Good morning, everyone, and welcome to the EVERTEC's First Quarter 2020 Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the call over to Kay Sharpton, Vice President of Investor Relations. Go ahead.
Thank you, and good morning. With me today are Max Schuschler, 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's website at www.avertechinc.com.
I'll now hand the call over to Mac.
Thanks, Kaye, and good morning, everyone. Before we begin, on behalf of our company, I'd like to share our sympathies with all of those who have been affected by this global pandemic. In particular, I want to express my regrets to those who have lost loved ones and my gratitude to those in the medical community and all essential workers who are on the front lines for the benefit of us all. I also want to thank my colleagues who are diligently working remotely, as well as those who have continued to tirelessly work on-site given the nature of their roles. Just as with Hurricane Maria, the EVERTEC team is continually demonstrating their adaptability, persistence and strong values, making me incredibly proud and honored to lead this organization.
While we continue to cautiously monitor the impact of COVID-nineteen, we believe that our past experiences with extreme circumstances have proven the resiliency of our business and our people. We're fortunate to be able to highlight on this call the successful efforts of our team to maintain our business operations and even implement new solutions during the quarter. Turning to Slide 4, I'd like to cover some of these highlights. In preparation for COVID-nineteen, we deployed our business continuity plans a few days before the Puerto Rico government enacted a shelter in place directive on March 16. Since then, every country in which we operate has implemented some type of social distancing measures.
Our priority has been the safety and support of our colleagues as we transitioned to a work from home environment, while also implementing safety measures for those critical employees that were needed on-site. Through our internal initiatives, we were able to provide equipment and remote access to our colleagues as well as clear direction and focus throughout the organization to keep everyone informed and productive. For our colleagues who needed to be on-site, keep the network operations running as well as cash handling and other critical operations for our customers, We implemented safety procedures such as temperature checks each day as they enter the building, provide a productive gear, develop safe distancing spaces and increase the overall sanitation at our offices. In March, a significant focus of was supporting our clients' evolving needs as well. For our largest customer, Popular, we assisted them in the transition of over 4,400 employees to work from home environment.
Many of our customers depend on us for communication, security and numerous other business functions that required modifications in this new environment. Adjustments included increasing the capacity of our phone lines to allow for more customer calls, as well as modifying our systems for our customers as it related to late fees and interest charges, license and tax handling and the acceleration of other projects necessary to serve clients in this new environment. For the small business clients in our Puerto Rico merchant portfolio, we are particularly mindful of the severe impact to their finances brought on by the pandemic and are assisting them with applying for aid as well as finding other ways that we can provide support. And for the communities throughout our organization's footprint, we are already promoting our application to the 2020 scholarship program, to which we have contributed over $500,000 over the past 5 years. The need has never been greater to help these students and our commitment firmly remains.
While our results in the quarter were impacted by effects of the pandemic, both in Puerto Rico and Latin America, we believe our unwavering investment in our employees, customers and communities during this time of crisis strengthens our relationship with each of our stakeholders over the long run. Beginning on Slide 5, I'll cover some of the quarter's financial highlights and provide you with an update on recent developments. Total revenue was $122,000,000 an increase of 3% compared to 2019. Our revenue results in January February were on track with our expectations, but in mid March, transactional revenue was impacted by COVID-nineteen measures. Additionally, we had some one time revenue last year that was a headwind for Q1 this year.
Adjusted EBITDA was $56,000,000 or a 2% decrease as compared to the prior year, and adjusted earnings per share was $0.46 a decrease of 8% compared to last year. We generated significant operating cash flow and returned approximately $7,000,000 to our shareholders through share repurchases. Dividends approved by the Board in February were paid on April 3 and our next dividend will be paid June 5. Our quarter end liquidity was over $220,000,000 Moving on to our business update on Slide 6. 1st, in Latin America, we are pleased that we were able to continue to provide our customers with new innovative solutions such as the new service implemented for Exido, the largest supermarket chain in Colombia.
Through a portal, customers can purchase a card for necessity that is then redeemable using a virtual card at Exido establishments or online. For every ARS 50,000 of card purchases through April 30, Exido contributed ARS 5,000 to a relief fund. This is a creative solution that is helpful during this challenging time to support the community in Colombia. This new service is supported by our recently acquired digital payment gateway, Place2Pay. We also implemented an e commerce solution for a large U.
