Good afternoon, everyone, and welcome to the EVERTEC's First Quarter 2023 Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the call 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 in 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. Reconciliation 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.

Thank you, and good afternoon, everyone. We delivered strong first quarter results, which benefited from both increased sales volume and transactions as well as contributions from acquisitions, a testament to the strength of our business model. 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 first quarter results as well as an update to our expectations for the rest of the year, which includes raising our guidance for 2023. Before I begin with the summary of our financial results, I would like to highlight that we are revising our adjusted EBITDA calculation to exclude the effect of noncash unrealized gains and losses from foreign currency re-measurement. This will better present the overall financial performance of our core business and facilitate comparison with industry peers while also aligning to our credit agreement definition of adjusted EBITDA. This change will also translate to changes in our adjusted net income and adjusted EPS metrics. For clarity and comparability, we have recast prior period numbers to conform revised calculation. Beginning on Slide four. Total revenue was approximately $160 million for the first quarter, an increase of 6% compared to the first quarter of 2022. Adjusted EBITDA was approximately $67 million, a decrease of 8% when compared with the prior year recast amount of $73 million. SAdjusted EBITDA margin was 42%, in line with our expectations, and adjusted earnings per share was $0.69, and an increase of 5% from the prior year quarter's recast adjusted EPS of $0.66. We generated operating cash flow of $55 million, and we returned approximately $10 million to our shareholders through dividends and share repurchases. Additionally, our liquidity remained strong at $368 million as of March 31. Moving on to our Puerto…

[Operator Instructions] Our first question will come from Vasu Govil with KBW.

I guess the first question, can you talk a little bit about the change in quarterly cadence that you saw from Jan, Feb to March and then relative to March, where April trends are tracking just to give us a sense for like the magnitude of moderation. Joaquín Castrillo : Sure. Vasu, this is Joaquin. I'll use kind of sales volume. So we started January in the high single-digit range, and we exited March in close to the 4% sales volume growth range, April is trending similar to March. And so that's kind of the level of decline that we saw on a sequential basis.

Got it. And then just I got the comment on the pricing initiative still helping growth. Is -- have you disclosed sort of when we may see those lap and sort of impact the growth rate this year? Joaquín Castrillo : We implemented this throughout the year last year, but I would say that most of the price initiatives took place between Q2 and Q3. So we will probably start to see those lap in the second half of Q2 and throughout Q3.

Got it. And then one quick one for you, Mac. I know you've talked about M&A as being a strategic priority for you. Any update on whether you were seeing valuations just to a level where you think the probability of actually completing a larger size deal may be increasing? And then, I guess, if you could also give us an update on what the pipeline looks like today. Any indication on whether that has increased as fintechs are struggling more and sort of the complexion of size of the deals in the pipeline?

Sure. So yes, thanks, Vasu. As we announced earlier, we hired a new EVP to run the area, who was actually the CFO of Despegar, which basically is Expedia of Latin America. He has a lot of M&A and investment and banking experience, and we're excited to onboard them in March. What I would say is are starting to move a little bit, but I wouldn't say there's complete capitulation because even the public markets have bounced back up. So hopefully, during the back half, we'll continue to see pricing settle. As far as the pipeline, we have a pretty active pipeline that we're going through different opportunities across the region. We are looking at deals that are similarly sized to what we've executed in the past, and frankly, some deals that potentially could be larger as well.

Super helpful. And if I can squeeze in one last one. Are you knock on that from everything that's gone on in the U.S. banking industry and the turmoil or you didn't hear any knock-on effects from that in any part of your business?

No. We -- I mean, we haven't seen an effect. And in fact, the local banks, a couple of them have already announced earnings and they had great quarters. And so we've been sort of insulated from that.

Our next question comes from [indiscernible] with Deutsche Bank.

Just wanted to ask a few more follow-up questions on the macro situation in Puerto Rico. So you talked about lower ticket sizes in your prepared remarks. I know at your last update, you had mentioned inflation being 6% in Puerto Rico. So just wondering your thoughts on the trends for inflation through the remainder of the year? Do you expect ticket sizes to continue decreasing? And then you also mentioned travel and leisure being up 9% in March. Just wondering, is that in line with your expectations? And then do you -- can you share what your sort of travel assumption that you have baked into your current 2023 guidance? Joaquín Castrillo : So yes, I'll try to break that up into a few visas and if I miss one, I'll come back. I would say that in terms of travel and leisure, we don't necessarily have specific expectation flowing through all I will say the reason for that is that in general, right, tourism for Puerto Rico is only about 5%, 10% of total GDP contribution. So it's not a huge factor in just the general macroeconomic environment. Obviously, it's something that we track, and it's important in the sense of volume from specific verticals but it's not a huge driver to our business. In terms of average ticket sizes, this is something that we've been going out for a few quarters. We know that given the stimulus that we saw, the stimulus effect on consumption over the past couple of years, average tickets really got to a level that were higher than usual. Inflation has kind of kept them or get the average it a little bit higher than what we expected for a longer period of time. But we continue to have an expectation that average ticket will slowly come back modernization and that is part of the guidance that we've put forth. What was the other question, I'm sorry? .

