Good morning everyone and welcome to the EVERTEC First Quarter 2020 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Kay Sharpton, Vice President of Investor Relations. Go ahead.

Thank you and good morning. With me today are Mac Schuessler, our President and Chief Executive Officer; and Joaquin Castrillo our Chief Financial Officer. Before we begin, I'd like remind everyone that this call may contain forward-looking statement and should be considered in conjunction with cautionary statements contained in our earnings release and the Company's most recent periodic SEC report. 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 common share. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides, which are available in the Investor Relations section of our company's website at www.evertecinc.com. I'll now hand the call over to Mac.

Thanks Gary and good morning everyone. Before we begin, on behalf of our company, I'd like to share our sympathies with all of those who have been affected by this global pandemic. In particular, I want to express my regrets to those who have lost loved ones and my gratitude to those in the medical community and all the essential workers who are on the front lines for the benefit of us all. I also want to thank my colleagues who are diligently working remotely as well as those who have continued to tirelessly work on sites, given the nature of their roles. Just as with hurricane Maria, the EVERTEC team is continually demonstrating their adaptability, persistence and strong values, making me incredibly proud and honored to lead this organization. While we continue to cautiously monitor the impact of COVID-19, we believe that our past experiences with extreme circumstances have proven the resiliency of our business and our people. We're fortunate to be able to highlight on this call the successful efforts of our team to maintain our business operations and even implement e-solutions during the quarter. Turning to Slide 4, I'd like to cover some of these highlights. In preparation for COVID-19, we deployed our business continuity plans a few days before the Puerto Rico government enacted a shelter-in-place directive on March the 16th. Since then, every country in which we operate has implemented some types of social distancing measures. Our priority has been the safety and support of our colleagues as we transitioned to a work-from-home environment, but also implementing safety measures for those critical employees that were needed on site. Through our internal initiatives, we were able to provide equipment and remote access to our colleagues as well as clear direction and focus throughout the organization to…

Thank you, Mac, and good morning everyone. I'll now provide a review of our first quarter 2020 results. Turning to Slide 8, you will see the consolidated first quarter results for EVERTEC. Total revenue for the first quarter was $121.9 million, up 3% compared to $118.8 million in the prior year, which included a onetime revenue benefit of $2.7 million. Our overall performance over the first two months of the year were in line with expectations as we saw modest sales volume and transaction growth in Puerto Rico and Latin America as well as some good progress in some of our key projects. Beginning in mid-March however, our Merchant, Payment Puerto Rico and Payment -- segments were directly affected by the pandemic of the some of our business solutions lines of business some lines of business that are transactional. Our Latin America segment was also negatively impacted by affect. We estimate that the impact to revenue related to COVID-19 in the quarter was approximately $3 million. Adjusted EBITDA for the quarter was $56.3 million, a decrease of 2% from $57.6 million in the prior year. Adjusted EBITDA margin was 46.2%, and this represents 230 basis point decrease, compared to the prior year. The year-over-year decrease in margin primarily reflects the decrease in transactional revenue, the increased mix of business in Latin America and Business Solutions which are lower margin as well as the impact of the prior year one-time project revenue. The adjustments in the quarter for adjusted EBITDA included our normal adjustments for non-cash equity and share-based compensation and also include a $2.1 million charge related to transactional fees. Adjusted net income in the quarter was $33.5 million, a decrease of 10% as compared to the prior year, primarily reflecting the lower adjusted EBITDA as well as increased operating…

[Operator Instructions] Our first question is from Vasu Govil from KBW. Go ahead.

Hi. Thanks for taking my question. It's good to talk to you all and glad that that everyone is safe and healthy. I guess my first question, within things for the trends on April that you gave us, but within the month. Can you talk us through, if you saw much improvement towards the end of the month and into early May and sort of what the magnitude changes are that you were seeing in the improvement?

Sure Vasu. This is Joaquin. And so, I'll just walk you through what we have been seeing. In March the activity order for Puerto Rico started March 16th, so I would say the second half of March, we saw a decline in volume kind of getting to high thirties. That grew a little bit more going into the first two weeks of April as everybody got really serious in the shelter-in-place initiative. So, we saw high thirties, low forties and it stabilized there through the first two weeks of April. It improved slightly towards the end coming down to low thirties. And now, as I said in prepared remarks, the governor allowed several businesses to open up this past Monday. We don't have that much of stability because it's only been a few days, but we've seen a couple of days commonly in the high teens, low twenties. So, we need to see how this continues to develop, and hopefully in the next stage of businesses opening of May 18th. To the extent that we are able to kind of control the positive cases and more sectors continue to open, we would expect to continue see a positive trend, but it's still early. So, we're definitely looking at this very closely.

