Q4 2021 Evertec Inc Earnings Call
Good day and welcome to the ever Tac fourth quarter 2021 earnings Conference call.
All participants will be in listen only mode.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May press Star and then one on your telephone keypad.
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Please note this event is being recorded.
I would now like to turn the conference over to Kevin Hunt of Investor Relations. Please go ahead.
Thank you and good afternoon with me today are Mac Schuessler, our president and Chief Executive Officer, and Joaquin <unk>, Our Chief Financial Officer.
Before we begin I would like to remind everyone that this call may contain forward looking statements should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent periodic SEC report.
During today's call management will provide certain information that will constitute non-GAAP financial measures under SEC rules, such as adjusted EBITDA adjusted net income and adjusted earnings per common share.
Reconciliations to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides, which are available in the Investor Relations section of our company website at www dot ever technique Dot com.
Now hand over the call to Matt.
Thanks, Kevin and good afternoon, everyone. We have a lot to cover this afternoon beginning.
Beginning on slide four I would like to provide an overview of our call today I will start with a summary of our financial results and business highlights for 2021, followed by a walk through of the strategic transformation that has occurred in advertising since 2015, and how we have evolved today. Our next cover the announcements related to our relationship with Banco popular.
And then provide some color regarding our announcements on Latin America.
Finally, I'll provide an overview of the Puerto Rico economic environment, and our viewpoint on Latin America I will then turn the call over to Joaquin to cover 2021 results as well as our outlook for 2022.
Beginning on slide five let me start with some highlights from our 2021 results.
We delivered a record year with $590 million in revenue an increase of 16% year over year.
We had a strong finish in Q4 with the results above our expectations, including a particularly impressive month of December most.
Most satisfying was our Latam growth, 29% in Q4, and 25% for the year driven by our successful partnerships with Santander and Mercado Libre expansion of our digital platform place dependent and organic growth in Central America.
Our earnings and cash flow performance were even more impressive with adjusted EBITDA growing 23% for the year and adjusted EPS growing 32%.
In addition to the strong financials business highlights include the announcements today regarding pop bar as well as those in Latin America, which I will discuss in a moment.
In 2020 , one we continue to generate significant operating cash flow of $228 million for the year, and we returned approximately $39 million trying to shareholders through dividends and share repurchases.
Additionally, our liquidity remains strong at $396 million as of December 31.
We're also pleased to announce that we've increased our authorization for buybacks to $150 million, providing increased flexibility to execute on our capital allocation strategy.
To provide context of todays announcements, please turn to slide six.
Since 2015, we have been in a process of a strategic transformation that has included five key imperatives.
The first was to invest in and improve our service and infrastructure.
Designing new metrics and a better organization to improve execution and increase customer satisfaction. In addition, we invested in new infrastructure operations and information security capabilities.
Second there was a focus through M&A to expand our geographic footprint in Latin America, which allowed us to enter markets, such as Colombia, Chile, Paraguay as well as deepen our presence in some of our existing markets.
Third we focused on accelerating product development innovation to ensure that we were building products that our customers wanted and needed.
We created a new organization solely dedicated to product management and development.
This team evolved ath mobile in Puerto Rico transform the pay studio platform to a service model for Latam.
And localized a place to pay gateway in multiple countries.
For regarding popular Theres been a focused effort to strengthen that relationship by implementing tools to better assess client satisfaction across multiple constituencies within the bank.
Over the years, we have improved our accolades introduce new ones for services that were not previously measured and even increased penalties for Mr. <unk>.
We have also established pricing tiers in certain products to encourage collaboration and mutual growth.
That brings us to the fifth imperative in our transformation extending and modifying the agreements with our largest customer tomorrow.
Turning to slide seven I'll cover some details to this accomplishment.
First we are pleased with the extension of our key payment contract.
We can drive our growth through this predictable long term revenue stream and provides certainty in our cash flow.
Our merchant acquiring agreement, which was scheduled to expire in 2025 with extended an additional 10 years through 2030.
We also modified the agreement to include a revenue share provision consistent with industry practices that we believe once that popular to help us grow that portfolio.
Our Ath network agreement, which was expiring in 2025 with extended for an additional five years through 2030 committing popular to the continued issuance in support of the Ath network and our services as their processor, including a huge marvell and.
And further we are extending our master services agreement for three years through 2028.
Modifications of the MSA include the elimination of the exclusive services requirement.
Adjustments to the CPI clause for existing services and the inclusion of annual minimums established for 2028.
All of these changes we believe he will incentivize popular to continue being a key strategic partner for the foreseeable future.
Second we are divesting certain assets popular skus.
Skew exclusively used by them and are not part of ametek's long term growth and investment strategy.
In return for these assets pocket of ours, exchanging adverse tax stock with approximately $197 million.
This sale demonstrates our desire to focus on higher growth segments, while reducing our exposure to St client products consistent with our long term strategy.
Third we expect to eliminate the regulatory hurdles necessary to execute M&A.
And investment activities.
