Global Payments Inc (GPN) — Q1 2019 Earnings Call Transcript

Good morning and welcome to EVO Payments' First 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 website. Today, we will discuss our first 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, North America. Now I will turn the call over to Jim Kelly.

Thank you, Ed. And good morning and welcome to EVO's First Quarter Earnings Call, where we will review our results for the quarter and provide updates on our business performance, our integrations, our new bank partnership in Poland, and our recently announced acquisition in Mexico. For the quarter, constant currency adjusted revenue grew by 10%, and constant currency adjusted EBITDA grew by 13%. Our results reflect the timing of the Easter holiday in the current year, as compared to the prior year, specifically given the adverse impact on revenue growth in our largest international markets: Mexico, Poland, Spain, and Ireland. Beginning with our European segment, I'll start with an update on our performance in the U.K. and in Ireland. In the U.K., we are primarily focused on ISV relationships, while in Ireland our sales are driven by leveraging our long-term partnership with the Bank of Ireland. Together, these businesses generated approximately 1,600 new merchants per month, with ISV merchants representing approximately 20% of new business in the U.K. As a reminder, these were startup markets for EVO that began in early 2015, and our performance is largely the result of our strong sales effort and partnership strategies. In Ireland, our e-commerce business continues to gain traction in the market via our Snap platform. Our platform is the single integration point for all our products and services, now including e-commerce capabilities. Since we began offering this product in Ireland last year, we now have over 1,000 merchants, including SMEs, large domestic and multinational companies. In addition, our recent Way2Pay acquisition currently supports over 100 primary and secondary schools in Ireland, with an opportunity of more than 4,000 schools countrywide. We are also expanding the Way2Pay platform to target Irish sports clubs and U.K.-based schools and clubs, both of which represent a large addressable market. By year-end, we expect to launch Way2Pay into all EVO markets via Snap. In the U.K., revenue growth is driven by our relationship with ISVs. Over the last 18 months, we have added over 25 ISVs in the market and signed over 4,000 new merchant locations. Additionally, utilizing ClearONE's ISV integrations, we are already launching the platform capabilities directly into the U.K. while we continue to finish ClearONE's integration to Snap. Turning to our largest European market, Poland continues to perform as expected after considering the Easter holiday timing, the annualization of the initial year of the cashless program, and a commission refund. The Polish business remains focused on accelerating its Tech-enabled division, with a heavy emphasis on e-commerce to complement our very strong Direct division. Additionally, this quarter, we signed an agreement with the government to install over 2,000 terminals in its police vehicles to enable electronic payments for traffic and other citations. Finally, Spain also had a solid start to the year after considering the Easter holiday timing. Spain's growth is driven by its core bank referral business, direct sales efforts, and tech-enabled sales. Liberbank continues to perform as expected. Santander continues to show solid new referral growth. However, these are being somewhat impacted by the ongoing efforts by the bank to integrate and consolidate the Popular branches. The Tech-enabled division performed very well and is a catalyst for accelerated growth. Additionally, the ClearONE gateway continues to exceed expectations in terms of the number of new relationships on the platform. The platform now boards over 300 new merchants on the system each month and represents an opportunity to now offer acquiring solutions directly to these merchants. As I mentioned earlier, while the integration to Snap is still pending, ClearONE's technology solution has already been extended to the U.K. We remain very optimistic about the ongoing benefits of ClearONE's capabilities, its product offerings, strong market reputation, and our ability to leverage the acquisition beyond the Spanish market. Turning now to North America. In the Tech-enabled division, our U.S. ISV business unit grew in the mid-teens for the quarter. We now support ISVs that span over 50 unique vertical markets across our combined dealer and direct ISV networks in the U.S. While today our ISV business is heavily concentrated in hospitality, our objective is to further diversify toward supporting software solutions in high-growth verticals with still low penetration. To that end, we are sourcing new ISV relationships and looking to acquire gateway integration companies, as we did with Sterling and Notice. Our B2B business unit continues to be the fastest-growing component of our U.S. Tech-enabled division, demonstrating very strong double-digit growth for the quarter. We are now cross-selling acquiring services to Notice's software customers and are offering Notice's gateway solutions to our core B2B customers. We have also successfully launched an Oracle ERP solution with new B2B customers and see additional opportunities regarding other ERP solutions. Turning now to Mexico, revenue growth was again in line with our expectations after considering the impact of the Easter holiday. In the first quarter, we added customers in key verticals such as healthcare, government, education, and hospitality as a result of our strong alliances with Citibank and Sabadell. We also added a large national retail merchant with over 100 locations and a large insurance company, thanks again to our bank relationships and our strong internal sales efforts. As stated on the last call, we launched our global e-commerce platform into Mexico earlier this year to offer end-to-end solutions for our customers. Next, I'd like to provide an update on the ongoing integration work, the new bank relationships, and our recently announced acquisition in Mexico. In the first quarter, we migrated another portion of the Santander portfolio from the national processor to our Polish platform. We anticipate the remaining merchants will be largely migrated by year-end. The Liberbank migration should begin during the second half of this year and be completed in the first half of 2020. The German systems and back-office migration previously discussed on the third quarter earnings call is on schedule and should be completed by year-end. The savings associated with that integration have been reflected in our 2019 guidance. Finally, the work to migrate our Mexican back-end systems to our U.S. platform remains on track, with testing likely to occur by year-end and the migration to begin in the second half of 2020. Next, I'd like to discuss our new bank partnership in Poland. Postbank is a Polish national retail bank with a focus in small cities and towns, which also complements our PKO footprint. We were selected as their partner through a competitive process, whereby our capabilities stood out to successfully displace the incumbent. This new relationship offers us 1,000 locations from which to market our products and services. The incumbent acquirer owns the back book of merchants' contracts, so, like in our Irish business when it began, we will be starting fresh with the new bank relationship. However, we have the opportunity to target its existing merchant base of 11,000 merchants. In Mexico, we recently signed an agreement to acquire certain assets of SF Systems, an ISV integrator similar to ClearONE. We currently have merchants whose ISV POS systems are connected through their gateway and will now have direct control over the platform to accelerate integrated growth in the market. SF Systems is currently integrated with some of the largest POS providers in the country, including Micros, Simphony, and OPERA. The platform is also integrated to support smaller ISVs, which are the fastest-growing part of the integrated market. Like Notice, ClearONE, and Way2Pay, SF Systems accelerates our speed to market for integrated payments in Mexico. We will integrate SF Systems into our Snap platform as we have done with our other integrated acquisitions, giving our U.S. and European ISVs access to the Mexican market. Overall, we are very pleased with our results. And Kevin will now cover the financials in more detail.

