Q1 2020 Earnings Call
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At this time, all participants are any listen only mode.
After the speakers presentation, there will be a question and answer session.
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Please be advised to today's conference is being recorded.
I would now like to turn the call over to at O'hare Senior Vice President of Investor Relations for Eagle. Please go ahead Sir.
Good morning, and welcome to Eagle payments first quarter earnings Conference call.
This call is being webcast today and a replay will be available through the Investor Relations section of Eagles website. Shortly after the completion of this call.
Please note that somebody information you will hear a during our discussion today will consist of forward looking statements.
These forward looking statements are based on currently available information and actual results may differ materially from the views expressed in these statements, particularly due to the impact of covert 19 on our business.
For additional information on factors that may cause our actual results to differ.
As expressed in any forward looking statements made today, please refer to todays press release and the risk factors discussed in our periodic reports filed with the FCC, including our most recent 10-K available on our website.
In addition to provide additional information to investors.
Today's discussion also includes certain non-GAAP financial measures.
An explanation <unk> reconciliation of these non-GAAP financial measures to the nearest GAAP financial measures can be found in our earnings release available on our Investor Relations website.
Today, we will discuss our first quarter performance and provide an update on the impact cobot 19 is having on our business.
Joining me on the call today, Jim Kelly Chief Executive Officer.
Tom Panther Chief Financial Officer.
Darren Wilson President of the International segment and brand intangible President of the Americas segment.
I'll now turn the call over to Jim. Thank you Ed and good morning, everyone in the first quarter, either delivered 4% normalized revenue growth and 12% normalized adjusted EBITDA growth, which reflects the company strong performance in January and February offset by the impact of Cobot 19, beginning in early to mid March.
Well, we are pleased with a strong start of the year.
Early success has been overshadowed in many respects by the covert 19 pandemic that isn't Gulf the world.
Viruses rabid spread has proven devastating to the global population and the economy profoundly affected our daily lives.
He though reacted quickly as the crisis unfolded in our markets implementing our business continuity plan to ensure that health and safety of our employees and a continued support of our merchants and partners.
I'm very proud of all our employees for quickly adapting to the situation the dedication and professionalism and enabling our operations to continue without interruption.
As many government has now begun to ease the cover 19 related restrictions.
There are complying with the local government guidelines and regulations to safely enable our employees to return to the office.
We have posted on our Investor Relations website, a timeline of the decline in our volumes beginning in early to mid March when government restrictions began to be implemented in our markets.
As you can see the slides reflect the initial declines in our volumes in both Europe and the Americas and also the recent improvements beginning in late April has a number of jurisdictions in Europe, and the United States allow a limited number of businesses to gradually reopened.
Well, our overall volume remains depressed, we're seeing some positive indicators economic activity resuming.
One such illustration is the number of active merchants, which we believe will be an early indicator of business activity resuming.
As of May 1st the number of active merchants has increased nearly 30% from the mid April low at certain jurisdictions began the reopening process Darren and Brendan will provide details on how the cover 19 virus as affected our segments later on the call.
Also as we began to see our volumes rapidly decline in mid March they took three decisive actions to significantly lower a fixed cost and strengthen our balance sheet to address the potential of a deep and prolonged economic impact due to the pandemic.
First we moved it to protect and improve our cash flows by aligning our expenses with the recent decline in revenue.
We implemented expense reductions across the company, including personnel cost and third party spend and eliminated noncritical capital expenditures.
Getting on April 1st we reduced our payroll cost through a combination of furloughs and salary reductions and we've also significantly cut many of our non payroll expenses second we strengthened the company's balance sheet with 150 million dollar investment from our long time Investor Madison Dearborn partners. After receiving these funds in mid April.
We repaid the balance of our revolver and are holding the remaining proceeds and cash.
Our pro forma leverage has been reduced to 3.1 times as a result of this transaction.
Finally, as we announced in this mornings press release, we amended our leverage covenant to six times EBITDA through March 2021, given the uncertain timing of the global economic recovery, Tom will discuss the various impacts of these three actions as well as our cash flow and leverage objectives later on this call.
Taken together these actions provide us financial flexibility, ensuring we will be able to weather the current crisis and emerge well position to resume our growth plans. We're committed to actively managing your cash flows and supporting our please and customers as we work through this challenging situation I will now I'll turn the call over to Darren.
Discuss our European business Darren.
Thanks, Jim as you can see a European segment began to feel the impact have you been 19 in early March as governments implemented social and commensurate restrictions to slow the spread of the virus.
Experienced widespread declines across all of 'em office.
Vein without first smokers to feel the impact the economic disruption followed by Poland Czech Republic.
And then the UK.
A diverse merchant portfolios have helped soften volume decline.
That's the largest portion of our European volumes are derived from large big box merchants, such as national supermarket chains.
Home goods and supply stores and got station.
Right It depends I mean travel and lodging represented approximately 5% of a European volumes.
Primarily concentrated in Spain, which was the market most significantly impacted by the government restrictions.
With the widespread government actions.
In closing most borders and businesses.
The could rapidly declined to approximately 50% versus the prior year.
I think carefully monitoring the government decisions regarding the easing the restrictions.
And now seeing certain businesses within our markets reopened and begin the recovery purchases.
For example, Ireland, Germany, and the Czech Republic, Orlando certain businesses to reopen while adhering to government guidelines related to social distancing.
Very protective equipment.
