Good afternoon, everyone, and welcome to the EVERTEC's First Quarter 2018 Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the call over to Kay Sharpton, Vice President of Investor Relations. Please go ahead.

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 Tuesday, May 8. Access information for the replay is listed in today's financial release, which is available on our website under Investor Relations section of evertecinc.com. For those listening to the replay, this call was held on May 1. 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 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. It's a pleasure to speak with you today. We're very pleased that our results for the first quarter of 2018 exceeded our expectations. We benefited from Puerto Rico's increased rebuilding and recovering activity, which drove increased sales volume and margin growth progressively over the quarter. Beginning on Slide 4, I'll cover some of the quarter's financial highlights and provide you with an update on recent developments. Total revenue was $110 million, an increase of 9% compared to 2017, which was stronger than anticipated due to increased sales volume driven by a significant increase in the average ticket and an improved net revenue mix. Additionally, our initiatives to manage expenses helped us to deliver adjusted EBITDA of $54 million, up 10% over the prior year; adjusted earnings per common share was $0.47, an increase of 4% compared to last year. We generated significant operating cash flow in the quarter of more than $30 million or $5 million above last year. Given the quarter results and our expectations for the remainder of the year, we are increasing our guidance for the full year. Before I provide more specific updates for our business, I'd like to give you some additional comments on Puerto Rico on Slide 5. Power distribution is at approximately 95%. We are encouraged that we have seen improvement in our merchant base from our last call with a rebound in our local and smaller merchants, which has positively impacted our spread. We have approximately 12% of our merchants still not processing transactions compared to normal levels and we remain focused on getting every merchant we can back in business. Regarding relief funds for Puerto Rico, on April 10, the U.S. Department of Housing and Urban Development announced that $18 billion was earmarked for Puerto…

Thank you, Mac, and good afternoon, everyone. I will now provide a review of our first quarter 2018 results. Turning to Slide 8, you will see the consolidated first quarter 2018 results. Total revenue for the first quarter of 2018 was $110.3 million, up 9% compared to $101.3 million in the prior year. Our sales volume grew unexpectedly in the second half of the quarter, finishing in March at an elevated level across all merchant payment categories. Consequently, revenue significantly exceeded our expectation. We also effectively contained expenses in the quarter. This combination produced results that far surpassed our initial projections. That said I will provide further details when I review the segment results in a moment. Adjusted EBITDA for the quarter was $54 million, an increase of 10% from $49.2 million in the prior year. Adjusted EBITDA margin was 48.9% and this represents a 40 basis point increase in our adjusted EBITDA margin compared to the prior year. This improvement in year-over-year margin is primarily related to the strong sales volume and includes the lower margin contribution from PayGroup. We executed on our plan cost initiatives and benefitted from the timing delay of certain expenses as well. Adjusted net income in the quarter was $34.6 million, an increase of 5% as compared to the prior year and the increase primarily reflects the higher adjusted EBITDA, offset by higher interest as well as a higher tax rate as compared to last year. The effective tax rate in the quarter of 13.8% included a discrete tax item of approximately $500,000 that contributed to an increase in the rate. Given the slightly higher tax rate in Q1, our expectation for the full year is now a range of 12% to 13%. Adjusted EPS grew 4%, reflecting a slightly higher share count compared…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Bob Napoli of William Blair. Please go ahead.

Thank you. And congratulations on a really nice rebound, great to see that.

Hi, Bob.

Just the guidance - I missed the guidance for the merchant acquiring segment, looking at the growth of merchant acquiring for the year.

Yeah, hi, Bob. It's Peter.

Hi, Peter.

We said it would be mid-single-digits. What we projected is a modest decline from this level that we had in the first quarter as we do see some uncertainty there. We had the really impressive rise in our average ticket. But it's unclear whether that will sustain for the rest of the year. So just out of caution we backed it off a little bit and that arrives at mid-single-digits for the full year.

So you're - I mean, and that's kind of the basic theory that you have throughout your guidance. But isn't it as likely that you get - that you maintain or even with the recovery funds coming in, that could even improve?