S. Retailer operating in Central America to further support their card not present payment. These payments became critical as a result of COVID-nineteen as they easily facilitate home delivery and pickup. Additionally, we implemented a virtual benefit card program for the Dominican Republic government to distribute aid to those families with economic needs impacted by the pandemic. This program, which was implemented by April 1, has impacted over 530,000 families in the community by distributing over $64,000,000 which helped both the bank and unbanked population.
Lastly, we are pleased with the progress on our Santander Chile project and have now successfully tested the acceptance of American Express. We still have more work to do, but this is a significant milestone. We have delayed our go live date as most merchants are closed in Santiago, and we're using this time to do further testing and preparation with an expected implementation in just a few months. We continue to see interest in our products and although timelines may be extended due to COVID-nineteen, we are seeing growth opportunities. We have differentiated ourselves from our competitors through our customer focus, our service and our investments, and we believe we will emerge as a unique payment service provider in Latin America.
Moving on to Puerto Rico. The environment is challenging and just like the rest of the world, we are seeing significant increases in unemployment and small businesses are struggling. Puerto Rico is anticipated to receive $5,000,000,000 in federal aid through CARES and the government of Puerto Rico provided their own aid package, which included approximately $800,000,000 The local government has also supported the economy by continuing to employ the government workforce. As for the reopening of Puerto Rico, earlier this week, several industries were allowed to resume business, which is positive and will provide some economic activity. The government is evaluating the opening of additional business segments by May 18, depending on how COVID-nineteen cases develop over the next few weeks.
We will continue to focus on serving our clients' needs, on innovation and on executing the opportunities as they arise. Turning to the rest of 2020, while the COVID-nineteen impact was clearly evident in our results in March, it is challenging to provide annual guidance given the uncertainty around the depth and duration of the pandemic at this time. The best perspective we can provide on the impact of our business is to share preliminary trends we are seeing so far in the month of April. Joaquin will share those trends and provide an illustration of how, if they continue, they will impact Q2. We are encouraged by the recently released government plans for the gradual reopening of the economy, and we would expect to see some improvement as these plans are implemented.
Fortunately, we continue to have a strong balance sheet with low leverage. We expect to continue to have positive cash flow under all the scenarios we have modeled, and we believe we have adequate liquidity to weather this storm. Our commitment is to continue to keep steady amidst the turbulence and focus on the longer term opportunities that remain ahead of us. Whether the recovery is a V, a U or a W, we are confident in one thing based on our previous challenges, the human spirit's ability to prevail over adversity. With this understanding, we will continue to focus on our values with a view to the future, and we believe we will become better for it.
With that, I will now turn the call over to Joaquin.
Thank you, Mac, and good morning, everyone. I'll now provide a review of our Q1 2020 results. Turning to Slide 8, you will see the consolidated Q1 results for EVERTEC. Total revenue for the Q1 was $121,900,000 up 3% compared to $118,800,000 in the prior year, which included a one time revenue benefit of $2,700,000 Our overall performance over the 1st 2 months of the year were in line with expectations as we saw modest sales volume and transaction growth in Puerto Rico and LatAm as well as some good progress in some of our key projects. Beginning in mid March, however, our merchant, PENEM Puerto Rico and PENEM in LatAm segments were directly affected by the pandemic as did some of our business solutions lines of business that are transactional.
Our LatAm segment was also negatively impacted by FX. We estimate that the impact to revenue related to COVID-nineteen in the quarter was approximately $3,000,000 Adjusted EBITDA for the quarter was 56,300,000 dollars a decrease of 2% from $57,600,000 in the prior year. Adjusted EBITDA margin was 46.2 percent and this represents a 230 basis point decrease compared to the prior year. The year over year decrease in margin primarily reflects the decrease in transactional revenue, the increased mix of business in LatAm and Business Solutions, which are lower margin, as well as the impact of the prior year one time project revenue. The adjustments in the quarter for adjusted EBITDA included our normal adjustments for non cash equity and share based compensation and also included a $2,100,000 charge to transaction fees.
Adjusted net income in the quarter was $33,500,000 a decrease of 10% 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. Our adjusted effective tax rate in the quarter was 17.6%, primarily reflecting the impact of COVID-nineteen on the mix of business as well as a discrete tax item of approximately $500,000 We expect our full year effective tax rate to be higher than prior year, primarily due to the impact of COVID-nineteen to our mix of business. Adjusted EPS was $0.46 for the quarter and decreased 8% compared to the prior year. Moving on to Slide 9, I'll now cover our segment results starting with Merchant Acquiring. In the Q1, Merchant Acquiring net revenue decreased 3% year over year to approximately $25,100,000 The revenue through February increased by low single digits and then in March decreased approximately 11%, driven primarily by lower sales volume in the last 2 weeks of approximately 40% year over year.