Thank you, Jim. And good morning, everyone. As Jim mentioned, EVO delivered a strong quarter of top and bottom line growth. For the first quarter, adjusted revenue excluding the Traditional division grew 13% on an adjusted currency-neutral basis, with acquisitions contributing five percentage points of that growth. FX negatively impacted revenue by 480 basis points in the quarter, as anticipated. Based on the current FX rates, most of the adverse FX impact, compared to 2018, occurs in the first half of 2019, although the euro and the Polish zloty continue to weaken versus the prior year. As Jim previously mentioned, Q1 growth rates were likely impacted further because of the Easter holiday timing, particularly in Mexico, Spain, Poland, and Ireland. As a reminder, EVO adopted ASC 606 on January 1, 2019. Our revenue is now reported net of card network fees, which were $23.9 million in the first quarter. We are reporting adjusted revenue excluding this deduction to aid in comparability with 2018. In the first quarter, we continued to deliver currency-neutral adjusted revenue growth in our largest international markets, including Poland at 20%, Spain at 9%, the Irish and U.K. market at 25%, and Mexico at 7%. As mentioned earlier, growth rates in these markets were likely impacted by the timing of the Easter holiday. Also in the quarter, Raiffeisenbank, which had been a partner in Poland for the last three years, sold the bank to BNP Paribas, and we will no longer receive referrals from this bank. Going forward, we expect our new relationship with Postbank to more than offset the loss of referrals from Raiffeisen. Additionally, in Poland, one of our larger customers was acquired and migrated processing faster than expected, which will adversely impact growth for the balance of the year. Growth will also be impacted, beginning in Q2, by the annualization of several large merchants that we added in 2018. On a currency-neutral basis, adjusted EBITDA increased 13% to $30.6 million. Currency-neutral adjusted EBITDA margin increased 43 basis points compared to the prior year period or 128 basis points excluding new public company costs. Looking at our North America segment, first quarter adjusted revenue excluding the Traditional division increased 12% over the prior year period on a currency-neutral basis, with acquisitions contributing seven percentage points of that growth. Within the segment, our U.S. Tech-enabled adjusted revenue increased 11% compared to the prior year period and represents half of U.S. adjusted revenue. Our U.S. Direct and Traditional divisions adjusted revenue grew 7%, reflecting low single-digit organic revenue growth in the Direct division, the Federated buyout, and expected declines in the Traditional division. On a currency-neutral basis, our adjusted revenue per transaction in North America increased 2% in the quarter, reflecting the growth in our ISV and B2B business units, slightly offset by the impact of large merchants in Mexico who have recently been growing faster than our smaller merchants. Our B2B business unit has merchants with high average ticket sizes compared to the average retail merchant, increasing the revenue per transaction for the segments. Segment profit for the quarter was $22.7 million, an increase of 9% on a currency-neutral basis. North America segment profit margin improved 36 basis points to 28.9% in the quarter due to our revenue growth and ongoing operating efficiencies. Turning to Europe, we saw strong performance out of this segment as well. Segment adjusted revenue in the quarter grew 14% over the prior year period on a currency-neutral basis despite the negative impact of the Easter holiday timing. In the first quarter, our adjusted revenue per transaction in Europe declined 3% 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 first quarter European tech-enabled transactions grow 17% versus the prior year, driven by our sales in Poland, Spain, Ireland, and the U.K. The Tech-enabled division now represents 21% of European adjusted revenue. Segment profit for