EVERTEC, Inc. (EVTC) Q4 2017 Earnings Report, Transcript and Summary

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 in Puerto Rico as well as lower utility expenses due to the power and water outages. Additionally, we observed increased hurricane-related large ticket spending, which we believe was partially supported by relief and reconstruction efforts as well as insurance payments. While we're encouraged by the aggregate spending levels in Q4, the underlying spending patterns remain unpredictable and this is likely to continue in the near term. We also are uncertain as to the impact of immigration. At this time, it remains unclear as to how many Puerto Ricans living off the island will return when the power is fully restored. Our restoration has been slow and challenging, only reaching approximately 65% of the island residents at the end of the quarter and the situation is further complicated by the Title III process and the weak financial condition of wrap up. Approximately 15% of our merchants are still in our processing transactions compared to normal levels. How many will be restored and when they will be restored is still clear. We believe that federal relief funds, what's ultimately received will provide spending stimulus to the economy and benefit EVERTEC. Shifting to our earnings in this quarter, we were negatively impacted by the hurricanes and unfortunately results were also impacted by an impairment charge related to project delays and overruns with a third-party vendor in part caused by the hurricane. While disappointing, we are committed to satisfying our client and anticipate the completion of this multiyear project in 2018. In Latin America, revenue growth was significant and benefited from the PayGroup acquisition. On a comparable basis, excluding PayGroup, we generated mid-single-digit revenue growth despite the impact of some client migrations. I am pleased to announce four wins in Latin America that were completed recently. First, we renewed our largest customer outside of Puerto Rico, Banco do Costa Rica. This customer has been with us for almost 10 years and we again won this through our public bid process. Second, we expanded our business in Central America with one of the world's largest retailers. These two specific wins reflect the benefit of our customer service initiatives over the past three years. Third, we achieved our first cross-sell of our PayGroup product to one of our Colombian customers. This will be one of our first processing client as we build our payment processing capabilities, leveraging PayGroup assets. Fourth, we completed our cross-sell of multiple PayGroup solutions to one of the accounts that is migrating off of other EVERTEC products. Achieving these two early wins demonstrate the positive benefit of the PayGroup acquisition. Another notable recent event was that EVERTEC received a certification as essential Costa Rica, a distinction that is awarded to companies that demonstrate excellence, sustainability, social progress and innovation. We are proud of our employees in Costa Rica and believe this award further supports our reputation among clients, suppliers and partners. Lastly as a step in the integration of PayGroup, we completed a reorganization in the quarter. We will now be reporting our Latin American payments business separately from our Puerto Rico payments business. Rodrigo del Castillo, formerly Head of PayGroup will lead Latin America. We believe that this organization and reporting structure will allow us to operate more effectively and provide for better decision-making. Peter will provide additional details on the segment reporting. Reflecting on 2017 and our accomplishments, Slide 6 is a summary of the areas I'd like to comment on. First, we've demonstrated a strong commitment to our customers, reserves and innovation. Our clients in Puerto Rico witnessed our capabilities and commitment to their success despite incredible challenges. We believe no one outside of Puerto Rico nor on the island was able to achieve our level of responsiveness and client service and I am proud of my colleagues here in Puerto Rico. Second, we were able to further enhance our position as an innovator with our introduction of ATH Movil business, which is supported by the growing acceptance of ATH Movil, now with over one million users. We have over 3,000 businesses now using the ATH Movil business application. Third, in Latin America, with the full impact of 2017 PayGroup acquisition, our revenue in 2018 is anticipate to approximately double from where we were at the end of 2015. We now have significantly more competitive products and entered some of the most interesting markets and have a deeper bench of talent in the region. Lastly, I am proud of our service in the communities where we operate. EVERTEC employees contributed thousands of hours of work for those in need. It was truly a time when our values were put into action. Looking ahead to 2018 on Slide 7, we will continue to support the rebuilding of Puerto Rico. It will continue to be our top priority to get more merchants back in business. We will also focus on growing the acceptance of our ATH Movil business solution. Additionally, we're staying ready to address opportunities to help the Puerto Rican government with our efforts to streamline their operations. In Latin America, we will continue our focus on service improvements, build on our product offerings and leverage our client base with cross-selling opportunities. Lastly, we will focus on delivering shareholder value through our capable deployment of capital. With that, I will now turn the call over to Peter.

