Good day and welcome to the EVERTEC Fourth 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'll now hand over the call to Mac.

Thanks Kevin and good afternoon everyone. We have a lot to cover this afternoon. Beginning on Slide 4, I would like to provide an overview of our call today. I will start with a summary of our financial results and business highlights for 2021 followed by a walk-through of the strategic transformation that has occurred at EVERTEC since 2015 and how we have evolved today. I will next cover the announcements related to our relationship with Banco Popular and then provide some color regarding our announcements on Latin America. Finally, I'll provide an overview of the Puerto Rico economic environment and our viewpoint on Latin America. I will then turn the call over to Joaquin to cover 2021 results as well as our outlook for 2022. Beginning on Slide 5, let me start with some highlights from our 2021 results. We delivered a record year with $590 million in revenue, an increase of 16% year-over-year. We had a strong finish in Q4 with the results above our expectations including a particularly impressive month of December. Most satisfying was our LatAm growth of 29% in Q4 and 25% for the year, driven by our successful partnerships with Santander and Mercado Libre, the expansion of our digital platform Place2Pay and organic growth in Central America. Our earnings and cash flow performance were even more impressive with adjusted EBITDA growing 23% for the year and adjusted EPS growing 32%. In addition to the strong financials, business highlights include the announcements today regarding Popular as well as those in Latin America which I will discuss in a moment. In 2021 we continue to generate significant operating cash flow of $228 million for the year and we returned approximately $39 million to our shareholders through dividends and share repurchases. Additionally, our liquidity remained strong at…

Thank you Mac and good afternoon everyone. Turning to Slide 15. I'll first review the fourth quarter and full year results for EVERTEC. Total revenue for the fourth quarter was $155.2 million, up approximately 16% compared to the prior year. Fourth quarter results were above our expectations as transaction revenue in Puerto Rico increased as a result of a return to more normal seasonal spending patterns, the continued benefit of federal funds, as well as onetime hardware and software sales in the quarter. Revenue in Latin America continued to grow very well at 29% for the quarter as we continue to see benefits from client implementations completed early in the year as well as healthy organic growth. Adjusted EBITDA for the quarter was $75.9 million, an increase of 19% from the prior year quarter, while adjusted EBITDA margin increased by 130 basis points to 48.9%. The higher margin was mainly driven by revenue growth in our Payments segment both in Puerto Rico and LatAm which are highly scalable partially offset by higher personnel costs and cost of sales related to hardware and software sales. Adjusted net income for the quarter was $52.6 million, an increase of 23% year-over-year. And adjusted EPS was $0.72, an increase of 22%. For the full year total revenue was $589.8 million, an increase of 16% from the prior year, a record level that represents a substantial increase from the 5% growth reported in 2020. The strong year-over-year growth in Puerto Rico was driven by the inflow of COVID-related federal funds early in the year higher ATH Móvil and ATH business transactions, the impact from the expansion of our relationship with FirstBank and the continued benefit in our Business Solutions segment from higher volumes in our digital channels. The increase in Latin America reflects the acceleration…

[Operator Instructions] Our first question today will come from Bob Napoli with William Blair. Please go ahead.

Thank you. A lot going on there. Nice quarter and good to see the extension trying to figure out all the effects of -- now on the EBITDA margin guidance that you gave for next year 44.5% to 45.5%, does that -- is that a full year impact or only a partial year impact of the change in the Banco Popular agreement?

Hi Bob. So the 44.5% to 45.5% includes the impact of the Popular transaction taking effect midyear.

Okay. Because you said in your release 400 to 450 basis points of impact. I mean that 44.5% to 45.5% is a full year is -- I mean that would be a reduction of that amount from your run rate. So it's actually a reduction of more than that on a full year basis. So it's more like closer to on a full year basis 1000 basis points. So your ongoing EBITDA margin going into say 2023 all else equal is going to be closer to 40%?

