Good afternoon, and welcome to the EVERTEC, Inc. 1st Quarter 2016 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Kay Sharpton of Investor Relations. Please go ahead.
Welcome to the EVERTEC's Q1 2016 earnings call. With me today are Mac Schuessler, our President and Chief Executive Officer and Peter Smith, our Chief Financial Officer. A replay of this call will be available until Wednesday, May 18. Access information for the replay is listed in today's financial release, which is available on our website under the Investor Relations tab. As a reminder, this call may neither be recorded nor otherwise reproduced without EVERTEC's prior written consent.
For those listening to the replay, this call was held on May 11. Please note there is a presentation that accompanies this conference call and it is accessible in the IR section of our website as well as via the link provided in the release earlier today. Before I begin, I'd like to remind everyone that all financial results described in this presentation should be considered preliminary and unaudited. As previously disclosed, the company was unable to timely file its 2015 annual report on Form 10 ks for the year ended December 31, 2015, due to a restatement that is in process. The restatement will also delay the company's 2016 1st quarter report on Form 10 Q.
The referenced preliminary information has been prepared by the company's management and has not undergone the complete review of the company's outside auditors that is customary for the quarterly results. The preliminary information represents the company's good faith belief as to the company's results for the periods presented. Additionally, this call may contain forward looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward looking statements about our expectations for future performance are subject to known and unknown risks and uncertainties. EVERTEC cautions that these statements are not guarantees of future performance.
All forward looking statements made today reflect our current expectations only, and we undertake no obligation to update any statements to reflect the events that occur after this call. Please refer to the company's most recent annual report on Form 10 ks filed with the Securities and Exchange Commission for factors that could cause our actual results to differ materially from any forward looking statements. 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 share. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides. I'll now turn the call over to Mac.
Thank you, Kaye, and good afternoon, everyone. Kaye Sharpton has joined the EVERTEC team as Head of Investor Relations. I've had the pleasure of working with her in the past and I'm confident her relations experience and background in the industry will be an asset to us as we move forward. Again, welcome to the team, Kay. We are pleased with our preliminary Q1 results as we exceeded our expectations in a challenging environment.
I'll cover some of the quarter's highlights provide you with an update on recent developments. Beginning on Slide 4, we have a summary of our Q1 results. Total revenue was approximately $95,500,000 an increase of 5% compared to the Q1 of 2015. We generated adjusted earnings per share of $0.41 an increase of 8%. We generated significant free cash flow and returned approximately $10,000,000 to our shareholders through approximately $2,500,000 in stock buybacks and $7,500,000 in dividends.
While we were limited in our ability to repurchase shares in the quarter due to the restatement, I am pleased that we continued to generate strong cash flow, enhancing our ability to resume share repurchases once we have satisfied our reporting requirements, which Peter will speak to later on this call. On Slide 5, the summary of the Latin America results. As previously disclosed on March 1, we completed the acquisition of 65 percent of Processa for approximately $6,000,000 Processa offers a wide variety of payment services including processing for card issuers, financial institutions and merchants in Colombia. Compensar, Colombia's 2nd largest social fund administrator, retained its 35 ownership stake in the company. We include 1 month of results from Processa in the quarter and those results were consistent with our expectations.
We're excited about the Processa deal as it provides us with a platform to expand upon in the Colombian market, one of the large payment markets in LatAm. Excluding Processa, Latin America generated single digit revenue growth in the Q1, which reflects some impact of anticipated client migrations. Importantly, the LATAM team is working hard to retain customers and continues to improve our pipeline of new prospects, and we expect to announce some wins as we progress throughout the year. On Slide 6 is an update on Puerto Rico. We have executed well in Puerto Rico in a challenging environment and continue to see the benefits from the expansion of our relationship with First Bank.
