EVERTEC, Inc. Q1 FY2020 Earnings Call

Thank you and good morning. With me today are Mac Schuessler, our President and Chief Executive Officer; and Joaquin Castrillo our Chief Financial Officer. Before we begin, I'd 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's website at www.evertecinc.com. I'll now hand the call over to Mac.

Thanks Kay and good morning everyone. Before we begin, on behalf of our company, I'd like to share our sympathies with all those who have been affected by this global pandemic. In particular, I want to express my regrets to those who have lost loved ones and my gratitude to those in the medical community and all the essential workers who are on the front lines for the benefit of us all. I also want to thank my colleagues who are diligently working remotely as well as those who have continued to tirelessly work on-site, given the nature of their roles. Just as with Hurricane Maria, the EVERTEC team is continually demonstrating their adaptability, persistence, and strong values, making me incredibly proud and honored to lead this organization. While we continue to cautiously monitor the impact of COVID-19, we believe that our past experiences with extreme circumstances have proven the resiliency of our business and our people. We're fortunate to highlight on this call the successful efforts of our team to maintain our business operations and even implement e-solutions during the quarter. Turning to Slide 4, I'd like to cover some of these highlights. In preparation for COVID-19, we deployed our business continuity plans a few days before the Puerto Rico government enacted a shelter-in-place directive on March 16th. Since then, every country in which we operate has implemented some types of social distancing measures. Our priority has been the safety and support of our colleagues as we transitioned to a work-from-home environment while also implementing safety measures for those critical employees needed on-site. Through our internal initiatives, we were able to provide equipment and remote access to our colleagues, as well as clear direction and focus throughout the organization to keep everyone informed and productive. For our colleagues who needed to be on-site, to keep the network operations running, as well as cash handling and other critical operations for our customers, we implemented safety procedures such as temperature checks each day as they entered the building, provided protective gear, developed safe distancing spaces, and increased the overall sanitation at all our offices. In March, a significant focus of ours was supporting our clients' evolving needs as well. For our largest customer Popular, we assisted them in the transition of over 4,400 employees to a work-from-home environment. Many of our customers depend on us for communication, security, and numerous other business functions that require modifications in this new environment. Adjustments included increasing the capacity of our phone lines to accommodate more customer calls, as well as modifying our systems for our customers relative to late fees and interest charges, license and tax handling, and the acceleration of other projects necessary to serve clients in this new environment. For the small business clients in our Puerto Rico merchant portfolio, we are particularly mindful of the severe impacts to their finances brought on by the pandemic and are assisting them with applying for aid as well as finding other ways that we can provide support. For the community throughout our organization’s footprint, we are already promoting our application to the 2020 scholarship program, to which we have contributed over $500,000 over the past five years. The need has never been greater to help these students and our commitment firmly remains. While our results in the quarter were impacted by the effects of the pandemic, both in Puerto Rico and Latin America, we believe our unwavering investment in our employees, customers, and communities during this time of crisis strengthens our relationship with each of our stakeholders over the long run. Beginning on Slide 5, I'll cover some of the quarter's financial highlights and provide you with an update on recent developments. Total Revenue was $122 million, an increase of 3% compared to 2019. Our revenue results in January and February were on track with our expectations, but in mid-March, transactional revenue was impacted by COVID-19 measures. Additionally, we had one-time revenue last year that was a headwind for Q1 this year. Adjusted EBITDA was $56 million, a 2% decrease as compared to the prior year, and adjusted earnings per share was $0.46, a decrease of 8% compared to last year. We generated significant operating cash flow and returned approximately $7 million for our shareholders through share repurchases. Dividends approved by the Board in February were paid on April 3rd, and our next dividend will be paid on June 5th. Our quarter-end liquidity was over $220 million. Moving onto our business update on Slide 6, first in Latin America, we are pleased that we were able to continue to provide our customers with new innovative solutions, such as the new service implemented for Exito, the largest supermarket chain in Colombia. Through our portal, customers can purchase a card for necessities that can then be redeemed using a virtual card at Exito establishments or online. For every COP50,000 of card purchases through April 30th, Exito contributed COP5,000 to a relief fund. This is a creative solution that is helpful during this challenging time to support the community in Colombia. This new service is supported by our recently acquired digital payment gateway, PlacetoPay. We also implemented an e-commerce solution for our large U.S. retailer operating in Central America to further support their card-not-present payments, which became critical as a result of COVID-19, as they easily facilitate home delivery and pickup. Additionally, we implemented a virtual benefit card program for the Dominican Republic Government to distribute aid to those families with economic needs impacted by the pandemic. This program, which was implemented on April 1st, has impacted over 530,000 families in the community by distributing over $64 million, which helped both the banked and unbanked populations. Lastly, we are pleased with the progress on our Santander Chile project and have now successfully tested the acceptance of American Express. We still have more work to do, but this is a significant milestone. We have delayed our go-live date as most merchants are closed in Santiago, and we're using this time for further testing and preparation, with an expected implementation in just a few months. We continue to see interest in our products, and although timelines may be extended due to COVID-19, we are seeing growth opportunities. We have differentiated ourselves from our competitors through our customer focus, service, and investments, and we believe we will emerge as a unique payment service provider in Latin America. Moving on to Puerto Rico, the environment is challenging, and just like the rest of the world, we are seeing significant increases in unemployment and small businesses are struggling. Puerto Rico is anticipated to receive $5 billion in Federal Aid through CARES, and the Government of Puerto Rico has provided their own aid package, which included approximately $800 million. The local government has also supported the economy by continuing to employ the government workforce. Regarding the reopening of Puerto Rico, earlier this week, several industries were allowed to resume business, which is positive to provide some economic activity. The government is evaluating the opening of additional business segments by May 18th, depending on how COVID-19 cases develop over the next few weeks. We will continue to focus on serving our clients' needs, on innovation, and on executing the opportunities as they arise. Turning to the rest of 2020, while the COVID-19 impact was clearly evident in our results in March, it is challenging to provide annual guidance given the uncertainty around the depth and duration of the pandemic at this time. The best perspective we can provide on the impact to our business is to share preliminary trends we are seeing so far in the month of April. Joaquin will share those trends and provide an illustration of how, if they continue, they will impact Q2. We are encouraged by the recently released government plans for the gradual reopening of the economy, and we would expect to see some improvement as these plans are implemented. Fortunately, we continue to have a strong balance sheet with low leverage. We expect to continue to have positive cash flow under all the scenarios we have modeled, and we believe we have adequate liquidity to weather the storm. Our commitment is to continue to stay steady in this turbulence and focus on the longer-term opportunities that remain ahead of us. Whether the recovery is a V, U, or W, we are confident in one thing based on our previous challenges: the human spirit’s ability to prevail over adversity. With this understanding, we will continue to focus on our values with a view to the future, and we believe we will emerge stronger. With that, I will now turn it over to Joaquin.