No Bob. So let me try to break it down for you a little bit better right? So in terms of our run rate if you look at where we're coming off Q3 Q4 that kind of gives you a data point as to more or less where we're running at. And what we're saying is post closing the transaction is going to have an impact of 400 to 450 basis points of that run rate right? So that kind of gives you a ballpark as to what we're seeing going forward.

On an annualized basis.

On an annualized basis correct.

Okay. Because you did 49% in 2021 on EBITDA margin.

And I think as part of our remarks -- I'm sorry to interrupt as part of our remarks while we kind of gave some highlights right? One we benefited from some foreign currency gains this year that we're not expecting for next year. We're also expecting some of the trends in our Merchant Acquiring segment are coming back right to some of the pre-pandemic levels like the average ticket and the card mix as we start to see more travel. And those have a direct effect on margin and spread.

So Bob this is Mac. So a part of what you're seeing in the margin in 2022 is the transaction with Popular and the impact. Part of it is the fundamentals and some of the changes in the business as we come off a really strong 2021.

Right. So as you think about '23 you're looking at an EBITDA margin in the low 40s a little over 40% or so is kind of what you're viewing as a normalized margin?

Well I mean we're not going into 2023 guidance at this point. We're trying to kind of obviously dimension what the impact of this transaction is. And again I think if you look at where we're running Q3, Q4 and then the impact of the basis points we just mentioned you kind of get an idea.

Okay. So from 3Q, 4Q less 400 to 450 basis points is what you view as your normalized EBITDA margin. The revenue effect on '22 from the changes on a full year if it was on a full year basis, what is I guess the primary revenue effect? Is it revenue share?

Right. So the other component Bob just to be clear right the revenue share won't impact the top line. So that will be treated as an expense in our Merchant Acquiring segment. And that is the impact that is included in the 400 to 450 basis points post closing that we just discussed. In terms of Business Solutions, the top line effect is about $30 million which is an annualized number for the assets that we just sold.

Okay. In which you're getting the stock reduction -- the share count reduction?

Right. And in terms of -- just to be complete right? In Business Solutions you will also have a margin impact because of the sale of those assets and also the CPI concession.

Okay. Thank you. Appreciate it.

Our next question today will come from James Friedman of Susquehanna. Please go ahead.

Hi, congratulations on a great quarter and a great year a lot of work here. I remember there used to be some minimums on the Santander contract as well. And then I thought that when you were in full production mode, you relieved those minimums. I may be saying it wrong. But how are you thinking about the Santander because that's a good one for 2022?

Yes. So Santander had some minimums this year and for the duration of the contract. And that was so -- that as the contract ramped, we'd still be able to make money in the first year given that we're the processor. And so we'll benefit from that through 2022 2023 for the duration of the contract.

Got it. Okay. And then in terms of some of your comments about the ticket size because that is always real relevant for your yields. Could you just walk through maybe step some of the dynamics again? I know you said it already but if you could kind of refresh how you're thinking about that? Thank you.

Sure Jamie. So I mean in terms of the puts and takes on Merchant Acquiring right this past year and we kind of put a slide of us to some of the federal benefits that flow to Puerto Rico. We saw obviously a ramp-up in consumption and a really high average ticket. In addition to that because of some of the travel restrictions we saw a shift towards more local transactions that also yield a higher spread for us and a shift to debit which is also a more profitable product overall for us. As we start to move into next year some of those variables like Fed funds although we're expecting a continued benefit from them is going to be lower than what we saw in 2021. We're seeing the average ticket continue to slow down or start to normalize on a sequential basis. And that's something that we are expecting to see going forward. And then obviously travel has come back. So we're starting to see some of those international cards also hit Puerto Rico and that is impacting the yields. So I think those are the three main things that we're looking at.

Got it. I will jump back in the queue. Thank you.

Our next question today will come from Vasu Govil of KBW. Please go ahead.

