Evertec, Inc.

Good afternoon, everyone, and welcome to Evertech's fourth quarter and full year 2022 conference call. Today's conference call is being recorded. At this time, I would like to turn the call over to Kevin Hunt of Investor Relations. Please go ahead.

Thank you, and good afternoon. With me today are Max Scherzler, our President and Chief Executive Officer, and Joaquin Castrillo, our Chief Financial Officer. Before we begin, I would like to remind everyone that this call may contain forward-looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent periodic SEC report. 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. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides which are available in the investor relations section of our company website at www.evertechinc.com. I'll now hand over the call to Mac.

Thanks, Kevin, and good afternoon, everyone. We are pleased to announce strong fourth quarter and full year results, especially against the backdrop of more difficult comparisons because of federal funds that positively impacted the prior year. I will start today's call with a summary of our financial results and business highlights for 2022. Next, I will move to a discussion of our Puerto Rico results and current environment, followed by a discussion of our Latin America businesses, and conclude with some areas of focus for Evertech in 2023. I will then turn the call over to Joaquin, who will provide some additional details on our Q4 and full year results, as well as our outlook for 2023. Beginning on slide four, let's start with some highlights from our 2022 results. We delivered a record $618 million in revenue for the year. a 5% increase over prior year, exceeding our expectations despite some growth headwinds in the second half of the year following the completion of the popular transaction. We finished the year strong with fourth quarter revenue of $162 million, a 4% year-over-year increase. Our LATAM revenue growth of 23% in the fourth quarter and 21% for the year was particularly encouraging. Adjusted EBITDA for 2022, of $270 million was down approximately 9% when compared with the prior year, driven by the impact of the popular transaction as well as the effect of non-cash foreign currency remeasurement losses. 2022 adjusted EPS of $2.42 was down 12% year-over-year. For the quarter, adjusted EBITDA was approximately $68 million and adjusted EPS was $0.65, mostly in line with our expectations. I will conclude this slide with some cash flow highlights. In 2022, we continued to generate significant operating cash flow, $223 million for the year, and returned cash to shareholders at record levels, approximately $14 million through dividends and $97 million through share repurchases, including $24 million in the fourth quarter. Additionally, our liquidity remained strong at $371 million as of December 31st. Turning now to Puerto Rico on slide five. We are pleased with the strong growth, especially given that we saw diminishing benefits from federal funds as the year progressed. In the fourth quarter, merchant acquiring revenue was $40 million, up approximately 8% year-over-year, driven by a strong holiday season that translated into higher sales volume and spread. Payments to Puerto Rico revenue increased $6 million, or 14% year-over-year, driven by an overall increase in POS transactions and ATH mobile business, which continues to be a big driver of segment growth. We also benefited from the tuck-in acquisition completed in the second quarter of 2022. Business Solutions revenue was down approximately 9% year-over-year due primarily to the assets sold mid-year as part of the popular art transaction. Finally, a few comments about the macro environment. Like the rest of the world, inflation in Puerto Rico remains elevated at an estimated 6% in December 2022, slightly lower than what the U.S. has experienced. It is worth noting that some of our businesses, like merchant acquiring, provide natural offsets in an inflationary environment, while in others