Good afternoon, everyone, and welcome to EVERTEC’s Fourth Quarter and Full Year 2017 Earnings Conference Call. All participants will be in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Kay Sharpton, Vice President of Investor Relations. Ma'am you may begin.

Thank you, and good afternoon. With me today are Mac Schuessler, our President and Chief Executive Officer; and Peter Smith, our Chief Financial Officer. A replay of this call will be available until Wednesday, February 28. Access information for the replay is listed in today's financial release, which is available on our website under the Investor Relations section of evertecinc.com. For those listening to the replay, this call was held on February 21. Please note, there is a presentation that accompanies this conference call, and it is accessible in the Investor Relations section of our website. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements about our expectations for future our 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, adjusted earnings per common share. Reconciliation to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides. I'll now hand the call over to Mac.

Thanks, Kay, and good afternoon, everyone. Thank you for joining us on today's call. This quarter, we overcame numerous challenges and made solid progress existing on customers and restoring our payments businesses in Puerto Rico. Transaction volumes and spending have bounced back faster than our product expectations but continue to be erratic in the post Maria period. We also continue to grow in Latin America with the benefit of PayGroup as well as modest growth in our existing business. I'll cover some of the year's highlights, provide you with an update on recent developments and then comment on our priorities for 2018. Beginning on Slide 4, we have a summary of our 2017 results. Total revenue was approximately $407 million an increase of 5% compared to 2016, which exceeded the top end of our most recent guidance by approximately $6 million. We generated adjusted earnings per share of $1.47. Despite the hurricane, we generated significant operating cash flow of almost $146 million. We returned approximately $29 million to our shareholders this year through almost $8 million of stock buybacks and $22 million in dividends. As the conditions in Puerto Rico have yet to stabilize, the Board shows to continue to sustain the dividend at this time. Now I'd like to give you some more specific updates for our businesses in Slide 5. First, we're pleased with the solid progress on revenues in this quarter, surpassing our expectations, driven primarily by elevated post-hurricane spending. Sales volume recovered to approximately 95% of last year's levels by the end of the quarter and almost 80% on average for the quarter. While we're encouraged by increase off the lows of September and October, we believe the consumers benefited from the moratorium on mortgage and consumer loan payments that was offered by the major banks…

Thank you, Mac and good afternoon, everyone. I'll begin with a review of our consolidated fourth quarter and full year 2017 results, provide some information on their new segment reporting structure and then review each segment in greater detail. Turning to Slide 9, total revenue for the fourth quarter of 2017 was $99.6 million down 2% compared to $101.9 million in the prior year and reflects an estimated $8 million impact from hurricanes, which was better than we projected exiting Q3 due to higher than transaction and sales volumes in Puerto Rico. During the quarter, consumer spending was erratic and this trend has continued into the first quarter of 2018 as Mac referenced. Adjusted EBITDA for the quarter was $37 million, a decrease of 22% from $47.6 million in the prior year. Adjusted EBITDA margin was 37.2% and this represents a 950-basis point decline in our adjusted EBITDA margin compared to the prior year. The decline year-over-year is primarily attributable to the impact of lost high-margin volumes due to the hurricanes and we estimate this contributed approximately 600 basis points of margin impact. The fourth quarter results also include a $5 million impairment charge on a project where we experienced customer delays driven by the hurricane and related cost overruns with a third-party vendor. We were also negatively impacted by foreign currency of approximately 40 basis points and by increased information, security and compliance of approximately 30 basis points as compared to the prior year. Adjusted net income in the quarter was $17.7 million, a decrease of 43% as compared to the prior year and $0.24 on a per-share basis, a decrease of 44%. The decrease primarily reflects lower adjusted EBITDA as well as higher interest and depreciation expense as compared to last year. Our full year non-GAAP tax rate…

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator instructions] And our first question today comes from Rob Napoli from William Blair. Please go ahead with your question.

Thank you. I appreciate the segment information. Lot of stuff that you guys hammered through there. I guess maybe a question on the Payment Services Latin America segment, is the -- what type of organic growth, it sound like you had already some cross-selling success, I don't know if you can talk about what do you think synergies, cross-sell synergies could be from that business? And what type of growth rate do you expect for that business organically, understanding you have a couple customers de-converting, but as you get through that, what type of revenue growth would you expect to have for that group as you say going to '19 and 2019 and 2020.

Yeah, so Rob, this is Mac, I'll answer from the cross-sell opportunity and the product set. As I said earlier, the products that we've inherited as part of the PayGroup we think are some of the best in the region and we have already had some early wins in Colombia and Dominican Republic as well. We continue to have a pretty healthy pipeline of existing pipeline that the PayGroup had and also cross-sell pipeline now that we've mentioned with our customer base. Peter, I don't know if you want to…

Yeah, hi Bob. So, the organic growth was approximately 6% in the quarter that was affected by couple million dollars of attrition over the year, which was approximately $750,000 in the quarter. And then secondly, after we get through the attrition impacts, which the majority will hit in '18 we anticipate growing in the low double-digit area.

