Good afternoon and welcome to the EVERTEC Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kevin Hunt 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 would 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 website at www.evertecinc.com. I will now hand over the call to Mac.

Thank you and good afternoon everyone. Thank you for joining us on our third quarter 2021 earnings call. We are pleased to announce another strong quarter of financial results as we continue to benefit from strong sales volumes across our markets. In Puerto Rico, the continued effect from federal funds, increased digital usage, and a return to some pre-COVID seasonality drove strong transaction volumes. In Latin America, we are seeing strong growth driven by both recent implementations as well as organic growth from existing clients. Beginning on Slide 4, our total revenue for the third quarter was $146 million, an increase of approximately 7% compared to the third quarter of 2020. Adjusted EBITDA was $70 million roughly the same as the prior year and our adjusted earnings per share was $0.62, a decrease of 5% year-over-year, in line with our expectations despite a higher than expected adjusted effective tax rate. We generated significant year-to-date operating cash flow of $176 million and we returned approximately $35 million to our shareholders through dividends and share repurchases. Our liquidity remained strong at $363 million as of September 30. Moving on to our update for Puerto Rico on Slide 5, we saw continued strong volume and revenue growth in the third quarter. The ongoing effect from the inflow of federal stimulus and EBITDA funds earlier in the year was a major driver of growth as was a pickup in back-to-school spending in August, a sign that we are returning to pre-COVID spending patterns. Merchant Acquiring sales volume growth was approximately 23% year-over-year and average ticket is coming down on a year-over-year basis, but remained above pre-pandemic levels. We remain pleased with the growth of ATH Móvil, which was up 24% for the quarter, as we continue to see a shift in preference to digital…

Thank you, Mac and good afternoon everyone. Turning to Slide 8, you will see the consolidated third quarter results for EVERTEC. Total revenue for the third quarter was $145.9 million, up approximately 7% compared to the prior year. As Mac mentioned, our Q3 results reflect increased transaction volumes in Puerto Rico, mainly impacted by the inflow of COVID-related federal stimulus earlier in the year and double-digit growth in Lat Am as we continue to see more transactions from our recent business implementations and organic growth from existing clients. Adjusted EBITDA for the quarter was $69.8 million, down slightly from the $70 million reported in the prior year. Adjusted EBITDA margin was 47.8%, down 350 basis points from a year ago. The decline in margin reflects the year-over-year comparison against the onetime Department of Education contract and a $2 million benefit from non-operating income due to foreign currency gains related to balance sheet remeasurement, both of which positively impacted last year’s margin. Adjusted net income for the quarter was $45 million, a decrease of 5% as compared to the prior year. The decline in adjusted net income was primarily due to higher operating, depreciation and amortization and a higher adjusted effective tax rate. This was partially offset by lower cash interest expense. Our adjusted effective tax rate in the quarter was 16.9%, reflecting a discrete foreign tax impact this quarter. We now expect our full year tax rate to be approximately 14%. And adjusted EPS was $0.62 for the quarter, a decrease of 5% compared to the prior year. Moving on to Slide 9, I will now cover our segment results, starting with Merchant Acquiring. In the third quarter, Merchant Acquiring net revenue increased approximately 23% year-over-year to $37.6 million, driven by both higher sales volume and revenue generated from the…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Vasu Govil with KBW.

Hi, thank you for taking my questions.

I am sorry, one moment. You may go ahead.

Hi, thank you for taking my questions. Mac and Joaquin, just a high level question for you guys. I know you don’t provide long-term revenue or earnings growth targets, because the macro situation in Puerto Rico has usually been very uncertain, but it seems the macro environment is now more stable. You may have some tailwinds from the federal stimulus funds coming in. The pace of digitization has accelerated globally, including in most of your end markets. With that backdrop, how should we think about sort of the growth algorithm for EVERTEC over the next say 3 to 5 years? If you could provide any color in terms of how you think about that internally? And then as a follow-up, Joaquin, if you could just talk about the fourth quarter revenue guide, how are you expecting some of the trends across the segment? Because obviously, in the third quarter, you saw some pretty strong growth in the Merchant Acquiring segment and in the Payment Services LatAm segment, should some of those trends continue into the fourth quarter? Thank you.

