Greetings. 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. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. 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 third quarter 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 12th. 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 4th. 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. 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-K 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 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, two 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 four, we have a summary of our Q3 results. Total revenue was $92.8 million, an increase of 4% compared with the third quarter of 2014, which was slightly ahead of our expectations. We generated adjusted EBITDA of $46 million, an increase of 3%, and adjusted net income per share of $0.42, an increase of 5%. Both of these were in line with our expectations.
We returned approximately $33 million to our shareholders this quarter through a $25 million stock buyback and our $8 million quarterly dividend. Turning to slide five, we provide a summary of the planned acquisition of Processa, which is a diversified Colombian payment company headquartered in Bogotá. As previously disclosed, we have entered into an agreement to buy 65% of Processa for a purchase price of approximately $5.7 million at the current exchange rate. The deal now provides us with a business platform to expand upon in the Colombian market. Processa offers a wide variety of payment services, including processing for card issuers, financial institutions, and merchants. Its clients include Grupo Éxito, one of Colombia's largest retailers with approximately 550 stores. Several financial institutions, including Banco de Bogotá and Bancamía, and two of the top social funds administrators, Cafam and Compensar.
Compensar, the current majority owner and Colombia's second-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 are still targeting a close date for the end of November. Moving to slide six. We are pleased to announce that as of October 31st, we have agreed to extend and expand our business relationship with FirstBank for a term of 10 years. FirstBank is the second-largest commercial bank on the island and has over $12 billion 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 business community and demonstrates that opportunities remain for EVERTEC in Puerto Rico. Now please turn to slide seven 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 eight 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 Schuesslers. In addition to Peter, we announced a number of other internal organizational changes. We now have three senior business leaders, two in Puerto Rico and one for outside of Puerto Rico, who are solely focused on working with our key customers.
Ensuring the satisfaction of our existing 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 am 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 Latin American business on slide eight. 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 Goldvarg, who is solely focused on our growth outside of Puerto Rico. Additionally, during the recent quarter, Mariana added a CIO who was the number two 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 third quarter, this growth rate is not reflective of the performance we are anticipating in the near term.
The future 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 re-accelerate the growth of our business over time. Now turning to slide nine, 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%, effective July 1st. It applies to approximately half of our merchant sales volume.
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 the increased 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 two headwinds. First, every year, effective October 1st, a significant portion of our business with Banco Popular is repriced based on the September Consumer Price Index. The CPI starting in the fourth quarter is much lower than we've experienced in the past. Second, also effective October 1st, 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 the beginning of the year and discussed on previous calls. I'd like to review where we stand on each. First, we said we'd 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'd 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 between the expansion of our relationship with FirstBank 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 second-largest target market, Colombia. Finally, we said we'd evaluate our internal capabilities, which we've 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 and processing 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 third quarter 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 third quarter and nine-month period segment revenue details and the same for the total company. Total revenue for the third quarter of 2015 was $92.8 million, up 4% compared to $88.9 million in the prior year. Total revenue for the nine months year to date was $277.4 million, and also up 4% year-over-year. We are encouraged by our year-to-date performance and the 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 $20.8 million, 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 1st. We estimate that the sales tax increase added one to two 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 nine-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 third quarter to $27.5 million, up from $25.8 million 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 approximately 5% during the quarter as compared to last year, continuing the trend we have experienced in 2015. For the nine-month period, payment processing grew 4% to $80.6 million, driven by these same causals and partially offset by lower revenues from electronic benefit transfer card processing business. Business solutions grew 2% to $44.5 million 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 nine-month period, business solutions grew 2% to $134.7 million, 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 third quarter and nine-month periods. The adjustments to EBITDA in the third quarter of 2015 included a $5.7 million charge for severance payments, primarily in connection with a voluntary retirement initiative provided to and accepted by certain employees. We expect a savings payback period of a year and a half 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 million, an increase of 3% from $44.5 million in the prior year. Adjusted EBITDA margin was 49.6%, an increase 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 nine-month period, Adjusted EBITDA grew 3% to $138.8 million 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 third quarter. Starting from the left column, the bridge begins with the Adjusted EBITDA margin in the third quarter of 50.1%, 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 third quarter of 2015. This positive margin impact was offset by three items.
First, 2014's results included certain non-recurring favorable vendor credits that drove a benefit of approximately 70 basis points. Second, we wrote off a bad debt this quarter where there was a contract renewal involved, which impacted us approximately 40 basis points. Third, we increased investment related to a card-issuing product initiative. 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 third quarter of 2015. We continue to have significant operating leverage across our existing platforms and businesses. The focus is to drive incremental business and volumes through these platforms while we pursue additional growth opportunities. Moving to slide 15. Adjusted net income in the third quarter was $32.4 million, up 3% from $31.4 million in the prior year.
