Evertec, Inc.

Good afternoon, everyone, and welcome to the Evertech's first quarter 2023 earnings 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 Schuessler, 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 gap 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.

Thank you, and good afternoon, everyone. We delivered strong first quarter results, which benefited from both increased sales volume and transactions, as well as contributions from acquisitions, a testament to the strength of our business model. On today's call, I will start with some highlights from the quarter, and then we'll turn it over to Joaquin, who will provide further details on our first quarter results, as well as an update to our expectations for the rest of the year, which includes raising our guidance for 2023. Before I begin with a summary of our financial results, I would like to highlight that we are revising our adjusted EBITDA calculation to exclude the effect of non-cash, unrealized gains and losses from foreign currency remeasurement. This will better present the overall financial performance of our core business and facilitate comparison with industry peers, while also aligning to our credit agreement definition of adjusted EBITDA. This change will also translate to changes in our adjusted net income and adjusted EPS metrics. For clarity and comparability, we have recast prior period numbers to conform to this revised calculation. Beginning on slide four, total revenue is approximately $160 million for the first quarter, an increase of 6% compared to the first quarter of 2022. Adjusted EBITDA was approximately $67 million, a decrease of 8% when compared with a prior year recast amount of $73 million. Adjusted EBITDA margin was 42%, in line with our expectations, and adjusted earnings per share was 69 cents, an increase of 5% from the prior year quarter's recast adjusted EPS of 66 cents. We generated operating cash flow of $55 million and we returned approximately $10 million to our shareholders through dividends and share repurchases. Additionally, our liquidity remained strong at $368 million as of March 31st. Moving on to our Puerto Rico update on slide five. We experienced strong growth in both merchant acquiring and payment processing with business solutions down as expected due to the impact of the popular transaction. Merchant acquiring revenue was up 13% year over year driven by sales volume increases, mix of cards, and pricing initiatives. Payments Puerto Rico was up 21% year-over-year, with strength coming from POS processing, as transactions grew 11% year-over-year, and ATH Mobile, which continues to drive growth for the segment, as well as contribution from the small acquisition completed last year and their anniversary Q2. Our business solutions segment revenue was down 11% year-over-year, as expected, due primarily to the business sold as part of the popular transaction. We are pleased to announce that we have extended our issuing relationship with Oriental for an additional seven years, which provides further proof of the strength of the ATH network with key institutions on the island. Oriental has been a long-term partner of the ATH network, one of the top three financial institutions in Puerto Rico, and will now continue to issue ATH branded cars through 2030. With this extension, we have now extended issuing relationships over the medium term with the top three banks in Puerto Rico. Finally, a few comments on the macro environment in Puerto Rico. While the overall backdrop remains positive, the economic data has clearly begun to moderate on many fronts. The unemployment rate remained at 6% in the first quarter, still at the lowest level in decades, but largely unchanged from the fourth quarter of 2022. The Economic Activity Index has begun to moderate, with an increase in January at less than 1%, and a reduction in February of approximately 20 basis points when compared to the prior year. On a positive note, travel and tourism continue to recover, with total airline passengers up 9.3% year-over-year in March. But on the negative side, auto sales in the month of March were down 4% from a year ago. So while we remain optimistic about our own business, we are not assuming significant tailwinds from the overall economy. Turning now to Latin America on slide six. LATAM revenue was up 23% year-over-year in the quarter. We continue to experience strong organic growth and revenue contribution from the BBR acquisition completed in the third quarter last year. And this quarter, we also had a partial contribution from the PaySmart acquisition that we announced in February. I'm also pleased to announce another key business win with an important partner in LITAM that further strengthens our strategy in the region. We have expanded our relationship with MercadoLibre to process their issuance of credit cards in Mexico. Recall that we currently process debit cards for MELI in Mexico and more recently in Chile. We expect this new business to ramp over the next few quarters with a more meaningful contribution in 2024 and beyond. Finally, aligned with our focus on capital deployment, I'm pleased to have welcomed Alberto Lopez Gaffney as Executive Vice President of Corporate Development. Alberto joined us in March and his hiring further demonstrates our commitment to our strategic objective of continuing to diversify the company and execute on M&A as a key driver of both growth and diversification. With that, I will now turn it over to Joaquin to provide a more in-depth look at our first quarter results and our increased outlook for 2023.