Hey, Vasu, thanks and thanks for the question. So, on the first question, I will take a stab at it and then I will hand it over to Joaquin to give his comments and then to answer the second question. On the first question, as you pointed out, we don’t give long-term guidance and we will give – we do give annual guidance, and we’ll give guidance for 2022 on our next call. But I do want to point out, as you pointed out, the company, some of the dynamics of the company and the markets that we operate have improved over the past years. Number one, in Puerto Rico, we have seen stabilization in the economy, both from the federal funds coming through from Maria and also because of the pandemic. And in that environment, we’ve been able to capture additional market share as the larger banks, the international banks have left the island. And both Popular and Oriental have benefit from that – I mean, I am sorry, FirstBank and Oriental have benefited from that recently. Those are all our customers, the local banks. So we do feel like that, in the short term, in the next few years, we do have a great environment in Puerto Rico in which we can operate, continue to increase our market share and hopefully have a stable – more stable economy than we’ve seen here in the past. Secondly, if you look at Latin America, when I arrived at the company 7 years ago, these markets were closed. Primarily, they were operated by monopolies and duopolies for payments. And we’ve been fortunate that the markets have opened, and we now have a great set of products where we own the intellectual property. We have a rolodex of customers that continues to increase when we added Santander Chile, Mercado Libre, Alelo. Now with Caja Popular Mexicana, we believe that our LatAm business should grow at a good pace compared to the past as well. So we won’t give you numbers and we won’t give long-term guidance, Vasu. We will give you 2022 guidance on our next call. But to your point, the markets have stabilized. In the case of Latin America, it has now opened and I believe we have executed well to take care of those – to take advantage of those opportunities. Joaquin?

Yes. In terms of the second piece of the question, Vasu, what I would say is when we look at the different segments for Q4 and other trends that we saw in Q3 in terms of how the segments grew will sustain in general. I would say that NAV for the Merchant Acquiring segment, we still expect to see kind of high-teens to low 20s in terms of growth in the fourth quarter. And in Latin America, we are also expecting kind of high-teens, low-20s in terms of growth. Business solutions, as we have kind of communicated in the past, when there is a lack of any specific project that goes into production, we are expecting that to usually be in the low to mid single-digits. So that kind of breaks down, obviously, thinking about the range that we just provided in the script kind of where we expect those segments to be.

Great. Thank you very much. That was super helpful.

Thanks, Vasu.

Our next question comes from Korey Marcello with Deutsche Bank. You may go ahead.

Hey, guys. Thanks for taking my questions. Just wanted to talk a little bit about the volume and transaction growth, obviously, you guys spoke a little bit about the spike you saw in October. Can you give us a sense of kind of how the volumes or transactions trended into kind of the September, October timeframe?

I think you meant August, Korey, with the back-to-school. So we did see...

Yes, August.

We did see that kind of come back. And obviously, in Puerto Rico with the vaccination rates and the enrollment kind of going back to normal and kids going back to schools, it’s something that we sort of expected, but to see that actually get reflected again was something positive. I would say that October, we continue to see strong volume when we compare that against the prior year. I would say that’s similar to what we saw coming off of the most of September. So as I just mentioned on Vasu’s question, I mean, we’re expecting Merchant Acquiring to be in the high teens, low 20s overall. So that’s based on strong volumes still in Q4.

Got it. That’s helpful. And then ATH Móvil, I think kind of slowed to 24%. You mentioned in the quarter, I believe growth was 60% last quarter. And I know there is tougher comps there, but can you give us a sense of what you think kind of the right normalized growth rate is for that business coming out of the pandemic?

Let me – we won’t sort of – again, we will give the 2022 guidance next call. What I would say is, during the pandemic, as we’ve said, we saw significant increase as people move to digital payments. And we’re encouraged that we now continue to see that trend continuing. And then now that people have adopted to the technology, they are using it more frequently. We are seeing a good velocity of adoption. So we do expect it to grow meaningfully in the future. But to your point, the comps of the past are hard.