Additionally, we experienced card payment transaction growth of approximately 4% in the quarter. Unfortunately, there is currently no resolution to the Puerto Rico fiscal situation. In addition to the debt payment default announced earlier this month, the Puerto Rican government is closely managing its payments to ensure that essential services are maintained on the island. Given our status of the government and the essential services we provide, we continue to see our government receivables pay consistent with our past experience. We are monitoring the government situation closely.
If the government ceases or delays paying its non lenders, there may be ripple effects such as business values or further unemployment that could negatively impact the island's economic activity. While we continue to work hard to find opportunities for our company, it is imperative that the government finds a resolution to its physical problems to avoid broader impacts to the economy. Thus far, our transactions and business have been resilient to the physical situation. Our April transactions have continued the trend we experienced in Q1, which is encouraging. Regarding the Department of Justice review, we have recently responded to the request for information and we expect them to review our responses over the next several months.
It is a confidential process, but we will keep you updated if there are any new developments we can share. Our view remains that we operate in a highly competitive with large global companies as well as local competitors. Accordingly, we will continue to compete for business every day as we go through this process. Turning to Slide 7. As we continue to improve our organization, I want to update you on several recent items.
I'm delighted to announce a new addition to our organization to further drive revenue through product and marketing initiatives. Guillermo Rospigliosi will lead our product management, marketing and innovation teams. Previously, he was with Visa for 10 years, most recently as Chief Risk Officer in Latin America. And prior to that, he was Managing Director of Latin America for Visa's CyberSource division. This quarter, we also launched our new corporate values focused on creating a high performance culture and celebrated our first ever annual recognition of our top performers at the New York Stock Exchange on March 11.
Through these initiatives, we are building an even more engaged workforce. Through these efforts and our investments in the business to drive service and innovation, I am confident in our future success. With that, I will now turn the call over to Peter. Thank you, Mac, and good afternoon, everyone. Before I begin my comments on the quarter, I want to give you an update on our restatement process.
We are working diligently to complete the restatement of our 2013 2014 financials that will allow us to file our 2015 Form 10 ks and the Q1 2016 Form 10 Q. We are working with a plan to complete these filings before May 30, which is important date that I will cover later when I review the amendment to our credit facility that was negotiated in the quarter. I'll now provide a review of our preliminary unaudited first quarter results and then update our financial outlook for 2016. Turning to Slide 9, you will see the Q1 segment revenue details as a total company revenue. Total revenue for the Q1 of 2016 was 95.5 $1,000,000 up 5% compared to $91,300,000 in the prior year.
We had a positive impact of one extra day in the quarter related to the leap year effect as well as approximately 1 month of contribution from Percepta, partially offset by the shift in the Easter holiday. Easter fell in March this year and was in April last year. Unlike the U. S, many businesses closed during the holiday in Puerto Rico, having a negative effect on payment processing. With respect to the segment mix, in the first quarter, merchant acquiring net revenue 14% year over year to approximately $23,000,000 primarily driven by our expanded FirstBank merchant business.
Payment processing revenue in the Q1 was $27,000,000 an increase of approximately 2%. Increases in our ATH debit network volume and 1 month of revenue contribution from the Processa acquisition were partially offset by the revenue shift associated with the FirstBank agreement is now reported in the Merchant segment. Payment processing growth was also reduced by the terminated government lottery tax program in the Q4 of 2015. Transaction growth in Puerto Rico was resilient with payment transactions growing approximately 4% year over year for the quarter, continuing the trend we experienced in 2015. In April, we have seen this 3% to 5 percent trend continue, but we remain cautious given the fiscal situation.
Business Solutions Q1 revenue increased 2% to $45,600,000 and included the one time benefit of revenue related to several completed IT consulting projects. We continue to experience growth in our core banking business driven by new services and volume increases related to bank consolidation activity in Puerto Rico, which we will analyze in the Q2 of 2016. This growth was partially offset by year over year decreases in item and cash processing and hardware revenues. We expect these decreases to continue throughout the year. Moving on to the next slide, number 10, you will find a reconciliation of our adjusted EBITDA detailing our adjustments to EBITDA.
