Greetings, and welcome to the EVERTEC Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Alan Cohen, Executive Vice President and Head of IR. Thank you. You may begin.
Welcome to the EVERTEC's Q3 2015 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 Thursday, November 12. 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 November 4. 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 press release earlier today. Before we begin, I would like to remind everyone that 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 statement 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 measures under SEC rules such as adjusted EBITDA, adjusted net income and adjusted net income per share. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides. I will now hand over the call to Mac.
Thank you, Alan, and good afternoon, everyone. Thanks for joining us on today's call. Since our last earnings call, we've accomplished quite a bit, including solid financial results, 2 announced transactions and several key organizational changes. I'll cover each of these in more detail and then provide you with an update on our Latin American business as well as an update on recent developments here in Puerto Rico. Beginning on Slide 4, we have a summary of our Q3 results.
Total revenue was $92,800,000 an increase of 4% compared with the Q3 of which was slightly ahead of our expectations. We generated adjusted EBITDA of $46,000,000 an increase of 3% and adjusted net income per share of $0.42 an increase of 5 percent. Both of these were in line with our expectations. We returned approximately $33,000,000 this quarter through a $25,000,000 stock buyback and our $8,000,000 quarterly dividend. Turning to Slide 5, we provide a summary of the planned acquisition of Processa, which is a diversified Colombian payment company headquartered in Bogota.
As previously disclosed, we have entered into an agreement to buy 65% of Processa for a purchase price of approximately $5,700,000 at the current exchange rate. The deal now provides us with a business platform to expand upon in the Colombian market. Percesta offers a wide variety of payment services including processing for card issuers, financial institutions and merchants. Its clients include Grupo Exido, one of Columbia's largest retailers with approximately 550 stores Several financial institutions including Banco de Bogota and Banco Mia and 2 of the top social fund administrators, Kavam and Compensar. Compensar, the current majority owner and Columbia's 2nd biggest social fund administrator will retain a 35% ownership stake.
Under the Bank Holding Company Act, Banco Popular is required to submit an application on our behalf to the federal banking authorities. The application has been submitted for approval and we're still targeting a close date for the end of November. Moving to Slide 6. We are pleased to announce that as of October 31, we have agreed to extend and expand our business relationship with First Bank for a term of 10 years. First Bank is the 2nd largest commercial bank on the island and has over $12,000,000,000 in assets, 54 branches in Puerto Rico, 12 branches in the Virgin Islands and 10 in Florida.
This transaction is an example of how our unique commitment to the island resonates well with the to Slide 7 for a few more details about the organizational changes we announced earlier in the quarter. I'm delighted to be joined today by Peter Smith, our new CFO. He has been here about 8 weeks and he brings significant industry knowledge as well as financial strategy and governance experience. Peter has relocated his family here to Puerto Rico and is settling into his new home, which is actually just around the corner from the shoe stores. In addition to Peter, we announced a number of other internal organizational changes.
We now have 3 senior business leaders, 2 in Puerto Rico and 1 for outside of Puerto Rico, who are solely focused on working with our key customers, ensuring the satisfaction of our clients while accelerating the addition of new business. We created distinct IT and operational areas that are clearly focused on and report into our major business lines. At the same time, we centralized oversight for critical technology and compliance areas under our Chief Operating Officer to ensure that we manage standards and leverage capabilities where appropriate. We have also made organizational changes in Latin America that I'll review in more detail in a moment. I'm pleased to say that our leadership team is now in place, and I'm confident that these changes will improve our customer focus and accountability across the entire organization.
Now I'd like to turn to a discussion of our business on Slide 8. The first priority with LATAM was to run it with a dedicated and experienced management team. As previously announced, LATAM is now led by a talented and seasoned President, Mariana Goldfarb, who is solely focused on our growth outside of Puerto Rico. Additionally, during the recent quarter, Mariana added CIO, who was the number 2 executive at one of the largest card processors in Colombia and hired a new head of account management whom we recruited from one of our largest international competitors. We have also promoted some of our strong internal talent into leadership positions.
Now that we have new leadership in LatAm, we have better visibility into our opportunities and challenges, which puts us in a much better position to execute on our objectives. While we are pleased that the LatAm business delivered double digit growth in the Q3, this growth rate is not reflective of the performance we are anticipating in the near term. The future set and success of our organic growth is predicated on our account management function, which we've recently introduced to the business. The team is working to retain customers who have previously informed us of their intentions to leave, but have not yet migrated and is also actively building a pipeline of new prospects. Given the nature of our business, both departing and incoming clients take time to convert.
