Good afternoon, everyone, and welcome to the EVERTEC Second Quarter 2022 Earnings Conference Call. Today's conference call is being recorded. At this time, I would now like to turn the call over to Mr. 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. [Operator Instructions]. I'll now hand over the call to Mac.

Thanks, Kevin, and good afternoon, everyone. We are pleased with our second quarter results in both Puerto Rico and LatAm driven by strong revenue growth. Puerto Rico benefited from increased transaction volumes and onetime revenue while LatAm continues to benefit from organic transactional growth. We were also able to close both the Popular transaction and the BBR acquisition on July 1, in line with our previously announced expected timing, and I want to thank the whole team who worked tirelessly to get these transactions to completion. On today's call, I will start with some highlights from the quarter, and then we'll turn it over to Joaquin, who will provide further details on our second quarter results, a review of the impact from the Popular transaction and an update to our outlook. Beginning on Slide four. Total revenue was $161 million for the second quarter, an increase of approximately 8% compared to the second quarter of 2021. Adjusted EBITDA was $73 million, a decrease of approximately 9%; and adjusted earnings per share was $0.65, a decrease of approximately 17% from the prior year quarter. During the quarter, we returned approximately $18 million to our shareholders through dividends and share repurchases, an increase of $14 million when compared with the prior year. Additionally, our liquidity remains strong at $404 million as of June 30. Moving to our Puerto Rico update on Slide five. Merchant Acquiring revenue increased slightly when compared with a year ago and in line with our expectations. Last year's second quarter was heavily impacted by COVID stimulus that did not repeat in the current period, resulting in lower sales volume during the quarter. However, we were able to offset this headwind with select pricing actions. Payments - Puerto Rico benefited from increased POS transaction volumes, up 6% year-over-year as…

Thank you, Mac, and good afternoon, everyone. Turning to Slide 9, you will see the consolidated second quarter results for EVERTEC. Total revenue for the second quarter was $160.6 million, up approximately 8% compared to $149.1 million in the prior year. Second quarter results in Puerto Rico reflected increased payment transaction volume as well as the continued growth of ATH Movil and ATH Business and the contribution from the tuck-in acquisitions completed this quarter. We also benefited from the printing contract that was signed in June 2021, onetime software sales Mac noted on the effects of the 5% CPI escalator in our Popular MSA, which has now been amended with the close of the transaction on July 1. We continue to experience double-digit growth in Latin America, mainly due to organic growth, and we continue to grow existing relationships as well as expand our presence in certain countries. Adjusted EBITDA for the quarter was $73.4 million, a decrease of approximately 9% from $80.3 million in the prior year. Adjusted EBITDA margin was 45.7%, an approximately 810 basis point decrease compared to the prior year. The decline in margin is driven by the $4.1 million impairment loss recorded in the quarter for a multiyear software development, foreign currency exchange losses of approximately $200,000 in the quarter compared with gains of approximately $1.4 million in the prior year quarter, increased provisions for expected losses as well as changes in the mix of business and higher operating expenses in part due to inflationary impacts. Adjusted net income for the quarter was $47 million, a decrease of approximately 18% as compared to the prior year, primarily reflecting the lower adjusted EBITDA as well as a higher tax rate and higher operating depreciation and amortization. Our adjusted effective tax rate in the quarter was higher…

[Operator Instructions] Our first question comes from Bob Napoli of William Blair. Please go ahead.

Than you. A lot going on there. So the BPOP transaction being - so we'll have a full effect of that in the second quarter and your low to mid-40s EBITDA margin is what you're talking about is the corporate EBITDA margin over the long term. We would expect that to be in the second quarter. There were a number of, I think, one-offs in this quarter maybe that had some effect.

Bob, this is Joaquin. I think you mean in the second half and the second quarter does not have any of the impact --

In the third quarter, I meant third quarter.

Yes, yes, in the third quarter. So the third quarter - so let me start from the back. The 40% - the low 40 to mid-40s margin is on a go-forward basis, taking into consideration the different effects of the transaction. As we mentioned, though, the third quarter will have this credit related to CPI that will be, let's say, a onetime impact because it is a retroactive amount.

Okay. What is the CPI credit? What is the amount?

About $7 million.

$7 million?

Yes.

And that's built into your guidance for the full year.

It is built into our guidance for the full year. That's correct.

Because that's a CPI uplift from the very end of last year and the first half of this year. They get a credit back to that. So - but you won't see that until Q3 given that we closed at the end of - we closed during the quarter, Q3 - or beginning.

And just with your balance sheet and the strength, I mean, Banco Popular has said on their call, they're looking to sell down their position. I think their agreement is to take it from 10% to 5% ownership. With your balance sheet in such great shape, why wouldn't you just buy the shares from Banco Popular?

So I think we'd be consistent, Bob, on our capital allocation strategy. Obviously, to the extent that we don't have M&A and growth in front of us, we'll certainly consider repurchases. And so it's something that we'll consider based on market conditions.