That's business returns.
Anticipate card usage to increase as consumers and merchants helps use credit and debit cards rather than cash.
I'm not sure well equipped to respond to this anticipated shifting consumer behavior through the use of contactless mobile terminals and E Commerce solutions.
As you can see from the slide we have seen a multi week improvement enough volume, which are now down roughly 20% compared to last year.
No. It appears that we all night on improving trajectory.
We are also seeing the number of active merchants increase across many of our markets, which provides for the encouragement that trends are improving.
For example, in Poland, where volumes decreased nearly 50 sent out the laid point, we have begun to see a recovery with volumes currently approaching flat versus 29 team.
On the number of active much and increased to nearly 75% pre k. that 19 level after bottoming around 50%. Additionally, we've been actively manage I'm I'm not sure portfolio during this period.
Remained in contact with our network trade an industry organizations to ensure we remain well coordinated across industries to assist damage and through this challenging time.
Finally, I'd like to provide an update on our expansion into Portugal, which was delayed as result of a bank has announcement to acquire you're a bit on February the 10.
We began initial discussions with the Banca following the announcement, but unfortunately these discussions were interrupted by the pandemic and we've agreed to resumed discussions next quarter.
I will now turn the call over the Brendan.
Provide updates on our Americas segment Brendan.
Thanks Darrin.
Our payment volumes in the Americas demonstrated trends similar to our European businesses, although the steep decline occurred approximately one week later, given the progression the viruses spread.
As you can see from our slide our Americas volume declined by approximately 40% in mid April. However, we have seen a steady improvement as businesses have begun to reopen with volumes now the only approximately 20% from the prior year.
Our merchant mix in the U.S. is predominantly Smbs. However, these declines have been somewhat offset by a b to b business, which has withstood the crisis reasonably well.
And our Mexico business, we process for many national merchants, including large grocery stores supercenters and gas stations, which have softened the volume decline in our Americas segment.
We are actively working with our merchants to support them through this crisis and have been in regular contact with state and local authorities as we prepare for the government restrictions to ease an economic activity to return.
Today, we have seen many states ease the restrictions to enable businesses to reopen and we anticipate this trend to progress over the coming weeks as most states have issued a reopening plan.
We are monitoring volumes and merchant activation rates at both state and MCC level in order to better understand of market trends and we're encouraged by the rate of improvement that we are experiencing especially in certain industry verticals.
In the U.S., where a number of states have allowed businesses to reopen active merchants have increased by more than 20% in the past two weeks.
Importantly, we're also seeing this in states where stay at home orders are still in place as more businesses adapted to this evolving economic environment.
Lastly, we continue to make progress towards launching our 50 50 joint venture in Chile would be <unk>.
We are preparing to process payments in the market through our Latin American platform based in Mexico and have established the legal entity under which we will conduct business.
As the joint venture will leverage the fixed costs already embedded in our Latin American platform. It will not require any significant cash investments. This year. We're now waiting for final regulatory approval and are in frequent dialogue with the regulators to address their questions as independent merchant acquiring has a new concept in the market.
With that I will turn the call over to Tom who will now cover the financials in more detail Tom.
Thank you Brendan and good morning, everyone.
Delivered constant currency revenue growth of 4% in the quarter when excluding the BNP termination fee from last year.
FX negatively impacted revenue by 180 basis points as the peso Euro and Polish zloty continued to weaken compared to the prior year.
On a currency neutral basis, adjusted EBITDA grew 6% and margin expanded 112 basis points. However, normalized adjusted EBITDA grew 12% and margin increased 209 basis points.
Through February our financial performance was well in line with our previous guidance. However, the steep decline in volume beginning in March significantly reduced our revenue and EBITDA growth.
As Jim mentioned beginning in April we implemented specific cost reductions that have resulted in a material decline in our fixed costs that we anticipate will allow us to operate on a cash flow positive basis over the course of this economic downturn.
Payroll expenses comprise approximately two thirds of the reduction and is largely the result of furloughs and salary reductions which went into effect on April 1st.
We also focused on non payroll expenses and has significantly reduced these costs.
The combination of these actions have reduced our ESG and I spend by approximately 25% or $6 million per month.
In addition, we have significantly scaled back our capital expenditures include only critical projects expect capex decline approximately 75% compared to last year.
The current decline in our processing volume is less severe than we forecasted at the time, we implement our expense reduction initiatives, which gives us confidence that they actions we have taken will deliver the desired results.
However, it's important to keep in mind that the duration of this economic decline in the pace of the eventual economic recovery remain uncertain.
We will continue to actively manage our expenses and cash flows based on our revenues as economic activity resumes in our markets.
We're also monitoring daily margin activity in order to closely manage our risk profile and minimize charge back related losses.
As far given our diversification, we remain comfortable with the risk profile of our portfolio I've not seen a significant increase in charge back activity.
Across all of our markets. We're also working closely with government authorities to utilize the local assistance programs for merchants and our employees in order to secure any financial benefits from these programs.
With respect to our segment performance in Europe normalized segment revenue grew 7% and adjusted segment profit increased 19% or profit margin expanded over 300 basis points compared to last year.
Turning to the Americas constant currency revenue grew 2% and adjusted segment profit increased 12% while margin also expanded approximately 300 basis points on a currency neutral basis.
Adjusted corporate expenses for the quarter were $7 million, which is an increase of $1 million compared to the prior year period due to an increase in general operating expenses.