Puerto Rico social distancing measures began March 16 and allowed for only essential businesses to remain open, such as supermarkets, pharmacies, banks, gas stations, and only for a limited period of time a day. All other businesses had to remain closed and people could only go out of their homes to buy groceries, medications and visit doctors or hospitals. These measures drove down sales volume for all business categories except for supermarkets and pharmacies. Average ticket, which had stabilized in January February, increased in March, driven by changes in consumer behavior towards larger purchases that enabled them to remain in their homes for longer periods of time. Spread, however, declined mainly driven by the mix shift.
Adjusted EBITDA for the segment was 11,300,000 dollars down 6%. Adjusted EBITDA margin was 44.9%, down approximately 120 basis points as compared to last year, reflecting the impact of lower transactional revenue and the mix of business. Expenses are mostly variable in this segment. On Slide 10, you will see the results of the payment services Puerto Rico and the Caribbean segment. Revenue for the segment in the first quarter was $29,900,000 down approximately 7% as compared to last year, primarily due to $2,700,000 onetime project revenue last year.
In addition, we had negative transaction growth year over year, mainly for the same COVID-nineteen reasons that impacted our merchant segment after March 16. January February saw POS transaction growth in the mid single digit range and then down approximately 17% in the month of March. We experienced a similar drop off on ATM transaction volumes as well. These were partially offset by ATA Mobile and ATA Mobile Business Transaction Growth as well as new transactional volumes and incremental revenue recognized from the new service with Medicaid benefits we discussed last quarter. Adjusted EBITDA for the segment was $16,100,000 decreasing 24% as compared to last year.
Adjusted EBITDA margin was 53.8%, down over 1,000 basis points as compared to last year, primarily due to lower revenue and higher operating expenses related to post implementation costs from the EBT project. This segment has mostly fixed costs related to technology infrastructure. On Slide 11, you will see the results for our Payment Services LatAm segment. Revenue for the segment in the Q1 was $21,600,000 up approximately 4% as compared to last year. This growth was driven by the acquisition of face to pay as well as organic growth.
This growth was partially offset by attrition of approximately $500,000 in the quarter, negative FX impact of the Chilean peso, the Brazilian real and the Colombian peso all declined approximately 20% versus prior year. Prior year also included $500,000 of our onetime intercompany license revenue. Other than the effects, the transactional impact to our LATAM segment from COVID-nineteen was limited as the social distancing measures in some of the countries in which we operate were less strict, started later in the month of March and many of our contracts have minimums and also have a revenue component based on accounts on file or plastics issue. We expect a more significant impact as we move into Q2 based on some of the trends we have been following and some of our implementation projects get delayed. Adjusted EBITDA for the segment was $8,200,000 and adjusted EBITDA margin was 38.1%, down approximately 150 basis points as compared to last year, driven by the impact of one time intercompany license revenue as well as the high margin attrition in the quarter.
We now anticipate that we may see some delays in the attrition this year given the current environment and anticipate the attrition in 2020 to now be between $3,000,000 to $4,000,000 On Slide 12, you will find the results for the Business Solutions segment. Business Solutions revenue for the Q1 was up approximately 9% to 55,900,000 dollars Revenue growth in the segment was driven by new services for Popular as well as project implementation that impacted the quarter by approximately $1,500,000 For the quarter, adjusted EBITDA was $27,400,000 and adjusted EBITDA margin was 49.1%, up approximately 4 20 basis points as compared to last year. The increase in the adjusted EBITDA margin was primarily driven by the increased revenue in the quarter. Moving on to Slide 13, you will see a summary of corporate and other. Our first quarter adjusted EBITDA was negative $6,800,000 a decrease of 3% as compared to prior year and 5.5% as a percentage of total revenue, approximately 30 basis points favorable to the prior year.
Moving on to our year to date cash flow overview on Slide 14. Our beginning cash balance was approximately $131,000,000 including restricted cash of approximately 20 $1,000,000 Net cash provided by operating activities was approximately $34,000,000 a $5,000,000 increase as compared to prior year and this includes the impact settlement timing and other working capital differences. Capital expenditures year to date were approximately $9,000,000 dollars We paid approximately $21,000,000 in debt payments, which included a $17,000,000 payment related to an excess cash flow sweep feature in our credit agreement, which applies to cash generated over a certain level to be paid against our loan. Dollars 3,000,000 in withholding taxes on share based compensation and $1,000,000 of other debt pay down resulting in a total net debt decrease of approximately $24,000,000 We did not pay cash dividends in the quarter due to timing of the payment occurring after quarter end on April 3. We repurchased approximately $7,000,000 of common stock.