Notably, we incurred severance costs related to planned cost actions that we took in the quarter and incremental costs related to the Processa transaction and the restatement. We currently estimate the cost of the restatement to range from $5,000,000 to $7,000,000 assuming a pre May 30 filing, and this includes the consent fee for the credit facility amendment. These costs are anticipated to have a cash impact in the second quarter. Adjusted EBITDA for the quarter was $46,000,000 an increase of 1% from $45,700,000 in the prior year. Adjusted EBITDA margin was 48.2 percent and this represents a 180 basis point decline to adjusted EBITDA margin compared to last year.
Our Q1 adjusted EBITDA growth and our adjusted EBITDA margin percentage are explained in more detail on the next slide. Moving to Slide 11, you will see a year over year adjusted EBITDA margin bridge for Q1. Starting from the left column, the bridge begins with the adjusted EBITDA margin in the Q1 of 2015 of 50%. Moving to the right, first, we benefited approximately 60 basis points from a favorable revenue mix. 2nd, investment expense increased year over year approximately 110 basis points, primarily due to incremental investment expense in Latin America and our card processing product initiatives.
We expect these investments to continue. 3rd, we were impacted by unusually high health insurance expense in the quarter related to specific claims. These claims impacted our margin by approximately 70 basis points. The business to business tax and other operating taxes continue to impact us by approximately 60 basis points. As an update, the VAS tax that was intended to replace the B2B tax in April has been extended to the end of June and will impact the Q2.
The combined impact of these reference items results in an adjusted EBITDA margin of 48.2 percent for the Q1. Moving to Slide 12, Adjusted net income in the Q1 was $31,100,000 an increase of approximately 6% from $29,400,000 in the prior year. We benefited from approximately $300,000 in interest savings driven by lower outstanding debt balance and a reduced interest rate. Our effective tax rate in the Q1 was 8.5% as compared to 10.5% in Q1 of 2015 and was primarily lower due to the tax planning initiatives that we completed in the Q4 of 2015 that reduced non Puerto Rico taxable income. Adjusted net income also now reflects the impact of non controlling interest associated with the Processa acquisition.
Q1 adjusted earnings per diluted share was 0 point 41 dollars an increase of 8% from 0.38 dollars in the prior year and reflects the benefit of a lower diluted share count. Moving on to our cash flow overview for the quarter. On Slide 13, net cash provided by operating activities was approximately $30,000,000 a 1% year over year increase and this amount includes the impact of severance payments in the quarter. There has been an approximate $3,000,000 decrease in restricted cash as we substituted $3,000,000 of our unused revolver to satisfy the card network cash collateral requirement related to our card processing business. Moving along, the Processa acquisition was approximately $6,000,000 and capital expenditures totaled approximately 3,000,000 dollars We expect CapEx to increase throughout the year and continue to plan for CapEx to be approximately $35,000,000 to $40,000,000 for the year.
Next, the company made $7,000,000 in principal debt payments and payments on our short term facilities. And finally, during the quarter, we paid cash dividends to stockholders of approximately $7,500,000 and we repurchased approximately $2,500,000 of common stock for a total of $10,000,000 returned to our shareholders. We continue to have approximately $117,500,000 available for future use under the company's share repurchase program. We announced today another $0.10 dividend to be paid on June 10, 20 16 to shareholders of record as of May 23, 2016. Our ending cash balance at March 31 was $36,000,000 dollars an increase of approximately $7,000,000 from our 2015 year end balance.
At this time, I'd like to provide you with an update on the status of our government receivables. Our receivables at March 31 was $18,000,000 which is slightly down from the balance at the end of 2015 and down approximately $5,000,000 from our ending Q1 balance in 2015. Receivable balance as of April 30 is relatively unchanged from March. Given the government debt situation, we continue to monitor our receivables diligently. Moving to Slide 14, we provide a summary of our debt.