we are able to push through price increases. We also continue to control costs and shift headcount towards Latin America to manage the impact of inflation. Other macro indicators, like the Economic Activity Index, have begun to moderate somewhat as we anniversary the 2021 federal COVID-related stimulus. Recent analysis indicates that Puerto Rico received 50% less federal funds in 2022 compared to 2021, mainly as a result of COVID-related funds estimated to have fallen to approximately $3.8 billion in 2022 compared with $17.4 billion in 2021. On a positive note, overall federal stimulus funds to Puerto Rico are anticipated to be fairly flat in 2023 compared to 2022. On the tailwind side, the employment picture remains strong, with the unemployment rate trending down throughout 2022 to levels not seen in decades. As it relates to tourism, airline passengers were up 6.5% in 2022 over 2021, accelerating during the months of November and December. While there are certainly some economic headwinds, we feel the overall macro backdrop in Puerto Rico remains supportive of growth for Evertech as we enter 2023. Turning to Latin America highlights on slide six, Fourth quarter revenue was up 23% year over year. We continue to benefit from strong organic growth across the region with both new and existing customers. For example, this quarter, Santander contributed incremental growth with our risk monitoring service. And in Brazil, we saw a positive contribution from new services to Alelo. During the quarter, we also secured business wins that will contribute in 2023, including a new deal with SumUp in Chile for issuing services that is already in production. Additionally, we were able to renew a key relationship in Central America with Banco de Costa Rica. This represents an important renewal with one of our longest standing relationships in Latin America and demonstrates our ability to retain key clients, which are so important as we continue to focus on expanding in the region. Finally, growth in LATAM also benefited from the BBR transaction completed at mid-year. Finally, on slide seven, I would like to highlight some 2022 business accomplishments that place Evertech in a strong position for growth in 2023 and beyond. I have already mentioned the popular transaction, a major milestone for Evertech, which strengthened the relationship with our largest customer, offering us up to pursue M&A more aggressively. We also expanded relationships with key customers in LATAM, including moving with MercadoLibre from Mexico into Chile and from Chile to Uruguay with GetNet. On the capital deployment front, we completed two tuck-in acquisitions during 2022, one in Puerto Rico and one in Latin America, and we continue to explore other opportunities to fuel growth. In fact, today we announced that we have signed and closed on the acquisition of PaySmart in Brazil. PaySmart provides issuer processing services and bid sponsorship services for prepaid programs under domestic and international schemes in Brazil. With over 100 customers, PaySmart accelerates our expansion in Brazil and complements our existing product offering in this important market. I would like to conclude by highlighting some areas of focus for Evertech in 2023. We continue to be committed to a high-quality, diverse workforce, and we are proud to have been named to Bloomberg's Gender Equality Index for the fifth consecutive year, placing us among the many global leaders who value and demonstrate this commitment to diversity. We also remain committed to our shareholders as demonstrated by the approximately $110 million we returned to shareholders in 2022 via dividends and share repurchases. Our top priorities in 2023 will be funding organic growth opportunities with product development, as well as inorganic opportunities through the pursuit of M&A. We also view repurchasing Evertech stock as a good return for our shareholders, and we expect to remain active in that area in 2023 when we have excess cash. I'll now turn it over to Joaquin.

