Earnings Call Transcript - EVTC Q1 2024

Operator, Operator

Good afternoon, everyone, and welcome to EVERTEC's First Quarter 2024 Earnings Conference Call. Today's call is being recorded. I will now hand it over to Beatriz Brown-Saenz of Investor Relations. Please proceed.

Beatriz Brown-Saenz, Investor Relations

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 and the company's most recent periodic SEC report. During today's call, management will provide certain information that will constitute non-GAAP financial measures under SEC rules, such as adjusted EBITDA, adjusted net income, and adjusted earnings per common share. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides, which are available in the Investor Relations section of our company website at www.evertecinc.com. I will now hand the call over to Mac.

Mac Schuessler, CEO

Thanks, Beatriz, and good afternoon, everyone. We are pleased to announce a good start to the fiscal year with strong revenue growth driven by a full quarter contribution from Sinqia and organic growth across all our segments. I will begin today's call with a summary of our first quarter 2024 financial results, followed by a discussion of the Puerto Rico environment and an update on Latin America. I will then turn the call over to Joaquin, who will provide some additional details on our Q1 results and an update on our 2024 outlook. Beginning on Slide 4. Let's start with some financial highlights from our first quarter. We reported $205 million in revenue, a 28% increase over the prior year quarter, and adjusted EBITDA was $78.2 million, up approximately 16% compared with the prior year, driven by the revenue increase. Adjusted EBITDA margin was 38.1%, down from a year ago and aligned with our expectations, driven by a full quarter of Sinqia contributions at lower margins. Adjusted EPS for the quarter was $0.72, up 4% year-over-year. Operating cash flow for the quarter was $36 million. On the capital allocation front, we returned approximately $3 million to shareholders through dividends and entered into a $70 million ASR as anticipated on our last call, which we expect to complete by the third quarter. Our liquidity remains strong at approximately $408 million as of March 31. Turning to our Puerto Rico update on Slide 5. All our Puerto Rico segments performed well during the quarter, reflecting solid organic growth over the prior year. Payments Puerto Rico revenue grew approximately 10% year-over-year, driven by higher POS transactions and continued strength in ATH Móvil Business. Merchant Acquiring grew approximately 7% on a year-over-year basis, benefiting from sales volume growth and a higher spread. The Business Solutions segment returned to growth, up approximately 4% year-over-year, reflecting growth across various lines of business. The Puerto Rico macro environment continues to be supportive for EVERTEC as we move through 2024. The unemployment rate remained low at 5.7% in the first quarter, and the level of employment remained steady at 1.1 million, the highest number since 2009. Travel also remains robust with airport arrivals up over 10% year-over-year in the first quarter. Turning to Latin America on Slide 6. LATAM revenue was up significantly year-over-year in the quarter, reflecting the contribution from the Sinqia acquisition that closed in the fourth quarter as well as continued organic growth from our legacy business. On our last call, we discussed our area of focus with Sinqia for 2024, and we continue to make strides in all fronts. From a technology modernization perspective, we have laid out detailed road maps and have identified the key projects that we will prioritize throughout 2024 with a focus on those investments that will have the largest impact for our clients. We believe these enhancements will open the door for pricing initiatives with existing customers and better offerings to capture market share. As for our customer-centric initiatives, we have implemented regular visits to our top clients, and we are making a point of acting on the feedback they've given us. Our next step will be to leverage these relationships to cross-sell our products. The integration process continues to be a priority for the executive team. And to that end, we have promoted Claudio Prado to Group Head of Brazil, replacing Bernardo Gomez, who for personal reasons, has decided to take a step back and shift to a consultant role. Bernardo did a fantastic job building Sinqia over the past years, and we thank him for his contributions during the integration process. Claudio has over 30 years of experience in the technology industry, including as CIO of Santander and Deutsche Bank, and over 7 years contributing to Sinqia. Claudio's entrepreneurial background provides a good perspective of the client-focused approach best suited to handle the day-to-day leadership responsibilities at Sinqia. We look forward to providing further updates on the integration process as we progress. With that, I will now turn the call over to Joaquin.