the quarter was $14 million, an increase of 28% on a currency-neutral basis. For the quarter, segment profit margin was 24.7%, an increase of 272 basis points compared with the prior year due to lower head count and operating expenses as we continued to consolidate back-office functions across Europe, coupled with the previously mentioned commission refund. Turning to our corporate expenses, adjusted corporate expenses grew $1.6 million to $6.1 million for the quarter, compared to the prior year period, primarily due to new 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 $6.5 million for the quarter, reflecting growth of 91%. On a reported basis, consolidated net loss was $19 million for the quarter. Reflecting adjustments described in our press release and all share classes, pro forma adjusted net income per share was $0.08. At the end of the quarter, our basic share count was 26.4 million, which represents the weighted average Class A common stock outstanding. Including all share classes and dilutive securities, we had 83.3 million shares outstanding. In April, we successfully completed a follow-on offering of 5.75 million shares of Class A common stock including five million shares sold by existing shareholders and 750,000 new shares. Net proceeds from the new share issuance of approximately $19 million were used to pay down existing debt on our credit facility. In the first quarter, we spent $6.5 million in capital expenditures, of which 71% was for point-of-sale terminals in our international markets. CapEx declined 24% 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 4.5x last 12 months adjusted EBITDA. After the debt paydown from our April follow-on offering, net leverage is now 4.3x last 12 months adjusted EBITDA. Interest expense declined 24% in the quarter compared to the prior year period. Free cash flow, described as adjusted EBITDA less capital expenditures, less net interest expense, was $13.2 million, an increase of 152% over the prior year period. And finally, based on our Q1 performance and outlook for the remainder of the year, we are providing an update to our 2019 guidance. We now expect reported revenue, with the impact of ASC 606, to range from $496 million to $505 million. On an adjusted basis, adding back the impact of ASC 606, we now expect revenue to range from $601 million to $610 million, for the growth of 6% to 8% over 2018. We expect FX headwinds for the remainder of 2019 to be approximately 350 basis points, with the Q2 impact expected to be 420 points. However, as previously stated, we expect the unfavorable impacts from FX to be stronger in the first half of 2019. Therefore, on a currency-neutral basis, we now expect adjusted revenue to grow 10% to 12% compared to 2018 results. Adjusted EBITDA is now expected to be in a range of $159 million and $163 million, reflecting growth of 7% to 10% over 2018 adjusted EBITDA or 11% to 14% on a currency-neutral basis. Adjusted EBITDA margin is now expected to range from 26.5% to 26.7%, reflecting expansion of 40 to 60 basis points over 2018 currency-neutral adjusted EBITDA margin. We expect lower margin expansion in Q2 compared to Q1 but expect greater margin expansion in the second half of the year as we annualize public company costs and benefit from the back-office consolidations and migrations. Net loss per share attributable to EVO on a GAAP basis is now expected to be $0.29 to $0.23 compared to a net loss per share attributable to EVO of $0.70 in 2018. Pro forma adjusted net income per share is now expected to be in the range of $0.55 to $0.58, reflecting growth of 12% to 18% on a currency-neutral basis. These numbers are calculated based on an updated pro forma share count of 84 million shares, which includes all share classes. We now expect capital expenditures to be in the range from $45 million to $50 million, with 60% being comprised of point-of-sale terminals. Our updated outlook does not consider the pending EuroBic and SF Systems acquisitions or additional share issuances. I will now turn the call back over to Jim.