Thanks. That's really helpful. And Mac, at a very high level, what we hearing across the payments industry is that the pandemic is sort of accelerating the shift of digital by multiple years in many cases. And that digital will be the new way of life for many people as trying to acting in a certain ways. Are you seeing evidence of that in Puerto Rico in particular in some of the LatAm economies that were more cash focused? And do you think that coming out of it the growth rates going to be structurally higher for EVERTEC?

So, we agree with what you're hearing from our peers. There's a move to digital payments. I mean, I will tell you what we've seen with ATH Movil and particularly ATH Movil business. It's become the preferred payment method for many of the small businesses, some of the small grocery stores. So, we have seen that trend and that business has held up. We've even seen it as we talked about in Columbia, when we talked about Exito trying to create a virtual card to make shopping more in a digital environment. So, we are seeing that trend. We do think that, that trend will continue to accelerate coming out of COVID-19 and we are very happy that we've invested in ATH Movil and then we've also made the investment in PlacetoPay. So, during this period, given sort of where we are from a liquidity perspective, we need to invest in this technology. So, it come out of this stronger.

Our next question is from Korey Marcello from Deutsche Bank. Go ahead.

Hey guys, this is Korey on for Brian Keen. I just wanted to ask first, if you could talk a little bit about the merchant base, kind of the mix of merchants that you have there, maybe it's a small merchant and then maybe online volume as well. Just any color you could give around that?

Yes. I'll take it first. You've got to remember in Puerto Rico, where we're less weighted on travel and entertainment. We have a lot of the local economy. So, we've got a lot of the supermarkets the pharmacies, the utilities are our customers. So, that's why you've seen the type of relative stability in some of our payments businesses and segments. And on the digital piece, we don't break that out separately. We have given some of the growth rates on ACH in the past we were not on this call. But as I said earlier, that's become one of the preferred methods of payment is the ability to pay with your cell phone small businesses. I personally, gone to another local pizza places and you place your order on the front line, you walk up to the door and you show them your phone that you've already paid and they hand the pizza out the door to you. So, we are seeing the digital increase. But that sort of gives you sort of an understanding of the waiting a lot of the core economy is part of our processing. I don't know if you want to add anything Joaquin.

Yes, just to give you some additional color around the portfolio. We have seen a pretty significant shift, and mainly driven by the businesses that are that have the ability to remain open because all other businesses were required to remain closed. So, we are seeing a significant shift towards supermarkets, pharmacies and gas stations mainly as those are the essential "businesses" that could continue to do this and throughout this period. It would be other important or I guess, key factors series, we're also seeing an increase in the average ticket. So, although these are as I mentioned, in the script lower margin businesses, we are seeing the average ticket homeowner or at least that's what we saw in these last few weeks, as people go out to the supermarket and make larger purchases, so they can stay within their homes for a longer period of time. So, that kind of offsets a little bit some of the shifts that we're seeing towards these lower margin businesses. Then alluding to what Mac said, I would just add that there should all these digital channels continue to grow and even throughout this whole period, right. So, as physical payments, card present payments are taking this hit and given the shelter-in-place, we have seen a slowdown in some of the other P2P transactions and business transactions and they do continue to grow year-over-year.

I guess, as a quick follow up, you guys mentioned some potential kind of outcomes for the upcoming quarter around EBITDA. Just curious, I think that was related to some six cars. So, I'm just curious if you could go into some detail maybe what, what type of cost take out controls that you guys are taking and how that could potentially benefit versus the expectation that you laid out.

Sure. So, as we've seen in the past, we run a very high margin on a normalized basis some of the best industries. So, we are very cost conscious continuously, we run the Company, very lean and so significant levers of cost, and are really not there for us. However, we are always looking for areas where we can be more efficient and we continue to focus on those given the obviously impact to the top line and as we identify those will continue to execute.

Yes, so let me just say going into this, we were very focused on taking care of our employees, and our employees take care of our customers. So, we actually saw an acceleration of expenses for setting up in a virtual environment making sure we had and then some additional compensation for those that had to continue to work on site. So, we were very focused on investing to make sure that the operation continued to perform well and we were very, very focused on productivity. So, if back to the other call, we are continuing to invest in our digital platforms. We're continuing to invest in Santander Chile, which is we make good progress on even during this period. But that being said, we did offset that back Of course, T&E was down, around travel budget went down. We're very closely managing our marketing budget and others and training budgets to make sure that we try to offset some of the incremental cost that we’ve incurred as we moved into the remote working. Going forward, we will continue to look at those discretionary expenses, and make sure that we manage those as closely as possible without sacrificing the future growth of the Company. Because as a company in emerging markets, it's really enters in new countries with some interesting opportunities, we don't want to cut expenses at the expense of future growth. But we're going to be very diligent in making sure that we manage margin with some of the discretionary expenses.

