Good afternoon, everyone. And welcome to the EVERTEC Third Quarter 2020 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 Joaquin Castrillo, our Chief Financial Officer. Before we begin, I’d like to remind everyone that this call may contain forward-looking statements 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 will now hand the call over to Mac.

Thanks, Kay, and good afternoon, everyone. We achieved strong results with the highest quarterly performance in our company’s history, driven by consumer demand as the economy reopens as well as the impact from new business. Additionally, we have continued to execute on our Latin America initiatives, which will position us for growth over the longer term. Beginning on slide four, total revenue was $137 million for the third quarter, an increase of 15% compared to 2019, adjusted EBITDA was $70 million an increase of 26% as compared to the prior year and adjusted earnings per share was $0.65 an increase of 38%. We generated significant operating cash flow year-to-date of $121 million and we returned approximately $18 million to our shareholders through share repurchases and dividends. Additionally, our liquidity as of September 30th was $246 million. Moving on to our update on slide five for Puerto Rico. We continue to see significant transaction revenue as a result of the federal and Puerto Rico Government stimulus programs earlier in the quarter, timing of tax payments and the further reopening of businesses. Merchant revenue surged in July to over 30% growth, tapering off in the subsequent months for a total quarterly revenue growth of 16%. The Puerto Rico Government further reduced COVID restrictions beginning in early September. However, consumer demand has been tempered by the expiration of the stimulus support. That said, we are encouraged by the recently announced release of $13 billion in federal funds to rebuild the electric infrastructure on the island, which will be a longer term benefit to the economy. Additionally, we would expect to see a more immediate impact from the additional $300 per week of unemployment benefit, as outlined by the President’s Executive order, which was approved by FEMA for Puerto Rico only a few weeks…

Thank you, Mac, and good afternoon, everyone. Turning to slide nine, you will see the consolidated third quarter results for EVERTEC. Total revenue for the third quarter was $136.5 million, up 15%, compared to $118.8 million in the prior year, reflecting the strong bounce back in consumer demand, positively impacting all our transactional revenue. As Mac mentioned, we also benefited from onetime revenue of $4.4 million with our new Department of Education contract. Total revenue for the nine months was $376.4 million, an increase of 4% year-over-year. Adjusted EBITDA for the quarter was $70 million, an increase of 26% from $55.5 million in the prior year. Adjusted EBITDA margin was 51.3%, and this represents a 460 basis point increase compared to the prior year. The increase in margin primarily reflects the higher transactional revenue and additional services provided to the government. Additionally, we benefited from non-operating income of approximately $2 million, due to foreign currency gains related to balance sheet re-measurement. Year-to-date, adjusted EBITDA was $176.5 million, an increase of 3% from $170.9 million in the prior year. Adjusted net income for the quarter was $47.2 million, an increase of 37% as compared to the prior year, primarily reflecting the higher adjusted EBITDA and lower cash interest. This was partially offset by increased operating depreciation and amortization, driven by capital expenditures in the prior year, as well as key projects that went into production this year and late last year. Our adjusted effective tax rate in the quarter was 13.6%, reflecting the mix of business in Q3. We now expect our tax rate in Q4 to range from 13% to 14% depending on the mix of business. Adjusted EPS was $0.65 for the quarter and increased 38% compared to the prior year. Year-to-date, adjusted net income was $108.5 million and…

Yes. Thank you. [Operator Instructions] And the first question comes from Bob Napoli with William Blair.

Yeah. thank you. Good afternoon. Nice job on the quarter.

Hi, Bob.

The -- what do you expect from Chile and Citigroup in 2021?

Yeah. So, Bob, we are not giving -- this is Mac and good to talk to you. So we are still very focused on getting those implemented this year, and in fact, in Chile, we already have some merchants that we are processing transactions for. So we feel like that those will contribute to 2021 and we have been able to continue to get those projects done on time by the end of the year. But we are not giving guidance about what this will contribute until we give guidance at the next call.

Okay. Very good. And that it’s included, I guess, in the LatAm, high-single to low-teens revenue growth?

Correct, Bob. It is included in there.

Okay. And then the -- growth in the Merchant Acquiring segment, the higher ticket, what are you looking for in the fourth quarter for the Merchant segment as far as growth in the Merchant Acquiring segment? And just Banco Popular had some pretty strong growth in spend. I think 27% for the quarter, debit and credit card spend. Does that not match up with EVERTEC’s business?

I mean the way that -- one, I mean, the numbers for Popular are due to certain transactions that we don’t necessarily see, right? So it’s more necessarily correlate.

Okay.

A perfectly, I mean, we saw and as we said on the call, very strong sales volume across the Board and across the quarter, obviously, there is a lot of stimulus that was impacting Q3. As we go into Q4…

Right.