Adjusted net income was $9 million and adjusted net income per share was 11 cents, which both increase over 70% compared to last year.
This increase is driven by strong operating leverage as we were able to grow revenue by 4%, while maintaining stable operating expenses compared to a year ago.
At the ended the quarter, including all share classes and dilutive Securities. We had 83 million shares outstanding which is flat compared to a year ago.
Going forward the shares underlying the convertible preferred stock, which closed on April 20, Onest will be included in our diluted shares outstanding.
Turning to our leverage we ended the quarter with 4.1 time, the trailing 12 month adjusted EBITDA.
Upon receiving the preferred stock proceeds last month, our leverage ratio improved 3.1 time.
As Jim noted, we've repaid the revolver, which provides us $200 million of available borrowing capacity.
As announced this morning, we have received approval from our revolver lender group to increase our leverage covenant to six times. The last 12 months EBITDA through the first quarter of 2021.
Previously the leverage Covenant was scheduled to step down throughout 2020 to five times by year end.
The combination of these actions provides a strong liquidity and significant financial flexibility going forward.
Lastly, I'd like to provide an update on our outlook.
Given the current global economic uncertainty, we will not be providing revenue or EBITDA forecast for Q2 or full year 2020 at this time.
However, we have provided recent volume trends and specific cost and cap ex reduction details to assist with modeling our financial performance.
Until the economic activity in our markets has normalized we will continue to provide quarterly update of these operating metrics to help you understand the trends we're seeing in our business.
With that I will turn the call back over to Jim Jim.
Thank you Tom Eva remains focused on delivering on our commitments and responsibilities to all stakeholders. During this unprecedented time.
While the duration of the economic disruption remains uncertain.
Early actions, we took to address the impact of the pandemic position us to emerge from the crisis with a stronger balance sheet and the ability to continue or expansion strategy.
I'm also encouraged by the recent trends, we're seeing and our volumes and active merchant counts and remain optimistic that economic activity will continue to gradually resume in our markets.
Ill now turn the call over to the operator to begin the question and answer session operator.
And ladies and gentlemen at this time, if he would like to ask an audio questions. Please press star one on your telephone keypad.
And your first question comes from the line of Ramsey El Assal from Barclays. Please go ahead.
Hey, guys on it has been butadiene for Ramsey.
I wanted to ask about your go to market in Europe, our understanding is that it's a little bit more bank space.
Coming to the bank of then being kind of cross sold with others.
In commercial banking products.
Have you guys had to make any any changes to that strategy kind of with everything going on over there.
How long might you expect that to kind of continue.
On the same like have you been able to switch to virtual selling or telesales things like that.
Hi, there yet Darren here. Thanks for question yet it is that a different <unk> operating model in terms of bank clients is a across almost all of our European markets.
No. The activity is continued with banks banks have been very much encouraging that business customers to pivot to E Commerce online virtual terminal type transactions.
Because obviously the look downs cash usage customers rules this fall and significantly through ATM, So I've been doing campaigns with up to them minutes in the states.
In terms of leveraging and selling.
That's a terminal E Commerce type solutions and also through Oh, a tech enabled channels strongly in the UK, but but across all of our markets. Similarly, a tech enabled solutions three omnichannel opportunities afforded new matching up cintas.
The.
Pivot from call. It presents a card not present transactions so other business as usual.
Okay great.
If I could ask I know, you're not giving guidance for the quarter, but in the past you've given some helpful color on sort of the differential between transaction growth and revenue growth would could we expect kind of the same thing with volumes would it would that be a fair assumption.
Yes. This is Jim.
And volumes to some extent, yes. There is that we gave these charts just so that people get a good sense of the effect, but also that we're now seeing a recovery I would say.
Volume can be a little misleading for example in our petroleum business.
Sending out where gas prices continued to move.
They can move that move down so one purchase of gas.
Is one transaction, but the the value of the cost of the of the purchase could swing pretty significantly, but I think for.
You know for purposes of where we are today I think it's a good enough proxy.
Okay, well, thanks, so much into hope you're also bankers.
Okay. Thanks.
And your next question comes from the line of Bob Napoli with William Blair. Please go ahead.
Hi, good morning, everybody or good to talk to you learn about.
The.
What are your thoughts.
Jim or Tom and just on the ability to main what type of EBITDA margins, assuming that the trends.
Our in place now are stable quarter slightly improving as you would think the would be.
What type of EBITDA margins, you can't key could maintain.
Well.
As we described.
Cost reductions that we put into place in the beginning of April.
Or combination of payroll and non payroll, including some furloughs.
So the I think the EBITDA margins for the foreseeable future are sustainable.
Recognizing though that part of that is the result of.
Of pretty significant payroll reduction so at some point those will get returned back as the business returns.
As Tom said in his comments as the volumes return and in the revenue to kind of normal levels and as these markets open up.
There may be inflection points as we.
Return salaries back to where they were.
Before the crisis. So we're really playing a month by month as we see volumes improve I think what's most significant is as Tom said in his comments is in one of our most important international markets Poland worse, we've seen a very significant improvement in volumes in that market close to where.
Sure It where it was last year at this time on a volume basis, not necessarily revenue for our EBITDA, but on a volume basis as the market started to open up so I think we like everybody else on this call and around the world are waiting to see the effects of.
Commerce once the.
