EVERTEC, Inc. Q1 FY2023 Earnings Call

Good afternoon, everyone, and welcome to EVERTEC'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 Mac 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 in 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. Reconciliation 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.evertecinc.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 the 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 re-measurement. This will better present the overall financial performance of our core business and facilitate comparisons 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 the revised calculation. Beginning on Slide four. Total revenue was 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 the prior year recast amount of $73 million. Adjusted EBITDA margin was 42%, in line with our expectations, and adjusted earnings per share was $0.69, an increase of 5% from the prior year quarter's recast adjusted EPS of $0.66. 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 31. 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 Movil, which continues to drive growth for the segment, as well as contribution from the small acquisition completed last year and that will anniversary in 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 cards 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 continued 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 of last year. In 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 LatAm that further strengthens our strategy in the region. We have expanded our relationship with Mercado Libre to process their issuance of credit cards in Mexico. Recall that we currently process debit cards for Mercado Libre 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 welcome Roberto Lopez Gaffney as Executive Vice President of Corporate Development. Roberto 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 EVERTEC. 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 Mac 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 personnel 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 $0.69 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 activity 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, partly attributed to new merchant adds and strong organic growth. We also benefited from the effect of pricing initiatives, most of which were 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 Payment 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 tuck-in acquisition completed in the second quarter of last year. POS transactions were up 11% from the 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 Movil, specifically the business app, continues to drive important growth for the segment with sales volume growth of approximately 48% year-over-year. This 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 120 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 WVR 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 personnel 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 revenues sold, which were higher margin, as well as higher operational costs driven by supplies for our printing business that 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 the 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 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 31 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 2 to shareholders of record as of May 1. 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 0.9x. As of March 31, 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 to our 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% and continue to expect adjusted EBITDA margin to range between 42% to 43%. 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 segment, 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 rate 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 tuck-in 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 BBR 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 upcoming conferences in the coming months.

Our first question will come from Vasu Govil with KBW.

I guess the first question, can you talk a little bit about the change in quarterly cadence that you saw from January, February to March and then relative to March, where April trends are tracking just to give us a sense for the magnitude of moderation.

Sure. Vasu, 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. And 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 may 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 price 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&A as being a strategic priority for you. Any update on whether you were seeing valuations just to a level where you think the probability of actually completing a larger size 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 the size of the deals in the pipeline?

Sure. So yes, thanks, Vasu. As we announced earlier, we hired a new EVP to run the area, who was actually the CFO of Despegar, which basically is the Expedia of Latin America. He has a lot of M&A and investment banking experience, and we're excited to onboard him in March. What I would say is 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 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. Are you seeing any knock-on effects from everything that's gone on in the U.S. banking industry turmoil or you didn't hear any knock-on effects from that in any part of your business?

No, we haven't seen any effect. In fact, several local banks have already announced their earnings, and they had excellent quarters. So we have been somewhat insulated from that.

Our next question comes from an unidentified analyst with Deutsche Bank.

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 at your last update, you had mentioned 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 can you share what your travel assumption that you have baked into your current 2023 guidance?

So yes, 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 specific expectations flowing through, all I will say the reason for that is that in general, right, tourism for Puerto Rico is only about 5% to 10% of total GDP contribution. 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 going out for a few quarters. We know that given the stimulus that we've seen, the stimulus effect on consumption over the past couple of years, average tickets really got to levels that were higher than usual. Inflation has kind of kept them still 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 down, 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. That also makes sense. I know last quarter, you had highlighted that the unemployment rate in Puerto Rico was expected to be flat in '23 versus '22? Is that still the case?

We continue to expect that to be the case, correct?

Got it. Got it. And then just for my follow-up, wondering if you can give a little more color on the expanded relationship with Mercado Libre. Obviously, it sounds like very exciting moving beyond just the debit. So maybe you can talk about how material your current partnership with Mercado Libre is, what the new business entails, and how significant you think the new relationship can be for the LatAm business going forward?

Yes. So this is Mac. I mean, look, Mercado Libre is probably the best brand, particularly e-commerce brand in the region. So testimonial of their business. They started with the 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 is 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 out the importance. What we have said in the business 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 out 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 the Latin America segment.

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

Our next question comes from Bob Napoli with William Blair.

So Mac, Joaquin, you become more active now that the deal with Banco 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 that you kind of have that M&A machine and the integration working well?

Yes. Generally speaking, if you review the deals we've completed over time, the most notable brands we've discussed and announced are on those new platforms. For instance, Mercado Libre and Santander Chile are both utilizing intellectual property that we acquired and integrated effectively. We've successfully transitioned new customers from a licensing model to a processing model. Additionally, Grupo Aval, the second-largest bank in Colombia, is operating on the e-commerce gateway that we bought. We believe we've been effective in acquiring assets at favorable valuations where we identified revenue synergies, allowing us to expand our business. We conduct a postmortem to learn from each acquisition, ensuring we continuously improve because each situation is unique, whether it involves different countries or technologies. Sometimes, we shift from licensing to processing. Overall, we are pleased with our progress. While there are occasional mistakes, we address them promptly. We believe we have successfully acquired at the right price, integrated, and realized the synergies. Looking ahead, we aim to pursue more mergers and acquisitions, which is why we have appointed a new leader. The previous team did an excellent job, but now we want to accelerate our efforts. We are emphasizing how I structure my direct report team and bringing in additional leadership, as this will be a significant focus moving forward.

Great. And then the 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?

Yes, we don't break that out. So we do have that playing in some of the numbers we've got 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.

