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spk01: Ladies and gentlemen, thank you for standing by, and welcome to the EvoPayments second quarter 2021 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ed O'Hare. Thank you, sir. You may begin.
spk04: Good morning and welcome to EvoPayments' second quarter earnings conference call. Our press release and slides detailing the company's recent volume trends are available on the investor relations portion of our website. Before we begin, I want to remind all listeners that EvoPayments desires to take advantage of 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 our press release and filings with the SEC. Please refer to our press release for an explanation of the non-GAAP financial measures discussed in today's call, along with reconciliation of those measures to the nearest applicable GAAP measure. Today we discuss our second quarter results and our overall business performance. Joining me on the call is Jim Kelly, our Chief Executive Officer, Tom Panther, our Chief Financial Officer, Darren Wilson, President of the International Segment, and Brendan Tansel, President of the America Segment. I will now turn the call over to Jim.
spk02: Thank you, Ed. Good morning, everyone, and thank you for joining us today. I'm pleased with our second quarter financial results and business performance, despite lingering COVID restrictions in our markets. We are seeing positive trends across our business, including new merchant wins from our bank and tech-enabled referral networks, the build-out of proprietary capabilities in our product and services suite, and the continued adoption of digital payments, which began accelerating in 2020. Given our positioning, I'm confident in our ability to capitalize on additional growth opportunities during the second half of the year and into 2022. I'd like to begin by reviewing some of our recent announcements. As many of you are aware, since our last call, we launched our operations in Chile with our bank partner, BCI, acquired a leading e-commerce gateway in the market to complement our JV, and most recently, completed the acquisition of a UK-based omnichannel payment gateway, which expands our integrated payments offering in Europe. We look forward to leveraging these investments to continue expanding our global distribution. Darren and Brendan will provide more detail later on the call. Now I'd like to provide a brief overview of our recent volume trends. As you can see from the slides, the company demonstrated strong growth of 33% year-over-year and 11% compared to 2019. We delivered these results through our strong sales efforts and superior customer service, coupled with the continued card adoption trends across Europe and the Americas. As our markets, especially Europe, fully reopen and economic activity returns to pre-pandemic levels, we expect our volumes to continue to increase. Turning to our financial performance, compared to the second quarter of 2020, on a constant currency basis, revenue grew 23%, Adjusted EBITDA increased 34%, and margin expanded 300 basis points to 35%. The strong results we demonstrated reflect the easing of COVID-related restrictions across our markets and our efforts to realign the company's cost structure over the last 18 months. Tom will cover our second quarter financial performance in more detail later on the call. We look forward to building on our recent accomplishments as we continue to execute on our long-term strategy of solid organic growth coupled with M&A. Our acquisition strategy remains unchanged, partnering with leading financial institutions in new and existing markets and acquiring tech-enabled assets that enhance our merchant offering and augment our distribution channels. Across the markets, we have recently seen an increase in M&A activity as evidenced by our previously mentioned announcements, and we are well positioned to capitalize on emerging opportunities as we move forward. Finally, as we announced yesterday, I'm pleased to welcome Stacey Peniasu to our Board of Directors. Stacey has extensive global experience from her time at the Coca-Cola Company and her current position at Graphic Packaging International. Her expertise will be a great addition to Evo as we continue to expand our international footprint. And I'll turn the call over to Darren to discuss our European business. Darren?
spk07: Thanks, Jim. To begin, I'd like to discuss two recent updates, our acquisition of Anderson's X and our partnership with Premier Lotteries Ireland, both of which complement our European tech-enabled strategy. Anderson's X is a UK-based omnichannel payment gateway, which provides us with additional ISV and merchant relationships across the UK and Ireland and continental Europe and will enable us to drive payment acceptance for merchants across a wide range of market verticals including hospitality, pharmacy, event venues and ticketing. This acquisition is consistent with our proven international ISV strategy of acquiring in-market gateways such as ClearOne in Spain, SF Systems in Mexico and Way2Pay in Ireland. both enhance our proprietary capabilities and augment our integrated payments distribution. In addition, we have already begun cross-selling our acquiring services to Andersen-Zach's gateway-only partners and customers to enhance these relationships with better products and services. In Ireland, I am very pleased about our partnership with Premier Lotteries Ireland, whereby Evo will supply proprietary gateway and acquiring services to process e-commerce payments for the Irish National Lottery online platforms. We are excited about this competitive takeaway, which will help us grow our e-commerce business as online payments continue to accelerate in Ireland and across Europe. In our other European markets, we continue to capitalise on the accelerated cash-to-card tailwinds by signing new merchants' partners in both our tech-enabled and bank referral channels. As economic activity improves and our sales performance surpasses pre-pandemic levels, we anticipate we will continue to grow our referral relationships to meet the increasing consumer demand for digital payments. In other news, in Poland, we recently partnered with Visa to provide our hospitality and restaurant merchants with access codes which enable live broadcasts of the Tokyo Olympic Games. in an effort to help attract additional customers to those businesses most significantly impacted by the pandemic. Turning to our financial performance for the quarter, European constant currency revenue improved 28% year over year. Volumes for the second quarter were approximately 31% higher compared to 2020 and grew 11% versus 2019. In July, European volumes increased 14% compared to 2020 and 23% versus 2019. Since our last call, our markets have steadily reopened and vaccination rates increased across the segment. Recently, the EU rolled out a digital COVID certificate program, which is accepted in all EU member states and validates an individual's vaccination or COVID immunity via QR code and unique digital signature. This initiative is helping to facilitate free movement within the EU, enabling the easing of travel restrictions and the opportunity for business activity to return. I'm pleased with our recent performance and excited about the momentum we have heading into the second half of the year. A strong revenue and volume growth this quarter reflects the impact of the reopening-driven recovery coupled with increased card adoption across all markets. As business activity continues to accelerate, we'll expect cross-border activity, including DCC, to improve, which will have a positive impact on our revenue as well as our margins. I'm confident in the continued recovery of our European business and our ability to deliver financial results that exceed pre-pandemic levels once markets are fully open. I will now turn the call over to Brendan, who will provide an update on our America segment. Brendan?
