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Edited Transcript of EVOP.OQ earnings conference call or presentation 7-Aug-19 12:00pm GMT

Q2 2019 EVO Payments Inc Earnings Call

Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of EVO Payments Inc earnings conference call or presentation Wednesday, August 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendan F. Tansill

EVO Payments, Inc. - President of North America

* Darren Wilson

EVO Payments, Inc. - President of International

* Edward O’Hare

EVO Payments, Inc. - SVP of IR

* James G. Kelly

EVO Payments, Inc. - CEO & Director

* Kevin M. Hodges

EVO Payments, Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Andrew William Jeffrey

SunTrust Robinson Humphrey, Inc., Research Division - Director

* Ashwin Vassant Shirvaikar

Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst

* Georgios Mihalos

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* James Edward Schneider

Goldman Sachs Group Inc., Research Division - VP

* Jason Alan Kupferberg

BofA Merrill Lynch, Research Division - MD in US Equity Research & Senior Analyst

* Joseph Dean Foresi

Cantor Fitzgerald & Co., Research Division - Analyst

* Kartik Mehta

Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst

* Ramsey Clark El-Assal

Barclays Bank PLC, Research Division - Research Analyst

* Robert Paul Napoli

William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology

* Tien-Tsin Huang

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the EVO Payments Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ed O'Hare, Senior Vice President of Investor Relations for EVO. Please go ahead.

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Edward O’Hare, EVO Payments, Inc. - SVP of IR [2]

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Good morning and welcome to EVO Payments second quarter earnings conference call. This call is being webcast today, and a replay will be available through the Investor Relations section of EVO's website shortly after the completion of this call.

Please note that some of the information you will hear 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. For additional information on factors that may cause our actual results to differ from the views expressed in any forward-looking statements made today, please refer to our earnings release; and the risk factors discussed in our periodic reports filed with the SEC, including our most recent 10-K, which is available on our website.

In an effort to provide additional information to investors, today's discussion also includes certain non-GAAP financial measures. An explanation and reconciliation of these non-GAAP financial measures to their nearest GAAP financial measures can be found in our earnings release available on our Investor Relations website. Today, we will discuss our second quarter 2019 performance. Joining me on the call today is Jim Kelly, Chief Executive Officer; Kevin Hodges, Chief Financial Officer; Darren Wilson, President, International; and Brendan Tansill, President, the Americas.

Now I will turn the call over to Jim Kelly.

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James G. Kelly, EVO Payments, Inc. - CEO & Director [3]

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Thank you, Ed, and good morning, everyone. Welcome to EVO's second quarter earnings call, where we will review our results for the quarter and provide updates on our business performance, our platform migrations and our recently announced acquisitions.

For the quarter, constant currency adjusted revenue grew at 11% and constant currency adjusted EBITDA grew at 14%, when excluding the card network incentive recognized in the prior year period. These results reflect our strong international bank partnerships, our growing integrated payments network and our expanding sales efforts across all markets.

I'd now like to provide an update on our business performance in Europe. Our Polish business continued to deliver solid results in the second quarter, leveraging both our bank relationship with PKO and our strong direct sales team. We signed several large national customers, including a pharmacy network and a grocery store chain. Additionally, we signed an agreement with a merchant which supports over 1,000 locations and is implementing Visa Direct for payouts immediately to the consumers Visa debit card. This application is Europe's first implementation of Visa Direct at a physical point of sale, and we are excited to work with Visa and the merchant to launch this digital solution. On a side note, we anticipate lodging Visa Direct in the U.S. during the second quarter of next year.

We also expanded our sales team to include the Postbank branch network to support our new relationship with the bank, which we announced last quarter. Additionally, we have renewed our agreement with the Polish Post to continue to provide card acceptance and mobile top-up solutions for its network of over 4,700 post offices and 3,500 couriers.

Our Tech-enabled division continues to deliver strong results as well. Earlier this year, we expanded our Snap** platform to provide e-commerce processing capabilities for in-market merchants, and have already signed new merchants utilizing these capabilities.

Lastly, as we mentioned on our previous call, the cashless program began its rollout in Q1 2018, and we continue to see new business from this program. As expected, growth rates have slowed as the program annualizes over 2019. We have seen strong renewal rates for merchants after the initial trial period as now they transition to a traditional processing arrangement.

Turning to Ireland and the U.K. These businesses continued strong growth in the second quarter as well. In Ireland, we continue to leverage our partnership with the Bank of Ireland to sign new merchants. Additionally, we have implemented new Tech-enabled solutions in the market. For example, since rolling out our Snap** e-commerce platform in Ireland earlier this year, we have signed key customers requiring Tech-enabled capabilities such as virtual terminals, omnichannel solutions and e-commerce.

As discussed in our last call, we integrated our Way2Pay acquisition to Snap* to further enhance our e-commerce offering. Since the acquisition, 70% of new Way2Pay signings are using EVO acquiring services, demonstrating the success of our cross-selling capabilities. In the second quarter, we also extended Way2Pay into the U.K. market where we began signing new schools. In the U.K., our business continues to board over 1,000 new merchants monthly through its direct sales efforts.

In our Tech-enabled division, our ISV network remains strong and continues to deliver a steady stream of merchants, as 1/3 of our new merchant signings are now referred by an ISV partner.

Our e-commerce offering is gaining traction in the market as well, with 30% of new deals from our direct sales force now including an e-commerce component.

Finally I would like to provide an update on Spain. In our Tech-enabled division, we continue to build our strong distribution by adding new ISV partners in the medical, education and hospitality verticals. Additionally, ClearONE's unique product capabilities continue to attract new customers, including a large national gift shop chain and a multi-store clothing retailer. We now see over 60% of new ClearONE gateway customers using EVO's acquiring services, demonstrating success of our integrated strategy.

In our Direct division, we remain pleased with our Liberbank relationship and are seeing steady referrals from the bank. With respect to Santander, the bank has recently announced that it has completed its accelerated consolidation of the Popular branch network and IT infrastructure, which has increased attrition and impacted new referrals.

Turning to North America. We continue to see strong adjusted revenue growth from our U.S. ISV and B2B business units, which together grew at 21% in the second quarter. Our U.S. ISV business grew in the high teens this quarter, and we are focused on signing new partners to expand the vertical markets we support. For example, in the second quarter, we signed a key software partner in the U.S., focused on veterinarian practices. As this partner is an international company, we plan to support this partnership both inside the U.S. and in Europe via our Snap* platform. We also expanded several key relationships with existing software partners and found new ISVs focused on membership clubs and unattended retail.