Now we have approximately $23,000,000 available for future use under the company's share repurchase program. And we recently announced another $0.05 dividend to be paid on June 5, 2020 to shareholders of record as of May 4. Our ending cash balance as of March 31 was $125,000,000 and this included approximately $22,000,000 of restricted cash. Moving to Slide 15, you'll $104,000,000 of unrestricted cash and approximately 5 $104,000,000 of unrestricted cash and approximately $512,000,000 of total short term borrowings and long term debt. Our weighted average interest rate was 4.41 percent.
Our net debt to trailing 12 months adjusted EBITDA was under 2x for the first time. A multiple below 2 times threshold will provide a 25 basis point improvement in our interest rate on approximately 45% of our debt. However, we will likely go above the 2 time multiple in Q2 given the impact on adjusted EBITDA related to COVID-nineteen. As of March 31, total liquidity was over $220,000,000 This balance excludes restricted cash and includes the available borrowing capacity under our revolver. At the end of the quarter, although we are confident of our cash and liquidity position, we decided to draw $30,000,000 of our revolver for a further buffer on our liquidity.
The cost to draw on the revolver will have a minor impact on our interest expense and seem prudent given the uncertainty of the environment. Moving to Slide 16, given the very unique nature of the COVID-nineteen pandemic, we are suspending our annual guidance. But to provide some visibility and perspective on how COVID-nineteen is impacting our business, we are sharing a view of our preliminary April revenue impact and then for illustrative purposes, showing the estimated 2nd quarter revenue and adjusted EPS at these levels. Based on this, total revenue would be down approximately 12% from prior year, resulting in total revenue of $108,000,000 and adjusted EPS would be down approximately 41% or $0.30 per share in Q2. Adjusted EBITDA margin is an estimate assuming relatively fixed costs.
Although we are focusing on cost containment where possible, for purpose of this illustration, we have assumed limited levers, most of which would be offset by COVID-nineteen potential impacts. That said, at these levels, we expect to deliver about $42,000,000 in adjusted EBITDA. As Mac mentioned in his remarks, the Puerto Rico governor announced last week that several business verticals could begin to open this past Monday. This is certainly positive and we have seen an improvement over the last few days in terms of volumes and transactions. However, there is still much uncertainty as to what impact the pandemic will have on the economy and future consumer behavior.
And also this opening of the economy is subject to COVID cases remaining under control. We will continue to monitor the situation and provide an update when we have greater clarity on the depth and breadth of the COVID-nineteen pandemic impact to our business. On a positive note, we continue to anticipate positive cash flows even in the lower scenario we modeled. And depending on the results, we would see an uptick in our leverage ratio, but still remaining below 3x levered. In summary, it was a challenging quarter, but we continue to execute well against our longer term initiatives that we believe will continue to benefit us in 2020 and beyond.
We will now open the call for questions. Operator, please go ahead and open the line.
Our first question is from Vasu Govil from KBW. Go ahead.
Hi, thanks for taking my question. It's good to talk to you all and glad that everyone is safe and healthy. I guess my first question within think of the trends on April that you gave us, like within the month, can you talk us through if you saw much improvement towards the end of the month and into early May and sort of what the magnitude changes are that you're seeing in the improvement?
Sure, Vasu. This is Joaquin. And so kind of to just walk you through what we've been seeing. In March, the accelerated border in Puerto Rico started March 16. So I would say the second half of March, we saw a decline in volume kind of getting to high 30s.
That grew a little bit more going into the 1st 2 weeks of April as everybody got really serious in the shelter in place initiative. So we saw high 30s, low 40s and it stabilized there through the 1st 2 weeks of April. It improved slightly towards the end coming down to low 30s. And now as I said in the prepared remarks, the governor allows several businesses to open up this past Monday. We don't have that much visibility because it's only been a few days, but we've seen a couple of days come in the high teens, low 20s.
So we need to see how this continues to develop and hopefully the next stage of businesses opening up is May 18. And to the extent that we are able to kind of control the positive cases and more sectors continue to open, we would expect to continue to see that positive trend. But it's still early, so we're definitely looking at this very closely.
Thanks. That's very helpful. And Mac, at a very high level, what we are hearing across the payments industry is that this pandemic is sort of accelerating the shift to digital by multiple years in many cases and that digital will be the new way of life for many people, as they will stick to transacting in a certain way. Are you seeing evidence of that in Puerto Rico and particularly some of the Latin economies that were more cash focused? And do you think that coming out of it, the growth rates could be structurally higher for Abortax?