Government restrictions are relaxed and people feel comfortable to stop start resuming then their normal lives.
That's all I wasn't clear on the difference in the revenue versus the volume trends as we look at these volume trends.
How is revenue tracking in line did she gets again would be in line with is buying trends.
Not necessarily but only because.
Not necessarily.
Because in the volume trend do you have right now a lot of large merchants. So for example, like Poland probably.
25% of our merchants are an active yet although we're back to.
Normal or or prior year volume levels. So those are more big box type of.
Organizations less DCC DCC is an important piece of our business.
Poland in Spain, and other European markets as people cross the border to purchase.
Items.
I don't think it's necessarily all of the same.
Just because volumes are back revenue and EBITDA going to be exactly the same there's other things that have to come into play but this is a first good indicator that when the government's reopen people resumed spending.
And and the business starts to recover.
Thank you appreciate it.
Okay. Thank you.
And your next question comes on line as Tim Willi with Wells Fargo. Please go ahead.
Oh, hi questions I guess about just sort of the operational side of the business beyond.
No. The current turn it environment I guess, the tightness is earlier I apologize I jumped on late but could you just talk out what may be you learned.
About egos operational.
Resiliency for I guess, just sort of what are the learnings here that may be applicable on the other side of this around efficiency productivity customer service.
That's question number one that I had a quick follow up.
Okay. Good morning.
Yeah, I, probably the biggest learning is whether we need any buildings anymore.
It's been quite amazing that.
As this started to unfold say in March and RBC. Please plans I think like most others were to lose a facility or to not 26, all within a matter of a week.
So I think the resiliency of evil, probably like most companies, but even in particular was quite amazing that we were able to pivot.
Oh, I get the requisite number of laptops and VPN, so that people could work remotely at the same time businesses.
We're not as active call centers were not as far as active at least in the early days, but.
But it was quite an amazing feat.
And in this industry for 20 years and I can tell you over the last say 45 days I've seen a zero.
[music].
Comments from employees customers partners about service.
The deterioration in service. So I think the learnings were BCP was viewed one way and I think now that we've all learned to work remotely.
Thats going to be an integral part of how.
We prepare in the event that this resumes again in the us in the fall or anything like this comes again.
Do you think that are their permanent.
Positives in terms of margin structure or how do you think about staffing.
That probably stay with.
You in terms said on the other side of this maybe that welcome that profitability.
So what had been enhanced whenever we get back at some.
Semblance of normal.
Yeah. That's still it is early to to see how how long it will take two to recover but but clearly if you look at the total.
We had 2400 employees, we furloughed roughly 600 of those employees. So we're continuing to operate.
At a level much lower than I would have you would have asked me in the beginning of January.
That could have happened so I think when you're pressed into action you kind of.
You learn what your limits are in the limits of the organization and I meet regularly with the senior team across all markets actually did all that this week with with Webex is.
Just to hear how people are feeling and I think get to a person.
Everybody feels unfortunate obviously that we're in this situation, but that everybody has really pulled together. So I think we have found.
A new operating model, we are going to return back to offices I'm in the office today, our offices, where the jurisdictions are allowing at our open again, it's on a voluntary basis to come in initially I don't know all the.
The the specifics of what's going on in somebody's life, but to the extent that they are good to come in we want to get back to business, but I think as we look forward and this is still early days. This is one of things I heard from the leadership team of the company is evaluating our our fixed cost as it relates to a realist.
Right.
We.
I have a lot of facilities because were spread into a lot of different markets, but the size of those facilities. The efficiency, we've seen from people working remotely.
The ability to to reach out and hire people that might previously not been able to do it because it mobility issues.
Without question once all this normalizes.
We will definitely take a look at.
Deficiencies the efficiencies at our gains have been gains here and how we apply them.
Going forward and when you look at the payroll side of the reduction and Tom will keep me honest here I think two thirds.
This was related to furloughs and a third was related to salary reductions. So we're going to look very carefully.
And the timing of those.
As they come back.
And try to be as efficient as possible.
Going into 21.
Great. Thank you very much for for the time appreciate the thoughts.
Thanks.
And your next question comes from the line of Kartik Mehta with Northcoast Research. Please go ahead.
Hey, good morning.
Jim I know this is going to sound like an odd question, but I'm just wondering.
What the acquisition environment could be like after post covered 19, if you think you'll have a better opportunity or maybe some assets, we'll see a reduction price.
So now I think that is a very good question I know, we highlighted that when we did the equity raise.
In April that wasn't the only reason, but clearly that's part of it when he though.
Eva has been around since 89, but evil international so to speak.
In 12 13.
One of the reasons. We were successful early is because the world was still recovering from.
The alito nine crash or global crash.
Financial crash, so I don't know that we're going to have exactly that although I saw neiman Marcus file for bankruptcy and.
J crew filed for bankruptcy so.
There may be that opportunity on what's unfortunate I think for us as we had a really strong pipeline going into this year, the M&A team, Brendan and Delaware very busy on new opportunities.
We're continuing to stay in touch with those opportunities to the extent that we can.
It's harder to get people, obviously on the phone these days for that type of conversation when they're very focused on.
Just operating their business.
But we are as Tom said in his comments were.
Balance sheet is in good shape to to execute on those opportunities. It's something that is part of the DNA of the company.
Yes, I think there is a chance that those opportunities will be enhanced because banks will.
Either need.