This slide reflects a quarter ending net debt position of approximately $631,000,000 comprised of the just mentioned $36,000,000 of unrestricted cash and approximately 667 $1,000,000 of short term borrowings and long term debt. Our weighted average interest rate was approximately 3% and our net debt to trailing 12 month adjusted EBITDA was 3.4x. As of March 31, total liquidity, which includes unrestricted cash and available borrowing capacity under our revolver, was $125,000,000 I will now provide some details on the credit facility amendment I referenced earlier. As we announced on April 14, in of the of the financial reporting deadlines for our 2015 Form 10 ks and 2016 Q1 Form 10 Q to September 15, 2016. As consideration for the extension, we paid a consent fee of approximately $4,000,000 In the event that the 10 ks and 10 Q were not filed by May 30, 2016, the amendment provides for a permanent 50 basis point increase in the interest rate applicable to the loans under the credit facility.
If we missed this deadline and failed to file by July 15, 2016, we would incur a further 25 basis points increase and the result would be a combined permanent 75 basis point increase. Additionally, there is a condition in the amendment that suspends our stock repurchase program until the amendment conditions are satisfied. Although there can be no assurance until it is complete and our filings are made, we're working diligently on the restatement and have a plan to complete this work prior to May 30, which would leave the interest rate on the facility unchanged and get us back in compliance. Moving to Slide 15, I will now provide an update on our 2016 guidance. We are raising our guidance ranges on revenue and adjusted earnings per share to reflect our favorable results in Q1 as well as our completed acquisition of Processa.
We now expect revenue to be in the range of $378,000,000 to 385,000,000 dollars representing growth of 1% to 3%. Our adjusted diluted earnings per share guidance of $1.59 to $1.66 represents a range of negative 1% to 3%. We now expect margins to trend lower towards the midpoint or lower portion of the 48% to 49% guided range as a consequence of our Processa acquisition, which operates at lower overall margins and a continuation of the B2B tax I referenced. Also, as I mentioned last quarter and as a reminder, in 2016, we no longer receive an expense offset of approximately $1,500,000 related to maintenance expense reimbursements provided for in the popular merger agreement and this begins to fully impact us in the Q2 and for the remainder of the year. We are also closely monitoring 2 potential incremental regulatory headwinds that could impact us negatively.
The first is a proposed permanent extension of the B2B tax and the second is the proposed change to the Fair Labor Standards Act that could change requirements to pay overtime in Puerto Rico. The latter could significantly increase wages across Puerto Rico given average wages on the island are significantly lower than the U. S. Mainland and thus more employees would fall into the scope of the proposed change to the Act. Our guidance does not reflect the enactment of either of these laws.
Also for clarification, the guidance assumes a completion of the restatement prior to May 30. In summary, we are pleased with the operating performance in the Q1 and the closing of Processa. While we cautiously monitor the unfolding resolution of the Puerto Rico debt situation, we remain focused on the execution of our annual goals and our strategic initiatives. We will now open the call for questions. Operator, please go ahead.
Thank you. We will now begin the question and answer session. And our first question will come from George Mihalos of Cowen. Please go ahead.
Great. Thanks guys and nice start to the year. Wanted to ask on the guidance, the $5,000,000 increase to the revenue range that you're looking at. Is that roughly $2,000,000 or so coming from processor? Can you just parse that out for us?
Hi, George. It's Peter Smith. The majority of that is PERSESSOR.
The majority of the $5,000,000
That's correct, yes. Okay. Okay. And then just
a little bit of housekeeping. It like by my math, based on the 6% growth rate in LatAm that Puerto Rico grew about 4% or so. Is that is my math right in the quarter?
That's correct, George.
Okay. And you had called out, I think, some one time or non recurring work in Business Solutions. Can you parse that out for us? And it sounds like that will continue in 2Q before tapering off?
Well, just in our Business Solutions segment, we're continuously performing consulting projects in large part for Banco Popular. This quarter, we had 2 significant projects complete. The revenue related to the projects generally can be a bit lumpy depending on the revenue recognition. That's particular to each arrangement. To answer your question as we move forward, our pipeline has been relatively strong with Banco Popular.