Joaquín Castrillo, CFO

Thank you, Mac, and good afternoon, everyone. Turning to Slide 8. I'll begin by reviewing the first quarter results for EVERTEC. Total revenue for the first quarter was $205.3 million, up approximately 28% compared to the prior year, reflecting strong growth in our Latin America segment that benefited from a full quarter contribution from Sinqia as well as continued strong organic growth. The quarter also benefited from higher sales and transaction volumes, continued strength in ATH Móvil Business, and a return to growth in Business Solutions. Adjusted EBITDA for the quarter was $78.2 million, an increase of approximately 16% from the prior year. And adjusted EBITDA margin was 38.1%, down approximately 390 basis points from the prior year, mostly as a result of the Sinqia acquisition, but aligned to our expectations. Adjusted net income was $48 million, an increase of approximately 5% year-over-year, mainly as a result of the higher adjusted EBITDA and a non-GAAP tax benefit compared with a non-GAAP tax expense in the prior quarter. The tax benefit will be partially offset in the remaining quarters, and we now expect our adjusted effective tax rate to be in a range of 6% to 7%. These positive balances were partially offset by higher operating depreciation and amortization, resulting from the increased CapEx in prior years and higher cash interest expense given the incremental debt raised to acquire Sinqia. Adjusted EPS was $0.72, an increase of approximately 4% from the prior year driven by the same reasons pointed out, impacting adjusted net income, partially offset by a higher share count due to the shares issued as part of the Sinqia acquisition. Moving to Slide 9. I will now cover our first quarter results by segment, beginning with Merchant Acquiring. Net revenue increased by approximately 7% year-over-year to $43.1 million, driven by strong volumes and a higher spread. Sales volume was up 6%, driven by incremental volumes for existing merchants, effects of inflation on key verticals and new merchants signed towards the end of last year. Our overall spread per transaction was also higher than the prior year, in part driven by card mix and partially offset by a declining average ticket. Trends for the month of April are aligned to Q1 results with mid-single-digit sales volume growth. Adjusted EBITDA for the segment was $16.2 million. And adjusted EBITDA margin was 37.6%, down approximately 110 basis points from the prior year. The margin decrease was primarily due to higher transaction processing expenses given the lower average ticket per transaction. On Slide 10 are the results for the Payment Services, Puerto Rico and Caribbean segment. Revenue in the quarter was $53 million, an increase of approximately 10% from the prior year. The revenue increase was driven by transaction growth of 7% year-over-year as well as continued strength in ATH Móvil Business, which experienced a 27% year-over-year increase in transactions during the quarter. Adjusted EBITDA was $30.4 million, up approximately 9% from the prior year. And adjusted EBITDA margin was 57.2%. On Slide 11 are the results for LATAM Payments & Solutions. Revenue in the quarter was $74.2 million, up approximately 110% year-over-year, reflecting a full quarter of revenue contribution from Sinqia, the contribution from the paySmart acquisition completed in March of the prior year and continued organic growth across the region as we continue to benefit from growth across key markets and from the Getnet relationship. Adjusted EBITDA was $16.3 million, up approximately 57% from the prior year, with adjusted EBITDA margin of approximately 22%, down approximately 740 basis points and mainly driven by the inclusion of Sinqia, which contributes at a lower margin compared to the segment average. Turning to Slide 12, you will see the results for our Business Solutions segment. Revenue was $58.1 million, an increase of approximately 4% from the prior year. There were a number of factors that contributed to the higher revenue this quarter, including the effect of the CPI increase that began in Q4 of approximately 1.5% and growth across several business lines driven by the impact of incremental volumes and specific consulting projects that positively impacted the quarter. Adjusted EBITDA was $23 million, up approximately 3% from a year ago, and adjusted EBITDA margin was 39.6%, down approximately 50 basis points from the prior year. The margin decline is consistent with our expectations and due primarily to higher cost of sales and higher cloud expenses. Moving to Slide 13, you will see a summary of our corporate and other expenses. Corporate and other expenses was $7.7 million in the quarter or 3.8% of total revenue, down from 5.7% in the prior year quarter due to lower professional services and personnel costs as we continue to manage expenses. Moving on to our cash flow overview on Slide 14. Net cash from operating activities was approximately $36 million. Capital expenditures were $21.9 million for the quarter. We drew $80 million from our revolving facility, paid down $23.1 million in debt. Paid dividends of $3 million, and entered into the $70 million ASR. Our ending cash balance in March was $337.6 million, a decrease of approximately $1.4 million from year-end 2023. On Slide 15, our net debt position at quarter end was approximately $793 million, comprised of approximately $1.1 billion in total loan and short-term debt, offset by approximately $294 million of unrestricted cash. Our net debt to trailing 12-month adjusted EBITDA was approximately 2.51x up from 0.9x a year ago, but still within our target range of 2 to 3x. As of December 31, our total liquidity, which excludes restricted cash and includes our borrowing capacity, was $407.6 million, up from $367.6 million from a year ago. Now turning to Slide 16, I'll provide an update on our outlook for the remainder of the year. We are raising the lower end of our revenue outlook by maintaining the high end of our revenue range for the year resulting in a range of $846 million to $854 million, representing growth over the prior year of approximately 22% to 23%. Regarding overall margin, we continue to anticipate that our adjusted EBITDA margin will be between 38.5% to 39.5%. And on adjusted EPS, we are also raising the lower end of our outlook and maintaining the higher end, resulting in a range of $2.85 to $2.94, representing growth of approximately 1% to 4%, when compared with $2.82 reported for the prior year. Our operating depreciation came in above our earlier forecast, and we now expect a higher overall operating depreciation for the full year with a partial offset to this impact coming from taxes where we now expect a lower effective tax rate in the 6% to 7% range for the full year. In terms of segments and given our Q1 results, we now expect Merchant Acquiring to grow closer to mid-single digits. We continue to expect our Payment Processing Puerto Rico segment to grow in the mid-single digits. For the LATAM Payments & Solutions segment, we expect growth in the low 70s. And for Business Solutions, we still expect revenue growth in the low single digits for the year. In summary, we are pleased with our first quarter results. We continue to work on integrating Sinqia while also delivering strong results from our payment businesses in Puerto Rico and the rest of Latin America. We believe EVERTEC is well positioned for growth for the remainder of 2024 and beyond. We look forward to updating you on our progress in the coming year and hope to see some of you at conferences over the next few months. With that, operator, please open the line for questions.