No, I think you touched on it. That also makes thing. I know last quarter, you had highlighted that the undoing Puerto Rico were expected to flat in '23 versus '22? Is that still the case? Joaquín Castrillo : We continue to expect that to be the case, at correct? .

Got it. Got it. And then just for my follow-up, wondering if you can give a little more color on the expanded relation with Mercado Libre. Obviously, it sounds like very exciting moving beyond just the debit. So maybe you can talk about how material your current partnership with Mel is what the new business entails and kind of how significant you think the new relationship can be the LatAm business going forward?

Yes. So this is Mac. I mean, look, Mercado Libre is probably the best brand, particularly e-commerce brand in the region. So testament that they do business. They started with the debit card business in Mexico, then we picked up their debit card business in Chile. And now that they're doing credit with us in Mexico is good from a financial perspective, but it's great reputationally as well. The credit cards are being issued to both consumers and merchants to conduct business. And I don't know if you want to add anything on the materiality. Joaquín Castrillo: No, we haven't broken out the month reality. What we have said in the bus though is both of these, let's say, our debit relationship and the credit relationship now with Magali who have really started from the ground up in terms of issuance. So these are businesses that need a little bit of time to ramp up and actually build out the portfolio. So it becomes more meaningful to the overall business. Having said that, they have been contributors to the growth that we're seeing organically in Latin America segment.

And exceeded our forecast, right? They exceeded our forecast, both of those. So we're optimistic. .

Our next question comes from Bob Napoli with William Blair.

So Mac, Joaquin, you become more active now that the deal with Banco Popular is completed on the M&A front, how are the deals done that you've completed so far? How are the integrations going? I mean are you feeling confident are the -- as you look at future deals that you kind of have that M&A machine and the integration working well.

Yes. So Bob, I would say, generally, if you look at the deals we've done over time, the biggest marquee brands that we've discussed and announced are on those new platforms. So if you look at Mercado Libre, Santander Chile, they're both running in Santa Derry -- they're running on intellectual property that we acquired, and we integrated that well. We were able to bring up new customers, changing it from a licensing model to a processing model. If you look at Grupo Aval, the second largest bank in Colombia, they're running on the e-commerce gateway that we purchase. So we think we've done a good job of buying things at the right valuation things where we had revenue synergies and we were able to expand our business. We always do a postmortem and we learn from those to make sure that we continue to improve on each and every acquisition because each is different, right? It may be a different country, different type of technology. Again, sometimes we're pivoting the model from licensing to processing. But in aggregate, I think we've been very pleased from time to time, there are mistakes that we make that we correct and we're very -- I try to do that in an agile way. But so far, we think we've done a good job buying stuff at the right price and then integrating it and getting the synergies. As we look forward, we hope to do more M&A. So that's why we're -- we have a new leader. I mean the team that did it in the past has done a fantastic job. It's just we want to do now more over a shorter period of time. So we put more emphasis both of my time when -- how I've stacked my direct report team, but also bringing in an additional leader in building out that team and because that's going to be a big focus.

Great. And then the good growth in Payment Services Puerto Rico, also Latin America. How much was the inorganic portion of that? Can you give some color on what the acquisitions have added?

You mean in terms of every segment specifically or you...

Are you I don't know, however you want to give it, I guess, if you want to give a broad like the inorganic revenue growth in the quarter or something like that would be helpful.

Yes, we don't break that out. So we do have that playing in some of the numbers we've got in Puerto Rico and to your point in LatAm. We would say the organic growth rate is healthy, but we don't break that out separately. Joaquín Castrillo : Correct. What I would say, Bob, right, we try to give some additional highlights as part of the prepared remarks to kind of help at least with the cadence. In Puerto Rico, we did acquire or completed the stocking in Q2. So we are expecting a slowdown, right, in the year-over-year growth just because we're anniversarying that. And you can see that we're still expecting high single-digit growth in the second for the year. So you can kind of back in to more or less what that's going to be on a go-forward basis without M&A. And in Latin America, I know it's a little bit more -- because we do have two acquisitions flowing through them. But the most meaningful one, which is the one we acquired in Chile last year, we will anniversary in the third quarter. So we are expecting somewhat of a slowdown to what you're seeing today from a year-over-year growth perspective as we never show that in Q3 and still expecting high teens growth, right, for the full year, which you can also kind of back into more or less what the impact would be.