… I think we are trying to obviously continue to get information, stimulus spending have come down from the levels that people were receiving and we still have uncertainty as to whether there’s going to be another package coming in Q4. But to the extent that, that does not happen and we go back to a more normalized economy, let’s say, without the stimulus, we are expecting the average figure to start to come down and normalize, which is actually something we saw throughout the quarter as well. And that’s a big driver of what we are seeing in that segment and the impact to margin as well. So we would expect the margin to also start to normalize for the Merchant Acquiring segment as we move into Q4 considering everything.

But, Bob, two things are certain. One is, the $300 stimulus for the unemployment, the Puerto Rican Government…

Yeah.

… has approved those and they have already started putting those into the island and into the system. The second thing is the shift to digital, just like probably every other company are following, we have seen a huge shift. So we saw significant growth that we talked about on ATH Movil and ATH Movil Business and both B2B transactions and the business transactions were up, I think over 350% for the quarter. But between the two of them, it’s over 200% increase between P2P and B2B. And then as we talked about too the demand for the QR codes, the ability to go in to Starbucks, to McDonald’s, to Burger King and actually not have to pull out a card and hand it to someone else. We have increased the number of locations by 275% since our last call and we are still seeing significant demand. So 5% of the merchants now, they are ATH merchants now, accept that form of QR code and some of them -- they are higher activity merchants. And we are rolling out a significant number of merchants every week as we speak, so the digital shift will continue.

Yeah. That was my next question. It seems like, yeah, Puerto Rico was set up for a massive digital shift, and again, thank you for the color on that. And the ATH, the $2.3 million was that the revenue in the quarter from ATH?

No. So that was the contribution of both the B2B and the business to our growth in Q3. So not the actual revenue generated by those products.

So that the $2.3 million was the growth in dollars over the prior year or the prior quarter?

Over the prior quarter.

Okay. And can you tell me what...

The growth over -- the growth over the third quarter.

Okay. In the prior quarter and what is the total revenue from that in the quarter?

Oh! Well, so we do from the prior year quarter…

Okay. Prior year quarter.

[Inaudible] Yes. Year-over-year.

Okay. Okay. Okay. Thank you. Appreciate it.

Thanks, Bob.

Thank you. And the next question comes from John Davis with Raymond James.

Hi. Good afternoon, guys. Encouraging to hear the $13 billion being released. How is that supposed to layer in over the next, I assume, a couple of years and also any update on the $8 billion of HUD funding that’s still, I think, in limbo? And then last one here, the $300 a week, how long is that supposed to last in Puerto Rico for the unemployment?

In terms of the $300 million that started last week and there was actually a retroactive payment going back to the beginning of August. And the program is pretty much the same as in the U.S. and our understanding is that that will go on for about another month.

And then you were asking about the $13 billion on the electrical grid. That’s going to be over a series of time. But that’s going to do two things. One is you are going to have to have workers. I mean, there’s going to be stimulus to the economy and the direct investment, rebuilding the electrical grid and then you also have the trickle effect to the broader economy. And then hopefully long-term one of the biggest costs of doing business here is the utilities and the electric. Hopefully, and continue to make it a competitive -- more competitive place to do business.

Okay. No. That’s helpful. And then, as I think about outside of Puerto Rico, I mean, Chile is beginning to ramp here toward the end of this year into next year. What are some of the other markets that you potentially are targeting for growth outside of Puerto Rico and has there been any further progress or any, I guess, events of note in some of the other markets, whether it’s bank consortiums breaking up or we just focused on Chile at this point, maybe just kind of an ex-Puerto Rico broader uptake would be helpful?

Sure. So we are seeing a couple of trends. One, we are seeing, as we have talked about on several calls, we are seeing the monopoly either getting broken up or sold like in Argentina and then Transbank. And as we have talked about with Bob, we do have Santander Chile on track to implement by the end of the year, we are already processing transactions for some merchants that have now opened. So you are seeing sort of a shift where people are willing to move outside of the monopolies or duopolies. The second thing we are seeing is really regulators issuing new licenses to fintechs so they can provide payments and banking services and those have -- are becoming some of our customers as well. So we talked about, I think, at the beginning of this year and last that we are very focused on localizing our platforms in Chile, Colombia, Mexico and Costa Rica, as we tucked in the PlacetoPay acquisition. We have now PlacetoPay, which is our e-commerce gateway that we are going to continue to invest in going forward as in Colombia and Ecuador at the time of purchase. Now we have localized in Central America and Panama and Costa Rica for some of our existing clients. Because, frankly, the product that they had was not to the level that we really wanted to provide to them and we have now given them a product where they are existing -- they are migrating their existing merchants to this new platform and it’s allowing them to sell new merchants as well, because the PlacetoPay platform is much improved. And we also are looking at plans to localize the PlacetoPay platform in both Puerto Rico and Chile as well. So, those are sort of the key countries, and we now have -- the great thing is we have now got the product, I mean, the risk products, the payments product across issuing and acquiring and then the gateway to -- we are making the investments to localize it based on where we are running business.