Our next question is from Bob Napoli from William Blair. Go ahead.

Thank you. Good morning, everybody good to hear about everybody's doing well, and you guys are doing well. On 16th, just throwing up on the April trend and kind of the rough guys, so are you assuming that the April trend holds for the quarter to get you to the $42 million of EBITDA? Or do you have -- and what is your thought on the trend through the quarter?

No, as I said, this obviously assumes our April trends continue. But again, the governor just opened a few sectors of the business and there's additional sectors that might open up in May, at the same time that's subject to the COVID-19, continuing to and so -- so this is really a preliminary view, based on what we saw in April.

Bob, the short answer is yes.

Okay.

We're assuming in the quarter in the slide that you're seeing, but that assumption does not factor in that the economy is already opening. And then the governor is continuing to open businesses, as we speak this week and next week. So, but it is -- but also those businesses could open and then they could close again, right. So -- but [indiscernible] quarter is three months of April.

Yes.

But we are already seeing a couple of things. One is we are seeing continued money hitting bank accounts, the unemployed, and we are also seeing the governor opening the economy.

Okay. Thank you. And there is the card-not-present growth rate and mix. I think you said you haven't given that up, and especially in this environment, that would be really helpful to understand what percentage of your business, your payments businesses card-not-present, and kind of what the growth rate of that is?

Yes, it's a great point. And we may consider doing that in the future. What I would tell you is, the good news is it's every day becomes a bigger piece of the business and it is growing even through this environment. But right now, we're not prepared to disclose that. But given your feedback, we'll take a look at doing that in the future.

Just last question. In the Santander Chile, what are your thoughts on what the revenue to be, out of that is overtime? And do you have broader strategy for Chile that you want to use that to build off of?

Yes. So what I would tell you is what we said on previous calls. And our goal in Chile is to replicate to some extent, what we have in Puerto Rico and that's a broad set of products with a broad base of clients. And we already have a lot of the Chilean banks and retailers as customers on our bill payment platform. This is hopefully, one of several Merchant Acquiring customers over time, and merchant processing customers. So we plan to have sort of a broad customer base and solution set. We haven't given specific carve-out of what the revenue is going to be at Santander Chile, but we did said on the previous call as we [teed] up 2020 that it would be a significant part of that segment for this year, and really helped to contribute to pre-COVID-19 to double-digit growth in the segment.

Our next question is from John Davis from Raymond James. Go ahead.

Hey, good afternoon guys or good morning. I just wanted to maybe touch a little bit on card penetration, in Puerto Rico. I think many expect COVID to accelerate cash the card. I know the data is a little bit difficult, but maybe can you give an idea of what card penetration looks like in Puerto Rico today?

What I would tell you, John is, we obviously have been focused on trying to create additional avenues through some of our digital products to get to that cash economy, but there continues to be a very large piece of the pie that is an informal in unofficial economy that is part of of Puerto Rico. So, it's tough for us to be that specific percentage, but what I can tell you is that, through the products that we're putting out there, like ATH Movil and ATH Movil business under growth rates that we're seeing in some of those digital products, and we are definitely making a dent in penetrating some of that to non-card economy that exists here.

And to add to Joaquin's point, it's definitely less penetrated than the U.S. There's still a significant sort of informal economy. What I would reiterate also, I think the theme of several of the questions on the call, this is accelerating the adoption of technology. So, people who didn't try in the past to use ATH Movil, people that didn't try to ATH Movil business application, there is a more rapid pace of adoption, because people are being forced to use, even I think in each of our businesses. We've really pushed the envelope of what can be, what physicians can work from home and more and more people within our own company are more comfortable with Zoom, different technologies. So, we're actually seeing that with our consumer base as well. So, I do think this is going to be a catalyst, down to actually hopefully close the gap, and digitize or electronify payments at a faster pace.

Okay, great. And then any update on the approved HUD funding or any of the other kind of aid that was coming to the Island from the hurricanes? This sped it up, slowed it down, just kind of any update there would be helpful.