Akamai has agreed to reduce their voting interest in advertising to forefront.
5% over a period of three months after the close of the transaction through either the sale of shares or conversion to nonvoting preferred shares.
At that point, we believe <unk> will no longer be deemed to be a subsidiary of popular for purposes of the bank holding company.
And thus we will no longer be subject to regulation and oversight for the board of governors and the Federal reserve system.
Given the increased competition for M&A transactions, and our possible interest to make investments beyond what the regulations permit.
This is a key aspect of today's announcement and should provide increased flexibility and agility to pursue growth.
Turning to Latin America highlights on slide eight we are excited about the success of our two key partnerships implemented in 2021.
The first is mercado Pago payment subsidiary Macondo Libre.
As you recall, we had a very successful debit card launched in Mexico, where we exceeded our projections for cards issued by over 300%.
Based on the success of this initiative. We are confident we will have further opportunities in the region with Mercado Libre.
Second as you recall and then there is payment aren't getting that in Chile has exceeded their projections for enrolled merchants by over 17000.
Consequently, we have now expanded our relationship with get that into earthquake again, using our proprietary technology to enable the bank to acquire merchants in the country.
These announcements are gratifying Testament to the progress we've made to organically expand in the region.
Additionally, in Latin America today, we announced the acquisition of B B R. A transaction that we expect to close by mid 2022.
Subject to customary regulatory approvals.
This acquisition will allow us to expand our capabilities in Chile for B B, our services over 30000 terminals and also gives us direct access to larger retailers in the country. They use them more integrated and customized form of payment acceptance BB are also services over 12000 terminals in Peru, which opens a new country for us through us.
Our country dominated by a duopoly, which we believe will provide further opportunities of growth for advertising as that market opens.
I would now like to turn to the constructive environment. We see ahead in Puerto Rico, and Latin America, and we believe will provide a backdrop to fuel our future growth.
Starting on slide nine the Puerto Rico economic environment is better than it has ever been.
As you can see economic indicators continue to improve and in some cases have now surpassed pre pandemic levels I would point out two key statistics on this page the <unk>.
First is the labor participation rate of 44, 2%, which is at the highest level since 2010.
As we have mentioned in the past 2021 and benefited from the inflow of pandemic related federal stimulus funds, resulting in increased consumer spending.
We are now, noting the good portion of the federal funds received in Puerto Rico, with a positive and local banks.
Such perhaps most impressive indicator on this page is the individual and commercial bank deposits in Puerto Rico, which have increased 41% over the past two years from $42 $2 billion to $59 $6 billion. These are additional funds that should translate into future spending it will continue to drive growth for advertising.
Turning to slide 10, we will provide an overview of federal funding for Puerto Rico.
As you can see 2020 , one was an exceptional year in terms of funding given the significant impact from COVID-19 relief as.
As we look forward. We are encouraged that federal funds are expected to continue to flow into the island.
This detail shows you the economic disaster fund COVID-19 relief.
There are federal benefits and inflows related to the infrastructure Bill are expected to provide approximately $10 billion in stimulus that will flow through the economy in both 2022 and 2023.
This represents approximately 15% of the island's GMP we.
We believe that this level of funds flow should remain strong stimulus for the economy.
And finally, turning to slide 11, as many of you may have read Puerto Rico debt restructuring has been approved by the bankruptcy judge assigned to the permissive proceedings and this will cut the items that roughly in half from $70 billion to approximately $34 million.
The left side of the slide shows you the components, which provides stability to the economy, while reducing the annual debt service from $3 9 billion to 1.15 does it.
This will allow the Puerto Rican government to get back to making investments that will improve areas such as education health and public safety and continue to work on measures that make Puerto Rico, a better place to do business.
Now turning to Latin America on Slide 12, we highlight some data that shows the region is prime for growth.
As we have noted in the past Latin America continues to be underbanked, when compared with more mature economies around the world presenting a significant opportunity for us as these markets are on average twice as large as Puerto Rico.
Credit card penetration in consumer spend on cards in our core markets and significantly lower than that we see in the U S. As an example, Chile, Mexico, and Colombia are particularly interesting and areas of focus for our company.
Next.
Turning to slide 13.
Given the nature of the opportunity that we have outlined and protect is as well positioned as we've ever been in Latin America.
Since 2015, we have doubled our offices in the region more than tripled our employees and increased revenues from $37 million to $106 million.
Pounded annual growth rate of approximately 19%.
Additionally, with the <unk> acquisition, our presence will grow into Peru.
This is quite a contrast to what this map looks like in 2015, when we had no presence at all in South America. We believe <unk> is well positioned to be the regional payments processing leader.
We have now extended and reestablished our relationship with popular creating a roadmap for growth in our main region.
We've also established an enviable footprint of people and products in Latin America, and a more flexible structure for M&A going forward.
Even the state of our key markets and the expected benefits from the transactions announced we are more optimistic than ever about our company's future.
In closing, we believe that our employees are the key ingredient for successful innovation and a high performing workforce.
