Afternoon, everyone, and welcome to EVERTEC's Second Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Kay Sharpton, Vice President of Investor Relations. Please go ahead.
Thank you, and good afternoon. With me today are Max Schuchler, our President and Chief Executive Officer and Joaquin Castillo, 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 website at www.evertecinc.com.
I'll now hand the call over to Mac.
Thanks, Kaye, and good afternoon, everyone. While we were impacted by the pandemic, we were encouraged to see improvement throughout the quarter in transaction based business results. We have continued to execute on both product innovations and our priorities in Latin America. Beginning on slide 4, total revenue was $118,000,000 a decrease of 4% compared to 2019. Adjusted EBITDA was $50,000,000 or 13% decrease as compared to the prior year and adjusted earnings per share was $0.38 a decrease of 25% compared to last year.
Despite the headwinds, we generate significant operating cash flow year to date of $87,000,000 $11,000,000 above prior year due to our results and effective cash management. We returned approximately $14,000,000 to our shareholders through share repurchases and dividends. Additionally, our liquidity as of June 30th was $234,000,000 Moving on to our business update on Slide 5 for Puerto Rico. As the Puerto Rico government started to reduce restrictions beginning in early May, there was continued improvement in sales volume and transaction volumes with significant uplift after June 16th. Most businesses were allowed to reopen at that time, including entertainment venues with some restrictions such as required masks and limitations on the maximum capacity.
Our merchant acquiring revenue increased from a trough in April to more than a 20% increase year over year in June, likely due to pent up consumer demand and the benefits from federal programs such as CARES and other funding from the government of Puerto Rico. We continue to focus on serving our clients' needs, on innovation, and on executing new opportunities. For example, in the second quarter, we worked with the Department of Labor to distribute unemployment benefits that were awarded as part of the CARES Act. Additionally, we engaged in a new contract with the Department of Education in which we recently provided new computers and support to public education teachers. Our innovation related to the ATH network continues to benefit us as we saw a significant uptick in our digital payment channels.
For example, our ATH mobile P2P transactions in June were up over 50% compared to last year, and our ATH mobile business revenue increased more than 400% over last year. We are encouraged to see consumers embracing these digital solutions as this trend has the potential to continue to drive additional growth of the payment market in Puerto Rico. Lastly, we are excited about our recently launched contactless functionality through QR codes with over 400 businesses now using this feature. This solution allows the consumer to use their ATH mobile app for a contactless payment transaction at the point of sale. On Slide 6, you can see an example of the transaction.
The user takes a picture with their phone of the QR code and that initiates a payment. The feedback has been highly positive from both the businesses and the pilot as well as the consumers. Most of the fast food restaurants on the island have implemented this payment option and we will continue to expand this convenient solution to more of our merchants over the coming months. On Slide 7, I'll review our Latin American business. Regarding the environment, we are seeing different responses to the COVID-nineteen pandemic and varying levels of restrictions and reopenings.
For example, in Santiago, Chile, there was an initial limited reopening and then as cases of COVID-nineteen began to rise, again lockdowns and restrictive measures were reestablished. Costa Rica and Panama have also returned to restrictions due to a rise in new cases. Mexico has allowed construction and tourism to reopen even though cases have continued to rise. In Brazil, cases continue to rise and the response measures vary between states. Despite the ongoing impact of COVID-nineteen in these geographies we serve, we remain focused on executing our LatAm growth initiatives.
As it relates to Santander Chile and City Banamex, we continue to make progress with each client throughout the quarter and are targeting to launch 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 Turning to Slide 9, you
will see Turning to Slide 9, you will see the consolidated second quarter results for EVERTEC. Total revenue for the 2nd quarter was $117,900,000 down 4% compared to $122,500,000 in the prior year, primarily reflecting the impact of COVID-nineteen. Our revenue improved every month throughout the quarter as businesses reopened in Puerto Rico and we benefited from growth in our digital payment solutions as well as from new services delivered. We also had a headwind from one time revenue of $2,500,000 in the prior year. Total revenue for the 6 months was $239,900,000 and down 1% year over year.