Therefore, next year will continue to be a transitional year for our LATAM business. However, with a new team in place, EVERTEC is uniquely positioned to reaccelerate the growth of our business over time. Now turning to Slide 9, I'll review recent developments in Puerto Rico. As we discussed last quarter, the government increased the local sales tax from 7% to 11.5 percent effective July 1. It applies to approximately half of our merchant sales During the quarter, we saw transaction volume up 5% year over year despite the 4.5% increase in sales tax.
We continue to monitor any impact to increase sales tax and the overall uncertainty in Puerto Rico may have on consumer spending. Turning to more recent developments, there are both headwinds and tailwinds for our business. Let me discuss 2 headwinds. First, every year effective October 1, a significant portion of our business with Banco Popular is repriced based on the September Consumer Price Index. The CPI starting in the Q4 is much lower than we've experienced in the past.
2nd, also effective October 1, the government implemented a business to business tax of 4%. This tax will be charged on much of the goods and services we purchase from our vendors. Both of these items will have a negative impact for the remainder of this year and into next. Peter will provide more detail on both items later in the call. As for tailwinds, in addition to our FirstBank announcement, several legislative opportunities continue to emerge in Puerto Rico.
Recently passed legislation will require most licensed professionals such as doctors and certain other professionals to provide an electronic payment option to their customers. Additionally, there is pending legislation that may require all consumer businesses above a certain annual revenue threshold to provide an electronic payment option to their customers. We are evaluating our opportunity to expand and service these merchants as previously most only offered cash as a payment alternative. Both trends should continue to accelerate the conversion of cash to cards in Puerto Rico. On Slide 10, we've listed several of the areas where we've been focused since beginning of the year and discussed on previous calls.
I'd like to review where we stand on each. First, we said we focus the right leaders on key priorities. We now have a world class team in place executing on our key objectives. We also said we focus on corporate development and we now have one deal pending regulatory approval and a few potential opportunities in the pipeline. We promised to focus on executing well in Puerto Rico and doing the expansion of our relationship with First Bank and the performance in our local payments business, I feel confident we have our eye on the ball.
We will continue to focus on executing well within this challenging environment. We committed to accelerating growth in Latin America, and we now have a leadership team in place with that focus. At the end of the year, we will also own a platform to leverage in our 2nd largest target market, Colombia. And finally, we said we'd evaluate our internal capabilities, which was partially completed and which informed much of our recent restructuring. We will finalize this work in 2016.
In summary, our focus in 2015 has been to transition from an IT department of a bank to a professional technology company and I'm delighted with the progress we have made to date. I'm energized by the prospects ahead and thank the EVERTEC team for their hard work. With that, I will now turn the call over to Peter. Thank you, Mac, and good afternoon, everyone. I'll provide a detailed review of our Q3 results and our year to date performance and then conclude by updating with our financial outlook for 2015.
Turning to Slide 12. You will see the 3rd quarter 9 month period segment revenue details and the same for the total company. Total revenue for the Q3 of 2015 was $92,800,000 up 4% compared to 88 $900,000 in the prior year. Total revenue for the 9 months year to date was 277 $400,000 and also up 4% year over year. We are encouraged by our year to date performance and resiliency of our business given the challenging macro conditions in Puerto Rico.
With respect to segment mix, merchant acquiring net revenue increased 8% year over year to $20,800,000 driven primarily by sales volume growth. A portion of the increase reflects the impact of the net 4% sales tax increase that went into effect July 1. We estimate that the sales tax increase added 1 to 2 percentage points of growth. The overall sales volume increase we experienced was partially offset by lower volumes for gas station and utilities driven by the ongoing year over year decline in oil prices. For the 9 month period, merchant acquiring grew 6%, reflecting primarily the growth related to the continued payment migration from cash to card transactions and the factors I just referenced.
Payment processing increased 6% in the Q3 to $27,500,000 up from 25,800,000
in the prior
year period. Revenue growth in this quarter was primarily driven by an increase in our ATH debit network volume and increased accounts on file and related transaction growth within our card products business. Point of sale transactions in Puerto Rico increased 5% during the quarter as compared to last year, continuing the trend we have experienced in 2015. For the 9 month period, payment processing grew 4% to $80,600,000 driven by the same caustals and partially offset by lower revenues from electronic benefit transfer card processing business. Business Solutions grew 2% to $44,500,000 in Q3, driven mainly by growth in our core banking business from new services and volume increases in existing services primarily driven by bank consolidation activity in Puerto Rico.