No, I appreciate that, guys. And just maybe if I could sneak one more in, on Santander, I think you mentioned they upped the guidance to 50,000 merchants in Chile. At what point do we kind of move past the minimums and start to see incremental benefit from that? Thanks, guys.

What I would say, Korey, at this point, we are still within the minimums, and we have some way to go. But overall, for us, and obviously, for Santander, it’s encouraging to see the types of opportunities that exist out there when we penetrate some of these markets that weren’t necessarily open in the past. So we’re going to continue to be excited about the progress that they are making in terms of continuing to put clients on the platform.

And I think for us, as a company, I mean, not only naming these marquee brands as our customers but now performing and exceeding their expectations, and they talk about that publicly, is good for our pipeline in the future. So it’s not only the impact of the financial results on that specific contract, but it’s also building a reputation that not only do we win business, but we exceed our customers’ expectations.

Thanks, guys.

Our next question comes from Bob Napoli with William Blair. You may go ahead.

Thank you and good afternoon. Mac and Joaquin, so the CPM win, the issuer processing in Mexico, can you give a little color on just that business, the issuer processing business and the size of the business kind of geographically, I mean – and maybe a pipeline that you have in that business?

Yes. So it’s on our issuing business. And Bob, we issue both – we assist our customers issuing both debit and credit cards. We had announced previously that, in Mexico, we were doing Mercado Libre debit cards. This is credit cards Caja Popular Mexicana, which we’re excited about because they have 3 million customers, almost 500 branches. They are the largest of their kind in the country. So they are already in the market with the product working. We’re moving slowly to make sure that we can work out any kinks. But they have already announced it publicly that this is operating, the product is in the market, and this is a significant win for us in Mexico.

And maybe, I mean, do you have more pipeline in Mexico? Or is that – maybe just some color on the momentum in that business.

Yes. So what I would say, generally, I mean, where we see our pipeline from an organic perspective is around issuing and around acquiring processing services, we have – those are the two biggest lines, and we are seeing demand throughout the region and interest. And like I said on the previous comment with Santander Chile, the good news is not only are we announcing wins, but I think people are impressed by the fact that we are exceeding our customers’ expectations based on their own announcements. I mean the Santander Chile numbers we’re giving you are numbers that they have announced publicly. But yes, I would say, Bob, our organic pipeline is healthy. It’s been healthier than it’s ever been.

Great. And then – so you have liquidity getting close to $400 million of liquidity. You certainly broadened out the markets that you’re serving in Latin America. There seems to be a lot of opportunity in Latin America. From an M&A perspective, what are you focused on? You have a pipeline. And what – where do you see the biggest opportunities to add to your business inorganically?

Yes. So our thesis on M&A has not changed significantly. We are working in pipeline in Latin America, and we’re still focused solely on Latin America, and we’re looking at opportunities every month. So we’re still actively looking at M&A. And like I said, we will announce something when we have it, but there are still opportunities in Latin America that we’re evaluating.

And then I guess, lastly, just on your product development or your product road map, where are you investing internally? What product expansions could we expect to see over the next year or 2?

Yes. So I think we talked a little bit about this in 2019 that we – at the end of 2019, early 2019, we talked about we were going to invest in creating a processing model for our business. Because we have just bought PayGroup, we wanted to localize and turn it to a processing business for the acquiring and issuing. And we named the countries: Chile, Colombia, Mexico, Costa Rica. And so those are the investments that we’ve made in the past, and we continue to make investments in that platform in those countries and looking at new countries as well. We’ve also invested heavily in PlacetoPay. So we recently – right before the pandemic, we closed on PlacetoPay, which is our e-commerce gateway. So we have localized that now in Costa Rica, in Puerto Rico now. It was already operating in Colombia, and so – and we’ve localized it in Chile as well. So we focused on our e-commerce gateway because we believe that, as everyone else, e-commerce and digital transactions are important, and that, that gateway is our primary and our lead product. And then we’ve also made investments, Bob, as you know, around ATH Móvil, and that’s paid off very, very well, and it’s become a significant part of our P&L.