Thanks.
So we agree with what you're hearing from our peers. There's a lot there's a significant move to digital payments. I mean, I will tell you what we've seen with ATH Movil and particularly ATH Movil Business, it's become the preferred payment method for many of the small businesses, some of the small grocery stores. So we have seen that trend and that business has held up. We've even seen it as we talked about in Colombia, when we talked about Exodo trying to create a virtual card to make shopping more in a digital environment.
Very happy that we've invested in ATH Movil and that we've also made the investment in place today. So during this period, given sort of where we are from a liquidity perspective, we're continuing to invest in those technologies, so we come out of this stronger.
Our next question is from Cory Marcello from Deutsche Bank. Go ahead.
Hey, guys. This is Corey on for Brian Keane. I just wanted to ask first, if you could talk a little bit about the merchant base, kind of the mix of merchants that you have there, maybe small merchants and then maybe online volume as well, just any color you could give around that?
Yes, I'll take a first shot. You got to remember in Puerto Rico, we're less weighted on the travel and entertainment. We have a lot of the local economy. So we've got a lot of the supermarkets, the pharmacies, the utilities or our customers. So that's why you've seen the type of relative stability in some of our payments businesses and segments.
And on the digital piece, we don't break that out separately. We have given some of the growth rates on ATH in the past. We're not on this call. But as I said earlier, that's become one of the preferred methods of payment is the ability to pay with your cell phone, small businesses. I've personally gone to one of the local pizza places and you place your order on the phone, you walk up to the door and you show them your phone that you've already paid and they hand the pizza out the door to you.
So we are seeing the digital increase. But that sort of gives you sort of an understanding of the weighting. A lot of the core economy is part of our processing. I don't know if you want to add anything Joaquin?
Yes. Just to give some additional color around the portfolio, we have seen a pretty significant shift, mainly driven by the businesses that are that have the ability to remain open because all other businesses were required to remain closed. So we are seeing a significant shift towards supermarkets, pharmacies and gas stations mainly as those are the essential businesses that could continue to do business throughout this period. And the other important or I guess key factor to consider is we're also seeing an increase in the average ticket. So although these are, as I mentioned in the script, lower margin businesses, we are seeing the average ticket come up or at least that's what we saw in these past few weeks as people go out to the supermarket and make larger purchases so that they can stay within their homes for a longer period of time.
So that kind of offsets a little bit some of the shift that we're seeing towards these lower margin businesses. Alluding to what Max said, I would just add that at the HMO oil and these digital channels continue to grow even throughout this whole period, right? So as physical payments, card present payments are taking this hit and given the shelter in place, we have seen a slowdown in some of the Atea HMO, P2P transactions and business transactions and they do continue to grow year over year.
Got it. That's helpful. I guess as a quick follow-up, you guys mentioned some potential kind of outcomes for the upcoming quarter around EBITDA. Just curious, I think that was related to some fixed costs. So I'm just curious if you could go into some detail on maybe what type of cost takeout controls that you guys are taking and how that could potentially benefit versus the expectation that you laid out?
Thanks very much.
Sure. So as we've said in the past, right, we run at very high margins on a normalized basis, some of the best in the industry. So we are very cost conscious continuously. We run the company very lean and so significant levers of cost are really not there for us. However, we are always looking for areas where we can be more efficient and we continue to focus on those given the obviously impact to the top line and as we identify those, we'll continue to execute.
Yes. And let me just say, going into this, we were very focused on taking care of our employees and our employees taking care of our customers. So we actually saw an acceleration of expenses for setting up in a virtual environment, making sure we had and then some additional on investing to make sure that the operation continue to perform well. And on investing to make sure that the operation continue to perform well and we were very, very focused on productivity. So back to the other call, we are continuing to invest in our digital platforms.
We're continuing to invest in Santander Chile, which is we made good progress on even during this period. But that being said, we did offset that. Of course, T and E was down, our own travel budget went down. We're very closely managing our marketing budget and training budgets to make sure that we try and offset some of the incremental costs that we've incurred as we moved into the remote working. Going forward, we will continue to look at those discretionary expenses and make sure that we manage those as closely as possible without sacrificing the future growth of the company.
Because as a company in emerging markets that's really entered some new countries with some interesting opportunities, we don't want to cut expenses at the expense of future growth, but we're going to be very, very diligent in making sure that we manage margin with some of the discretionary expenses.