This growth was partially offset by a year over year decrease in IT consulting services principally attributable to a major project that was delivered in Q3 2014. For the 9 month period, Business Solutions grew 2% to $134,700,000 reflecting the growth in our core banking services partially offset by lower item processing and IT consulting services revenue. Moving to the next slide, number 13, you will find a reconciliation of our adjusted EBITDA for the Q3 9 month periods. The adjustments to EBITDA in the Q3 of 2015 included a $5,700,000 charge for severance payments primarily in connection with the voluntary retirement initiative provided to and accepted by certain employees. We expect a savings payback period of 1.5 years on the severance paid related to this initiative.
Otherwise, the adjustments included our typical adjustments for share based compensation, popular merger related costs, including transaction and other one time fees and the elimination of non cash equity method income. Adjusted EBITDA for the quarter was $46,000,000 an increase of 3% from $44,500,000 in the prior year. Adjusted EBITDA margin was 49.6 percent, a decrease of 50 basis points as compared to the prior year. Our Q3 adjusted EBITDA growth and our adjusted EBITDA margin percentage were impacted by certain notable items that I will review in more detail on the next slide. For the 9 month period, adjusted EBITDA grew 3% to $138,800,000 at a 50.1% margin, which was also down 50 basis points from 2014.
Moving to Slide 14, you will see a year over year adjusted EBITDA margin bridge for Q3, which highlights certain significant items that affected our adjusted EBITDA margin in the Q3. Starting from the left column, the bridge begins with the adjusted EBITDA margin in the Q3 of 50.1 percent and moving to the right, we benefited approximately 100 basis points from the increase in revenue and the favorable margin mix of payment related growth in the Q3 of 2015. This positive margin impact was offset by 3 items. 1st, 20 fourteen's results included certain non recurring favorable vendor credits that drove a benefit of approximately 70 basis points. 2nd, we wrote off a bad debt this quarter where there was a contract renewal involved which impacted us approximately 40 basis points.
3rd, we increased investment related to a card issuing product initiative and this reduced margins approximately 40 basis points. We anticipate this growth investment to continue. The combined impact of these items resulted in adjusted EBITDA margin of 49.6% for the Q3 of 2015. We continue to have significant operating leverage across our existing platforms and businesses. Our focus is to drive incremental business and volumes to these platforms, while we pursue additional growth opportunities.
Adjusted net income in the 3rd quarter was 32,400,000 Adjusted net income in the 3rd quarter was $32,400,000 up 3% from $31,400,000 in the prior year. Adjusted net income reflects lower cash interest expense, which declined $400,000 versus the prior year period to 5.1 $1,000,000 Interest declined due to a lower outstanding debt balance and a reduced interest rate due to a reduction of 25 basis points on our credit facility from a lower leverage ratio. The interest savings were partially offset by a decrease in earnings from our investment in the Dominican Republic. Our effective tax rate in the 3rd quarter was 11.2% and was a little higher this quarter due to a slight change in the mix of taxable income between Puerto Rico, which is taxed at a significantly lower rate and our non Puerto Rico taxable income. Cash taxes in the quarter were $1,000,000 compared to $300,000 in Q3 of 2014.
The year to date effective tax rate was 10.3%. Adjusted net income per diluted share increased 5% to $0.42 from $0.40 Year to date, adjusted net income was $96,800,000 up 1% and adjusted diluted earnings per share was $1.25 up 3% from 1.21 dollars Moving on to our cash flow overview for the 9 months on Slide 16. Net cash provided by operating activities in the 9 months was approximately $123,000,000 a significant year over year increase driven primarily by working with the Puerto Rican government insofar as it impacted our working capital performance and because obviously we are carefully monitoring the fiscal situation and its potential impact on our business. Our receivable with the Puerto Rico government at September 30 was $16,200,000 which is down from $21,000,000 from the beginning of the year and down approximately $1,000,000 from our ending Q2 balance. As a reminder, we do not hold any credit of the government.
In terms of collections, I would characterize our experience thus far as normal. We have followed our normal processes and have received payments within customary timeframes. Notwithstanding, we remain cautious and are actively monitoring our receivables accordingly. As a Puerto Rican company, we are most aligned and passionate when it comes to delivering progressive essential technology and solutions to the government of Puerto Rico. We had a solid operating cash generation this quarter and are very satisfied with our 9 month operating cash flow generation.