I guess more significantly the capabilities of payments as maybe consumer behaviors change or the banks have otherwise been somewhat harmed because of fit failures of there.
Borrowers and we'll look to raise capital and this tends to be a pretty good business for them to leverage.
And then.
And just a question for you you talked a little bit about in Europe.
Use of blood cash and credit and debit and wondering do you have any statistics you could share on the growth you're seeing in contact was.
In what the pandemic might have done for that.
I can't say just try again, thanks for the question Yeah I'm.
Kind of early days in seeing the transitional numbers. Many countries have been in look them so kind of.
Most of that the initial transactions through the let them period of inevitably be inevitably E beam.
E Commerce and virtual terminal based as the markets are opening up we're certainly seeing.
An increase in the contactless traffic exactly as you calling out so I think Poland, specifically is where we're seeing a substitution from customer cod and you know with where he we're seeing numbers kind of 80% to 90% of contact with.
From the kind of early reopening of.
The stores.
Kind of transactions normalized, but the kind of the panic buying a post cohabit or being allowed out should I say, let David locked down.
It is seeing gum.
The old behavior as we don't expect of caution flags <unk> high levels contactless, but we'll see that probably normalize will be I think cash this is a.
Big facilitates are they test account conversions.
Kartik.
I when I was food shopping last night at whole foods and I'll use my Apple pay so that's happening here too.
Thank you.
I appreciate it.
Sure.
Okay understood.
A question comes from the line of George My House with Cowen. Please go ahead.
Hey, guys glad glad neural doing well and thanks for taking my questions.
I wanted to start off I think you said the.
Cost savings or about 6 million, a month or or or some of the about.
Just curious what are you going to be looking forward to maybe reinstituting. Some of those costs. Those furloughs that have been put in place and you guys have a rough sense I know, it's early but you know maybe what portion of that might be permanent going forward as we as we look into 21 and beyond.
Yes, thanks for the question yes.
We'll continue to carefully monitor our volumes were actually managing our business on daily basis, We get daily reports around our volumes and and mid counts and things of that nature. So I think the good thing about how we structured.
Our cost base going forward and.
Blend of payroll and non payroll costs is that we'll be able to dial the expenses back.
Based on what is happening within our markets both from a volume perspective and from a pricing perspective as Jim mentioned earlier volume is a good proxy, but it's not a perfect proxy because there's a merchant mix element in there that affects spreads that we earn and so we'll be very mindful of what's going on from a volume perspective as well.
As well as from a revenue perspective.
Not in a position to give any view into 2021 at this point based on your question that would be premature.
But I think where we've positioned ourselves I think the point that leave with you is that we've positioned ourselves to be very nimble.
And to be able to adapt to the environment based on what we're seeing happening at the point of sale with our merchants.
Okay. That's that's helpful and just two quick other ones.
Tom as it is it correct. It's in from a modeling perspective again as we look at one quarter to from once you to Twoq.
The revenue per transaction that should come under.
Pressure given a mix of larger merchants and then.
Just a question for Brendan if you could just talk a little bit about the trends that you've seen in Mexico versus the us thanks guys.
Yes, so briefly on that on that first one yes, I think thats fair because as you know what we're seeing in terms of our volume it's highly E com based.
Big box grocers superstores things like that that's where our spreads are little center. So while volume trends are encouraging it'll take some time for the SMS to come back where the pricing was a little bit higher levels. So I think you're right on top of it from a modeling perspective.
A question.
George George just for me that good morning, So I'll talk quickly here, what we're seeing in Mexico.
So in Mexico. The portfolio makeup looks a lot different than what we would have here in the U.S., Mexico because of our bank partner Banamex, We service many of the largest merchants in the in the industry or in the market, rather and our exposure to more defensive industries like grocery is much more pronounced so as is.
Sure, you're well aware Costco, we service Costco in the market.
The impact on volume at its peak is more moderate than what you would see in the U.S.
And you would also see the peak impact on volume there probably three weeks behind the U.S. the pandemic clearly moved.
From Asia to Europe than than Europe to the U.S. and then ultimately it down into.
Done into Mexico, and then further into central and South America.
So timing, there's a timing difference and then a magnitude impact magnitude differences as well.
And your next question comes from the line of 10 cents Wang with JP Morgan. Please go ahead.
Hey, Thank you Tom has good morning, guys, but do you guys supporting office actually be.
Jim curious would you say that there's going to be pent up demand or even the market would open up a little bit more for deal activities.
With the pandemic being a little bit of a wake up call for for banks that that might want to consider outsourcing.
I know the timing is tricky, but just curious if you agree with that or not.
Yeah, I know sale, how quickly will open up if you look at eight and nine it took a little while but yes. Some of it depends on how long how deep.
And how much.
Damage.
Comes along for those who need to do it to raise capital, but without question anybody feels like they are behind the April relative to a payment strategy trying to build one from scratch not impossible, but nearly impossible. So therefore.
Partnership is the way to go in and again, that's one of the reasons why we wanted to make sure. We are well positioned is coming out of this both on the cost reductions and the additional equity to be able to capitalize on those opportunities as they present.
And just how you can also see it as a capital raising.
Activity or opportunity for the financial institutions as well so depending on how long and painful. This is from a credit loss perspective for financial institutions. This can also be a very efficient way for them to generate.
Capital.
Makes sense makes sense, the M&A and the it was that are really couple of times, but just.