Yes. So Bob, this is Mac. I mean we will definitely consider, depending on the pricing, participating in their sell-down. We do want to make sure though that we have the appropriate capability, though, to continue to pursue M&A because part of the thesis of this transaction was to free us up from the Bank Company Holding Act. But we will definitely look at their sell-down as an opportunity to deploy capital as well.

And last question was in that line. Given the lift - reduction of restrictions, Latin America seems to be doing well. So maybe just some commentary on your interest and what you're seeing and opportunities to add to Latin America and where you're seeing, in particular, strength. I know you called out Mexico. How is Chile doing?

Yes. So the businesses are performing well. Both Mexico and Chile have performed well. We've exceeded our sort of expectations. As you know, for the quarter, we grew 19% in Latin America, which, Bob, when I first got the job, you really pushed me hard I got to get to double digit. And so we are, and we're pleased with that. We are still focused on M&A. We're still looking throughout the region. We announced there's still not only the closing of the Popular transaction but also the closing of BBR, which is the deal in Chile, and a small tuck-in deal in Puerto Rico as well that complements our payments business here.

Thank you, appreciate it.

Thanks Bob.

Our next question comes from Vasu Govil of KBW. Please go ahead.

Hi, thanks for taking my questions. The first one for you, Mac, big M&A announcement related to one of your competitors in Chile. Does that change the competitive dynamics for you at all in the region? Are there any high-level thoughts on that?

Yes, great question. I mean, look, two good companies. I know those organizations and some of the leaders in both. What I would say is, look, regardless of the change in the environment, whether it's a hurricane or a pandemic or changes on the competitive landscape, we feel like that we've always focused very intently on our customers and been able to perform well regardless of the change around us. So we still think we have a very competitive value proposition for these local markets and being a Latin American player, and we think that this doesn't change that.

That's helpful. And then two quick modeling ones for Joaquin. First, the higher interest expense, any color on how we can calibrate that higher interest burden for next year between...

I mean what I would tell you, Vasu, if you look at our - on our capital structure, right, we do have a swap that helps us mitigate a portion of the interest lift. It's above - slightly above 50% of our total outstanding debt. So that kind of gives you a little bit more color as to how much of our capital structure is subject to those increases going forward.

Got it. And then just on the pricing initiatives you've talked about, I think the first we heard about that was last quarter if I'm not mistaken. So do we expect them to lap in the fourth quarter? Or do we see some benefit from those in the next year as well?

So as we've said before, Vasu, I think this is something that we do continuously. I think in some cases, they might be a little bit more impactful than others. But we've been very strategic and very detailed oriented in terms of how we evaluate the portfolio on where and when we want to execute those price initiatives. We thought that given some of the headwinds that we saw because of the tough comps last year that some of these pricing initiatives were prudent, and that's how we'll continue to evaluate those going forward.

Thank you very much.

Thanks Vasun.

Our next question is from John Davis of Raymond James. Please go ahead.

Hi, good afternoon guys. Joaquin, I want to touch on the margins for a second. Obviously, there's a lot of moving pieces with the BPOP transaction. But you've seen a lot of your larger peers in the U.S. talk down margins on wage inflation and other pressures. So just curious, I know you said low to mid-40 margins post transaction. Has those expectations come down at all a little bit? Obviously, even within the range - are you seeing similar kind of inflation pressures on wages and others? Just curious on your comment there.

I mean I would say that from a wage perspective, yes, and I think there are specific pockets where we're seeing that a little bit more than others. I can tell you that in Latin America specifically, when we're talking about technology resources, we are seeing wage inflation, and we have reacted to some of that competition through wage increases. What I would say is - and we've said this in the past, John. We are very much margin focused. We've been able to maintain our margins, even though we're growing in Latin America, which is our lowest margin segment. We knew that the Popular transaction was going to put some pressure on that margin on a go-forward basis. But as we stated when we announced the transaction originally, we have certain levers on our side from a revenue perspective and from a cost perspective that we'll continue to execute to try and partly maintain that expectation of low to mid-40s and over time increase it.

Well, John, I think one thing that's important is, I mean, the transaction with Popular brought margins down because of the businesses that we sold and then the share that we're giving them on MAB. As you look at our guidance for the year, I mean, we have seen pressure on discrete items as it relates to inflation like paper costs for our printing business, but that's not huge. And also we have seen in the labor market, particularly outside of Puerto Rico, we've been very focused on ensuring that we can retain our key talent and develop these products where we have our own intellectual property and we think are unique in the region and to recruit new programmers because the pipeline of development is critical to our growth. So we've been fortunate that those are low-cost markets to begin with. So the increases that we've made, we've been able to offset in other ways. And it really hasn't upset our margin expectations for the year. That's why - in a significant way, and that's why the guidance is where it is.

Okay. And then a follow-up on one of Bob's questions earlier. Obviously, the BPOP transaction closed about a month ago. Has there been any significant impacts or increase in your M&A pipeline, parties that are willing to talk to you now because they're a little bit less worried about kind of bank holding company aspect? Or just curious, like, obviously, you guys did this for a reason. Has your pipeline gotten bigger? Any comments there? Obviously, the balance sheet's in great shape.

