National Bank of Greece S.A. (ETE) Earnings Call Transcript & Summary

Good morning, and welcome to the EVO Payments Conference Call. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the call over to Ed O’Hare, Senior Vice President of Investor Relations for EVO. Please go ahead.

Good morning, and welcome to the EVO Payments conference call. Before we begin, I want to remind all listeners that EVO Payments intends to rely on the safe harbor provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call, such as projections regarding future performance may be considered forward-looking statements within the meaning of the act. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to today's slides as well as our press releases and filings with the SEC. Today, we will discuss EVO's acquisition of a majority interest in the National Bank of Greece's merchant acquiring business. To aid our discussion, we have provided slides capturing a few market business and financial highlights. These slides are posted on the Investor Relations section of our website. Please refer to these slides for a discussion regarding the non-GAAP financial measures referenced in this call. I will now turn the call over to Jim.

Thanks, Ed. Good morning, and thank you for joining us today as we outline our new international joint venture with the National Bank of Greece. Both parties have worked diligently over many months to consummate this transaction. And I'd like to express my thanks to Paul Mylonas, CEO of NBG, and the entire NBG team for the tremendous effort and hospitality they extended us this fall and to the EVO team for their diligence, including extensive international travel and long hours to complete our first bank transaction since the beginning of the pandemic. Thank you again. Over the course of the last 6 months, the EVO team made several trips to Athens, working closely with NBG through the intricacies of our new acquiring partnership and related government documents. As I've mentioned before, similar to a marriage, any new long-term relationship is about getting to know the partner, having detailed conversations, developing trust, setting expectations and finally, sharing meals together. While these ingredients are critical to any lasting business relationship, they are especially important in the case, such as this where the 2 parties are now supporting a common customer base and growth mission. As we recently demonstrated with our Bank of Ireland renewal, a successful long-term bank relationship is dependent not just on the 5 operative agreements we execute, but a mutual respect and trust gained through face-to-face engagement. Executed correctly, bank JVs withstand the test of time, leveraging the respective strengths of the 2 partners. For the bank, it is their recognized brand, market reputation and branch and client distribution. And for EVO, it's our global footprint, acquiring reputation, secure technology and solutions, product suite and growth-focused team. We are very excited about this announcement and look forward to sharing with you the exciting characteristics of the Greek market and our expectations for value creation as we work jointly with NBG to accelerate growth for the business. This morning, I am joined by Darren Wilson, who is charging this effort and will provide an overview of our new partner and market highlights; followed by David Goldman, Executive Vice President of Business Development and Strategy, who led the negotiations and will outline key points of the transaction; and Tom Panther, who will provide details around the financial impact and value accretion we expect from our Greek business. We will then open the call up for Q&A. And now I will turn the presentation over to Darren. Darren?

Thank you, Jim. Beginning on Slide 3, NBG is the largest bank by assets and has over 5 million active customers, nearly 360 branches throughout the country and a strong and rapidly growing digital banking presence. We are very excited to be partnering with Greece's leading financial institution as we expand EVO's presence in Southern Europe. NBG's market-leading share for both card issuing and merchant acquiring provides a strong foundation as we expand the payments offerings for their current customers and work with the bank to grow the business. Turning to Slide 4. As you can see, Greece represents an attractive growth opportunity with low card penetration on a comparative basis to our other markets. Additionally, the tailwinds from the strong digital payments adoption trends will benefit our business as we build market share. It's important to note that card payments are a relatively new form of tender in Greece. Prior to government regulations beginning in 2016, cash accounted for the vast majority of all in-market transactions. However, since 2016, the government has instituted a number of mandates to encourage digital payment adoption. This legislative support over the last 5 years includes mandatory point-of-sale terminals for nearly all businesses, transaction limits for cash payments and tax penalties for non-usage of electronic payments. Additionally, as we have seen in other markets, consumers are now utilizing cards at an accelerated rate in response to the pandemic. Together, these factors provide a tremendous opportunity to drive continued digital payments adoption in Greece. Further, as you can see on Slide 5, NBG has a large and rapidly growing merchant portfolio. NBG's acquiring volumes and merchant counts have increased by more than 20% annually since 2016. Even more notably, over the last 2 years of the pandemic, the business has performed extremely well as volumes increased over 30% compared to 2019 despite very limited international travel. This rapid growth is supported by the bank's product and service offerings, which includes capabilities such as card present and card-not-present transactions and value-added services. Once the joint venture is underway, we will enhance this product offering with our leading suite of solutions and accelerate growth for the business. Turning to Slide 6. You can see how well diversified the NBG merchant portfolio is with customers ranging from SMEs to large corporates, all of which span a wide assortment of industry verticals. The portfolio is anchored by supermarkets, which based on our experience in Poland and Mexico, has shown to be a resilient customer base across all economic cycles, generating strong organic volume growth. As we build out the JV's direct sales team with our payments expertise and proprietary product offerings, we will further penetrate the bank's more than 500,000 business customers and expand our acquiring market share with significant runway when benchmarked to NBG's issuing penetration levels. Turning to Slide 7. We summarize our proven go-to-market alliance strategy that we will initiate with NBG to successfully launch the joint venture. This approach, which we have effectively executed across our existing bank alliances, will enable the JV to capitalize on NBG's and EVO's respective strengths as we grow the business. Based on the excellent working relationships that we have already formed over the last 6 months, we are excited to be partnered with NBG and jointly leverage our solutions to meet the bank's evolving customer needs. Similar to our other markets, we anticipate a growing demand for tech-enabled payment solutions in Greece. Upon the transaction closing, we will begin offering our omnichannel capabilities to the market, including card present and card-not-present functionality, additional payment gateway solutions and alternative payment solutions such as bank transfers, digital wallets, installments, and unique in-market payment methods, among others. I'm particularly excited to also launch our international ISV strategy in Greece. As we have seen in our other European markets, the frictionless nature of our software integration has proven to be attractive to both merchants and partners, which will enable us to drive enhanced distribution and grow the portfolio. I will now turn the call over to David to discuss the terms of the transaction. David?