Thanks guys. Hope you all stay healthy and well.
Thanks. Same to you.
Our next question is from Bob Napoli from William Blair. Go ahead.
Thank you. Good morning, everybody. Good to hear everybody is doing well and you guys are doing well. On 16, just following up on the April trend and kind of the rough guide. So are you assuming that the April trend holds for the quarter to get you to the $42,000,000 of EBITDA?
Or do you have what is your thoughts on the trend through the quarter?
No, I
mean, as I said, this obviously assumes that April trends continue. But again, the governor just opened a few sectors of the business and there's additional sectors that might open up in May. At the same time, that's subject to the COVID-nineteen continuing to contain.
So this is really a preliminary view based on what we saw in April. But the short answer is yes. We're assuming that Okay. In the flat you're seeing, but that assumption does not factor in that the economy is already opening and that the governor is continuing to open businesses as we speak this week and next week. So but also those businesses could open then they could close again, right?
So but the answer that you're seeing on the quarter is 3 months of April, right? But we are already seeing a couple of things. One is we are seeing continued money hitting bank accounts, the unemployed and we are also seeing the governor opening the economy. Okay.
Thank you. And the card not present growth rate and mix, and I think you said you haven't given that, but it would be and especially in this environment, that would be really helpful to understand what percentage of your business, your payments business is card not present and kind of what the growth rate of that is?
Yes, it's a great point and we may consider doing that in the future. What I would tell you is the good news is it's every day a bigger piece of the business and it is growing even through this environment. So right now we're not prepared to disclose that, but given your feedback we'll take a look at doing that in the future.
And just last question, in the Santander Chile, what are your thoughts on what the revenue could be out of that over time? And do you have a broader strategy for Chile that you want to use that to build off of?
Yes. So what I would tell you, it's what we've said on previous calls and our goal in Chile is to replicate to some extent what we have in Puerto Rico and that's a broad set of products with a broad base of clients. And we already have a lot of the Chilean banks and retailers as customers on our bill payment platform. This is hopefully one of several merchant acquiring customers over time and merchant processing customers. So we plan to have sort of a broad customer base and solution set.
We haven't given specific carve out of what the revenue is going to be sent to their Chile, but we did say on the previous call as we teed up 2020 that it would be a significant part of that segment for this year and really help contribute to pre COVID-nineteen to double digit growth in the segment.
Thank you. Appreciate it.
Thanks, Bob.
Our next question is from John Davis from Raymond James. Go ahead.
Hey, good
afternoon guys. Good morning. Just wanted to maybe touch a little bit on card penetration in Puerto Rico. I think many expect COVID to accelerate cash to card. Know that data is a little bit difficult, but maybe directionally, can you give us an idea of what card penetration looks like in Puerto Rico today?
What I would tell you, John, is we obviously have been focused on trying to create additional avenues through some of our digital products to get to that cash economy. But there continues to be a very large piece of the pie that is an informal unofficial economy that is part of Puerto Rico. So it's tough for us to give a specific percentage, but what I could tell you is that through the products that we're putting out there like at the HTML, we're in the at the HTML business and the growth rates that we're seeing in some of those digital products, we are definitely making a dent in penetrating some of that non card economy that exists here.
Yes. And to Joaquin's point, it's definitely less penetrated than the U. S. There's still a significant sort of informal economy. What I would reiterate also, I think the theme of several of the questions on the call, this is accelerating the adoption of technology.
So people who didn't try in the past to use ATH Movil, people that didn't try the ATH Movil Business application, there is a more rapid pace of adoption, because people are being forced to even I think in each of our businesses, we've really pushed the envelope of what can be what physicians can work from home and more and more people within our own comfortable with Zoom, different technologies. So we're actually seeing that with our consumer base as well. So I do think this is going to be a catalyst, John, to actually hopefully close the gap, and digitize or electronify payments at a faster pace.
Okay, great. And then any update on the approved HUD funding or any of the other kind of aid that was coming to the island from the hurricanes? Has this sped it up, slowed it down? Just kind of any update there would be helpful.
There's no real update, John. I mean, the construction side or the construction sector was one of the business areas that was able to go back to business this past Monday. And so we are obviously looking at this very closely and seeing if now that people are getting back to work and looking to get back to reconstruction if we see more of an inflow of that funding, but nothing specific that I would call out from our last call.
Okay. Thanks. And then one more maybe for Mac. Just talking a little bit about your appetite for M and A here. I think, obviously, maybe not right now, but kind of on the other side of COVID or once things stabilize a little bit, valuations look better, your balance sheet is the best shape it's ever been in.