Thank you, Mac, and good afternoon, everyone. Turning to slide eight, you will see the consolidated first quarter results for Evertech. Total revenue for the first quarter was $159.8 million, up approximately 6% compared to $150.2 million in the prior year. We experienced strong growth across most payment segments, both in Puerto Rico and LATAM, driven primarily by increasing transaction volumes and the contribution of three small acquisitions completed over the past year, partially offset by the revenue sold as part of the popular transaction. Adjusted EBITDA for the quarter was $67.1 million, a decrease of approximately 8% from $72.7 million in the prior year as recast. As Mike mentioned, beginning with this quarter, we have modified our definition of adjusted EBITDA to exclude the impact of non-cash unrealized gains and losses related to foreign currency remeasurement. This will better present the overall financial performance of our core business and facilitate comparison with industry peers, while also aligning to our credit agreement definition of adjusted EBITDA. This change will also translate to changes in our adjusted net income and adjusted EPS metrics. We have recast results from prior periods to conform to this new presentation, and you can find those details in our press release. All of my comments about growth rates are based on the recast numbers from prior periods. Adjusted EBITDA margin was 42%, a 640 basis point decrease compared to the prior year. The decrease in margin reflects the impact of the popular transaction that we have discussed on previous calls, higher personal costs, as well as higher expenses related to acquisitions. Adjusted net income for the quarter was 45.6 million, a decrease of approximately 5% as compared to the prior year. primarily reflecting the lower adjusted EBITDA, partially offset by a lower than expected tax rate. Our adjusted effective tax rate in the quarter was 9.5%, reflecting benefits in certain jurisdictions that will likely be given back in future quarters. We continue to expect the tax rate for the full year to range from 16 to 17%. Adjusted EPS was 69 cents for the quarter, an increase of approximately 5% compared to the prior year, with the increase being driven by a lower share count as a result of the shares received and retired in consideration for assets sold as part of the popular transaction and our share repurchase activities throughout 2022. Moving on to slide nine, I will now cover our segment results starting with merchant acquiring. In the first quarter, merchant acquiring net revenue increased approximately 13% year over year to approximately 40.3 million. This increase was driven primarily by strong sales volume growth, mainly in the first two months of the quarter, and moderating as we exited the month of March. We saw increased sales volume across most categories, in part attributed to new merchant ads and strong organic growth. We also benefited from the effect of pricing initiatives, most of which were put in place throughout last year that improved our overall spread. We also expect moderation in our spread growth as we begin to anniversary some of these initiatives throughout the rest of the year. Adjusted EBITDA for the segment was $15.6 million, down approximately 9%. Adjusted EBITDA margin was 38.7%, down approximately 920 basis points as compared to last year, reflecting the impact of the revenue share implemented as part of the popular transaction, as well as some higher processing costs from the payments Puerto Rico segment, as we continue to see a declining average ticket per transaction when compared to last year. On slide 10, you will see the results for the Payment Services Puerto Rico and the Caribbean segment. Revenue for the segment in the first quarter was $48.4 million, up approximately 21%, driven by strong transaction growth and the contribution from the token acquisition completed in the second quarter of last year. POS transactions were up 11% from prior year and aligned to the trends observed in merchant acquiring where the first two months of the quarter were very strong and starting to moderate as we exited the month of March. ATH Mobiles, specifically the business app, continues to drive important growth for the segment, with sales volume growth of approximately 48% year-over-year. The segment also continues to benefit from increases in transaction processing and monitoring revenues recognized for services provided to the payment services Latin America segment. Adjusted EBITDA for the segment was $27.9 million, up approximately 17% compared to last year. Adjusted EBITDA margin was 57.6%, down 220 basis points as compared to last year. The margin decline was due to an increase in provisions for operational losses and higher professional fees, partially offset by leverage from the strong revenue growth. On slide 11, you will see the results for our payment services LATAM segment. Revenue for the segment in the first quarter was $35.3 million, up approximately 23% as compared to last year. We continue to see strong organic growth with existing customers across the region, complemented by the addition of both the BBR acquisition completed in the third quarter of last year and a small contribution from the Paysmart acquisition that we announced in late February. Adjusted EBITDA for the segment was $10.4 million, and adjusted EBITDA margin was 29.3%, down approximately 410 basis points as compared to last year, due primarily to higher personal costs, which is a function of increased headcount, both organic and via acquisitions, and also