Operator, Operator

The first question comes from Chris Kennedy with William Blair.

Cristopher Kennedy, Analyst

Can you give your updated thoughts on the accretion opportunities for Sinqia?

Joaquín Castrillo, CFO

Chris, this is Joaquin. So as we said in our last call, we continue to expect Sinqia to be more on the neutral side of the range. We had originally commented when we closed on the deal that we're going to be in the neutral to slightly accretive range. And as we discussed a little bit in the last quarter, given a little bit of the slowdown coming off towards the end of the year last year, we now expect it to be closer to the neutral side of that range.

Mac Schuessler, CEO

And let me add a little color. So I mean, we're still incredibly excited about Sinqia. What we're very focused on right now is discipline around execution. So we're focused on now that we've had the leadership change, now Claudio is running the company. He has self-focused reporting directly to him. So we're very focused on selling more and converting the sales through implementations into revenue faster. We've also now built a plan on in the past, they were very focused on buying other companies and trying to absorb those. Now we're focused on investing in those platforms, so we can continue to sell more features, more customizations, that type of thing. And then finally, we are looking long term at how do we make this a faster growing, more accretive deal is by also looking at pricing, how do we price better, because they've accumulated all these companies, but now they have the opportunity to go back and look at how do they price each of the contracts better. So that's what we're really focused on, Chris, is how do they execute better, because the past 2 years, they've been focused on absorbing companies, going through the sales process. We now have a CEO in place, who is focused on the company and not personal issues and is focused on executing the companies that he's bought. So we're still very bullish.

Cristopher Kennedy, Analyst

Right. And then just one follow-up. Can you give the organic growth of the Caribbean business or the non-Puerto Rico business?

Joaquín Castrillo, CFO

I mean, we're not breaking out our Latin America segment, right, in terms of the different pieces. As we've said, we continue to expect that segment to grow in the double digits. Obviously, this year, it's very different because we have the Sinqia impact on a year-over-year basis. But that continues to be an expectation for the segment overall.

Operator, Operator

The next question comes from Nate Svensson with Deutsche Bank.

Nate Svensson, Analyst

I wanted to touch on EBITDA margins quickly. So maybe a touch lower than where the street was before the print and I guess, 38.1% is below the low end of your guide for the full year. So I know you said that margins were in line with your expectations, but maybe you can talk about some of the puts and takes with margins in 1Q beyond the impact of Sinqia. And then, I guess, maybe in light of maybe higher expenses in 1Q, anything we should keep in mind when modeling margins out through the remainder of the year?