From an M&A perspective, how do you prioritize now the assets you'd like to go out and acquire and they've done some middleware.
Build in the past is can we assume that E com and omni and things of that nature might be at the higher end of the list now.
Yes, Thats definitely a learning through this I mean, we have traditionally aligned with financial institutions internationally, and so thats been more of a face to face business and you can see the.
Our stock and others that are more oriented to face to face. So I think a diversification in markets and in capabilities.
Buying into ecommerce platforms, they're not all that plentiful globally, but it's not as though it hasn't been a focus it has been its just.
Finding the Rob right opportunity I think we'll continue to pursue technology as we have previously but.
We're optimistic to that bank portfolios with which provide us a great entry point into a new market and kind of a base of business to build all our capabilities around will probably be one that.
Im expecting will be more.
Plentiful than it than it had been years that.
Great. Thank you.
Thanks to enter next.
And your next question comes from the line of Tom Blakely with Suntrust. Please go ahead.
Hi, Good morning, guys running public health Andrew Jeffrey.
Thank you mentioned some strength that you're seeing in b to b and we've seen that with other.
Peers of yours reporting in the last week or so I was wondering if you could just.
Provide any color.
No industries or different changes in mix as it relates to this.
Destructive period in terms of era.
To be strength would be helpful. Thank you.
Yeah. Good morning high it's it's Brendan here, so you're absolutely right. When we look at first quarter trends and then more recently, we see a much much much more moderate impact.
On B to B relative to the balance of the U.S. business and in fact in the first quarter B to B enjoyed one is the best quarters ever in terms of volume and revenue growth.
But then as we look past the first quarter, where I think we provided some insights into how volume performed in April.
You would see again that business pretty much more resilient the mix shift has not particularly changed not noticeably, but what we're seeing as.
That.
From a volume perspective considerably.
More defensively position than.
Even the I answer your ecommerce businesses.
Yeah, and Thomas comprehensive just put a little dimension around brendans comment around revenue growth just in the first quarter, we saw revenue growth around 25% in the B to B channel now obviously.
Based on the timing of that pandemic and when it hit the U.S. that's.
Somewhat immunized from the impact, but as Brendan said the volumes were.
Less sensitive to it and so it was a healthy quarter. Despite the last month of the of the quarter being.
Distracted by what was going on in the market.
Thank you are not just on the heels contingents question with regard to opportunities with the banks.
It's odd question with an odd time how is your.
Go to market motion their changed in the last kind of 45 days.
Curious on the pipeline changes in the last kind of month.
Yes, it's still early I mean, it's 45 days since the start it most people are still just.
Dealing with the reality and it would be consistent with our nine where it wasn't like thanks started phoning people.
In the middle of the downturn, but my impression is that.
The top of the house looks around in says we need to raise capital we're going either do it through an equity raise or sell noncore assets, we've been looking at.
Yes payment strategy for some time, it's now time to pull the trigger we're going to need to either run RFP or fine.
A partner and I don't I don't see that happening until we have greater clarity with the pandemic that things are normalizing people are moving around hopefully, they're not wearing masks all that kind of stuff.
But for the pipeline that was they are in the pipeline means where we were actively in discussions those discussions obviously hit the brakes for 30 days or so maybe a little longer but.
I was just talking too.
One of the President's on the way in a at E., though and they are.
Reengaging with the people we were talking about talking with 45 days ago. So.
The the conversations are resuming where conversations were already in place.
But I mean, maybe with others, but right now I think for us to started a new relationship.
It's still might be a little bit early.
No thats.
Helpful. Just tell US just two quick question, specifically on your important market in Poland.
We are monitoring I think earlier pressures on.
Merchant discount rate with related.
You know investments from from smaller players we've already commented on the call about liquidity potential and I know, it's early but any any changes there with regard to the merchant discount rate, Poland or expectations. There in coming out of this crisis would be helpful. Thats all from thank you.
Not yet I would say.
If you look at the stats that we published.
For the weeks preceding the downturn for Europe in particular.
See that strong growth that's Poland. So Poland has been it continues to be a leader in Europe in terms of of growth.
Pricing, it's a competitive world so pricing is always there, but theres no.
Nothing more aggressive there was one player in particular, who I think was sold.
Just prior to the pandemic that was.
Maybe a little bit more aggressive then then run of the mill, but no we're not seeing anything new specific to Poland.
And your next question comes from the line of Ashwin Shirvaikar with Citi. Please go ahead.
Hey folks.
You are doing fine.
Good morning, Ashley weekly money, Bonnie we should be weekly volume charged by Geo.
My question cost Yeah, there's a good should make that the regular thanks.
Tom clarified until the until the pandemic has subsided I don't know we're going to this forever, but we thought it would be helpful. Since we weren't giving guidance. We thought it would be helpful. We gave you the cost reductions which are at we've already seen.
And and you can seem the charts that there definitely was the valley there, but were climbing out of the valley.
Yeah, Yeah, yeah, yeah, so on the cost side, though.
Can you remind or talk to what sort of year fixed versus variable cost distribution was before pandemic and made it is currently and I understand completely that.
People talk so what is considered fixed changed but I'm just trying to think through traditional definitions.
Yeah. So.
Fixes the obvious rent so we're not able to affect rents. There was a early hysteria that people were going to give you three months often you would just put it at the end of the lease term.
That didnt really leased for us that didnt really happening.