higher salaries due in part to foreign currency fluctuations in the region. On slide 12, you will find the results for the business solutions segment. Business Solutions revenue for the first quarter was down approximately 11% to $55.7 million and aligned with our expectations. The decline is mainly a result of a tough comparable quarter in the prior year that wasn't impacted by the effects of the popular transaction that closed during the third quarter. Mainly, the revenue sold and the effect of CPI. For the quarter, adjusted EBITDA was $22.4 million and adjusted EBITDA margin was 40.2%. down approximately 710 basis points as compared to last year. The adjusted EBITDA margin decrease was primarily driven by the impacts from the popular transaction, which include the effects of revenue sold, which were of higher margin, as well as higher operational costs driven by supplies for our printing business, which have been impacted by inflation. Moving to slide 13, you will see a summary of corporate and other. Our first quarter adjusted EBITDA was a negative 9.1 million, a decrease of approximately 21% compared to prior year. Our adjusted EBITDA as a percentage of total revenue was 5.7%, up slightly when compared to the prior year. Moving on to our cash flow overview on slide 14, our beginning cash balance was approximately 216 million, including restricted cash of approximately 18 million. Net cash provided by operating activities was $55 million, a nearly $13 million decrease compared to the prior year, mainly as a result of lower net income and fluctuations in working capital as we paid down certain accrued liabilities. Capital expenditures were approximately $13 million, and we continue to anticipate approximately $70 million of CAPEX for the full year 2023. We paid down the outstanding balance on our revolving credit facility of $20 million, approximately $5 million in long-term debt payments, and $6 million in withholding taxes on share-based compensation, which resulted in a total net debt decrease of approximately $31 million. We paid cash dividends of $3 million, and we repurchased approximately 188,000 shares of common stock at an average price of $33.35 for a total of approximately $6 million. We have approximately $72 million available for future use under the company's share repurchase program. Our ending cash balance as of March 31st was $193 million, and this included approximately $19 million of restricted cash. Additionally, we recently announced another $0.05 dividend to be paid on June 2nd to shareholders of record as of May 1st. Moving to slide 15, you will find a summary of our debt as of March 31. Our quarter-ending net debt position was approximately $236 million, comprised of approximately $174 million of unrestricted cash and approximately $410 million of total short-term borrowings and long-term debt. Our weighted average interest rate was 5.3%. Our net debt to trailing 12-month adjusted EBITDA was approximately 0.9 times. As of March 31st, total liquidity was approximately $368 million. This balance excludes restricted cash and includes the available borrowing capacity under our revolver. Moving to slide 16, I will now provide you with an update toward 2023 outlook, as well as some comments on the remainder of the year. Given our Q1 results and additional visibility, we are raising our guidance and now expect revenue to be in a range of $644 million to 652 million, representing growth of 4 to 5.4 percent, and continue to expect adjusted EBITDA margin to range between 42 to 43 percent. We now expect adjusted earnings per share of $2.59 to $2.68. On a GAAP basis, earnings per share is anticipated to be between $1.80 to $1.90. We had a strong first quarter driven by better than expected performance from our Puerto Rico payment segments. And even though some of the drivers of this growth are expected throughout the remainder of the year, we are considering some moderation over the next few quarters given the trends observed during the month of March and what we have seen through April. In terms of adjusted earnings per share, we are also anticipating that our non-GAAP effective tax rate is expected to come back to more normalized levels over the remaining quarters, and we continue to anticipate our full-year non-GAAP effective tax rates to range between 16% and 17%. We have not considered any additional share repurchases as part of our outlook. In terms of the segments, we now expect our merchant acquiring revenue to grow in the mid-single digits. We expect our payments processing Puerto Rico segment to grow in the high single digits and expect year-over-year growth to slow down starting in the second quarter as we anniversary the token acquisition completed last year. We continue to anticipate our payments LATAM segment to grow in the mid to high teens for the full year with a strong second quarter, but we'll see year-over-year growth slow down in the third quarter as we anniversary the BVR acquisition completed last year. In business solutions, We are expecting a low to mid single digit reset for the full year with the second quarter resembling our first quarter and turning to positive growth in the second half of the year as we anniversary the popular transaction in the third quarter. In summary, we are pleased with our results in the first quarter and the trends we see in the business. We look forward to hopefully seeing you in person at our coming conferences in the coming months. Operator, please go ahead and open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Vasu Guldiel with QVW. Please go ahead.