Thank you, Mac, and good afternoon, everyone. Turning to slide nine, I'll first review the fourth quarter and full year results for Evertech. Total revenue for the fourth quarter was $161.8 million, up approximately 4% compared to the prior year, and slightly better than expected as we benefited from strong payment volumes in Puerto Rico and continued strong organic growth in LATAM. Adjusted EBITDA for the quarter was $68.4 million, a decrease of approximately 10% from the prior year. And adjusted EBITDA margin was 42.3%, down approximately 660 basis points from the prior year, including an approximately $900,000 non-cash foreign currency remeasurement loss. Margin was in line with expectations given the impact of the popular transaction. Adjusted net income was $42.6 million, a decrease of 19% year-over-year, with an adjusted effective tax rate in the quarter of 17%. Our adjusted tax rate has increased year-over-year due to changes in the mix of our business as we continue to grow in LATAM, where we don't have the benefit of preferential tax rates, and we lost some low tax revenue in Puerto Rico as a result of the sale of assets to Popular earlier in 2022. Adjusted EPS was $0.65, a decrease of approximately 10%, and in line with our expectations. For the full year, total revenue was $618.4 million, an increase of approximately 5% from the prior year. Throughout the year, we benefited from strong volumes, continued growth of ATH mobile business, and strong organic growth with new and existing customers in Latin America. We also saw growth driven by the two acquisitions completed during the year, offset by the sale of assets and the one-time credit of approximately $6.9 million from the popular transactions. Adjusted EBITDA was $269.5 million, a decrease of approximately 9%, with an EBITDA margin of 43.6%, an approximate 640 basis point decrease from the prior year. The decrease in margin was primarily a result of impacts from the popular transaction. Foreign currency remeasurement losses amounting to $6.6 million, as well as comparison against record high margins a year ago that were a result of COVID-related funds. Adjusted net income was $167.6 million, a decrease of approximately 16% from the prior year. and adjusted EPS of $2.42 also decreased approximately 12% from the prior year. Moving to slide 10, I will now cover our fourth quarter results by segment, beginning with merchant acquiring. Net revenue increased by approximately 8% year-over-year to $40 million, driven by strong volume growth in the quarter as we saw holiday seasonality come back. We saw increased sales volume in almost all categories over prior year, combined with a slightly higher spread. We benefited from pricing initiatives implemented earlier in the year, as well as higher POS rental income, which was also driven by holiday seasonality. Adjusted EBITDA for the segment was $15.1 million, and adjusted EBITDA margin was 37.8%, down approximately 12 percentage points from the prior year. The margin decrease was primarily due to the revenue sharing agreement put into effect as part of the popular transaction, higher operating expenses, as well as a comparison against high margins a year ago when we experienced a larger benefit from federal stimulus funds. On slide 11 are the results for the payment services Puerto Rico and Caribbean segment. Revenue in the quarter was $47.8 million, an increase of approximately 14% from the prior year. The revenue increase was driven by approximately 7% growth in overall transactions processed, an ATH mobile business which continues to deliver strong year-over-year growth, in part driven by the holiday seasonality. The small token acquisition completed earlier in 2022 also contributed to growth in the quarter, and we are pleased with how that acquisition has progressed. Adjusted EBITDA was $28.1 million. of approximately 19% from the prior year, and adjusted EBITDA margin was 58.8%, of approximately 210 basis points over the prior year. The increase in margin was due primarily to expense leverage off of the higher revenue. On slide 12 are the results for Payment Services Latin America. Revenue in the quarter was $34.9 million, up 23% year-over-year, including an approximate 2% headwind from foreign currency fluctuation. The increase was once again driven by strong organic growth from existing clients across the region, customers like Santander and Alelo that Mac mentioned, and the contribution from the BBR acquisition completed in the third quarter. We continue to be encouraged by the strong organic growth in the low-to-mid teens and the evolution of our products in the region. Adjusted EBITDA was $10.9 million, down approximately 6% from the prior year, with adjusted EBITDA margin of 31.2%, down approximately 950 basis points from the prior year, due in part to non-cash currency remeasurement, which was a $900,000 loss this quarter versus a $1.2 million gain in the prior year. Normalizing for the effect of foreign currency re-measurement, our Q4 margin would have been approximately 33.9%, compared to 36.5% in the prior year, and aligned with our expectations of mid-30s margins. Turning to slide 13, you will see the results for our business solutions segment. Revenue was $58.7 million, a decrease of approximately 9% from the prior year. The revenue reset was due primarily to the assets sold to Popular mid-year, which we have indicated were generating about $30 million in revenue annually. Results were slightly better than expected for the quarter due to strength in core banking and network services, as well as some one-time hardware and software sales. Adjusted EBITDA was $24.9 million. down approximately 18% from a year ago, and adjusted EBITDA margin was down approximately 460 basis points from the prior year to 42.4%, aligned to our expectations for the quarter. The reduced margin was due primarily to the sale of assets to Popular, which were of higher margin. Moving to slide 14, you will see a summary of our corporate and other expenses. Corporate and other expense was $10.6 million in the quarter, or 6.6% as a percentage of total revenue, up $2.5 million from the prior year in part due to specific corporate initiatives. Moving on to our cash flow overview for 2022 on slide 15, net cash from operating activities was $223 million, a $5 million decrease from the prior year. Capital expenditures were $72 million. a $5 million increase from 2021, including key development projects resulting from the popular transaction