Joaquín Castrillo, CFO

No, we are slightly below our guidance for the quarter. However, we remain confident in achieving 38.5% to 39.5% for the full year. As we enter the second half of the year, we expect to improve our margins compared to the first quarter. We are continually looking for efficiencies to enhance our margins, considering the scalability of our business. This focus will remain a priority as we approach the end of the year.

Nate Svensson, Analyst

I appreciate your thorough explanation. Regarding the segment guidance, I noticed two changes since our last update: acquiring has been adjusted upwards to the mid-single digits, while LATAM has been revised downwards to the low 70s. Could you provide some insight into what led to these adjustments in both segments, particularly why acquiring moved towards the higher end and LATAM towards the lower end of their respective ranges?

Joaquín Castrillo, CFO

I believe that in the Merchant Acquiring business, we had a strong first quarter. When analyzing this quarter, several specific factors stand out that we believe will influence the rest of the year. For instance, Easter occurred earlier this year compared to last year, and we also experienced a leap year. Looking at the trends in April, they continue to show a more normalized pattern, remaining in that mid-single-digit range in terms of sales volume, which is crucial for us. Therefore, we felt more confident in projecting that to the higher end of our range for the remainder of the year. Regarding Latin America, we are continuously monitoring how various elements are evolving. The situation with Sinqia will still require some time before we can achieve the growth we aim for in that area. Consequently, as we consider the rest of the year, we thought it wise to lower that projection slightly.

Nate Svensson, Analyst

Makes sense. And just to clarify, so I guess on LATAM is that you're spending this time investing on tech client-centric stuff in Sinqia and so that kind of drives it towards the lower end more than anything else.

Joaquín Castrillo, CFO

That's right. That's correct.

Operator, Operator

The next question comes from John Davis with Raymond James.

John Davis, Analyst

Mac, I appreciate the comments so far on Sinqia. I think last quarter, you noted that revenue growth has decelerated a little bit. It sounds like that hasn't probably changed given kind of the tone on investing and kind of working on execution, integration, but how do you think about this business longer term? Do you think you can reaccelerate it back into kind of that low double-digit growth on an organic basis? Or just any other color there on kind of how you think the longer-term trajectory of that business looks?

Mac Schuessler, CEO

I mentioned this on the last call, and since then, I've spent significant time with clients. What excites me about Sinqia is that we are a local software provider that complies with local regulations, allowing us to offer the capabilities needed to compete effectively. We are among the largest and most reliable providers, and the demand from customers to work with Sinqia is clear during my interactions with them. Over time, clients have been acquiring companies, trying to understand and integrate them, and then they engaged in a merger and acquisition process with us. They became somewhat distracted by these efforts, figuring out how to structure their operations before ultimately selling to EVERTEC. Currently, the culture and environment have shifted, especially after Bernardo stepped aside for personal reasons. While we anticipated his departure in one to two years, it occurred sooner due to his circumstances. Claudio has now taken over and has clear objectives for the team to ensure that salespeople spend more time with clients and that we effectively track our pipeline. We're focused on resolving operational issues so clients are encouraged to purchase more from us. There is a much closer relationship with clients now, starting with me, and Sinqia is operating more efficiently from a client perspective. Additionally, once a deal is secured, it’s crucial that our implementation teams effectively convert that into revenue, ensuring the new systems and customizations are in place so that revenue can be booked. There is now a heightened focus on executing and managing operations aligned with our goals. Clients are also looking for us to continue investing in these platforms; we cannot just acquire new ones but must ensure that those we previously bought remain current and effective. We are developing a multiyear plan to reassure our clients that we are committed to investing in these platforms, prioritizing those that can deliver the best returns in the shortest timeframe. On pricing, we are reviewing all contracts to identify areas that are less profitable and strategizing how to adjust pricing to achieve our desired margins. Essentially, John, we are aiming to apply the operational excellence from EVERTEC to Sinqia.

John Davis, Analyst

I appreciate the insight, Mac. Joaquin, I have a broader question about margins. You've had very high margins, and while they remain relatively high, we've seen a consistent decline over time, even when excluding some recent M&A activities. Do you believe that with the Sinqia integration and the synergies, we have established a solid baseline margin for this year? I'm not looking for guidance for 2025, but is there any reason to think we shouldn't begin to see some operating leverage? Typically, your payments businesses exhibit high incremental margins. As we consider the long term, should we expect improvements in margins from this point?