Hi, thanks for taking my questions. I guess the first question, can you talk a little bit about the change in quarterly cadence that you saw from Jan, Feb to March and then relative to March where April trends are tracking just to give us a sense for like the magnitude of moderation?

Sure. Hi, Vasu. So this is Joaquin. I'll use kind of sales volume So we started January in the high single-digit range, and we exited March in close to the 4% sales volume growth range. April is trending similar to March. So that's kind of the level of decline that we saw on a sequential basis.

Got it. And then just I got the comment on the pricing initiative still helping growth. Have you disclosed sort of when – we might see those lapse and sort of impact the growth rate this year?

We implemented this throughout the year last year, but I would say that most of the pricing initiatives took place between Q2 and Q3. So we will probably start to see those lapse in the second half of Q2 and throughout Q3.

Got it. And then one quick one for you, Mac. I know you've talked about M&As being a strategic priority for you. Any update on whether you were seeing valuations adjust to a level where you think the probability of actually completing a larger-sized deal may be increasing? And then I guess if you could also give us an update on what the pipeline looks like today, any indication on whether that has increased as fintechs are struggling more and sort of the complexion of size of deals in the pipeline? Thank you.

Sure. So, yeah, thanks, Basu. As we announced earlier, we hired a new EVP to run the area who was actually the CFO of Despigar, which basically is the Expedia of Latin America. He has a lot of M&A and investment and banking experience, and we're excited to onboard him in March. What I would say is, you know, valuations are starting to move a little bit, but I wouldn't say there's complete capitulation because even the public markets have bounced back up. So, you know, hopefully during the back half, we'll continue to see pricing settle. As far as the pipeline, we have a pretty active pipeline that we're going through different opportunities across the region. We are looking at deals that are similarly sized to what we've executed in the past and, frankly, some deals that potentially could be larger as well.

Super helpful. And if I can squeeze in one last one. Sure. Any knock-on effects from, you know, everything that's going on in the U.S. banking industry and the demo you've seen here, any knock-on effects from that in any part of your business?

No, I mean, we haven't seen an effect. In fact, the local banks, a couple of them have already – you know, announced earnings and they had great quarters. And so we've been sort of insulated from that.

Great. Thank you.

Our next question comes from Nate Swenson with Deutsche Bank. Please go ahead.