spk02: Thanks, Darren. As Jim previously mentioned, in June we announced that our JV with BCI received regulatory approval to commence operations in Chile, and our processing is now live in the market. The Chilean market is well positioned for acquiring growth with approximately 20 million people and only 40% card penetration. In addition, the market has approximately 1 million merchants that process over $800 billion in annual sales. Of BCI's 60,000 current bank customers, we have established an initial list of over 15,000 merchants to target for acquiring services and have committed to purchase approximately 10,000 terminals to ensure smooth customer onboarding given the significant demand for differentiated capabilities. We have rolled out local sales, marketing, and product support in Chile and are leveraging our Latin American platform based in Mexico to provide superior products and services for our customers as processing in Chile is dominated by the national bank-owned TransBank platform. In June, we completed the acquisition of Pagafacil, a leading in-market e-commerce gateway equipped with acquiring capabilities. This acquisition immediately adds over 3,000 merchants to the JV, including key customers such as Patagonia and Pandora Jewelry, and expands our products and services offering with its proprietary integrations to Shopify and WooCommerce, among others. Further, PagoFacil's customer list spans a variety of high-growth market verticals, such as healthcare, hospitality, ticketing, and travel. As PagoFacil has now been integrated into our SNAP platform, the Gateway will provide additional support for our e-commerce business in Mexico and new markets we seek to enter in the region. Turning to our financial performance, for the quarter, the Americas constant currency revenue improved 20% year over year. which reflects the growth from our Mexican market and our U.S. ISV and B2B businesses. As you can see from the slides, volumes for the second quarter continued to improve. Beginning with the U.S., volumes for the quarter were approximately 26% above the prior year. Our B2B business demonstrated high-teens revenue growth, consistent with its historical growth trends, both before and during the pandemic. This quarter, we launched EVO ACH to enable our merchants to send and receive ACH payments directly to and from customers via our PayFabric gateway. As we focus on growing our B2B business, we are making additional investments in our proprietary gateway and pursuing M&A opportunities, including additional ERP integrations. Our ISV business grew 27% in the quarter as this business benefited from the merchant shift to software at the point of sale in a significant rebound in volume in certain market verticals, including restaurants and hospitality. We continue to gain sales momentum coming out of the pandemic by finding new partners and rolling out new products and capabilities. Earlier this year, we successfully launched the Evo SimpleTab payment integration. Our proprietary pay-at-table solution, which we will soon expand to include QR-based payment functionality for our ISV partners. We will continue to invest in these types of capabilities as well as additional partnerships as we seek to meet changing consumer demands that have remained in effect coming out of the pandemic. Our B2B and ISV businesses together represent approximately 40% of our U.S. revenue. which we expect to increase as we expand our product offering and capitalize on additional sales and M&A opportunities. Turning to Mexico, our volumes increased 47% this quarter compared to last year and 19% compared to 2019. In July, volumes increased 31% compared to the prior year and 15% compared to 2019. We saw strong growth both from our bank referral and tech-enabled channels, specifically our e-commerce business, throughout the quarter. As we leverage Pago Facil's integration into our Snap platform, we expect to deliver strong merchant wins and increased capabilities that will drive revenue and earnings growth from our Latin American e-commerce business. I am pleased with our recent financial performance and our expanding distribution in Latin America. The results demonstrate our ability to leverage our diverse referral network, including bank partners and an expanding tech-enabled channel, and enter new markets to grow our merchant portfolio. With that, I will turn the call over to Tom, who will cover the financials in more detail. Tom? Thanks, Brendan, and good morning, everyone. For the quarter, on a currency-neutral basis, revenue increased 23%, adjusted EBITDA increased 34%, and margin of 35% expanded 300 basis points compared to the prior year. Further, our second quarter revenue was in line with 2019 results, and EBITDA increased 9% as our margin expanded 300 basis points. We generated record volumes in the second quarter, which increased 33% compared to 2020 and 11% compared to 2019. However, revenue spreads remained below pre-pandemic levels due to changes in merchant and transaction mix and lower DCC and cross-border activity. This quarter's solid results demonstrate our ability to capitalize on the favorable consumer trends and the economic recovery that's occurring in our markets as we exit the pandemic. With respect to segment performance, in Europe, our year-over-year constant currency revenue increased 28%, and adjusted segment profit increased 63%. In the Americas, year-over-year constant currency revenue increased 20%, and adjusted segment profit increased 31%. These solid results reflect the favorable macroeconomic trends as well as the adjustments we made to our cost structure, both of which we expect to have lasting favorable impacts on our results. Our businesses are well positioned to capitalize on the acceleration in card penetration as we make investments that enhance our products and services. Adjusted corporate expenses for the quarter were $9.7 million, which increased 63% from the prior year, primarily due to the impact of salary reductions along with furloughs in the prior period. Adjusted net income for the quarter increased 105% to $20 million compared to last year, and adjusted net income per share for the quarter was 21 cents, which increased 10 cents, or 91%, compared to a year ago. At the end of the quarter, dilutive shares totaled $95 million, an increase of 5 million weighted average shares compared to the prior year. As a reminder, on May 25th, we announced that the Class B common shares were canceled, consistent with the original terms of our up-sea structure at