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Evertec, Inc. (NYSE:EVTC)

Q2 2014 Earnings Conference Call

August 6, 2014 5:00 PM ET

Executives

Luis Cabrera – SVP, Treasury, IR and Corporate Development

Peter Harrington – President and CEO

Juan José Román – EVP and CFO

Analysts

Jim Schneider – Goldman Sachs

Tien-tsin Huang – JP Morgan

George Mihalos – Credit Suisse

Bryan Keane – Deutsche Bank

Faton Begolli – Bank of America Merrill Lynch

Chris Brendler – Stifel Nicolaus

Bob Napoli – William Blair & Co

Smitti Srethapramote – Morgan Stanley

Operator

Good afternoon, everyone, and welcome to the EVERTEC Incorporated Second Quarter 2014 Earnings Conference Call. Today’s conference is being recorded.

At this time, I’d like to turn the conference over to Luis Cabrera, Senior Vice President, Treasury, Investors Relations and Corporate Development. Please go ahead sir.

Luis Cabrera

Thank you, operator. Good afternoon everyone. Welcome to EVERTEC’s second quarter 2014 earnings call. I’m Luis Cabrera, Senior Vice President, Head of Investor Relations for EVERTEC. With me today is Peter Harrington, our President and CEO; Juan José Román, Executive Vice President and Chief Financial Officer.

A replay of this call will be available until Wednesday, August 13, 2014. Access information for the replay is listed in today’s financial press release, which is available on our website under the Investor Relations tab. As a reminder, this call may not be taped or otherwise reproduce without EVERTEC’s prior consent.

Before we begin, I would like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements about our expectations for future performance are subject to known and unknown risks and uncertainties. EVERTEC cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflects our current expectations only and we undertake no obligations to update any statements to reflect our events that appear after this call.

Please refer to the company’s most recent Annual Report on Form 10-K filed with the SEC for factors that could cause our actual results to differ materially from any forward-looking statements. 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, adjusted net income per share. Reconciliations to GAAP measures and certain additional information are also included in today’s earnings press release.

With that, we’ll begin by turning the call over to Peter Harrington, our President and CEO. Peter?

Peter Harrington

Thanks, Luis, and good afternoon, everyone. Thanks for joining us on today’s call. We had another good quarter, highlighted by Merchant Acquiring and Payment Processing revenue growth of 9% year-over-year; adjusted EBITDA margin expansion of 130 basis points to 50%; and adjusted earnings per share growth of 17% to $0.41.

Revenue growth in our Payments business outside of Puerto Rico remained strong in the second quarter, increasing 10% compared with Q2 of last year. We continued to see good growth in all of our non-Puerto Rican markets, driven by demand for our current product and POS processing solutions.

Within Puerto Rico, transaction growth was solid despite the ongoing economic headwinds, as POS processing transactions were up 7% on a year-over-year basis.

As our result for the first half of 2014 indicates, demand for our Payment Services remains solid across our entire Latin American footprint and our new business pipeline continues to build into the second half of the year.

Looking forward, our outlook for our Payments businesses remains positive based on our leading market position, our demonstrated ability to gain share in all of our markets and the ongoing secular cash to card conversion trend, which is driving consistent growth of electronic payments across our entire market footprint.

I want to share with you a few new business developments in Payments, which show that we continue to successfully execute on our growth plan.

First, we are now on the final steps of acquiring the principal member license for VISA Colombia. This means we can sponsor any financial institution that is not a direct VISA member to issue VISA branded cards or acquire VISA transactions under the EVERTEC license. While having this license allows us to be a direct acquirer of VISA transactions, as we’ve stated in the past, this is not our strategy.

Instead, we’re aiming to find one or more partners whose commercial relationships we can leverage, and they in turn, can leverage our member’s license scale, network and expertise.

Next, I’d like to give you a quick update on the new Puerto Rico value-added tax project, which we announced last quarter. As a reminder, we developed and are now hosting an integrated merchant portal for the reporting and payment of the new tax.

The new VAT tax will go live in August, and we will continue to expect that this service will yield additional Payment Processing revenue as new merchants are included in the portal throughout the year.

Now for Business Solutions. Business Solutions’ revenue declined 4% year-over-year in the second quarter to $44.9 million. Growth in this segment continued to be effected by lower levels of hardware and software sales versus the particularly strong sales we had in the first and second quarters of last year.