I want to thank all of our dedicated team members for their commitment throughout 2021 for building a strong foundation for growth in 2022 and beyond.
I'll now turn it over to Joaquin to provide some comments on our 2021 results and our 2022 outlook.
Thank you, Mike and good afternoon, everyone.
Turning to slide 15, I will first review the fourth quarter and full year results for everything.
Total revenue for the fourth quarter was $155 2 million.
Approximately 16% compared to the prior year.
Fourth quarter results were above our expectations as transaction revenue in Puerto Rico increased as a result of a return to more normal seasonal spending patterns. The continued benefit of federal funds as well as onetime hardware and software sale in the quarter.
Revenue in Latin America continued to grow very well up 29% for the quarter as we continue to see benefits from planned implementations completed early in the year as well as healthy organic growth.
Adjusted EBITDA for the quarter was $75 9 million, an increase of 19% from the prior year quarter, while our adjusted EBITDA margin increased by 130 basis points to 48, 9%.
The higher margin was mainly driven by revenue growth in our payments segment, both in Puerto Rico, and let them, which are highly scalable partially offset by higher personnel costs.
Cost of sales related to hardware and software sales.
Adjusted net income for the quarter was $52 6 million, an increase of 23% year over year and adjusted EPS was <unk> 72 cents, an increase of 22%.
For the full year total revenue was $589 8 million an increase of 16% from the prior year a record level that represents a substantial increase from the 5% growth reported in 2020.
The strong year over year growth in Puerto Rico was driven by the inflow of Covid related federal funds early in the year higher Ath mobile and Ath business transactions the impact from the expansion of our relationship with Forest Park and the continued benefit in our business solutions segment from higher volumes in our digital channels.
The increase in Latina America reflects the acceleration of new clients organic growth from existing customers and the expansion of our payment gateway place debate, which we have no localized and rolled out in many of the countries, where we have a presence.
Adjusted EBITDA was $294 8 million, an increase of 23% with an EBITDA margin of 50% a 290 basis point increase from the prior year and an all time high for everything.
The increase in margin was driven primarily by revenue growth in our scalable payment segments and efficient cost management across all categories.
Adjusted net income was $199 7 million, an increase of 32% from their prior year and adjusted EPS of $2 74 also increased 32%.
Moving to slide 16, I will now cover our fourth quarter results by segment, beginning with merchant acquiring.
Revenue increased 27% year over year to $37 2 million driven by an increase in sales volume of approximately 27% as we saw a return to more normalized holiday seasonal spending patterns that also shifted volume towards higher spread verticals. We also saw the benefits of the first banking expansion earlier in the year.
Which we will anniversary in Q1 2022.
We continue to have a higher than normal average ticket, which also drove a higher spread per transaction.
Adjusted EBITDA for the segment was $18 6 million.
And adjusted EBITDA margin was 50% up 30 basis points from the prior year.
The margin increase was primarily driven by the strong revenue growth and high spread per transaction consistent with what we have been seeing all year.
On slide 17 are the results from the payment services, Puerto Rico on the Caribbean segment.
Revenue in the quarter was $41 8 million, an increase of 22% from the prior year.
The revenue increase was driven by transaction growth of approximately 18%, reflecting a return of seasonal spending patterns and an increased level of bolt ins by consumers going back to physical shopping.
Ath mobile on Ath business continued to grow well at 27% year over year and contributing an incremental 1 million in revenue.
We also benefited from the effects of intercompany revenues as we deliver processing services through our Latin America segment supporting their growth.
Adjusted EBITDA was $23 7 million.
Up 24% from the prior year quarter, and adjusted EBITDA margin was 56, 8% up.
Oh 80 basis points over the prior year quarter.
The increase in margin was due primarily to the higher revenue, partially offset by an increase in personnel costs and third party processing fees and cloud related expenses.
Both late 18, although results for payment services Latin America.
Revenue in the quarter was $28 3 million.
29% year over year with growth driven by new client implementations that went into production earlier in 2021, as well as organic growth from existing clients.
Adjusted EBITDA was $11 5 million up 29% from the prior year with adjusted EBITDA margin of 47% relatively flat when compared to the prior year quarter as our revenue increase was partially offset by increased fees for transaction processing of monitoring services from the payment services Puerto.
<unk> segment.
Turning to slide 19, you will see the results for our business solutions segment.
Revenue was $64 4 million, an increase of 6% from the prior year.
The increase was driven by onetime revenue from hardware and software sales of approximately $3 million and an increase in online banking services as we continue to benefit from the shift to digital channels as well as the benefit from the new printing construct and third during the year.
Adjusted EBITDA was $30 2 million.
Roughly flat with the prior year quarter, while adjusted EBITDA margin was down 320 basis points from the prior year to 46, 9%.
The decrease in margin was a result of a change in the mix of business as well as higher operating expenses.
Moving to slide 20, you will see a summary of our corporate and other.
Adjusted EBITDA was a negative $8 1 million down nine 8% from the prior year quarter as we continued to lunch corporate expenses effectively 5% as a percentage of total revenues in line with our expectations.