Our B2B business unit continues to be the fastest growing component of our Tech-enabled division, demonstrating strong adjusted revenue growth once again for the quarter. The performance from this group is a result of our direct sales efforts, growth in our B2B partner network and the ongoing software sales of our Microsoft- and Oracle-integrated ERP solutions.

We also continue to develop new products for car-based solutions such as our newest application to support Microsoft Dynamics 365 Business Central, which we released last month. As a result of this application, we have signed a new Microsoft partner specializing in ERP implementations for distribution and manufacturing customers.

The third component of our U.S. Tech-enabled division is our e-commerce business, which trails ISV and B2B in its performance, as previously discussed. As such, we have implemented several strategic initiatives this year to improve its performance, including launching and marketing our Snap* e-commerce capabilities directly to partners and merchants.

Turning to Mexico, we demonstrated very strong constant currency adjusted revenue growth of 13%, which includes the positive incremental impact of the Easter holiday. Our primary bank partner, Citibanamex, continues to deliver strong merchant referrals ranging from small merchants to large national customers. Beyond our bank referral channel, we have launched new technologies and capabilities in the market, including paperless boarding, integrated solutions and our proprietary e-commerce gateway, which we are utilizing to sign new merchants and enhance the experience for our current customers. For instance, in the second quarter, we signed the e-commerce business of Heineken and will begin processing by year-end.

Next, I'd like to provide a brief update on our ongoing integration work. In the second quarter, we began the Liberbank migration from the national processor to our Polish platform. The pilot phase of the project is now complete and we are boarding new merchants directly to our platform. We expect this existing portfolio of merchants to begin migration in the first half of 2020.

In Spain, we also migrated another portion of the Banco Popular portfolio, and continue to migrate the remainder of the portfolio that includes larger merchants requiring a higher level of coordination.

Last year we completed the initial phase of the Mexican migration, which was to in-source our customer service and technical support functions from a third party. The migration of our Mexican merchants onto our U.S. backend platform remains on plan for the initial requirements phase, and we anticipate commencing the next phase of the project in the second half of 2020.

In addition to our ongoing migration efforts, our teams have been ensuring we are in compliance with the European Strong Customer Authentication mandate, SCA, that is part of the PSD2. We have a comprehensive plan in place to meet these requirements, although the regulatory landscape continues to evolve.

Our EuroBic joint venture in Portugal is still pending regulatory approval. We anticipated we would receive approval by this summer, however, we now expect to hear from the regulator in late fall.

Now I would like to turn the call over to Brandon Tansill, who will discuss our recent acquisitions in Mexico and in Chile. Brendan?

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Brendan F. Tansill, EVO Payments, Inc. - President of North America [4]

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Thanks, Jim. Good morning, everyone. As Jim mentioned, in Mexico we continue to make investments in our tech-enabled distribution to drive growth for the business. In July, TouchBistro, a well-known point-of-sale provider for restaurants with a strong U.S. presence, announced it was launching its integrated payments platform to restaurants in Mexico later this year, and selected EVO to be its acquiring partner.

At the end of last month, we also closed on our acquisition of SF Systems, an ISV integrator platform based in Mexico, to complement our Snap* platform in the market. The acquisition extends our ISV capabilities and allows us to accelerate growth in the Mexican ISV market, using its existing integrations.

Turning to Chile. As was announced in May, EVO signed an agreement to form a new 10-year exclusive bank joint venture with Bci. Chile is a new market for EVO and our first operation in South America. Recent regulatory changes have enabled greater innovation in the market, ending the historical monopoly for payment processing. Local banks are now evaluating their digital strategies to compete in this evolving market, and are looking for innovative solutions. Anticipating this change, Bci conducted a competitive evaluation process last year, and selected EVO based on our deep understanding of successfully building acquiring businesses internationally. This will be EVO's 16th international bank relationship since we started our global expansion in 2012.

As a result of the transaction, EVO will become the first independent merchant acquirer to enter the Chilean market by partnering with a leading financial institution. We are very excited about entering Chile and South America. Chile is a market-oriented economy with strong foreign trade, financial institutions and public policy. There are over 600,000 merchants in Chile today, and it is estimated that only 40% accept card payments. Additionally, the market has experienced strong growth of 22% in credit and debit card transactions annually over the last 5 years, driven by a robust economy and the shift from paper to plastic.

With $60 billion in assets and 325 branches serving over 70,000 customers, Bci is the third largest bank in Chile by assets, with a 17% market share. Bci has been in the market for more than 80 years and is committed to providing a digital experience to its customers. As an example, in 2017, the bank successfully launched a leading-level payment solution in Chile, MACH, and has had tremendous success with over 1 million subscribers in less than 2 years. In addition to P2P capabilities, the mobile solution also allows consumers to pay merchants like Amazon, Spotify, Netflix, AliExpress and other international e-commerce brands via a virtual debit card connected to MACH. We look forward to marketing this product with Bci via the JV, and expanding its capabilities to include the point-of-sale as we launch EVO's global product suite in the market.

Under the terms of the agreement with the bank, EVO will own a majority of the new joint venture and have operating control. Bci will exclusively refer merchant customers from its branches and corporate offices to the JV, while EVO will deliver a unique platform proposition to differentiate from the offerings currently in the market and provide its global proven sales and marketing expertise to quickly gain market share for the business.

We have already identified a country manager from Bci, who will work with our head of Latin America to ensure the business' success as we look to expand further into South America. The business in Chile will initially leverage our Mexico infrastructure for support, similar to how our European businesses utilize our Polish infrastructure. The JV in Chile does not include a back book of merchants, ad will require initial investments to establish the business, not unlike our Irish business which began in 2014 and achieved 25% acquiring market share within 4 years of its launch. Utilizing our proven sales and marketing expertise, we can achieve a similarly successful outcome in Chile as well.

I will now turn the call back over to Jim. Jim?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [5]

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Thanks, Brendan. We look forward to the launch of our business in Chile this year, after obtaining regulatory approval.

Our M&A strategy remains the same, as we partner with international financial institutions and continue to expand our tech-enabling capabilities in new and existing markets.