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 was 12.3% and our rate in Q4 was higher than anticipated due to higher taxes in the LATAM region and a higher than anticipated proportion of Puerto Rico taxable income outside our preferential tax decree. For the full year, total revenue was $407.1 million and was up 5% year-over-year. Adjusted EBITDA was $178 million, a decrease of 5% with an adjusted EBITDA margin of 43.7% down 450 basis points as compared to prior year. Adjusted net income was $107.1 million down 14% and adjusted earnings per common share was a $1.47 down approximately 12% year-over-year. Before I discuss the results of our segments, I wanted to provide some overall background on our segment reporting changes. We've expanded our segment reporting and will now provide reporting on four operating segments as well as provide information on corporate and other expenses, which also includes intersegment eliminations. As compared to our prior segments, our most notable change is that we have separated our payment processing segment into two segments, Payment Services, Puerto Rico and the Caribbean and Payment Services Latin America. In our slides and release, we have provided the revenue and adjusted EBITDA performance metrics on each segment. You will also find a reconciliation of our non-GAAP measures to GAAP results in the release and the appendix of this presentation. Additionally, for reference, we have provided a supplemental schedule included with the 8K filing of the earnings release, which recaps our historical results in the News segment for the full year 2015 through 2017 as well as the quarterly results for 2016 and 2017. Moving on to Slide 11, I'll now cover our segment results starting merchant acquiring. In the fourth quarter, merchant acquiring net revenue decreased 21% year-over-year to approximately $18.2 million. The revenue decline was due to reduced volumes related to the hurricanes. As compared to our Q3 estimates, we experienced higher than anticipated sales volume, which grew progressively over the quarter to levels just below the prior year in December. Consumer spending was erratic and their average ticket was elevated as consumers and businesses spend money recovering from the hurricanes. Our merchant mix and net revenue spread also improved throughout the quarter as smaller merchants reopened for business. To put this into perspective, our average net revenue percentage spread improved approximately 15% from October to December, as electricity coverage increased across the island. Notwithstanding, our percentage still remains considerably lower than last year, reflecting an unfavorable merchant mix. As of the end of January, approximately 15% of our merchants still have not processed a transaction since Maria. At this time, it remains unclear whether or when these merchants will restart their businesses, but we are proactively engaged in assisting them where possible. Adjusted EBITDA for the segment was $7.8 million and adjusted EBITDA margin was 42.7%, down approximately 80 basis points as compared to last year, primarily as a result of the reduced revenue related to the hurricane. For the full-year, merchant acquiring was down approximately 6% year-over-year at $85.8 million reflecting the year-over-year impact of the mid-2016 customer contract change as well the impact of the hurricanes in the second half of the year. Adjusted EBITDA for the merchant segment for the full year was $37.5 million down 10% and adjusted EBITDA margin was 43.7% down 190 basis points as compared to last year. On Slide 12 are the results from the Payment Services Puerto Rico and the Caribbean segments. Revenue in the fourth quarter in the segment was $22.9 million down approximately 11% as compared to last year, primarily due to the hurricane impact. Our revenue is better than we anticipated as volumes grew beyond our Q3 estimates. Puerto Rico transaction volumes in the quarter average 75% of the prior year levels, growing from less than 50% in October to 95% in December. This average has sustained into Q1, however on a day-to-day basis, our volumes have been erratic. Adjusted EBITDA for this segment was $8.1 million down 50% and adjusted EBITDA margin was 35.6%. Adjusted EBITDA was impacted by reduced revenue related to the hurricane as well as the impairment charge that I mentioned earlier. For the full-year, this segment grew 2% to $101.7 million driven by the merchant customer contract change that impacted us in the first half of 2017. Adjusted EBITDA for the full year was $58.5 million down 7% and adjusted EBITDA margin was 57.6%, although down 570 basis points as compared to last year, primarily due to the hurricane and the impairment charge. On Slide 13, you'll find the results for our Payment Services Latin America segment. Revenue in the fourth quarter in this segment was $19.3 million up approximately 55% as compared to last year, primarily driven by our acquisition of PayGroup, which contributed approximately $6 million. Adjusted EBITDA for the segment was $4.3 million and adjusted EBITDA margin was 22.1% down 610 basis points as compared to last year, primarily due to the lower margin contribution from PayGroup and the impacts of customer attrition. For the full-year, this segment grew 33% to $62.7 million driven primarily by the PayGroup acquisition in July. Adjusted EBITDA for the full year was $17.6 million and adjusted EBITDA margin was 28% down 460 basis points as compared to last