Hi, guys. Congrats on the results. Just wanted to ask a few more follow-up questions on the macro situation in Puerto Rico. So you talked about lower ticket sizes in your prepared remarks. I know what your last update you had mentioned, you know, inflation being 6% in Puerto Rico. So just wondering your thoughts on the trends for inflation through the remainder of the year. Do you expect ticket sizes to continue decreasing? And then you also mentioned travel and leisure being up 9% in March. Just wondering, is that in line with your expectations? And then do you, can you share what your sort of travel assumption that you have baked into your current 2023 guidance?

All right, so yeah, I'll try to break that up into a few pieces, and if I miss one, I'll come back. I would say that in terms of travel and leisure, we don't necessarily have a specific expectation flowing through the mall. I will say the reason for that is that in general, right, tourism for Puerto Rico is only about five to eight percent of total GDP contributions, so it's not a huge factor in just the general macroeconomic environment. Obviously, it's something that we track, and it's important in the sense of volume from specific verticals, but it's not a huge driver to our business. In terms of average ticket sizes, This is something that we've been calling out for a few quarters. We know that given the stimulus that we saw, the stimulus effect on consumption over the past couple of years, average tickets really got to a level that were higher than usual. Inflation has kind of kept them or kept the average ticket a little bit higher than what we expected for a longer period of time, but we continue to have an expectation that average ticket will slowly come back to normalization, and that is part of the guidance that we've put forth. What was the other question? I'm sorry.

No, I think you touched on it, but that also makes me think, I know last quarter you had highlighted that the funds coming into Puerto Rico were expected to be flat in 23 versus 22. Is that still the case?

We continue to expect that to be the case, that's correct.

Got it, got it. And then just for my follow-up, I'm wondering if you can give a little more color on the expanded relationship with MercadoLibre. Obviously sounds like very exciting moving beyond just the debit. So maybe you can talk about how material your current partnership with Mellie is, what the new business entails, and kind of how significant you think the new relationship can be to the LATAM business going forward.

Yeah, so this is Mac. I mean, look, MercadoLibre is probably the best brand, particularly e-commerce brand in the region. So the test meant that they do business, you know, they started with a debit card business in Mexico. Then we picked up their debit card business in Chile. And now that they're doing credit with us in Mexico, it's good from a financial perspective, but it's great reputationally as well. The credit cards are being issued to both consumers and merchants to conduct business. And I don't know if you want to add anything on the materiality.

No, we haven't broken down the materiality. What we have said in the past, though, is... Both of these, let's say our debit relationship and the credit relationship now with Mercado Libre have really started from the ground up in terms of issuance. So these are businesses that need a little bit of time to ramp up and actually build up the portfolio so it becomes more meaningful to the overall business. Having said that, they have been contributors to the growth that we're seeing organically in our Latin America segment.

And exceeded our forecast, right? They exceeded our forecast, both of those. So... We're optimistic.

Super helpful. Thanks, guys, and congrats again. Thank you. Thank you.

Our next question comes from Bob Napoli with William Blair. Please go ahead.

Thank you. Good afternoon. Question. So Mac, Joaquin, you've become more active now that the deal with Bank of Popular is completed on the M&A front. How are the deals done that you've completed so far? How are the integrations going? I mean, are you feeling confident as you look at future deals that you kind of have that M&A machine and the integration working well?

Yeah, so, Bob, I would say generally, if you look at the deals we've done over time, the biggest marquee brands that we've discussed and announced are on those new platforms. So if you look at MercadoLibre, Centender Chili, They're both running in Santa De Uruguay. They're running on, you know, an intellectual property that we acquired, and we integrated that well. We were able to bring up new customers, changing it from a licensing model to a processing model. If you look at Grupo Evolve, the second largest bank in Colombia, they're running on the e-commerce gateway that we purchased. So we think we've done a good job buying things at the right valuation. things where we had revenue synergies and we were able to expand their business. We always do a postmortem, and we learn from those to make sure that we continue to improve on each and every acquisition because each is different, right? It may be a different country, a different type of technology. Again, sometimes we're pivoting the model from licensing to processing. But in aggregate, I think we've been very pleased. You know, from time to time, there are mistakes that we make that we correct, and we try to do that in an agile way. But so far, we think we've done a good job buying stuff at the right price and then integrating them and getting the synergies. As we look forward, you know, we hope to do more M&A, so that's why we have a new leader. I mean, the team that did it in the past has done a fantastic job. It's just we want to do now more over a shorter period of time. So we put more emphasis both of my time when I look at how I've stacked my direct report team, but also bringing in an additional leader and building out that team because, you know, that's going to be a big focus.