Adjusted EBITDA for the quarter was $50,200,000 a decrease of 13% from $57,800,000 in the prior year. Adjusted EBITDA margin was 42.6 percent and this represents a 4 60 basis point decrease compared to the prior year. The decrease in margin primarily reflects the decline in transactional revenue. The increased mix of business to lower margin revenue and increased costs in part driven by COVID-nineteen. The adjustments in the quarter for adjusted EBITDA included our normal adjustments for non cash equity and share based compensation and also included a $2,800,000 charge related to transaction fees.
Year to date, adjusted EBITDA was 106 $500,000 a decrease of 8% from $115,400,000 in the prior year. Adjusted net income for the quarter was $27,800,000 a decrease of 25% as 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. Lower cash interest was partially due to a 25 basis point improvement in our interest rate as a result of our debt multiple dropping below the 2 time threshold last quarter. Our adjusted effective tax rate in the quarter was 20.2%, reflecting the impact of COVID-nineteen on the mix of business as well as a discrete tax item and other taxable items in foreign jurisdictions. Excluding the unusual items in the quarter, we would expect to continue to see our tax rate for the back half of the year trend higher than last year to a range of 17% to 19%, assuming some continuation of revenue mix shifts related to COVID-nineteen.
Adjusted EPS was $0.38 for the quarter and decreased 25% compared to the prior year. Year to date adjusted net income was $61,300,000 down 17% and adjusted earnings per common share was $0.84 a decrease of 17% from $1.01 in the prior year. Moving on to Slide 10, I'll now cover our segment results starting with Merchant Acquiring. In the Q2, Merchant Acquiring net revenue decreased 8% year over year to approximately 24,800,000 dollars driven by the impact of lower sales volumes and non transactional revenue as a result of COVID. The revenue improved each month from a low of negative 33% in April to growth of over 20% in June, driven primarily by the continued opening of the economy and the pent up consumer demand as well as extra funding from both local and federal programs as a result of COVID.
The merchant mix during the quarter shifted from an unusually high share of supermarket and pharmacies to a more normal mix with most businesses being opened by the end of June, although with some limitations related to social distancing measures. We also benefited from a higher average ticket and higher spread in the quarter. Most recently, on July 16, the governor returned to some more restrictive measures, which resulted in a decline from the highs we experienced in June to a more modest increase as compared to last year over the past 2 weeks. Given the uncertainty around COVID and the potential impacts to consumer spending behavior, it remains difficult to forecast the impact on our future results. Adjusted EBITDA for the segment was 13,400,000 up 9%.
Adjusted EBITDA margin was 54%, up approximately 8.30 basis points as compared to last year, reflecting the impact of lower operating expenses resulting from the lower transaction volume and the higher average ticket. We would likely see these elevated margins decline as average ticket begins to normalize. For the 6 month period, merchant acquiring revenue decreased 5 percent to $49,900,000 primarily due to the same reasons I referenced for the quarter. Adjusted EBITDA year to date for the segment was $24,700,000 up 2% and adjusted EBITDA margin was 49.4%, a 360 basis point increase as compared to last year. On Slide 11, you will see the results for the payment services for Torrigo and the Caribbean segment.
Revenue for the segment in the Q2 was 27,500,000 dollars down approximately 10% as compared to last year, primarily due to lower transaction volume, mainly for the same COVID-nineteen reasons Transaction volumes improved throughout the quarter, ending at negative 6% for the month of June from a low of negative 43% in April. We experienced a similar decline and improvement on ATM transaction volumes, although these have not come back as strong. These were partially offset by ATH Movil and ATH Movil Business transaction growth as well as new transactional volumes and incremental revenue recognized from new services such as the healthcare benefit card we mentioned earlier this year. Adjusted EBITDA for the segment was $13,300,000 decreasing 35% as compared to last year. Adjusted EBITDA margin was 48.3 percent, down over 18.3 percentage points as compared to last year, primarily due to lower revenue and higher operating expenses related to EBT post implementation costs as well as increased operating expenses related to COVID.