the time of the IPO. However, this change has no impact to our total dilutive shares of $95 million. In the second quarter, capital expenditures were $9.1 million versus $3.5 million in Q2 2020. Of this amount, 68% was for terminals as our markets are reopening and adding new merchants. Also note that comparisons to the prior year are against the lows of the global lockdown. Free cash flow for the second quarter was $28 million, an increase of 44% over the prior year. This is a result of our EBITDA growth and lower interest expense offset by the increase in capital expenditures. We ended the quarter with leverage at 2.6 times, which is down from 2.8 times at the end of the first quarter. We use the free cash flow generated from the business to purchase Pyrofacil and reduce our leverage. Our strong liquidity and low leverage, coupled with $176 million of available cash and $200 million of unused capacity in our credit facilities, provide us the financial resources to capitalize on M&A opportunities. Turning to our outlook. Our second quarter results were modestly ahead of our expectations as the vaccine rollout and resulting economic recovery began sooner than expected. We anticipate a modest acceleration in revenue in the second half of the year, although we are monitoring the impact of the emerging COVID variants. Assuming no additional government restrictions are instated, we now expect 2021 revenue to increase 11% to 13%, adjusted EBITDA to grow 18% to 21%, and margins to expand 200 to 250 basis points compared to 2020. This guidance reflects the estimated financial impact of our recent acquisitions and launch into Chile. With that, I will now turn the call back over to Jim. Jim? Thanks, Todd. So what a difference a year makes. As I stated previously, I'm pleased with the company's performance in the second quarter and momentum as we continue to execute on our existing sales strategies and capitalize on emerging M&A opportunities. I will now turn the call over to the operator to begin the question and answer session. Operator?
spk01: As a reminder, if you would like to ask a question, please press star then the number one on your telephone keypad. Again, that is star then the number one. Your first question is from Andrew Jeffrey with Truist Securities.
spk08: Hi. Good morning, everybody. Appreciate you taking the question. I'd like to dig in a little bit on the gateway strategy, both B2C and B2B. It seems like Evo has taken the approach of acquiring regional gateways that are accelerating Omni and EECOM. Just wondering if you could elaborate a little bit on whether or not that's something you seek to expand across all your markets and whether there's an opportunity for a more unified gateway just broadly across geographies or if they're going to be standalone. I've got a quick follow-up on B2B. Okay.
spk02: Well, good morning, Andrew. If you go back many years before we were public, We acquired a gateway here in the U.S. called IP Commerce, which we now have been referring to as SNAP. And the original plan was to, I think, do exactly what you just described, which is to have one gateway solve the issues of the world from a payment standpoint for EVO. The practical side is given... geographies and nuances, even though it's Visa MasterCard globally, there's lots of nuances to do business in all the different markets. So consistent with the way we have three platforms, one for the US, the processing platform, one for Europe, and one for Latin America, what we discovered, what I discovered is speed to market was better if we had local talent, local infrastructure. instead of trying to repurpose a U.S. gateway to do everything that's needed in all the different markets. I think the other component of this are each one of the ones we've acquired, so one was in Ireland called Way2Pay, ClearOne in Spain, FFS in Mexico, IPG in Europe. Each one of those companies have been around anywhere from 5 to 15 years. So we get the benefit of the experience of the team in market, which are going to have much better line of sight than somebody who is sitting in Denver where Snap is based. It's just not realistic that they would have the same experience level as now we're going to have with Anderson's Act in the U.K. market. And that has been a very successful growth process. market for us in particular on ISV in the last several years. And Anderson Sachs and the team there is going to help accelerate it. They have, I think, something like 23 ISVs already integrated with thousands plus merchants that are not our merchants currently but have the opportunity to become our merchants. So I think it's a playbook that works. You should anticipate that you'll see more of these. They're relatively you know, inexpensive in the scheme of things versus a merchant portfolio from a bank. But the organic growth that comes out of it and the shift of the company to be more oriented to integrate it in each of the markets that we're in, we think this is a winning strategy. Okay.
spk08: That's helpful. Thank you. And on B2B, can you update us on your efforts to convert volumes over to your gateway, I assume, accentuating or improving yield in that business in the U.S.?
spk02: Sure. I think I'll let Brendan take that. Yeah, hey, good morning. The strategy on converting the back book, I wouldn't say that's first and foremost why we bought these businesses. We bought these businesses for the integrations that they provide the company, the various ERP solutions, and the ability to board net new accounts with both a software and acquiring solution. But in the case of DeLego, yes, we have been converting accounts. It's not a huge portfolio of merchants, and we've made some headway. I wouldn't say it's material to the financial performance of the B2B business. In the case of the notice business that we bought that was integrated from Microsoft and now Oracle, we have done a broader conversion there. There are still customers that just buy the integration solution that we continue to talk to about the acquiring piece. But the opportunity set for us there is to bring those integrations and our acquiring capabilities to net new customers and offer a one-stop shop that provides the entire value chain of the solution.
spk08: Thank you. I appreciate that.
spk01: Your next question is from Kartik Mehta with North Coast Research.
spk03: Good morning. Jim, just a question on your M&A comments you made. It seems like you have some opportunities. Are those opportunities on the B2B side or more on the traditional firing side?
