Evertec, Inc.

Good morning, everyone, and welcome to the Evertech's fourth quarter and full year 2020 earnings conference call. Today's conference call is being recorded. At this time, I would like to turn the call over to Kay Sharpton, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. With me today on the call are Max Schuessler, our President and Chief Executive Officer, and Joaquin Castrillo, our Chief Financial Officer. A replay of this call will be available until Monday, March 8th. Access information for the replay is listed in today's financial release, which is available on our website under the investor relations section of evertechinc.com. For those listening to the replay, this call was held on March 1st. Please note, there is a presentation that accompanies this conference call, and it's accessible in the investor relations section of our website. Before I begin, I'd like to remind everyone that this call may contain forward-looking statements as 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. Evertech cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflect our current expectations only and we undertake no obligation to update any statements to reflect the events that occur after this call. please refer to the company's most recent annual report on Form 10-K filed with the Security and Exchange Commission 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, and adjusted earnings per common share. Reconciliation to GAAP measures and certain additional information are also included in in today's earnings release and related supplemental slides. I'll now hand the call over to Mac.

Thanks, Kate, and good morning, everyone. Our record fourth quarter and full year 2020 results are a testament to the resiliency of our business and our team in a challenging environment. Also, we were able to continue executing our strategy, creating an even stronger business entering 2021. I'll first cover some of the quarter highlights as well as discuss a few recent developments and then update you on our strategies for growth in 2021 and beyond. Beginning on slide four, we have a summary of our 2020 results. Total revenue for the year was approximately $511 million, up 5% compared to 2019, which exceeded the top end of our initial expectations for the year. We generated adjusted EBITDA of $240 million, an increase of 6%. We also delivered adjusted earnings per share of $2.07, an increase of 6% as well. Our company generated significant operating cash flow of $199 million. Our liquidity as of December 31, 2020, was a strong $320 million, and we returned approximately $22 million to our shareholders with over $7 million in stock buybacks and $14 million in dividends. Truly impressive results, and my thanks go to all the Evertech team members on a job well done in the most unusual pandemic year. Now I'd like to give you more updates on our businesses, beginning with Puerto Rico on slide five. First, we anticipate to benefit from the recent consolidation in the banking industry in Puerto Rico, specifically the integration of First Bank and Sentinel there. We expect this will positively impact our 2021 merchant segment growth rate. We also believe we will continue to benefit from the current trends of digital transactions as we localize place to pay and focus on ATH mobile product features. We made further progress throughout the fourth quarter implementing QR codes for contactless payments, which are now available in more than 10% of our merchants. This continues to strengthen our ATH brand and drives consumers to embrace digital transactions, which escalated during the pandemic. Additionally, during the first half of the year, we plan to launch a new mobile app for electronic benefit, or EBT, users that provides access to their balances on their EBT cards and notification of their next deposit. This new mobile app will further complement our EBT services to the government and respond to the needs of the consumer. Regarding the overall Puerto Rico economic environment and pandemic impact, there haven't been any significant changes in restrictions. Similar to most places, certain social distancing measures continue to be in place, the most important being a maximum capacity requirement at 30% for restaurants and other businesses. As it relates to the economic environment, unemployment levels have improved since the beginning of the pandemic but continue to be significantly higher than prior year. Other economic indicators, such as cement sales and retail sales, have reflected positive variances against the prior year, which hopefully continue to drive growth into early 2021. The federal stimulus payments that were received between Q2 and Q3 continue to support an increase in sales lines in Q4, driven by a high average ticket, although transactions were down as compared to the prior year. Sequentially, we have seen some decline in average ticket as the benefits from unemployment payments and other stimulus begin to land. The new $600 stimulus payment began rolling out in late January and early February, and we are anticipating this to benefit the first quarter. Additionally, I am delighted to say that the vaccine rollout in Puerto Rico is progressing with over 10% of the island