What I would say is that we try to provide additional highlights during the prepared remarks to help with the cadence. In Puerto Rico, we completed a tuck-in acquisition in Q2, so we are expecting a slowdown in year-over-year growth as we anniversary that. We still expect high single-digit growth for the second half of the year, which can give you an idea of what to expect going forward without considering M&A. In Latin America, it’s a bit more complex due to two acquisitions impacting the figures. The most significant acquisition was in Chile last year, which we will anniversary in the third quarter. Therefore, we anticipate some slowdown in year-over-year growth as we did not show that last year in Q3, but we still expect high teens growth for the full year, which you can also estimate the impact of.

And just lastly, sneak one in. On the other partnerships, the Citibanamex and the SumUp. I think SumUp is a really interesting partner, a great partner there. Can you give any color on how those partnerships are adding to growth or if they're being successful?

Yes. So I'll start with SumUp, which was the one we announced last quarter. Similar to Mercado Libre, we are very excited about SumUp in terms of their regional presence. But in the same manner, similar in that this is a brand-new portfolio; we're not acquiring or, let's say, going to an existing business where we can migrate a pay 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 a series to be that. In the case of Citibanamex, we continue to work with Citi across multiple countries in the region and 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.

Yes, because on the Citibanamex side, you have to get the customer up and then you have to get their vendors up. So it's sort of a longer sales process because of the nature of the product that's being sold.

Our next question comes from Jamie Friedman with Susquehanna.

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 vis-a-vis, you look at some of our peers, so I think the strength of the consumer has been surprising, not only through Q1 earnings season, but just in general. 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.

Can you provide a breakdown of the quarters for comparison so we can accurately model our expectations? Specifically, can you remind us if there were any notable events in Q2 or the second half of last year? It would be helpful to recall when those occurred as we refine our model.

Sure. I'll kind of go through some of the key ones that we called out. As I just mentioned, Bob, we will anniversary the tuck-in acquisition that we did in Puerto Rico in the second quarter. That's in the Payment Puerto Rico segment. I would say that in the Latin America segment, we will anniversary the BBR 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 in Puerto Rico. I would say that the one for, as we said last year, is a much cleaner quarter. And if you look at what we just reported for Q1, it simulated to what 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.

Our next question comes from John Davis with Raymond James.

Mac, you mentioned that the consumer has remained resilient at the beginning of the year, but I noticed that you raised your guidance slightly less than the first quarter's performance. I'm curious about your perspective on the macroeconomic environment compared to three months ago. Is there a more cautious outlook for the second half of the year? Any commentary on the macro situation would be appreciated.

I'll start, John, and maybe Mac can add his thoughts. We're certainly surprised by the strength of the consumer, especially in the first two months of the quarter, which began on a very strong note. However, we have seen this strength taper down to more expected levels as we moved from March into April. We're closely monitoring these trends as we plan for the rest of the year. Our guidance for the full year still reflects a positive economic environment for us to perform at that level. As Mac mentioned, we continue to operate effectively. We need to keep a close eye on consumer strength because inflation and rates remain high, along with the declining trend observed in the first quarter.

Yes. I mean, as consumers exhaust the excess cash from the Fed and as rates stay high, we do believe the back half is going to be weaker than the first half.

Okay, that's helpful. Mac, we've discussed capital allocation extensively in relation to M&A and the new Head of Corporate Development. It's been nearly a year since the BPOP transaction, which gives you more flexibility. How much leverage are you open to taking on? What size of deal are you considering? You've completed several smaller acquisitions during your time at EVERTEC, but I'm interested in your willingness to pursue a larger deal and how you view leverage now that it's below a turn.

Look, I mean, we would look at 3 to 4x 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 more 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 the deal we have one, but we are looking at deals that are more sizable than in the past.

Okay. Great. And then last one for me. Just any update on Chile. Obviously, you made a net in that market a few years ago. We had COVID. Just curious kind of how that partnership is going, SP-2 Any color there?

Yes. Santander Chile was the first major deal that generated a lot of excitement for the company. After acquiring Petro or Paygroup, we transformed it into a processing business and partnered with the most successful bank in Chile. The collaboration is progressing exceptionally well, with results significantly surpassing expectations. Additionally, they have expanded into Uruguay with us. Chile is a market we are very enthusiastic about due to this business and our legacy operations there. It represents a substantial market for us, as it is one of our largest markets outside of Puerto Rico, and it has performed well.

Our next question comes from James Walker with Morgan Stanley.

This is Jeff Goldstein on 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 do, right? This is mostly in the Puerto Rico segment. So that's where we're kind of seeing the 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 is a general comment 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 leverage do you have to pull to protect margins? Just how should we think about that?

Puerto Rico is a unique market. About 40% of the population relies on federal subsidies, which are typically stable even during a recession and may even increase. Additionally, there is ongoing federal funding related to the hurricane and the pandemic, estimated at around $50 billion, as suggested by some banks. This funding provides a level of protection against economic downturns, as it is less likely to be affected. Regarding costs, we have been focused on managing our margins, both in Puerto Rico and Latin America. We still have opportunities to leverage labor costs across different locations and will continue to explore possibilities with our vendors.

Our next question is a follow-up from Bob Napoli with William Blair.

I appreciate it. I just wanted to follow up on PaySmart/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 it in Brazil.

Regarding M&A, should we anticipate similar activities in the future? Are there specific areas or technologies you are interested in acquiring? We would appreciate any insights on potential business types or technology acquisitions.

Yes. 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 will look to expand into geographies in a larger way, like you mentioned, potentially in Brazil. But we want to make sure that being part of EVERTEC makes the target a better company and creates value. But we are looking wide at adjacencies as well.

This concludes our question-and-answer session. I would like to turn the conference back over to Mac 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.