Overall, we are pleased with our results for the quarter. Kevin will now cover the financials in more detail. Kevin?

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Kevin M. Hodges, EVO Payments, Inc. - Executive VP, CFO & Treasurer [6]

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Thank you, Jim, and good morning, everyone. As Jim mentioned, EVO delivered a strong quarter of top and bottom line growth. For the second quarter, normalized adjusted revenue grew 11% on a currency neutral basis, with acquisitions contributing 4 percentage points of that growth. FX negatively impacted revenue by 260 basis points in the quarter. Based on current FX rates, most of the adverse FX impact compared to 2018, occurred in the first half of 2019, although the euro and Polish zloty continued to weaken versus the prior year. Results are normalized for a card network incentive in the prior year period. As previously discussed, our revenue is now reported net of card network fees, which were $27.5 million in the second quarter. We report adjusted revenue excluding this deduction, to aid in comparability with 2018.

In the second quarter, we delivered double-digit currency neutral adjusted revenue growth in our largest international markets, including Poland at 10%, Spain at 11%, the Irish and U.K. market at 24% and Mexico at 13%.

As indicated on our previous call, growth in Poland was impacted in Q2 as a result of the annualization of the cashless program and the migration of a large customer at the end of Q1, which affected growth beginning in the second quarter. Growth was further impacted by merchant renewal pricing in Q2. We expect these factors to impact Polish growth through Q1 of next year.

While revenue in Spain grew at 11% in the quarter, we initially had higher growth expectations earlier in the year, which were impacted by the Santander consolidation efforts, as Jim previously mentioned.

On a currency neutral basis, normalized adjusted EBITDA increased 14% to $39.3 million. Currency neutral normalized adjusted EBITDA margin increased 82 basis points to 26.2% compared to the prior year period, when excluding the previously mentioned card network incentive.

Beginning with our European segment, segment-adjusted revenue in the quarter grew 11% over the prior year period on a currency neutral basis. In the second quarter, our adjusted revenue per transaction in Europe declined 8% due to the growing number of large merchants performing well in the market and lower DCC take rates, which will annualize in Q4.

We saw second quarter European tech-enabled transactions grow 20% versus the prior year, driven by our sales in Poland, Ireland and the U.K. The Tech-enabled division now represents 22% of European adjusted revenue. Segment profit for the quarter was $15.1 million, an increase of 9% on a currency neutral basis. For the quarter, segment profit margin was 23.7%, a decrease of 47 basis points compared to the prior year, due to the previously mentioned headwinds in Spain.

Turning to North America. We saw strong performance out of this segment as well. Second quarter normalized adjusted revenue increased 10% over the prior year on a currency neutral basis, with acquisitions contributing 5 percentage points of that growth. Within the segment, our U.S. Tech-enabled normalized adjusted revenue increased 8% compared to the prior year period, which reflects the strong growth in our ISV and B2B business units offset by the performance of our e-commerce business. Our U.S. Direct and Traditional divisions adjusted revenue grew 9%, which reflects the federated buyout and expected declines in the Traditional division. The strong growth in Mexico is a result of our strong bank partnerships and direct sales teams in the market, coupled with our growing Tech-enabled division. On a currency neutral basis, our normalized adjusted revenue per transaction in North America decreased 1% in the quarter, which reflects the impact of large merchant growth in Mexico, as previously discussed.

Segment profit for the quarter was $29.9 million, an increase of 16% on a currency neutral basis when adjusting for the card network incentive in the prior year. North America segment profit margin improved 180 basis points to 34.6% in the quarter, due to our revenue growth and ongoing operating efficiencies.

Turning to our corporate expenses. Adjusted corporate expenses were up modestly to $5.7 million for the quarter compared to the prior year period, primarily due to additional public company costs. Expenses related to operations as a public company largely began in Q2 2018, and the company is continuing to make investments in this area during 2019. Pro forma adjusted net income was $13.4 million for the quarter, reflecting growth of 29%. On a reported basis, consolidated net income was $3.8 million for the quarter. Reflecting adjustments described in our press release in all share classes, pro forma adjusted net income per share was $0.16. At the end of the quarter, our diluted share count was 31.9 million, which reflects the weighted average Class A common stock outstanding in all diluted securities. Including all share classes and diluted securities, we had 85.7 million shares outstanding.

In the second quarter, we spent $6.8 million in capital expenditures, of which 62% was for point-of-sale terminals in our international markets. CapEx declined 61% versus the prior year period, as we annualized the terminal investments made in the prior year to support the cashless initiative in Poland and the timing of other purchases last year. We ended the quarter with net leverage of 4.2x last 12 months adjusted EBITDA.

In addition, interest expense declined 21% in the quarter compared to the prior year period, after adjusting for the prior year debt modification costs associated with the post-IPO refinancing.

Free cash flow described as adjusted EBITDA less capital expenditures less net interest expense, was $22 million, an increase of 270% over the prior year period.

Finally, as mentioned, we've seen headwinds in Spain from the bank's consolidation and related efforts pertaining to Banco Popular. As such, we now estimate a revenue impact to the company of 75 to 100 basis points for the year. We maintain our full year 2019 guidance and expect adjusted revenue to grow between 10% and 12% on a currency neutral basis. We expect adjusted EBITDA to grow between 11% and 14% on a currency neutral basis and pro forma adjusted net income per share to grow between 12% and 18% on a currency neutral basis.

I will now turn the call back over to Jim. Jim?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [7]

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Thanks, Kevin. I will now turn the call over to the operator to begin our question-and-answer session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Tien-Tsin Huang with JPMorgan.

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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I wanted to ask on Bci, just the cost to stand that up. I know that there's no back book involved here with Transbank keeping that. But I'm just curious how quickly. I think you mentioned 4 years, I heard that. But just the cost to stand it up and how quickly we might see it flow into the P&L.

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James G. Kelly, EVO Payments, Inc. - CEO & Director [3]

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Okay. I think the 4 years was in Ireland we reached 25% market share over a 4-year time period. Here, as we mentioned in the comments, as Brendan mentioned, we're going to leverage our Mexican infrastructure. So we have a group of over 400 in Mexico. And similar as we do in Europe, where we have Poland is kind of the back office for Europe, it's kind of a hub-and-spoke structure, we intend to do the same for South America. So Bci initially will just be sales, some product and [account] support. Over time, we'll likely put some first-line customer service into the market. So there clearly will be some cost. I think most of the cost will really be around sales expense standing it up in advance of the revenue coming in.