Thank you, Mac, and good morning everyone. I'll now provide a review of our first-quarter 2020 results. Turning to Slide 8, you will see the consolidated first-quarter results for EVERTEC. Total revenue for the first quarter was $121.9 million, up 3% compared to $118.8 million in the prior year, which included a one-time revenue benefit of $2.7 million. Our overall performance over the first two months of the year was in line with expectations, as we saw modest sales volume and transaction growth in Puerto Rico and Latin America, as well as some good progress in some of our key projects. Beginning in mid-March, however, our Merchant, Payment Puerto Rico, and Payment segments were directly affected by the pandemic in some of our business solutions lines of business. Our Latin America segment was also negatively impacted. We estimate that the impact to revenue related to COVID-19 in the quarter was approximately $3 million. Adjusted EBITDA for the quarter was $56.3 million, a decrease of 2% from $57.6 million in the prior year. Adjusted EBITDA margin was 46.2%, representing a 230 basis point decrease compared to the prior year. The year-over-year decrease in margin primarily reflects the decrease in transactional revenue, the increased mix of business in Latin America and Business Solutions, which are lower-margin, as well as the impact of the prior year’s one-time project revenue. The adjustments in the quarter for adjusted EBITDA included our normal adjustments for non-cash equity and share-based compensation and also included a $2.1 million charge related to transactional fees. Adjusted net income in the quarter was $33.5 million, a decrease of 10% compared to the prior year, primarily reflecting the lower adjusted EBITDA as well as increased operating depreciation and amortization, partially offset by lower cash interest expense. Our adjusted effective tax rate in the quarter was 17.6%, primarily reflecting the impact of COVID-19 on the mix of business as well as a discrete tax item of approximately $500,000. We expect our full-year effective tax rate to be higher than the prior year, primarily due to the impact of COVID-19 on our mix of business. Adjusted EPS was $0.46 for the quarter, down 8% compared to the prior year. Moving on to Slide 9, I'll now cover our segment results starting with Merchant Acquiring. In the first quarter, Merchant Acquiring net revenue decreased 3% year-over-year to approximately $25.1 million. Revenue through February increased by low single-digits, and then in March decreased approximately 11%, driven primarily by decreased sales volume in the last two weeks of approximately 40% year-over-year. Puerto Rico's social distancing measures began on March 16th, allowing only essential businesses to remain open, such as supermarkets, pharmacies, banks, gas stations, and only for a limited period of the day. All other businesses have to remain closed, and people could only go out of their homes to buy groceries, medications, and visit doctors or hospitals. These measures drove down sales volume for business categories except for supermarkets and pharmacies. The average ticket, which had stabilized in January and February, increased in March driven by changes in consumer behavior towards larger purchases that enabled them to remain in their homes for longer periods of time. Spread, however, declined mainly driven by the mix shift. Adjusted EBITDA for the segment was $11.3 million, down 6%. Adjusted EBITDA margin was 44.9%, down approximately 120 basis points compared to last year, reflecting the impact of lower transactional revenue and the mix of business. Expenses are mostly variable in this segment. On Slide 10, you will see the results of the Payment Services, Puerto Rico, and the Caribbean segment. Revenue for the segment in the first quarter was $29.9 million, down approximately 7% compared to last year, primarily due to the $2.7 million one-time project revenue last year. Additionally, we had negative transaction growth year-over-year, mainly for the same COVID-19 reasons that impacted our merchant segment after March 16. January and February saw POS transaction growth in the mid-single digit range and then down approximately 17% in the month of March. We experienced a similar drop off in interim transaction volumes as well. These were partially offset by ATH Movil and ATH Movil business transaction growth, as well as new transactional volumes and incremental revenue recognized from the new service with Medicaid benefits we discussed last quarter. Adjusted EBITDA for this segment was $16.1 million, decreasing 24% compared to last year. Adjusted EBITDA margin was 53.8%, down over 1,000 basis points compared to last year, primarily due to lower revenue and high operating expenses related to post-implementation costs from the EBT project. This segment has mostly fixed costs related to technology infrastructure. On Slide 11, you will see the results for our Payment Services in LatAm segment. Revenue for this segment in the first quarter was $21.6 million, up approximately 4% compared to last year. This growth was driven by the acquisition of PlacetoPay as well as organic growth. This growth was partially offset by attrition of approximately 500,000 in the quarter. These effects impacted the Chilean peso, the Brazilian Real, and the Colombian peso, which all declined approximately 20% versus the prior year. The prior year also included 500,000 of a one-time intercompany license revenue. Other than the effects that were a special impact to our LatAm segment from COVID-19, the impact was limited as the social distancing measures in some of the countries in which we operate were less strict and started later in the month of March. Many of our contracts have minimums and also have a revenue component based on accounts on file or plastics issues. We expect to see some significant impact moving to Q2 based on some of