Okay. And then what do you think EBITDA margin should be for that segment over the medium term?

Well, as we plan for next year, we have multiple things going on, specifically the attrition, which is we've estimated $5 million to $8 million of high-margin revenue and then we continue to integrate PayGroup. As we announced, we had some wins there. We also had some other opportunities on the organic side and we hope to continue the margin performance that we exited Q4, which was 22% and we're planning towards a 20% type margin for the full year.

And then Bob, the strategy has been to expand our footprint into these exciting markets and then invest in the products to make sure they're highly competitive and we can be successful in these cross-sells and over time, we have to expand the margins.

And then, last question. I'll turn it over. On the immigration side, your Banco Popular and some of the others have suggested that the reports of the level of immigration have been grossly exaggerated and I just know wasn’t sure you were agreeing with that. And then just as my second part of that last question, EBITDA margins in the past were in the mid-to-high 40s to 50%. As we're looking at 2019 and 20, and understanding you're investing heavily in non-Puerto Rico can those EBITDA margins get maybe back to the mid-40s?

Yes, so Bob I'll take the immigration question. I will say right now, it's been ambiguous because people -- some people are still here working. Their family have left as well the schools they may come back or that person may decide to migrate in the summer. I don't think there is any data right now that is highly reliable because it's uncharted territories. So as this point we really can't give you a forecast on immigration trends.

That's right. The data is all over. We also have on the island a lot of relief workers, which are contributing to our payments volumes. So that fuels another variable that makes it difficult to really understand the impact of the immigration. I will note that our overall payment volume that we can track, which is a complex item to track, we estimate that we have between 1% and 2% of our volume from cardholders that is in the United States right now. So that's one metric that we're following to see how that changes over time. With respect to the margin that as we move forward, obviously it depends largely upon the future in Puerto Rico. We do anticipated to be in this lower margin in the Latin America segment as we continue to build out on our strategy, which will require some investment in each country and then as we had experienced as we develop that after we've posted that investment, we will continue to grow margin within that country, but there is going to be initial investment as we move report in each particular country.

Thank you.

Thanks Bob.

Our next question comes from George Mihalos from Cowen. Please go ahead with your question.

Great. Good afternoon, guys and encouraging commentary. Just wanted to start off on the merchant acquiring segment, where I think you highlighted the elevated average ticket. Curious if you're seeing that elevated ticket continue in the first quarter? And then I want to make sure I understand that you talked about sort of a positive spread coming from mix or I guess more SMB customers. Is that surprising given that I certainly would have thought more the volume would've been more towards larger retailers and maybe how you're thinking about that first half over back half?

Yeah sure. Hi George, it's Peter. So personally, what we called out on the prepared remarks, is that our spread increased 15% and that was coming off of where we were in the beginning of the recovery from the hurricane and that was greater than what we had projected at that time. However, it's important to note that we're still behind the prior levels. So, we still have a mix issue as compared to the past. As we looked at the spending as going on just to give you some perspective from day-to-day we see double-digit swings in transactions and payment volume. We're obviously very encouraged with the overall spend and the overall transactions, but it's not something that's comparable to what we experienced before the hurricane and then with respect to spread, right now we're seeing an impact in high single-digits with respect to that as well unfavorably and then with respect to the average ticket, that too is approximately the same in a favorable amount. So, we're seeing elevated spending almost across every category, some of which is driven by higher gas prices, but just generally, we're seeing a higher spend per ticket.

Okay. That's helpful. And then just thinking about the roll-off of some of that higher margin revenue in the payment services side, should we be thinking about spread out evenly throughout the year or will that be more backend loaded based on the visibility that you have today?

I'd say it's predominantly from Q2 on. So, it's smaller in the first quarter and then it gradually builds throughout the year.

Okay. Great. Thanks guys.

Thanks George.

Our next question comes from Vasu Govil from Morgan Stanley. Please go ahead with your question.

Hi. Thanks for taking my question and congratulations I think things are progressing better than we'd anticipate. I think you guys said that the payment trends are quite erratic, but could you still try to give us the trends on a monthly basis, how they progress and where they are in January?

Hi Vasu. So, as we indicated from our last call, we're projecting to get to approximately an 80% level. In fact, we reached 95%. So that was significantly better. That trend has sustained into January and so far into February between essentially 95% and 100% over prior level. Some of that we believe as we indicated in our script is related to the moratorium where there's more disposable income in the pockets of consumers and we're monitoring that. We're obviously encouraged by that, but cautious as look forward.

Got it. And just continuing on the questions about the spread impact and the ticket sizes, I don't know if you have these numbers handy, but could you give us some sense on what the historic processing mix has been between small and large merchants and where is compared to that right now?

I think it's a challenging statistic to give you. It's definitely predominantly more larger merchants and we have some emerging categories such as tax payments that are different previously, but just given the elevated spend that's most across all our categories, it has to be difficult to give you precise amounts, but we're absolutely seeing a higher portion of large merchants.