Moving along, capital expenditures have totaled $27,400,000 year to date. We now project that our capital expenditures for the year will be between 33 $1,000,000 $35,000,000 CapEx will exceed our previous full year guidance of $30,000,000 as we invested in approximately 4,000,000 dollars in hardware and software directly related to certain long term service contracts executed in the year. We expect these additional assets and contracts to deliver sustained cash flow returns comfortably in excess of our cost of capital. Year to date, the company has made $21,000,000 in principal debt payments on our credit facilities. Additionally, there has been an approximate $8,000,000 increase in restricted cash.
Year to date, we have paid cash dividends of $23,000,000 and announced today another $0.10 dividend to be paid on December 4, 2015 to shareholders of record as of November 16, 2015. In the quarter, we actively repurchased our stock and for the 9 months we have repurchased approximately 35,000,000 of common stock, leaving the company with a total of 40,000,000 available for future use under the company's share repurchase program. Our ending cash balance at September 30 was $40,400,000 Moving to Slide 17. We provide summary of our debt. The slide reflects a quarter ending net debt position of approximately $635,000,000 comprised of just mentioned $40,400,000 of unrestricted cash and approximately $675,000,000 of total short term 3.4x.
As of September 30, total liquidity which includes unrestricted cash and available borrowing capacity under our revolver was approximately $122,000,000 Finally, regarding our 2015 financial outlook on Slide 18, we are updating our outlook based on our year to date results and our expectations for Q4. We expect revenue to be at the top end of our previous range of $368,000,000 $372,000,000 and have narrowed the range to $370,000,000 to $372,000,000 for growth of 2.5% to 3%. Adjusted EBITDA growth has been revised from between 3% and 4% to a range of 1.2% to 2% in 2015. Our previous adjusted diluted earnings per share guidance of $1.68 to $1.72 has been narrowed to $1.68 to 1 $0.69 As Matt mentioned, we had certain headwinds impacting Q4. We have 4 items.
1st, we expect reduced Latin American growth due to projected client migration. 2nd, a significant portion of our business was repriced pursuant to a contractual CPI increase effective October 1. This year, the CPI adjustment was a negative 4 basis points compared to a positive 166 basis points last year. 3rd, we have experienced a modest deceleration in payment transaction volumes from August to October. And 4th, we are absorbing the 4% business to business tax that went into effect October 1.
We estimate the business to business tax will reduce adjusted EBITDA approximately $500,000 All of these items are considered in our guidance. These headwinds will be partially offset by the addition of First Bank's recently expanded services that commenced in Q4. For further clarification, in our guidance, we have neither included any estimates for the Processa transaction nor factored in any potential exogenous impacts related to the Puerto Rico fiscal situation. In summary, while we cautiously monitor and wait for the resolution of the Puerto Rico fiscal situation, we are pleased and encouraged by our progress that's evidenced by the announced transactions, the ongoing resilience of the Puerto Rican consumer and the performance of our business model under the circumstances. We will now open the call for questions.
Operator, please go ahead.
I would like to turn the floor back to Alan to comment on the mistake on the slides. Alan?
Thank you, operator. It has come to our attention that Slides 14 and 16 were corrupted upon transfer. Our apologies. There will be a corrected version of the presentation available on our site under the Investor Relations tab very shortly. Operator, we will now open the call for questions.
Thank you. We will now be
conducting a question and answer session. Our first question comes from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.
Hi, guys. This is Evan Bull on for Bryan. Just some clarity on the bridge for the adjusted EBITDA margin. I heard that the value is 70 basis points to 4040, but how many of those are one time and then how many of those are going to be recurring? It sounds like just the increased investment might be recurring?
That's correct.
And then so if we look sorry, go ahead.
Yes, the prior vendor credits and
the bad debt are one time
and the investment is recurring.
Then if we look into 4Q for the adjusted EBITDA, can you size the magnitude of the increased investments in that quarter, just given that we now have the investments as well as the B2B tax reduction? And then are there any other difficult compares in the Q4 of 'fourteen that also impact the margin in 4Q of this year? First,
with respect to the investment, you can expect a similar 40 basis point impact into Q4. And then secondly to help you with the quarter, as you look by segment, we could expect the merchant acquiring revenue to be approximately high single digits, driven in part by the First Bank transaction. And secondly on payments, we expect to have low single digits as that's impacted by the lower expected transaction growth well as the reduced Latin American volume and the contract reprice that we referenced.
Got it. And then if you could
Excuse me, once more and then on Business Solutions, we expect to be flat to down slightly because of the contract reprice and a tough comparable where last year we had approximately $1,000,000 more in hardware
the last one for me is, you mentioned a deceleration in transactions that's kind of impacting the guide. Can you size kind of the magnitude of the deceleration that you've seen thus far? And then that's it. I'll turn it back to the queue.