So just maybe talk about the pipeline and how you think about M and A going forward from here?
Yes. So I mean our perspective has not changed and that's a part of the thesis on how we grow the company. To your point, we do feel fairly good about the balance sheet and about the performance of the company, particularly compared to other payment peers. So it's still a focus of ours. I can tell you we're still whether even organic growth, we're still having calls with prospects.
We've had several throughout calls with leaders in South America, some potential clients. On the inorganic side, on the M and A side, it's a bit slower, it's a bit more complicated, because people aren't necessarily willing to sell it a completely distressed price. So there may have to be some normalization or sort of shaking out of what valuations look like, but it's incredibly important part of our story and it's a place that we continue to focus.
All right. Thanks guys. Thank you.
Our next question is from James Faucette from Morgan Stanley. Go ahead.
Thanks very much. Thanks for taking my question this morning, everybody. Just wanted to touch base as you're seeing and looking across different geographies, are you seeing much variance in terms of activity levels and rate of improvement as people open up the economies or start to? And within the regions that you serve, how much impact, if any, has there been from government stimulus on what you're seeing in terms of your business flow?
Yes. So what I would say is of course each country is different. And again it's difficult for us to monitor because our businesses are different in each country. So we don't have apples to apples to apples between each country we do business in necessarily. But some countries went into a shelter in place faster than others.
Some have had more of a broad based pandemic than others. So we have seen sort of a difference in how each country operates. We have moved into a complete, where we can, in every country we've moved to a remote workforce. So our philosophy has been the same, protecting our employees, making sure they're focused, but it's been different from country to country and coming out of it has been different from each country. But we have seen stimulus in several countries.
Of course, we talked about what we've seen in Puerto Rico. We've also, as I said earlier, in the Dominican Republic supported the government there to distribute funds to both not only the bank's population, but the unbanked. I think seeing those dollars flow through trends for the countries where we have a significant piece of business like Puerto Rico, that's just now starting to occur.
Got it. And then I think you've talked about and there's been a lot of talk about like kind of a potential for a permanent shift
in the trajectory
of adoption of the electronic payments and the like. And that makes sense to me. I'm wondering how that is impacting both your own product development thoughts as well as what you're looking at for potential future M and A. M and A has always been important part of EVERTEC's opportunity set. And just how the current environment may be shifting that and reprioritizing if at all?
Great question and it goes back I think to a question that was previously asked about expenses. I will tell you the shift to electronic payments and to online, I mean we have historically seen in our products and then that was one of the reasons that we bought Place2Pay was because we knew this was just going to be a natural evolution. With the pandemic of COVID-nineteen, we are now again, as I said earlier, to what extent we don't know, but it's the adoption is going to be faster, particularly if the shelter in place or the slow gradual reopening of economies occurs because then people are going to adapt to those technologies for a longer period of time. So our approach is going to be very cautious from an investment perspective to make sure we not only do we continue to invest, but in some places we accelerate our investment and we move even more quickly on different projects and different initiatives. So for us, it's going to be to I mean to continue to invest in those areas and in some cases accelerate the investment.
That's great. Thanks a lot.
Thank you.
Our next question is from John Coffey from Susquehanna. Go ahead.
Hey, guys. It's actually Jamie Friedman. Good to hear your voices. I'm glad you're well. Thank you for this Slide 16.
This is really interesting and incremental. But not to be lost on that slide is that business solutions, which is a large segment for you is still growing, right? So everybody is suffering in merchant. So I guess my question is now I realize business is business solution decelerating, but maybe if you could talk about some of the characteristics of that business that may be less economically sensitive, I think that would be helpful.
Sure. I'll let Locke cover that.
Yes. So just to give some context, right, within that segment, we provide most of our core banking services to Banco Popular and a lot of those services which are kind of the backbone or the back office of some of their key systems are based on number of accounts on file, number of loans, etcetera, which aren't really impacted by the volatility on a transactional basis. In addition to that, to Mike's point before on digital and some of the questions that we've gotten, we also manage the digital channels for the bank. So we've actually seen some increases in some of those channels and users going into those channels that are helping that line of business. And as we also do some of these support projects in terms of COVID-nineteen, we also run their networks and have supported them in the work from home environment.
All of those things are helping from stability perspective and also from the slight growth that you see on this sheet. And what I would say is even if we go into some of our other businesses like printing, we do a lot of regulatory printing and mailing, which isn't also impacted again by the volatility. We do have some small pieces here that are more discretionary for our clients. So those we are already expecting them to come down. And we do have some transactional lines of business in there like item processing and cash processing where we've actually seen a deceleration.