having received their first dose to date. Lastly, in January, federal government announced that FEMA will award $3.7 billion to help rebuild Puerto Rico's water and wastewater treatment plants. This award, along with the $13 billion announced in September to rebuild the electric grid, will be beneficial to the long-term health of the economy. Moving on to Latin America, on slide six, we achieved a number of significant implementations in the quarter and in early 2021. I'm delighted to announce that we launched MasterCard debit card processing with MercadoLibre in Mexico. MercadoLibre owns the leading online payment solution in Latin America, MercadoPago, and is one of the most valuable companies out of Latin America known for their online marketplaces. This is testament to our growing reputation with leading banks, financial institutions, as well as technology players in Latin America. Additionally, I am pleased to announce that the Citi Banamax collection platform and Santander Chile Payment Processing Service are both in production. Furthermore, Santander received formal regulatory approval from the government of Chile, which is a significant milestone for the country's payment system. Regarding other wins, we have been awarded the formal bid for Banco Popular of Costa Rica. While the contract will be finalized in the coming weeks, we are pleased to continue building on this relationship. It is an important renewal of current services we provide, as well as a potential expansion of the relationship with some additional services. Lastly, we renewed contracts with both Banco Ito and Banco Estado, both in Chile. These new wins, renewals, and implementations represent an important reputational advancement for Evertech in Latin America. Growth from these new services with current and new customers will be important in 2021 and beyond, particularly as these markets continue to evolve. With respect to the economic environment in Latin American markets, COVID-19 continues to create challenges for the regions. But TAM revenue in Q4 was flat year over year as we continue to see the impact of the pandemic and previously discussed attrition. Vaccine distribution has just begun in February, which will likely further delay the recovery. Moving to slide seven, I want to update you on our perspective regarding industry tailwinds as well as our growth strategies in 2021 and beyond. There continues to be a significant opportunity for growth across Puerto Rico and Latin America given the dominant position of cash transactions. and the low penetration of card volumes. In mature markets like the US and the UK, cash transactions are estimated to be approximately 15% of total transactions. In Puerto Rico and Latin American markets, cash use is more than 50%. We believe the positive trends in cash-to-digital payment conversion, driven by an increasing online presence and smartphone usage, should fuel growth for many years to come. Additionally, as countries move away from the controlling monopolies or duopolies, there will be increasing opportunity to participate in this growth trajectory. While some payment markets like Columbia have evolved more slowly than we anticipated, and our investments may be lower there in the coming year, we would anticipate Chile, Uruguay, Costa Rica, and Mexico to be more robust in 2021. Turning to slide eight, to take advantage of this digital transformation in our markets and to advance our growth strategy further, we made progress in 2020 by accelerating innovation such as the QR code, which is shifting more of our consumers to contactless payment transactions and further solidifying our ATH brand presence. We are also seeing faster adoption of our new gateway product as we expand it into other geographies. Innovation will remain at the forefront of our strategy given the rapid evolution of the payments industry. We remain committed to cross-selling our products for existing clients as well as new clients. In 2021, shifting our risk center and payments products from a licensing model to a processing model will allow us to grow with the payment transaction trends and expand our recurring revenue in the region going forward. Lastly, acquisitions will continue to be important to our growth, whether in Puerto Rico or in Latin America. Our multi-product solutions, strong local presence, and our financial capacity allow us to be uniquely positioned to become the partner of choice. Moving to slide nine, we are also proud of being included for the third consecutive year in the Bloomberg Gender Equality Index. which distinguishes companies committed to transparency in gender reporting and advancing women's equality. At Evertech, one of our core commitments is to diversity in the development of our employees. In 2020, we surveyed our employees and had the highest participation rates and scores for employee engagement in years. While there is still work to do, we believe that our employees are the key ingredient for successful innovation and a high-performing workforce. I want to thank all of our dedicated team members for their commitment throughout 2020 and for building a strong foundation for growth into 2021 and beyond. With that, I will now turn the call over to Joaquin.