It’s worth mentioning however, that excluding hardware and software sales, business solutions revenue grew 2% in the second quarter, in line with the first quarter results excluding hardware and software, and also consistent with our expectation of low-single-digit growth for the business.

Overall, we continue to see solid demand for our recurring Business Solution products and services such as network solutions and IT consulting, and we continue to sign new deals. For example in July, we were awarded a contract with the Puerto Rico Police Department to provide a new data protection infrastructure.

We were also recently awarded a contract to implement kiosks to provide digital information network throughout the largest mall in the Caribbean.

Turning now to our full year 2014 outlook. We continue to look for upper-single-digit revenue growth in our Payment businesses, driven by the positive market trends that I just discussed. In addition, our adjusted EPS guidance of $1.65 to $1.71 remains unchanged.

As our first and second quarter results have shown lower margin hardware and software sales have very little impact on the profitability growth, and as a result, we have even met or exceeded our EPS expectations in the first half of the year, despite the revenue shortfall.

However, based on our current visibility in the hardware and software sales for the remainder of 2014, we now believe there are significantly higher risks that we will not achieve our overall growth target for Business Solutions this year.

As a result, we are adjusting our 2014 total revenue growth guidance range to 3% to 4%, from the 5% to 7% previously indicated. While we continue to see new business opportunities, this segment is more susceptible to delays in client decision making, and in some cases, because of the current economic situation in Puerto Rico, thus increasing the risk that hardware and software sales will be lower than previously expected.

In summary, our second quarter results were solid, and we’ve ended the second half of the year with strong momentum in our Payment businesses. The hardware and software components of our Business Solutions unit are creating a drag on our top line results, but because of the strength of our business model, we continue to achieve greater profitability and strong free cash flow.

We continue to take the steps necessary to position EVERTEC for accelerated growth over time, and we are confident in our ability to succeed, given our strong market position, best-in-class network and services and unmatched track record of delivering value to our customers.

I will now turn the call over to our CFO, Juan José, who will take you through our financial results in more detail. Juan?

Juan José Román

Thank you, and good afternoon, everyone. As Peter mentioned, in the second quarter the payment side of our business performed very well, with both, Merchant Acquiring and Payment Processing revenue growing 9% year-over-year. On the Business Solutions side, similar to the first quarter, we again have a difficult year-over-year comparison, due to the particularly high level of hardware and software sales we booked in the second quarter of 2013.

Nevertheless, operating leverage in our payment-related businesses, combined with our ongoing focus on managing cost, again enables us to increase profitability.

In the second quarter, we delivered over 100 basis points of adjusted EBITDA margin expansion and strong double-digit adjusted net income and EPS growth. Let’s go through the results in more detail.

Total consolidated revenue was $91.1 million, an increase of 2%, compared with $89.2 million in the prior year period.

Turning to our segments. Merchant Acquiring net revenue increased 9% to $19.8 million from $18.2 million in the prior year period. Growth was driven mainly by an increase in transaction volumes.

Payment Processing revenue also increased 9% to $26.4 million in the second quarter, up from $24.3 million in the prior year period. Growth was driven mainly by new customer additions and an increase in accounts on file within our card products business, as well as an increase in ATH and POS processing transactions.

In addition, as we discussed with you in our Q1 call, in the second quarter we recognized approximately $0.65 million of revenue for Department of Education program we processed in Puerto Rico. We recognized no revenue from this program in the second quarter of 2013. Excluding the educational program, our Payment Processing revenue would have increased approximately 6% year-over-year.

Our payment-related businesses outside of Puerto Rico continued to grow at a strong pace in Q2, up 10% versus the prior year, driven mainly by card product processing. Additionally, POS volume growth within Puerto Rico was up a solid 7% compared with the prior year.

Our Business Solutions segment revenue decreased 4% to $44.9 million in the second quarter, compared with $46.7 million in the prior year period. Similar to the first quarter, this decrease was due almost entirely to a $2.9 million decline in hardware and software product sales in the quarter, partly offset by increase in revenue for other product and services, including network solutions and IT consulting.

Moving to expenses on a GAAP basis, our second quarter total operating expenses were down by approximately 9% compared with the prior year period. Cost of revenue excluding depreciation and amortization was $38.8 million, a decrease of $2.9 million or 7% from the corresponding 2013 period. This decline was due primarily to a reduction in cost of sales resulting from lower level of hardware and software product sales.