Moving onto our cash flow overview on slide 21.
<unk> cash from operating activities was a record 228 million a 29 million increase from the prior year.
Capital expenditures were $67 million, an $18 million increase from 2020, as we continue to invest and innovate as well as refresh existing infrastructure. We spent $15 million on the first plant expansion and received approximately $1 million from the divestiture of our ticket BOP business.
Paid down $42 million in debt and returned 39 million through share repurchases and dividend.
No shares were repurchased in the fourth quarter, our ending cash bottoms for 2020 , one was $286 million an increase of $65 million from the from year end 2020.
Moving to slide 22, our net debt position at year end was $202 3 million comprised though $468 6 million in total long and short term debt offset by $266 3 million of ownership unrestricted cash.
Our weighted average interest rate was approximately four 5%.
Our net debt to trailing 12 month adjusted EBITDA was approximately one four times down from one eight times a year ago.
As of December 31, our total liquidity, which excludes restricted cash and includes borrowing capacity was $385 5 million.
Roughly $65 million from a year ago.
No starting to slide 23, I'd like to review some of the financial impact of the agreements with popular.
First.
We are very pleased that we were able to expand our T agreements with our largest client and shareholder at this creates certainty over the medium to long term with a significant portion of our business and portfolio.
These expansions are based on what we consider strategic areas of focus on growth.
Mike mentioned, we have extended our merchant acquiring agreement through 2035, a 10 year extension from the original exploration in 2025 on a time of 13 and a half two years from today.
This expansion comes with a revenue share to popular that will better align our interests as we focus on innovation and work together to expand our share of payments in Puerto Rico and the Caribbean.
If revenue share will be treated up unexplained and will result in a decline for our <unk> segment margin post closing.
We have also extended our ath network participation agreement with pulpwood or through 2030.
A five year extension from the original 25 exploration and an additional eight and a half years from today.
Cremant further strengthens the number one form of payment in Puerto Rico with its largest issuer uninsured commitment to rolling out enhanced debit products that we expect will further our bonds our network's presence.
Our MSA with blah, blah, blah, blah, but being extended through 2028, a three year extension from the original 2025 exploration and then an additional six and a half years from today.
This extension gives us the opportunity to continue working hand in hand, with our largest client while also providing them with increased flexibility as they focus on customer experience.
As part of this extension, we have conceded the 5% CPR for the 2021 2022 period that commenced on October 1st of 2021.
We will be retroactively crediting CPI to pulpwood or once the transaction closes.
It's part of the agreement.
<unk> spent a margin headwind for 2022, mainly in our data solutions segment and to a much lesser extent in our payment Puerto Rico segment.
Additionally, going forward, we have reduced our CPI cap from 5% to one 5% through 2025, an MSA services, which are mostly reflected in our business solutions segment.
As part of this agreement we have also introduced minimums through 2028, aligning both of our interests and working together into the future and allowing us to focus on those areas, where we want to grow uninvested.
As we execute on our strategic goals. We have also decided to sell back to mobile are certain assets that are solely used by them and aligned to their customer experience initiatives.
Local form so our long term strategy.
Assets generate approximately $30 million and business solutions revenue on an annualized basis.
The sale of assets on the MSA changes described will all result in a decline to our <unk> segment margin post closing.
The sale of these assets will result in approximately $197 million in consideration to be paid with approximately $4 6 million shares of everything at an average price of approximately $43 <unk>.
This represents approximately 6% of our outstanding shares.
But without the ownership of our shares outstanding will decline from approximately 16% to approximately 10% of our dosing of the transaction.
Our agreement provides for pulpwood or to sell shares over the subsequent three months in the open market or convert their shares into nonvoting stock to reduce their voting interest to under four 5% at which point as Mike mentioned, we believe we will no longer be deemed a subsidiary of pulpwood or for purposes of the bank holding company.
This determination will enable us to be agile as we execute on our capital allocation strategy, which is growth through many of its first priority.
We expect to close this transaction by mid year 2022 at which point the extensions will also become effective.
This transaction will be executed under our current credit agreement provisions without any need for an amendment and we expect our leverage ratio to increase to approximately one five times adjusted EBITDA.
Life basis.
You know the margin impact expected from the transaction will be in a range of 400 to 450 basis points post closing.
Distributed relatively even between our merchant acquiring segment and our <unk> segment.
As we have always done we will focus our efforts on driving efficiencies on growing our highly scalable products across all our regions to increase margin over time.
With that I will move on to slide 24, I'll provide our 2022 outlook, which consider this transaction closing by midyear 2022.
We expect our revenue to range between 591 and $600 million and our adjusted earnings per share to range between $2 47 to $2 56.
You have films on adjusted EBITDA margin between 44, and a half to 45, 5% mainly impacted by the popular transaction a continued decline in the average ticket in spread as consumption behavior normalizes.
Frank currency gains that benefited the prior year not expected for 2022.
The effective tax rate is expected to range between 13% 14%.