Thank you, Mac, and good morning, everyone. I'll begin with a review of our consolidated fourth quarter and full year 2020 results and then review each segment in greater detail. Turning to slide 11, total revenue for the fourth quarter of 2020 was $134.2 million. up 6% compared to $127.2 million in the prior year, driven by higher sales volume, positive impact from growth in ATH Mobile and ATH Mobile's business, new services, and project implementation. Adjusted EBITDA for the quarter was $63.9 million, an increase of 16% from $55.3 million in the prior year. Adjusted EBITDA margin was 47.6%. and this represents a 410 basis point increase in our adjusted EBITDA margin compared to the prior year. The increase in margin was primarily driven by revenue growth and the positive impact of foreign currency exchange related to balance sheet remeasurement. Adjusted net income in the quarter was $42.8 million, an increase of 23% as compared to the prior year, and $0.59 on a pair share basis, an increase of 23%. The increase primarily reflects the increased adjusted EBITDA and includes the impact of higher operating depreciation offset by lower interest expense and a lower effective tax rate in the quarter. For the full year, total revenue was $510.6 million and was up 5% year over year. Revenue was favorably impacted by higher sales volume and higher spread in a merchant acquiring business. higher ATH mobile and ATH mobile business transactions, as well as the benefit of $4.4 million from the Puerto Rico Department of Education and increases related to COVID-19 specific services. Adjusted EBITDA was $240.5 million, an increase of 6%, with an adjusted EBITDA margin of 47.1%, up 70 basis points as compared to prior year. Adjusted net income was $151.4 million, of 5%, and adjusted earnings per common share was $2.07, of approximately 6% year-over-year. Our full-year non-GAAP tax rate was 15.2%, an increase from 12.3% in prior year, mainly due to the mix of business. Moving on to slide 12, I'll now cover our segment results, starting with merchant acquiring. In the fourth quarter, Net revenue increased 8% year-over-year to approximately 29.3 million. The revenue increase was due to increased sales volume as well as increased spread driven by a higher average ticket that was up 17% as we continue to benefit from the tailwinds from the unemployment benefits and stimulus programs that began earlier in the year. Through Q4, we continue to see the mix of cards skewed more towards debit than pre-pandemic as well as a lot less international cards because of less inbound travel. both of which contributed to the improved spread and higher revenue. Although we continue to see higher average ticket year over year, it continues to drift lower than the levels we saw in Q3, as the impact from the stimulus programs eased and pent-up demand began to normalize. Adjusted EBITDA for this segment was $14.6 million, and adjusted EBITDA margin was 49.7%, all approximately 650 basis points when compared to last year. This increase was primarily driven by higher net revenue and the positive impact to operating expenses from overall lower transaction volume, resulting in lower transaction processing costs, which is the highest expense driver for the segment. For the full year, merchant acquiring was up approximately 3% year-over-year at $109.8 million, reflecting the growth over last year's results primarily due to the same reasons mentioned in the quarter. Adjusted EBITDA for the full year was $55.1 million, an increase of 17%, and adjusted EBITDA margin was 50.2%, up 590 basis points as compared to last year, primarily due to the impact of the higher average ticket and higher spread. On slide 13 are the results for the payment services Puerto Rico and the Caribbean segment. Revenue in the fourth quarter was $34.1 million, up approximately 5% as compared to last year. We continue to benefit from the shift towards digital transactions reflected through growth in ATH mobile and ATH mobile business, with revenues up over 160% and contributing an incremental $2.3 million, as well as the impact from other new services, partially offset by declines in both POS and ATM transactions of 6% and 8% respectively. This decline in POS transactions aligns with the higher average ticket we have been experiencing in our merchant acquiring segment. Adjusted EBITDA for the segment was 19.1 million, up 3%, and adjusted EBITDA margin was 56%, down approximately 110 basis points. Adjusted EBITDA margin was down due to increased operating expenses, including cloud-related expenses. For the full year, the segment revenue decreased 1% to 124.8 million, in part driven by lower POS and ATM transaction volumes as consumer behavior changes through the pandemic resulted in higher average tickets and more digital transactions, and one-time revenue last year related to an EBT project, partially offset by ATH mobile and ATH mobile business increases, which benefited from the push to digital cost by the pandemic. Adjusted EBITDA for the full year was 66.9 million, down 15%, and adjusted EBITDA margin was 53.7%, down 890 basis points as compared to last year, primarily due to decreased revenue and largely fixed expenses in this segment, as well as the impact of last year's high-margin EVP project previously mentioned. On slide 14, you will find the results for Payment Services Latin America. Revenue in the fourth quarter was $22 million, approximately flat as compared to last year, driven primarily by anticipated client attrition of $1 million and negative effects impacting year-over-year growth of $0.7 million. partially offset by the revenue gains related to the place-to-pay acquisition. Adjusted EBITDA for the segment was 8.9 million, and adjusted EBITDA margin was 40.6%. So, as compared to last year, due primarily to positive effect impact resulting from the remeasurement impact of U.S. dollar balances in the quarter of 1.9 million, as compared to negative impact in Q4 of 2019 of 0.4 million. Adjusting for the positive effect impact, margin would have been approximately 32%, and generally consistent with our expectations. For the full year, the segment revenue was $84.6 million, and flat to prior year, driven by the same impact that I mentioned in the quarter. Additionally, as we make progress on transitioning our platforms to a processing model, we are selling fewer licenses. While this was a headwind to growth in 2020, this transition will allow us to benefit from the transactional growth anticipated in the Latin American markets that Mac mentioned. Throughout 2021, we will continue progressing on this product transition in several geographies, as well as begin to reap the benefits from the new processing-type contracts such as Santander. Adjusted EBITDA for the full year was $32.8 million, and adjusted EBITDA margin was 38.7%, up 240 basis points as compared to last year. Adjusting for the positive FX impact from re-measurement, the normalized margin for the year would have been approximately 34%. Moving to slide 15, business solutions revenue in the fourth quarter increased 6% to 60.5 million. We benefited from the CPI increase that began in October 2020. We continue to benefit from COVID-related services for the Department of Labor, new services for Popular, as well as positive impact from projects that were completed in the quarter. Adjusted EBITDA for the segment was $30.3 million, and adjusted EBITDA margin was approximately 50%, up 630 basis points as compared to last year, due to revenue makeshift towards higher margin revenue and lower operating expenses as we completed several projects. For the