year. Moving to Slide 14, Business Solutions revenue in the fourth quarter decreased 7% to $46.1 million. We benefited from the CPI increase on the Banco Popular MSA, which was offset by reduced professional service revenue due to hurricane related project delays. As a reminder, we completed multiple large projects in the prior year quarter, which contributed to the year-over-year variance. Adjusted EBITDA for the segment was $21.4 million and adjusted EBITDA margin was 46.4% down 230 basis points as compared to last year. For the year, Business Solutions grew 3% to $189 1 million, reflecting the growth and impacts of these same drivers. Full-year adjusted EBITDA for this segment was $86.8 million down 3% and adjusted EBITDA margin was 45.9% down 250 basis points year-over-year. Moving to Slide 15, you'll see a summary of our corporate expense. Our fourth quarter corporate and other expense was $4.6 million, a year-over-year reduction of 28.5%. The decline primarily reflects reduced incentive compensation and professional fees. For the full year, corporate and other expense was $22.4 million up 3% over the prior year. Moving on to our year-to-date cash flow and review on Slide 16, net cash provided by operating activities was approximately $146 million or a $22 million decrease as compared to the prior year. We had an approximately 1.8 increase in our restricted cash, our acquisition of PayGroup was for approximately $42.8 million, capital expenditures were approximately $33.4 million. Next, we paid approximately $20 million in principal debt payments and reduced approximately $20 million in short-term and other borrowings resulting in a total net debt decrease of approximately $40 million. And finally, we have paid cash dividends to stockholders of approximately $22 million and repurchased approximately 8 million of common stock for a total of approximately $29 million, returned to our shareholders for the year. We have approximately $72 million available for future use under the company's share repurchase program as well. Our ending cash balance as of December 31, was $50 million. Moving on to Slide 17. you'll find a summary of our debt as of December 31, 2017. Our quarter ending net debt position was approximately $574 million comprised of the $50 million of unrestricted cash and approximately $625 million of total short-term borrowings and long-term debt. Our weighted average interest rate was approximate 4%. Our net debt to trailing 12-month adjusted EBITDA was 3.3 times reflecting the terms of our credit agreement, which limits the cash applied to the net debt calculation to $25 million. As of December 31, total liquidity, which excludes restricted cash and includes available borrowing capacity under our existing revolver was $134 million. As a reminder, we have a $27 million principle payment due in April to retire our 2018 term loan A. We're planning to retire this obligation with cash on hand in our revolver which reduces from $100 million to $65 million in April as well. We made significant progress this year on our government receivable. Our government receivable at December 31 was approximately $11 million which is down approximately $7 million from the balance at the end of 2016. Before I discuss our 2018 guidance details, it's important to note that a high level we are encouraged by the improved volumes and spending activity in Puerto Rico but remain cautious due to all the uncertainties we face. Notwithstanding, these uncertainties, we remain committed to sharing our estimates and assumptions, updating them at the year progresses as appropriate when we have more clarity. Moving to Slide 18, I'll now provide you with our 2018 guidance. We expect revenue to be in the range of $411 million to $425 million, representing growth of 1% to 5%. Our adjusted earnings per share outlook of $1.25 to $1.41 represents a range of negative 15% to negative 4% as compared to the adjusted earnings per share in $2017 of $1.47. On a GAAP basis, earnings per share is anticipated to be between $0.60 and $0.76. I will now highlight some of the key underlying uncertainties that we are faced with and how we've analyzed and planned for them. These key uncertainties are the following. The impacts and timing of power restoration, the winding down of the bank moratorium stimulus, mainland immigration, fed relief funding and insurance proceeds, government and fiscal plan and budget initiatives. With respect to power restoration, we believe we will have a clear understanding of our projected sustained transactions volumes and revenues in month or two after all powers are restored on the island. Since power is now reported to be approximately 75% restored at the customer's level on the island, we project that the last 25% will have a model positive impact on transaction growth as transactions are more likely to disperse among the merchant base as compared to growing the aggregate. However, we remain uncertain until such time. We are also monitoring whether or not to be approximately 15% inactive merchants will restore their businesses when power is fully restored. If they do not restore our business, we would lose fixed monthly fee revenues and we've assumed that approximately just over half of these merchants will not restore service. As the power is expected to be substantially restored by the end of the second quarter, we believe that this timeframe will give us a clearer view in terms of sustained transaction volumes and merchant