Joaquín Castrillo, CFO

I mean, what I would say, John, is if you look at our slides from last quarter, with Sinqia specifically, we actually had a little box that said margin optimization. So we are certainly focused on maximizing margin from our current baseline. What I would say historically is that the reasons why margin has come down has been very specific to actions that we have taken. One, with the Popular deal, we sold off some assets. And we took on a revenue share on our Merchant Acquiring business that we knew was going to bring margin or put pressure on the margin as we exited that deal, but that gave us extended relationships with the bank, a renewed relationship with the bank and got us out of the bank holding company that allows us to do more M&A. We did Sinqia now, which we knew coming in at a slower contribution margin, because it doesn't have obviously the same scale that we necessarily have in Puerto Rico. And as we said, as we become more and more successful in Latin America, that will continue to put pressure on the margin. So I think that when we look at historically how we've gotten to where we are today, it hasn't been really operationally driven. It's been very specific and purposeful actions that we have taken. And now we're focused on margin optimization and efficiencies across the board, as Mac just mentioned. So our goal would be to certainly focus on margin going forward.

Mac Schuessler, CEO

Let me add to that, John. As Joaquin mentioned, the margin declines you've observed across the company have been due to strategic decisions, particularly with the Popular deal and the Sinqia deal. This hasn’t stemmed from a lack of operational focus or leverage, but from intentional choices to transform and advance the company. When we’ve acquired other companies, like PayGroup and Place2Pay, and integrated them into LATAM, we have typically seen an increase in margins over time as we operate them. However, as Joaquin pointed out, the margin reductions we've experienced have been part of a strategy to foster company growth.

Operator, Operator

The next question comes from Vasu Govil with KBW.

Vasundhara Govil, Analyst

Mac, 2 quick ones for you on Sinqia first. I got your comments about the debt modernization and investment in the platform. Just wanted to understand if you think that's going to be a prerequisite for you to be able to take the pricing changes that you're hoping in that business? Or could pricing changes happen? I'm just trying to get a sense for whether pricing can be an upside driver relative to expectations for this year or is it more of a longer-term upside driver. And then a quick follow-up on that is just the tech spending and demand environment in Brazil from a macro perspective. If you could give us some color on that?

Mac Schuessler, CEO

That’s a really insightful question. We are systematically reviewing all of our contracts for repricing opportunities. We have some immediate chances to adjust prices, and some of these adjustments may depend on improvements we'll make through investments. Fortunately, many of these investments can be implemented quickly and are already part of our 2024 plans. What we are focusing on now will affect this year, but it will involve a mix of immediate actions and those that require more time and resources. There's certainly an opportunity to enhance our business margins and strengthen our relationships with customers through these investments. Regarding technology spending in Brazil, this is a particularly vibrant market for technology. I recently met with the President of the Justice System, who shared that they are now utilizing artificial intelligence for judicial decision-making, albeit with oversight. The rapid evolution happening in financial services, especially with advancements from tech companies and OpenAI, creates significant pressure for financial institutions to adapt. As a result, technology providers like Sinqia play a crucial role in this market. I sense a strong demand from our customers for assistance in keeping pace with these changes and in launching new products. Therefore, I view this as a promising opportunity for both EVERTEC and Sinqia.

Vasundhara Govil, Analyst

A quick one for you, Joaquin. Just I got the number, 27% transaction increase in ATH Móvil. Any color on what drove that trend? And anything onetime in that? Or do you expect that type of strength to continue?

Joaquín Castrillo, CFO

No. I mean, look, it's mostly ATH Móvil Business. What I would say is that it has been consistent. I think for us, what's continues to be very positive is that it is coming off of strong growth historically. This is on top of very good growth last year. Again, we did have some seasonality in the first quarter because of the leap year and Easter being pushed into the first quarter. But the business continues to perform well and it continues to drive some growth through the Payment Puerto Rico segment.

Operator, Operator

The next question comes from Jamie Friedman with Susquehanna.

James Friedman, Analyst

Congratulations on the results. Mac, I wanted to go back to some of your prepared comments about the macro environment, which is so helpful in Puerto Rico, in particular, you referenced here that unemployment had a very low 5.7%, the employment rate, the highest since 2009 and travels up. I'm just wondering, I know it's hard to tell, but what's your confidence level that we wind up staying here? And is that macro tailwind embedded in the guidance?

Mac Schuessler, CEO

So look, given your specific guidance, Joaquin, I'll let you kind of talk about how you blend that in.