A reminder, this segment has mostly fixed costs related to technology infrastructure. Year to date revenue for the segment was 57,300,000 dollars down approximately 8% as compared to last year. Year to date adjusted EBITDA was 29,400,000 dollars down approximately 29% and adjusted EBITDA margin was 51.2%, down approximately 15 0.4 percentage points as compared to last year for the same reasons previously mentioned. On Slide 12, you will see the results for our Payment Services LatAm segment. Revenue for the segment in the Q2 was 19,800,000 dollars down approximately 6% as compared to last year.
This decline was driven in part by COVID-nineteen impact from transactional revenue, specific customer initiatives, as well as the negative effect of anticipated attrition of approximately $1,000,000 FX impacted the segment negatively by approximately $1,200,000 as the Chilean peso, the Brazilian real and the Colombian peso all declined between 20% 40% when compared to the prior year. These negative impacts were partially offset by the acquisition of Place2Pay as well as progress on projects throughout the quarter. Adjusted EBITDA for the segment was 6,100,000 dollars and adjusted EBITDA margin was 30.7 percent, down approximately 610 basis points as compared to last year, driven by lower revenue described previously. For the full year, we continue to anticipate client attrition in 2020 will be between $3,000,000 to 4,000,000 dollars And based on current trends in foreign currency, we will likely continue to see a negative impact on
a year over year basis.
Year to date revenue for the segment was $41,400,000 down approximately 1% as compared to last year. Year to date adjusted EBITDA for the segment was $14,300,000 and adjusted EBITDA margin was 34.6%. On Slide 13, you will find the results for the Business Solutions segment. Business Solutions revenue for the Q2 was up approximately 1% to $55,500,000 Revenue increase in the quarter was primarily due to new services for Popular as well as the government of Puerto Rico, partially offset by one time project revenue and hardware software sales that benefited last year by approximately $2,500,000 For the quarter, adjusted EBITDA was $24,000,000 and adjusted EBITDA margin was 43.3%, down approximately 70 basis points as compared to last year. The adjusted EBITDA margin decrease was primarily driven by higher operating expenses related to COVID-nineteen.
Year to date, Business Solutions revenue was $111,400,000 up 5% and adjusted EBITDA for the segment was $51,500,000 with a 46.2 percent margin. Moving on to Slide 14, you will see a summary of corporate and other. Our 2nd quarter adjusted EBITDA was a negative $6,600,000 a decrease of 4% compared to prior year, as we control expenses such as travel and professional fees as well as lower incentive compensation accrual. Our adjusted EBITDA as a percentage of total revenue at 5.6% was approximately flat with the prior year. Year to date, our corporate and other was $13,300,000 or 5.6 percent as a percentage of total revenue and favorable approximately 20 basis points when compared to last year.
Moving on to our year to date cash flow overview on Slide 15. Our beginning cash balance was approximately 131,000,000 dollars including restricted cash of approximately $20,000,000 Net cash provided by operating activities was approximately $87,000,000 an $11,000,000 increase as compared to prior year. And this includes the impact of an improvement in our collections of accounts receivable and to a lesser extent benefit from tax payment deferrals and waivers in some countries related to COVID-nineteen that we were able to take advantage of. Capital expenditures year to date were approximately $18,000,000 We continue to anticipate approximately $45,000,000 for the full year and some acceleration of CapEx in the Q3. We paid approximately $24,000,000 in long term debt payments, dollars 3,000,000 in withholding taxes on share based compensation and $2,000,000 of other debt paydowns.
While as of quarter end, continue to have $15,000,000 drawn on our revolver, resulting in a total net debt decrease of approximately $13,000,000 Subsequent to the end of the quarter, given the increased confidence in our cash and liquidity position, we repaid the full revolver balance. Year to date, we paid cash dividends of $7,000,000 Although we did not repurchase any stock in the quarter, total repurchases of common stock year to date were approximately $7,000,000 We have approximately $23,000,000 available for future use under the company's share repurchase program. We recently announced another $0.05 dividend to be paid on September 4, 2020 to shareholders of record as of August 3. Our ending cash balance as of June 30 was $169,000,000 and this included approximately $22,000,000 of restricted cash. Moving to Slide 16, you'll find a summary of our debt as of June 30, 2020.