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

This is actually Ben Budish on for Ramsey. I wanted to ask about your ISV business in the U.K. and more, I guess, on the content of just acquiring in general. I think a lot of people look at Europe as being a couple innings behind the U.S. And it seems that you guys are having some success there. I guess, could you comment maybe more broadly on how big is the opportunity in the U.K., and Europe? How penetrated are those markets? How does the U.K. compare to the continent?

Good morning, thank you. I would agree. I think we're in the early innings in terms of the impact on the business. The European market is still very bank-centric. It's still very terminal-centric. So the successes, when we started in the U.K. about 18 months to two years ago, were really a startup specifically in the ISV space. And that's why we're seeing such great growth, because our entire group there is focused on growing that segment of the market, as opposed to supporting institutions, but it's not just limited to that market. The Spanish market as well, we've seen very significant growth. As we mentioned on the last call, our acquisition of ClearONE accelerated our interconnectivity to ISVs across the Spanish market, which we've now been able to export into the U.K. market. We see the same opportunity in Poland. It's just early innings, to use your analogy, relative to the United States, but I think it'll gain traction quickly.

And if I can get one more. Could you maybe give some color on just the cadence of M&A contributions throughout the year? I know there's Federated but a number of others. I guess, when do things start to lap? And when can we expect more of a normalized growth rate? Or normalized to reflect organic?

Well, so Federated was last year. Federated was a business that we already owned part of. It was part of kind of original EVO, going back into the early mid-2000s. So we acquired that in October, the beginning of October, so it would lap in October. But I think, with us, we've made over 20 acquisitions in the last five years. So I think, each year, you're going to have some cadence. Some will be to use your baseball analogy, some will be singles and doubles, and then you'll see the odd triple or maybe even larger than that. And that will come periodically. It's a big part of what we do across all our regions as we look for opportunities to expand our distribution in the existing markets and into new markets. But at the same time, in all of Kevin's comments and mine, we call out FX and acquisitions so you get a sense of what the organic growth rates of each of the markets look like.

Thanks, good morning. Just wanted to ask on the second quarter growth, maybe get some help on that, versus the first quarter with the Easter shift impact and the loss of Raiffeisen and some tough comps. I think a large client rolling off and other things. Just how do you expect Q2 to shape up on revenue versus Q1?

I'll start, then I'll let Kevin continue. So as we called out in the script and, I think, you saw with other companies that have an international footprint, in particular, we're in Ireland, Poland, Mexico, and Spain. Mexico is almost off an entire week's holiday last year. It ended on the 30th, 31st; and this year, it was mid-April. So there are expectations, or we will see an uplift relative to what we would have seen in the prior year because of that relative to what we've experienced in this quarter. I think, in terms of the customer rolling off in Poland, it was a business that was acquired by another company, and that company is a competitor of ours in Poland. So periodically, we're going to see those headwinds when we're dealing with large merchants. But the business otherwise in Poland continues to be strong. To more of the specifics for the quarter, I don't know, Kevin, if you want to add something.

Yes. And I think what you're going to see in Poland impacting us for the rest of the year, not so much the Raiffeisen agreement. Jim talked about we've got Postbank that's now coming online. It's really going to be, as Jim mentioned, that larger customer that was acquired and migrated off a little bit faster than anticipated.

We acquired Raiffeisen in two markets several years ago with the expectation of becoming pan-European. However, there was a management change within Raiffeisen that shifted their strategy. Despite this, we have retained the 7,500 merchants associated with the bank, as they are under a non-solicit agreement and cannot approach these merchants. Although it was unfortunate that the bank was ultimately acquired, we recognized this risk at the time of our acquisition. We recently announced a new relationship that will more than compensate for new production, so I do not expect it to significantly impact our performance in Poland.