Selling, general and administrative expenses for the quarter were $10.5 million, down $2.2 million or 17% from the corresponding 2013 period. This decrease was due mainly to a one-time $3.1 million non-cash charge, taken in the second quarter of 2013, in connection with the vesting of all our tranche B and C stock options, as a result of our IPO.

The decrease was partly offset by $1.1 million in professional fees related to our debt offering in the second quarter of 2014, which was withdrawn for reasons I will explain in a few minutes.

Depreciation and amortization expense decreased $1.5 million or 8% compared with the prior year. The decrease is related primarily to lower amortization of software packages that became fully depreciated.

Income from operations for the second quarter was $25.4 million, an increase of 50% compared with $16.9 million in the corresponding 2013 period. Total non-operating expenses were $5.7 million, a decrease of $81.2 million from the corresponding 2013 period.

The decrease was driven mainly by two non-recurring expenses incurred in the second quarter of 2013. First, a $58.5 million loss, related to the extinguishment of debt as a result of our debt refinancing in April 2013. And second, a $16.7 million expense associated with the termination of our consulting agreements with Apollo and Popular.

In addition, our interest expense declined by $3.2 million as a result of our refinancing last year.

GAAP income tax expense in the second quarter was $2 million versus an income tax benefit of $5 million in the prior year period. Cash income tax expense was approximately $0.4 million versus approximately $1 million in the prior year. We have strict cash taxes to return to a more normalized rate beginning in the third quarter.

As of June 30, 2014 we had approximately $58 million of NOLs available to offset future tax payments related to our operations in Puerto Rico.

Adjusted EBITDA for the second quarter was $45.5 million, an increase of $2.1 million or 5% from $43.4 million in the corresponding 2013 period. The increase in adjusted EBITDA was due mostly to revenue growth and operating leverage in our Merchant Acquiring and Payment Processing businesses. Adjusted EBITDA margin was 50%, up 130 basis points from 48.7% in the prior year period.

Adjusted net income in the second quarter was $32.2 million, up 11% from $28.9 million in the prior year. This increase was due mainly to adjusted EBITDA growth and lower levels of operating depreciation and amortization expense and cash taxes.

Moving to our balance sheet. As of June 30, we reported $27.8 million of unrestricted cash and $698.6 million of total short-term borrowings and long-term debt. During the quarter, we made a mandatory repayment of approximately $4.8 million on borrowings outstanding on our Term A and Term B senior secured credit facilities, paid $17 million on our revolving line of credit and paid dividends of $7.8 million.

As of June 30, total liquidity, which includes unrestricted cash and available borrowing capacity under our revolver, was approximately $104.8 million. For the second quarter, our free cash flow, defined as adjusted EBITDA minus CapEx, cash interest expense and cash income taxes, was $32.2 million, up 10% compared with the prior year period.

Now I would like to briefly address the $400 million senior notes offering which we withdrew from the market in June. Our aim was to opportunistically access the debt capital markets to enhance our already strong balance sheet with longer term low-fixed rate capital.

However as we went through the process, we concluded that it was not the right time to move forward, giving the cost of capital achievable was not attractive to the company. We do need to refinance any of our existing debt at this time. Our balance sheet is strong, and have no significant maturities over the next four years.

And as you know, we generate significant annual free cash flow. All of this means, we maintain considerable financial flexibility, and if we chose, we can pursue new debt financing alternatives at a time that is been efficient to us and our shareholders.

We remain committed to the prudent return of capital to shareholders. This afternoon, we announced that our Board of Directors declared a regular quarterly dividend of $0.10 per common share.

Now onto our guidance. As Peter mentioned, we now expect total revenue growth in 2014 to be between 3% to 4%, compared with our prior outlook of 5% to 7% growth. Our updated revenue guidance reflects greater risk to the hardware and software portions of our Business Solutions segment.

We continue to expect adjusted EBITDA growth of at least 100 basis points higher than our revenue growth, and fully diluted earnings per share of between $1.65 and $1.71. We now expect full year 2014 operating depreciation and amortization expense of approximately $31 million, compared with $32 million previously.

We continue to expect cash interest expense of approximately $25 million, and fully diluted shares of approximately $79.2 million. We expect 2014 cash income tax expense of $2 million, compared to $3 million previously. Our 2014 effective tax outlook on a GAAP basis remains between 10% and 12%.