Our GAAP basis.
Earnings per share is anticipated to be between $1 84, and $8 93, excluding potential onetime effects from the popular transaction.
I will now highlight some of the key underlying assumptions that we have considered for this 20 billion to outlook.
We expect our merchant acquiring segment to generate revenue growth in the low to mid single digit range. We're.
We're coming off a historic year in terms of overall growth sales volumes, our margin, making 2021, a tough comparable period.
We will anniversary that first bucket expansion in Q1, and although we continue to expect a benefit from increased sales volume in part driven by anticipated influx of federal funds. These are anticipated to be at lower levels.
Additionally, we continue to expect our average ticket on the mix of cards to continue moving towards pre pandemic levels, which will be a headwind to our spread of margin in 2022.
Famous photo eco revenue is X.
To grow mid single digits as we also come off a historic year in terms of transactions and more importantly, the contribution from Ath mobile and Ath business in the previous year as a result of the pandemic are related really fun.
In 2022, we continue to expect growth to be mainly driven by <unk> sections as well as from our ath mobile products, but at a more moderated pace.
Additionally, some of our other business late in the segment benefited last year from federal programs on stimulus that will not be available in the current year, So child enhanced DVD.
Famous Latino America revenue growth is expected to be in the mid to high teens, driven by a healthy pipeline of business across the region organic growth and the contribution from the BB or if we see some anticipated for the second half of the year.
Mr Solutions is expected to have a mid to high single digit reset primarily driven by the pulp wood our transaction.
Regarding corporate expenses, we expect these to approximate 5% of total revenue consistent with 2020 one results.
As it relates to work quarterly cadence January revenue grew approximately 6% based on the trends to this point, we expect the first quarter will grow mid single digits, starting in the second quarter, we expect to see the impacts from the popular transaction.
Second half of the year the effects of the <unk> acquisition.
Our operating depreciation and amortization to increase to approximately 44% to $45 million, primarily reflecting our increased capex spend.
Offset by the anticipated reduction from the popular transaction.
We are expecting an increase in our cash interest expense in line with market expectations, partially offset by the impact of scheduled payments as well as them another repayment.
<unk> 2021 .
As a reminder, approximately 50% of our debt has been fixed through interest rate swaps.
This guidance assumes average diluted shares to be approximately $69 million for the full year and include the retirement of this shared received in the popular transaction without any additional share buybacks.
Our capital expenditures for 2020.
<unk> are expected to be approximately $60 million and reflect our ongoing investment in technology localization of our products in Latin America and continued investment in innovation.
Our capital obligations strategy remains unchanged, we will continue to focus on growth investments internally as well as through M&A, while the timing of M&A is uncertain and we currently have a higher than normal cash bonds. We are constantly focused on evaluating our best use of cash.
With that operator, please open the line for questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star and then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star and then two our first question today will come from Bob Napoli with William Blair. Please go ahead.
Yes, Thank you lot going on there and nice quarter.
Good to see the extension.
I'm trying to figure out all the effects of now on the EBITDA margin guidance you gave for next year 44, and a half of 45 and a half.
Does that is that a full year impact or only a partial year impact.
Of the change in the Banco popular Inc.
Hi, Bob So the 44 and a half 245 and a half includes the impact on double what our transaction taking effect midyear.
Okay. Because you said in your release 401, and 50 basis points of impact.
At 44, 5% to 45, and a half to get full year.
That is I mean.
That would be a reduction of that amount from.
Your run rate.
So it's actually a reduction of.
More than that on a full year basis, so it's more like.
Closer to.
On a full year basis to 1000 basis points say your ongoing EBITDA margin going into say 2023, all else equal is gonna be.
Closer to 40%.
No Bob So let me try to break it down for you a little bit better right. So in terms of our run rate. If you look at where we're coming off Q3, Q4 that kind of gives you a data point after more or less where we're running at and what we're saying is post closing the transaction is going to have an impact of 400 to 450 basis points of that run rate right. So.
That kind of gives you a ballpark of what we're seeing going forward.
On an annualized basis on a normalized basis correct.
Okay, because you did 49% in 'twenty, one on EBITDA margin.
Right and I think as part of our remarks, I'm, sorry to interrupt but other remarks, while we kind of gave some highlights right. One we benefited from some foreign currency gains. This year that we're not expecting for next year. We're also expecting some of the trend in our merchant acquiring segment.
Scott going back to some of the pre pandemic levels.
The average ticket on the card mix as we start to see more travel and those have a direct effect on margin and spread.
Bob This is Mac.
What youre seeing in the margin in 2022 is the transaction with Buckler and the impact part of it is the funds appraisals of success in some of the changes in the business as we come off a really strong 21.
And so as you think about 'twenty three you're looking at an EBITDA margin in the low forties, a little over 40% or so it was kind of what you're viewing as a normalized.
Margin.
Well I mean, we're not going into 2020 three guidance at this point, we're trying to garner obviously dimension what the impact of this transaction is and again I think if you look at where were running Q3 Q4, and then the impact of the basis points. We just mentioned okay.