But as Brendan went through the statistics in the market, organic growth in that market, just because of it's so under-penetrated for card issuing and merchant acceptance is over 20%. So our expectation is that we should see pretty rapid growth.

If you want me to estimate, I would say 2 years. But we'll likely see some losses, and we'll call those out during these calls.

And we would have been happy to buy a back book. Unfortunately, there wasn't one available because it's owned by the central processor. But we're very, very excited about this opportunity; wanted to get into South America, which we've talked about on numerous occasions. But we also think there's lots of growth in the market. We think we have an excellent partner who's very focused on technology. As Brendan mentioned, they have a product already in market similar to like the Venmo, on P2P, which does some payments online, as mentioned, with Amazon and e-commerce businesses. They'd like to see this in the face-to-face world as well, plus all the capabilities that we can bring and our Mexico team, in particular, that's had great success into that marketplace.

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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Yes. No, I was glad to see it. I know you mentioned South America being a focus. Is there more to do behind this one? Or do we need to give this time to develop and provide a proof point for others that you can stand something like this up?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [5]

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Yes. I think that's a really good question. For us, because, as we described our M&A strategy, our objective is to form a long-term relationship with a financial institution and benefit from their distribution and they benefit from our monoline capabilities. So it's not as easy as going to a private equity firm and buying a business. You have to cultivate a relationship. Typically these financial institutions, if not typically, all the time run a process. So you have to wade through the process, the contracts, all that stuff. So yes, it -- Bci took over 1 year from start to finish. But our expectation are a number of the Spanish-speaking countries, in particular in South America, I think will look at Chile and also Brazil, but look at Chile and how it's opening up; obviously the same in Argentina. So my expectation is that you'll see us in other countries in other countries in the not distant future, but we don't have anything that's actionable immediately.

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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No. Congrats on that. Real quick, if you don't mind the third question. Just on the North America margins, Kevin, is that a sustainable level for the second half of the year?

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Kevin M. Hodges, EVO Payments, Inc. - Executive VP, CFO & Treasurer [7]

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Yes. No, as we said on the call, we've introduced some cost efficiencies in the market already, just the actions we've taken in last year. So yes, we're sort of seeing that steady as she goes as the EBITDA margin for the back half of the year.

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Operator [8]

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And our next question comes from Bob Napoli with William Blair.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [9]

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Just wanted some clarification initially on the guidance, the 10% to 12%. I mean very good quarter. Seemed like you could have raised guidance. And I know you mentioned some Spain, some challenges there. But on the guidance, first of all, why not increase with the strength you've had. And then on the revenue growth, the 10% to 12%, how much of that would be FX neutral organic?

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Kevin M. Hodges, EVO Payments, Inc. - Executive VP, CFO & Treasurer [10]

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Yes. So the 10% to 12% would be constant currency. The acquisitions, kind of this year are impacting the overall growth by a few percentage points, but those will annualize in the second half of the year. We're not anticipating in the guidance kind of the acquisitions that have not closed. So Chile is not in there, Portugal's not in there.

And I think to your first question about why not raise in guidance, I think it's for the reasons we called out. It's really Spain. We wanted to make sure that we were giving you all some color around some of the headwinds that we're seeing in Spain with the bank's consolidation efforts. As we called out the 75 to 100 basis points that we see in the back half of the year, really related to just lower merchant referrals coming from the bank and higher attrition. The other markets are doing well.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [11]

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And just on the M&A front, I know you guys are always active and it seems like you've been very successful with the deals that you've done. Is there a pipeline? I know your leverage 4.2, and you've been doing small tuck-ins that seem to be really synergistic. Are there other of those tuck-ins? Or are you actually interested in larger transactions as well?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [12]

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Yes. I think the short answer is we'll look at all opportunities to be able to expand in our existing markets and new markets. The smaller ones that you mentioned, like SF Systems, ClearONE, the way I view that is, that is a way for us to accelerate our growth over the long term as these markets in particular, outside the U.S., converge on integrated payments as we've seen here in the U.S. So this, as we've said on several of these calls, ClearONE has over 100 ISVs that are connected to it. And I think we're 60% or 70% of the new business that comes through that platform, which is roughly over 100 merchants a week are coming through ISVs that we are now acquiring for.

So that component of our strategy is building organic growth, making sure that we're not dependent entirely on a financial institution or market and really just diversifying in a market. But at the same time, like a Bci, our interest was to expand, and is now successfully into South America. There are some markets where there is not a large national payment processor that owns the merchant contracts where financial institutions, like in other markets, own those contracts.

So we are, I would say half of our time and the GMs in each of the markets that we operate, Brendan and Darren, that's a big part of their incentive as well as their responsibility to me, is to look for new opportunities. And I would say the pipeline being a public company, makes it a lot easier because people know who we are. You can go pull our 10-K and read about the company; whereas, a private organization it is or business is much more complicated. So I think the pipeline is as good as it's been. We also are respectful of the fact that we were committed to delever the company from the IPO, which we have done from 6 down to what, 4.2 now?

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Kevin M. Hodges, EVO Payments, Inc. - Executive VP, CFO & Treasurer [13]

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4.2.

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James G. Kelly, EVO Payments, Inc. - CEO & Director [14]

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And we'll continue to trend down. The tuck-in acquisitions that we've been doing are relatively small. I think just because they're small in size -- as Brendan mentioned, we would pick up TouchBistro in Mexico; it's a big win, and we'll continue to do those type of transactions in markets. So yes, big transactions, small transactions; I don't think it's necessarily the size. It's really just fitting the strategy.

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Operator [15]

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And our next question comes from Jim Schneider with Goldman Sachs.

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James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [16]

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I was wondering if you could go a little bit further on Chile and with the Bci deal. Do you have any comment on the kind of competitive nature of that deal? I assume you've been working with them for a long time. But I think one of your competitors is also in the market with a processing contract with one of the large banks down there. So I'm just kind of curious how you see that market; whether you see there being further opportunities for opening that up. And I guess how fast do you think that is going to take off as we head into 2020 and you start to board new merchants?