amounting to approximately $6 million. Key investment areas in 2022 included software development focused on product enhancement and functionality of existing services, hardware refresh, and some regulatory investments. We spent approximately $62 million on two acquisitions, We paid down $46 million in debt and returned $110 million to shareholders through share repurchases and dividends. We repurchased approximately 741,000 shares for $24 million during the fourth quarter. And at year end, we had approximately $78 million available for future use under the company's share repurchase program. Our ending cash balance for 2022 was $216 million, a decrease of $70 million from the prior year. Moving to slide 16, before I review our debt as of December 31st, I'd like to comment on the debt refinancing that we completed in December. We now have a $200 million revolving credit facility and a $415 million term loan A, both due in 2027. We used the proceeds of the new term loan and $50 million drawn from the revolver to repay in full our previous term A and term B loans. The rate on both the new revolving facility and term loan will be SOFR plus 10 basis points plus an applicable spread, which will be based on Evertech's leverage ratio. On our current leverage ratio, the spread over SOFR is approximately 150 basis points. This represents an improvement versus our prior debt terms, and the $200 million revolver provides us with greater capital flexibility compared to the previous $125 million facility. Turning now to our debt position, at year end was $238 million, comprised of $435 million in total long and short-term debt, offset by $197 million of unrestricted cash. Our weighted average interest rate was approximately 5.2%. Our net debt to trailing 12-month adjusted EBITDA was approximately 0.99 times, down from 1.39 times a year ago. As of December 31st, Our total liquidity, which excludes restricted cash and includes borrowing capacity, was $371 million, down roughly $14 million from a year ago. Now I'll turn to slide 17 for commentary on our 2023 outlook. For 2023, we expect our revenue to be in a range of $638 to $647 million, or growth of 3.2 to 4.6% year-over-year. Adjusted EPS is expected to be in a range of $2.53 to $2.64, which represents growth of 4.5% to 9.1% compared to the 2.42 cents reported for 2022. This range assumes an adjusted EBITDA margin between 42% to 43% and an effective tax rate of 16% to 17%. I will now walk you through some of the key underlying assumptions that we considered in arriving at the outlook, beginning with revenue expectations for our business segments. For merchant acquiring, we expect low to mid single-digit growth in 2023, driven primarily by pricing initiatives and new anticipated high-volume merchants, as well as a stable spread. In payments Puerto Rico and Caribbean, we expect mid-single-digit growth driven by continued strong growth of ATH Mobile, solid POS transaction growth, the CPI effect from services to Popular, and a full-year contribution from the token transaction that closed in April of 2022. We expect a stronger first quarter given the impact from the acquisition that will anniversary in the second quarter. For payments Latin America, we expect growth to be in the mid to high teens, driven primarily by the expectation of continued strong organic growth from existing customers and the effects of acquisitions like DVR completed in the mid-year 2022 that will now have a full year of contribution, as well as the contribution of Paysmart in Brazil, which will have a minimal impact to Q1, but should begin to have a more meaningful contribution in Q2. Finally, in business solutions, we expect a low-to-mid single-digit decline in revenue for the full year, with the reset due entirely to the business sold to Banco Popular in July 2022. Given the timing of that sale, we expect a larger reset in the first half of the year and a return to low single-digit growth in the second half of the year, driven by a combination of new business wins and CPI adjustments with Popular. Now turning to margins, our expectations for adjusted EBITDA margin are consistent with the low to mid 40s target range we have outlined following the completion of the Popular transaction. From a cost perspective, we are planning for a high single-digit increase in operating expenses with the effect of a full year of merchant acquiring revenue share with Popular and the effect from acquisitions completed that are expected at slightly lower margins. We will continue to work to limit operating expenses where we can in order to offset investments, and we do not expect a recurrence of some of the one-time charges we experienced in 2022. Additionally, our guidance does not include any impact of potential gains or losses from foreign currency remeasurement. In terms of other items, we expect interest expense for the year to be relatively flat when compared with 2022 and consider the impact from the debt refinancing discussed previously. We also continue to have an interest rate swap agreement in place which fixes 250 million or approximately 60% of our outstanding debt at 2.93% plus the applicable spread. We expect an adjusted tax rate of 16 to 17% higher compared to recent years due to the shift in our business mix to higher tax countries in Latin America and the sale of revenues as part of the popular transaction that were taxed at preferential rates in Puerto Rico. We also expect a lower share count in 2023 compared to 2022 due to the higher level of share repurchase activity last year, but we have not included an assumption of further repurchases during 2023. And finally, our target for GAPEX is $70 million, similar to 2022. In summary, We generated strong fourth quarter and full year results in 2022 and executed on several strategic imperatives. We executed on extensions with our largest customer, Banco Popular, and are no longer considered a bank holding company. We completed two token acquisitions, we returned cash to shareholders at record levels, and we refinanced our credit facilities, positioning Evertech for continued growth in 2023 and beyond. We look forward to updating you on our progress in the coming year and hope to see some of you at conferences over the next few months. With that, operator, please open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your hands up before pressing keys. To answer your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Bob Napoli with William Blair. You may now go ahead.