Well, we're obviously hopeful for that. At this point, as we look at the relief funds, we think it's been predominately insurance payments that have come in, as well as the Q1 moratorium with the banks. And the federal funding which has been approved is still unclear with respect to the timing that's coming on. And then the uncertainties that we're addressing here are specifically the timing of the relief funds itself, the immigration that we expect to occur in the summer, which is the traditional pattern, and then just this elevated spending in terms of the increased ticket just because we hadn't experienced that before.

And, Bob, this is Mac. So as Peter said, there are puts and takes. Again, immigration this summer, the predictability about that people will continue to migrate off the island as school ends, as they make decisions. And the second thing is austerity has not started with the government. So as the government looks at austerity measures and businesses look at rightsizing, it's hard to predict that. But there are puts and takes to the year. But in the forecast we try to bake those in.

What is PayGroup growing at if you compared it on a pro-forma basis?

We're not going to be breaking that out. We really combine the business. Bob, but you can more or less derive it if you just look at the high-single-digits that we called out for our organic growth and then look at the segment.

Okay, all right. And then, I guess, with the recovery and your balance sheet and your leverage all of the sudden looking very healthy, are you back in the M&A market?

So, Bob, this is Mac. I mean, as we said earlier, I mean, we're really, really focused on getting PayGroup integrated well. But we are actively always looking at opportunities in Latin America and we'll continue to do that.

Great. Thank you very much. I appreciate it.

Thanks, Bob.

Our next question comes from James Schneider of Goldman Sachs. Please go ahead.

Good afternoon. Thanks for taking my question. Maybe could you give us a little bit of color in terms of the outperformance you're seeing in the payment segment? That's obviously very good to see. Can you give us any kind of sense, either on payments or merchant acquiring? How much is due to just the organic recovery effort on the island, people rebuilding themselves, and how much kind of incremental contribution there might be attributed to external recovery or release efforts?

I mean, I think that's very difficult for us to isolate. But we are saying broad-based increase in spending and moving more back to our small and local merchants, which is encouraging, because that means it's reactivating the economy. And then I'll let Peter answer any…

I think Mac summarized it well. We have seen spending in categories such as home construction and things of that nature that are obviously elevated and isolated with respect to the recovery. But it pretty much has been broad-based. What was surprising was just it increased substantially in the second half of the quarter and continued through in large part in April.

I understand. And then just in terms of the margin cadence we expect through the year. I understand there are some deconversion impact as you get to the end of the year and some - obviously some incremental expenses that you bring on, given how rationalized they've been over the past couple of quarters for obvious reasons. But is there potential upside to margins to the extent revenues are better than you would expect or would you look to potentially flow through incremental kind of investments and expenses in new proximate and like to the extent things are better?

We're committed to our plans with respect to initiatives that we have under way on expenses in terms of development and other product and sales activities. We have done a great job containing our expenses across the entire company. And to the extent revenues do surpass what we've guided to, we would expect to see margins improve. But we're very, very excited about our performance this quarter and it really was two-fold. It was the revenue. But then again we've done a good job containing our expenses as a team here.

That's good. And then just finally, can you maybe just comment looking back at the acquisitions you've done, Processa, Accuprint, PayGroup, et cetera, and how they've kind of performed relative to your internal plan? How would you kind of score them like any that stand out more than others in terms of over underperformance?

Yeah, so maybe take a look at FirstBank, Accuprint, Processa and PayGroup, we've been pleased with all the acquisitions. PayGroup, we closed more recently. As we talked about on the last call, we've been able to win some significant business and retain some business, because of that acquisition. So we feel like the underlying performance of the businesses, but strategically, those have changed the company and those have changed the company particularly outside of Puerto Rico.

Thank you very much.

Our next question comes from George Mihalos of Cowen & Company. Please go ahead.

Great. Good afternoon, guys, and congrats on the quarter. Just wanted to dovetail a bit on Bob's question. If we look historically outside of 2017, usually revenue tends to ramp from the first quarter on, at least for the most part. And I think, if we just kind of hold steady the $110 million that you did, that gets us to the high-end of the guidance. What sort of in the back half of the year that can cause you to come in lower? Is that just the de-conversion of some of the portfolios or something else that's worth calling out?