Yes. So from as we referenced
from August to October, we've seen a modest decline, been about 1 to 2 percentage points down from what we've been experiencing, that being 5%. It oscillates weekly, so it's very difficult for us to track a certain number on it, but we've projected that that same volume being between 3% 4% for the remainder of Q4.
Great. Thanks.
Thank you. Our next question comes from the line of James Schneider with Goldman Sachs. Please proceed with your question.
Hi. This is Jordan on for Jim. Can you just provide some color around payment trends you're seeing within Puerto Rico? In particular, if you can provide some color around same store sales versus credit versus debit volumes, anything else that you want to highlight as the economy continues to be under pressure? That would be helpful.
Yes, so at this point we don't disclose at that level. The information that we gave you we've seen a slight deceleration in October, but we don't break it out by debit and credit at this point.
Okay. And then just one more if I may. To the extent that things get worse from a macro standpoint in Puerto Rico, can you quantify any spending levers at your disposal that would help cushion any impact to earnings? Thank you.
Yes, let me just sort of give
you my view and then I'll hand
it to Peter for a second. So when you think about what's going on in Puerto Rico, it's really hard to predict. Nobody's got a crystal ball. So we don't want to get into that business. Just the indicators on this call we did want to talk about was specifically the receivables are performing normal, right, they are actually a little bit better.
So that's a good indicator. We did mention out on the last call our government business and what we believe the exposure to be and that remains the same. And we are monitoring impact to the consumer, but they've been resilient in this type of economy. Over time, we think we can be part of the solution with the government, But then as it relates to levers, I will sort of hand that to Peter and you can address that.
Yes, I would just add a bit to what Max said there. We are looking opportunistically at some of the disruption caused by the economy and we think we can grow market share to offset some of those impacts. With respect to the levers, we are managing our business and our P and L as you'd expect and we're trying to reduce our cost structure. We're in the throes of our 2016 planning and we do this as a matter of course. So we'll be looking at that.
That includes all vendors and other aspects of our cost structure.
Yeah, let me just continue with that theme that Peter mentioned a good point again about First Bank Doral earlier in the year. So it is an opportunity for us to consolidate because we have to leverage and scale. And as far as expenses, as Peter mentioned, we are managing those we think very well. We had the voluntary reduction that we talked about earlier that Peter referenced. So we're actively managing the expenses in this environment to make sure we maintain our margin and then consolidate the top line opportunities where we can.
Thanks.
Thank you. Our next question comes from the line of George Mihalos with Cowen.
I wanted to start off, I know you said that the non Puerto Rico business, the LATAM business was up double digit.
I was hoping maybe you can give us
a more direct number just for sort of parsing what Puerto Rico grew versus the part that is non Puerto Rico? And should we still be thinking kind of 85% versus 15% for the non Puerto Rico mix?
Yes. So I'll let Peter answer the specific mix, but just to give you a little more color, George, on the Latin America business. This quarter it grew 12%. And what we're trying to make sure that we caution you is that, that was a bit of an anomaly because we had 2 one timers on projects, 1 around E and B, the other around migrating a customer and so that's what drove us against double digit. We're confident we'll get the growth quarter to quarter where we want it to be.
We've just implemented a new account management team as we referenced in the earlier material and the intent of that team is to try and keep accounts cross sell, because we did have some accounts that were had canceled in the past, because we did have account management function and so we may see the impact of that in the future, because it takes a while for accounts to migrate off. But again, we have a group trying to manage that and keep what we can and then we've also we're building a pipeline that we're pretty optimistic about. But as we win that business, it takes a while to win the business and then to actually implement it. So into 'sixteen, we do think that you will see a little bit more volatility and probably more like you seen this quarter would be more of an anomaly, you'll see more single digit as we head into 'sixteen. And then later in 'sixteen moving into 'seventeen, we think we'll get the growth rate where we want it to be.
As far as the exact mix between Puerto Rico and LatAm, I'll hand that to Peter.
Yeah, so as Mac referenced, Latin America was up 12% and then Puerto Rico was up approximately 3.5%.
Okay, great. Appreciate that color. And then, Peter, talking about I think you made some comments about the Business Solutions segment and sort of the repricing contract there. Should we be thinking that sort of this flattish rate of growth is going to be in the cards over the next several quarters now given the headwind that that presents?
Yes, I think that's a good way to look
at it. Yes, it starts October 1.
So it just repriced October 1, 2015 and that pricing will carry through to the end of September of 2016. And that's I mean the Puerto Popular is a big piece of our business and the majority of the business solutions segment
of our business.