spk02: I would say in all categories. If you go back to some comments I made last year around this time relative to M&A, the bank side, the bank channel was much more we thought closed down, just given what was going on with the pandemic. We're starting to see that improve, and by evidence of the acquisition in Chile and then the one that Darren announced in the UK. Those are the two flavors of what we're looking for. Thanks to be able to enter a new market, leverage their brand and their back book of customers, plus the front book of referrals, and then supportive or technology that will accelerate organic growth and also shift away from being holistically focused on the bank in a market. I think Ireland's a good example where Brian and his team started at 100% of our new business in Ireland when that began back in, I think it was 13, 14. Now it's probably less than half or significantly less than half because of the acceleration of integrated and e-commerce in the market. I think on the B2B side, as I think we've mentioned or I'm sure Brendan has mentioned in the past, the focus there is to build out more capabilities on the receivable side while we look at payables as a possibility, building more integrations, and building is really buying. So we've bought into DeLego for SAP, noticed for Microsoft, Oracle, of the quasi-acquisition, but there's plenty of other ERP targets that we'd be interested in to build out the capabilities of the platform that we refer to as Safe Habits.
spk03: And then, Tom, just on the guidance, it looks like you obviously had a very good second quarter. The July trends, which you showed on the slides, are very good. I'm curious as to maybe if you're being conservative around the guidance or if there's other reasons or trends that you're seeing that maybe you didn't increase the guidance a little bit more.
spk02: Hey, Cardick. Good morning. Good morning. Yeah, I think we're being, frankly, I think, smart about the guidance. We are cautious about the second half of the year with the uncertainty around variants and government responses to the COVID variants that are out there. You know, we see the second half of the year being, as we said in our remarks, where we are accelerating. You saw a revenue print of 122 for the quarter, and it would grow from there to get to that full year guidance number. That's going to be driven, we think, from volume and transactions, not necessarily spread appreciation in the second half of the year. But I would characterize this kind of our kind of, you know, best guess around what we think is appropriate for the second half of the year based on the momentum that we have. We'll continue to be diligent around expenses as we work to achieve the EBITDA number. But I think we've got really good momentum, and it's just continuing that momentum into the second half of the year and hoping that disruption from COVID doesn't create a speed bump like it did last year.
spk03: All right. Well, thank you, Tom. Appreciate it.
spk01: Your next question is from Team CMR with J.P. Morgan.
spk09: Thanks so much. Good morning, everyone. Just to build on Karthik's question, just the change in the guidance here. I just want to make sure I captured it all. Is it primarily the acquisitions as well as you're layering in some of Chile? Was there any underlying change in the base business?
spk02: Sure. I think it's both, Tenjin. We did layer Chile in, both the intro from BCI and then as well as Pagopasil. That's more of a 22-story on both levels, but Pagovacil was an existing business, and so there's some revenue in EBITDA day one associated with that business. We see it growing at very strong levels. BCI, we're kind of starting from a base, but that's factored in there. But we also are encouraged by what we're seeing from a recovery perspective in all of our markets, particularly internationally. and we expect the volumes to hold up and maybe even exceed what we were originally anticipating. That's what happened to a modest degree in the second quarter, and if we can keep that momentum, continue to see the tailwinds that we've talked about, the cash-to-card and all those things that we've talked about, the greater adoption of tech-enabled and ISV, all of those things are trending in our favor. I think that's
spk09: all factored into that you know acknowledge a you know modest bump in in the guidance but there's also some uncertainties out there that that are hard to predict yep very clear and reasonable just on the spreads to your comment tom i think uh you're still running a little negative you're not assuming any improvement in the spread between revenue and volume growth in the backup of the year um To see that improve, is it really just we need to see travel and cross-border travel come back? I'm asking because I'm looking at the charts while we're talking here. The spread between volume and revenue in Europe is actually pretty tight, so I'm a little bit surprised by that, but just wanted to make sure I understood that.
spk02: You're right. Yeah, we have kept our expectations is that, you know, spreads may slightly increase, but that, you know, is not a driver to the overall top line, bottom line. Cross-border is a key. DCC still remains low in Europe, Poland, Spain in particular. So I think that would be a piece. Seeing some of the SME market come back full strength. So even though the merchant may be processing, they still may be working under some level of restrictions. And I think those are things that are going to have to move in our favor before we see the spread increase. But I also think we've seen a shift in some merchant mix, some just composition of our business. The larger merchants are making up a greater portion of our business. When you look at our revenue per tran that we publish, that includes the growth in our ATM business. So that's also a factor that goes into the overall valuation. So to some degree, it depends on kind of which metrics you're looking at. But I do think we've seen the shift in our merchant base. where higher volume, lower spread, but very accretive, very profitable business. Just from an overall spread view, it may look a little lighter than what it historically was pre-pandemic.
spk09: I see. No, that makes sense. I don't think that will come back, and that will be a little kicker for next year. Just last one, if you don't mind, a third question. I'll add one for Jim, because I've learned so much about payments from Jim over the years. Just thinking about the buy, not pay later, so tender-type payments, The market seems to think there's a lot of growth potential in that category. What are the implications for EVO and to the broader acquiring industry in your mind, Jim? And that seems like it is another important phenotype, but we'd love to hear your thoughts.
spk02: Yeah, it's not – I mean, I know there was a big announcement the other day. We all saw it. And it's not the first time, if you remember, it was a building later that PayPal bought years ago.
spk09: Yep.
spk02: I think they changed the name of that to something that had PayPal in the name. I don't know. I think they're targeting a segment of the world population that otherwise doesn't have access to cards, I'm guessing. If it's a tender type at the point of sale, as long as it doesn't become an acquiring solution, then we're happy to Support any tender type. Remember, we're holistically focused on supporting the merchant. So if it's something that the merchant wants to offer and it's noncompetitive, then we're fine with it.
spk09: Perfect. Thank you.