Thanks, Darren. Since I joined EVO over 5 years ago, we have successfully completed transactions, which expanded our footprint across Europe, Latin America and the United States. We are very excited to announce our latest deal in Greece, and I share Jim's view that NBG will be an excellent long-term partner. Throughout the last 6 months, we have worked diligently with the NBG team to collaborate and complete this transaction. The entire NBG team has been great to work with, and I'm confident that our relationship with the bank will provide a strong channel of future growth for the company. As you can see from Slide 8, we are forming a 20-year joint venture with NBG. Similar to other bank partnerships we have formed, the bank will spin off its merchant acquiring business into a new entity prior to the transaction closing. And at closing, EVO will acquire a 51% interest in the joint venture, which includes a back book of approximately 165,000 merchants. In conjunction with this acquisition, we had formed a mutually exclusive marketing alliance with the bank as part of our go-to-market strategy, whereby NBG will refer customers to the JV. We've agreed to pay EUR 158 million or approximately $180 million for our majority interest in the business. The transaction is subject to customary regulatory approvals and is expected to close in the second half of next year. The agreement includes a 3-year transition services agreement in which the bank will continue to provide ongoing services to the JV. However, we are already developing our integration plan to migrate the bank's existing merchant portfolio to our European processing platform. The utilization of this platform enables us to rapidly deploy our existing product set and accelerates the integration of the Greek business into our infrastructure to further leverage our existing fixed cost for the benefit of the JV. Tom will now discuss the financial benefits of the transaction. Tom?

Thanks, David. If you turn to Slide 9, you will see that this acquisition significantly expands EVO's European footprint with Greece becoming our second largest market in Europe. Further, our purchase of the existing business enhances our merchant portfolio, which, on a pro forma basis, increases our annual European payment volumes by approximately $10 million. On a revenue per transaction basis, Greece will generate approximately $0.08 per transaction, which is accretive to our overall European business. In 2021, this business is expected to generate approximately $30 million of revenue which translates into approximately $12 million of adjusted EBITDA attributable to EVO, if you exclude the 49% noncontrolling interest. As we work with NBG to expand the business, we expect both revenue and adjusted EBITDA to grow approximately 20% annually, which is accretive to our growth rate. As Darren previously stated, the tailwinds from the accelerated payments adoption in Greece are consistent with EVO's growth strategy of entering markets with low card penetration and growing the business through our differentiated products and services, economic growth and increasing card penetration. Our strong balance sheet and low leverage enable us to fund the acquisition, utilizing a combination of available cash and our existing credit facilities resulting in a pro forma leverage ratio of approximately 2.5x at closing. In addition, using our existing European processing platform limits the amount of incremental capital that we need to deploy to integrate the business. The last slide provides a summary of the key points covered on the call today. We are extremely excited about the acquisition and to be working with the National Bank of Greece. This transaction provides us another high-growth market for us to build upon EVO's proven record of creating enterprise value through long-term bank alliances. The combination of NBG's strong brand and large customer base, the accelerating card adoption trends in Greece, and EVO's market-leading products and services position the joint venture for strong top and bottom line growth over the 20-year term of our alliance with NBG. With that, I will turn the call over to the operator, who will begin the question-and-answer session. Operator?