Thank you. And good afternoon, Mac, Joaquin. Thank you. Solid results and guidance. I appreciate it. I guess just we're two-thirds of the way through the first quarter. Can you give a little bit of color in what you're seeing from a macro perspective and, you know, kind of what kind of macro overlay you've included in your guidance for 23?

Hey, Bob. So what I would say is kind of going with the commentary that Mac had in the script, I mean, we continue to see, obviously, a slightly higher inflation than what we've seen in the past. And there has been somewhat of moderation in the Economic Activity Index, which is one of the indicators that we track because it has very good correlation to GMP in Puerto Rico. But at the same time, We continue to see very good employment, a very high employment participation rate, and we are starting to see movement in terms of bigger projects that have been announced especially around electricity, where the government has moved to privatize some of the generation of electricity. That should put some pressure on some of the funds that are supposed to come through to Puerto Rico, and that was a big piece of some of those disaster recovery funds from Maria that we've been waiting for some time. So I would say that it's pretty balanced in terms of some of the general macro indicators at higher levels that we're seeing in the U.S. But as we said in the goal, we have some offsets from just some of the funding that's still coming through, which should be similar to 2022.

Thank you. And then just a big picture of thoughts, I guess, around Latin America. I mean, your acquisition in Brazil was interesting. Latin America really helps to accelerate the growth rate overall of Evertec. Uh, but just some, you know, what are your thoughts on the, uh, Mac on, you know, how large Latin America, you know, how large is the opportunity for, uh, Evertech? Uh, and I guess your MNA strategy moving into Brazil, Brazil is not a market that you've highlighted a lot in the past. Uh, but are you getting more aggressive there? So just thoughts on, you know, Latin America, uh, broadly, how large can it be? What is the opportunity for Evertech? And then your move into Brazil, or I guess, you know, with the acquisition a little further into Brazil, I thought was interesting.

Yeah, no, thanks, Bob. So look, M&A is, you know, increasingly important for us. That's one of the reasons we did the BPOP deal and got them out of stock was so that we didn't have the regulatory hurdle. We've got a great balance sheet, we're throwing off a lot of cash. So we're casting a very wide net in LATAM. to accelerate M&A. You know, last year we did BVR. We just announced this acquisition with PaySmart. I mean, we have a business today in Brazil, but it's a licensed business with just, you know, a small set of customers. This actually gives us over 100 clients now that are processing. So it's a processing model with prepaid cards, and we now have 60 employees as well. So this allows us to enter the market with, you know, a good small investment at a good valuation and and, you know, go after one of the biggest markets in the region. But this will continue to be a focus for us, you know, being acquisitive in Latin America and continuing to diversify the company.

And just broadly, I guess, the mix, the opportunity in Latin America, I mean, it's, I guess, about 20% of your revenue today, payment services, Latin America. Can that be 40% over the next, you know, through a combination of organic plus M&A over the next five years?

Yeah, I mean, it's a great question, Bob. And as you know, we don't give long-term guidance. What I would point to is if you look at that business today, to your point, it's growing mid-teens organically. Over the last six, seven years, we've tripled that business. And now we're going to be even more focused on M&A. So our hope is that we can more rapidly diversify the entire company by expanding more quickly in LATAM.

Great. Thanks, Mac. Thanks, Joaquin. Appreciate it.

Our next question will come from James Fawcett with Morgan Stanley. You may now go ahead.

Hey guys, this is Jeff Goldstein on for James. You mentioned taking pricing initiatives in the quarter, but can you talk about any like specific product areas you were implementing those? And then just when we think to 2023, what type of pricing contribution is built into your guidance?

Look, I think from the 22 perspective, this is something that we started doing probably in the second quarter, and this is something that we discussed in previous calls. We are fairly strategic in how we look at the portfolio by segment. We go by industry and really try to be – strategic in how we implement some of these pricing initiatives, especially in areas where we feel we have pricing power and can still remain very competitive. We've also looked at some of the ancillary services that we give our merchants that are maybe not necessarily transactional, but where we help them with PCI assessments, etc. And so this is something that we're continuously doing. I think given the, let's say, headwind from some of the federal funding that we saw in 2021 going to 2022. We were a little bit more aggressive in how we evaluated the portfolio, and that's something that we'll continue to do as we move forward.