Hi, thank you for taking my question and congratulations on the extension of the BPOP contract. I also love the new slides on Puerto Rico so thank you for that as well. Just first question for you Mac on just the BPOP extension all good stuff. Just on the slight modification on the exclusivity part. Any sort of comment on what BPOP's thinking was there? And is that potentially a risk long term with the scope of the relationship on the Business Solutions side?

Yes. So let me explain to you how the exclusivity works today. Today -- and then I'll explain how it's going to be under sort of the new contract after we close. Today there's a set of services that are exclusive to EVERTEC. And that's whether or not we perform the service today or whether or not in that category of services there's something new that they want to do. And if they want to do something new in those services they actually have to go through a process with us to give us the first right of refusal. And it may be that we don't have the software that performs the service, we may not have the type of applications. But they still have to go through the process with us even though that service may be better with somebody else. So it creates friction in the relationship right? So under the new deal if there's stuff that makes sense somewhere else and it's going to end up at another vendor regardless of going through the ROFR process they'll be able to do it more quickly. So it's better for the commercial relationship. On the existing services where we're performing them today we know there are things that they want to do either with another vendor or themselves. And those are primarily the assets that they purchased. That was why we sold some of the assets. We got a pretty good price for them and we exchanged shares right? Going forward there may be -- I mean we worked really hard in the past. We've increased our SLAs. We've invested in infrastructure. And now we've been pretty aggressive on pricing by giving up CPI and making some other accommodations so that in the future the services that we have today we hope to keep as much as possible. Now there will be some things down the road that they may want to leave, but there are also things that we're not doing today that we believe would be well performed by EVERTEC. And so those minimums give us the opportunity as now we're performing at a high level. We're performing -- or we provide a very competitive pricing that we can manage through that over the next 6.5 years. We ultimately have worked really hard over the last five years to be a provider they want to do business with not have to do business with. And I think when you look at the fact we were able to get a 10-year extension on MAB five years on ATH and frankly three years on the MSA services we think we're building a competitive organization that EVERTEC will -- that Popular will do business with for a very long time.

No that all makes sense. I guess my follow-up is for Joaquin just on the guidance. I know -- just if you could lay out how you thought about all the variables. Stimulus is obviously a tougher comp issue for you guys. There's some probably inflation impact. Just how should we think about what could be the upside drivers versus downside drivers versus the outlook that you've laid out? But historically obviously you have a solid track record of being really conservative?

Look I mean yes Puerto Rico and all the different moving pieces have been complicated to try and dimension right? Again, I think we are working off of a backdrop that's better than it's been and that is a positive. But the reality is we did see a significant amount of funding coming to Puerto Rico last year and a type of funding that were going directly into people's pockets. I think we've laid out some incremental funding that's expected coming to Puerto Rico this year like the child tax credit and the employment credit that is also directed into people's pockets. But some of the incremental funding that's expected continues to be reconstruction infrastructure etcetera. And these are again funds that we've been waiting for some time. We continue to see progress on the government working towards putting a lot of money to work. And some of the trends that we're showing from an employment perspective from an economic activity index perspective are starting to reflect that. So I think we're optimistic that we'll see some outflow through in some of our Payment segments. And when we think about Latin America as we said we have a very good pipeline. We're still expecting high teens to -- high-teens growth. And -- but those are the main aspects.

Great. Thank you very much.

Our next question will come from James Faucette of Morgan Stanley. Please go ahead.

Hey guys. This is Jeff Goldstein on for James. Thanks for taking my question. On the Mercado Libre relationship now that we're approaching a year since the onset of that partnership just any sense on the ability to further expand that contract whether into new services or geographies? Just how are you thinking about that opportunity?

Sure. So we're very focused on with Mercado Libre specifically not announcing deals until they're actually in production. But what I can tell you is, we've exceeded our expectations and exceeded theirs as we talked about earlier on the call. And we're very, very confident that that's going to lead to both geographic and product extensions with that partner. So it's we're incredibly excited about working with them.