But again, it's the revenue recognition that will dictate which quarter we'll experience similar one time amounts like this.
Okay. And then two quick ones. Mac, you sounded a lot more encouraged about the pipeline of new business. Maybe you could elaborate on that? And then should we assume after the filings that you will be an active repurchase of your stock again?
Thank you.
Yes. Thanks, George. It's Mac. So on the pipeline, we're definitely encouraged that we're making that progress, not only in trying to retain some of the accounts we've talked about in the past, but also building the pipeline for new business. We don't have anything to announce on this call.
So I think you'll see throughout the year, this is a place we're going to be focused on making progress. And as far as the repurchase, what I would say is the window will be back open once the restatement is completed. Yes. I'd just add that we'll follow our capital allocation methodology where we're going for growth investments first with our free cash flow and then returning excess cash flow through our dividend and share repurchases once that window is open. Thank you.
Thanks, Troy.
Our next question will come from Vasu Govil of Morgan Stanley. Please go ahead.
Hi. Thanks for taking my question. Just quickly first, I think, Mac, you said that you thought that the quarter did better than your expectations despite a challenging environment. Can you talk about where did you see the strength? Was it mostly Puerto Rico or your other geographies in Latin America?
And it sounds like the guidance change was only for process and not for the better performance in the quarter. So can you just talk us through whether you expect you're just taking conservative view or is there just seasonality in the business going forward from here?
Yes. What I would say is Puerto Rico performs well given the quarter. It's as I said earlier, it's an ambiguous situation with the government now being very careful about who they can pay. So I do think we were delighted with the Q1 metrics. And as we said in April, that was consistent as well.
This is an uncharted territory for many executives. So I think it's performing consistent with the past, which I think is good news for now. And then just adding with respect to the full year on, Percepta is the majority of the revenue variance in the uptick in the guidance. And then with respect to the rest, we are seeing some of the profits that we carry forward from Q1 and project out adding to the bottom line as well.
Got it. And I just quickly wanted to revisit the tax breaks that you guys have in Puerto Rico. Any risk of those getting pulled completely or reduced given the continued stress that the government is in?
We have not heard any mention of any replication of the tax grants that of the type that we have. So we're unaware of any intent or potential action to do that. And I would just add to that, that there's 2 issues with Puerto Rico. 1 is the government debt and the second is jobs creation. So the second component is pretty well known, I think, by the politicians, both here and in D.
C. And by the local business community. So I'm optimistic that job creation will continue to be important, which will make those tax credits important. We can't predict the future, but any job creations and economic stimulus is going to be important in Puerto Rico going forward.
Great. Thank you very much.
Our next question
Jeff, the growth you had 14% revenue growth in merchant acquiring with the addition of First Bank. How much did First Bank add to that? And do you expect merchant acquiring at this point, understanding the caution you have around Puerto Rico, but on the current trends, is that a reasonable run rate of revenue growth in merchant acquiring?
Bob, 13% of the 14% was First Bank. Okay. And with respect to the overall growth rate that we experienced, volumes, sales volume is tracking a couple of points below the transaction volumes that we're seeing. And we are seeing a lower average ticket and a less advantageous revenue mix. And those are really what are driving the growth in merchant acquiring.
As we move forward, as we've cautioned, we have projected a tail off in volume throughout the year that we don't expect to see the 14 repeat for the rest of the year. Yes, Bob, this is Mac. Again, the government is they're trying to risk some critical vendors now. They've announced a plan that non critical vendors can make slow payments. So it is very difficult for us to predict what the trending is going to look like over the rest of the year.
I think we've tried to put guidance out there that is assumes either way a little bit of variance. We got to see what happens over the coming months.
Okay. And then just you talked about pipeline of potential new clients. What about of the bank partnerships or acquisitions, anything on that front that you've been able to build into a pipeline of potential investments?