year, business solutions grew 8%. to $235 million, driven by the one-time project for the Department of Education of $4.4 million, positive impact from COVID-related services, as well as new services and projects implemented for Popular. Full-year adjusted EBITDA for this segment was $114.8 million, up 18%, and adjusted EBITDA margin was 48.9%, up 390 basis points year-over-year. Excluding the impact from the Department of Education project, which was recognized net of expenses and other one-time benefits, margin would have been more closely aligned with prior year. Moving to slide 16, you will see a summary of our corporate expense. Our first quarter corporate and other expense was $9 million, a year-over-year increase of 26%. This increase primarily reflects higher expenses related to the timing of several corporate initiatives partially offset by lower travel as compared to last year. For the full year, corporate and other expense was $29.2 million, and as a percent of revenue, approximately flat with prior year at 5.7%. Moving on to our year-to-date cash flow overview on slide 17, net cash provided by operating activities was approximately $199 million, or a $19 million increase as compared to prior year, as we continue to efficiently manage our working capital. Capital expenditures were approximately $49 million and included a higher spend than normal towards innovation and other new product implementations, including the localization and transition of our LATAM platforms to a processing model. We repaid approximately $31 million of our long-term debt, $8 million in withholding taxes on share-based compensation, $2 million in other debt paydowns, and $2 million of FX impact. which resulted in a total net debt decrease of approximately $38 million. And finally, we paid cash dividends to stockholders of over $14 million and repurchased over $7 million in common stock for a total of approximately $22 million returned to our shareholders for the year. We have approximately $100 million available for future use under the company's share repurchase program. Our ending cash balance as of December 31st was $221 million, which includes approximately 18 million in restricted cash. Moving to slide 18, our year-ending net debt position was approximately 298 million comprised of the 203 million of unrestricted cash and approximately 501 million of total short-term borrowings and long-term debt. Our weighted average interest rate was approximately 4.4%. Our net debt to trailing 12-month adjusted EBITDA was approximately 1.8 times reflecting a $60 million cap on cash in accordance with our credit facility. As of December 31st, total liquidity, which excludes restricted cash and includes the available borrowing capacity, was $320 million. As a reminder, the terms of our credit agreement include an excess cash flow feature that applies to cash generated over a certain level to be paid against our loans. This payment will be made before the end of the first quarter and is contingent on the debt holder's acceptance. Moving to slide 19, I will now provide you with our 2021 outlook as well as some comments on Q1. We expect revenue to be in a range of $533 million to $544 million, representing growth of 4% to 7%. Our adjusted earnings per share outlook of $2.15 to $2.23 represents a range of 4% to 8% as compared to the adjusted earnings per share in 2020 of $2.07. On a gap basis, earnings per share is anticipated to be between $1.58 to $1.66. I will now highlight some of the key underlying assumptions and uncertainties that we have analyzed and planned for. We would expect to see a strong first-half revenue growth given the tailwinds from stimulus programs, as well as from comparing to COVID-impacted months last year. The back half is anticipated to be flat to down given the strong performance in last year's second half driven by high levels of stimulus funds, as well as benefits from COVID-related services, as well as the impact of one-time revenue such as the Department of Education project and other multi-year projects completed in the prior year. The merchant segment will likely generate a double-digit increase for the year as we continue to benefit from increased sales volumes in part driven by recent stimulus programs along with the benefits from banking consolidation that Mac mentioned. Payments Puerto Rico is anticipated to be high single-digit revenue growth and also first-half weighted as ATH Mobile and ATH Mobile Business continue to fuel growth driven by the trends in digital payments. ZATAM will see low to mid-teens growth given the contribution from new contracts such as Santander, City Dynamics, and others. However, COVID impacts and lower software license sales as we transition to a processing mode will be partial headwinds. Business solutions will likely be flat to low single-digit growth with a first-half positive and back-half negative, largely due to the one-time revenue I mentioned earlier. Regarding corporate expenses, we are managing these well, and we expect these to approximate 5% of total revenue, which is down both in dollars and as a percent of revenue from the last several years. Regarding our first quarter, January revenue grew approximately 8%, and based on this trend to this point, our best sense is that the first quarter revenue will be neat to high single-digit revenue growth, with an uptick in the second half of March as we lap the beginning of the COVID lockdown. All these trends are considered in our guidance and combined we believe will generate adjusted EBITDA margin in a range of 46 to 47%, similar to last year, with some headwind from the normalization of the average ticket and the high margin benefit of the Department of Education contract last year. Further, this year, our non-operating income does not include any potential impact from FX remeasurement, which was favorable approximately $5 million to last year. Our operating depreciation and amortization is anticipated to increase to approximately $44 million, up $4 to $5 million, primarily reflecting our increased gap expense and resulting depreciation related to multi-year projects that went into production last year and early in 2021. Our non-gap effective tax rate is anticipated to be approximately 13%, down slightly given a more normalized mix of business as compared to 2020. assumes approximately flat average diluted shares of $73.1 million without any share buybacks included. Our capital expenditures for 2021 are expected to be approximately $50 million and reflect our ongoing investment in technology, localization of our products in Latin America, and continued investment in transitioning our licensing model in LATAM to a processing model. Our capital allocation strategy remains unchanged. We will continue to focus on growth investments internally as well as through M&A. While the timing of M&A is uncertain and we currently have a higher than normal cash balance, we are constantly focused on evaluating our best use of cash. We plan to continue our dividends to shareholders and as excess cash is available, we will repurchase shares under our recently renewed and increased share repurchase program. In summary, we executed well during 2020 and delivered strong cash generations. As we continue to focus on our innovation and opportunities in Puerto Rico and expanding our Latin business, we look forward to updating you on our progress in the coming year. We will now open the call for questions. Operator, please go ahead and open the line.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the rosters. The first question comes from George Mihalis with Cowan. Please go ahead.