With that operator, we will now open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question will come from Jim Schneider with Goldman Sachs.

Jim Schneider – Goldman Sachs

Good afternoon. Thanks for taking my question. I guess, I understand that the hardware and software is relatively immaterial to your EBITDA contribution, so you’re keeping your earnings guidance unchanged, but can you give us a little bit of color around the hardware and software bookings in the pipeline? Whether you think that any of that business is pushing out to the back half of the year, so you’ve been conservative on the full year outlook, or do you think that most of this may not happen at all in 2014 and may just get pushed into 2015 or cancelled altogether?

Peter Harrington

I would say that we probably see at this point that more of it will get pushed to 2015 from 2014. We do have opportunities that we will execute on in the second half of the year, but given some of the projects that we expected in ‘14, that clearly won’t happen until 2015.

But I think you need to understand that a lot of its hardware and software comes from current customers, where we already have a recurring revenue stream and maybe where we’ve had a contract and they are now upgrading to newer versions of hardware and software. And so we will continue to generate the recurring revenue. It’s just that refresh that is now probably been pushed to 2015.

Jim Schneider – Goldman Sachs

Okay, that’s helpful. Thanks. And then, I was wondering if you could give us any update on your partnerships for processing in Colombia in terms of the two customers that you’ve already signed up. When should we expect to start to see revenue materialize from those customers?

Peter Harrington

Yes, nothing has changed there. We are implementing, and we expect to see the first revenue by year-end, in the fourth quarter. So we are very much in the midst of going through the implementation process, but nothing has changed from the last quarter. We expect to bring that first customer online by end of the year.

Jim Schneider – Goldman Sachs

That’s helpful. Thank you so much.

Operator

(Operator Instructions) And our next question will come from Tien-tsin Huang. Go ahead sir.

Tien-tsin Huang – JP Morgan

Great, thank you. Just following up on that. Just on the hardware and software sales. Is it broad-based, or is it really, Popular, that’s driving some of that? And I’m curious maybe just on Popular, how their spend is tracking versus plan. I noticed they paid back TARPs. So just wonder to get an update there?

Peter Harrington

I would say that the hardware shortfall is less Popular and more the government, when you look at what we had expected in 2014. Popular’s revenue, give or take, is roughly flat and in line with where we expected it.

Tien-tsin Huang – JP Morgan

Okay. So no big change there. Fair enough. That’s good to know. And then Peter, just on the – I think in the past, you’ve talked a little bit about, sort of, new deals and bookings and backlog. I know you don’t give us hard numbers there, but can you just compare for us, sort of, year-to-date how bookings, backlog compares to this year versus last year?

Peter Harrington

I would say it’s right in line. We’ve signed a couple of new customers in the second quarter. So right now based on what I am seeing, we should have a year that looks a lot like 2013 as far as new customer sales on the payment side.

We don’t really track because of the nature of the Business Solution side, sum up all the smaller deals that we do in the network and BPO business. But on the Payment side, we’re in line with where we were last year.

Tien-tsin Huang – JP Morgan

Okay. That’s good to know. And then just last one for me. It just sounds like Puerto Rico is pretty stable, that’s good, but there has been a lot rumblings of different changes regulatory-wise in different parts of Latin America. I know you’re not big in Mexico, I know the VAT tax change is there, but anything to call out that maybe good or bad relative to when we last got together with respect to regulation situation around payments? Thanks.

Peter Harrington

No, I don’t see anything around the payment side. I think clearly there has been, again considerable amount of noise related to Puerto Rico. And I think that what we’re seeing is probably some of the impact of that is, the pushing out of some of these projects to refresh the hardware and software, but as you saw in the numbers, we don’t see it on the payment side of the business. We’re still seeing consumption just as we have, and as I’ve been telling every quarter, we’ve been running at 7% to 8% year-over-year growth and that continues. And to be honest with you, we’re seeing the same thing already in the beginning of this third quarter. So that trend, I don’t see any impact to it.

Tien-tsin Huang – JP Morgan

That’s good. That’s consistent. Ironically, actually a little better than the actual performance sounds like this quarter in the U.S. So that is ironic. Anyway, appreciate that.

Peter Harrington

Thanks Tien-tsin.

Operator

And our next question will come from George Mihalos from Credit Suisse.