Yes. I would say we continue to be very focused on M and A, as we've said on multiple calls, and we have somebody dedicated to that effort. We don't want to make the mistake of the past of talking about those types of deals until we're ready to close on them. But it continues to be a focus for the company.
And what types of deals are you looking for? Has that changed at all?
And as I've changed from what we said in the past, I mean the size would be anywhere from Processa to maybe $50,000,000 on the high end. But we'll look for opportunities to expand our footprint like PROCESSA did. We're looking for opportunities to expand our technology and product capabilities. And we would also look for leverage and scale opportunities in markets where we already exist, if there's something that's affordable where we can roll it into our existing operations. Those are the 3 types of things we'd look for and sort of the view or profiles haven't really changed.
Okay. Then just last question. You hired this gentleman from Visa to lead management marketing innovation is what is there a specific area of his expertise that you're looking him to add to? And do you have you been able to maintain the other key executives in your organization?
Yes, we have. We have been able to retain those that we think are critical to the growth of the business. I can think that Guilherme brings a regional experience across Iran's CyberSource, which is the e commerce division of Visa. He's also got risk experience. But what we really want to do is get someone who can take a look at our products across all of our different geographies to make sure we're maximizing the revenue potential in each country of those products, make sure that we're more focused on marketing so that we can bundle the products together, win the full piece of business, bit more discipline around those different areas, which we haven't done in the past.
And given his experience in the industry and across the region, he's Peruvian and he's got his MBA. So he's got great academic experience as well. I think he's going to be a good add to the industry.
Great. Thank you.
And our next question will come from Bryan Keane of Deutsche Bank. Please go ahead.
Hi, guys. Just first wanted to ask on FirstBank. How many points of growth did that contribute to the quarter? And then second, when does that contract anniversary? It sounds like it anniversaries already, so the Q2 growth rate will drop as a result, but just want to make sure I got the timing correct.
Hey, Brian, it's Peter. So the Q1 contribution was 13% of First Bank and it will anniversary in Q4.
What about total revenue?
I think you can derive that math.
I guess we can just calculate it out. But you mentioned that merchant should drop, the growth rate should drop. And if it doesn't anniversary for another couple of quarters,
I guess I'm just trying to figure out why we would be the growth rate. Yes. Yes. As we just to help clarify, we are projecting sales volume to go down in part just by lower average ticket as we've discussed and just what we see will be a bit of a squeeze naturally coming from the fiscal situation and we're just being cautious in the outer quarters.
And you're seeing that already or you're just planning to be conservative in case that happens? We're
planning. Yes. What we said, Brian, is that April was somewhat consistent with the Q1. But again, it is we do know the government, which is the largest spencer on the island, is prioritizing payments and withholding payments to sometimes just at least that's what they're publicly saying. So it's very difficult to assess the impact.
But invariably, it is a by far the largest spender on the island. We are anticipating that it could impact the volumes.
I got it. No, that helps clarify the merchant segment.
And I think it's important to recognize too that many of these resolutions for the debt situation have austerity measures in place. So that may as well and if you look at a physical control board, that's going to be put in place to make sure that they control government spending. Now how that plays out is difficult to model, but that's what we are trying to anticipate cautiously. No, that's helpful.
And then just finally for me, looking at the potential two regulatory changes that you mentioned, Peter, you said that's not built into guidance. I guess if those things do get enacted, what kind of impact would it have on the model? Thanks so much.
Well, Brian, they're both the B2B is fairly straightforward. It's impacting us about $500,000 a quarter. The Labor Act is much more difficult. It requires the facts and circumstances analysis of what employees do. And there it's very uncertain what form the law is going to come out in.
So we really don't have an accurate way of modeling that. But on the
first one, on the B2B tax, that's already embedded in guidance for the full year anyways, it's just that if it continues?
No, it's embedded for Q2. We had originally thought that the law originally had it being replaced by the VAT tax in April that it would expire, but it was extended in Q2. And we didn't think it was legislation. Right. And now just to clarify, there's proposal to keep it permanent, and that's what we called out as a risk.