Good morning. This is Allison on for George. Thank you for taking my questions. To start, I was curious if you can provide color on the pipeline for additional deals in Latin America. and whether there is a preference for JVs or more processing partnerships like we saw in Chile.

Yeah, so this is Matt. Thanks for the question. I mean, if you look at what we announced over the last year and this quarter specifically, we've announced more deals organically in Latin America than we have since I've been at the company. And if you look at how Joaquin guided for the year to get double-digit growth in LATAM that's all organic, we feel pretty good about the pipeline that we closed and implemented. So If you look at it, we implemented Citi Banamax. We implemented Senator Chili. We also announced MercadoLibre. It's the first time we've talked about those guys as one of our partners now, which is one of the most valuable companies in Latin America and probably one of the best technology companies. So I think we don't comment on deals before we sign them or close them, but we feel very good about the pipeline. And to demonstrate that, we look back at what we've closed over the last year, year and a half.

That's great color and great progress. Thank you for that update. And then last one for me. I caught the total revenue performance of 8% in January. I was wondering if you can provide color specifically on the trends you saw in both the merchant acquiring and payment services businesses in Puerto Rico quarter to date versus the 8% and 5% we saw in 4Q? Sure.

I mean, look, if we think about January, there was an additional push of stimulus impacting the island, right? So sales volume was up compared to what we saw coming off of Q4, which is positive. However, as I said before or in the prepared remarks, the average ticket does continue to come down sequentially, and we have seen kind of inbound travel starting to come back slowly but surely, and that will impact spread, and that's something that we also saw in the month of January. As it relates to transactions, ATH Mobile and ATH Mobile Business As we said also in the guidance, we are expecting that to be strong in the first half, and we saw that in January just because of kind of the tailwind of the shift to digital. And transactions are coming back as well slowly, still kind of flashed to the prior year, but positive.

Great. Thank you for taking my questions, and congrats on the results.

Thank you. Thank you.

The next question is from Bob Napoli with William Blair. Please go ahead.

Hi. Thank you. Just I guess your congratulations on a good year in a tough environment. You know, really a nice job. The balance sheet now you have in really strong position. And I know you don't have any buybacks in your guidance. And so is it, I mean, do you have, what is the capital strategy for, From here, and do you have a significant pipeline of M&A, and so maybe a little bit of color around that strategy as opposed to returning capital? I mean, obviously, you've done a nice job with the balance sheet.

Sure. Yeah, thanks, Bob. So what I would say is, look, 2020 was sort of a year where everyone was very conservative and cautious. We're very, very focused on continuing to invest in our products and our employees during a very difficult year, which is, we learned that from Hurricane Maria. We do feel like coming into 2021, we have a little bit more confidence in what this year will look like. We are focused on being appropriate with capital allocation and making sure that we pull all the levers this year. On the pipeline from an M&A perspective, what I would tell you is, as you know, Bob, we never talk about deals until we have one, but we will continue to focus on those deals. If you look at The portfolio of companies we've acquired over the last five years, it's really created what we now have. It's created some good business in Puerto Rico, like the relationship we have with First Bank, and it's also created great assets in Latin America where we now, for the first time in a long time, are seeing double-digit organic growth in Latin America. So we will continue to focus on now investing in that business organically, but also we're continuing to look at M&A opportunities.

Would you likely do larger M&A transactions than you have in the past, given the expansion of the business and the strengthening of the balance sheet?

We would be opportunistic to look at any type of transaction available. I mean, there are a couple of different types we see in the region, Bob. Some are small tokens like we've done in the past, and we've been pleased that we've been able to purchase those at a reasonable valuation and then integrate those and really leverage those products to grow the company. There's also the monopolies and duopolies across the region, which sometimes are talked about, will those sell like Prisma sold in Argentina? So we will look at everything, but we'll make sure that the numbers make sense and that it makes sense strategically for the company. But we try and get visibility to as much flow as we can.

And then just last question. The chart that you show, and it's obvious that the cash in the markets that you serve is very high, which should give you secular growth for a very long time. But the organic growth rate of this business seems like it should be accelerating over the next few years, given the cash in the markets. So what are your thoughts around the acceleration rate of the top-line revenue growth, and shouldn't earnings grow faster than revenue, A, given the cash flow, and B, given that this is a good-scale business that usually leads to higher margins over the long term?