the trends we have been following, and some of our implementation projects are delayed. Adjusted EBITDA for the segment was $8.2 million with an adjusted EBITDA margin of 38.1%, down approximately 150 basis points compared to last year, driven by the impact of one-time intercompany license revenue as well as the high margin attrition in the quarter. We now anticipate that we may see some delays in the attrition this year given the current environment and anticipate the attrition in 2020 to be between $3 million to $4 million. On Slide 12, you will find the results for the business solutions segment. Business solutions revenue for the first quarter was up approximately 9% to $55.9 million. Revenue growth in the segment was driven by new services for Popular as well as project implementations that impacted the quarter by approximately $1.5 million. For the quarter, adjusted EBITDA was $27.4 million and adjusted EBITDA margin was 49.1%, up approximately 420 basis points compared to last year. The increase in adjusted EBITDA margin was primarily driven by the increased revenue in the quarter. Moving on to Slide 13, you will see a summary of corporate and other. Our first-quarter adjusted EBITDA was negative $6.8 million, a decrease of 3%, compared to the prior year, and 5.5% as a percentage of total revenue, approximately 30 basis points favorable to the prior year. Moving on to our year-to-date cash flow overview on Slide 14, our beginning cash balance was approximately $131 million, including restricted cash of approximately $20 million. Net cash provided by operating activities was unfortunately $34 million, a $5 million increase compared to the prior year, and this includes the impact of settlement timing and other working capital differences. Capital expenditures year-to-date were approximately $9 million. We paid approximately $21 million in debt payments, which included a $17 million payment related to an excess cash flow sweep feature in a trade agreement and supply the cash generated over a certain level to be paid against our loan. Additionally, we had $3 million in withholding taxes on share-based compensation and $1 million in other debt pay downs, resulting in a total net decrease of approximately $24 million. We did not pay cash dividends in the quarter due to the timing of the payment occurring after quarter-end on April 3rd. We repurchased approximately $7 million of common stock; we now have approximately $23 million available for future use under the company’s share repurchase program, and we've recently announced another $0.5 dividends to be paid on June 5, 2020, to shareholders of record as of May 4. Our ending cash balance as of March 31 was $125 million, which included approximately $22 million of restricted cash. Moving to Slide 15, you'll find a summary of our debt as of March 31, 2020. Our quarter-ending net debt position was approximately $408 million, comprised of approximately $104 million of unrestricted cash and approximately $512 million of total short-term borrowings and long-term debt. Our weighted average interest rate was 4.41%. Our net debt to trailing 12 months adjusted EBITDA was under two times for the first time. A multiple below two times threshold will provide a 25 basis point improvement in our interest rate on approximately 45% of our debt. However, we will likely go above the two-time multiple in Q2 given the impact on adjusted EBITDA related to COVID-19. As of March 31, total liquidity was over $220 million. This balance excludes restricted cash and includes the available borrowing capacity under our revolver. At the end of the quarter, although we are confident in our cash and liquidity position, we decided to draw $30 million from our revolver for a further buffer to our liquidity. The cost to draw on the revolver will have a minor impact on our interest expense and seems prudent given the uncertainty of the environment. Moving to Slide 16, given the very unique nature of the COVID-19 pandemic, we are suspending our annual guidance. But to provide some visibility and perspective on how COVID-19 is impacting our business, we are sharing a view of our preliminary April revenue impact for study purposes, showing the estimated second-quarter revenue and adjusted EPS at these levels. Based on this, total revenue will be down approximately 12% from the prior year, resulting in total revenue of $108 million, and adjusted EPS would be down approximately 41% or $0.30 per share in Q2. Adjusted EBITDA margin is an estimate, assuming fixed costs. Although we are focusing on cost containment where possible for the purpose of this illustration, we have some limited levers, most of which will be offset by COVID-19 potential impact. That said, at these levels, we expect to deliver about $42 million in adjusted EBITDA. As Mac mentioned in his remarks, the Puerto Rico Government announced last week that several business verticals could begin to open this past Monday. This is certainly positive, and we have seen an improvement over the few days in terms of volumes and transactions. However, there's still much uncertainty as to what impact the pandemic will have on the economy and future consumer behavior. Also, this opening of the economy is subject to COVID cases remaining under control. We will continue to monitor the situation and provide an update when we have greater clarity on the depth and breadth of the COVID-19 pandemic's impact on our business. On a positive note, we continue to anticipate positive cash flow even in the lowest-case scenario. Depending on the results, we would see an uptick in our leverage ratio, but still remaining near three times leverage. In summary, it was a challenging quarter, but we continue to execute well. Our longer-term initiatives we believe will continue to benefit us in 2020 and beyond. We will now open the call for questions. Operator, please go ahead and open the line.