George Mihalos – Credit Suisse

Great. Thanks for taking my question. Just to build on the prior question from Tien-tsin. Peter, any update with regard to signing another merchant alliance obviously outside of Columbia? I thought they were seeing perhaps something else in the pipeline that could be imminent?

Peter Harrington

Yes, it is – I don’t have any news for you, George. We’re still – it’s out there. I think we’ve gone to a point where we’re waiting on them. I think they’ve got probably some stuff they are working through internally, but we still feel good about it. It’s just – I don’t have any real update for you. We’re still there.

George Mihalos – Credit Suisse

Okay. And you don’t…

Peter Harrington

But I think the positive on the Colombia thing is now, as I told you before, I had to wait to get this before I can actually go have conversations, so now I’m in a position where we can start focusing on that to find our partner in Colombia.

George Mihalos – Credit Suisse

Okay, great. And does that – is your sense of that’s not, at this point, going to materially weigh on how you were thinking about 2015 growth, the push out of the merchant alliance?

Peter Harrington

No.

George Mihalos – Credit Suisse

Okay, great. And just last question from me. I think you had mentioned that revenue growth outside of Puerto Rico was, sort of, low-double-digit, call it, about 10%. Did that decelerate a bit from what you saw in 2Q?

Peter Harrington

No. I think – well it did from, if you kind of – on a real basis, I think we grew 16% in the first quarter.

George Mihalos – Credit Suisse

Okay.

Peter Harrington

But as we’ve said before, it’s not really deceleration. It’s that, if you look back at what we published in the third and the fourth quarter of last year, it goes up and down a little bit, because as you can imagine, it has to do with the size of the customers I put on. And so if I put on big customers last year and smaller customers this year in the quarter, then obviously the number is affected.

But I wouldn’t read anything more than that. This is how it’s going. You will see some quarters, it will be in the low-teens. Some quarters, it will be in the mid-teens. I think that’s what you’ll see.

George Mihalos – Credit Suisse

Okay, great.

Peter Harrington

We still think it will run around, somewhere around 15% give or take year-over-year.

George Mihalos – Credit Suisse

Okay, thank you.

Operator

And our next question will come from Bryan Keane with Deutsche Bank.

Bryan Keane – Deutsche Bank

Yes, hi guys. Just wanted to follow-up on that. On the international growth, is there areas of strength versus areas of weakness that you can talk about that you saw in the quarter?

Peter Harrington

No, not really. We don’t give it out – we don’t give the market-by-market. I would just tell you that we continue to sign business in a number of the markets we’re in. So we’re seeing growth in sales in all of our markets, like we did last year. And we’re seeing the growth – it’s driven again. I mean a lot of this is driven by two things, the sales we have last year and the cash to card conversion. And we’re seeing that pretty uniform across the markets.

Bryan Keane – Deutsche Bank

Okay. And then just to follow-up on Business Solutions. What does the revenue guidance for the year now come out to be for Business Solutions? And then, do we expect a rebound in the first quarter of ‘15 or is the visibility still unclear when that rebound will be in Business Solutions?

Juan José Román

For the rest of the year, Business Solutions maybe in the second half will be around 4% growth versus last year. Yes, well, we still have not look into 2016, but the reality is, we expect to be better than 2014 mostly because of the impact really this year on hardware and software will be lower, but we expect to be more normalized year starting Q1 of next year.

Bryan Keane – Deutsche Bank

Okay. All right, that’s helpful. Thanks. That’s all I had.

Operator

And our next question will come from Faton Begolli from Bank of America Merrill Lynch.

Faton Begolli – Bank of America Merrill Lynch

Yes, thanks for taking my questions. So most of them have been answered already, but just once again, so what – the current Puerto Rico situation, how is that effecting EVERTEC specifically, and what are you hearing from clients? Thanks.

Peter Harrington

Well again, if you look from an EVERTEC perspective, that separated, like we’ve said on the Payments side, we’ve seen really no impact, and that we continue to see growth in the payment transactions. And again we have probably more visibility to this than anybody. And we’re seeing just very consistent growth year-over-year on the Payment side of the business and you see that in the numbers.

On the Business Solutions side, we have seen no impact of Popular at this point. So Popular is behaving exactly from a revenue perspective for EVERTEC as we had expected really to behave and in line with what is done last year. So we don’t see any negative impact to Popular. It makes up the majority of the revenue in Business Solutions.

