EVERTEC, Inc. (EVTC) Earnings Call Transcript & Summary

Yes. And so the growth rate is -- look, so before the pandemic, the P2P trend was already going on, right? We had good hockey stick growth. We saw that accelerate during the pandemic because people did cut out on personal cash transactions. But of that 200%, the huge acceleration is ATH business. And that small business is what we're trying to do before the pandemic, in the P2P app, we had some people that needed to move to business and because it was a commercial account. It's all the same app on your phone, if you just push a different button. But this accelerated people moving the business because they were doing more volume, and now they had to identify as a business, and it increased the number of people that enrolled. Because you could have a burger shop that had a cash register, but they didn't want you come in, in the store. So we had a significant amount of people move to ATH business. But most of that's new spend, new categories that was cash. And then the QR code is the piece we've talked more recently about because again, we want this to be the app that you use for all of your transactional needs as it relates to payments. So that's what's exciting about it is -- and again, it's because we have the network effect of having almost every consumer in Puerto Rico having an ATH account because all the banks are members. And then most of the merchants because we have a large share of the merchants, actually being able to accept the QR code. So we think the growth rate there. Prior to the pandemic, we still had great growth on P2P. It turbocharged the business transaction, which was what we were trying to do through other sort of activities, promotions, reaching out to merchants, but -- and then it helped us accelerate [indiscernible] the QR codes. So we think now that given you can manage face-to-face personal transactions and small business transactions digitally, we'll continue to see good growth into the future.

Okay. And then moving outside of Puerto Rico PlacetoPay, you acquired the gateway in 2019. I think you didn't expect it to have a material impact in 2020, but it seems like just with the pandemic, that growth has accelerated. Do you -- what's happening, the acceleration in e-commerce kind of changed your view on rollout timing or strategic planning for PlacetoPay? Any thoughts there?

Yes. So I mean, we will -- so what we've done, if you back up and you look at Latin America 6 years ago, our Latin American business was primarily in Central America. We did not have great products. Frankly, we didn't have the service that we needed either. So fast forward 5 years, we've acquired some great assets. So we now have a great risk management product that runs on the cloud. We have an issuing and an acquiring product. The acquiring product, we own the IP of all of this. Most of it's developed in Uruguay. That's what we're rolling out with Santander Chile, is the acquiring platform. And then what you're referring to PlacetoPay was sort of the last piece that we needed to have the full set because we want to own the intellectual property, we want to be able to deploy it at the pace we need and prioritize the market and not be dependent on others. So PlacetoPay, when we bought it, we were focused on Colombia, continuing to roll it out in Colombia and Ecuador because they're in Ecuador as well. But now what we've done is accelerated the product road map to roll it out in more countries faster. So we've already rolled it out in a couple of countries in Latin America -- I mean, I'm sorry, in Central America, and some of our bank partners are replacing it with the old product that we were providing them with. And it's allowed them to convert those merchants, but now they're selling more merchants because the product is so much better. We've also accelerated the road map to when do we bring into Puerto Rico so we can upgrade the product here. So we're very pleased, and it was fortuitous that we bought it at the time we did because that was the last product we needed. And right now, it's one of the most important that we continue to turn up the investment on.

Okay. That's helpful. And then what drives success there? Is it capabilities? Is it distribution? Is it -- are there not a lot of alternatives in the markets you're going after? Can you talk a little bit about that?

Yes. I mean the interesting thing about Latin America in general is, and this is why it's an attractive market, while we're fairly well positioned, it's an underserved market. So the bigger players are trying to combine with other big companies, move into Europe and into Asia. And then you basically have the monopolies and duopolies that are fairly slow. So given our size, given our balance sheet, given the earnings that we have, we're a very big player in these countries. And so it's a great opportunity for us, but making sure we localize it and then we localize it to the local network, so we have acceptance by the local debit networks. Then making sure that we have the right channels to distribute their products is incredibly important. We have most of the features and functionality. We keep adding new features and functionality, but it's about local connectivity and local distribution. So we are now localizing in those markets with appropriate debit networks and forms of payments that are prevalent in those markets and then rolling it out through our bank partners.

Okay. That's helpful. And then if we could move to Chile, you just discussed the growth opportunity with Santander. I'm sure that was a competitive process. So what made Santander go with EVERTEC? And then just what should we expect from a rollout pace over the next year or 2 with that relationship?