Yes. I mean I do think this is going to open up the universe of the types of targets that we can go after. It is an unusual time right now in both credit and equity markets, right, as far as what sellers are willing to take. So I think the year has got to work through some more what are fair valuations. But we are very focused on M&A, and we do think that this is going to create new opportunities for us.

Okay, all right, appreciate the color. Thanks guys.

And our next question comes from James Faucette of Morgan Stanley. Please go ahead.

This is actually Jeff Goldstein on for James. Just thinking about your guidance for the second half here. How should we think about the upside case, specifically on the top line? Is that tourism coming back faster in Puerto Rico? Is it more kind of federal funding making its way through, more partnerships in the pipeline maybe that closed? Just how should we think about what could drive upside to your forecast at this point if you had to rank order them?

So I would certainly say that it would be, more than anything, payments in Puerto Rico. If we look at - it's a few moving pieces really. This specific quarter, we had pretty flattish, right, Merchant Acquiring segment, but we still saw very good transactionally to come through our ATH network and ATH Movil that really exceeded what we had originally expected for Q2, so as we - to Q3 to the extent that we continue to see that strong growth from a transactional perspective and we start to see some shifts in our merchant segment. And the reason I say that is we continue to see lower average ticket. We continue to see out of credit - more credit volume than debit volume that are putting pressure on our spread. So if we're actually continuing to see good transactional volume in our network and then some of those trends in Merchant Acquiring start to move our way, that could push us towards the higher end of that guidance range. But those two need to combine. At this point, if you look at our Merchant Acquiring according payment and what we've said for the full year, we are expecting kind of low to mid-single-digit growth in the Merchant Acquiring segment, which puts, say, a low single-digit growth on the second half, right?

Okay. Got it. And then a follow-up question on e-commerce. I know e-commerce is a fairly low percentage of your mix. But how do you think about the long-term opportunity there? Can that improve materially over the next, say, four to five years? Or is that just much, much less of a focus for you than, let's say, solidifying some of your core products in new geographies?

I would say it's incredibly important to us. We acquired a company called PlacetoPay back in 2020. We've now made that gateway, our marquee e-commerce product on most of the markets where we have a presence. We just launched it in Puerto Rico. And we've seen almost immediate reactions from our clients that didn't have access to such a good product from an e-commerce perspective. So I would say that certainly solidifying our clients and our products is important, but this e-commerce gateway is helping us do that and then also bringing in incremental growth that we think will continue into the future. Mac, I don't know if you...

Yes, let me just - I mean I agree with Joaquin. It's - we think it's a big part of the future. That's one of the reasons we bought PlacetoPay out of Medine. And to Joaquin's comments, we've localized that now in several of the markets that we do business with and most recently, Puerto Rico. And then we've had - in the markets where it's been around for several months, we're actually seeing an incremental uplift in the number of customers that are coming to us for e-commerce. I talked a little bit about we made an organizational change. We - part of the organizational change is [indiscernible] is now our Group Head of Latin America, and he will continue to manage the e-commerce business. So we're keeping that as a discrete business so that we can continue to localize it, continue to really focus on adding more merchants and potentially long term using it as an offering to customers that may be looking for a regional offering, which will be even more compelling the more countries that we have the capability localized. So it will be a focus for us going forward.

Great, all very helpful. Thank you.

Thanks.

[Operator Instructions] Next question will come from Jamie Friedman of Susquehanna. Please go ahead.

Hi Mac, Hi Joaquin, in your prepared remarks, you mentioned the Puerto Rican unemployment rate. It's down around 6%. How do we interpret that as the implications for the business? And if so, to which segments?

Yes. So I mean when we think about Puerto Rico this year and into the future, you still have significant funds coming in from Maria and some incremental dollars coming in from the pandemic. So helping to stimulate the economy, putting people to work, making sure that they have the discretionary funds to spend using our ATH network, spending in our merchants and actually continuing to have activity at our largest customer, Popular, is very beneficial to our business. So having an economy that has nice tailwinds with the federal funding come in and a good unemployment rate by historical standards is good for our business given that a lot of it is driven on consumer and discretionary spending.

Yes. Makes sense. And then I just had one kind of housekeeping thing. In payments and services - Puerto Rico and Caribbean, there was a point, I think you were making around the software impairment charge. What was that about?

No, we took an impairment this quarter that impacted the margins for that specific segment. Let's say a multiyear software project that we have here, we've done significant customization to it. And as a result of the evaluation of that asset, we had to record impairment.

Okay. I mean is there anything to worry about or that's just part of the business?

No, we were not expecting - this is a onetime item. We're not expecting this to have any future impact.

Got it. Okay. Thank you, I'll drop back in the queue.

[Operator Instructions] At this time, it appears that we have no further questions. This concludes our question-and-answer session. I'd now like to turn the conference back over to Mr. Mac Schuessler for any closing remarks. Please go ahead.

Thank you, operator. I want to thank each of you for joining us on the call tonight, and we look forward to seeing you in the future at conferences. Thank you.

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