Our quarter ending net debt position was approximately $376,000,000 comprised of approximately $147,000,000 of unrestricted cash and approximately $523,000,000 of total short term borrowings and long term debt. Our weighted average interest rate was 4.3%. Our net debt to trailing 12 month adjusted EBITDA was 2.1 times, an increase from last quarter, primarily as a result of a reduced trailing 12 month adjusted EBITDA impacted by COVID-nineteen. As of June 30, total liquidity was over $234,000,000 This balance excludes restricted cash and includes the available borrowing capacity under our revolver. Given the very unique nature of the COVID-nineteen pandemic and continued uncertainty, we are not providing an annual guidance.
We were encouraged that June was particularly strong, but it may not be representative of future results or the longer term impacts of this pandemic. We are pleased with the new Department of Education contract that Mac mentioned, which will provide additional revenue during the Q3, and we continue to look for opportunities in which to help the government as well as our other clients manage through the situation. In summary, it was positive to see sequential improvement in the Q2, while we continue to monitor the COVID-nineteen situation and resulting impact to our business. We are executing well against our longer term initiatives such as innovation in Puerto Rico, new services with the government and our progress on key projects in Latin America, all of which should benefit us over the longer term. We will now open the call for questions.
Operator, please go ahead and open the line.
Our first question comes from John Davis with Raymond James. Please go ahead.
Hey, good afternoon, guys. Appreciate the commentary on merchant in June and then kind of where we are in July. But any commentary on some of the other segments and kind of how they performed July to date? I think last quarter you gave kind of an update on all the segments for April. So just maybe some at least some color commentary for July would be helpful.
Sure, John. This is Joaquin. In terms of payments, the correlation obviously to what we mentioned in merchant acquiring will be there. So we have seen transactions come back strongly compared to obviously April May. As I mentioned in the prepared remarks, there was kind of a rollback of some of the more restrictive measures, still a lot more flexible than what we originally had here in the month of April, and that has slowed down a bit what we saw in the month of June.
So transactions continue to improve, and we are encouraged by that movement in the month of July, but it has slowed down a little bit just compared to what we saw in the month of June. When we look at LatAm, very similar as well. Although, as we mentioned last time in LatAm, just given the diversity of products and the fact that not all of our revenues are transactionally driven, the volatility that we have in that segment is not the same. But we have seen transactions come back from a trough in the month of April, May. And in the case of Business Solutions, as you can see, I mean, we still reflected some slight growth for the quarter.
We continue to have opportunities with the government. We mentioned the Department of Education contract that we were just awarded and that should be helpful to Q3. But overall, that segment continues to be steady.
Yes. So John, what you'll see is in Puerto Rico, like much of the country in the world, there's been a slight pullback in sort of restrictions, but business is still operating on the island. And then as Joaquin said, we won some new business with the government. So we found ways to continue to help support them through the pandemic and finding new business opportunities.
Okay. That's super helpful. And then, Mac, appreciate the commentary on ATH revenue up 400%. Any other stats you can give? Can you size that for us?
How meaningful is that today? User base, increase in transactions per user, any other kind of stats that you could give to help us with ATH Movil and kind of the progress we're seeing there?
Yes. So let me break it down in a couple of components as it relates to my opening comments. I mean, again, like the rest of the world, we're seeing a big shift to digital transactions and we are doubling down on our investments in that area. So on ATH Mobile, the P2P app, we saw a 50% increase in transactions. But more interesting on ATH mobile business where a small business like a food truck can accept these digital payments from the debit accounts, we saw a 400% increase in June.