Okay. Thank you.
Thank you. Our next question comes from the line of Bob Napoli with William Blair. Please proceed with your question.
Thank you. I guess looking at the growth rate of merchant acquiring, you won a new contract or expanded with First Bank. As you move into 2016, do you still would you expect to maintain merchant acquiring growth the high single digits and payment processing, I guess, in those low to mid single digits for 'sixteen is on a trend basis is that reasonable?
Let me so first off, Bob, let me give you a little more color on the First Bank deal because we're pretty excited about this. As you know Firstessa is the first acquisition this company has made since it's gone public. First Bank is the 1st merchant acquiring deal that we have done since the company has gone public. So we're quite excited about this. It is we bought the merchant contracts of First Bank and we did the processing for First Bank in Puerto Rico, but now we actually own the contract and we actually did not have their business in the Virgin Islands, which is a meaningful part of their business, that's part of this deal as well.
So that's the good news. And then it is factored into Q4. It helps offset some other headwinds and I'll hand it to Peter to sort of address specifically your question.
Yes, George, we're not providing 'sixteen guidance. We're in the middle of our planning. We'll update you next quarter. Excuse me, Bob. We'll do that next quarter.
As we I just alluded to, we are seeing the high single digits and expect that to continue in Q4 and the low single digits in the payment segment.
But there's no reason why that there's nothing out there that turned January 1st that you should see a significant change? Or is there any pricing or anything that would cause a significant change that you know of in those trends?
So I think a couple of things.
One is it's hard because we are in the planning process. We do have the legislation where the government has said that doctors' offices, attorneys have to accept cards now, which is new legislation, it's a couple of months old. It's also potentially going to be passed at any business that I think it's over $125,000 of the current legislation, we will have to accept cards. So we don't know yet what the impact of that could be. So it's a bit early to say what the puts and takes are, but there's a lot of movement I think on the regulatory front and then we do have to factor in the impact of FirstNet.
Yes, but to answer your question, we don't have a known item. No, there
is nothing generic with the device.
Then mix wise, I mean those two segments are your highest margin segments, the merchants the Business Solutions, your lowest margin segment, should we start to see a little bit of operating leverage coming through understanding that you're investing for growth? Would you expect to start to see a little bit of operating leverage in over the next year or 2? Or do you look at this point, are you looking to really drive up the growth rate and maybe invest for a bit heavier?
We're evaluating our investments as part of our plan and additionally on the growth, we would expect to get some leverage on those businesses, but the questions that we're dealing with in our planning is how much to reinvest to pursue other growth initiatives in Latin America.
Yeah, and I mean, Bob, I think we've said this before is, we're really focused on growth and we don't want to sacrifice cutting expenses in order to
Right. Affect the growth rates that we see
in these territories and these regions. So the first priority will be to grow and try to maintain our margins and everything we can put through Puerto Rico and get some scale we will, but the focus is going to be growth.
And then last question, Mac, I mean what do you feel like the long term growth rate should be for this business? I mean, I know you mean you brought on a lot of new talent. I mean, you've not even been there a year yet, but at this point, are you getting a feel for what you kind of think the long term growth rate for the business, what the potential is?
You always ask me the toughest question.
What I would say is no, we're still thinking through If you think about a big chunk of our business was Popular and the pricing is flat for
a year.
Right. And that's a significant dynamic of our business. However, if you look at the deals we are doing, I mean Colombia is the 2nd largest Spanish speaking market in all of Latin America. In fact most of our business right now is in Central America. If you look at our Latin American business, Colombia GDP is bigger than all of Central America.
So long term I think we are entering some really exciting markets, but you have to look at the entire mix of business that we have and we are still thinking through that trying to figure out what these deals look like. So we don't have a firm. I mean we have a strategy and a thesis around what the business should look like and the pieces we want to pull together, but giving long term guidance is not a place where we are at right now.
Great. Thank you.
Thanks Bob. Thank you. Our next question comes from the line of Sarah Gubins with Bank of America Merrill Lynch. Please proceed with your question.
Thank you. Do you plan to continue to absorb the business to business tax that you mentioned?
The business to business tax, to make sure I understand your question, Sarah, are you asking whether we have plans to offset it or it's
Yes, you talked about so when you talked about the various headwinds that caused you to lower the EBITDA guidance, one of the things that you mentioned was absorbing the 4% P2P tax. Is there anything that you can do from a pricing perspective or anything else to try to offset that? Or is that just something that we should think about as kind of being a permanent tax and therefore continues to impact you negatively next year?