Yes. So let me -- as just so people are familiar with the Chilean market. In Chile, all of the merchant acquiring and all the contracts are owned by one company called Transbank. And Transbank is owned by the banks in Chile. Santander Chile is one of those owners. And they made the conscious decision as we're seeing pressure in other markets, to leave Transbank. And they decided to leave Transbank because: Number one, they wanted someone to be more innovative and bring new products to the market. Number two, they were contributing a lot of leads to Transbank, but they only owned a certain amount of the equity. So they felt like their ownership was disproportionate to the amount of leads that they were contributing. And so in Chile, what we have is a processing deal. So Santander has to go sell each merchant one at a time because the contracts are currently owned by Transbank. With this processing deal, we have minimum. So as soon as we go live, which we plan to do before the end of the year, we will immediately start booking the revenue, and we'll immediately have good earnings for that segment that will be meaningful for our LATAM segment. That was the deal we did versus doing a JV deal where you make the investment and then you get it back over a long period of time as you slowly build the book the business. Our vision for Chile, because most of the banks do business with EVERTEC in Chile today with our bill payment product, is to do what we do -- we've done in Puerto Rico: go broad and go deep. So have a lot of banks as customers, which we already have them as part of our Rolodex, but then also sell them after you sell them the acquiring platforms of issuing services, some risk management services, and the gateway. So we're localizing the gateway. You talk about PlacetoPay in Chile, right now for Santander Chile as well. So that's our view is that as we go wide and deep and we become the #1 fintech of choice around payments for these banks in Chile and the alternative, that we can create sort of a P&L that has more leverage from a margin perspective.

And then just more broadly on bank distribution. Is there a pipeline for opportunities with other banks as well? I mean, the relationship with Citi as well in Mexico. So you -- it seems like you have the right conversation when you're talking to these banks. Just anything there from a distribution perspective?

Yes. So -- and that's another important component. So in Chile, we -- it's not an exclusive deal with Santander. So once we get them up and running, we'll give a little bit of runway, then we actually can sell this to anybody else clearly. So for EVERTEC reputationally, the Santander deal in Chile and the Banamex deal were transformational just from a reputational perspective in the region. And so we are -- have a good pipeline of organic business. Alelo uses our product in Brazil, which is a very big sort of prepaid card provider in Brazil. So these wins have helped us sort of become at the top of the list when people in these countries look for alternatives. And that's why it's important. We -- it was fortuitous for us to do the deal with Santander Chile as we're localizing our platform. And that's why we're trying to pick the right markets to localize as we see the opportunities become available.

So in terms of just distribution in South America, like so you land in Chile with a bank partnership. Are there other -- over time, do you spread out into other methods of distribution, whether it's just direct and you have your own book of business? I guess, how does the distribution in your various markets evolve over time?

Yes. Right now we're very focused on sort of the traditional banks. So -- and in Chile, just to be clear, we already had a business in Chile. So we were already -- bill payment collection was a product that most of the banks in Chile were already using. And then we upsold them on the Merchant Processing business once we had the EVERTEC merger because they saw the financial wherewithal of the whole entity. And they're like this is something we're comfortable doing this business with. But so we -- traditional banks are a big -- one thing, we're not trying to compete with the bank. We're trying to make the bank successful because we want to have a regional platform and footprint. And so we're focused on traditional banks, we're focused on retailers, large retailers. Like Éxito is a customer of ours, particularly around the bill payment product. And then we're also focused on fintechs. So what you'll find in some of these countries, like Mexico, is their new fintech license coming out, where small fintech companies can offer banking services to help embrace the unbanked. Those are our customers as well.

Okay. That's helpful. And then just a question on EBITDA margins. Historically, EBITDA margins have been in the mid- to upper 40% range. Obviously, last quarter was higher due to some -- seemed like a couple of nonrecurring factors, but generally in the mid upper 40% range. What are the key drivers of margin going forward? Obviously, scale is a component, but you do have to balance sort of scale in your core market with expansion in LATAM. So how does that balance work? If you could talk through that?

No. I mean, you kind of summarized it well. I mean, that is the balance, right? From our perspective, Puerto Rico continues to be our main market. The size and the scale that we have here is reflected in the very good healthy margins that we have in Puerto Rico, but our expansion, right? And as we look to grow at a faster pace, that's really in our Latin America market. And even though those margins are lower than our rest of Puerto Rico margins, we have: one, been working over the past couple of years in converting licensed products to processing products and Chile being kind of an example of a client that's going to go up onto our acquiring platform on a processing model. But over time, we're expecting that to give us the same ability of building scale and over time, also expanding margin as we continue to drive transactions through those platforms. And in general, we have been able to expand margins in Latin America, if you go back a couple of years to where we are today in the mid-30s. So I think as we grow and as we grow faster outside of Puerto Rico than in Puerto Rico, the overall margin will get impacted or eroded slightly just because we're bringing in revenue at a lower contribution rate. But we are always trying to position ourselves even in these LATAM countries to have a scale business that we can expand margin over time.

Okay. That makes sense. And then switching gears to capital allocation. Just with the debt leverage below 2x, does M&A become more of a priority now? Or just -- any thoughts in terms of capital allocation priority at this point?