Adjusted net income reflects lower cash interest expense, which declined $400,000 versus the prior year period to $5.1 million. 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 third quarter was 11.2% 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 million, 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 $96.8 million, up 1%, and adjusted diluted earnings per share was $1.25, up 3% from $1.21.
Moving on to our cash flow overview for the nine months on slide 16. Net cash provided by operating activities in the nine months was approximately $123 million, a significant year-over-year increase driven primarily by working capital improvements. At this time, I'd like to provide you with a general update on the status of our receivables 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 30th was $16.2 million, which is down from approximately $21 million from the beginning of the year and down approximately $1 million 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 time frames. 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 nine-month operating cash flow generation. Moving along, capital expenditures have totaled approximately $27.4 million year-to-date. We now project that our capital expenditures for the year will be between $33 million and $35 million. CapEx will exceed our previous full-year guidance of $30 million as we invested in approximately $4 million 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 million in principal debt payments on our credit facilities. Additionally, there has been an approximate $8 million increase in restricted cash. Year-to-date, we have paid cash dividends of $23 million 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 nine months, we have repurchased approximately $35 million of common stock, leaving the company with a total of $40 million available for future use under the company's share repurchase program. Our ending cash balance at September 30th was $40.4 million. Moving to slide 17, we provide a summary of our debt.
The slide reflects a quarter-ending net debt position of approximately $635 million, comprised of the just-mentioned $40.4 million of unrestricted cash and approximately $675 million of total short-term borrowings and long-term debt. Our weighted average interest rate was 2.95%, and our net debt to adjusted trailing 12-month adjusted EBITDA was 3.4 times. As of September 30th, total liquidity, which includes unrestricted cash and available borrowing capacity under our revolver, was approximately $122 million. 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 million-$372 million and have narrowed the range to $370 million-$372 million for growth of 2.5%-3%. Adjusted EBITDA growth has been revised from between 3% and 4% to a range of 1.2%-2% in 2015.
Our previous adjusted diluted earnings per share guidance of $1.68-$1.72 has been narrowed to $1.68-$1.69.
As Mac mentioned, we have certain headwinds impacting Q4. We have four items. First, we expect reduced Latin American growth due to projected client migration. Second, a significant portion of our business was repriced pursuant to a contractual CPI increase effective October 1st. This year, the CPI adjustment was a negative four basis points compared to a positive 166 basis points last year. Third, we have experienced a modest deceleration in payment transaction volumes from August to October. Fourth, we are absorbing the 4% business-to-business tax that went into effect October 1st. We estimate the business-to-business tax will reduce adjusted EBITDA approximately a half million. All of these items are considered in our guidance. These headwinds will be partially offset by the addition of FirstBank's recently expanded services that commence 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'll 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'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for questions. Our first question comes from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.
Hi, guys. This is Eavan Boland for Bryan. Just some clarity on the bridge for the adjusted EBITDA margin. I heard the value of the 70 basis points, the 40 and 40, 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.
If we look Sorry, go ahead.
Yes, the prior vendor credits and the bad debt are one time, and the investment is recurring.
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? Are there any other difficult compares in the fourth quarter of 2014 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. 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 FirstBank transaction. Secondly, on payments, we expect to have low single digits as that's impacted by the lower expected transaction growth as well as the reduced Latin American volume and the contract reprice that we referenced.
Got it.
Excuse me, once more. 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 million more in hardware sales than we expect this next quarter.
Got it. The last one from me is, you mentioned a deceleration in transactions that's kind of impacting the guide. Can you size the magnitude of the deceleration that you've seen thus far? That's it. I'll turn it back to the queue.
Yes. As we referenced from August to October, we've seen a modest decline. It's been about one to two 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. We've projected that same volume being between 3% and 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.
Yeah. 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. 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.
Let me just sort of give you my view, then I'll hand it to Peter for a second. When you think about what's going on in Puerto Rico, it's really hard to predict. Nobody's got a crystal ball, 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're actually a little bit better. 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. We are monitoring impacts of 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.
As it relates to levers, I'll sort of hand that to Peter, and you can address that. I'd just add a bit to what Mac 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&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. We'll be looking at that. That includes all vendors and other aspects of our cost structure.
Let me just continue with that theme that Peter mentioned a good point again about FirstBank, Doral Bank earlier in the year. This is an opportunity for us to consolidate because we have the leverage and scale. 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. 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 Georgios Mihalos with Cowen. Please proceed with your question.