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Brendan F. Tansill, EVO Payments, Inc. - President of North America [17]

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Yes. Thanks. Good question. And this is Brendan Tansill here. So as it relates to Chile, what we saw out of Bci is relatively typical for a bank that's evaluating establishing a partnership from an international acquirer like an EVO. So they engaged a third-party consultancy and ran an RFP. It was sent out for bid. And for bid, there was no consideration paid, because there was no back book of merchants, as Jim mentioned. But it was bid to the extent that we had to go down there, present our capabilities. We had to spend a considerable amount of time with the senior management of the bank to ensure social and cultural and strategic alignment. There was some reverse due diligence of our facilities here in the U.S. So we hosted them at, at least 2 of our facilities here to get them comfortable with how we operate our business here domestically. And then after a number of discussions with them around how we would envision the joint venture operating and how we would envision the governance working, they ultimately selected us as their partner.

And the only real work to do after that is to execute a contract that we call a Marketing Alliance Agreement, which is the document by which our 2 organizations align themselves. And then I guess the Shareholders Agreement as well. As we've been clear, we own 50.1% and they own 49.9%. So that was the selection process.

As it relates to ramping, there's still regulatory approval to be achieved. So we would expect that to come sometime here in the fall. That's about as specific as they've been with us, so it's as specific as we can be with you.

And then I think in my comments in the earlier portion of the call, I made reference to our experience in Ireland. And I think it's highly germane here, because the 2 efforts are remarkably similar. While we're entering a new market where we don't have capabilities prior to our partnership, in Ireland it took us -- we experienced very rapid growth, and 4 years in, we're at 25% market share. And that's a market which is really a duopoly from a banking perspective with Allied Irish Bank and Bank of Ireland being the 2 large financial institutions, each with roughly 40% share. So our 25% share, I think still has room to go in Ireland.

And I would expect that our acquiring share in Chile would similarly coalesce around the banking share of the bank, if not surpass it. So the bank, I believe is a 17% market share player, and we would expect to get there in a relatively compressed timeframe. And then we would expect further that the market would continue to experience significant growth. As Jim mentioned, transactions have grown each year for the last 5 years at roughly a 20% CAGR. So we think that the market has a long runway, where, if we can position the business appropriately, align our product and technology capabilities with the bank's distribution, but there's no reason why we can't be enormously successful.

And then I guess the final question I heard you ask was our entrance into the market vis-a-vis other parties. Again, in the case of our competitors that have entered the market, that's more of a processing relationship. So they're receiving a fee per transaction to process transactions. But they're not so much in the acquiring business where they're participating in the discount rate that is charged to merchants to provide the acquiring services. And we are more in the latter camp where we are processing. But we are processing as a means to an end. And that end is delivering a value proposition to the customer.

So we ourselves are generating the customer relationship. We are maintaining that relationship and we are pricing the merchant to reflect the value that we're delivering and also the risk that that individual merchant presents to the company, to the joint venture.

So while our business I think will undoubtedly result in some near term operating losses as Jim highlighted in the answer to Tien-Tsin's question, we feel like our growth should be significant and the long term profit opportunity is substantial.

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James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [18]

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That's helpful color. And then maybe as a follow-up. Kevin, can you maybe just talk about the EPS guidance? You outperform pretty significantly versus The Street and our own expectations in Q2. So I guess I'm just wondering if the North American margin performance is sustainable, as you mentioned earlier, is there anything we should be thinking about in the back half of the year that would pose a headwind to earnings growth.

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Kevin M. Hodges, EVO Payments, Inc. - Executive VP, CFO & Treasurer [19]

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No. We obviously talked about what we've been seeing in Spain, that most significantly impacts the revenue but drops into the EBITDA and the EPS as well. We sort of called out the color on revenue, because we're trying to make up the difference on the EBITDA side. And so we've got the teams kind of putting in place some initiatives there.

And then just on the EPS side, we do have the impact of the April follow-on offering, increase in number of shares. You would have seen not going from Q1 to Q2. That obviously continues for the rest of the year. And then we do get some benefit from the lower depreciation just as a result of the lower CapEx that we've been seeing the first half of the year.

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Operator [20]

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And our next question comes from Andrew Jeffrey with SunTrust.

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Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [21]

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Jim, I wonder if you could elaborate a little bit on what you're seeing in U.S. e-com and maybe some of the initiatives or steps you're taking to improve growth there. And then just broadly, when you look at your e-com strategy globally, could you may be position EVO versus some of the other players in the market? What really differentiates your go-to-market? And what do you think gives you a competitive advantage as you try to take share?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [22]

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Okay. So on the first point relative to the U.S., nothing significant has changed relative to what we've said on prior calls. We're looking to round out the team. As we've mentioned, we've brought some of our capabilities that originated internationally, mainly our gateway, into the U.S., to be able to offer that as a solution as opposed to using third-party gateways.

I would say beyond the U.S., I think we called out in Mexico as well as Europe, that we use a common gateway. So this is the one that we acquired around the same time we acquired Snap*. It was not necessarily one that was well-known in terms of the Strips, [Adienz], Worldpays. But in terms of capabilities, it has no less capabilities.

And our differentiation is the same differentiation that a Bci gives us or any of the other 16 international banks that we do business with, and Deutsche Bank here domestically, is their distribution. So to the extent that they have merchants that need e-commerce, which they do, we're the chosen exclusive provider. So those businesses will come to us directly.

I think in particular in e-commerce where it's been around for quite some time, many of these larger companies already have integrations to third parties. And to the extent they do, we'll still be the acquirer, but we may have a competitor platform in between and, to some extent, we would prefer it to be ours, but it's not necessarily a game changer.

Our strategy is about building distribution, not necessarily building e-commerce distribution versus face-to-face versus ISV, but to build distribution through the financial institution networks that we currently have and will continue to expand, and then take all our capabilities and make those available to the customers.

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Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [23]

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And do you think that you can gain traction in those initiatives this year? Or are we thinking about 2020 as being the period in which you're likely to see that part of your business accelerate and contribute more to organic growth?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [24]

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Yes, it is today internationally accelerate -- it is a big part of the growth or component of growth in the international markets. Domestically, though, I would say we'll need another year to shift what was a business dependent on third parties referring business to us, to a business that's more organically generated. So I'm not expecting any change for this year and likely not for next year either, in the U.S. piece.

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Operator [25]

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And our next question comes from George Mihalos with Cowen.