Yeah, it's a great question. So, Bob, first what I would say is we really spent some time this year, you know, reaffirming our strategy by taking a deep dive on each of the markets we do business in so that we could understand the opportunity and also sort of the competition in the product set, and that's Part of that output is what you see on the industry tailwinds. So you're correct. We think the tailwinds in Latin America are great because there's still a lot of cash, because there's still an opportunity for new entrants as the markets continue to open and people look for alternatives, and as more people move from unbanked to banked or some type of financial services and they move to more digital technology. So we think the tailwinds for Latin America are fantastic. When you think about the growth of the company, If you dissect the revenue guidance for this year, we are seeing acceleration in growth organically, in Latin America specifically, to where we do have the double-digit growth. We do have to look, and, you know, even in MAB, so our merchant business in Puerto Rico, we anticipate double-digit growth. So, we are seeing that, but we do, and then payments last time is going to be high single, right? So, we are seeing an acceleration of our growth. Teams, sorry. I'm sorry, payments in Puerto Rico is high single. So we are seeing the acceleration in our growth rate, particularly in LATAM, as you point to. And we are going to be very focused on managing our expenses. As Joaquin told you, our corporate expenses are actually going to be lower this year. But we are going to make sure we invest in the business so that as the market opportunities arise, we're able to capture those with great products, great service, and stability. So we do have to balance those. But we do think, to your point, Bob, the tailwinds are great. And we are seeing that acceleration in our LATAM business that's starting to pay off.

Thank you. Appreciate it.

Thanks, Bob.

The next question is from Basu Govil with KDW. Please go ahead.

Hi. Thank you for taking my question, and congratulations to both of you for, you know, a great year amidst adversity. So I guess my first question was just on know any color that you could provide us on what percentage of merchants are still inactive as the recovery is taking shape if you're seeing sort of the sales uh improvement be pretty broad based or being driven by certain verticals or industries so so hi also actually the the number of inactive merchants is pretty much come all the way back to pre-pandemic levels and obviously

there's different puts and takes in terms of verticals. But when we see it on a general basis, we're talking about maybe a percent off where we were at the beginning of the pandemic. And that kind of moves up and down kind of from month to month in terms of the verticals. So, I mean, nothing really to comment specifically.

Got it. That's helpful, Keller. And then my next question was on business solutions. You know, historically, this business was seen as a low single-digit grower. And now you've had three years of sort of mid to high single digit growth. So is there sort of a change in the way you're thinking about the sustainable growth of this segment long term? If you could just sort of give us some color there, Mac and Joaquin.

So, I mean, if you look back to the past two years specifically, right, and even if we look at just 2020, we've had several very specific either projects or situations that have helped us drive that segment at a faster pace of growth. So if you take this year, we have the Department of Education contract. We also, because of our relationship with the government and the relationship with Banco Popular, we're there to support them in terms of COVID, either in helping them get to their workforce being completely remote or in the case of the government with printing and sending checks, processing checks related to all of the unemployment benefits and stimulus that was coming through. So I would say that that was a big driver of why that segment kind of outperformed what we expected at the beginning this year. And if you look at the prior year, we saw popular kind of acquire reliable. So the banking consolidation also helped us when we look at 2019 in terms of kind of speeding up the growth in that segment. But looking forward, I think, again, our sales process is longer. The projects are longer. It takes time for us to put something in place, and then implement and see the revenue come through. So that's why we're going back to this kind of flattish to low single-digit growth for 2021.

Got it. And the last one, if I may, you know, you've seen really strong growth in this ADH mobile product. Is there anything you can do to capitalize this and sort of take it outside of Puerto Rico? Just any thoughts there.

When I look outside of Puerto Rico, we've really expanded the products. We have the risk management product. We now have issuing capabilities that we talked about most recently in Mexico. We have acquiring capabilities that we're launching in Chile. We also have the bill collection platform that we're doing in Mexico, and we're also renewing some contracts in Chile. So we definitely have a much broader set of products than we've historically had, which has helped us grow the business. I think when you look at ATH, it's not a product that we've sold outside of Puerto Rico to any substantial extent. It is something that we continue to present to customers. But to this point, we haven't found a lot of opportunity. But that may change in the future as people look for sort of digital apps. But it's not something that we've sold recently in the region.

Got it. Thank you very much, Dr. Miller.

The next question is from Jamie Friedman with Jessica Hanna. Please go ahead.

Hi, Mac. Hi, Joaquin. Hi, Kay. Good numbers here. Congratulations. I just wanted to ask first, is it possible, Joaquin, to help quantify the term to processing conversion impact? Mac, you had discussed it in your prepared remarks, and you did as well, Joaquin. So any quantification there?

Can you clarify, Jamie, do you mean in LATAM when we move from licensing to processing? Is that what you are referring to?

From licensing to processing, yes, and in LATAM, right.