spk02: One other thing as it relates to Europe. Remember, while we see what it looks like here in the United States, we still have our Irish market. We're not in the office yet. I know that sounds strange because a lot of people are not in the office, but we're essentially in all our offices and have been for some time. So your comment about cross-border and DCC, that is a big part of the drag on what would have been their historical spread levels. And I think your last comment that that is an opportunity for the back half of the year. We just don't know exactly when that will be or more likely more into 2022.
spk07: Yeah, no, great. We're all patiently waiting. Thank you.
spk01: Your next question is from Robert Napoli with Rogan Blair.
spk06: Thank you, and good morning. I guess just on the reopening, as you look at your business today, assuming the world gets back to normal over the next, you know, one to two years, whatever that may be, whenever this eventually washes through. How much, you know, what areas, how much upside is there, I guess? Or where do you see, obviously, the cross-border piece? I don't know if you can put some, you know, some numbers around that on, you know, what that means to spread or yield or revenue. But, you know, certain markets that haven't opened yet. Is there, like, is it, like, 10% upside the revenue? I mean, do you look at it? I mean, have you dug into it that way and see what you're still missing, I guess?
spk02: Yeah, hey, Bob. So, sure, we've seen, we look at it all kinds of ways. You know, pre-pandemic, drop of the pandemic, where do we stand today? Do we get all the way back to pre-pandemic levels as an industry? I don't think so. I think there's just going to be some consumer behavioral change that's just not going to get it all the way back to that level. But I do think that we will see cross-border pickup, and with cross-border picking up, you'll see more activity and revenue generated on the DTC front. You know, if you had me to peg a metric around it, you know, we think we could see, call it a $5 to $10 million revenue lift relative to DCC, the new normal, whatever that new normal is. As I said earlier when I was responding to Ken Jim's question, that's not a 21. And, you know, your guess is as good as mine is whether or not that's the summer of 22. Let's all hope so. But if you were to just decide the bread basket, I think it's a $5 to $10 million number, you know, call it two basis points potentially in added spread when we get back to what, you know, we would look into a crystal ball and say the new normal is.
spk06: Okay. And it would be very high margin revenue, I assume.
spk02: Yeah. Yeah, there's really no cost associated. And then on top of that, you would have? Cross-border, our Spanish business continues to suffer from the standpoint of it's oriented to travel, and travel has not resumed to normal levels. So I think there's a ways back. Tom was just speaking to the DCC component, but there's other components of the business that have not fully reopened. The SME markets across the world that have been adversely affected were the larger stores did better than the smaller ones. The online obviously did better than the face-to-face. That'll eventually sort itself out both on the retail and the restaurant side. So I don't know. It'll be hard for anybody to predict the future given what we've just gone through, but we feel good about where our customer base is today and the trajectory for the balance of the year.
spk06: Thank you. And then, uh, maybe a follow-up on the B2B payments business. When you look at that business and you look at some of the other players, you know, out there, whether it's, you know, you know, build classes, so build.com, acquire invoice to go. I mean, how does your, how does your B2B business compare to the others in the market? How different is it? And what, I mean, the growth rate, I know some of these like a high radius, I think these, are showing very high growth rates, but have somewhat different business models?
spk02: Sure, good question. So our B2B business, our focus is on generating or developing or acquiring full-blown ERP integrations. So we want to be integrated to the full ERP offering, And we are focused today exclusively on the receivable side. A lot of the companies that you're mentioning do a lot on the payable side, which is virtual card issuing and interchange becoming revenue. As Jim has alluded to, and I think I've alluded to on prior calls, we've looked a little bit at that business. There are some businesses that are larger in scale that would have a very, very, very fulsome payables offering. And it's not clear to me or us that that's the right direction for the company. Today, you know, our revenues are entirely on the receivable side. And I think there's a place for us to play on the payable side. But I, you know, we've addressed the big three ERP ecosystems today. There are a bunch of ISVs in those ERP ecosystems. So there are ISVs that would operate in the Microsoft ecosystem that would be specific to various industries that Microsoft would be selling its ERPs into. And now that we have the Microsoft integration, there are ISVs that we can further integrate to to really embed ourselves in that community. And the same is true of SAP and Oracle, and then there's a long tail of smaller ERPs that we are pursuing both as a direct integration that we would build out of our PayFabric gateway, or, again, we would buy an integrator that we would integrate to PayFabric and therefore have an integration to the ERP. Our interest, you know, we are, I suppose, in the software business through that integration, but our interest is to make money on spread. Our interest is to make money, you know, processing payments. And if this allows for a stickier customer relationship, which it undoubtedly does, then it's, you know, I think all the better for us.
spk06: Great. Thank you. And then one last question, I guess. Now, Jim, you've been in this business a long time. The industry is changing. There's a lot of innovation. Where do you see, I guess, the future in payments and innovation, if you would? I mean, buy now, pay later is maybe one aspect. I mean, your e-commerce business, Stateways, OpenAPI, you know, for card issuing, you know, a number of different things going on. But I guess as you look at the business today, is it changing faster than what you've seen in the past? And if so, where and, you know, where is Evo investing around that innovation?