We do think there is a lot of uncertainty in the government side. And I think you’re seeing that in some of these projects that are not being upgraded as quickly as we had expected them to be. I’ll be honest, we think it’s just timing. We think they’re going to have to upgrade at some point. It’s just – they’re trying to balance the budget for the first time in 22 years. I think that probably has more playing it than anything else.

Faton Begolli – Bank of America Merrill Lynch

I see, all right. Thank you. So just to clarify again, the Business Solutions’ weakness was mainly due to government. Is that right or…

Peter Harrington

Well, it was mainly due to hardware and software, but in the hardware and software, it was predominantly government contracts.

Faton Begolli – Bank of America Merrill Lynch

I see, okay. And then for Merchant Acquiring and Payment Processing, is it okay to assume that you’re expecting high-single-digit growth for the second half?

Peter Harrington

Yes.

Faton Begolli – Bank of America Merrill Lynch

Okay. That’s all I had. Thank you.

Operator

Up next, we have Chris Brendler with Stifel.

Chris Brendler – Stifel Nicolaus

Hi, thanks. Good evening guys. I just wanted to ask a follow-up on the international expansion front, the strategy and the plans to find an acquiring partner either in Colombia or other markets like Costa Rica or Benelux [ph]. No real update sounds like from you guys at this point. I just wanted to know, just sort of take your temperature on how you feel about the multiyear outlook, it’s not that you’re trying to get discouraged about or it’s just simply that you needed to take...

Peter Harrington

No.

Chris Brendler – Stifel Nicolaus

Longer and maybe by markets, how are things trending from, sort of, the sample of potentially getting something done in calendar 2014?

Peter Harrington

Yes. I think as we’ve said before, this is a new experience for the partners that we’re talking to. This is not a common practice in our footprint. We’re the ones trying to leave this in the market. And so yes, we clearly have learned that it will take longer than we had originally expected, but I am not any more – I’m no more confident than I was before.

Colombia is a different story. We really couldn’t move in Colombia until we had access to licenses. And now we feel very good about Colombia because we have finally gotten the VISA license, which gives us the ability now to actually go into the markets.

Now as we’ve said in the script, we could go in as EVERTEC, but that’s not the strategy that we have been pursuing or will pursue. We want the partner with the financial institution.

Chris Brendler – Stifel Nicolaus

Okay, great. And then, back to Puerto Rico for a second. It sounds like it’s remarkably stable. Any inflections in terms of just consumer spending and spending on cards? Is it sort of 7% rate. It’s been very consistent for the last several quarters. Is there any movement either way on that front?

Peter Harrington

I don’t – it has been so consistent that there is nothing that we see that tells us that that’s going to change. Now, we have gone through a lot of noise as you know here over the last, give or take what, six, nine months, it hasn’t changed. So the consumer confidence in the market hasn’t – if anything has had, absolutely no impact.

I think this is very isolated. There has been a lot of noise, but it’s not about the consumer, it’s about the government. It’s not really about – because we would see it, believe me, we would see it before anybody else are.

Chris Brendler – Stifel Nicolaus

Okay, great. Thanks so much.

Operator

Up next, we have Bob Napoli from William Blair.

Bob Napoli – William Blair & Co

Hi guys, good afternoon.

Peter Harrington

Hi Bob.

Bob Napoli – William Blair & Co

Any chance we could get the hardware and software sales number for 2013? I think last quarter it made just such a huge difference in margins that it would be great if you broke that out. What did you have in full year ‘13 and what do you have year-to-date in ‘14?

Peter Harrington

Let us look at that, I don’t have that in front of me, but me or Juan will get back to you on that, Bob.

Bob Napoli – William Blair & Co

Okay.

Juan José Román

We will, but again I just want to remind, last year was around 3%, 3.5% give and take. This year obviously would run even lower than that. So that will give you good a sense what the number is. It’s really not…

Bob Napoli – William Blair & Co

3% of total revenue, Juan?

Juan José Román

Of total revenues.

Bob Napoli – William Blair & Co

Okay.

Juan José Román

Around that.

Bob Napoli – William Blair & Co

Okay. Thank you. And then just in the non-Puerto Rico growth. As you look at expecting that to continue in mid-double-digits, what markets are you getting are the most and where are you getting the majority of that growth today, and where do you expect to be getting it over the next couple of years?

