acquisition as well as the 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 and we expect to be able to leverage our position in Colombia 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 and customer experience. Regarding new business, I am pleased to announce that the LatAm team was able to sign a new contract in Honduras with 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 Colombia expanded this relationship with us in a competitive process. We continue to focus on other proposals in our pipeline to grow 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 the new executive team, new investment and renewed commitment to service. And to our shareholders, this new branding translates into a focus on growth. Lastly, regarding that focus on growth, our corporate development team continues to focus on the M&A opportunities and 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 and good afternoon everyone. Before I begin my comments on the quarter, I want to note that with the completion of the restatement in 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 effort. 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 months 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 ’15 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 perform has reduced but we are pleased to have won their business in a competitive process and look forward to our continued relationship. As we experienced 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 months 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 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 and it is expected to be a contributor in the third quarter. Additionally, as he 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 months period payment processing grew 4% to $55.1 million driven by the 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 drought conversion. For the six months period business solutions grew 1% to $91.9 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 will find a reconciliation over adjusted EBITDA and 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, severance and share based compensation. Total restatement cash expenditures were approximately $6 million and all in GAAP, the lender consent fee of approximately $3.5 million is required to be deferred and amortized at 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% and 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 slide. 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 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 the 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 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 and 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 reimbursement provided for in the Popular merger agreement which impacted us approximately 30 basis points. The combined impact that these reference items resulted in an adjusted EBITDA margin 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 the 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 discrete 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 reflects 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% and 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 2 pennies from $1.61 to $1.59 and 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 and this primarily reflects the impact of 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 our card network, cash collateral requirement related to our card processing business. Next, the Processa acquisition was approximately $6 million U.S. 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. And finally, year to date we've 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 our shareholders. We have approximately $104 million available for future use under the company's share repurchase program and 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 the quarter ending net debt position of approximately $632 million comprised of the 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% and our net debt to trailing twelve 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. 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 and 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] Our first question will come from George Mihalos of Cowen & Company.

Great thanks. Thanks for taking my question guys. 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 conversions getting pushed out or is there anything else that would have impacted it as well?

Hi George, this is 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.

And just kind of 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, no, George, it’s incorrect, it’s 1% and – it was 1% down for a few reasons in particular we had a difficult comparable last year, we had drought which added a bunch of revenue, we had a bit of a spike in our merchant business related to the transition to the news sales tax. And then we did have a slight deceleration in the volume that we called out here with respect to the lower average ticket and merchant mix that we experienced in the quarter.

And just last question for me as it relates to the first day of the deal with Bancolombia, any thoughts around that?

Hi George, it’s Mac. Yeah, so first, Colombia had an issue in the relationship for the past probably three years, so it wasn’t up for surprise for us to see them extend that merchant acquiring – into merchant acquiring. I actually met with the Bancolombia guys when I was there maybe six weeks ago. And it was obvious they were entertaining this process well when we bought Processa. So we weren't surprised by that. I do think long term what this means for the market Colombia is that banks are making decisions to go outside of the existing model of processors that are in that country and they're looking for different alternatives. So I think long term this provides an opportunity for EVERTEC and Processa as banks look for different solutions. But the deal with Bancolombia was sort of in formation well before we got our Processa deal and we had a relevant presence in the country.

Our next question will come from Jim Schneider of Goldman Sachs.

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

This is Mac. I'll address it from a sort of qualitative perspective and then I’ll let Peter answer from a numbers perspective. What I would say is as we said on previous calls the real fiscal issue in Puerto Rico has been the government. We are hopeful now that PROMESA provides a way for the government to work through the debt issue. And in the past we haven’t seen a significant impact [ph] because again this has been a government debt issue. As PROMESA comes in and has to make some tough decisions and we look at our austerity measures to cut back on government spending, it’s unclear to us how that will impact the economy. But right now we haven't seen it in the retail spend.

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

That's helpful. And 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 backup stabilizing. Can you maybe talk about some of the investment initiatives you're thinking about as you start to get a little bit more leeway on the OpEx side and kind of be rank order 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’re spending a bit more CapEx. We're focused very much on Latin America and the product set that we have there that’s where the bulk of our investment focus is, is going in terms of investment. With respect to Puerto Rico, we're looking to be opportunistic as we've discussed before, looking at opportunities as things are challenged on the island that we can take advantage of our scale. And to the extent we see something that is attractive in that capacity that will warrant some investment for us. Other than that it's just sort of the maintenance capital that we're continuously spending and really those are the areas that -- have our focus from an investment perspective.

Our next question will come from Vasu Govil of Morgan Stanley.

Hi thanks for taking my question. First, could you help us break down the revenue contribution from Processa [indiscernible] the FirstBank deal during the quarter?

Yes, I will provide just generally what the contributions are. Together they represent the bulk of our growth. FirstBank’s 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 to merchant segment. We had a shift in Oriental and then the shift as we described before in the pricing and sales mix that we have 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 lift that we did last quarter it’s slightly better now, as I indicated. And we're very happy with the performance thus far with 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’re very pleased with the performance of both of those portfolios and businesses.