Additionally, we talked about that and we did a press release last week. We now are rolling out QR codes. So you now as most people know ATH is the number one payment brand on the island and with ATH Mobile now you can actually walk into a McDonald's, a Burger King, many of the fast food restaurants, actually most of them take a photograph of the QR code and now pay at the cash registry without a card being present. So we're seeing a big shift to digital. Some of it is defensive, like the fast food restaurants are existing customers, but maybe we'll just place some cash with that.
And some of it is brand new categories of spend like ATH mobile business where we're seeing new small business enterprises that used to accept cash that now no longer want to accept cash. Okay. Thanks. And then on
the capital allocation front, do you guys feel comfortable yet, obviously, in the 2nd quarter you're buying stock back given kind of what's going on? Do you feel comfortable yet buying stock back or maybe potentially doing a deal later this year? Just kind of how are you thinking? Obviously, the balance sheet is in great shape. But just trying to figure out kind of when and if you guys would be comfortable comfortable doing something with capital in the near to medium term?
Yes. What I would say is, again, we everyone I think moved into the pandemic with a significant amount of caution. As Joaquin stated, we did pull down on our revolver and we've now paid all that back. So as we move back to normal levels, we will sort of rebalance our capital allocation sort of work. But again, we still want to be cautious given that the pandemic is still spreading through most of the economies where we do business.
Okay. And then last quick Molly one for our team. The higher tax rate, is that something you see just kind of in the back half of this year? Or is that something we could expect kind of going forward? And maybe just a little more color on what's driving that tax rate higher?
I know you said revenue mix shift, but anything else there to help us as we model the out years?
Thanks, guys.
Sure. The expectation of this higher tax rate is really the second half of twenty twenty, taking into consideration that we get to a normalized level of kind of business mix by next year. So we don't expect this to be kind of the run rate into future years, John, but it is something that we need to continue to monitor. And to the extent that the pandemic continues to have an impact on the mix, then we'll come back and kind of realign that rate. But the expectation is that as we come back to what we had pre pandemic, that the rate comes back to a normalized 13% thereabout of run rate into the future.
The next question comes from Bob Napoli with William Blair.
To talk to you. I guess, just if you look at the trends, and I know it's very hard when an economy is opening and closing to forecast your business, but given that April was by far the worst month and June was by far the best, if the trend stayed like they are now, would I mean, I would guess that revenue should be up in the Q3 versus the Q2. Is that a fair assumption?
I mean, Bob, what I would say is, as we all know, these are unprecedented times. But the one thing that I think everyone has learned is how to accommodate the pandemic and doing business and going about business and going out and getting essentials and that type of thing. So our hope would be that we've learned to adapt and that we won't see the closures to the significant level than we saw in the past that we saw in April. But again, unprecedented times, we can't predict the future at this point, but we do believe that the world is learning to adapt with the pandemic. And so that should be helpful.
I don't know if
No, the only thing I would add, Bob, is, yes, June was the best month, but there are certain factors in there that we are looking at that we know aren't necessarily sustainable at those levels, right? We know that there's a lot of pent up demand, one of people just staying in their homes for a prolonged period of time, not doing much of buying and then having this kind of freedom to go out drove some of that volume. And then we also have these federal programs as well as the local programs putting additional money into people's pockets. So we're seeing a really high average ticket, which is something that assimilates to what we saw after the hurricane, where all of that funding coming into the island and into the economy drove up a real high average ticket. And the expectation would be that, that will normalize over time.
One, those programs start to kind of expire. And as Max said, people kind of get used to just going back to normal and doing their regular purchases as they did in the past. So as we said, definitely a great month and July looks strong as well, but there are certain things in there that we know aren't necessarily sustainable over a longer period of time.
Great. And I guess one thing that maybe is sustainable was the ramp up in digital payments. You happen to have a lot of cash in the markets you serve. So maybe does this do you think this accelerates your potential growth rate post pandemic given the shift?
We do. I mean, what we found is whether people are going to their phone to check the deposits from their unemployment deposits, whether they're going to use ATH mobile because they want to avoid a cash transaction and now they can go buy food by scanning a QR code. We do think that it's going to change people's behaviors permanently to where they are able to use ATH Movil and the need for ATH Movil is greater. So I think it's going to be great for that business and also Place2Pay. We bought the gateway out of Colombia and we are localizing that as well.