spk02: I don't know just because I've been in the industry that long, Bob. I have the greatest insight to it. I mean, obviously I've seen a lot around the world over the last 20-odd years. My position is the Visa MasterCard model works extremely well. And what you're talking about, in some instances, are derivations of Visa MasterCard ways to make money on and around the core concept. It doesn't specifically have to be those two, obviously, just cover MX, union pay, how many trillions it represents and spends globally. I think that's a very solid infrastructure that lots of companies, not just Evo, depend upon. I think where you're seeing changes, and put aside buy now, pay later, where you're seeing changes, and we're participating in that, Anderson's Act, and Pug of Steel would be two examples of it, is the ways that consumers want to do business. I think the phone... The advent of the phone and the iStore and everything that goes around that has caused consumers and consumers being, you know, pushing merchants in a direction to make it easier for us to do business, whether it's at our home during a pandemic or how we order and buy. So I don't think that's going to change, and I think companies that are going to succeed are going to have to change with the times, and they're going to have to change ever faster and faster and faster. You're seeing the The terminal manufacturers have largely gone out of business. The major ones have been consumed by processors because the shift away from a standalone terminal is going to continue to accelerate. The other part of it is the B2B piece that you've talked about with me a bunch, as well as with Brendan. B2B is a huge market, at least in the U.S., not really globally, but in the U.S. it's been largely untapped. And I think what's caused that shift is the same thing we've seen on the consumer side, that merchants now want to be able to pay with a card or they want to pay with ACH through a gateway solution and not have to deal kind of with the traditional way of sending checks around. So as long as we're positioned with the right technology, I think we're going to continue to win in the market with lots of big and small companies as well as new entrants. I think that the other side of it, which is the buy now, pay later, the company that Square bought in Australia, I think it was, that's not really what we do. That's on the consumer side. We're not a consumer-facing company. We're supporting the merchant side of the equation. And because payments are so important and so big of an industry, I think it's going to attract more and more players into the industry at the same time. You know, we're also seeing a lot of consolidation. But, you know, on EVOs, Keith, the focus on building distribution through banks and technology, I don't think that's going away any time in my career or lifetime. And we're continuing to see opportunities. Latin America, we set a board meeting yesterday, and we had the team in from our Mexico and Chile group. And the growth opportunities in Latin America are – more than significant. This is a largely untapped relative to some of the other markets we do business with in terms of their need to bring technology and capabilities into the market. So I think we're still early stages on the shift that you're going to see in technology, and we feel really well positioned to take advantage of it.
spk06: Thank you. Appreciate it. Thank you.
spk01: Your next question is from Ramsey with Barclays.
spk05: Hi. Thanks for taking my question. I wanted to ask about the Irish National Lottery relationship. Is that a vertical where you see, you know, optionality in other geographies? Is that something you could replicate elsewhere? And I guess more broadly, is gaming a place where you could move into?
spk07: Thanks, Ramsey. So the lottery, we already support lotteries in a number of other markets. It's a vertical through our gateway, but also on an acquiring basis. So there are two elements here in terms of the support to that type of vertical. So yes, it's a good vertical in that it's typically state-sponsored lotteries. Also, though, with our gateway, with IPG Gateway, we have a number of gaming customers already in that portfolio. So yes, it's a vertical we're very used to and expanding into. The tier one players are really where the focus is because obviously there's risks as you go further down the value chain there. And we'll always look in the markets where it's legal, regulated, et cetera, to support that vertical. But it's a part of the e-commerce vertical as has been discussed throughout this call. The switch from cash to card across multiple and attended software in-app solutions is where we're ensuring there's no single concentration risk in any one vertical. But certainly we're very pleased to be switching from a competitive to competitive that Irish National Lottery opportunity.
spk05: Cut it. And I wonder if you could also update us on the Mexico progress in e-commerce in Mexico. I know you guys already have pretty material market share there, but how has the pandemic impacted trends in that market? And do you see any other banks that you could partner with there to sort of drive further adoption?
spk02: Yeah, of course. So we have set up our European gateway in Mexico. So that gateway is Intelligent Payment Group, IPG. It's been a big success story for us in Europe, and we've now enabled it for transaction activity in the Mexican market. I think ultimately, Pagafacil, the acquisition that we covered in the script earlier on the call, will serve as our regional platform. But Today, e-commerce represents roughly 15% of the Mexico business. It grows, you know, 30-ish percent generally and has sort of more or less for the six years that we've been in the market. We have in the past relied on third-party gateways. You know, those gateways are in two buckets. The one would be multinational gateways that need domestic support. So those would be the audience of the world, the world pays to the world. And in some instances, we will support multinational companies that require domestic support in the Mexican market. I would say that is not, though, the majority of our e-commerce portfolio. The preponderance of our business on the e-com side has been domestic businesses, either self-sourced by our sales force or referred by Banamex. And many of those businesses came to us prior to standing up the IPG gateway in the market, and we've referred those to third parties. And in most cases there, that's MasterCard payment gateway services. So I think there will be an opportunity prospectively to move some of that volume off of third-party solutions and see some earnings accretion within the portfolio. But the more interesting story, rather than converting the back book onto an internal solution with ostensibly no variable cost, the bigger opportunity is to go forward. that we continue to see an enormous amount of current present merchants express an interest in establishing an e-commerce presence, and we continue to see net new activity in the market with new entrants, and we've seen no degradation in the volume growth story that, as I say, has been ongoing since 2015 when we entered the market. I'm just going to add to that. One of the reasons we bought Pago Facil, while we're using our European gateway to support Mexico currently, And this is kind of keeping with the earlier question that I got. Being able to acquire a business that is doing business in Latin America and has many of the feature functionality that we would have to continue to build out in Europe, we're going to leverage the Pagafacil acquisition across Latin America. So we'll kind of have two available to the market in Mexico and then Pagafacil for the for the rest of Latin America. Because I think like everyone, while e-commerce was super important before the pandemic, it is nothing but the bullseye right now. And if you look at e-commerce across Latin America, if you take Brazil out, maybe the markets that were mostly focused on Mexico being one of them, penetration in e-commerce is still very low. So I would expect to see over the next several years, very high growth in e-commerce in this region.