Peter Harrington

Obviously it comes from the bigger markets that we operate in today, okay.

Bob Napoli – William Blair & Co

Panama or is that…

Peter Harrington

Well, what I’m saying is the – if you look at our footprint today, Bob, right.

Bob Napoli – William Blair & Co

Yes.

Peter Harrington

So our bigger markets would be Panama, it would be Costa Rica, it would be the Dominican Republic. Those are our bigger markets in our current footprint, right. And that’s where obviously the bigger banks are and we’re seeing the majority of the transactions, right.

Bob Napoli – William Blair & Co

Yes.

Peter Harrington

But we’re seeing growth in El Salvador, we’re seeing growth in Guatemala and Belize [ph] and a number of other markets. If you look in the grand scheme, those are fairly smaller markets. The future obviously is that the growth will come from places like Colombia, I mean that’s where the growth – the majority of the growth will come from as we go forward.

Bob Napoli – William Blair & Co

Okay.

Peter Harrington

So that story really hasn’t changed much, Bob.

Bob Napoli – William Blair & Co

Any different thoughts on return of capital and share buybacks? And you’re generating a lot of capital paying down debt. How much longer do you want to pay down debt? I know you’d love to do an acquisition to buy a portfolio, or it doesn’t sound like you’re that close to anything material on that front. So what are your thoughts as far as share repurchases?

Juan José Román

Yes, for in order to happen a change, we continue focus obviously investing in the company. In terms of our debt repayment, as I said today, we continue paying down our revolver. You should expect that we will continue so. We expect to pay all of it during this year. And we will continue doing the mandatory debt repayment, right.

After that, we will have the discussion with our board to evaluate what other alternative we will do including the buyback. As we said, we buyback last year was very positive for our shareholders. So it’s a consideration for us to discuss with our board. But short-term, as I said, you would see us paying down fully our revolver.

Bob Napoli – William Blair & Co

And then from an M&A perspective, Peter, you’re not really seeing any material opportunities at this point?

Peter Harrington

Not for 2014, no.

Bob Napoli – William Blair & Co

Okay, great. Thank you very much.

Operator

At this time, we have one question remaining in the queue. (Operator Instructions) We’ll take our next question from Smitti Srethapramote from Morgan Stanley.

Smitti Srethapramote – Morgan Stanley

Yes. Hi, Peter and Juan.

Peter Harrington

How are you doing?

Smitti Srethapramote – Morgan Stanley

Good, thank you. Just a follow-up question on the international expansion plans, especially on the merchant acquiring alliance front. Just wondering, do you think it would be possible to accelerate the timeframe of signing some of these alliances if you were to contribute some of your own capital to JV?

Peter Harrington

No, I don’t think so because I would be happy to do that today. It isn’t that we’re reluctant to commit capital. As we just said, that would be my first use of capital before I would even pay down the revolver and do a buyback. My first use of capital would always be to invest in the business. So now it’s not – that isn’t going to help the process. We’re more than happy to do that today.

Smitti Srethapramote – Morgan Stanley

And then maybe just a follow-up on the international front. A while back you guys talked about introducing new products, like Dynamic Currency Conversion and such. Can you give us an update in terms of what’s in the pipeline for new products and new geographies that you are likely to enter outside the merchant acquiring alliance front?

Peter Harrington

There is no substantial product offering that I would highlight to you today. We’re always adding functionality to the platform, but there is nothing that stands out like Dynamic Currency Conversion or ATH, the person-to-person payment product that we launched. There isn’t anything today that’s imminent that I would bring to the – that I would put on the table to you.

Smitti Srethapramote – Morgan Stanley

Okay, thank you.

Operator

And it appears there are no further questions at this time. Mr. Harrington, I’d like to turn the conference back to you for any additional or closing remarks.

Peter Harrington

Thank you, operator. In summary, we had a solid second quarter. We continue to add business from new and existing customers. We continued to invest to support long-term growth, and we’re driving greater profitability by leveraging our attractive business model.

I want to thank you for your support and I look forward to speaking with you again on our third quarter earnings call. Operator, you may now end the call.

Operator

This does conclude today’s conference. Thank you for your participation.

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Source: Evertec's (EVTC) CEO Peter Harrington on Q2 2014 Results - Earnings Call Transcript

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