We have other contracts that you would view as fixed but those are volume based and so as the volumes came down while it is a fixed comp contract.
It is variable in the sense that is.
Related to to volumes I think the biggest cost that would otherwise be viewed as fixed is payroll and.
That was the first.
Area that we focused on.
As the payroll structure to get the sizing right because we saw the volumes coming down.
These charge at the same charts I was looking at and we adjusted based on this really size the organization based on the new reality and so.
We took.
Average say, a 25% between the highs and lows between the directors and executive team down to I think the lowest level is 5%.
For a.
For a vast majority of the employees that stayed with the company and then where we had opportunities to to furlough, where there were government programs to support employees that were furloughed.
As I said earlier that was roughly two thirds of the payroll side of the cost reduction on the non payroll side.
We literally took out the top 100 or 150 vendors assign them to each of the vps and and work through those vendor specifically to.
Either eliminate the service all together or try to renegotiate.
The cost related to it all in I think it's roughly 25% of our SGN a.
Was impacted.
I think it's meant to pick it up.
25% of our of our yesterday was impacted as we said on the comment one third two third between non staff and staff.
And ask them back to your question kind of a structural question around how do we think about fixed costs versus variable within our overall cost base. Our Q will be filed later this morning, So looking back at our K and you look at just the components of Arne.
Expense total expense.
The cost of services line item, we view that as heavily variable that drive that fluctuates based on revenue that's about 20% of that overall expense base, yes, DNA is about 50% to 60% of expense base and that was the area that we really focused on when we took out the 25%.
Some of that is variable, but we think of that as predominantly fixed base. So within the total expense base, we think 20% to 20% of it is fairly variable in the rest of is fixed obviously depreciation amortization is what it is that just going to roll off as as necessary overtime as we tighten up on.
Capex.
And have some are higher spending years roll off in or lower spending years stay on.
You could see that rotate down over time.
Great.
It is quite useful information when one quick clarification the pace of your own internal initiative is on systems consolidation productivity those sorts of things.
Does that still continuing right I mean, the you had this stuff you've done.
You didn't see mento, it might be temporary but it's incremental.
That's correct. So we didn't stop operating the company.
We adjusted and maybe.
Europe had 80 projects and we cut back on a number of them that in some instances required people do touched stuff and leave their houses to those obviously couldn't go forward, but anything related to.
Integrations conversions.
There's been a lot of work to stand up Chile, and I think the testing will be ready by the end of this month so.
This is not been a vacation I've heard that.
Anecdotally from employees that they're more efficient now than ever because you know they're sitting at their home and they can easily be <unk> be contact the biggest no no with everybody knows where they are so it's business as usual as is even though it's a little bit new usual right now.
Yeah.
Thanks.
You know statement I think asking.
After next question comes from the line of Brian <unk>. Please go ahead.
[noise] Hi, guys come morning, I mean, you were talking about active merchants in in some increases there. So I guess I'm just thinking about turn in general and what this is going to look like.
As as we come out so maybe you could help us understand what percentage of merchants in the U.S. in Europe are still inactive versus the pre covert levels and then.
And then what kind of bank <unk> bankruptcy rate or what kind of turned rate you guys think will happen here, even as we come out.
So yeah I think that's a a very good question.
David Goldman who runs emanate for us as his business kind of slowed down there for a while he was the one who's been digging into all the data and [noise].
We're very focused on volume and he shifted to active merchants and I think what's very positive there as we've seen almost mmm in lock step as the volume has come back so as active merchant. So it's not simply the big Bucks that Brenda was talking about are we seeing these and many of our markets where we have.
Large [noise] large customers, we are seeing the smaller merchants open up and if you speak to like the U.S.
The money that was you know the government pushed out to a small merchants no. We are starting to see the activation rates for our merchants on the restaurants side and the retail side in the U.S. start to open as the restriction open in each other markets. So they're almost the same.
If you look at the charts enough I gave you.
The same charts for active merchants, they're they're almost living in lock step. So that's a good sign how many bankruptcies are going to be this is this a question actually asked of the European team.
Yesterday, you know what it what is what has been the support by the local governments or in each other countries and there are programs not just to support the citizens, but like the United States has to support the merchants so [noise].
A question that everybody's gonna wait to see what the answer is once it's fully normalized you know who survived the pandemic and who didn't [noise].
Obviously there'll be some.
Fall out we have an incredibly diverse portfolio and no. One merchants is is material to us. So I don't know that it's going to be overly burdensome to us if we have some but right now we're not seeing that we're hearing anything about that and Brian that financial stimulus from government institutions.
The dimensions.
Exists here in the U.S. during you know the the great recession, there wasn't that level of financial stimulus. So I think that's a dimension that has yet to play out that you may have.
Ability certainly I think they're the government's intentions is a curb the level of of Bankruptcy's and hopefully those programs will will play out that way. So that they are given the lifeline that they need the there isn't the the high bankruptcy level.
No. That's helpful. And then you guys have an idea how effective the P.P.P. program has been in in the U.S. I mean speaking to clients or they're still frustrations. Therefore, <unk> seem to be you know been smoothed out.
You know I'll start it, but I think brendan might be better positioned disease closer to the details, but you know in the early days we.
Even though it was not for us, but we've got you know hundreds of thousands little merchants.
<unk>, we gathered as much information since synthesize the down and then pushed it out through our dealer network into our smaller merchants so that they knew where to go if they didn't otherwise you know if they weren't up on on the latest opportunities since I think it was at first come first serve basis.