How do we quantify that? Yeah, I mean, look, licensing in a LATAM business, specifically around the product that we're selling now, was probably in the 15% to 20% of the business, so that's why we're As we have decided to move all of those products to processing, we've pretty much stopped selling licenses in those regions where we're localizing the platform. So we have that portion of our business that's kind of flourished growth, mainly because we've been so focused in bringing these platforms up and bringing clients like Santander into production. In the case of Santander, I mean, we've been localizing and talking about this now for over a year, so it does take some time to localize and get all of the specific regulatory requirements within each country set. But if you think about what Mac kind of went through, we have Santander up and running in Chile. We have Mercado Libre in Mexico. renewed Banco Popular in Costa Rica. And even though that's not on the platform, it just shows that we now have the platform up and running in these two regions, and we continue to focus in Colombia and in Costa Rica to do the same.

Yeah, I think the important piece is that transition is sort of multi-year, and not only is there some incremental expense, but there's also a learning curve. And if you look at the new technology that we're deploying across the region, we have now moved to a processing model with many of the software solutions that we have, maybe just one or two countries. So we've now gained the expertise in moving into localizing these platforms, gained the expertise of implementing it in a processing mode. So that's what we're pretty comforted about, is that we now have that experience with this software in different countries. And that investment was made sort of last year and going into this year. Now, when we continue to localize an existing platform in a new country, there will be some additional incremental expense, but it should be less as we continue to deploy the software, and it should be more cost and time effective as we move forward. But what we can tell you is we believe the opportunities exist, and we're excited that financial institutions, retailers, and as we demonstrated at this call with MercadoLibre, technology companies are looking for partners.

And about that, Mac, and that's a great horse to back, the MercadoLibre, is that a sole-sourced relationship in Mexico? How is that going to work?

Yeah, so the relationship with MercadoLibre, so just for everyone to have background, MercadoLibre is one of the largest e-commerce companies in Latin America. It's headquartered out of Argentina, large Mexican business, large businesses in Brazil and across the region. They are now partnering with us on issuing in Mexico for their debit card product, which is a new product for them in the market, and we have a direct relationship with MercadoLibre. The product is held under MercadoPago as their payments brand, but that is something we haven't talked about in the past, and we're pretty excited about the specific opportunity but also the long-term potential relationship that we can have with MercadoLibre.

Got it. I'll drop back in the queue. Thank you.

Thanks.

The next question is from James Fawcett with Morgan Stanley. Please go ahead.

Hi. Good morning. I just want to build on Jamie's question on MercadoLibre and, you know, with that specific partnership and issuance that you're doing, how do you think about the potential for expansion of other services with MercadoLibre? Like, where would you think there could be opportunity, et cetera? And what does this speak to in terms of similar type opportunities maybe with other partners throughout the region?

Sure. So, again, the MercadoLibre relationship today is debit processing in Mexico. So we provide other services in Mexico that we would love to sell to MercadoLibre. They also are expanding across the region. So if we do well on this product and if we perform well, we do believe there will be additional opportunities. And as we spoke about earlier, we're seeing this demand across Latin America. What's happened in the United States where you have so many different types of alternatives for online payments, online marketplaces, that's just now evolving in Latin America. And given that we have technology that's developed in the region by Spanish-speaking programmers, this really puts us in a very good position to be a partner of choice. We do hope that these successful relationships not only will help us broaden the relationships with these existing clients, but be our calling cards to new clients.

And then when you look at the load of mid-teens growth in Latin America, that certainly seems promising. At the same time, we realize that there are still some attrition headwinds. Can you talk about the environment broadly in the market? both in terms of COVID, but maybe more generally your ability to enter into the market or expand footprint where you already have presence?

Yeah, so as we talked about earlier, we really, in 2020, focused on continuing to support our employees and support our customers and to try and accelerate development. And that was incredibly important to us, and we think that our partners noticed. So if you look in Chile... We believe that Santander Chili is one of the first institutions to go out with an acquiring product because of our relationship. They received regulatory approval for the product. So we think that we've demonstrated an ability to continue to invest, to continue to deliver, even under difficult circumstances. So we think the opportunities are continuing. I do think Latin America is, And it's a fact they're a little bit behind on vaccines. So, you know, they may have some continued impact in 2021. But it has not slowed our implementation of clients significantly. I mean, of course, we had some delays. But again, with City of Anamax, with Centro de Chile, with MercadoLibre, we're in production, right? And we were able to do that through the pandemic.

And I would just add that even though, right, as Max said, the vaccine rollout is behind to where maybe the U.S. is, and the impact to some of the economies is expected to be a little bit more severe, right, just because of the ability of the government to support the economy. We have seen other positives. So in Colombia, for example, the way that the government is rolling out the benefits has also driven people to open bank accounts. So the government and the way that they're pushing out stimulus is also helping some of these underlying factors that help in terms of driving growth in digital payments. So, bankarization in Colombia, I think they added more accounts in the last six months of 2020 than they did all of 2019. So, that kind of thing is kind of a silver lining in meeting all the COVID impacts.