spk05: Great. A lot of helpful detail there. I appreciate it. Thank you. Yep.
spk01: Your next question is from George Mihalos with Cowen.
spk10: Hey, good morning, guys. Thanks for taking my questions. I guess to kick things off, you know, Jim, on some of the prior calls, if we're sort of thinking or looking at the business geographically, you sounded more upbeat about opportunities in LATAM on the M&A side, on the partnership side. I'm curious if that maybe has changed at all just with Europe opening up, or do you still, you know, kind of see more near-term opportunity out of LATAM maybe to do things versus the European geographies?
spk02: Yeah, kind of like with your kids, you don't pick one side versus the other. I like them both. I think Latin America actually for us, because we're in two major markets, now we're in Chile and we're with a bank partner there with technology that's localized as well as Mexico. We've been in since 2015 and our dominant player in that market with an outstanding team that looks after Latin America for us. I think in terms of opportunity in Latin America, it's smaller GDP, but the growth opportunity in Latin America is absolutely a high focus of Brendan's responsibility and David Goldman, who runs our M&A group, to open up more markets. And in opening them up, it's not to just start signing up merchants across the border or is looking for another bank partner. BCI is an outstanding relationship now with us. As I've said multiple times, they're extremely excited about being able to, for the first time, launch payments into the market. Just to remind you, Chile is a monopoly, one provider owned by all the banks that's being broken up largely by the government. And we're the first entrance into the market. So this is the first time BCI has really been in this aspect of payments and are excited. So we're looking forward to finding other opportunities in Peru, Ecuador, Colombia, Argentina, probably more of the Spanish-speaking, but I wouldn't say Brazil was out, but Brazil is pretty crowded these days with lots of players. And then I think for Europe, Darren, once he's allowed to travel freely across the market, as he's been sitting in his home office for 18 months... Europe remains a key focus. We have a new general manager for our Spanish business who's already made some inroads in Spain and Portugal and even into Italy. So I am looking forward to the awakening of Europe and banks who are not well positioned in payments to listen to us about our opportunities to do business with them. And then lastly, the U.S. is not as though we've abandoned it. In particular, on the B2B side, I think we'll continue to be very acquisitive, as well as on the ISV side, not in software, but in enabling capabilities. And then lastly, Asia. To get into that region, really like any other new market we go into, we're looking for a bank partner, and there we need to be a sizable one, just given the time zone difference. You're essentially setting up an entirely different new business halfway around the world. So as the world opens up, we're well positioned financially to be able to take advantage of M&A opportunities. And as we said, we've been able to do two in this quarter.
spk10: Thanks. I think that's a pretty comprehensive answer there. Darren, quickly as a follow-up, I think you commented about kind of post-pandemic Europe achieving higher rates of growth than pre-pandemic. I was hoping maybe you can talk a little bit about that. Is that a mix shift, more of your push on the tech side, you know, what you're seeing with e-commerce, maybe some commentary there?
spk07: Sure. Thanks, George. Yeah, I mean, Tom's already outlined some of the underlying mix shifts, but But actually the majority trend really is the cash-to-card conversion and also the tech-enabled and e-com solution. As Jim outlined, I think in answering Bob's questions about where's the market going, we're seeing a lot of moves to in-app and attended software, e-com, supported by the underlying cash-to-card conversion trends. Also, you know, we've seen, obviously, as Tom commented, the big drag on the lack of international travel. So, you know, the real opportunities there that we'll see the growth rates of BCC coming back as well. So, you know, there are many drivers, but we've seen, you know, various schemes. We've talked about, you know, five years movement in the last 12 months in terms of a move from cash to card. in terms of our core acquiring business. Amazingly, in some markets where we support ATM customers, there is still ATM, which are all growing amazingly, especially in the Netherlands, for example. So it's not happening anywhere, but the overriding trend is definitely a cash-to-card conversion at scale. Thank you.
spk01: Your next question is from Brian King with Deutsche Bank.
spk11: Hi, good morning, guys. I know we're running late, so let me just keep it to one question. Jim, just love to get your thoughts on, you know, the concern in the market about the traditional acquirers losing share, the Stripe and Square, and the growing fintech. and we've seen that impact multiples in some of the peer groups. So how do you think about share shifts and acquiring? Is that an overblown concern, or do you think it's real?
spk02: You want my honest answer?
spk11: Yeah, that's why we're kind of at the philosophy of Jim here today on kind of how you see things.
spk02: Don't tell my wife. She doesn't think my philosophy is very good about anything. I think it's massively overblown. I think that because you buy a company in Australia, it's going to adversely impact three very successful large players in the marketplace. I didn't see that comparison. I think the success to any industry is the bill distribution. We happen to use financial institutions because That's been the genesis of our industry. But if you look in the United States, we don't support financial institutions really at all. I mean, we have two that are sponsors, but otherwise that's not a model that we pursue. So I think any business, as long as they can continue to build distribution to leverage or take advantage of the services that they offer, I think you're going to be successful. I don't know why you're not going to be successful. And banks have been around since the 1400s, so I'm not expecting in the next year or two that we're going to see the end of the financial institution model. So look, the market is very fickle, and people are trying to figure out what's positive and negative from the pandemic. But no, I'm a big believer in financial institutions. I think they're a bedrock of any of our economies, and I don't think the new entrants who are trying to find another way, digital bank or otherwise, I don't think that that's going to change the landscape in the near term. If you're talking 10 or 15 or 20 years out, I'm not that smart to be able to suggest it, but I think those three companies are well positioned. I think they're very strong competitors to ours. They're massively larger than we, but I don't think our business model is – is challenged anyway because somebody bought an existing public company.