Okay. That’s helpful. And then last one for me, do we have -- do you have any sort of stats or more than just directionally what you think card penetration either was in Puerto Rico or what the increase has been? I mean, can you see, like, on a same-store sales basis, you are seeing an X percent increase in transactions and volume, if you look at, for example, BPOP is up 27%? So just anything to help us kind of dimensionalize the shift to electronic payments that’s currently happening in Puerto Rico, any stats at all would be super helpful? Thanks guys.

I mean a specific stat, John, is really there is a one source. We are taking into consideration many different data points that we have here to kind of give some direction, obviously, we are seeing every category in terms of consumption going up from a sales volume perspective and we are seeing the banks here also report that they are seeing volumes across credit and debit increase. We are seeing the use of all digital channels increasing as well and these are all driven by the use of cards at the end of the day. And so we continue to see a very big opportunity to continue to make inroads into kind of the cash business here in Puerto Rico, which continues to be a big part of the economy. And as Mac said, ATH Movil and ATH Movil Business for us is kind of the best way for us to continue to get additional penetration.

Yeah. And John, the thing I would say, there’s still -- this looks a little bit more like a more sophisticated Latin American country, if you look at penetration rates versus the states, because you still have a large underground economy and you still have sort of an unofficial economy. So even across traditional categories like gas stations or supermarkets or restaurants, you might have a lower level of penetration than you would see in the U.S. But the big opportunity is where we are breaking into new markets, with B2B, with ATH Movil business, where you are paying service contractors, food trucks, which is a significant opportunity as well, so that’s where we are seeing a lot. And as I told Bob earlier, I mean, if you look at P2P for the quarter, it was up 70%, right? And if you look ATH Movil Business, which -- that is primarily new electronic payment volume that was up over 350% for the quarter. So there’s still a lot of opportunities.

All right. Very helpful. Thanks guys.

Thank you. And the next question comes from James Friedman with Susquehanna.

Hey, guys. Good results by you and your team. I just wanted to ask in your prepared remarks you called out the $300 a week stimulus. I know you referenced that in a prior question. But if you could just give us some sense of how enduring you see that and how long is this going to last? And then I will just ask my second one upfront, Joaquin, are you -- you said that in ‘21 the client attrition would be similar to that in 2020. Can you just remind us, I don’t mean to beat a dead horse because it sounds like you are not going to focus on that, but what was it in 2020? Thank you.

Yeah. So on the $300, it’s the -- I think you are right. You are seeing amount that was approved by the President by executive order and that the local government has to match a portion of that and it’s less than the previous unemployment funding that was coming out of the federal government. The duration of that currently is probably a couple of more weeks, but we do think that’s going to be helpful. If this continues, though, I mean, the economy still remains open here, it’s a smaller amount and -- but for the next couple of weeks it will have an impact.

What was the other part of your question, James?

On attrition.

Can you talk...

Yeah. On the attrition this year, we said, we -- for this quarter the impact is about $1 million and we are going to see $3 million to $4 million this year. We have originally expected $4 million to $5 million. And that’s why we made a reference to a slight delay in attrition, which as we said in previous calls, has been coming down for a few years. We are expecting an additional $3 million to $4 million next year. And given that it’s at the same level and we are trying to move away from kind of keeping -- updating that on a quarterly basis.

Got it. Okay. Thank you, guys. All the best.

Okay.

Thank you.

Thank you. And the next question comes from James Faucette with Morgan Stanley.

Hi. This is Priscilla Russo on for James. Just two quick questions, on the Latin American trends as these markets have been opening up. Can you talk about what you have been seeing in terms of spend uplift or transaction growth and normalization there? And then on generally the health of the merchants within Puerto Rico, obviously travel is a outsized portion of your GDP and so even though you may not have direct exposure to travel, I just wanted to understand how businesses there are doing, are they buying more products from you, perhaps using the pivot POS devices, any color on that would be helpful? Thanks.

Yeah. Yeah. In terms of just the overall portfolio and our exposure to tourism, as we have mentioned in the past, we don’t have any significant direct exposure. Most hotels or airlines that we have in Puerto Rico are usually processing transactions through a corporate processor. So we have limited direct exposure. Obviously, tourism is a bigger part of the Puerto Rico economy. Although, it’s really closer to 5% really of GDP and it has an indirect impact through restaurants and retail sales. And even though it’s down, again, as we said, we have seen sales volumes up in pretty much every category. And in terms of the general state of the portfolio of merchants, we have seen a slightly higher percentage of inactive merchants over the quarter. Many merchants that haven’t started back to process or that are having maybe a little bit more difficult in getting off to business, but in general terms, that continues to also move toward normalization, so nothing really that we are overly concerned in terms of those getting back online. And in terms of Latin America, look, I mean, we continue to focus on the four countries that we have mentioned in the past, Chile, Colombia, Mexico and Costa Rica, and in getting our processing platform up and running, making sure that we are putting ourselves in a position to continue to expand margin into the future. And as we said, with Santander, it’s kind of our first client onto this platform and showing the success that we can bring by having a processing platform in these countries.