Got it. That's helpful. And then you've mentioned in the past the opportunity from converting ATH mobile P2P transactions to business transactions. So, I was curious if you could put any numbers around that. Like, what does the runway look like there? And was that dynamic a benefit at all in the fourth quarter?

I would say that in general, yes, it has been a benefit. I don't know that I can give you specific numbers in terms of the runway. But what I can certainly tell you is – ATH Mobile overall grew very well in the first quarter. ATH business continues to be the main driver of at least revenue generation. A lot of that, to your point, is coming from utilization in the person-to-person app, which is free, and initiatives that we've developed internally to, obviously, if we identify somebody using it for a business, then we'll have certain conversations with those specific merchants and convert them to the business portion, which generates more revenue for us.

Just to be clear, on P2P, we do have revenue, right? So we have revenue. It's free to the user. It's free to the consumer, and it's free to the receiver. But on P2P, we do make money, but we make significantly more money if we convert the receiver to a business, and then it looks much more like a credit card transaction from a revenue perspective, and that's been a significant lift. in ATH Mobile for the year.

Very helpful. Thank you.

Our next question will come from John Davis with Raymond James. You may now go ahead.

Good afternoon. This is Madison on for JD. Thanks for taking my question. I wanted to stick on M&A for a minute here. Can you just kind of touch on the overall pipeline? You know, where are valuations trended and, you know, your appetite to do a potentially larger deal? And then also, you know, kind of where you would take leverage, you know, if there was a larger kind of more strategic deal you saw.

Yeah, I mean, you know, I'll kind of point back to my answer with Bob. It is, you know, a significant focus for us now that we have, you know, the financial capacity and we have different, you know, less regulatory hurdles to do M&A. We are casting a wider net. We're looking across the entire region. As we just demonstrated, we did a deal in Brazil, which is an important market. It's the largest market in the region. And we're looking at adjacencies. What are other types of businesses that fit well with our commercial platform and also with our infrastructure? We will look at larger deals potentially than we have in the past, given the financial capability that we have, and even more competitive processes we'd look at because we now don't have a contingency for businesses to get regulatory approval if we're bidding on the business. But this will continue to be a focus for us because it's critical that we diversify outside of Puerto Rico.

Okay, great. And then for PaySmart specifically, you know, any insights you can give us into the revenue or EBITDA contribution? You know, is this a profitable business? Any kind of insight into the growth rates would be helpful. Thanks.

Yeah, I mean, I'll start with it is profitable. And then I'll let Joaquin tell you that.

I mean, we're not breaking it out. Specifically for Paysmart, this is something that we feel will certainly complement what we're doing today in the region. And specifically, as Max said, this gives us now a process in Brazil with a recurring revenue model and with a processing model, which is something that we've been able to do and execute well in some of our other countries. And this gives us a very good platform to do that as well now in Brazil.

Okay, great. And if I can sneak one more in real quick, you know, you've seen a lot of private equity money moving into Lantam. You know, just curious, anything to call out from a competitive standpoint from maybe six months, a year ago? You know, anything from tougher pricing, new entrants, just, you know, any update from a competitive standpoint?

Yeah, I mean, what I would say is we are seeing multiples move down a little bit. We're seeing, you know, when we Private equity is not as active as they were in the past, given where interest rates are. But we've also seen private equity not willing to let go of assets. Like they don't want to remark the things that they bought. So there is potentially going to be hopefully more dislocation as the year goes on and rates stay higher longer. But we are seeing a little bit of movement on multiples. But people are not ready to fully capitulate yet.

I think there was enough money for there still to be a runway here. So I think to the extent that that runway starts to get shorter with rates high for a longer period of time, there might be a little bit more movement above and beyond what we're seeing today.

Okay. Thanks for taking the questions, reporter.

Thank you. Our next question will come from Nate Svensson with Deutsche Bank. You may now go ahead.

Hey, guys. Appreciate all the colors so far. Kind of just wanted to touch on the margin guidance, 42% to 43%. So that suggests about 100 basis points of year-over-year contraction at the midpoint. Two questions there. One, is there any color you can give on margin contraction across the segments? And then two, sort of once we lap the impact of the popular deal and sort of noting that you don't give sort of longer-term guidance, what should we expect for you to be able to do to expand margins going forward as we move, you know, as we lap that deal and move into 2024?