India.
Okay.
Three Q4.
<unk> less 400 to 450 basis points is what you view as your normalized.
Our EBITDA margin.
The revenue effect on 'twenty.
22 from the changes.
On a full year, if it was that a full year basis, what does it have to get the rest of the primary revenue factors the revenue share.
Right. So the other components, Bob just to be clear right. The revenue share won't impact the top line. So that will be treated as an expense in our merchandise growing segment and that is the impact of that is included in the 400 to 450 basis points post closing that we just discussed in terms of business solutions. The adult line effect is almost $30 million.
Which is an annualized number for the assets that we just sold.
Okay.
And what you are getting the stock reduction.
The share count reduction right.
In terms of just to be complete writing business solutions and you will also have a margin impact because of the sale of those assets and also the the CPI concession.
Okay.
Thank you appreciate it.
Okay.
Our next question today will come from James Friedman of Susquehanna. Please go ahead.
Hi, congratulations on.
A great quarter, and a great year, a lot of work here.
I remember there used to be some minimums.
Minimums on the Santander contract as well and then.
I thought that when you were in full production mode. You relieve those minimums, so maybe say that wrong, but how are you thinking about the Santander because that's a good one for 2022 .
Yeah. So so Vincent there had some minimums.
This year and for the duration of the contract and that was so that as the contract ramped we'd still be able to make money in the first year, given that where the processor and so we will benefit from that through 2022 2023 that the duration of the contract.
Got it okay. Thanks for that back and then.
In terms of some of your comments about the ticket size cause that.
Is always real relevant for.
Your yields could.
Could you just walk through you know baby steps some of the dynamics again I know you said it already what Keith if you could.
Kind of refresh how you're thinking about that thank you.
Sure Jamie So I mean in terms of the puts and takes on merchant acquiring right. This past year and we cannot put US night all of us to some of the federal benefits of local Puerto Rico, we saw a ramp up in consumption in a really high average ticket. In addition to that because of some of the travel restrictions we saw a shift.
Towards I don't warn local transactions that that also yield a higher spread for us.
And a shift to debit which is also a more profitable product overall for us as we start to move into next year. Some of those variables like fed funds. Although we're expecting a continued benefit from them is going to be lower than what we saw in 2021, we're seeing the average speaker continue to slow down or start to normalize.
On sequential basis, and that's something that we are expecting to see going forward and then always be travel has come back. So we're starting to see some of those international cards also hit Puerto Rico and that is impacting the yield. So I think those are the three main things that we're looking at.
Got it I'll drop back in the queue. Thank you.
Our next question today will come from Vasu Golfo off K B W. Please go ahead.
Hi, Thank you for taking my question and congratulations it makes sense you have to be BOP contract am.
I also loved the new flight on Puerto Rico with the thank you for that as well right.
Great.
First question for you Mark on just to beef up extension all the good stuff.
Just on the slight modification on the excuse of a D. Barring any sort of comment on what people are thinking was there and is that potentially a risk long term to the scope of the relationship.
The business solutions side.
Yes, So let me explain to you how the exclusivity works today.
And then I'll explain how it is going to be under the new contract. After we close today. There's a set of services that are exclusive to advertise and that's whether or not would perform the service today or whether or not in that category of services. There is something new that they wanted to do.
And.
If they want to do something new in those services. They actually have to go through a process with us to give us the first right of refusal and it maybe that we don't have the sulfur that performs the service. We may not have the type of applications, but they still have to go through the process with us even though that service may be better with somebody else. So it creates friction in the relationship.
Right.
So under the new deal if there's stuff that makes sense somewhere else and it's going to end up at another vendor.
<unk> are going through the ROFO process there'll be able to do it more quickly so it's better for the commercial relationship.
On the existing services, where we're performing them today, we know there are things that they want to do either with another vendor themselves and those are primarily the assets that they purchased that was why we sold some of the assets, we got a pretty good price for them and we exchanged shares right.
Going forward there may be I mean, we've worked really hard in the past we've increased our SLA as we've invested in infrastructure.
And now we've been pretty aggressive on pricing by giving up CPI, making some other accommodations so that in the future the services that we have today.
Hope to keep as much as possible now there will be some things down the road that they may want to leave but Theyre also things that we're not doing today that we believe would be well performed by advertisers and so those minimums give us the opportunity as now we're performing at a high level, we're performing well we've provided very competitive pricing.
That we can manage through that over the next six and a half years. We ultimately have worked really hard over the last five years to be a provider. They want to do business with not have to do business with and I think when you look at the fact, we were able to get a 10 year extension on maybe five years on Ath and frankly three years on the MSA services, we think we're building a.
<unk> organization that ever Tac will that popular will do business with for a very long time.
No that all makes a.
And thank you for all that color I guess my follow up is probably looking just on the guidance I know just if you could lay out how you thought about all the variable you know.