Yes. I'll give you my thoughts and then maybe Mac can give you his. I mean M&A has always been a priority. I mean, I don't think that priority has changed, yes? Our leverage is now below 2x. So we're very comfortable where we are from a leverage standpoint and with a very strong balance sheet. What I would say is that over the past 2 quarters, obviously, the lack of visibility as to how quickly the business was going to recover, the economy was going to recover, was there going to be a second wave or a third wave of COVID, are things that we definitely took into consideration as we're thinking about capital deployment. Now that we're seeing some more stability and some better visibility as to how our business can kind of deal through these types of scenarios, we're in a much better position to kind of go back and execute on that same strategy. But from a priority perspective, M&A is and continues to be our top priority. And to the extent that that's not there, then we'll shift back to repurchases as we've done in the past.

Okay. I mean one thing, like, when we went into the pandemic started, we were very conservative because we wanted to focus on the [Technical Difficulty] in the businesses and invest in these projects, get these things off the ground and really come out of the pandemic in a position of strength. We also had a thesis that potentially, we'd see some distressed pricing in M&A assets. We haven't really seen that flow through. But we are still equally as focused now. We got to see what happens over the next coming months. I do see people being more cautious in getting out, kids getting the cold. Is it -- so I think the world is a little -- becoming trepidatious again. But our priorities really haven't changed. It's first organic growth, M&A and buyback. And we're very focused on the right capital allocation.

Okay. Maybe -- that's helpful. And then maybe one question on competition before we move to a wrap up question with only a few minutes here. I think there is an increasing recognition of the growth opportunity in Latin America, which is a good thing. But that also brings potentially more competition from larger players. I guess -- and this is very much country specific. As you discussed, things do need to be localized to compete at the local level. But in your various markets outside of Puerto Rico, has there been a step-up in competition? It seems like, obviously, there's still a lot of greenfield opportunity from a cash-to-card perspective, but it does seem like it's an increasing focus, particularly for large U.S. merchant acquirers. So just any comments on how the competitive landscape has changed would be helpful.

Frankly, I haven't seen a lot -- a significant amount of change. I have seen people are right -- part of it was, are these markets going to open, right? So there's been a lot of interest when some of these assets have been available for sale, the monopolies and duopolies. But you haven't seen a lot of those transactions. I think the only reasonable one is Prisma. And there've been rumors of others trading in the past and [Technical Difficulty] sort of changed hands. I do think that the fact that we have 200 people in Chile, the fact that we have 150 developers in Norway, you can't recreate that overnight. If people want to do business with people, people they're familiar with, people that are committed to their markets, people that have a presence there. So if we can have a blend of great competitive products and technology with already a local presence where we show a commitment to that market and an investment in that market, I think we're very, very well positioned competitively. And I don't believe that today, I've seen a significant change in that competitive advantage that we have.

That's helpful. And then with a couple of minutes we have remaining, maybe a wrap up question. When people look at EVERTEC, the first thing they see is Puerto Rico concentration. And then I guess that the simplicity to look at that. What's missed about that thought process? When people just look at simplicity, okay, Puerto Rico concentrate, is a player in Puerto Rico. What are people missing, particularly when considering your longer term opportunity? I think we've discussed a lot in terms of the Latin America opportunity. I think that's a big part of it. But just curious to how you would characterize it?

Well, I think -- I mean, there are 2 components to that. One is Puerto Rico in of itself. You can't get away from the fact, Puerto Rico is a significant part of our business. And no matter how fast we grow outside of Puerto Rico, it's still going to be something that we meaningfully contribute to, right? And I think people underestimate what is the prospect of Puerto Rico in the coming years? I think the hurricane did change the trajectory on that. But I think if you believe that we've got good tailwinds with the federal stimulus money after the hurricane, now money coming in from the virus and potentially the competitive landscape changing here once we have new utility cost, then you've got a different backdrop on top of somebody that has the market share that we have, the commitment to the island, the investment innovation, which has created a nice, steady, slow growing. I mean, it's not going to grow double digits. But it's created something nice and steady that has a very low tax rate. So it's a nice -- I think people underestimate that, that can be a nice investment over a long period of time. On top of the fact that outside of Puerto Rico, we've doubled the business and tripled the EBITDA in just 4 years, right? So if we can get both of those right, continue to steer well in Puerto Rico, whether there's a hurricane, an earthquake, a pandemic, but still be very diligent, be very innovative and convert the cash at a good tax rate, on top of continuing to grow well outside of Latin America, then I think we're really creating sort of a unique investment.

Okay. That's a good point to leave it on. Thank you, Mac. Thank you, Joaquin. Really appreciate your time today. Great discussion.

Thanks, Andrew.

Thank you, everybody.

Thanks. Next up, we have a panel on AP automation. Thanks, everyone, for joining. Bye now.