So I know [noise], we try to facilitate as much as we could it was really left to the merchant and it's bank or.
To to put it together, but I don't know <unk> Brendan.
Was not here in Atlanta with me He's in New York, So we're a little bit remote here do you want to pick up from that.
Yeah sure.
Yeah, So listen <unk>, we did see you know at at the peak you don't work with activity decline active merchant <unk> active merchant numbers declined by you know circuit, 35% and when those merchants when dormant we we reached out so we engaged through our opt seems in each of the four channels to talk to <unk>.
And say, what's going on and we were getting huge amounts of closure requests we were experiencing.
You know official levels at work, particularly elevated vis-a-vis you know other periods in our in our history.
And what we're hearing in many instances is that those merchants word temporarily dormant in their expectation was to to remain open.
So I think the P.P.B. plan has generally worked.
You know if you fast forward to that you know versus that 35% that I mentioned moments ago. You know, we're seeing roughly a third of those merchants you know now active again the ones that had previously closed and that's great.
So we're saying you know estates reopened and obviously you know our our merchant base is concentrated.
You know along the lines of where you would say you know merchants generally concentrated across the U.S., where we're no different than where merchants generally are dispersed. So so states up remain relatively close like California in New York or are going to you know impact our our act a merchant right. So some of this is T.V.
You know, it's a bit of hypothesis, where where extrapolating you know trends from smaller sample sites, but from our outreach from the dialogue that we have had you know the the experience though the the <unk>. We are they are having is basically that these merchants are temporarily shuttered and many of them.
Reopen when the states allow for it.
Okay. Thanks for the color and to see if unhealthy.
They thank you.
And your final question comes in the line of might don't cross So what tops point. Please go ahead.
The morning, making for taking my questions and appreciate charts when the incremental disclosure this corner.
Mm.
My questions on the impact of travel in certain geography means I know extort, we pulled out a larger percentage in Mexico.
But if you could maybe providing update on on that market and then.
The impact you're you're seeing and some of the other geography use as well.
Yeah, Mike Yes, Yeah. Brendan you go ahead, you can take it.
You, there, yeah, well, yeah and on here <unk> well.
As it relates to travel in Mexico, We did service I mean aeromexico the customer of hours and that's basically yet we do support supports l. chains, but you have seen you know in a normalize environment last year travel represent only less than 5% of of total volume So how's that total <unk>.
Has that five per cent total declined no question, but we were particularly exposed in the in in in any real material way to travel and we've got almost no travel here in the U.S.
So the travel you know the the small sliver of travel that was a year ago is you know largely gone, but you would also say you know.
Grocery for example, a year ago being roughly 15% it today being roughly 35%. So those are the types of mix chefs that we're saying that Jim was alluding to earlier in the call. When he said you know volumes and profit don't necessarily correlate one to one it because of the next shift and you'll volumes migrating to larger merchants, but the the impact.
Travel specific to your question Mexico is relatively modest.
Yeah, and Mike It's on let me pick up off of that and you also see on one of the charge that we posted I think it's on the totally <unk> call out box that shows.
Of our you know a top M.C.C.'s, you'll see travel total company was 4% of course, it's gone to virtually zero. The result of the shut down but you can see it's a it's a small portion really the only market were travel gets above 5% is in Spain and his daring sat in his comment that.
That Spain has obviously been impacted heart is because of just the economy in Spain, I think the broader point I'll leave you with is just this one egos strengthens our diversification just the the fly wheel of all of the different verticals that were involved in and the lack of you know specific concentration.
I think has been you know a strength of ours through this process, where we've been able to whether this you know grocery stores have picked up but you know restaurants have have fallen back, but that's that's what a diversified portfolio enables you to do and certainly something there'll be a focus of ours in one of those learnings of ours from an overall business management perspective on on a go forward basis.
You can you can expect us to continue to remain focused on that because we think it's a a real advantage regardless of of the economic environment.
Okay. Thank you bet that's helpful. I I suppose I should've clarified it when I when I was talking about traveling I meant more specifically cross border what what percentage of volume declined you're seeing is due to cross border.
Mm.
Well you know obviously, a fair amount because there's just not a lot of cross border activity you know in in Europe. Many borders are are close.
But that affects our revenue more from a D.C.C. perspective in terms of some of the cross border activity, rather than just necessarily going to the overall volume because as we said in in what brand and I were just talking about the overall volume just isn't overly sensitive to that but but we will see some impact from just the lack of cross border activity just from nothing else.
The the lack of D.C.C. revenue, particularly in Poland and to some degree but model more modestly in Spain.
<unk> and just to Dimensionalize that in Mexico International cards make up you know circuit 10 per cent of volume and then normalize period.
Okay, that's something they only market <unk>, yeah. The only market I would say that is heavily cross border for us would be Spain.
Because since you know, it's a vacation for Europe tends to head, there and Russia and.
In China, So [noise] that business because it's been closed but also just because of travel restrictions that that that is the market is down the deepest and probably will be the last to recover.
Thank you and now I'd like to Chinese back I'll put you Mr. Jim Kelly for any closing remarks.
Thank you operator, and thank you all for joining the call. This morning, and your continued interest and he he though please stay safe and thanks again.
Mm.
Please in general I mean this includes Chase conference call you may now disconnect.
[noise].
[laughter].