So the book stays with you. All right, good to know, that's helpful. Just a quick follow-up, Jim, you mentioned buying gateway integration companies like Notice. I'm curious about what kinds of assets are available. At ETA TRANSACT, during that event, it seems like there's a lot of activity happening in the ISV and integrated space. I'm interested to know how available these assets are to you and if they are a good fit.

Yes. We reached this conclusion after the Sterling acquisition. Although Sterling had its own integrated solution, it was specific to them and relied on a domestic third-party platform. This situation motivated us to be more proactive in this area. Instead of simply acquiring software companies, which we could easily do, we aimed to address the entire market. If someone is already in that market and has developed an interface for their business needs, making connections with various independent software vendors becomes an easier acquisition option than the effort required for direct integration. That's our strategy. We've successfully identified that with ClearONE and SFS in Mexico. Over the last few years, we've learned that integrating the Snap platform into each market as we expand takes time. It requires us to get the attention of independent software vendors in order to integrate with them. If we can find a company that has already laid the groundwork, we can proceed more efficiently. We will continue this approach. These acquisitions are small, so they won't significantly impact our revenue initially, but they will enhance our connectivity with the independent software vendors, driving organic growth, which is our main focus.

This is Mahesh Dass on for Bryan. Could you just update us on the progress on the EuroBic acquisition? Are we still on track for a summer close? And can you give us an idea of how large of an opportunity that is and how long it may take to pull through?

Sure. We recently met with the regulators and the process is moving forward, though it is new for them in Portugal. Initially, the bank needs to obtain approval for carving out the business, and then we need to secure approval for acquiring our more than 50% interest in the transaction. We initially anticipated being ready by early summer, but we've adjusted that timeline to sometime this summer, which extends through September. The timeline is entirely dependent on the regulators. Historically, looking back at previous more challenging times in Europe, the first deal in Spain took about 9 to 10 months to complete, so we remain optimistic. We are providing all necessary information to facilitate the transaction, and the best estimate for closing now is during the summer. In terms of size, we are looking at approximately 15,000 to 20,000 merchants, and historically, this business has grown at a rate exceeding 10%, which is strong for that area. The focus is primarily on small and medium-sized enterprises, not the larger bank players. We will update our guidance with financial details once the transaction is finalized.

Okay, good. And then one more, just on PSD2. It's kind of been since January since the initiative has been put in place. Any updates or anything that you’re seeing there in terms of the competition or any opportunities as a result of the directive?

We have Darren with us again, so I'll let Darren take the call since it's his market.

Thanks, Jim. No, there are no significant changes in market dynamics, competitive actions, or other factors. I believe everyone is observing and learning, primarily concentrating on compliance rather than the ASP or AISP. There are some emerging developments in open banking, but they mainly relate to data transparency in bank account reporting rather than the entry of new competitors pursuing acquiring strategies or developments.

Good morning. Obviously, been a busy morning juggling calls in the industry.

Yes. Many calls at the same time.

At least we had ours on file first, so...

I would like an update on your view of the current macroeconomic conditions, specifically where you see strengths and weaknesses. You're operating in some interesting markets, and there are various opinions on the macro economy. Could you provide insights into the strengths and weaknesses from a macro perspective?

Yes, I can provide a brief overview, but I'll allow Brendan and Darren to go into more detail about North America and Europe. I've received a lot of feedback from our sales and operations teams, and no one has indicated that economic factors are presenting challenges in the marketplace. This perspective doesn’t necessarily reflect all of 2019 or 2020, but from our view, we operate in 50 markets where the economy appears to remain strong. We continue to see opportunities to sign new merchants in established markets like North America, especially in the U.S., as well as internationally. Based on the feedback we've received, this is not a concern. I’m unable to provide comparable store sales figures as it would require a market-by-market analysis, which is a bit more complex, but I will see if Brendan has any additional comments on that.