That's great, Keller. Thank you very much.

The next question is from Matt O'Neill with Goldman Sachs. Please go ahead.

Yeah, hi, good morning, gentlemen. Thanks for taking my question. I was just wondering if we get a little bit of an update on the MSA with Banco Popular. And I was particularly curious about kind of the ongoing dialogue there now that we're in kind of the last third of the 15-year relationship as far as, you know, things like investments you guys make on an ongoing basis, you know, in the core processing services and you know, any kind of requests or, you know, desires that you guys are collectively working on from there into the equation, just as we, you know, start thinking about getting closer to the, you know, inevitable renegotiation phase on that contract. Thanks.

Sure. Good question. So as we've said, I mean, we've talked about this in the past. We're very focused on being a partner that people want to do business with, not have to do business with. We've been very focused on improving SLAs with a bank. We've been very focused on improving our products. and making sure that we're closely aligned. We just had our employee town hall at the end of the year, and every year I give employees the top five headlines that I want to see in the press about our company so that every employee can relate to that. And this year, last year, one of those is that Banco Popular chooses us as a partner of choice. So we're very, very focused on that, very focused on making sure we continue to improve our services, our quality, and making sure that we're constantly engaging with the bank because we know long term that contract is very, very important for Evertek.

Got it. And I guess just drilling into the core processing itself, I mean, from when that agreement was initially signed back in 2010, you know, a decade later, there's been a lot of innovation. It's, you know, moving from more of a license to outsource model in the industry, more, you know, private cloud, open API-based solutions from larger kind of outsource core providing processors, in the U.S., for example. And so I was just kind of curious, what's the kind of state of that business today, and where is it in its kind of evolutionary path?

The state of core banking?

Yeah, of Evertech's core processing services that are being provided to Banco Popular.

Yeah, so if you look at what we've done across our different products, if you look at ATH and the QR codes that we've delivered, We're also building APIs with our ATH product so it's easier for them to implement those types of products. So we're continually trying to evaluate what's the best service we can provide and what are those investments we need to make long term. We'll continue to evaluate this year. Are there places we need to invest more? Like MSP, MSSP providing a sort of a hosted service offering to not only Popular but other clients is something that we're looking at this year. Is that a business that we should also invest in? So we'll continue this year to evaluate where we want to invest just like we have done with our payments business.

Got it. That's all. I guess just the last one to round out here. It looks like the original MSA was signed on September 30th at 10. Is that when – is that like the 15-year sort of expiration would be September 30th of 25 or, you know, point of renewal presumably?

That's correct.

Okay. Thanks so much. I'll hop back in the queue.

The next question is from John Davis with Raymond James. Please go ahead.

Hey, it's Matt Chorazon for JD. Thanks for taking my questions. Thank you for the detail on the full year guidance. Two quick clarifications. Is the next round of stimulus that looks like will pass in the near future in the full year guide? And then any update on hurricane release funding and how much is embedded in the guide? Thanks.

Hi. So in terms of additional stimulus, we have included some incremental stimulus as part of the high side of our guidance. And what I would say is, right, we need to see what actually gets passed in the Senate. And then we also need to see how some of the factors have benefited us through 2020, like the average ticket, the shift between domestic cards and international cards now that people are getting vaccinated and probably travel will start to pick up. Those are our a couple of things that helped us in 2020 that we need to see if they continue through 2021 as it relates to the profitability of, for example, the merchant acquiring business. But we have included some incremental stimulus as part of the high side. I'd say that the range pretty much reflects kind of the opportunities and risks that we have some visibility to at this point. In terms of the hurricane funding, I think it's positive, everything that we're seeing in the news, the new administration is being proactive in kind of releasing funding to Puerto Rico. Everything that had been previously approved under the previous administration, based on the most recent reports, had a lot of strings attached to it, and that's why so little of that funding was actually used or dispersed by the Puerto Rico government. So I think it's definitely encouraging. We need to now see how quickly this moves because there's still kind of a bureaucratic process, but definitely positive in light of what we're seeing in the past.

Okay, great. Thank you for that. And then you mentioned 10% of merchants now have contactless enabled. Where do you see this trajectory going? Are there any major milestones you have in mind in increasing that percent to have contactless? Thanks.

Yeah, so I mean, look, We rolled that out fairly quickly, and to get to 10% penetration was a focus of the company and also a focus to get a certain number of merchants out. So we feel pretty good about the progress to date.

Great. Thanks, guys.

This concludes our question and answer session. I would like to turn the conference back over to Max Schuessler when he closes the mic.

Thank you. So again, I want to thank all of my colleagues In a challenging year, we continue to deliver, and we feel like that we've, you know, not only made sure that our customers are taken care of, our employees in our communities, and we're incredibly proud of what we've accomplished, and we look forward to speaking with many of you over the coming year at different conferences. So thank you.