I got it. Helpful. Thanks so much.
The next question will come from Tien tsin Huang of JPMorgan. Please go ahead.
Good afternoon. Thanks for the slides. It's really helpful. Processa from here, I guess what's the growth profile there and what's the plan to accelerate growth there? Is it penetrating existing or finding new partners?
What's the go forward plan?
Yes. So Prasad, and I'll let Peter talk a little bit about some of the details, but it grows faster than the rest of our business. So we like the general growth metrics as a standalone business. It doesn't have the same margins because it's a smaller business. So we'll be very focused on trying to grow that business, The products that we have that they don't have and vice versa.
So we think that there's going to be synergies in that way. We also they have a strong rolodex of clients. They have the largest retailer's a client, the largest social funds administrator in most of the banks. So the ability to grow that business faster with investments and with some of our capabilities out of EVERTEC are some of the things we're very focused on as we integrate that business. But like I said, the business, even as a standalone payments business, is pretty attractive.
And I don't know, Peter, if you want to add anything? Yes. I'd just add for clarification, 80% of Processa is in our payments processing segment and 20% is in the business solutions segment. It's growing just about low double digits and we're very optimistic about the complementary things we can do with it for the company.
Okay, good. That's helpful. I guess Colombia with the FX has been all over the place there. I'm curious and forgive me if it's a question that's not relevant, but just how does that impact the business at all in terms of billing and FX and translation, if at any, if at all?
Well, the majority of all our resources excuse me, the majority of all our resources will be in Colombia, right, in the same denominator currency. So the profits will be there to offset any of the decline should that continue.
Understood. So there's a match there. On the margin bridge, my last question, the margin bridge, the 110 bps of investment expense, sounds like that was planned and consistent. But is the return on investment that we should expect there, the new wins? Is that what that is driving for?
Is that more of a catch up in spend? Can you elaborate? Thanks.
I'll just speak generally. We're investing in Latin America with the new management team. We've made some technology investments to make sure we have some of the best products in the market. So that's been the majority of it. I don't know, Peter, if you want to Yes.
We would make those investments if we didn't expect to get a higher return than their cost in excess for our cost of capital.
Okay. So not necessarily a catch up. So I mean going forward, I mean and I'm assuming that's probably in the run rate, but do you have good line of sight in how much you need to spend beyond, say, 'seventeen, 'eighteen, 'nineteen at this stage? Or is it still in discovery mode, your investment plans?
Yes, we're still developing plans in certain countries and that will dictate the amount of investments that we're going to make. As we've talked about, we had to make investments to improve some of our products for the markets and that's really what this represents.
Okay, good to know. Thank you.
And our next question will be from Sarah Givens of Bank of America Merrill Lynch. Please go ahead.
Hi, thank you. Has the restatement process put a pause on M and A activity in the near term? Or have you been able to continue looking and continuing conversations with potential targets?
Yes. No, the restatement hasn't really impacted our interactions with our customers or our M and A prospects.
Okay. And then should we expect further severance?
We will continuously manage our cost structure. We're not planning any particular actions or that we would project for you right now. But we're always looking at our cost structure as we move forward. And then if there's anything meaningful, we'd let you know.
Okay. And then in terms of the impact of the sales tax, do you have any sense of what the impact has been on consumer spending? And have you seen any behavioral change in merchants where they might be shifting back to cash at all from electronic payments to perhaps try to avoid the higher sales tax?
I don't think we've really seen that as a trend. Like I said, when we publish these numbers, we give you the volumes of the trends. So it hasn't had a significant impact. Yes. I would just add that you would think there would be natural behavior perhaps to do that.
And then the other elements that we are concerned about with respect to the sales tax would be the impact of e commerce where people could go to e commerce and try to potentially avoid the sales tax.
Okay. But you're not seeing anything so far?