I mean my comments in the western hemisphere will be more specific to the various matters of which we compete with in payments. So in the U.S., we continue to see a share shift, a migration from terminals with integrated point-of-sale solutions. We continue to feel really good about our positioning in what we've termed tech-enabled payments. We've now introduced our European gateway proposition to the U.S. market, effective as of the first week of April. And we continue to see gains in ISV as point of sale and then, of course, in B2B as well, where our Notice acquisition and the theory that supported that acquisition of integrations to ERPs being a viable way to go to market with larger corporates. That's a strategy that we continue to feel good about, and that's a trend that we don't see ending anytime in the foreseeable future. In Mexico, the trends are, again, relatively unchanged. We see a regulator that's committed to eradicating what they've termed the black economy. The motivations out there is, of course, tax collections, but we feel really well positioned there with the certification of that same European gateway now to the Mexican platform and the certification of our Snap technology to the Mexican platform as well. We now have the ability to port our European and American ISV partners to the Mexican market and provide an in-house Internet processing solution where we control the entire end-to-end service delivery. So there once again the theory is more around cash-to-plastic conversion, much more so obviously than the U.S. and Canada, but there's also the same trend of the migration from terminals to integrated point-of-sale solutions and to the Internet.

We're observing similar trends in Europe with significant growth in omnichannel, digital, and e-commerce. Average transaction values are remaining steady and even increasing, which suggests a stable inflation environment. However, the situation with Brexit remains uncertain. It's likely that both the U.K. and Europe want to avoid a no-deal outcome, and the extension until the end of October provides an opportunity to negotiate a potential agreement. Our main operations are based out of the U.K., covering countries like Germany, Spain, and Poland, which positions us well to adapt to any movement of businesses from the U.K. to Europe. We are also safeguarded from a licensing standpoint. While Brexit is a major uncertainty, the overall trends are predominantly positive at this time.

Good morning, thanks for taking my question. Sorry, I got cut before. Maybe you could just give us a little bit of an update on the kind of the turnaround in your kind of direct markets and when you'd kind of expect the headwinds there to subside and maybe update us on anything you're doing at a strategic level in North America outside of the ISV space to bolster that growth.

I believe the primary market we've discussed regarding performance improvement is our Direct business. Our Traditional business, which consists of the legacy EVO operations, mainly involves agents and independent sales organizations, representing the older 'feet on the street' model. Many of these individuals have transitioned away from this field or sold their businesses, leaving us with a legacy business that is unable to advance. This segment is experiencing a decline in double digits, reflecting the level of attrition in the marketplace. On the other hand, our Direct business, which had been declining, is now showing positive growth domestically in the U.S. Although it's improving, there is still potential for enhancement. I anticipate that this upward trend will persist throughout the year as our new management team, including a recent addition to our operations team, focuses on driving performance. Our acquisition of Federated has been beneficial, and I believe these factors will work together to enhance our business. However, I do not expect this segment to grow beyond the mid-single digits, given the market characteristics. This area of our business does not align with significant growth opportunities like the ISVs. Strategically, as mentioned before, we are optimistic about the B2B sector domestically. There is substantial opportunity in this area since many companies have yet to leverage their ERP systems for payment processing. We are seeing positive progress and plan to continue investing in this market. Additionally, we aim to leverage our infrastructure and capabilities connected through our Snap platform and expand into Europe, Mexico, and other markets as we grow.

That's helpful. Sorry, I misspoke. I meant Direct and I didn't mean Traditional earlier. And then just as we think about the pace of margin expansion in the back half, you talked about that being stronger, but can you maybe give us a sense of what are some of the operational things you're doing that's kind of driving that just beyond the kind of the natural FX pressures normalizing in the back half?

Yes. I believe there are two primary methods for growing margins. One is through the organic growth of the company. We aim to make as many of our costs fixed as possible so that as we increase transactions, these transactions are typically as profitable as the previous ones but become even more profitable due to our fixed cost structure. We manage our processing across all markets and have aligned variable expenses with transaction processing, which is the main avenue for growth. When we went public, we communicated to the market our expectations of a 50 to 75 basis points increase. What we observed in the fourth quarter, and anticipate seeing again in the future, is a gradual increase in margins, often driven by acquisitions. Adjusting our pricing for loss-making merchants is a quicker method to change margin outlook. Additionally, infrastructure integration plays a crucial role. For example, regarding Germany, it has gained higher priority after being somewhat neglected for years. We've integrated the capabilities of our stand-alone German office into our operations, particularly tied to Poland, which serves as our European hub for back-office support while the individual countries operate as sales and customer service satellites. Regarding Mexico, we maintain an outsourced relationship there. Although we own the infrastructure, transactions are currently processed by a third-party provider, partially owned by our aligned bank. As we work on integrating this infrastructure, current expenditures will diminish because we will leverage the processing over infrastructure we've already invested in. In these cases, we expect to see a significant improvement in margins.

Thank you.