But overall, it is a stable segment with some specific lines where we're actually seeing some growth. So that's why we're seeing that 2% on there.
Okay. Thanks for that. And then a question I got from an investor was about your ATM exposure. And I'm going to say I can't remember the details, but if you could talk about that a little bit.
Sure. So we ATM is a big part of our payment Puerto Rico segment. We process most of the ATMs in Puerto Rico, I would say. And very much like POS, we saw a deceleration and actually negative year over year growth on ATM volumes. Again, people went into the shelter in place and there wasn't really a need to get cash out of the ATMs because most businesses were closed.
And just like with POS is now that businesses are kind of starting to open up towards the beginning of this week, we are seeing some improvements in those trends still negative year over year. But the expectation is that as business is going to start to open up, we cannot see those trends come back very similar to what we're seeing in
Got it. And then maybe last one, Mac. So you guys know EBT better than probably anyone. I was just wondering, it's not quite the same category, but the PPP, the participation for small business has been a big theme for some of the stateside FinTechs. So anyway, I guess my question would be, to what degree are you involved in like SBA distributions?
I think you did have a comment on the first slide, but if you could talk about that a little bit, it would be helpful.
Sure. I'll take that one, Jamie. I mean in terms of the PPP program and the FBA loans, we aren't really involved in any of that distribution. The banks here in Puerto Rico are the ones actually making those loans to the small businesses. Specifically from an EBT perspective, what we have seen is an acceleration of some of the disaster recovery funds that were approved last year and that were supposed to run through June, July timeframe.
Some of those were accelerated as a result of COVID-nineteen. But what we are really monitoring is the impact of obviously all of these unemployment benefits that are an add on to regular unemployment. So as part of the CARES Act, we have all of the self employed receiving some money. The local government also had an initiative that put money into people's pockets and especially also self employed. And it's an interesting mix because obviously we are these are replacements of funds that these people would have otherwise generated through working.
And so we need to wait and see how that impacts all of our transactional businesses. But specifically on PPP, we're not directly involved in any distribution. Got it. Thank you.
Thank you.
Our next question is from Bob Napoli from William Blair. Go ahead.
Hi. I just wanted to follow-up. As we listened in on the Banco Popular earnings call last week and they called out 46% decline in debit and credit card spending in April. And you're a lot lower than that. And I was just trying your merchant acquiring business is so much lower.
I was trying to understand why your business would not would be not nearly as bad as BPOXX was?
They also take into consideration their credit portfolio, which from our perspective, I mean, we don't manage from the issuing side those balances. Obviously, I don't know those credit cards are used here. But in terms of correlating both, I mean
It's hard to do AppRiver. They may be looking at their international spend. So when their customers are spending off island, somebody issuing business on the credit side, we don't manage. So it's hard to compare apples to apples.
And how much of your mix is credit versus debit? Is it primarily debit?
It is primarily debit. Yes, it is primarily debit.
Yes. So if you look at on the issuing side, it's primarily debit. On the MAB side, we process both.
Yes. Thank you. And then just maybe a follow-up on the BPOP relationship because I get this question a lot is there a significant part of your revenue. I mean, if you got contracts through 2025 and you have I mean, you mentioned a couple of quarters ago, there was a pricing discussion that you said is somewhat normal, but you felt it the need to call it out. Just any update on any pricing discussions?
And how long before that contract 1 terminates? Would you like to renew it? I mean, you seem obviously extremely tied in with BIPOP.
Yes. So let me so it's a good question, Bob. What I would say is, we did say that the pricing dispute we got behind us. I would just say what this is similar to Hurricane Maria and the fact that we think we've demonstrated the Banco Popular, how important of a partner we are. We help them mobilize very, very quickly their workforce to work remotely to implement some new programs to actually we do cut checks on their behalf.
We do manage a lot where some of these disbursements are being made. So we feel like in the feedback we've gotten, is again, we continue to demonstrate how important of a partner we are. And I think that will bode well in the future because as I've always said, every day we're focused on how do we perform so that they want to renew as much
as possible
At this time, we have no more questions. So it concludes our question and answer session. I would now like to turn the conference back over to Matt Schuessler for closing remarks.
Thank you. So again, I just want to reiterate, I appreciate the hard work of all of our colleagues, making sure that we focus on our customers. And I look forward to speaking to some of you on some of the virtual conferences coming up. Thanks again.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.