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Georgios Mihalos, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [26]

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Congrats on the results. Just wanted to ask, as we look at the transaction growth this quarter in North America, obviously it spiked very nicely; just curious if you could provide some color on that. It sounded like you had a lot more momentum in areas like Mexico and the like. But what drove that? And how should we be thinking about that transaction growth going forward?

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Brendan F. Tansill, EVO Payments, Inc. - President of North America [27]

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It's Brendan here. Thanks for the good question. So what you saw out of Mexico and North America transaction growth was we assumed the debit business for several of our largest corporate customers in the quarter. And that switch from an alternate provider to EVO's Mexico business resulted in very significant transaction growth.

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Georgios Mihalos, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [28]

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Got you. Okay. That's helpful. And then just a question, Jim. Building off the e-com questions, I think you said for Way2Pay, you're processing for 70% of the merchants there. Do you have a similar number for Snap* overall, where you're sort of providing the gateway and doing the processing?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [29]

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I wouldn't have it off the top of my head as to total number of merchants that are on there. But yes, we could call that out on another call or we can do that at a later point in time.

We were just highlighting our Way2Pay in one of the questions we had earlier in terms of these smaller tuck-in-type acquisitions. Way2Pay's been very successful in Ireland. It's now moving over to the U.K. And it's kind of for us a bit of a hybrid between software and e-commerce capabilities. So we were just referencing the fact that this, before we acquired it, was just simply a gateway, and now we're picking up substantial part of the schools or sports organizations that are utilizing the service, we are also the acquirer. Same for ClearONE. And you'll see the same for SF Systems. That is strategy I think we developed with Snap* and expanded to Sterling, and are continuing to locate these type of assets. Internationally, they're relatively small and they are oriented to clicks as opposed to the acquiring fee. And that's, as Brendan was describing Chile, that's the business that we're in. We're maybe the last of the mono line acquirers that are public companies. And our focus is to get as close to the merchant as possible and to try to eliminate as many intermediaries between us in the merchant as possible.

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Operator [30]

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Our next question comes from Ramsey El-Assal with Barclays.

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Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [31]

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I wanted to ask about the impact of Easter timing in the quarter. Was it a perceptible driver of growth? Or did it play out the way you thought? We had it in our model as maybe a little bit more of an impact.

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James G. Kelly, EVO Payments, Inc. - CEO & Director [32]

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Yes. It would be entirely a guess. As we were putting the script together, that was one of the questions actually I asked of Kevin to try to -- and that's why we put it in the script. So we were at 13% for Mexico. And that's a market that we probably saw it more notably. But it was probably 1% to 2%, to the extent we can guess how many people spent the month before or the month after relative to Easter. And that would align with what our expectations were for Mexico. Likewise for Poland, there's some other noise in the Polish numbers, as Kevin mentioned, but you're probably 1% or 2%. If you went back to the scripts, last quarter we were down I think at 8% or 9% for Mexico, as a corollary.

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Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [33]

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Okay. I wanted to ask also about the sort of broader DCC opportunity. I guess for some of these newer deals that have yet to roll on, whether it's Bci or EuroBic or maybe even Postbank, first of all, any of the new distribution sort of lend itself to DCC with footprints that are maybe heavy in kind of tourist locations, airports, casinos, things like that? I guess that's the first part of the question.

And then second is just more broadly, how penetrated is your existing book with DCC? Is there incremental opportunity there to kind of ferret out new locations? Or is it sort of what you have today is kind of the steady state of DCC in your business?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [34]

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Well, I've only been to Chile a couple of times, so I can't speak to the tourists. But last time I was down there was around Christmastime. And there was a lot of Americans heading down there to get on a boat and go to South America. So apparently that's the thing to do at Christmas in Chile. Not South America. Excuse me. To Antarctica.

I would say that every market has the opportunity for DCC, and we would make that available as a product. I think we've also seen, because of all the heightened attention on DCC in Europe last year, that there was probably some level of pullback by consumers potentially, because we saw some level of slowing, as Kevin has said on a couple of calls.

I don't know that there's more penetration opportunity in the existing books. The Polish business was already very well advanced with DCC. It's an in-house capability. We don't use a third party. We set rates and can change rates during the day. And we've been effective in rolling that out into the Spanish market, for instance, and into Ireland.

We do have a new book in Europe, Liberbank. So there is activity in increasing DCC capabilities, because the legacy national processor called SECA there, just has less capabilities on the DCC side. So it is part of the playbook wherever we go. But I don't know that it's something that would be overly material in the near term.

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Operator [35]

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And our next question comes from Ashwin Shirvaikar with Citi.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [36]

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The first question I guess for Kevin. Relative to our expectations, the EPS beat seemed to be due to lower depreciation, which you mentioned in answer to a previous question relative to lower CapEx in the first half. Wasn't clear to me was whether that lower CapEx is a sustainable. And if so, why?

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Kevin M. Hodges, EVO Payments, Inc. - Executive VP, CFO & Treasurer [37]

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Yes. So as far as, yes, it's sustainable. So what we've seen this year is lower CapEx compared to 2018, largely around point-of-sale terminals. We spent a lot of money last year in CapEx, $50 million, nearly $50 million CapEx, really around some key initiatives to develop the cashless initiative in Poland. Now that it's annualized, it's more regular. We don't have to make as large of an investment this year just in terminal purchases. And then we've also just seen lower terminal requirements needed in some of our other international markets.

Outside of point-of-sale terminals, we've also annualized some of the IT investments that we made last year, particularly in the second quarter of last year in North America. We haven't needed to repeat those in 2019. So we've been tracking more a new run rate of CapEx. I think our Q2 CapEx was pretty close to what we spent in Q1, and we're sort of anticipating that for the remainder of the year as well.

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James G. Kelly, EVO Payments, Inc. - CEO & Director [38]

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Yes. Ashwin, really has been a very big focus this year, going into this year about getting CapEx down and being more aggressive maybe than we had in the past. I think last year, we just convergence of the cashless program, as Kevin said, and some office refurbishments, expansions. And as we do make acquisitions, there's going to be maybe not as much CapEx, but there's going to be more cash spending.

So our focus this year is to improve cash flow. And I don't know that we expected it to be as strong as what we've seen thus far this year. But we've taken a very good look at the balance of the year. We think this will continue into the fourth quarter.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [39]

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Okay. And then that comment on lower terminal requirement, is something changing in your relationship as it relates to the terminal manufacturers? Or is it some would be maybe newer relationships, like the TouchBistro coming on? What's going on in that market?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [40]

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I would say it's 2 things. One, the cashless ate up a -- we bought a lot of terminals. I don't know how many, how many thousands. Darren, how many thousands did we put out in Poland?