Joaquín Castrillo, CFO

Jamie, what I would say is that this aligns with our expectations. We believe that the macroeconomic environment in Puerto Rico supports our growth objectives. Last quarter, we provided detailed information, including additional statistics and graphs, which set a strong baseline. We are reaffirming our confidence that we can deliver on the targets we've just provided.

Mac Schuessler, CEO

I would add that there is a lot of uncertainty regarding the current economic situation. Considering the labor statistics in the U.S., it's unclear how individuals will react to interest rates. Predicting next year's economic landscape varies greatly depending on whom you consult. It's important to note that Puerto Rico's economy is somewhat distinct. A significant portion of our economy relies on federal assistance for those on welfare, and we also have funds coming in from hurricane relief. This provides an underlying economic support that is somewhat insulated compared to what you might see in the U.S. However, we cannot forecast Puerto Rico's economy for 2025 and 2026 any more accurately than predictions for the U.S., but there is unique and beneficial stimulus in place here.

James Friedman, Analyst

And then for my follow-up, Mac, I'm just curious now that you're 6 months in with Sinqia, and you're spending so much time in Brazil. And I realize Brazil is one of the most dynamic markets you said it earlier. But at a very high level, how does it feel to be like instead of the big fish in a small pond, normal fish in a big ocean?

Mac Schuessler, CEO

It's an excellent question. Personally, I've previously managed the Global Payments International business and have experience in markets like China, Russia, and India. This background gives me insight into navigating dynamic environments. One reason Sinqia appealed to us is that it's one of the larger technology firms in Brazil, which is a highly exciting and evolving market. Sinqia stands out because of its size and credibility, unlike smaller companies lacking strong leadership and a proven track record. There’s a strong recognition for Sinqia in Brazil, similar to how EVERTEC is seen in Puerto Rico. The trust people place in EVERTEC is based on our established products, presence, and commitment to the region. Likewise, Sinqia has earned respect in Brazil, and I see parallels in our need to prioritize operational excellence and delivery there. When I engage with executives and financial leaders, including bank CEOs from other countries, they are familiar with Sinqia's history and capabilities. Thus, I see a resemblance between the strong position of EVERTEC in Puerto Rico and Sinqia's stature in Brazil.

Operator, Operator

The next question comes from James Faucette with Morgan Stanley.

James Faucette, Analyst

I'm asking a question on behalf of James Faucette. I was wondering how you're looking at capital allocation for 2024, 2025 and specifically, how you might be looking at timing or appetite for M&A now that the Sinqia deal has closed and you've started seeing those contributions coming in and kind of what that pipeline might look like?

Joaquín Castrillo, CFO

Yes. So look, specifically now with Sinqia, one thing to remember is Sinqia being a highly acquisitive company, also had a very good M&A team locally. They are very close to the entrepreneurs, to open coming companies that have technology that's either adjacent or complementary to Sinqia. So we certainly want to continue to leverage that, that has been a key part of how Sinqia has grown to be what it is today. And so we certainly continue to have a pipeline. In terms of general priorities for capital allocation, we continue to look for growth. I'd say that the scale or the size of the deals that we're probably looking at are now more like what we used to do before Sinqia. So relatively small size that we can attach to Sinqia or some of our other countries or entities across Latin America. But we're certainly continuing to focus on growth. And after that, as we announced on the call, we entered into an ASR, $70 million ASR to make an offer for some of the shares that we issued as part of the Sinqia deal, but also to buy back some of our shares, as we usually do every year to offset some of the dilution coming from some of our long-term incentive plans. So those are the priorities. And obviously, now with interest rates, we're obviously always looking at where our debt, where our rates and whether it makes sense for us to pay down some debt and save some interest expense cost.

Mac Schuessler, CEO

Yes, I would say that the most significant factor is that it's more expensive now. Therefore, we consider the potential to pay down debt more seriously than we have in the past. As Joaquin mentioned, we are still concentrating on mergers and acquisitions, focusing on smaller tuck-in deals similar to those we pursued before, and we now have a larger operation that allows us to integrate these. We have a strong pipeline both within Brazil and abroad, which remains a priority for the team.

Operator, Operator

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

Mac Schuessler, CEO

I want to thank everybody for joining the call. Joaquin, I look forward to seeing you over the coming quarter at different conferences and events. And thanks, and have a good night.

Operator, Operator

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