There's no real update, John. I mean, the construction side or the construction sector was one of the business areas that was able to go back to business this last Monday. And so, we are obviously looking at this very closely and seeing now that people are getting back from work and looking to get back to reconstruction, if we see more of an inflow of that funding. But not nothing specific that I will call out from our last call.

Okay, thanks. So then one more maybe for Mac. Just talking a little bit about your appetite for M&A here, I think, obviously maybe not right now, but kind of on the other side of COVID or once things stabilize a little bit, get evaluations, look better, your balance sheets the best shape it ever been in. So you just maybe talk about the pipeline and how you think about M&A going forward from here?

Yes. I mean, our perspective has not changed in that part of the thesis on how we grow the Company. To your point, we do feel fairly good about the balance sheet and about the performance of the Company, particularly compared to other payment peers. So, it's still a focus of ours. I can tell you, we are still whether, even organic growth. We're still having calls with prospects. We've had several calls with leaders in South America and some potential clients, on the inorganic side on the M&A side, it's a bit slower, it's a bit more complicated because people aren't necessarily willing to sell it a completely distressed price. So, there may have to be some normalization or sort of shaking out of what valuations look like. But it's incredibly, important part of our story and it's a place that we continue to focus.

Our next question is from James Faucette from Morgan Stanley. Go ahead.

Just wanted to touch bases as you're seeing and looking across different geographies, are you seeing much variance in terms of activity levels and a rate of improvement as people open up the economies or start to and within the regions that you serve have, how much impact if any, has there been from government stimulus on what you're seeing in terms of your business flow?

I guess what I would say, of course each country is different and again, it's difficult for us to monitor because our businesses are different in each country. So, we don't have apples to apples to apples between each country we do business in necessarily, but some countries went into a sell from place faster than others, some have had more of a broad base pandemic than others. So, we have seen sort of a difference in how each country operates. We have moved into a complete where we can in every country, we've moved to a remote workforce. So, our philosophy has been the same protecting our employees, making sure they're focused, but it's been different from country-to-country and coming out of it has been different from each country. But we have seen stimulus in several countries. Of course, we talked about what we've seen in Puerto Rico. We've also as I said earlier in the Dominican Republic, the support of the government there to distribute funds to those not only the bank population but the unbanked. I think seeing those dollars flow through trends for the country, the countries where we have a significant piece of business like Puerto Rico that's just now starting to occur.

And then, I think you talked about and there's been a lot of talk about like kind of a potential for a permanent shift in the trajectory of adoption of the of electronic payments and in the light. And that makes sense to me. I'm wondering how that is impacting both your own product development thoughts as well as what you're looking at for potential future M&A. M&A has always been important part of EVERTEC, opportunity set and just how the current environment may be shifting that and reprioritizing if at all?

And it goes back I think to a question that was previously asked about expenses. I will tell you the ship to electronic payments and online, I mean we have historically seen in our products and then that was one of the reasons that we bought PlacetoPay was because we knew this was just going to be a natural evolution. With the pandemic of COVID-19, we are now again, as I said earlier to what extent we don't know. But the adoption is going to be faster, particularly if you know the shelter-in-place or is slow gradual reopening of economies occurs because then people are going to adopt to those technologies for a longer period of time. So, our approach is going to be very cautious from an investment perspective to make sure we, not only do we continue to invest, but in some places we accelerate our investment, and we move into more quickly on different projects and different initiatives. So, for us, it's going to be to not -- me to continue to invest in those areas, in some cases accelerate the investment.

[Operator Instructions] Our next question is from John Coffey from Susquehanna. Go ahead.

Hey, guys, it's actually Jamie Friedman, good to hear your voices. Glad you’re well, thank you for this Slide 16. Really interesting and incremental, but not to be worse than that slide is that Business Solutions, which is large segment for you is still growing, right. So every suffering and merchant, so it is my question is -- now I realize businesses, Business Solution decelerating, but maybe if you could talk about some of the characteristics of that business that may be less economically sensitive, I think that would be helpful?

Yes. So just to give some context, right, within that segment, we provide a most of our core banking services to Banco Popular. And a lot of those services, which are a kind of backbone or back office of the some of their key systems and are based on number of accounts on file, number of loans, et cetera, which aren't really impacted by the volatility and transactional basis. In addition to that, to Mac's point before on digital and some of the questions that we've gotten. And we also managed the digital channels for the bank, so we've actually seen some increases in some of those channels and users going into those channels that are helping that that line of business. And as we also do some of these support projects in terms of COVID-19, we also run their networks and have supported them in the work from home environment. And all of those things are helping a from a stability perspective and also from the slight growth that you see on this sheet. And what I would say is even if we go into some of our other businesses like printing, we do a lot of regulatory and printing and mailing, which isn't impacted again by the volatility. We do have some small pieces here that are more discretionary for our clients. So those we are already expecting them to come down. And we do have some transactional lines of business in there like item processing and cash processing where we've actually seen a deceleration, but overall, it is a stable segment with some specific lines where we're actually seeing some growth. So that's why we're seeing that 2% on there.