The only thing I would add is PayStudio, Bob, which is actually a platform that you referred to with CPM, which is both issuing and acquiring. And that goes to what Mac mentioned in terms of taking product and becoming a processor. As we’ve localized that platform and now as we put clients on it, we continue to get feedback in terms of functionality products that we’re really taking advantage of and kind of putting into a platform across the different countries that we’re in. So I would say that those are the three main areas where we’re investing.

And when we announced these wins, Mercado Libre, when we announced Santander Chile, CPM, all of these are from the PayGroup acquisition, which is now the PayStudio product and the investments we’ve made and now that we’re getting a payback by announcing these wins.

I would add, Bob, as I said in my remarks, right, as we continue to enhance these products, we’re also making some investments that are going to hit our OpEx around just efficiencies in the operation and efficiencies around just product development. And that’s part of what I mentioned in the remarks around guidance for the fourth quarter.

Great. Thank you. Appreciate it.

Thanks, Bob.

Our next question comes from George Mihalos with Cowen. You may go ahead.

Hi, good afternoon, guys. Thanks for taking my question. Just wanted to ask one, as it relates to the Merchant Acquiring business, I know you talked about some unemployment benefits ending. I’m just curious, have you seen any sort of change in trend in volumes as you sort of exited September and moved into October? Just curious what you are seeing on the ground there?

What I would say, George, is, I mean, when we look at it year-over-year, it continues to be strong across, I would say, pretty much all verticals. And when we see – again, Q3 still had enhanced unemployment that really started to end in the second half of September. So the third quarter still saw some of that kind of push of funds coming through. I would say, sequentially, as we’ve said in the past, there is somewhat of a slowdown that we are tracking that applies to some of the different takes within Merchant Acquiring in terms of the average ticket also starting to come down to a more normal level. It’s still high when we look at what it was pre-pandemic. But as we move away from some of the significant funding that we saw early Q2, on a sequential basis, there is a slight slowdown.

Okay, thank you.

Thanks, George.

Our next question comes from John Davis with Raymond James. You may go ahead.

Hi, good afternoon, guys. Maybe just to start, wanted to hone in a little bit on LatAm. We’re seeing really strong growth there. I think you guys have highlighted that as kind of a growth area for – what’s going right? I think you guys can continue to kind of exceed our estimates for growth in that geography but just want to understand what’s going on. A lot of your, I guess, larger competitors have called out LatAm as an area for growth, just want to understand kind of what’s going right and what’s driving that growth?

What’s driving our growth, correct?

Correct.

Okay, because you mentioned our competitors. So yes, so what I would say is over the last 3 or 4 years, as I mentioned a little bit earlier in my comments, previously, these markets were closed. And EVERTEC was in a position, again, 5, 6 years ago, where we really needed to improve our products, our services. And once we did that, the markets would need to open. So what I would say what is going well for EVERTEC is, one, is we’re the beneficiary of these markets now opening, I mean, starting with Prisma getting sold to Advent, the Santander deal that we did in Chile. So these markets are now opening, so it’s a great opportunity for anybody who’s willing to invest in Latin America. And so that thesis is now playing out from a market opportunity perspective. What’s going well now is our ability to sell and win business. Because, if you remember, 7 years ago, when we get on these calls and talk about how is the pipeline, how are the sales opportunities, it was much more difficult. But now that we have clients that are already using our products, seeing that we’re winning business, seeing that we’re implementing business, I would say the sales pipeline and the execution on winning business is going well. And then the implementations, I mean I can tell you to move into a country like – to Chile and to build that from scratch and be the first one to do it, I was incredibly proud of how we executed, the same with Mercado Libre, the ability to implement in Mexico with the largest e-commerce player in all of Latin America, and now with Caja Popular Mexicana. So what I would say is, again, back to interest from different players in the market around a technology partner that can help them with issuing products and a technology partner that can help them with processing. As you’ve noticed, in Chile, some of the banks still want to own their own book of business, so they want to own the merchant contracts. Some don’t. And so we’ve been able to partner with both types. So I would say across the issuing and acquiring and acquiring services, our ability to win business and people seeing our dedication to the region and our ability to implement that business is what has allowed us to get to double-digit growth this year in Latin America, and that’s all organic. I also believe that with PlacetoPay, we’ve done a good job integrating that acquisition as we’ve learned with other acquisitions, and we’ve been able to localize that product more quickly in additional markets given our experience that we have with PayGroup. But that’s what I think is going well. It’s very symbiotic timing that the markets are now opening. There is real interest with the entrance of fin-techs, with regulators wanting more options in the market and our ability to execute on those opportunities.