No. We've shared the volumes and it's been holding up. It's been consistent.
Okay. Thank you.
Our next question will be from John Davis of Stifel. Please go ahead.
Hey, good afternoon, guys. I guess first, Peter, I was wondering if you could maybe parse out what guidance implies for PR transaction growth. I know it was 4% in the quarter. You said been consistent so far in April, but you also said you kind of expect or are bracing for some sort of slowdown. Is that low single digit assuming it still stays positive?
Any type of directional color would be helpful.
Yes. We have modeled out 2% to 3%. And additionally, as we've mentioned, we've also done some modeling on the sales volume and the impact, which again is just sort of falling in tandem.
Okay. And then a quick easy one. Leap year pretty much offset Easter. Those pretty much washed. Is that fair to think about that way?
I think so, yes. Easter here is just so you're aware, it's Good Friday and Easter because a lot of businesses are closed during those few holidays.
Okay. And then maybe could you help us think about I think you guys did a nice job breaking out government receivables. Do you have any idea of what percent of your receivables are for what you could consider non mission critical percentage of what they could potentially slow pay you on while continuing to pay you on the more mission critical stuff?
We look at it generally from the revenue perspective and that would be about, you say, 10% of our government revenue, which equates to about 1% to 2% of our overall revenue.
Okay. And lastly, maybe one for you, Mac. On DOJ, appreciate your comments. And obviously this is a little bit tough to talk about. But any sense for how long do they have a deadline to reply to your comments or any idea when we could potentially get resolution?
No, unfortunately not. I mean, like I said on the beginning of the call, our view has not changed around our position. And we've responded to their questions. So we're hopeful that they'll move expeditiously, but we haven't been given any type of time line.
Okay. And then last one for me. Just on the credit agreement amendment, does that forbid you from doing M and A? I appreciate that hasn't stopped you from having conversations, but let's just say worst case scenario, you don't file by May 30. Does it forbid you from doing M and A just like buybacks or is that not written in the agreement?
We're constrained just by the general leverage conditions within the facility, but there's nothing specific to the amendment that addressed it. Okay. Separately buybacks, which we mentioned in the Yes, except for the buybacks that he mentioned earlier. Okay. Perfect.
Thanks, guys.
Your next question will be from Jim Schneider of Goldman Sachs. Please go ahead.
Hi, this is Jordan on for Jim. Can you provide some color on payment trends in Puerto Rico? In particular, what are you seeing in regards to same store sales, credit for segment volumes? Any other things you'd like to highlight here would be very helpful.
I think beyond what we've said on the call earlier about what we're seeing in our volumes, we don't break out the volumes as you've described. I don't know if you'll Yes. I'd just add that on the island, debit is the predominant transaction type. And we think our metric that we're providing, the 4% is the most meaningful metric that reflects the transaction activity.
Got it. And just in light of the increasingly challenging environment in Puerto Rico, which and how many government contracts within business solutions might be at risk of deferral or cancellation in 2017 2016 rather? Thank you.
Like we've said earlier, most of what we do for the government is mission critical. Probably about Peter said earlier, 10% of our revenue is government, right? The majority of that we consider almost half of that is federally funded, right? I would say of it, 90% is we consider mission critical. So 10% we might describe as discretionary.
So if you look at our total revenue base, our view on what's discretionary would be anywhere from 1% to 2%, not much above that. What they would choose to cancel and how they would view that, we haven't been informed of any cancellations around those other services. But that's what we would consider most likely at risk if they went in that direction.
That's really helpful. Thanks so much. Yes.
And ladies gentlemen, this will conclude our question and answer session. I would like to hand the conference back over to Mac Schuessler for any closing remarks.
So thanks again for joining the call today. As we said earlier, we're pleased with the quarter. We are cautious about Puerto Rico, and we'll continue to monitor the situation here. And as we've done in the past, I think trying to provide opportunities for our company and our investors even in this challenging market. We look forward to seeing you guys in the future.
Thank you.
And ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.