Thanks.

Thank you. And the next question comes from George Mihalos with Cowen.

Hey, guys. Thanks for taking my questions. Really just two clarification points for me, I want to make sure, I am thinking about some of these things correctly. So, just on the acquiring side, I think, you said, July was up 30% and then it had moderated to kind of high single digits in September. I am just curious, have those high single-digit trends continued in October, have you seen any sort of moderation from there? And then just as it relates to the EBITDA, I think, you called that the $4.4 million onetime from the DOE and then another $2 million, anything else that we would need to adjust to kind of come up with a normalized margin? I think I am kind of backing into like a 48% margin if I do the math?

That’s correct, George. Those are the two main items really that we called out and that you should be taking into consideration kind of onetime impact to kind of that higher margin that we reported. In terms of -- and what was the first part of the question, George?

As it relates to the acquiring segment, I think, you said, in…

Oh! Yeah.

… kind of up high singles?

Yeah. No. I mean, so in October, I would say, that there has been some slight moderation in terms of sales volume. We continue to see a fairly strong sales volume. We have seen the average ticket, however, come down and transactions continue to be lower than the prior year. But as we said before, those usually go hand-in-hand, so as we have seen a slight improvement or recovery from the transactional side, we have seen that average ticket start to come down. So it’s something that even though the high sales volume that we saw in July was there, on a sequential basis, we have seen that average ticket come down and that is reflecting itself in October as well.

Thank you. Appreciate it.

Thank you. And the next question comes from Korey Marcello with Deutsche Bank.

Hey, guys. Thanks for taking my question. You mentioned 5% of the ATH merchants have the QR code now and that’s kind of ramping quite quickly. I am just curious if you could just give some high level thoughts on kind of where you see that penetration going forward? And more importantly, do you guys see a lift on kind of QR code transactions per merchant versus other transactions, just trying to think about that a little bit deeper?

Sure. So we launched this product during the previous quarter, so in Q2 and we have seen significantly -- the velocity of the adoption at the merchant level is pretty rapid. And what I would tell you is, trying to understand how that changes, the volumes of with a merchant, we are now analyzing, because we want to do two things. One is we would like to convert more of the transactions to our like product transactions because of ease of use and we would also like to convert more of the transactions to ATH versus other types of electronic payments, because that’s our debit network. So we are in the process of analyzing that and we are noticing. Yes, we have increased by 275% in the number of locations and within each location it appears that the volume or the tendency to use the QR code is increasing as well. Our goal is to get by the end of 2020 as much of the volume. So we focus on the larger chains, the largest merchants and sort of hold their hands and get them up and running and then we are in the process of finding an easier way for smaller merchants. We are already in process of testing, so that they can sort of implement the product on their own. But it’s a significant focus for us because we think it reinforces our relationship with these merchants and then it will increase not only the electronic payments, but when it is an electronic payment it will be an ATH payment.

Got it. That’s very helpful. And then I am just curious if you could talk a little bit more about just e-comm in general in Puerto Rico and some of the markets you serve, like, what are you seeing there in terms of a trend to e-comm and how is EVERTEC positioned to take on the e-con -- e-comm opportunity over the next couple of years?

Yeah. So, I mean, again, as we talked about whether it’s ATH, whether it’s our gateway, it’s the trend that we are seeing like all of the other payment providers. Our focus has really been the PlacetoPay product as our e-commerce gateway. We have seen…

Yeah.

… significant volume growth in Ecuador during the quarter and then like I told you now that we have localized it in Costa Rica and Panama, we are seeing success with those banks because they are adding new merchants, not just going sort of static with the existing base when they had the previous product. Because the previous product we had, again, is not a product that we felt like we could really grow the rate we would like to across the region. In Puerto Rico, we will also convert to that product, but it’s a -- the PlacetoPay product and acquisition has been incredibly successful and that will be the future gateway for the company.

Okay. Thanks, guys.

Thank you.

Thank you. And as there are no more questions, I would like to return the floor to Mac Schuessler for any closing comments.

Thank you. And I want to thank everyone for joining the call. I hope each of you and your families remain safe. We look forward to connecting with you virtually over the coming months and really look forward to seeing you again in person once we get past the pandemic. Thank you and good night.

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You now disconnect your lines.