Sure. So the first thing I'll mention is obviously when we look at it from a year-over-year perspective, the first half of last year still had all of Popular's assets that were higher margin. And so we're not going to have the benefit of that going into 2023. And also as part of the Popular transaction, we have now a revenue share that's impacting our merchant acquiring business specifically that is going directly down to EBITDA. I think if you take a look at what we did now in Q4, where it's a relatively clean quarter in terms of no real one-timers related to the popular deal, that gives you, let's say, a good baseline as to what the business is actually run rate margin at. And in terms of the second aspect of the question, Look, I think we're also growing in Latin America or trying to grow faster in Latin America where we don't have the same contribution margin that we have in some of the Puerto Rico segments. So as Max said, diversification away from Puerto Rico is a priority for us. M&A is a priority for us. So to the extent that we continue to be successful in that strategy, that will put pressure on our overall margin. I would say that the counter to that is the platform that we've built over the past few years and the fact that we're now doing processing across the region gives us economies of scale over time. So as we put more transactions through this platform, we feel that we'll be in a position to expand margin, again, in the medium to long term.

Got it. That's very helpful. And I just want to check in on the BBR acquisition and how that's going. I don't think you've quantified the impact to that in the past, but maybe you can get some more qualitative impact on how the BBR integration is going, how that asset is performing. And I know Peru was a big part of that. I don't know if there's been any impact from the protest there. I guess any color on BBR would be very helpful.

Yeah, what I would say, the integration is going well so far. We're excited because this gives us additional products that we don't have today to get deeper in some of our merchants. you know, processes around payments. So we're proactively now trying to cross-sell those into some of the other geographies that we operate in today. But so far, so good.

Appreciate the call.

Thanks, Nick.

Again, if you have a question, please press star then 1. Our next question comes from James Friedman with Susquehanna. You may now go ahead.

Hey guys, thank you for taking my question and congrats on a great year. I wanted to double click on Bob's question about LATAM that opened the call. Would it be possible to unpack some of the regions at least? For example, Chile, you had the Mercado Libre expansion last quarter. You got some up this quarter. You got that landmark Santander deal there. Is it possible to dimensionalize which of these regions in Latin America are, say, the most, you know, material or strategic for you at this point?

Yeah, so what I would say is, look, we've localized our platform in several countries, and we've benefited from that. So if you look at the fact that we've localized our platform in Chile, we've now been able to roll out incremental customers like SumUp, right? So Mexico, we've localized our new platforms. Chile, we've localized them. Uruguay, Costa Rica. So those are where we've already spent capex to roll out additional customers. What's exciting about this acquisition now in Brazil is that we have a prepaid platform with 100 clients already on it. So we now have the ability to roll out those products in Brazil as well. So that's where we're focused today. But we are opportunistic. I mean, look, we entered Uruguay when Santander said, we'd like what you're doing in Chile. Will you localize it in Uruguay as well? And so we're able to tie those costs to a specific contract.

Okay. No, that's great context. And then I'll just ask if I could, too, real quick. Could you repeat what you were saying about the macro for the assumption for flat for 23 versus 22? And then, Joaquin, is the reason you don't have share or purchase presumably because you're more likely to do M&A?

So the second part of the question, yes. I think we've been consistent in kind of capital deployment strategy, M&A, being the number one priority. In the past, we haven't incorporated share repurchases either, Jamie, mainly because we've been opportunistic on our repurchasing program rather than establishing a specific amount. We do always strive to at least buy back dilution coming from the long-term incentive plans. And then I think Mark's comment on the flattish was referring to the federal funds that were received in 2022 versus 2023. Those are expected to be relatively similar. But when you look at what happened from 2021 to 2022, that was a very significant decline in the amount of funds that were received because 2021 had so much coming in from the pandemic.

Got it. Thank you. I'll drop back into queue.

Okay.

Thank you.

Again, if you have a question, please press star then 1. It appears there are no further questions. This concludes our question and answer session. I would like to turn the conference back over to Mac for any closing remarks.

In conclusion, I just want to thank all of our colleagues for what we've accomplished in 2022, and I look forward to leveraging our capabilities uh to grow in 2023 and see many of you investors in the coming conferences operator you can close the call thank you the conference is now concluded thank you for attending today's presentation you may now disconnect