Our first question is from Vasu Govil from KBW. Please proceed.

Hi, thanks for taking my question. It's good to talk to you all and glad that everyone is safe and healthy. I guess my first question, within the trends on April that you gave us, but within the month. Can you talk us through, if you saw much improvement towards the end of the month and into early May and sort of what the magnitude of changes are that you were seeing in the improvement?

Sure Vasu. This is Joaquin. And so, I'll just walk you through what we have been seeing. In March, the activity order for Puerto Rico started March 16th, so I would say the second half of March, we saw a decline in volume kind of getting to high thirties. That grew a little bit more going into the first two weeks of April as everybody got serious in the shelter-in-place initiative. So, we saw high thirties, low forties and it stabilized there through the first two weeks of April. It improved slightly towards the end, coming down to low thirties. Now, as I said in the prepared remarks, the governor allowed several businesses to open up this past Monday. We don't have much stability because it's only been a few days, but we've seen a couple of days in the high teens, low twenties. So, we need to see how this continues to develop, and hopefully in the next stage of businesses opening by May 18th. To the extent that we are able to control the positive cases and more sectors continue to open, we would expect to continue to see a positive trend, but it's still early. So, we're definitely looking at this very closely.

Thanks. That's really helpful. And Mac, at a very high level, what we're hearing across the payments industry is that the pandemic is accelerating the shift to digital by multiple years in many cases. Digital will be the new way of life for many people. Are you seeing evidence of that in Puerto Rico in particular in some of the LatAm economies that were more cash-focused? Do you think that coming out of it the growth rates will be structurally higher for EVERTEC?

So, we agree with what you're hearing from our peers. There's a move to digital payments. I mean, I will tell you what we've seen with ATH Movil and particularly ATH Movil business. It's become the preferred payment method for many of the small businesses, some of the small grocery stores. So, we have seen that trend, and that business has held up. We've even seen it as we talked about in Colombia, when we talked about Exito trying to create a virtual card to make shopping more in a digital environment. So, we are seeing that trend. We do think that trend will continue to accelerate coming out of COVID-19, and we are very happy that we've invested in ATH Movil and also made the investment in PlacetoPay. So, during this period, given where we are from a liquidity perspective, we need to invest in this technology to come out of this stronger.

Our next question is from Korey Marcello from Deutsche Bank. Go ahead.

Hey guys, this is Korey on for Brian Keen. I just wanted to ask first if you could talk a little bit about the merchant base, kind of the mix of merchants that you have there, maybe it's small merchants and then maybe online volume as well. Just any color you could give around that?

Yes. I'll take it first. You've got to remember in Puerto Rico, we're less weighted on travel and entertainment. We have a lot of local economy. So, we've got a lot of passengers, pharmacies, and utilities as our customers. So, that's why you've seen the relative stability in some of our payments businesses and segments. On the digital piece, we don't break that out separately. We have given some growth rates on ACH in the past; we were not on this call. But as I said earlier, that's become one of the preferred methods of payment is the ability to pay with your cell phone at small businesses. I personally have gone to a local pizza place where you place your order at the front line, you walk up to the door, and you show them your phone that you've already paid and they hand the pizza out the door to you. So, we are seeing the digital increase, but that sort of gives you an understanding of the makeup of the core economy that is part of our processing. I don't know if you want to add anything Joaquin.

Yes, just to give you some additional color around the portfolio. We have seen a significant shift, mainly driven by the businesses that have the ability to remain open because all other businesses were required to be closed. So, we are seeing a shift towards supermarkets, pharmacies, and gas stations as those are the essential businesses that could continue operating throughout this period. An important factor to note is that we are also seeing an increase in the average ticket. Although these are lower margin businesses, we are seeing the average ticket home increase as people go out to the supermarket and make larger purchases to stay within their homes longer. That kind of offsets some of the shifts we’re seeing towards these lower margin businesses. As Mac said, these digital channels continue to grow even throughout this whole period. So, as physical or card-present payments take a hit, we've seen a slowdown in some of the other P2P transactions and business transactions, yet they continue to grow year-over-year.