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

My view is 2017 is premature to talk about, we’ve got to see what PROMESA is going to focus on and what – how that will impact Puerto Rico on our view on that. We’ve also got to take a look at as we talked about LATAM over performed in the quarter and part of that is because some of those exists of accounts will occur in 2017. So it’s premature to really give you the sort of visibility in 2017. It would be disingenuous.

I agree with Mac. We are focused on our planning obviously and looking at all aspects of Latin America, including the pipeline and so forth and all of that is going to ultimately come out in our guidance.

Our next question will come from Bob Napoli with William Blair. We’ll move to the next question. Our next question will come from Bryan Keane of Deutsche Bank.

This is Hisa Bagra [ph] calling on behalf of Bryan Keane. I had a question around the Oriental Bank. You've mentioned that they wanted to get control over their acquiring business. I was just wondering if you can provide some more clarity on what drove that decision. And just a follow up on that would be how should be think about, like you mentioned, that shifted the revenue from acquiring to payment processing. But did you also get a one time benefit in the quarter and 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 strategy. What I would say is they wanted to get closer to the merchant relationship and actually own the relationship more intensely. And what I'm very proud is that this demonstrates that EVERTEC, we're not just a pure play merchant acquirer and we’re able to provide whatever solution the customer so desires, so the fact that they changed their model, we were able to adapt. It also demonstrates as we constantly said this is a very competitive environment, and I can tell you we're competing with some of the biggest names in the industry that you would know and we still won that business and we're very pleased to keep them as a customer. I don't know Peter if you want to add anything on that.

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

And 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, what could that affect your government revenues and how we should think about it? And then the tailwinds that you talked about from greater electronic payments as well as more projects coming on, would that be more a 2017 event?

So when we talk about the government austerity, I think that's more related to – get the large employer in the island, so I think from an employment perspective, it’s less related to the technology investments because our thesis would be they’re going to have new technology to automate the tax systems to better automate the current government. Our focus during this period and I cannot predict what the impact would be because it’s sort of outside of our territories. 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 program – they do automate payments, and they are commissioning that with legislation today. So a part of our strategy – or the first part would be helping the government into that effort. I think we're very well positioned to do that, because often we’re the incumbent and when we do automate these programs, we create jobs in Puerto Rico and 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 drought and other guys if we continue to track we will benefit from that. So during this period over the next coming years we think we will be a beneficiary of that. And then the third is we continue to focus on putting more payments, transactions through our systems. We talked earlier on the call about the legislation that was passed that merchants over 50,000, now have to have a formal electronic payment as an option. So those are types of programs that we believe will put more payment transactions through EVERTEC. So the way we think about is what’s going to be your strategy during this period, it’s going to be focus on all those three areas. And we can't speculate exactly what PROMESA is 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 and learn.

The only thing I would add to Mac’s comment there would be that with respect to majority of our significant contracts we have renewed them. They are subject to fiscal funding process which are natural and they occur in most government and certainly things that we deal with for years here at EVERTEC but significant contracts have been renewed.

Our next question will come from Sara Gubins of Bank of America Merrill Lynch.

Good afternoon. Should the hardware benefits that you've got at business solutions continue or was there anything one off in nature around that?

Hi Sara, just as a general goal of ours where we will take hardware opportunities that are opportunistic and don't really seek them -- this one was really I would say more of a one off situation in 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. And so we accommodated that and that’s what that transaction represents.

And 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.

We've been very focused across all of the geographies on better managing the accounts that we have and the relationships that we have. And the bank in Latin American we weren’t effective with that in the past is why we put a team in place. So I would say you can tell with Oriental, you can tell with Davivienda, we’re doing a much better job in managing these relationships and renewing them.

Do you still have a way to go on that or have you reached service levels that you are now happy with?

I would say Puerto Rico we are at very good levels, in LATAM we're continuing to -- the feedback I’ve got from the clients is they’re very happy with the account management team. But I would say we’re still not satisfied until I see the wins to demonstrate that they're actually creating results.

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

Yeah, we do have moving pieces I think with respect to just giving precision on segment guys we will not do that. I think we described what's going on in the merchant area with the puts and takes around Oriental in particular. The other thing I will remind you of is that we have the FirstBank which has driven the most of our growth that anniversaries November 1. So you can put those two together to derive that and then with respect to the payments segment, obviously we’re benefitting from Processa and that has been a full quarter that, we do have the government contract that is coming on. And I want to call that out that's going into the business solutions segment as well. So those are more significant moving parts, hopefully that’s helpful, Sara.

Our next question will come from John Davis of Stifel.

Good afternoon. Peter maybe one quick one. Just as we think about guidance in the second half of this year. Do you kind of expect a little bit of acceleration of growth in Puerto Rico from the 1% and maybe a little bit of decel from the low 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. And then as you indicate 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.