Great. Thanks for taking my question, guys. Wanted to start off, I know you said that the non-Puerto Rico business or the Latin business was up double-digit. 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. Should we still be thinking kind of 85% versus 15% for the non-Puerto Rico mix?
Yeah. I'll let Peter answer the specific mix. Just to give you a little more color, George, on the Latin America business. This quarter it grew 12%. What we're trying to make sure that we caution you is that that was a bit of an anomaly because we had two one-timers on projects, one around EMV, the other around migrating a customer. 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. The intent of that team is to try and keep accounts cross-sell because we did have some accounts that had canceled in the past because we didn't have account management function.
We may see the impact of that in the future because it takes a while for accounts to migrate off. Again, we have a group trying to manage that and keep what we can. We've also, we're building a pipeline that we're pretty optimistic about. As we win that business, it takes a while to win the business and then to actually implement it. Into 2016, we do think that you'll see a little bit more volatility and probably more like you've seen this quarter would be more of an anomaly to see more single-digit as we head into 2016. Later in 2016, moving into 2017, we think we'll get the growth rate where we want it to be. As far as the exact mix between Puerto Rico and Latin, I'll hand that to Peter.
Yeah. As Mac referenced, Latin America was up 12%, Puerto Rico was up approximately 3.5%.
Okay, great. Appreciate that color. Peter, talking about, I think you made some comments about the business solutions segment and sort of the repricing of the 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. Yeah, it starts October 1st. It just repriced October 1st of 2015, That pricing will carry through to the end of September of 2016. Banco 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 Robert 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 FirstBank. As you move into 2016, would you expect to maintain merchant acquiring growth in the high single digits and payment processing I guess in those low to mid single digits for 2016 on a trend basis? Is that reasonable?
First, Bob, let me give you a little more color on the FirstBank deal because we're pretty excited about this. As you know, Processa is the first acquisition this company's made since it's gone public. FirstBank is the first merchant acquiring deal that we've done since the company's gone public. We're quite excited about this. We bought the merchant contracts of FirstBank, we did the processing for FirstBank in Puerto Rico, but now we actually own the contracts. We actually did not have their business in the Virgin Islands, which is a meaningful part of their business, but that's part of this deal as well. That's the good news. It is factored into Q4. It helps offset some other headwinds, I'll hand it to Peter to sort of address specifically your question.
Yeah. George, we're not providing 2016 guidance. We're in the middle of our planning. We'll update you next quarter. Excuse me, Bob. We'll do that next quarter. 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.
There's no reason why there's nothing out there that turning 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?
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 doctor's 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 a path that any business that I think it's over $125,000 is the current legislation. We'll have to accept cards. We don't know yet what the impact of that could be. It's a bit early to say what the puts and takes are. There's a lot of movement, I think, on the regulatory front, and then we do have to factor in the impact of First Bank.
Yes. To answer your question, we don't have a known item that.
No. There's nothing to report where we took a quick.
Otherwise could adjust.
Mix-wise, those two segments are your highest margin segments. 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 over the next year or two? Or 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. Bob, I think we've said this before, is we're really focused on growth, and we don't want to sacrifice cutting expenses.
Right
sacrifice the growth rates that we see in these territories and these regions. The first priority will be to grow and try and maintain our margins. Everything we can put through Puerto Rico and get some scale, we will, but the focus is going to be growth.
last question. Mac, what do you feel like the long-term growth rate should be for this business? I know you've brought on a lot of new talent. You've not even been there a year yet, but at this point, are you getting a feel for what you think the long-term growth rate for the business, what the potential is?
Bob, you always ask me the toughest question. What I would say is, no, we're still thinking through that. If you think about it, a big chunk of our business was Popular, and that the pricing is flat for a year.
Right.
That's a significant dynamic of our business. However, if you look at the deals we're doing, Colombia is the second 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. Long term, I think we're entering some really exciting markets, but you have to look at the entire mix of business that we have. We're still thinking through that, trying to figure out what these deals look like. 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're at right now.
Great. Thank you.
Thanks for asking, Bob.
Thank you. Our next question comes from the line of Sara 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, Sara, are you asking whether we have plans to offset it?
Yeah. 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% B2B 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 being a permanent tax and therefore continues to impact you negatively next year?
The absorption was referencing Q4 because it's quick and upon us here. We are looking at ways to try to offset it. It's significant. 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. We're looking at, as part of our planning exercise, addressing the cost, 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. It sounds like on the receivables from the government, that's been pretty stable so far. 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? Is there anything that's suggesting to you that that may become more of an issue in the near term?
Until the ambiguity is lifted and it's clear on how the government's 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 say is, if we look at the indicators as you've repeated, 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've got to run our systems in order to collect the taxes to pay all the creditors. We run the judicial system. I would say it's always going to be ambiguous until the debt situation is cleared up, but we're monitoring it closely. We feel good about where we are today. We don't have a crystal ball. This is something that will be ambiguous for a while.