[Operator Instructions] And your first question comes from Andrew Jeffrey from Truist Securities.

Nice deal, really good use of capital in this environment. Jim, I wonder if you can talk a little bit more about some of the tech-enabled opportunities you can bring to the table here, timing, order of magnitude. And then I also wonder if there are gateway opportunities in Greece potentially similar to the deals you've done in Chile and the U.K. and in Spain?

Well, thanks first -- and thanks for the comment. We agree. Well, I think this is a fantastic deal for the company. As it showed on the slides, it further diversifies the market for us, as Darren mentioned in his comments, which I didn't fully appreciate, although when we first started looking at this several years ago, how low penetration they were in terms of card acceptance. It's not to suggest they don't have technology in the market. There are some nuances to this market, where there's a fair amount of onus that I think will move over time. But just like in Chile with Pago Fácil, one of the next orders of business for Darren and the team beyond standing up the business and kind of the traditional moving merchants onto our platform, so they can take advantage of all the capabilities that we have across Europe and bring that to bear in the country, we will look at opportunities to acquire in the market. So it's not a market that we, obviously, understand as well as we do our other markets. So as we build out a team, leadership, which will come from the bank that will run the JV. You should expect that you'll see acquisitions -- further acquisitions around technology, but just will help accelerate penetration in the marketplace.

[Operator Instructions] Your next question comes from George Mihalos from Cowen.

Congratulations or as we say in Greek, [Foreign Language], so nice job. I wanted to ask, the transition on to your European platform, I think you guys said that you have sort of a 3-year period to do so, but it sounded like you felt you could maybe get that conversion in faster. And then I'm just curious, tied to that, if I look at Slide 9, the adjusted EBITDA, the margin of 40%, can that move materially higher once you're on your own platform?

Well, I'll take the questions sequentially. So 3 years is an outside estimated, took Spain a number of years to get converted. There was other dynamics in play that are not anticipated here. But some of it is dependent -- or a lot of it is dependent on the requirements that we get from the bank. So the pandemic -- the sequencing of the pandemic is not overly helpful. So we wanted to give ourselves some time to make sure that, that doesn't become an issue. But I would say it's 18 months to 2 years, probably in best case, is the -- the expectation here is this a back-end conversion. We're going to continue to use their authorization system and essentially put our new -- all new merchants onto our system once it's enabled in the market, but it's the back end that will be converted over that 18-month time period.

Yes. And George, this is Tom. I'll take the question about margin. I think you got a couple of things that will occur over the course of that multiyear period. One, I think we will get some savings by moving to our back end. We'll get off of some of the third-party providers that they use. For example, say, DCC will move to our DCC platform, that will create some savings. But on the flip side, we'll continue given the high growth characteristics of the market. We'll continue to invest resources in the overall business, including adding some functional support that currently the bank is going to be providing over that 3-year transition period. So our view conservatively is that the net push, the margin out of the gate is pretty attractive. I think where you'll see margin accretion is going to be more a function of top line, scale generation, revenue across fixed cost platform, not necessarily the migration. I think the migration is going to be kind of a net push as the support model matures over the last -- over the next couple of years.

Remember, too, that the revenue is because we're consolidating. The revenue is to consolidated with the total revenue of the business, but we're showing our portion of the earnings. So it's actually well north of 40%. And back in the day before Santander took over Popular, we had margins north of 65%, contribution margins coming out of Spain. The model in each of our regions, the model is centralized cost and then it kind of hub and spoke. And then the satellite markets, so Spain, U.K., Czech Republic is largely all sales costs locally or commission costs locally and very little processing cost that is paid for in that market because that's largely...

That's great. Just a quick follow-up. I'm just curious, was this a formal RFP process that you guys won? Or were you guys able to go in there and sort of sole source it by selling your capabilities to the bank?

There was a banker involved, so it's nearly impossible to sole source. I can't tell you in 20 years, how many actually were sole sourced for me. I don't know, maybe 2 or 3. I think it was fortunate there were other trades that already occurred in the marketplace, some of which we looked at, and for one reason or another didn't pursue. I will say for this, our interest was this bank all along, and we just kind of had to wait until they are ready to come to market. We did get in front of a long protracted process, but I don't know whether they did or didn't talk to other parties.

There are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

Okay. Thank you, operator, and thank you, everyone, for joining us this morning. And we wish you a happy holiday, and we look forward to an exciting 2022.

This concludes today's conference call. You may now disconnect.