We are the absorption was referenced in Q4 because it's kind of quick and upon us here. We are looking at ways to try to offset it. It's significant and then the other thing that's important to acknowledge is that the B2B tax is a temporary measure that's in place until April when it's supposed to be superseded by a VAT tax, which may have different impacts to our company. So we are looking at as part of our planning exercise, addressing the costs, including this tax and we'll relay that to you as part of our guidance as to how much we could absorb versus how much we could offset.
Okay, great. And then, so it sounds like on the receivables from the government that's been pretty stable so far. But there are some more concerns that the government may be running out of cash in relatively short order. Are you getting increasingly concerned about the receivables? Or does it is there anything that's suggesting to you that that may become more of an issue in the near term?
So I mean until the ambiguity is lifted and it's clear on how the government is going to pay their bills and deal with the debt issue, this will be something that we monitor closely and are concerned about. What I would tell you is if we look at the indicators as you've repeated, I mean they are paying us well, they're actually paying us better than they have in the past. We are a critical vendor. We run their tax systems. So they have got to run our systems in order to collect the taxes to pay all the creditors.
We run the judicial system. So I would say it's always going to be ambiguous until the debt situation is cleared up, but we are monitoring closely. We feel good about where we are today, but this is we don't have a crystal ball. This is something that will be ambiguous for our long term.
And I will just add that, as I mentioned, we have seen really business as usual. We are collecting and delivering and communicating under the same exact ways as before. In fact, we've been paid a little faster due to our collection efforts.
Great. Thank you.
Thank you. Our next question comes from the line of Chris Brendler with Stifel. Please proceed with your question.
Hi, thanks. Good evening.
Thanks for taking my questions. This is going to be a tough question, but let's just I'm going to try anyway. Any sense for some of the slowdown you're projecting from a high level in Puerto Rico? Is it more tax and government initiative related or just macro stress or maybe a combination of both? Thanks.
So I mean it would be a bit of conjecture on our part to know exactly what's causing this slowdown, but because of the tax there may be some movement to e commerce. But it seems that you're still seeing growth in a very tough market. So even despite the tax low single digits, I mean I am sorry low, I think yes low single digits, it's still relatively healthy in the market that we are in. And what we are trying to do on these calls is give you a sense of the latest data that we have given the debt situation, but it would be
a conjecture for us to
spend a lot of time trying to tell you exactly how it's going impact the consumer. Right.
There are many moving parts, Chris, and we analyze that weekly. The only other thing dynamic that is now coming in part into play is this new legislation with respect to doctors and the like, as well as potential future legislation to offer electronic payments for certain merchants over a certain revenue volume and that could have a positive impact and potentially offset other things. So there's just many different variables that have to be considered here.
Great. On the medical professionals and their requirements for cards, I didn't catch it. Is there any sizing on that? Are you talking about 100 basis point potential benefit or 500 potential? How big is that opportunity?
No, right now we don't have a number to provide. So we're not getting any type of view on that.
Okay. Separate question, just sort of take your pulse on M and A. I mean, sort of struck by at Money 2020 last week, just how hot payment still is and it's not it's good for, I guess, if you're in the right sector, but if you're trying to buy something it may be tough. What are you seeing on the M and A front right now?
Yes. So again, I mean we're pretty excited for Sensus. Again, the first deal that company has done since going public. It's created a lot of interest and what I would say is between that deal and between some of the talent that we've hired into the organization, we're seeing a lot of excitement in the marketplace and a lot of interest in doing business with EVERTEC, not only on the customer side, but also on the deal side. The guy that we've hired to run M and A for us is very, very active.
We have stuff we're constantly looking at in the pipeline. And as demonstrated with the Processa deal, some of these are very, very small and some of the big our big competitors wouldn't even have visibility to them. So we feel like that there's a growing and healthy pipeline, but we won't talk about deals until as we do on Processa, we have one to talk about.
Awesome. Thanks,
guys. Thank you. Our next question comes from the line of Tien tsin Huang with JPMorgan. Please proceed with your question.
Hey guys, this is Stephanie Davis on for Tien tsin. Could you talk a bit about any impact or change you've seen in consumer confidence versus your prior views, just given the deceleration in payment volumes and new tax and the macro?
Yes, I do want to emphasize, I mean the deceleration we're seeing is slight. I mean it is not again it's still growing low single digits, which I think is pretty healthy. So I do want to reemphasize that. But we are emphasizing it given the ambiguity that that's a sort of a trend we are seeing. But that's the key indicator we have right now.
I don't know if Peter, you want to add anything?