attrition. We also anticipate continued reduced net revenue spread as larger merchants are expected to process more sales volume. As Matt mentioned, the bank moratorium on consumer and business loan payments provided relief and stimulus in the fourth quarter and into the first quarter of 2018. As these programs end, we are monitoring the impact. We believe we will see a continued benefit from this disposable income stimulus in the first quarter that reduces over the quarter and end in the second quarter. It remains to be seen whether or not spending will reduce upon program completion and we've not projected a significant impact from this. My many reports there's been a significant immigration from the island to the U.S. and there are also reports that many island residents have returned to the island. In that sense, this picture is not clear, and there is also a concern that another wave of island residents will immigrate after the school year end, which has been the historical immigration pattern. We've assumed that immigration will continue to impact us negatively throughout the year and more significantly in the second half of the year. The timing of federal disaster relief funds is still uncertain as is the full benefit of hurricane insurance payments. While it is likely that these funds will be received, the timing and quantity is less clear. We've estimated that these funds will provide a positive stimulus in the second half of the year. The government's fiscal plan and related budget initiatives are work in process. We continue to support the government and its initiatives to improve efficiency and collections, but at this time, can't plan for any impact and have assumed we will renew our existing contracts in the normal course. Considering all these variables, we project Puerto Rico transaction volumes to essentially sustain their current level over the first half of the year and only modestly increase in the back half of the year. When power is fully restored and relief funds are added to the economy, that the immigration impact is greater. We anticipate a negative impact from merchant attrition and the reduced spreads to affect us for the majority of the year. Given these assumptions, merchant revenue is anticipated to be down, mid-single-digits year-over-year. Our Payment Services Puerto Rico and Caribbean segment revenue is also anticipated to decline mid-single-digits for this same reason. Our Latin America Payment Segment will continue to benefit from the PayGroup transaction in the first half, partially offset by $5 million to $8 million of anticipated client attrition, resulting in growth for the segment of approximately 20%. Adjusted EBITDA margins in this segment are estimated to decline as the addition of PayGroup is anticipated to only partially offset the anticipated attrition loss of higher-margin revenue. And finally, the Business Solutions segment revenue is anticipated to grow low-to-mid single-digits reflecting our Banco Popular revenue expectations and other IT projects expected to contribute during the year. Regarding corporate expenses, we expect these to approximate 2017 levels. We've also implemented cost actions of $3 million to $4 million and plan for related charge of approximately $1 million in Q1. All these items are considered in our guidance and combined we believe will generate adjusted EBITDA margins in the range of 40% to 42% or approximately a 200 and 400 basis point decrease from our adjusted EBITDA margin year-over-year. On a quarterly basis, we anticipate margins will be lowest in the first quarter and that we would expect to see modest improvement sequentially each quarter with revenue growth. Our operating depreciation is anticipated to increase approximately $3.5 million to $34 million, primarily reflecting increased depreciation related to new projects that will be going into production during the year. As I referenced, our cash interest expense is anticipated to increase in 2018 by approximately $1 million to $2 million based on consensus LIBOR protections. Our non-GAAP effective tax rate is anticipated to be between 11% to 13% and we believe we will be unaffected by the recent U.S. tax changes. The guidance does not reflect additional share repurchases. Weighted average diluted shares are estimated to be approximately 73.5 million shares for the year. Our capital expenditures for 2018 are anticipated to be in a range of $35 million to $40 million. We plan to retire the $27 million term loan A in April with our cash on hand and existing revolver facility, while we remain cautious and will continue to prudently manage expenditures as Puerto Rico stabilizes. With respect to the new revenue recognition standard ASC 606, we've concluded its impact will be immaterial, however I want to thank everybody that worked diligently on this significant project over the past year. In summary, we executed well during this extraordinary period and delivered strong cash generation under challenging conditions. We are very proud of our hurricane response and the significant contributions we need to help Puerto Rico bounce back from Maria. As we continue to focus on helping our customers in Puerto Rico and expanding our LATAM business, we will remain cautious as we manage through the post hurricane uncertainties. We look forward to updating you on our progress. We'll now open the call for question. Operator, please go ahead and open the line.

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.