Thanks. And then good growth in payment services, Puerto Rico, also Latin America. How much was the inorganic portion of that? Can you give some color on what the acquisitions have added?

You mean in terms of every segment specifically? Well, I don't know.

However you want to give it, I guess. If you want to give abroad, like the – inorganic revenue growth in the quarter or something like that would be helpful.

Yeah, we don't break that out. So we do have that, you know, playing in some of the numbers. We've got it in Puerto Rico and, to your point, in LATAM. We would say the organic growth rate is healthy, but we don't break that out separately.

Correct. What I would say, Bob, right, we try to give some additional highlight as part of the prepared remarks to kind of help at least with the cadence. In Puerto Rico, we did acquire or completed the stocking in Q2. So we are expecting a slowdown, right, in the year-over-year growth just because we're anniversarying that. And you can see that we're still expecting high single-digit growth in that second quarter of the year. So you can kind of back into more or less what that's going to be on a go-forward basis without M&A. And in Latin America, I know it's a little bit more convoluted because we do have two acquisitions flowing through them, but the most meaningful one, which is the one we acquired in Chile last year, we will anniversary in the third quarter. So we are expecting somewhat of a slowdown to what we're seeing today from a year-over-year growth perspective as we anniversary that in Q3 and still expecting high teams growth, right, for the full year, which you can also kind of back into more or less what the impact will be.

Thanks. And just lastly, sneak one in on the other partnerships, the Citi Banamex and the SumUp. I think SumUp's a really interesting partner, great partner there as well. Can you give any cover on how those partnerships are adding to growth or if they're being successful?

Yeah. So I'll start with SumUp, which was the one we announced last quarter. Similar to Mercado Libre, Bob We're very excited about SumUp. One, it has similar aspects to MercadoLibre in terms of their regional presence, but in the same manner, similar in that this is a brand-new portfolio we're not acquiring Let's say going to an existing business where we can migrate a portfolio of cards or transactions and get profitability ramped up very quickly. This is something that needs to grow into a more meaningful part of the business, but it certainly has the characteristics to be that. In the case of Citi Banamex, we continue to work with Citi across multiple countries in the region. trying to get that product sold. As we've said in the past, they are using our technology at the back end, but they are kind of leading this in terms of getting in front of clients and selling.

Yeah, because on the set of Animax, you have to get the customer up and then you have to get their vendors up. So it's sort of a two-step process.

It has been also a slightly longer sales process because of the nature of the product that's being sold.

Thank you.

Our next question comes from Jamie Friedman with Beth Guhano. Please go ahead.

Hi. Congrats on a good start to the year. Mac, I'm just wondering at a high level what so far has surprised you that you didn't expect? I know we're only four months in, but any kind of bigger picture takeaways about what you've seen so far?

From the business, the strength of the consumer, I think, has surprised everybody. I mean, if you look at Visa beat, you look at some of our peers beat. So I think the strength of the consumer has been surprising, not only through Q1 earnings season, but just in general, if you look. But that's been the biggest surprise. Other than that, I think we're executing very well. And like I said, we're very focused on M&A. But the strength of the consumer has surprised, I think, the entire industry.

Okay, and just as my follow-up, Joaquin, you know, sometimes you enumerate the quarters of the period of comparison so we can get the modeling right. So can you just remind us last year, was there anything in the Q2 or the second half? I know there's a lot, but if you could just remind us about when some of those things were, if you can think of it off the top of your head. I think that would be helpful as we try and kind of clean up the models. Thank you.