And then Mac, does First Data’s entry into secondary LATAM markets have any impact on your strategy or M&A plans or maybe just probably talk about the competitive landscape in the smaller Latin American markets?

Sorry you said First Data’s entry.

Yes.

So First Data is already in the market, so we compete with them every day in Central America and they've been in Colombia for quite some time, particularly in the issuing business. So really it doesn’t change how we operate and I don’t think it changes the opportunity for us. And I mentioned earlier I think really what you're going to find in some of these markets Colombia, Mexico, and they're really changing as the banks are looking for alternatives beyond what they have in the marketplace today. Right now they're primarily doing business with, everybody doing business with the same processor and they're looking for opportunities to differentiate themselves. So I think Bancolombia, it’s a great bank. I would love to have that business. But generally what I would to tell you is there are other opportunities there. And I think this is a sign of good things to come versus an issue.

And then finally I'm assuming no, but any updated comments on the DOJ investigation, any idea about timing?

No, I mean, so our position remains the same and we have no reason to believe otherwise. It’s a very competitive market and we compete for business every day, Oriental is a great example. We don't have a timeline from the government but I think it will be [indiscernible].

Our next question will come from Tien-tsin Huang of JPMorgan.

Just Mac, on the Oriental deal -- I'm wondering is that – can we interpret that as all to be a secular change in terms of banks wanting to do more direct acquiring? I guess what I'm trying to get at is could that open up the opportunity to maybe service consortium down the road, if they want to break up, it’d be more direct acquiring and consortium. I am trying to read between the lines what well that could mean.

So what I would say is Puerto Rico is a more mature market like the U.S. than some of the other markets in Latin America. So I don't think it's indicative necessarily of anything going on in LATAM. I would never read – what I would say is Oriental is a great bank, that is really trying to compete through differentiating and getting close to their customers because they don't -- I mean that’s sort of their focus. I don't think it implies anything else about the other banks here because the FirstBank deal is a new deal, we're still another eight or nine years on that. So I don't think it implies anything about additional changes to this market, and like I said a couple on the call, I think what it does indicate is they’re very very pleased with the services we provide and they still want us to be their back office. So I don't think it indicates anything about how the market and any other changes in this market.

And just under in terms of that change to a processing deal only, is there any offset in costs that we can consider given the change?

Yeah we sustained roughly the same margin but obviously we're doing less work. So there's less profit that we make and as we called out -- there's a revenue impact, it’s about 1% on the company.

Just I guess, I will jump off the line but I always ask that question, just on the Banco Popular and sort of their IT spending given this environment, any change there in terms of visibility and predictability of that business?

What I would say is I think with all the changes that are going on in Puerto Rico there are opportunities for Banco Popular to do more work for the government as well on some of the banking services side. And again if some banks choose to exit or 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 is recurring, and it is predictable but as far as the incremental I'm optimistic that again as there are changes in Puerto Rico they we will be the beneficiary of these changes. And subsequently we will be as well.

As I indicated last call, we have a very active schedule work that we're performing with them collaboratively and that’s still unchanged.

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

Thank you. Appreciate that. Just on – not sure what answer you give me but I don't think it's -- I mean 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, I mean 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 just give some color on organic and inorganic pipeline and what types of things are out there could be helpful?

So what I would say is on the M&A front, the inorganic side. We're very pleased that we're constantly looking at opportunities and they exist in the region. And I think we have a unique visibility into that pipeline. But a pipeline doesn’t equal deals. So we won’t really talk about and get you excited about something until we have something to get excited about. But there are opportunities in the regions, is probably the best way to put it. And several of those opportunities visible to us. On the organic side I would say the underlying trends in Latin America as far as the rise in the middle class and the adoption of electronic payments is very healthy. And once we get past the issue of these migrating accounts, and they are able to add new business, I think we'll get the organic growth where we need it to be. What's happening as we’re over performing this year because some of the migrations we anticipated are getting pushed out of that, so that’s the phenomenon. But I think I'm very pleased with our region within which we operate. I think there are opportunities both organically and inorganically.

And the migrating accounts, any chance that they won't migrate or is that just timing?

I am smiling because you’re not gone until they are gone, and that’s what I tell my team. But these are accounts that have made a strong indication that they contemplated for 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're going to work very very hard at retaining the best that we can. But right now I mean given –we did have the focus in a place, we will see some migration. But we're continuing to translate what we can and if we say something significant, we’ll 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?

The team is set, in that the last thing I wanted to do it was get someone to help manage the products and marketing function and that was sort of – if I looked at the strategic hires that I need to make, it was someone to run LATAM, the team underneath that, the CFO, and there is product and marketing. So as far as strategic hires, to really help us on our strategic initiatives, we are finished. End of Q&A

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’re pleased with the results and I hope in the coming months, I hope to speak with each of you as we travel to different locations and we look forward to keeping updated on our results. Thank you.

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