Okay. That’s very helpful color. And then maybe just switching to the balance sheet, obviously, leverage is under 1.5x now. Just you guys have generated a lot of free cash flow year-to-date, and I think would have returned the $35 million or so to shareholders. So just maybe, first, kind of remind us of what your comfort level is from a leverage perspective. Also, are there any opportunities with leverage where it is to refinance the balance sheet to bring down the cost of your debt, which I think is still about 4.5%? And then finally, just a little bit surprised to see kind of no buyback, should we read into that, that there is potential M&A on the horizon, price sensitivity? Just curious there, because I think if you look at your free cash flow year-to-date and what you’re returning to shareholders, there is kind of a big discrepancy, and 1.5x leverage is pretty low. So, just curious, thoughts from here, potential to do anything on the balance sheet and maybe refi that debt at a lower rate?

Hey, John, Joaquin here. So look, we’ve said before our kind of target range on leverage is 2 to 3x. We’re now, as you said, under that, and we’ve been under that now for a couple of quarters, in part, because of the good performance we’ve had from an EBITDA perspective. And what I would say is that we’re always looking at our capital structure and trying to make that more efficient. Having said that, when we look at the strategy for capital deployment and as Mac said before that, that hasn’t really changed, I mean our key focus here is M&A. And as Mac said, we have a pipeline. We’re looking at targets every quarter. And from a buyback perspective, consistent also with the strategy, we really look at those from an opportunistic perspective. And we don’t have a formal repurchase program or target that we’re trying to hit. And we did buy back some shares in Q1 and Q2. We did have a lower quarter this time around, but our main priority continues to be deploying capital for growth. We have also increased our CapEx. So we continue to invest in our own products which has given us results in Latin America. And that’s kind of where we are at this point, even though we have a strong balance sheet.

Okay. Alright, that’s it for me. Thanks, guys.

Our next question comes from James Faucette with Morgan Stanley. You may now go ahead.

Thank you very much and thanks for taking time this afternoon with us. Wanted to ask, you kind of outlined some of the things that have benefited you this year, like stimulus, etcetera. And obviously, that abates and that kind of thing. I’m wondering, though, on the flip side, as you also highlighted, is that we have tourism starting to pick back up and the like. How should we think about what you’re like planning assumptions are for when we can kind of get back to 2019 levels? And just trying to think through like the different components of the puts and takes, particularly going into next year?

You hit on one of them, which is obviously getting back a normalized economy in terms of the different factors that move is Puerto Rico, tourism being one of them. But I’ll just remind you on tourism, in and of itself, is less than 10% in terms of Puerto Rico GDP. It’s actually closer to 5% to 8%. And look, right now, we still see, as we said in our remarks, some tailwind from the stimulus that is still left out there, but not to the extent that we saw this previous year. We continue to track all of the recovery funding, which, at this point, even though we are optimistic that we will see that come through next year, we will definitely provide more detail. That is definitely an important part of our model and our assumptions as we go into 2022 and then just how Puerto Rico continues to recover economically. We are in a better backdrop than we’ve been in some time from a macro environment, but we need to see how this all starts to normalize once stimulus isn’t there.

And as far as some of the packages you’re looking at, to be clear, those are still being contemplated or they have already been signed off on, and you’re just kind of waiting for distribution and details there.