And just lastly, sneak one in. On the other partnerships, the Citibanamex and the sum up. I think some at an really interesting partner, a great partner there. as well. Can you give any color on how those partnerships are adding to growth or if they're being successful? Joaquín Castrillo : Yes. So I'll start with sum up, which was the one we announced last quarter. similar to mere Bob unit, we are very excited about some of, one, they have similar aspects to mere in terms of their regional presence. But in the same manner, similar in that this is a brand-new portfolio we're not acquiring or, let's say, going to an existing business where we can migrate a pay portfolio of cards or transactions and get profitability ramped up very quickly. This is something that needs to grow into a more meaningful part of the business, but it certainly has a series to be that. In the case of Citibanamex, we continue to work with Citi across multiple countries in the region and trying to get that product sold. As we've said in the past, they are using our technology at the back end, but they are kind of leading this in terms of getting in front of clients and selling.

Yes, because on the steady Citibanamex, you have to get the customer up and then you have to get their vendors up. So it's sort of a... Joaquín Castrillo : I mean also a slightly longer sales process because of the nature of the product that's being sold.

Our next question comes from Jamie Friedman with Susquehanna.

Congrats on a good start to the year. Mac, I'm just wondering at a high level, what so far has surprised you that you didn't expect? I know we're only four months in, but any kind of bigger picture takeaways about what you've seen so far?

From the business, the strength of the consumer, I think, has surprised everybody. I mean if you look at vis-a-vis you look at some of our peers beat -- so I think the strength of the consumer has been surprising, not only through Q1 earnings season, but just in general, look, but that's been the biggest surprise. Other than that, I think we're executing very well. And like I said, we're very focused on M&A, but the strength of the consumer has surprised I think the entire industry.

Okay. And then just as my follow-up, akin, sometimes you enumerate the quarters of the period of comparison that -- so we can get the modeling right. So can you just remind us last year, was there anything in the Q2 or the second half? I know there's a lot. But if you could just remind us about when some of those things were, if you can think of it off the top of your head, I think that would be helpful as we try and kind of clean up the model. Joaquín Castrillo : Sure. I'll kind of go through some of the key ones that we called out as I just mentioned, Bob, we will anniversary the tuck-in acquisition that we did in Puerto Rico in the second quarter. That's in the payment Puerto Rico segment. I would say that in the Latin America segment, we will anniversary the BBR acquisition in Chile in the third quarter. So that's an important item for that segment. And then in Business Solutions, we have the Popular transaction impacting the third quarter mostly right, where we had the sale of assets, plus we also had the CPI credit. And most of the impacts related to that will flow through Business Solutions, although we do have a small piece that flows through payments in Puerto Rico. I would say that the one for, as we said last year, is a much cleaner quarter. And if you look at what we just reported for Q1, assimulate to what kind of what we said at the end of the fourth quarter that Q4 is a good baseline as to what we expected for 2023.

Our next question comes from John Davis with Raymond James.

Mac, you just said kind of the consumer has held up better to start year -- but if I look at the guide, you guys raised a little bit less than the beat in the first quarter. So just curious, versus three months ago, kind of how do you think about macro and kind of your -- is there more conservatism based on the back half of the year? Just any sort of macro commentary would be helpful. Joaquín Castrillo : So I'll start, John, and maybe Mac can just chime in. What I would say is, look, we're certainly surprised by the strength of the consumer, and it was mostly reflected, as I mentioned, in the first two months of the quarter where it really started off really strong. We have seen that kind of taper down to more what we expected when we started the year coming -- kind of getting out of March into April. So we're certainly looking at those trends and taking that into the season as we model the rest of the year. I would say that if you look at our guidance for the full year, it still considers right, a positive economic backdrop for us to be able to perform at that level. And as Mac just said, we continue to operate very well. What the strength of the consumer is something that we need to continue to monitor closely because inflation is still high, rates are still high, and we have this declining trend that we saw during the first quarter.

Yes. I mean, as consumers exhaust the excess cash from the Feds and as rates stay high, take the effect that the Feds wanted to take, we do believe the back half is going to be weaker than the first half.

Okay. That's helpful. And then, Mac, obviously, we've talked a lot about capital allocation so far on this call in M&A, hired new Head of Corp Dev. But just -- we're almost a year from the BPOP transaction, which kind of frees you up, if you will. Where are you willing to take leverage? How big of a deal or kind of are you willing to do? You've done a bunch of nice tuck-ins throughout your time at EVERTEC. But just curious like what the appetite is to do a bigger deal and where you would take leverage given that we're now under a turn on leverage.