I'll just add that, as I mentioned, we've seen really business as usual. We're collecting and delivering and communicating under the same exact way 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 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.
It would be a bit of conjecture on our part to know exactly what's causing this slowdown. Because of the tax, there may be some movement to e-commerce. It seems that you're still seeing growth in a very tough market. Even despite the tax, low single digits is still relatively healthy in the market that we're in. What we're trying to do on these calls is give you a sense of the latest data that we have, given the debt situation. It would be conjecture for us to spend a lot of time trying to tell you exactly how it's going to impact the consumer.
Right.
Many moving-
Yeah, many moving parts, Chris, and we analyze that weekly. The only other thing dynamic that is now coming 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. That could have a positive impact and potentially offset other things. There's just many different variables that have to be considered here.
Great. On the medical professionals and their requirement 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. We're not giving any type of view on that.
Okay. Separate question. Just sort of take your pulse on M&A. I was sort of struck by Money20/20 last week, just how hot payment still is. 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&A front right now?
Yeah. Again, we're pretty excited for Processa. Again, the first deal that the company's done since going public. It's created a lot of interest. 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&A for us is very active. We have stuff we're constantly looking at in the pipeline. As demonstrated with the Processa deal, some of these are very small, and some of our big competitors wouldn't even have visibility to them.
We feel like that there's a growing and healthy pipeline, but we won't talk about deals until, as we did on Processa, we have one to talk about.
Awesome. Thanks, guys.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, it's star one on your telephone keypad. One moment while we poll for questions. 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.
Hey, Stephanie.
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, the new tax, and the macro?
Yeah, I do want to emphasize, the deceleration we're seeing is slight. Again, it's still growing low single digits, which I think is pretty healthy. I do want to reemphasize that. We are emphasizing it, given the ambiguity, that that's a sort of a trend we're seeing. 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 Mac says. 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 an attribution to a reaction to the new tax, which added one or two points in the past quarter?
If we knew for certain, we'd love to give you that type of view. What I would tell you is Serafina opened in Puerto Rico, and it's busy all the time, right? You know Serafina. It's difficult for us to tell. We've just seen it in one month, one or two months where we've seen it tick down one or two percentage points. I think as we observe the trend for a longer period of time, we'll have a more firm, formed view.
We're just letting you know what we did in terms of our projection for Q4. Really, that's what we were trying to share.
All right. Understood. One follow-up from me. Could you give us an update on your business solutions business and any kind of trends or delays you might be seeing in your project-based business, given some recent peer 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're still engaged on new projects with the government and our other corporate enterprises, the group solutions. There really isn't a change.
Yeah, I would say 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 Robert Napoli with William Blair. Please proceed with your.
Did you guys say what the revenue run rate is for Processa or the growth rate for that business?
We did not. We haven't closed yet, that information's not publicly available.
Okay. The FirstBank deal, the amount of revenue you expect to get?
We're not disclosing that at this point.
Okay. You also mentioned that you have some clients that are deconverting. Can you give me some feel for why that happened and what the lost revenue is going to be and what markets that is?
Yeah. I want to be very careful because of the competitive nature of the question.
Sure.
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 in front of them, cross-selling them. We simply did not have a function that did that effectively. We now have that in place, so we're getting underneath these issues. Our concern in 2016. As we've said on previous calls, we didn't do a good enough job building a pipeline with meaningfully sized businesses. 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. What I would say is it'll 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 onto our platforms. Some of those losses, we haven't seen the impact to our numbers to date. When we add business, it'll be offset by some of those losses. 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. I hope you guys will have the opportunity to meet that team in the future. I'm highly confident in our ability. Just like in Puerto Rico, I mean, who would have thought we'd have done Processa and FirstBank within, I've been in the job formally for six months.
Yeah.
It's because we had a great team here focused on the goal in Puerto Rico. We now have that same team in Latin America, we need to give them time to make the improvements that are necessary deal with the dynamics of our business around migrations.
Thanks. Just on capital expenditures, the $33 million you're spending this year, it's like 8%, 9% of revenue. What should the CapEx run rate be over the next few years, and 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 the growth that are going to keep that CapEx at a high level?
I think it's premature to predict out in the future, Bob, 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're very happy with that. We'll be monitoring that. We're 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 2016 and beyond, potentially.
On the next call, you look to give full year 2016 guidance and some detail, some good detail, I would expect, yeah.
That's our current plan, yeah.
Okay. Thank you.
Thanks, Bob.
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've got a corrected version of the presentation. It's 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. 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.