No, I'd echo what Max said. You still see buzzing activity throughout Puerto Rico, people spending money. It's just been a modest downtick from what we had experienced up until at the end of Q2.
How much of that do you
think could be seasonality versus some attribution to a reaction to the new tax, which added 1 or 2 points in the past quarter?
It's a look, we'd love to if we knew for certain, we'd love to
give you that type of view.
What I would tell you is, Sarafina opened on in Puerto Rico and it's busy all the
time, right? You know Sarafina.
So it's difficult for us to tell and we've just seen it in 1 month, 1 or 2 months where we've seen it tick down 1 or 2 percentage points. And so I think as we observe the trend for a longer period of time, we will have a more firm formed view.
And we are just letting you know what we did in terms of our projection for Q4 really that's what we are trying to share.
Alright, understood. One follow-up for me.
Could you give us
an update in your business solutions business and any kind of trends or delays you might be seeing in your project based business given some recent year
results? I wouldn't say that we have any delays at all. We're still actively working with Banco Popular as we ordinarily do. We are impacted by the CPI mechanism in the contract that we referenced. We are still engaged on new projects with the government and our other corporate enterprises that the group solution.
So there really isn't a change.
Yes, okay, status quo, nothing really new per se.
All right. Thank you. That's it for me.
Great. Thank you.
Thank you. We do have a follow-up question coming from the line of Bob Napoli with William Blair. Please proceed with your question.
But did you guys say what the revenue run rate is for PROCESSA or the growth rate for that business?
We did not. I mean, we haven't closed yet and that information is not publicly available.
Okay. And then the First Bank deal, the amount of revenue you expect to get?
We're not disclosing that at this point.
Okay. And then you also mentioned that you have some clients that are deconverting. What's the what is can you give me some feel for why that happened and what the revenue lost revenue is going to be and what markets that is?
Yes. So I mean, I want to be very careful because of the competitive nature of the question. We want to give you visibility into what that means from a growth perspective. What I would say is we didn't, in my view, do a good job of managing accounts, making sure that we understood their issues getting front of them, cross selling them, telling us I mean we simply did not have a function that did that effectively. We now have that in place.
So we are getting under these issues. So our concern in 2016 and then as we have said on previous calls, we didn't do a good enough job building a pipeline with meaningfully sized businesses. So I don't want to go country by country or call out specific accounts because some of those we're in the process of trying to save. But what I would say is it will put a damper on getting it to double digit growth next year, those two phenomenons. Anything we sign towards the end of this year, early next year is going to take a while to migrate on our platforms.
And some of those losses we haven't seen the impact to our numbers to date. So when we add business it will be offset by some of those losses. So that's the key point is just to get you a sense for Latin America is not where I want it yet. We have a fantastic team and I hope you guys will have the opportunity to meet that team in the future. So I am highly confident in our ability, just like in Puerto Rico, I mean who would have thought we would have done Processa at FirstBank within I have been in the job formally for 6 months.
And because we have a great team here focused on the ball in Puerto Rico, we now have that same team in Latin America, but we need to give them time to make the improvements that are necessary and then deal with the dynamics of our business around migrations.
And then just on capital expenditures, the $33,000,000 you're spending this year, it's like what is it, like 8%, 9% of revenue. What is the what should the CapEx run rate be over the next few years? And where should CapEx be able to moderate into the mid single digits or do you have a lot of projects that you're building that you need to support to growth that are going to keep that CapEx at a high level?
I think it's premature to predict out in the future, Bob. But the way we approach it is, we want to look and find as many growth investments that we can that are going to deliver solid returns, cash returns in excess of our cost of capital. We had a couple come up during the year which we'd expect people want us to pursue which we did and we are very happy with that and we will be monitoring that. We are obviously looking at the total CapEx spend very carefully as part of next year and then we'll give you some more color with respect to 'sixteen and then and beyond potentially.
So then on the next call, we should you're going to give you look to give full year 2016 guidance and some detail,
some good detail we expect.
Yes, that's
our current plan, yes.
Okay. Thank you.
Thanks, Bobby. Thank you.
Thank you. I'd like to turn the call back over to Mac for closing comments.
Okay, great. Thank you everyone. As Alan mentioned, we have got a corrected version of the presentation is now available on our website. We apologize for the mistake, but hope you appreciate the additional level of information we're providing through the call to help you better understand the business that you've invested in. I want to thank everyone once again for joining us today.
Look forward to meeting and spending time with you in the coming months and everyone have a great evening. Operator, you can close the call now. Thank you.
This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.