spk11: But the shift to digital and to Omni into more e-commerce, does that in itself have an impact on the traditional acquirers, or are they able to reap the benefits as well?
spk02: Name one of those companies that doesn't have a digital solution. Jeff has been buying software companies since they bought Heartland. He has a gateway in Europe called Relax that he's acquired. I haven't worked at Global for a long time, so I don't know how many assets they have in terms of e-commerce. First Data, likewise, they're heavily invested in technology with Clover, among other solutions, just given their size as well and their relationships with banks for distribution. And FIS, likewise. I mean, FIS may be more of a bank processor that a core acquirer like we are, but they bought Bantam for WorldPay, whatever the name was at the time it was acquired. And they have a leading e-commerce gateway, obviously being challenged by Audion and Stripe and Brainfree, but we all have competition. But I think as long as you meet the needs of the market relative to solutions, you're going to be fine. And that's what each of us try to do every day is keep up with the needs of the marketplaces.
spk10: Got it. Helpful. Thanks so much.
spk01: The next question is from . Hey, guys.
spk02: Good morning. I'll keep mine limited to one as well. I think you provided a July volume update and prepared remarks on kind of a segment level, but wanted to dig a little bit deeper into country-level trends in July. Could you just provide an update for Poland?
spk09: I know it's a big travel destination, at least intra-Europe and then Mexico as well.
spk02: Sure. I think Tom's got the chart. As you said, Mike, we did provide overall Europe. Just as a frame of reference, we had Europe up 14% year over year and 23% versus 2019. Arguably, 2019 could be the better comparison. With respect to the Polish market, which makes up a large share of Europe, they're seeing similar numbers, as I just quoted, July up you know, 25, 30% compared to 2019 and up, you know, low teens compared to 2020. I think the noise compared to 2020 is more about what was going on in 2020 than what's going on in 2021. When you look at things at an absolute level relative sequentially to June, you see some stability and actually a little bit of increase in Poland. And then similarly on Mexico,
spk11: similar kind of numbers. Keep in mind, Mexico did not hit the same kind of trough that we saw elsewhere in our markets, just because of the nature of the economy down there.
spk02: Their growth relative to 2019 is also in that mid-teens level, so above our pre-pandemic level. And relative to last year, they're up 25-30%. They're significant growers relative to either benchmark that you want to look at. I was trying to get away from these charts. I know they've become very attractive to the marketplace that we were consolidating, but it sounds like you'd like us to keep them for a little bit longer. Yes, that would be helpful for my end, but, you know, I appreciate the incremental color you're on the call. So, thank you. Sure.
spk01: Your last question comes from with Autonomous Research.
spk02: Hi. Good morning, everyone. Thanks for taking the question. I just want to follow up on that last question. Maybe we could touch on Poland and the growth runway there over the next, you know, call it two or three years. Just wondering if you could provide some detail on that growth runway. I know it's been growing fairly quickly, but over the next three years, I mean, do you expect that growth to remain in the double-digit range, or does that decelerate to something like high single digits, you know, since you've already captured a lot of that benefit from cash shifting to cards?
spk07: Thanks. Yeah, it's Darren again. So yeah, we do expect continued strong growth. There's a number of initiatives in Poland called fiscalization, which is really the automation of tax records going through an acquirer or an acquiring device. So that's going to push a lot of kind of gray-black economy onto public solutions with, you know, 70-year storage data, etc. So Not only have you got, it's still on a benchmark basis, the penetration of card usage relative to the European market being still low. And equally, we're making some very good traction in the market, Joanna and the team there, in terms of the ISV tech-enabled vertical. But it's still kind of embryonic again compared to the US or the UK. So There's lots of upside growth in terms of the ISP world and the e-commerce world, the digital world, as we've already touched on in terms of in-app software vendors unattended, etc. So that with underpenetrated card versus cash and the fiscalization strategy and just underlying inflation trends being above some of the other European markets, there's a lot of tailwind opportunity in Poland still.
spk02: Yeah, that makes a lot of sense. Thanks. Thanks for that. And then maybe just like, if I could speak one more and just on the, the mark in the core, I mean, the, the incremental margins in two Q versus one Q where we're really impressive. I mean, I think it's around 55%. So what's the, what's the appetite to let incremental margins run at similar or higher levels, or is there an appetite to, to reinvest back in the business as volumes recover? Yeah. As much as I think the market would like to believe as such, I don't want to necessarily run to a specific margin. We manage the business to the opportunities that we see in front of us, either near-term or long-term. During the pandemic, we definitely learned something about ourselves. We were able to run the company more lean than what we had historically done. We pulled in tight because of the pandemic and the duration was uncertain, and I think that just has allowed us to recalibrate what's needed to be effective in the market now for the company. Now, having said that, we do, I think like a lot of companies right now, are experiencing turnover as people who didn't leave their job last year are looking at opportunities for whatever reason, and the market is more challenging to hire, so we have a number of open position. We'll continue along the guidance expected for this year. I don't see it materially moving down. Whether it will continue to move up at that rate, I think that's unlikely without giving more size. At some point, size in our industry matters because it's a high fixed cost low variable cost model. We'll need more revenue, more markets to be able to continue to drive that margin up at some point. Thanks, Bob. Appreciate you squeezing me in, and thanks for the thoughts. Sure. Thank you very much. Operator, I think we're back to you.
spk01: Okay. There are no further questions at this time. Do you have any closing remarks?
spk02: Thank you all for your interest and appreciate your time.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for participating.
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