I guess, as a quick follow up, you guys mentioned some potential outcomes for the upcoming quarter around EBITDA. Just curious, I think that was related to some of your costs. So, I'm just curious if you could go into some detail about what type of cost take out controls you are taking and how that could potentially benefit versus the expectation that you laid out.

Sure. As we've seen in the past, we run very high margins on a normalized basis, some of the best in the industry. So, we are very cost-conscious continuously, we run the company very lean, and there are not significant levers of cost for us to pull. However, we are always looking for areas to be more efficient, and we continue to focus on those initiatives given the impact on the top line and as we identify those, we will continue to execute.

Yes, let me just say, going into this, we were very focused on taking care of our employees, because our employees take care of our customers. So, we actually saw an acceleration of expenses for setting up in a virtual environment, making sure we had everything in place and some additional compensation for those who had to continue working on-site. So, we were focused on investing to make sure that the operation continued to perform well, and we were very focused on productivity. So, going back to the other calls, we are continuing to invest in our digital platforms. We're continuing to invest in Santander Chile, where we have made good progress during this period. But that being said, we did offset that back with cost containment. Of course, T&E was down, and our travel budget went down. We're closely managing our marketing and training budgets to offset some of the incremental costs we incurred as we moved into a remote working environment. Going forward, we will continue to look at those discretionary expenses and manage them closely without sacrificing future growth of the company because, as a company in emerging markets, we have interesting opportunities ahead.

Our next question is from Bob Napoli from William Blair. Go ahead.

Thank you. Good morning, everybody. Good to hear that everyone's doing well. On Slide 16, just following up on the April trend and the guidance, are you assuming that the April trend holds for the quarter to get you to the $42 million of EBITDA? Or do you have any thoughts on the trend throughout the quarter?

No, as I said, this obviously assumes our April trends continue. But again, the governor just opened a few sectors of the business, and additional sectors might open up in May. This is subject to how COVID-19 develops, but this guidance is really a preliminary view based on what we saw in April.

Bob, the short answer is yes. We're assuming the quarter in the slide you're seeing, but that assumption does not factor in that the economy is already opening. The governor is continuing to open businesses as we speak this week and next week. But it is, however, those businesses could open and then close again.

Okay. Thank you. And there is the card-not-present growth rate and mix. I think you said you haven't given that out, and especially in this environment, that would be really helpful to understand what percentage of your payments businesses are card-not-present and what the growth rate of that is?

Yes, it's a great point. We may consider doing that in the future. What I would tell you is, the good news is that every day it becomes a bigger piece of the business, and it is growing even through this environment. But right now, we're not prepared to disclose that. Given your feedback, we will take a look at doing that in the future.

Just one last question. In the Santander Chile project, what are your thoughts on what the revenue from that might be over time? Do you have a broader strategy for Chile that you want to utilize to build off of?

Yes. So what I would tell you is what we've said on previous calls. Our goal in Chile is to replicate to some extent what we have in Puerto Rico in terms of a broad set of products with a wide client base. We already have a lot of the Chilean banks and retailers as customers on our bill payment platform. This is hopefully one of several Merchant Acquiring and merchant processing customers over time, and we plan to have a broad customer base and solution set. We haven't given specific carve-out of what the revenue is going to be at Santander Chile, but we did say on the previous call as we teed up 2020 that it would be a significant part of that segment for this year, and really help contribute to double-digit growth in the segment pre-COVID-19.

Our next question is from John Davis from Raymond James. Go ahead.

Hey, good afternoon guys or good morning. I just wanted to maybe touch a little bit on card penetration in Puerto Rico. I think many expect COVID to accelerate cash to card. I know the data is a little difficult, but maybe can you give an idea of what card penetration looks like in Puerto Rico today?