Jimmy This is obviously a tougher comp issue for you guys. There's some broadly in inflation and back just how should we think about what could be the upside drivers worse. It sounds like laggards versus the outlook that you've laid out what's historically, obviously you'll have it faster.
Track record of being really conservative.
Look I mean, yes, Puerto Rico on all the different moving pieces has been complicated to try on and dimension right.
Again, I think we are working off of a backdrop, that's better than it's been and that is a positive but the reality is we did see a significant amount of funding coming to Puerto Rico last year.
While funding that we're going directly into People's pockets I think we've laid out some incremental funding that's expected coming to Puerto Rico. This year like the child tax credit.
The employment credit that he has also directed into people's pockets, but some of the incremental funding.
That's expected continues to be reconstruction infrastructure et cetera, and these are funds that we've been waiting for some time, we continue to see progress on the government working towards putting all of that money to work and some of the trends that we're showing from an employment perspective from an economic activity index perspective are starting to reflect that.
So I think we we're optimistic that we'll see some outflow through.
<unk> installed in some of our payment segment and when we think about Latin America. As we said we have a very good pipeline, we're still expecting high teens too.
High teens growth.
But those are the main ethics.
Great. Thank you very much.
Our next question will come from James Faucette of Morgan Stanley . Please go ahead.
Hey, guys. This is Jeff Goldstein on for James Thanks for taking my questions.
No Mercado Libre relationship now that we're approaching a year since the onset of that partnership just any sense on the ability to further expand that contract whether it's new services or geographies. Just how are you thinking about that opportunity.
Sure.
So we're very focused on it with Mercado Libre, specifically not announcing.
Deals until they are actually in production, but what I can tell you is we've exceeded our expectations and exceeded theirs as we as we talked about earlier on the call and we're very very confident that that's going to lead to both geographic and product extensions.
With that partner so we're incredibly excited about about working with them.
Got it that's helpful. And then just in thinking about your internal investment priorities for 22 can you just talk about key focus areas, whether it's new capabilities or new geographies, just how should we think about that and then if I could sneak one more in just thinking about the margins for next year any any broad strokes on how he said.
Think about margins by segment. Thanks, sure. So I'll take I'll take the first part of the question.
Joaquin sort of give his thoughts on that and answer the margin question. So capital allocation, but we are very focused on growth as you notice our footprint. We now have a great footprint in South America, and Latin America generally were excited about our products. The paste platform that we've rolled out for Mercado Libre per center, there in Chile, and now we're going to roll it out with them in Uruguay place to pay our gate.
We've localized in many countries throughout the region. So we do feel like we have a more competitive product set that we've had in the history of the company as it relates to Latin America. We are still very focused on M&A and we do believe now that we have such a good balance sheet. We have now with these extensions we have great certain cash flow that we can.
Continuing to lever.
Now that we get rid of this regulatory contention contingency we will be very focused on M&A.
And M&A in the region that.
<unk> historical things, but there are three types of M&A, we always look at one that takes advantage of the leverage and scale that we have the other that gets us into new countries and the other it provides new products.
Outside of that we'll also be focused on.
We just authorized or increase our buyback to $150 million. So we will be focused on our capital allocation throughout the year.
And then on the margin question.
Just to clarify right. The 400 to 450 basis points that we mentioned on the call.
The impact of all the different factors in the popular transaction that we just walked through right. So that is a bolus clothing impact over the whole deal now in terms of how to look at this going forward and then kind of going back to what I mentioned to Bob If we take that post closing impact and we think that we've got kind of where we're coming off in Q3 Q4 that kind of gives you a baseline after what our overall margin.
<unk> should be post deal now in addition to that the way we're looking at going forward. If we break it down into a couple of buckets from a revenue perspective.
25% of our revenue is really subject to these reduced CPI cap. The other 75% of that is comprised of our merchant acquiring revenue our ath mobile business revenue, which actually has a hedge against inflation cause sales volume continue to increase we have our ath.
<unk>.
Revenues, which are subject to a 5% CPI Cup and then all of our other business, where we have pricing levers that we will continue to use strategically when needed from an expense perspective, our plan is to continue leveraging our footprint.
Labor arbitrage getting some jobs in different regions, where we can maximize our presence in some of these countries and then work with suppliers locally some of our key suppliers as we have been doing actively to try and get better terms for longer contract and as have been the case, even with our with our landlord here in Puerto Rico.
We're working with to reduce our CPI got going forward.
If we look strategically at what we've done.
We've always been very margin focused we've been able to expand margin and that's been done because we've been investing in our in our bromine already technology and in our payments segments. So the plan here is to get ourselves in a position to again expand margin over time.
I think what came in an important point, it's investing in things that we can leverage if a couple of quarters ago. We sold ticket Bob that was not a scale business. It didn't have a lot of opportunity before asset I mean, the assets that we sold today, it's more than four but that but the applications that we sold the day, the popular where things that didnt have leverage and scale, we couldnt use them with other customers, we couldn't use it outside of Puerto Rico.
As we invest and pay some place to pay the margin on those should be accretive because we can leverage those throughout the region.