Understood. And just last one, the tax reform I believe, had some provisions for a tariff to be applied on products manufactured by foreign subsidiaries including Puerto Rico, which I think the thought was that, that could impact some prime manufacturing in Puerto Rico. How are you guys thinking about that? Is that a potential risk? Is that still one of the factors that you are considering in how you formulated guidance?

Well, it's clearly not a direct risk to us because we're not directly affected as a company. However, to the extent those businesses changed their production levels and potentially re-domicile back to the United States, that could impact us and the overall economy in Puerto Rico. As they gets premature to make any estimates based on that and we're also anxious to see what countermeasures the Puerto Rican Government produces in their upcoming tax reform.

Thank you very much.

Our next question comes from Bryan Keane from Deutsche Bank. Please go ahead with your question.

Hi guys, encouraging signs here. Just want to ask on disaster relief stimulus and insurance fund stimulus, has that kicked in yet or is that more you think later in 2018?

Yeah, so this is Mac. I think there is more to come. I don't think we've seen yearly the extent of the insurance payments nor the relief funding. So we have seen some impact, but I think that's going to play out throughout the year and even into '19.

Okay. And then Peter, just was hoping you could give us maybe some cadence by quarter of revenue and earnings. It sounds like maybe second quarter will be the low for revenue and earnings and then maybe the back half of the year will be stronger that the first half. Just thinking about how to model this out?

Yeah, we're looking at it at just a steady upward trend, almost a slow ascent, if you will, from Q1 onward to the end of the fourth quarter.

Okay. But the attrition from the clients run off, won't happen until the second quarter of this year.

That's right and that should per our estimates be offset by some of the payments in Puerto Rico as Puerto Rico improves.

Okay. All right. That's all I had. Thanks guys.

Thank you.

Our next question comes from Jim Schneider from Goldman Sachs. Please go ahead with your question.

Good afternoon. Thanks for taking my question. I was wondering if you can maybe just comment a little bit on the Solutions Business and again I know some of these contracts are a little bit hard to have visibility on, but maybe talk about the cadence of some business in terms of the push out that you saw and then importantly what you see in terms of any contract renewal that are coming up throughout the course of '2018?

Yeah, hi Jim. So just first and foremost in the Business Solutions, it predominantly reflect our Master Service Agreement with Banco Popular and so we see and predict some modest growth with respect to that arrangement. And then what we're also experiencing is a benefit from our hurricane response where we are picking up business in business continuity services, where enterprises on the island are seeking our support in lieu of our performance during the hurricane which is obviously good.

Very good. And then just as a quick follow-up, could you maybe just address specifically what you're seeing in terms of the ATM volumes specifically and maybe talk about how much of that is being driven in terms of the recovery by A, that's arriving on the island versus the organic spend by cardholders who are residents?

I would say similar to pretty much all the tickets that we experienced on the spending side. You're seeing more or less the same amount of transaction, but higher money withdrawal. So that would be what we saw -- there is also a lot of relief workers on the island. As we've discussed before, there's still a strong cash presence and preference among merchants and so forth as well.

Makes sense. Thank you.

[Operator instructions] Our next question comes from Tien-Tsin Huang from JPMorgan. Please go ahead with your question.

Thanks. Just wanted to -- I guess I'll ask on the upside in the fourth quarter revenue, is that all just better hurricane recover or did some of the cross sell and other things contribute as well?

The majority that certainly was the hurricane and then we executed some other projects through multiple segments and that contributed, but the significant majority of that was the hurricane.

Got it. And then just to clarify, sorry go ahead.

I was saying just as compared to our estimates Tien-Tsin.

Understood. Understood. I just want to make sure I didn't miss anything. And then to clarify the $5 million impairment, was that contemplated in your prior guide, because obviously you offset that with the revenue and flow through would have much greater and that was tricky with impairments and when recognize or potentially see it, but just trying to understand how that fits with everything else?

No, would be the answer. We generally don't plan for this. As we indicated in our remarks, the hurricane impacted our customer, which caused some delays and that cascaded to where we ended up experienced some overruns with our critical third-party vendor. So that was what transpired.

Right. But was that contemplated to the potential risk to your guidance previously?

No, if we were aware of that, we would have reported that earlier.

Got you. Just wanted to make sure just that was the case. And then just lastly, just I know you get a lot of questions on the client de-conversions, but once put through '18, is there more potentially to come beyond what you called out for '18?

There is a little tail in '19 of approximately $3 million to $4 million that we currently estimate. So, to the extent these pushouts from '18 which by our latest estimates, we don't believe it will because the projects to de-converts have commenced that there would still be a year-over-year effect in 2019.

Okay. Great. Thanks for all that. Appreciate it.

[Operator instructions] And ladies and gentlemen at this time, I am showing no additional questions. I'd like to turn the conference call back over to Mac Schuessler, President and Chief Executive Officer.

Again, thanks everyone for joining the call and do want to reiterate thanks to all the employees at EVERTEC for making so much progress through a very challenging year and everyone have a good night.

Ladies and gentlemen, that does conclude today's conference. We do thank you for attending. You may now disconnect your lines.