But we do believe the shift to digital is because it's forced people to change their behavior and once they change it, we think it will be difficult to go back.
Great. Agreed. Last question and I'll turn it over. Citibanamex and Santander Chile, both are expected to launch before the end of 2020. Do you have any thoughts on what the size of those businesses could be over the next couple of years?
With some drop down of the revenue contribution?
My hope is that if we launch them by the end of this year, they'll be in next year's guidance.
Okay. And it'd be in next year's guidance, it would have to be at least a couple percent of revenue or?
Well, what we have is that Santander Chile will be meaningful to that and the combination of the 2 in particular will be meaningful to the LatAm segment. And over time Bob as you and I've discussed, our plan is to have multiple clients in countries like Chile with multiple products. So we'll have cross sell opportunity. So again, we are on track and very focused on both of those projects. We still plan on launching those by the end of 2020 and it will be material to that segment in 2020 and beyond.
And not just the revenue in those deals themselves, but the reputation that it builds for us throughout the region to land new business.
Okay. And then your balance sheet looks pretty strong right now. Are there opportunities cropping up that you're comfortable taking investing in M and A wise or other?
I mean, and A has been an important part of the company, particularly as we grow outside of Puerto Rico to acquire the right products and to expand our Rolodex. I would tell you it is there is still a little bit of dislocation in what valuations and it is a bit more complicated to do diligence virtually, but it is still something we're very focused on and if we find the right thing, we will look at it very, very closely.
Thank you. Appreciate it.
Thanks, Bob.
Our next question comes from James Frichetti with Morgan Stanley. Please go ahead. Hi.
This is Priscilla on for James. Just wanted to follow-up on the Santander Chile timeline that you set out. I think you mentioned you want to launch by end of year. Just wanted to hear whether or not everything is going as you expected. How is product collaboration going on there given the restrictions that we've seen in different Latin American markets?
Sure. So what we said previously is we process all of the major brands already, process the transaction and we are on schedule. The thing that has slowed us down are just the closures of business, the move of Santander, Chile to a virtual environment. So just the disruption of the pandemic generally. But we are very confident that given our current plans, we will launch this before the end of the year.
Great. And then on T. H. Movil, I believe you mentioned the strength in the business. Could you guess or give us some sense as to what portion of that strength is perhaps being driven by stimulusunemployment funds that are going through versus more recurring permanent shift towards digital?
So there has been an ongoing shift to digital even before the pandemic. We saw significant increases in ATH mobile being used for P2P transactions. When we rolled out the donation feature, when we rolled out the business feature for small businesses, what we see now is a significant acceleration in that adoption. And some of it is potentially unemployment funds that people now have in their pocket or social programs, but it's just become a general trend for all sources of income, regardless of the source of income that the preferred way to spend now is there's some type of digital application.
Perfect. That's good to hear. And just one last one, you mentioned some of the new work that you're doing for the government in Puerto Rico. Can you give us some color as to what percentage of that or at least what portion of it is more transitory related to this allocation of different stimulus funds versus some potentially more permanent relationships from here?
So we have a large relationship with the government of Puerto Rico across multiple agencies. The one that we announced on this call with the Department of Education is to actually deploy and help maintain PCs in the public school system. So there will be immediate impact to 2020 for the initial transaction and then there'll be an ongoing benefit for a few years on the maintenance piece as well. So that is that will have impact across multiple years. But as we saw after the hurricane when we were able to do more business with local commercial clients as well as the government, We're finding now with the pandemic, we are becoming the partner of choice on the island when they look for technical partners given our commitment to the island and the size and scale and stability that we can provide.
Perfect. Thank you very much.
Thank you.
This concludes the question and answer session. I would now like to turn the conference back over to Mac Schuessler for any closing remarks.
Thank you. I want to thank each of you on the phone for your support of EVERTEC. We hope that you stay safe and look forward to speaking with you in the future. Thank you.