The only thing I would add and I know you mentioned the margin might segment is right and we said this in the remarks most of the impact here is meeting our merchant acquiring segment on our business solutions segment. The merchant acquiring segment, because we have the Rev share and then on the business solutions segment because of the sale of these assets, but also the impact of the lower <unk>.
And just to kind of give some ballpark I mean, our expectation both deal before to have low to mid Forty's type margin on a core business solutions to be in the low 40% margin. So it kind of gives you a ballpark from a segment perspective of where we're going to see the impacts.
Got it. Thank you that was all very helpful color.
Great.
Again to ask a question. Please press Star and then one our next question today will come from John Davis with Raymond James. Please go ahead.
Hey, good afternoon, guys what came I'm just gonna.
Beat a dead horse here, just on the outlook and the impacts of the transaction with the pop, but maybe to look at a different way.
By our math, let's call it $24 million of EBITDA or call it 8%.
Think about the $30 million top line is it fair to say yeah, we're looking at like 'twenty to 'twenty two.
So the EPS impact or more or less kind of breakeven EPS neutral is the right way to think about it just to put a finer point on the EPS impact.
This transaction had on the 'twenty outlook.
Can you repeat that John I was trying to follow the difference.
Sorry, so really.
Really like so given the $30 million top line and the.
Revenue or sorry, the margin impacts you called out our math as you know, it's roughly a $24 million headwind to EBITDA.
There's about 8% of your EBITDA and so you know what once I'd take it down all the way to EPS I'm getting somewhere kind of in the low 20% range like call. It 'twenty to 'twenty two.
Headwind from this transaction and the outlook I'm just.
Just wanted to kind of maybe.
Focus a little bit on the EPS impact you guys are included from this we've talked a lot about margins and.
In topline, but just want make sure I'm not missing anything on the bottom line.
No I mean, we haven't broken we haven't broken it down and that wage and John I think the way to think about it below EBITDA from a box perspective et cetera, when youre getting to EPS right.
There aren't really any significant impacts so I think if you're basing.
Taking into consideration I'm kind of impact from a margin perspective, everything on their needs and beginning to concern you shouldn't always need and the retirement of the almost 5 million amount of shares that were going to receive and that should give you the avs effect.
But giving you on the absolute number of cents.
That's not how we broken down.
Okay fair enough.
And then my bigger picture question here clearly you highlighted one of the positives here is no longer being considered a bank holding company subsidiary and how much of an impact has that had on M&A over the last couple of years you guys, obviously have a.
So very good balance sheet.
And really good free cash flow generation. So just trying to understand like can we expect the pace of M&A to improve behind the scenes, how how much of a hang up has that been.
And can we expect some acceleration from M&A perspective, once that's for sure.
Sure. It's a great question Great question, So what I would say historically it hasn't been that much of an impediment, but because we've been.
Very focused on tucking in deals, where we could take it exclusive and really leverage those across the company. So we bought great products we've entered countries.
And so it hasn't hindered us in the past what I would say in the future. They given we do have such a great cash position and a great balance sheet and now we have these extensions where we have very certain cash flow that we can lever.
We believe and given the M&A is becoming more and more competitive generally we do believe that it could have been a challenge in the future. So this is the right time to get this deal done to get the certainty of cash flow to get this regulatory hurdle out of the way because we think it really does open up opportunities for the future.
Okay, and just remind us I think comfort range.
Leverage is somewhere in the two to three times Zip code.
That's right that's right.
And then last question for me just you know.
I think Mike you mentioned the success of Ath mobile and in business.
In 2021, just curious if you guys have any kind of updates or stats you can share on on the success and traction you've had there or how thats kind of trended more recently or maybe a full year 'twenty. One number just missing any kind of update there would be helpful.
Yeah, I mean, John what we can say is I think we've been giving some odd d'etats political interviews from English Molly is becoming almost 3% of our total revenue at this point, so it's starting to become a bit more material.
<unk> grew 27% this last quarter as we mentioned obviously, we're entering some some pretty tough comps because we got so much of ath mobile traffic that we saw when whenever they make was still pretty active we started to see more kind of physical activity here towards the end of last year. So I think we're still expecting good growth from these products right now.
Digital adoption is here to stay but we've been clear that we didn't necessarily expect.
Those high growth rates to sustain its kind of we went back to a more normal state.
Okay I appreciate all the color guys. Thanks. Thank.
Thank you.
Ladies and gentlemen at this time, we will conclude our question and answer session I'd like to turn the conference back over to Mac schuessler for any closing remarks.
Thank you.
Again, I want to I want to thank all of my colleagues.
Credibly proud of what we've accomplished as we look ahead I'm delighted the board has extended my contract with the company for the next three years together, we look forward to the growth ahead also want to thank everyone. Once again for joining us on today's call. We look forward to speaking to you at conferences in the coming future operator, please close the call.
Thank you. The conference has now concluded we do thank you for attending today's presentation and you may now disconnect your lines.
Okay.
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