Sure, I'll kind of go through some of the key ones that we called out. As I just mentioned to Bob, we will anniversary the token acquisition that we did in Puerto Rico in the second quarter. That's in the payments Puerto Rico segment. I would say that in the Latin America segment, we will anniversary the VBR acquisition in Chile in the third quarter. So that's an important item for that segment. And then in business solutions, We have the popular transaction impacting the third quarter mostly, right, where we had the sale of assets, plus we also had the CPI credit. And most of the impacts related to that will flow through business solutions, although we do have a small piece that flows through Payments Puerto Rico. I would say that the third one, Q4, as we said last year, is a much cleaner quarter. And if you look at what we just reported for Q1, it assimilates to kind of what we said at the end of the fourth quarter, that Q4 is a good baseline as to what we expected for 2023.

Perfect. Thank you. I'll drop back into Q. Thank you.

Next question comes from John Davis with Raymond James. Please go ahead.

Hey, good afternoon, guys. Mac, you just said kind of the consumers held up better to start the year. But if I look at the guide, you guys raised a little bit less than the beat in the first quarter. So just curious, versus three months ago, kind of how do you think about macro and kind of your guide? And, you know, is there more conservatism baked in the back half of the year? Just any sort of macro commentary would be helpful.

So I'll start, John, and maybe Mark can just chime in. What I would say is, look, we're certainly surprised by the strength of the consumer, and it was mostly reflected, as I mentioned, in the first two months of the quarter, where it really started off really strong. We have seen that kind of taper down to more of what we expected when we started the year, kind of getting out of March and into April. So we're certainly looking at those trends and taking that into consideration as we mull the rest of the year. I would say that if you look at our guidance for the full year, it still considers a positive economic backdrop for us to be able to perform at that level. And as Mike just said, we continue to operate very well. But that strength of the consumer is something that we need to continue to monitor closely because inflation is still high, rates are still high, and we have this declining trend that we saw during the first quarter.

Yeah, I mean, as consumers exhaust the excess cash from the feds and as rates stay high, you know, take the effect that the feds want it to take, you know, we do believe the back half is going to be weaker than the first half. Okay, that's helpful.

And then, Mac, obviously, you know, we've talked a lot about capital allocation so far on this call, and M&A hired new head of corp dev, but just, you know, We're almost a year from the BPOP transaction, which kind of freed you up, if you will. Where are you willing to take leverage? How big of a deal are you willing to do? You've done a bunch of nice tuck-ins throughout your time at Evertech. We're just curious what the appetite is to do a bigger deal and where you would take leverage, given that we're now under a turn on leverage.

Look, I mean, we would look at three to four times for the right deal. We do want to be very cautious. I think back to one of the previous questions to make sure. The bigger the deal, the higher the conviction and the execution risk, and we're very aware of that. But we would do a larger deal. We are looking at some things that are larger than we have in the past. I mean, look, we can't talk about a deal until we have one, but we are looking at things that are more sizable than in the past.

Okay, great. And then last one for me, just any update on Chile? Obviously, you made an interest in that market a few years ago. We had COVID. Just curious kind of how that partnership is going and kind of any color there.

Yeah, I mean, look, Santander Chili was, you know, the first major deal that created a lot of excitement at the company because we had bought PayTrue or PayGroup, and then we turned it into a processing business and brought up, you know, the most successful bank in Chili. The partnership has gone incredibly well. They've significantly exceeded their expectations, and as you know so well that they expanded into Uruguay with us. Chili is a market we love, right, because of this business and because of our legacy business that we purchased there. It's a sizable market. for us when you look at the whole company. It's one of our largest markets outside of Puerto Rico, and it's performed well.

Okay. Appreciate all the color. Thanks, guys.

Thanks, John.