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Darren Wilson, EVO Payments, Inc. - President of International [41]

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Over 45,000.

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James G. Kelly, EVO Payments, Inc. - CEO & Director [42]

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Yes. So it was just a really big, heavy spend. And I think, other than that, it's just been a better focus, I would say by me, by management, on being more careful on when we time purchases. As a privately held company, we would sometimes buy up on a better price, and I think some of that spilled into last year. But there's no shift in terms of strategy. In TouchBistro, as an example, it is not necessarily going to change. In terms of size, it's not going to change the spend for terminals in Mexico. This will go up. I mean, it's not going to be overly material. But it'll go up as we go into Chile, because I think Chile's got a similar model, as most of these markets do, where the bank was historically or, in this case, Transbank was providing terminals.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [43]

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Got it. And Jim, I know this questions been asked before with regards to the 3 large acquisitions that have happened in the industry and the impact on EVO from those. And you kind of mentioned in the past that really you're not seeing much of an impact. I just want to get sort of a down-the-road update. Are you beginning to see any actions as these deals start to close? Anything to watch out for that's really playing in different markets?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [44]

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So personally, no. I mean know that they all just closed or are about to close. I think Global's still not closed. Global TSYS is not closed yet. Anytime you have a transaction the magnitude of these, which were quite surprising I think to everybody, at least to me they were, and, particular, the speed at which they occurred, plus when we make these type of transactions, we're announcing the synergies and synergies translate to people. So I think on the positive, we see people who are open to leaving. There are really good -- there's talent in every one of these companies. So for us, I think there are opportunities on the talent side. From the customer network, we're very oriented domestically and these are mainly domestic transactions. We're very oriented to the dealer network for ISV sales. So I've heard anecdotal stories from those conferences about disruption within organizations as to who's going to be in charge and what does that mean downstream?

So I think anytime you put change, nobody likes change, anytime there's change in the marketplace, I think that provides opportunities for people that are not experiencing that change. But I haven't seen aggressive pricing or different type of proposals at this stage. That hasn't occurred.

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Operator [45]

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And our next question comes from Jason Kupferberg with Bank of America Merrill Lynch.

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Jason Alan Kupferberg, BofA Merrill Lynch, Research Division - MD in US Equity Research & Senior Analyst [46]

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I just wanted to see if we can go a little bit deeper on Mexico and Poland. I mean you gave us a great overview of the numbers there for the quarter. But just kind of at a higher level longer-term view, what are you seeing right now just from a macro standpoint, penetration rates on the consumer and the merchant side, market sharing competitive landscape? Would just love some color on those markets.

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James G. Kelly, EVO Payments, Inc. - CEO & Director [47]

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I'm going to have Darren take the Poland question, and then I'll have Brendan take on Mexico.

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Jason Alan Kupferberg, BofA Merrill Lynch, Research Division - MD in US Equity Research & Senior Analyst [48]

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Great.

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Darren Wilson, EVO Payments, Inc. - President of International [49]

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Thanks, Jim. In Poland, we're really starting to see the kind of more Western Europe adoption of ISV leading into CEE. So the growth in integrated solutions, tax reporting solutions, much like the cashless initiative, the government is very interested in eradicating the black economy and the growth of e-commerce. So the digital agenda is seeing increased kind of volume transitions from pay-by-link bank account, off-line cash-type transactions, to card and digital. So that penetration, it's the early days yet, but we're certainly seeing a good step up in the digital technology-enabled opportunities, which we're very focused on with the assets we have in the market [that are] integrated to our Poland platform. So good opportunities.

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Brendan F. Tansill, EVO Payments, Inc. - President of North America [50]

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And then switching to Mexico. It's Brendan again here. So the market is still largely controlled by banks. BBVA remains our #1 competitor. And BBVA has been very clear both specific to Mexico and then across their portfolio of markets globally, that they will continue to run acquiring as an in-house service. The [Norte], the same. Global obviously just entered the market with HSBC. But HSBC is a smaller financial institution in the market.

Where we see growth in Mexico is really around e-commerce, and then, of course, ISVs. So on the e-commerce side, as I've indicated to you guys in the past, e-commerce today accounts for roughly 10% of our volume, but that grows at 50% a year. So it's small today, but it's exciting in terms of growth. And we see that growth as highly sustainable, which is why we've made the technical investment to export our gateway capabilities from Europe to Mexico.

And then similarly around the ISV piece, it's precisely why we made the acquisition and investment in SF Systems, to bring the integration capabilities in-house. And as we said in the release there, it's not just the technology. It's also the personnel and the development capabilities to support additional integrations as new ISVs come to us.

And so on my last visit to Mexico, it just so happened that we happened to be hosting the TouchBistro management team at our office as I walked through the front door. And we had the opportunity to connect a little bit about why TouchBistro and EVO happened to be partnering together. And I think that the team there felt comfortable with our focus on ISVs, the investment that we had made to acquire SF Systems. We've got a ring-fence sales force in Mexico dedicated solely to the pursuit of new ISV relationships.

So we feel like through focus, through technical investment and capabilities, that we can continue to take share in ISVs, in the e-commerce piece and that the share shift that you see here in the US from traditional direct acquiring with a terminal next to a cash register, to a integrated solution and an online solution for omnichannel merchants, that's where we can really see accelerated growth and take market share in the market.

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Jason Alan Kupferberg, BofA Merrill Lynch, Research Division - MD in US Equity Research & Senior Analyst [51]

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Okay. That's all helpful. And just a quick follow-up, I know you mentioned likely losses for a couple years on Bci. Can you help us size that?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [52]

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I think we'll have more color as we get to closing. We're still having to stand up a technical infrastructure in the market. So I think we're probably a call away from being able to give you that insight.

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Jason Alan Kupferberg, BofA Merrill Lynch, Research Division - MD in US Equity Research & Senior Analyst [53]

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Fair enough.

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James G. Kelly, EVO Payments, Inc. - CEO & Director [54]

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Really, we're not anticipating -- I'll give you a parallel, I guess to some extent Ireland. Maybe we lost EUR 2 million or EUR 3 million total over the 2 or 3 years that it took to get to breakeven. So it's not a large number. Remember, too, thought, here, we're only at half of the business. So half of the losses will be covered by Bci. And we're half of the profit as well.