Got it. That's helpful. And then just in thinking about your internal investment priorities for '22, can you just talk about key focus areas whether it's new capabilities or new geographies? Just how should we think about that? And then if I could sneak one more in. Just thinking about the margins for next year, any broad strokes on how we should think about margins by segment? Thanks.

Sure. So I'll take the first part of the question and then let Joaquin sort of give his thoughts on that and then answer the margin question. So capital allocation we are very focused on growth. As you notice our footprint, we now have a great footprint in South America and Latin America generally. We're excited about our products the PAYS platform that we've rolled out for Mercado Libre for Santander in Chile and now we're going to roll it out within Uruguay. Place2Pay our gateway we've localized in many countries throughout the region. So we do feel like we have a more competitive product set than we've had in the history of the company as it relates to Latin America. We are still very focused on M&A. And we do believe now that we have such a good balance sheet. We have -- now with these extensions we have great certain cash flow that we can continue to lever. And now that we get rid of this regulatory contingency, we will be very focused on M&A and M&A in the region that same to historical things. There are three types of M&A we always look at one that takes advantage of the leverage and scale that we have the other that gets us into new countries and the other provides new products. Outside of that we'll also be focused on -- we just authorized or increased our buyback to $150 million. So, we'll be focused on capital allocation throughout the year.

And then on the margin question just to clarify right the 400 to 450 basis points that we mentioned on the call is the impact of all the different factors in the Popular transaction that we just walked through right? So that is the post-closing impact of the whole deal. Now in terms of how to look at this going forward and kind of going back to what I mentioned to Bob if we take that post-closing impact and we take a look at kind of where we're coming off in Q3, Q4 that kind of gives you a baseline as to what our overall margin should be post deal. Now in addition to that the way we're looking at it going forward, if we break it down and talk about bucket from a revenue perspective, about 25% of our revenue is really subject to these reduced CPI cap. The other 75% of that is comprised of our Merchant Acquiring revenue our ATH Móvil business revenue which actually have a hedge against inflation because sales volume continued to increase. We have our ATH revenues which are subject to our 5% CPI cap and then all of our other business where we have pricing levers that we will continue to use strategically when needed. From an expense perspective, our plan is to continue leveraging our footprint and labor arbitrage getting some jobs in different regions where we can maximize our presence in some of these countries and then work with suppliers locally some of our key suppliers as we've been doing actively to try and get better terms for longer contracts -- as has been the case even with our landlord here in Puerto Rico which we're working with to reduce our CPI cap going forward. And look if we look strategically what we've done we've always been very margin-focused. We've been able to expand margins. And that's been done because we've been investing in our probatory technology and in our Payments segment. So the plan here is to get ourselves in a position to again expand margin over time.

And I think Joaquin, an important point. It's investing in things that we can leverage. A couple of quarters ago we sold Ticketpop. That was not a scale business. It didn't have a lot of opportunity. The four asset -- I mean the assets that we sold today, it's more than 4 but the applications that we sold to Popular were things that didn't have leverage and scale. We couldn't use them with other customers. We couldn't use them outside of Puerto Rico. So, as we invest in PAYS and Place2Pay the margin on those should be accretive because we can leverage those throughout the region.

The only thing I would add and I know you mentioned the margin by segment is right the -- and we said this in the remarks. Most of the impact here is between our Merchant Acquiring segment and our Business Solutions segment. The Merchant Acquiring segment because we have the RevShare and then on the Business Solutions segment because of the sale of these assets, plus the impact on the lower CPI cap. And just to kind of give some ballpark I mean our expectation post-deal is for MAB to have low to mid-40s type margin and for Business Solutions to be in the low 40s margin. So that kind of gives you a ballpark from a segment perspective of where we're going to see the impact.

Got it. Thank you. that was all very helpful color.

[Operator Instructions] Our next question today will come from John Davis of Raymond James. Please go ahead.