Our next question comes from James Fawcett with Morgan Stanley. Please go ahead.

Hey, guys. This is Jeff Goldstein. I'm for James. Just on the slowing volume trends you called out, can you expand on if there are particular markets where that is most pronounced? Is there anything notable to call out by vertical maybe? Just some more color around those trends would be helpful.

Sure. I'll give you what we have visibility to, right? This is mostly in the Puerto Rico segment. So that's where we're kind of seeing these very good first half of the quarter and then moderating to kind of the exit of March and April. And I wouldn't say it's in any specific vertical. The truth is we did see strength across all verticals. We did see the average ticket pretty much come down also in all verticals. So there isn't any one thing that I could call out and say is the main factor or the main, let's say, vertical that's starting to moderate. I would say that it's a general common at this point. That's how we're seeing it.

Okay, got it. And then recession resilience continues to be a popular topic. So maybe you can remind us in a potential recession, how protected you view revenue? And then on the cost side as well, what levers do you have to pull to protect margins? Just how should we think about that?

I mean, look, the one thing, Puerto Rico is a bit of a unique market. One is 40% of the population is gets federal subsidies. And those typically don't go away if you get a recession. In fact, those could increase. So then you have the opportunity for, you know, the continued funding coming in from the feds from the hurricane and the pandemic. And that's still some people size that at about another $50 billion, right? And that's what some of the banks have said they anticipate as well. So that does create some type of insulation against a recession because those are federal funds that would be less likely to be impacted. From a cost perspective, look, if you look at what we've done with our margins over time, not only in Puerto Rico but in Latin America, we're very focused on managing our margins, and we still have the ability to continue to look at labor arbitrage between our different locations, and we'll continue to look for opportunities with our vendors. Very helpful. Thank you. Thank you.

Again, if you'd like to ask a question, please press star then 1. Next question is a follow-up from Ben Napoli with William Blair. Please go ahead.

Thank you. Appreciate it. I just wanted to follow up on PaySmart slash Brazil, I guess, if you would. I mean, Brazil is obviously a massive market. There's a lot of players down there. And you don't just make one acquisition in Brazil. Do you have a broader Brazil strategy? And how is PaySmart looking early days? but just broadly your thoughts around getting a lot bigger potentially in Brazil.

Great question, Bob. So, as you know, we've had a small business in Brazil when we bought PayGroup. PaySmart actually gives us an issuing business there with some great customers. Brazil, we believe, is an important market. It's a significant portion of Latin America in general. It's by far the largest market. It is a market that we're interested in if we can find the right opportunities. So we like the market. We do think you've got to buy the right asset. You've got to have a good local team, and you've got to be able to differentiate yourself. And so far, we've been able to do that with small acquisitions, and we'll continue to look at the market. And if we can find something bigger where we feel like we have a differentiated advantage and we can manage it better or create some synergies by combining it, we would absolutely do a deal in Brazil.

Thanks. And then just on what you're looking at from an M&A perspective, anything – You know, should we expect more of the same? Are there other areas or other technologies you'd like to acquire? Just any thoughts on the types of businesses or if we could see technology acquisitions?

Yeah, so, Bob, we are thinking very broadly. We're looking at our franchise and what strategic advantages we have in the region from both the existing customer set that we have and what additional products could we sell them. the infrastructure that we have and how could we leverage that infrastructure to run other products more cost-effectively. So we're looking at adjacent businesses that we think make sense both commercially and from an operating perspective that would make sense for us. So we'll look at products. We would look to expand into geographies in a larger way, like you mentioned, potentially Brazil. But we want to make sure that being part of Evertech makes the target a better company and create value. But we are looking wide at adjacencies as well.

Thank you.

Thanks, Bob.

This concludes our question and answer session. I would like to turn the conference back over to Matt Schuessler for any closing remarks.

I just want to thank everyone for joining the call today, and we look forward to seeing you over the coming months at different conferences. Thank you. Good night.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.