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Operator [55]

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And our next question comes from Kartik Mehta with Northcoast Research.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [56]

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Jim, you talked about Santander and maybe some of the issues you're facing in Spain. What can you do, is there anything you can do or other partners that are out there, that might help you offset some of the losses from that portfolio?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [57]

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Yes. So Santander acquired Popular. Popular was the relationship we had previous to that acquisition. The relationship extends to 2030. It's exclusive them to us. They've announced that they accelerated their consolidation, as I mentioned, on consolidations. They've set a pretty large target for cost reduction and they've closed a number of branches. So unfortunately, that's out of our control.

We have a strategy to do I think exactly what you are alluding to, which is expand around that relationship. So Liberbank was one example; that acquisition was last year. And Portugal, which is not closed, obviously not Spain. But it would be the same management team that would look after it. Again, that one has been announced; it's not yet closed.

And we continue to be active in the market. But Santander, it's a great team there. It's a very good relationship. It's the biggest bank in Spain. So we're unfortunately going to have to weather the storm, I guess so-to-speak, through their migration or consolidation, and we will remain active looking for other relationships in the market.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [58]

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And then I think you talked about SCA in Europe, part of PSD2. Does that create any opportunities for you in Europe in terms of revenue or the ability to take market share? Anything that that might help as a catalyst for growth?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [59]

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I'll let our European in the room take that call. Darren?

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Darren Wilson, EVO Payments, Inc. - President of International [60]

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Yes, SCA is an evolving picture, as you well know, in terms of whether EBA's going to [land] ultimately on its guidance for implementation. There are very many entities in Europe that will not be ready for SCA. And SCA is obviously covering payless transactions as well as e-commerce, although the major elements are on the e-commerce side. So whatever partner isn't ready and they may not get the extension from a local regulator, I think, clearly, that affords opportunity.

That said, the industry statistics are, at the minute, that 20% to 30% of transactions could effectively be rejected, which is what's putting pressure on the EBA, but also local regulators.

France has already called for a 2-year delay; Italy, similar; Nordics applying delays in implementation. MasterCard is proposing kind of an 18-month roadmap. So there are various countries or entities proposing delays on it. So I think it's such a moving piece that I couldn't say [that there's] a big short term loan [grab], because I think that 14 December date is just going to extend. So but whatever the opportunities in terms of ensuring partners and our merchants are seamlessly integrated into a Snap* or APG e-commerce proposition that gets them SCA compliant, then clearly we have opportunities for windfalls there. But I think the runway is still lengthy to see where this will play out over the next 18 months to 2 years.

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Operator [61]

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And our next question comes from Joseph Foresi with Cantor Fitzgerald.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [62]

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I just want to get a sense, I think you talked about 75 basis points to 100 basis points headwind from Banco Popular, and were also kind of onboarding or waiting to onboard Chile, and I guess Portugal. Maybe you could talk about sort of the relative headwind versus the possible tailwind. Do you expect those to be offset? And if so, when do you expect Chile and Portugal to start to contribute? How should we think about those presently and going forward?

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James G. Kelly, EVO Payments, Inc. - CEO & Director [63]

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Okay. So I think Kevin has covered on Spain, or specifically the Popular Santander situation.

In terms of EuroBic, there's no headwind on EuroBic. That's all going to be tailwind. So it's a back book. We're going to buy half of the back book, so there'll be immediate revenue coming in once that transaction closes. We are, I guess aggressively pressing both the regulator, to the extent we can do that, but more the bank to finish off what's necessary.

It took us almost a year to close Popular years ago, when we first bought that business. So it's not unprecedented that they take this long. It's longer than I had originally expected; that's why we updated the expectations. So that's a positive.

And from a revenue standpoint, Bci as well is going to be very favorable. I think the component is how much cost do we have to spend to attain that revenue? The referrals are going to come in from the financial institution. The only cost will really be the sales piece, because the back office is really just going to be spread over the Mexican business. In our company, there'll be some charges, but that's not something that you would otherwise see.

But as I said earlier, standing up a sales force, hiring a sales force, they'll get paid ahead of the revenue. Our revenue comes in transaction-by-transaction, so it builds over time. So I would expect over a 2-year time period, we should see a breakeven. And as the business gets bigger and is more profitable, then we'll likely move some of the front-line customer service to Chile, even though culturally, language wise, it's a very good match. Still people like to talk, at least if they have a customer service question, to somebody in the country. But that's probably 2 to 3 years out, and we wouldn't do that until the business was more than breakeven.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [64]

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Got it. Okay. And then my second question is just around sort of framing the argument or the discussion long term. Can you talk about any updates on your long-term outlook on annual margins and the potential to expand there, and obviously also on the debt side and the debt leverage? I just want to get an update on both of those.

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James G. Kelly, EVO Payments, Inc. - CEO & Director [65]

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Okay. I'm not sure that they really changed from last year when we went public. We've been laser-focused on margins, and I think we've exceeded our expectations of how much we could move margins up in a relatively short period of time from pre-IPO to where we are today.

To some extent, size matters. I think that's a place that size matters, because more revenue spread over a fixed cost base or largely fixed cost base is going to drive margins up. So we are hyper focused on expansion, as I said earlier, in markets that we're currently in, South America as an example into new markets. Asia Pacific remains an area of interest. Many of us coming from Global, were there when we set up the HSBC in 11 markets, so we're very familiar with that region as well.

So as we get bigger, not just through organic efforts, but through acquisitions and not the acquisitions that you've really seen to date, but more sizable acquisitions, I think you'll see the margin tick up more than the 50 to 75 basis points that we've historically been talking about.

In terms of leverage, our interest is to continue to pay down the debt. We had said somewhere between 2 to 3 times, that that would take time to get there. We're moving largely in that direction. But again, as we see opportunities, we're not going to forego the ability to move into a new market or expand into an existing market with a great bank partner or great opportunity. We'll just take a look at the capital structure at that time.

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Operator [66]

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Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Jim Kelly for any closing remarks.

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James G. Kelly, EVO Payments, Inc. - CEO & Director [67]

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Thank you, operator. And thank you all for joining this morning and your continued interest in EVO.

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Operator [68]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes our program, and you may all disconnect. Everyone have a wonderful day.