In most cases, a lot of money has already been allocated, but it hasn’t been distributed. Actually, recently, the new private company that is managing out of the transmission here in Puerto Rico for the public electric authority announced close to $600 million in projects that are being awarded. So we’re starting to see some movement in the right direction that is actually getting announced. But in the context of the amount that we saw that we’re seeing in the fiscal Board plan, which are in the billions, there is still some way to go. And again, some of the right things have been said in the last few quarters, both from the federal administration and the local government, as to the process with some of these funds. But as we’ve also said, we expect that to be more in 2022. So as we get closer to our next call and actually discuss the details of our 2022 guidance, we hope that we can go into a little bit more detail as to what our expectations are.

Great. And sorry, just lastly, back on the acquisitions front, clearly, you guys are seeing a good flow of potential deals. Are there a few things that you can categorize for us as to what have been inhibitors to date or kind of what you would expect or would like to see happen to get more of those across the finish line?

I mean, I can just describe generally. Sometimes, assets don’t trade because there may be multiple shareholders that are in the country, and it’s very difficult for them to get the shareholders aligned if they are financial institutions. It could be valuation expectations. I mean we actually thought when the pandemic originally started that it could be an opportunity. That never really happened, and valuations have gotten fairly frothy since then. If you look at our historical acquisitions, we have been able to pay a multiple that has allowed us to realize benefit very quickly. And so those have been two of the bigger barriers, but we still are looking at acquisitions around the region. And as Joaquin said, look our first investment is investing in ourselves. We love to invest in our products. And we’re incredibly excited that, 7 years later, we have great products that are winning great business. Second is buying companies, which we’ve done, and integrated those fairly well and then the other levers of deploying our capital. But M&A is still something we’re focused on. And we want a deal as much as anyone else. But we will only do the right deals, and we will announce when we have it.

That’s great. Thanks for the detail, everybody.

Thank you.

[Operator Instructions] Our next question comes from James Friedman with Susquehanna. You may now go ahead.

Hi, good results here guys. It’s Jamie at Susquehanna. Joaquin, with regard to your comments about the BPOP’s contract structure, I’m just trying to figure out, is it a good or bad thing that the CPI is rising? And is there risk to the margin structure of the contract, because you’re capped at 5%, and we’re hearing a lot about inflation globally.

I mean – so I don’t think it’s neither positive or negative. I think we’re being factual in terms of what the contract says, and the contract does cap CPI at 5%. I would say that we are very margin conscious. We have great margins. We are always looking for ways to be efficient. Obviously, inflation is a real thing, and cost of labor has been going up, and it’s something that we will continue to manage through.

And then Mac, maybe over to you, in terms of – you have some good questions on this. But in terms of your increased proliferation in Latin America payments infrastructure, I realize that you’re at minimums, and you’re calling out that those minimums may not persist next year, though you’ll probably win new contracts. But I mean your goal, presumably, with these is to get off of the minimums, right?

You’re talking about Santander Chile, specifically, right?

Yes.

Okay. Yes. So I mean, look, so the reason we loved the deal and just for people that are sort of new to the story, when we announced Santander Chile, it was a processing deal, right, where they actually own the merchant contracts. But what we loved about the deal is that we make money in the first year because we have minimums throughout the duration of the contract. So we weren’t bound by how quickly they could ramp new merchants. Now as they surpass those minimums, right, and as the volumes increase above what the minimums pay for, then we will get incremental revenue which will add to our margins. So the fact that they are exceeding their expectations means that, at some point, they will exceed the minimums, and we will generate even more revenue off the contract. We haven’t given any guidance on what those minimums are, what we think that timing will be. It’s a 5-year contract. But we do – I mean we are significantly exceeding their expectations and our own expectations. So that should be beneficial to us during the 5-year period. But we haven’t given any sort of dimension around how big are the minimums, when would they flow through and how will this impact that 5-year period.

Got it. Alright. Thanks for the perspective.

Okay. Great. Thank you, James.

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

I just want to thank everyone for joining us this afternoon and we look forward to seeing you from time to time in conferences over the next quarter. Thank you.

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