What I would tell you, John, is we have been focused on trying to create additional avenues through some of our digital products to get to that cash economy, but there continues to be a very large piece of the pie that is informal and unofficial economy that is part of Puerto Rico. So, it's tough for us to be that specific about the percentage. But through the products we are putting out there, like ATH Movil and ATH Movil business, and the growth rates that we're seeing in some of those digital products, we are definitely making progress in penetrating some of that non-card economy that exists here.

To add to Joaquin's point, it's definitely less penetrated than the U.S. There's still a significant informal economy. I would reiterate, as I think the theme of several of the questions on the call: this is accelerating the adoption of technology. So, people who didn't try to use ATH Movil before, are now being forced to adapt to it. More and more consumers in our business are more comfortable with technologies like Zoom. So, we're actually seeing that with our consumer base as well. This is going to be a catalyst in digitizing payments at a faster pace.

Okay, great. And then any update on the approved HUD funding or any of the other aid that was coming to the Island from the hurricanes? Did this speed it up, slow it down, just kind of any update there would be helpful.

There's no real update, John. The construction side or the construction sector was one of the business areas that was able to go back to business this last Monday. We are looking at this very closely and seeing if we see more of an inflow of that funding as people get back to work and look to get back to reconstruction. But there’s nothing specific that I will call out from our last call.

Okay, thanks. So then one more maybe for Mac. Just talking a little bit about your appetite for M&A here. I think, obviously, maybe not right now, but on the other side of COVID or once things stabilize a little bit, get evaluations, look better. Your balance sheet is the best shape it's ever been in. So can you talk about the pipeline and how you think about M&A going forward from here?

Yes. Our perspective has not changed regarding that part of the thesis on how we grow the company. To your point, we feel good about the balance sheet and the company's performance, particularly compared to other payment peers. So, it's still a focus of ours. Even organics, we are still having calls with prospects. We've had several calls with leaders in South America about potential clients, yet on the inorganic side, the M&A side, it's a bit slower and a bit more complicated because people aren't necessarily willing to sell at distressed prices. There may have to be some normalization or shaking out of what valuations look like. But it's an incredibly important part of our story, and it's a place that we continue to focus on.

Our next question is from James Faucette from Morgan Stanley. Go ahead.

I just wanted to touch bases as you're seeing and looking across different geographies. Are you seeing much variance in terms of activity levels and the rate of improvement as people open up their economies? Within the regions that you serve, how much impact, if any, has there been from government stimulus on what you're seeing in terms of your business flow?

I guess what I would say is, of course each country is different, and it's difficult for us to monitor because our businesses are different in each country. We don’t have apples-to-apples comparisons necessarily. Some countries went into a shelter-in-place faster than others; some have had broader pandemics than others. We have seen differences in how each country operates. We have moved to a remote workforce where we can. Our philosophy has been to protect our employees, and ensure they remain focused. We have seen stimulus in several countries; we talked about what we've seen in Puerto Rico, as well as the Dominican Republic’s support to distribute funds to both the banked and unbanked populations. I think seeing those dollars flow is a positive trend for the countries where we conduct a significant amount of business.

Then, just to reiterate, are you seeing a permanent shift in the trajectory of adoption for electronic payments and in light of that, what impact is that having on your product development thoughts as well as what you're considering for future M&A? M&A has always been an important part of EVERTEC's opportunity set, and how might the current environment be shifting that and reprioritizing, if at all?

It goes back to a question that was previously asked about expenses. The shift to electronic payments and online has been part of our products’ evolution, and that was one of the reasons we bought PlacetoPay. However, with the pandemic, it’s now an even greater urgency to advance. The adoption is going to be faster, particularly as businesses continue to slowly reopen. People are going to be forced to rely on those technologies. Our approach will be cautious from an investment perspective to not only continue investing but also to accelerate our investments in certain areas and projects.

Our next question is from John Coffey from Susquehanna. Please proceed.

Hey, guys, it's actually Jamie Friedman. Good to hear your voices. Glad you're well, thank you for this Slide 16. Really interesting and incremental. But noting that slide, I see that Business Solutions, which is a large segment for you, is still growing, right? So, my question is, now I realize Business Solutions is decelerating, but maybe if you could talk about some of the characteristics of that business that may be less economically sensitive; I think that would be helpful.