Okay, thanks for that. And then a question I got from the investor was about your ATM exposure. And I'm going to say, I can't remember the details, but if you could talk about that a little bit?

Sure. So, we -- ATM is a big part of our payments Puerto Rico segments. We process most of ATMs in Puerto Rico, I would say, and very much like POS, we saw a deceleration and actually negative a year-over-year growth on ATM volumes. Again, people wanting to the shelter-in-place, and there wasn't really a need to get cash out of the ATM because most businesses were closed. And just like with POS is now that businesses are kind of starting to open up first the beginning of this week, we are seeing some improvements in those trends, still negative year-over-year. But the expectation is that businesses will start to open up, we cannot see those trends come back very similar to what we're seeing in POS.

Got it. Let me, last one Mac. We saw, you guys know EBT better than probably anyone. I was just wondering, it's not quite the same category, but the PPP that participation for small business has been a big theme for some of the state-side fintects. So anyway, I guess my question would be. To what degree are you involved in like SBA distributions? I think you did have a comment on that first slide, but if you could talk about that a little bit would be helpful?

Sure. I'll take that one, Jamie. I mean in terms of the PPP program on SBA loans, we aren't really involved in any of that distribution. The banks here in Puerto Rico are the ones actually making those loans to small businesses, specifically from an EBT perspective, and what we have seen is an acceleration of some of the disaster recovery funds that were approved last year on that were supported to run through in June, July timeframe. Some of those were accelerated as a result of COVID-19. But what we are really monitoring is the impact of obviously all of these unemployment benefits that are an add-on to regular unemployment. So, as part of the CARES Act we have, all the self-employed receiving some money. The local government also had an initiative that put money into people's pockets in especially also self-employed. And it's an interesting mix because obviously, these are replacements of funds that these people would have otherwise generated through working. And so, we need to wait and see how that impacts all of our transactional businesses. And what specifically on PPP, we're not directly involved in any distribution.

Our next question is from Bob Napoli from William Blair. Go ahead.

Hi. I just wanted to follow up. We listened in on the Banco Popular earnings call last week and they called out a 46% decline in debit and credit card spending in April. And you're a lot lower than that. I was just trying your Merchant Acquiring business is so much lower. I was trying to understand why your business would not -- would be not nearly as bad as BPOP's was?

They also take into consideration their credit portfolio, which from our perspective, I mean, we don't manage from the issuing side those balances. Obviously, I don't know those credit cards are used here, but in terms of correlating both, I mean.

It's hard to do apples-to-apples. They may be looking at their international spend. So when their customers are spending off Islands at some of the issuing business on the credit side, we don't manage. So, it's hard to compare apples-to-apples.

How much of your mix is credit versus debit? Is it primarily debit?

It is primarily debit. Yes. It is primarily debit.

So if you look at it on the issuing side, it's primarily debit. On the MAB side, we process both.

Thank you. Then just maybe a follow up on the BPOP relationship because I get this question a lot as they're a significant part of your revenue, when you think that contracts through 2025 and you have, I mean, you mentioned a couple quarters ago there was a pricing discussion. You said is somewhat normal, but you felt the need to call it out. Just any update on any pricing discussions? And how long before that contract went terminates, would you like to renew it? I mean you seem obviously extremely tied in with BPOP.

So, let me -- it's a good question, Bob. I would say is, we did say that the pricing dispute we got behind us. I would just say what this is similar to Hurricane Maria and the fact that we think we've demonstrated the Banco Popular, how important of a partner we are. We help them mobilize very, very quickly their workforce to work remotely and implement some new programs to actually. We do cut checks on their behalf. We do manage a lot where some of these disbursements are being made. So, we feel like in the feedback we've gotten is demonstrating how important of a partner we are. And I think that bodes well in the future because, as I always said every day we're focused on how do we perform since they want to renew as much as possible in the future.

At this time, we have no more questions. So, it concludes our question-and-answer session. I would now like to turn the conference back over to Mac Schuessler for closing remarks.

Thank you. So, again, I just want to reiterate appreciate the hard work of all of our colleagues, making sure that we focus on our customers, and I look forward to speaking to some of you on some of the virtual conferences coming up. Thanks again.

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