Hey good afternoon guys. Joaquin I'm just going to beat a dead horse here just on the outlook and the impact of the transaction with BPOP, but maybe look at it a different way. By our math as you call it, $24 million of EBITDA call it 8%. And so, if I think about the $30 million top line is it fair to say, we're looking at like $0.20 to $0.22 of EPS impact or more or less kind of breakeven EPS neutral is the right way to think about it? I just want to put a finer point on the EPS impact that the transaction has on the '22 outlook?

Can you repeat that John? I was trying to follow the different...

Yes. Sorry. So really like so given the $30 million top line and the revenue -- or sorry the margin impacts you called out our math is it's roughly a $24 million headwind to EBITDA which is about 8% of your EBITDA. And so once I take it down all the way to EPS I'm getting somewhere kind of in the low $0.20 range like call it $0.20 to $0.22 of headwind from this transaction and the outlook. I just wanted to kind of maybe focus a little bit on the EPS impact that you guys have included from this. We talked a lot about margins and top line, but I just want to make sure I'm not missing anything on the bottom line?

No. I mean we haven't broken it down in that way. And John I think the way to think about it below EBITDA from a tax perspective etcetera when you're getting to EPS right there aren't really any significant impacts. So I think if you're taking into consideration kind of the impact from a margin perspective everything underneath and taking into consideration obviously the retirement of the almost $5 million shares that we're going to receive that should give you the EPS effect. But giving you the absolute number of cents that's not how we've broken it down.

Okay. Fair enough. And then Mac bigger-picture question here. Clearly you highlighted one of the positives here is no longer being considered a bank holding company subsidiary. How much of an impact has that had on M&A over the last couple of years? You guys obviously have a very good balance sheet and really good free cash flow generation. So just trying to understand like can we expect the pace of M&A to improve? Behind the scenes how much of a hang-up has that been? And can we expect some of the acceleration from an M&A perspective once that's removed?

Sure. It's a great question. So what I would say historically it hasn't been that much of an impediment because we've been very focused on tucking in deals where we could take it exclusive and really leverage those across the company. So we bought great products. We've entered countries. And so, it hasn't hindered us in the past. What I would say in the future that given we do have such a great cash position and a great balance sheet and now we have these extensions where we have very certain cash flow that we can lever we believe -- and given that M&A is becoming more and more competitive generally, we do believe that it could have been a challenge in the future. So this is the right time to get this deal done to get the certainty of cash flow to get this regulatory hurdle out of the way because we think it really does open up opportunities for the future.

Okay. And just remind us I think comfort range on leverages somewhere in the two to 3x ZIP code?

That's right.

And then last question for me. Just I think Mac you mentioned the success of ATH Móvil and Business in 2021. Just curious if you guys have any kind of updates or stats you can share on the success and traction you had there or how that's kind of trended more recently or maybe a full year 2021 number? Just any kind of update there would be helpful?

Yes. I mean John what we can say is -- and I think we've been giving some update to the contribution. ATH Móvil is becoming almost 3% of our total revenue at this point. So it's starting to become a little bit more material. It grew 27% this last quarter. As we mentioned obviously, we're entering some pretty tough comps just because so much of ATH Móvil traffic that we saw when the pandemic was still pretty active, we started to see more kind of physical activity here towards the end of last year. So I think we're still expecting good growth from these products right? That digital adoption is here to stay. But we've been clear that we don't necessarily expect those high growth rates to sustain as kind of we went back to a more normal state.

Okay. Appreciate it.

Thank you.

Ladies and gentlemen at this time we will conclude our question-and-answer session. I'd like to turn the conference back over to Mac Schuessler for any closing remarks.

Thank you. Again, I want to thank all of my colleagues. I'm incredibly proud of what we've accomplished. As we look ahead, I'm delighted the Board has extended my contract with the company for the next three years. Together we look forward to the growth ahead. Also, I want to thank everyone once again for joining us on today's call. We look forward to speaking to you at conferences in the coming future. Operator, please close the call.

Thank you. The conference has now concluded. And we do thank you for attending today's presentation and you may now disconnect your lines.