Look, I mean, we would look at 3 to 4x for the right deal. We do want to be very cautious, I think back to one of the previous questions to make sure the bigger the deal, the higher the conviction and the more the execution risk, and we're very aware of that. But we would do a larger deal. We are looking at some things that are larger than we have in the past. I mean, look, we can't talk about the deal we have one, but we are looking at that are more sizable than in the past.

Okay. Great. And then last one for me. Just any update on Chile. Obviously, you made a net in that market a few years ago. We had COVID. Just curious kind of how that partnership is going SP-2 Any color there?

Yes. I mean, look, Santander Chile was the first major deal that created a lot of excitement at the company because we had bought Petro or pay group, and then we turned it into processing business and brought up the most successful bank in Chile. The partnership is going incredibly well. They've significantly exceeded their expectations. And as you know so well that they expanded into Uruguay with us. Chile is a market we love, right? We -- because of this business and because of our legacy business that we purchased there. It's a sizable market for us when you look at the whole company is 1 of our largest markets outside of Puerto Rico, and it's performed well. .

Our next question comes from James Walker with Morgan Stanley.

This is Jeff Goldstein on for James. Just on the slowing volume trends you called out. Can you expand on if there are particular markets where that is most pronounced? Is there anything notable to call out by vertical, maybe just some more color around the those trends would be helpful. Joaquín Castrillo : Sure. I'll give you what we have visibility to do, right? This is mostly in the Puerto Rico segment. So that's where we're kind of seeing the very good first half of the port and then moderating to kind of the exit of March and April. And I wouldn't say it's in any specific vertical. The truth is we did see strength across all verticals. We did see the average ticket pretty much come down also in all verticals. So there isn't any one thing that I could call out and say, is the main fact or the main, let's say, vertical that's starting to moderate. I would say that is a general comment at this point, that's how we're seeing it.

Okay. Got it. And then recession resilience continues to be a popular topic. So maybe you can remind us in a potential recession, how protected you view revenue? And then on the cost side as well, what leverage do you have to pull to protect margins? Just how should we think about that?

I mean, look, the one thing Puerto Rico is a bit of a unique market. One is 40% of the population against federal subsidies. And those typically don't go away if you get a recession. In fact, those could increase. So then you had the opportunity for the continued funding coming in from the Feds from the hurricane and the pandemic. And that's still some sub-people size that at about another $50 billion, right? And that's what some of the banks have said they anticipate as well. So that does create some type of insulation against a recession because those are federal funds that would be less likely to be impacted. . From a cost perspective, look, we -- if you look at what we've done with our margins over time, not only in Puerto Rico, but in Latin America, we're very focused on managing our margins, and we still have the ability to continue to look at labor arbitrage between our different locations, and we'll continue to look for opportunities with our vendors.

[Operator Instructions] Our next question is a follow-up from Bob Napoli with William Blair.

Appreciate it. I just wanted to follow up on PaySmart/Brazil, I guess, if you would. I mean, Brazil is obviously a massive market. There's a lot of players down there, and you don't just make 1 acquisition in Brazil. Do you have a broader Brazil strategy? And how is PayeSmart looking early days, but just broadly your thoughts around getting a lot bigger potentially in Brazil.

Great question, Bob. So as you know, we've had a small business in Brazil when we bought PayGroup. PaySmart actually gives us an issuing business there with some great customers. Brazil, we believe, is an important market. It's a significant portion of Latin America in general. It's by far the largest market. It is a market that we're interested in if we can find the right opportunities. So we like the market. We do think you've got to buy the right asset, you've got to have a good local team, and you've got to be able to differentiate yourself. And so far, we've been able to do that with small acquisitions, and we'll continue to look at the market. And if we can find something bigger that -- where we feel like we have a differentiated advantage and we can manage it better or create some synergies by combining it, we would absolutely do it do in Brazil.

And then just on the -- what you're looking at from an M&A perspective, anything -- should we expect more of the same? Are there other areas or other technologies you'd like to acquire? Just any thoughts on the types of businesses or if we could see technology acquisitions?

Yes. So Bob we are thinking very broadly. We're looking at our franchise and what strategic advantages we have in the region from both the existing customer set that we have and what additional products could we sell them. The infrastructure that we have and how could we leverage that infrastructure to run other products more cost effectively. So we're looking at adjacent businesses. that we think make sense both commercially and from an operating perspective that would make sense for us. So we'll look at products, we will look to expand into geographies in a larger way, like you mentioned, potentially in Brazil. But we want to make sure that being part of EVERTEC makes the target a better company and create value. But we are looking wide as adjacencies as well.

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 the call today, and we look forward to seeing you over the coming months at different conferences. Thank you. Good night.

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