Thanks a lot. I was just curious if you can comment on how comfortable you are running at over 4x leverage. That just seems that this is above your target leverage level, and you continue to buy different assets. So is there any specific time line to get that leverage down to the 2x to 3x range?

Good morning. I assume you've been following us from the beginning. Before we went public, we were heavily leveraged at 6 times. During that time, we completed more than 20 acquisitions fairly quickly, primarily using the company's balance sheet. As original shareholders, we also invested additional capital throughout the last part of the IPO process over about five years. One of our initial goals after going public was to reduce that debt, which we successfully brought down from 6.2 times to around 5 times at the IPO, right? Kevin?

Yes, just under 5x.

We provided long-term guidance of 2x to 3x, which is a reasonable expectation for the market, but we were not suggesting that we would reach that within the first 12 months. We are nearing 12 months since going public, and currently, we are around 4.5x. By the end of the year, we expect to be at about 4x or slightly lower. The company, like others in our sector, generates significant free cash flow. In the first quarter, our capital expenditures were reduced by approximately 25%, largely due to a decline in terminal-related expenses. Last year, we initiated several programs, including the cashless initiative in Poland, and with acquisitions like Liberbank, we often have terminals that need to be replaced due to compliance issues. There were several factors that increased our cash expenditures over the past couple of years, which we anticipate will decrease, allowing us to generate more free cash flow to reduce debt. Although we did not specify a timeframe for reaching the 2x to 3x leverage ratio, this goal aligns with our strategy.

No, it makes sense. And you mentioned that you had some pressure on your DCC take rates. I was just wondering if you could disclose the overall revenue exposure to DCC and then maybe just comment on why the rates are declining there.

Okay. We are striving to be as transparent as possible regarding all our markets, but I won't provide specifics on sub-segments of our DCC in any particular market. We have DCC operations across various regions in Europe and a small presence in Mexico. Regarding your second question about the decline: last year, we received numerous inquiries about DCC in Europe, which drew significant attention. Initially, there was an expectation of regulatory changes from the EU, but that did not materialize, which may have influenced the pace at which DCC is utilized. Other than that, our businesses remain stable, though there may be some shifts in travel patterns since one needs an international card to engage in a DCC transaction. Particularly in the Polish market, we lost a customer that was airport-based, and since many travelers pass through those airports, this loss has affected our DCC outcomes. However, that is the extent of the impact.

And if I can just sneak one more; what was the contribution from acquisitions just in the North American segment?

Just acquisitions in North America?

Yes, just from the quarter.

Yes, it was about 7% just for North America, mainly due to the Federated acquisition. As Jim mentioned earlier, that will be annualized in Q4 this year. The smaller acquisitions were not really significant to the growth rates.

Yes. Notice had already annualized.

Okay, all right, thanks a lot guys. Appreciate it.

This is Jennifer. Thanks for taking my question. So I have two. The first is around the operational side. So when you're talking about your consolidation of the back office, can you perhaps shed any light on the impacts of costs for restructuring?

The cost for restructuring typically is around personnel. So it's exiting personnel that are duplicative to the consolidation. So if we had two offices that had common services, as we exited one, then we would take a charge that would be reflected in the financials for the severance related to those people that would be exiting.

And do you perhaps have a material number for that for the first quarter?

I noted, in the quarter, I mean, we did consolidate some offices as of the fourth quarter. And every quarter, there's probably some come out of that, but I don't know that one specifically. We could probably take that after. And it would be otherwise in the press release.

Could you provide more details on your operations in Mexico and the delivery of comprehensive technology solutions with timely delivery? Is this a straightforward process across the region, or is it something new? How does your company approach the market to offer this service?

Okay. I'll let Brendan take that.

I think what you're asking is around the SF Systems acquisition that we announced earlier this week. SF Systems today is integrated into the processing platform in Mexico. We've been working with SF Systems now for a number of years. I think what Jim was specifying was, by redirecting that integration from the processing infrastructure to EVO Snap, we would have the ability to export the integrations of SF Systems to our other markets in which we operate around the world, but SF Systems today is already integrated with our processing infrastructure. We've been working with the business for a number of years. It already provides services to many of our large national accounts within the Mexico market. And it enhances the stickiness of some of our most important customer relationships, which I think now cements our ability to provide, one, end-to-end technology solutions. And two, it solidifies the relationship for the foreseeable future.

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