Hi, George, it's Peter. I think, it's important to note that the first thing is that we are still operating in a natural disaster recovery environment, so it's quite unpredictable. Our transactions are a little lower than the prior year. We've seen this elevated spend in the ticket and it really took off in the second half of the quarter and had sustained slightly down for March and April. So as we look out, there's that unpredictability. We don't fully understand the impact of the moratorium that it could have on Q1, as I explained, the fiscal actions that may take place and the timing of those and the extent of the immigration. So with all that taken into consideration, we've been a bit cautious as we've looked out. We do also have the attrition from Latin America in the second half, which is also impacting us. So that is the - those are the variables that we considered as we projected out for the full year.

Yeah. And George, let me just add. I mean, part of this is timing. So if you think about it, we're six months after the hurricane and only a fourth of the interest proceeds have been distributed based on what people looked at. I think some of the federal funding has taken time to get approved, and it still hasn't really flowed through the system, because they're trying to put processes and agreements in place and trying to - because we had some very high average ticket, which was unusual, because it is based on these types of events. So timing that, given that it hasn't been released yet against the immigration, against some budget cuts by the government, because they've kind of made some significant cuts to pensions that could weigh on the end of next year and trying to time those against each other are complex. And then, again you layer on to your point, the migrations on the LatAm business. But this is our best forecast given the information we have right now.

Right. Just another way of thinking that, it could very well sustain, George, if in fact, the insurance payments are the primary driver and that sustains through the year and people continue to rebuild and spend money, but it's just unclear at this point. And we thought it would be just prudent to be a little cautious, and that's what we did.

Okay. Thank you.

Thanks, George.

[Operator Instructions] Our next question comes from Vasu Govil of Morgan Stanley. Please go ahead.

Hi, thanks for taking my questions, and congratulations on a great quarter. Just a couple of things, on the spreads outside of just the mix changes, was there any pricing that you guys were able to take during the quarter that might have helped?

We'd be - the only change versus our assumption with respect to pricing was an encouraging ability of our merchants to sustain in business. So we've still been charging merchants for their terminals and fixed fees that we do in an ordinary course. And we've been a bit surprised that they've sustained even though they are not processing transactions. Other than that, we did not do anything other than all the hard work we've put in to get our merchants back online, and that's the primary driver for the improvement.

Got it. And I think last quarter, you guys have said that you were assuming in the guide that about half of the SMBs that were out of business would come back. Have you made any changes to those expectations given what you've seen in the quarter?

No. We have not. We've seen an encouraging, as I just referenced, resilience of these merchants to continue paying us. But the assumption that half of them will not get back in business is still in place in our projections.

Got it. And then, I think you referenced the austerity measures a few time. Do we have any idea of when these austerity measures have to be put into place? Like does the government have a timeline when they will announce some of these things?

Well, they should take place with respect to the upcoming fiscal 2019 plan, which - the first draft of which is due to the fiscal control board this Friday. And that will be our first information on it. The fiscal plan was certified. But at this time, the government and the fiscal board are in disagreement over certain conditions of the fiscal plan such as pension reform and labor reform. And so, those matters need to be reconciled and then ultimately put into a fiscal budget for next year, and that's when we'll have insight.

Understood, and just the very last one. I know that the governor had earlier announced some proposal for labor reforms in Puerto Rico. Any update on that and when do we find out if the approval was approved or not - the proposal was approved or not?

Yeah, I think some of the encouraging news we'd heard is PRAPA [ph] being privatized and then some of the labor reform. Again, I think to Peter's point, they're still back and forth between PROMESA and the government, and what will actually the two parties agree upon. And that's part of the ambiguity around when the positive reforms will take effect, but also some of the austerity. So I think it's still TBD.

Got it. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Mac Schuessler for any closing remarks.

So, again, thank you for joining us on the call today. It's been a good start to the year. And we look forward to talking to you throughout the remaining quarters. Thank you and have a good night.

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