So just to give some context, within that segment, we provide most of our core banking services to Banco Popular. Many of those services are the backbone or back office of some of their key systems and are based on number of accounts on file and the number of loans which aren't really impacted by the volatility on a transactional basis. In addition, we manage the digital channels for the bank, so we've seen some increases in those channels and users going into them, which help that line of business. We also run their networks and have supported them in the remote working environment. All those factors have helped with stability and slight growth during the quarter. Even if we go into some of our other businesses, like printing, we do a lot of regulatory and printing and mailing, which isn’t impacted again by volatility. We do have some small pieces that are more discretionary for our clients, and those we expect to come down. Overall, we have a stable segment with some specific lines where we're seeing growth, which is why we're seeing that 2% growth in that segment.

Okay, thanks for that. And then a question I got from an investor was about your ATM exposure. So, if you could talk about that a little bit?

Sure. ATMs are a significant part of our payments Puerto Rico segments. We process most of the ATMs in Puerto Rico, I would say. Similar to POS, we saw a deceleration and negative year-over-year growth on ATM volumes. Again, people wanted to shelter-in-place and there wasn’t really a reason to withdraw cash from the ATM because most businesses were closed. The same applies to POS patterns, as businesses begin to open up this week; we expect to see improvements in those trends, but they are still negative year-over-year. However, the expectation is that business will reopen and those trends will recover, just like we are seeing in the POS space.

Got it. Let me ask one last one, Mac. We saw, you guys know EBT better than anyone. I was just wondering; it's not quite the same category, but the PPP participation for small businesses has been a big theme for some of the state-side fintechs. So anyway, I guess my question would be to what degree are you involved in SBA distributions? I think you did have a comment on that first slide, but if you could talk about that a little bit would be helpful.

Sure. I'll take that one, Jamie. In terms of the PPP program and SBA loans, we aren't really involved in any of that distribution. The banks here in Puerto Rico are the ones making those loans to small businesses. Specifically, from an EBT perspective, we have seen an acceleration of some of the disaster recovery funds that were approved last year, which were supported to run through in June, July timeframe. Some of those were accelerated because of COVID-19. We're monitoring the impact of all these unemployment benefits, which are an add-on to regular unemployment. These are replacements of funds people would have otherwise generated through working. We need to wait and see how that impacts our transactional businesses. On PPP, we are not directly involved in any distribution.

Our next question is from Bob Napoli from William Blair. Go ahead.

Hi. I just wanted to follow-up. We listened to Banco Popular's earnings call last week, and they called out a 46% decline in debit and credit card spending in April. And your revenue was not nearly as bad as BPOP's. I was trying to understand why your Merchant Acquiring business was not nearly as negatively impacted.

They also take into consideration their credit portfolio, which from our perspective, I mean, we don’t manage on the issuing side those balances. I don’t necessarily know what their credit cards are being used for.

It’s hard to do an apples-to-apples comparison. They may be looking at their international spend. So when their customers are spending off-Island, that's part of their credit business, and we don't manage that.

How much of your mix is credit versus debit? Is it primarily debit?

It is primarily debit. Yes, it is primarily debit.

If you look at it on the issuing side, it's primarily debit. On the MAB side, we process both.

Thank you. Then just a follow up on the BPOP relationship, since they're a significant part of your revenue. When do you think that contract terminates and would you like to renew it? I mean you seem to be extremely tied in with BPOP.

It's a good question, Bob. I would say we did say that the pricing discussions we've had are behind us. We've demonstrated to Banco Popular how important of a partner we are. We helped them mobilize their workforce quickly to work remotely and implement new programs. The feedback we've gotten indicates that we’ve displayed our importance as a partner. I believe this bodes well for the future because we're focused on our performance; we want to renew as much as possible.

At this time, we have no more questions. So, this concludes our question-and-answer session. I would now like to turn the conference back over to Mac Schuessler for closing remarks.

Thank you. Again, I just want to reiterate that I appreciate the hard work of all our colleagues in focusing on our customers. I look forward to speaking to some of you in some of the virtual conferences coming up. Thanks again.

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