Evertec Inc

NYSE:EVTC

Earnings Call Transcript 2021-Q4

[Operator]

Good day, and welcome to the EVERTEC Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to [ Kevin Hunt ] of Investor Relations. Please go ahead.

[Unknown Executive]

Thank you, and good afternoon. With me today are Mac Schuessler, our President and Chief Executive Officer; and Joaquin Castrillo, our Chief Financial Officer.

Before we begin, I would like to remind everyone that this call may contain forward-looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent periodic SEC report.

During today's call, management will provide certain information that will constitute non-GAAP financial measures under SEC rules such as adjusted EBITDA, adjusted net income and adjusted earnings per common share. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides, which are available in the Investor Relations section of our company website at www.evertecinc.com.

I'll now hand over the call to Mac.

[Morgan Schuessler, executive]

Thanks, Kevin, and good afternoon, everyone. We have a lot to cover this afternoon. Beginning on Slide 4, I would like to provide an overview of our call today. I will start with a summary of our financial results and business highlights for 2021 followed by a walk-through of the strategic transformation that has occurred at EVERTEC since 2015 and how we have evolved today.

I will next cover the announcements related to our relationship with Banco Popular and then provide some color regarding our announcements on Latin America. Finally, I'll provide an overview of the Puerto Rico economic environment and our viewpoint on Latin America. I will then turn the call over to Joaquin to cover 2021 results as well as our outlook for 2022.

Beginning on Slide 5, let me start with some highlights from our 2021 results. We delivered a record year with $590 million in revenue, an increase of 16% year-over-year. We had a strong finish in Q4 with the results above our expectations, including a particularly impressive month of December.

Most satisfying was our LatAm growth of 29% in Q4 and 25% for the year, driven by our successful partnerships with Santander and Mercado Libre, the expansion of our digital platform Place2Pay and organic growth in Central America. Our earnings and cash flow performance were even more impressive with adjusted EBITDA growing 23% for the year and adjusted EPS growing 32%.

In addition to the strong financials, business highlights include the announcements today regarding Popular as well as those in Latin America, which I will discuss in a moment.

In 2021, we continued to generate significant operating cash flow of $228 million for the year. And we returned approximately $39 million to our shareholders through dividends and share repurchases. Additionally, our liquidity remained strong at $386 million as of December 31. We are also pleased to announce that we have increased our authorization for buybacks to $150 million, providing increased flexibility to execute on our capital allocation strategy.

To provide context of today's announcement, please turn to Slide 6. Since 2015, we have been in the process of a strategic transformation that had included 5 key imperatives.

The first was to invest in and improve our service and infrastructure by designing new metrics and a better organization to improve execution and increase customer satisfaction. In addition, we invested in new infrastructure, operations and information security capabilities. Second, there was a focus through M&A to expand our geographic footprint in Latin America, which allowed us to enter markets such as Colombia, Chile, Uruguay as well as deepen our presence in some of our existing markets.

Third, we focused on accelerating product development and innovation to ensure that we were building products that our customers wanted and needed. We created a new organization solely dedicated to product management and development. This team evolved ATH Movil in Puerto Rico, transformed the PayStudio platform into a service model for LatAm and localized our Place2Pay gateway in multiple countries.

Fourth, regarding Popular, there's been a focused effort to strengthen that relationship by implementing tools to better assess client satisfaction across multiple constituencies within the bank. Over the years, we have improved our SLAs, introduced new ones for services that were not previously measured and even increased penalties for missed SLAs. We have also established pricing tiers on certain products to encourage collaboration and mutual growth.

That brings us to the fifth imperative in our transformation, extending and modifying the agreements with our largest customer, Popular.

Turning to Slide 7, I will cover some details of this accomplishment. First, we are pleased with the extension of our key payment contracts. We can drive our growth through this predictable long-term revenue stream and provide certainty in our cash flow. Our Merchant Acquiring agreement, which was scheduled to expire in 2025, was extended to an additional 10 years through 2035. We also modified the agreement to include a revenue share provision consistent with industry practices that we believe will incent Popular to help us grow that portfolio.

Our ATH network agreement, which was expiring in 2025, was extended for an additional 5 years through 2030, committing Popular to the continued issuance and support of the ATH network and our services as their processor, including ATH Movil. And further, we're extending our master services agreement for 3 years through 2028. Modifications of the MSA include the elimination of the exclusive services requirement, adjustment to the CPI clause for existing services and the inclusion of annual minimums established through 2028. All of these changes, we believe, will incentivize Popular to continue being a key strategic partner for the foreseeable future.

Second, we are divesting certain assets to Popular that are exclusively used by them and are not part of EVERTEC's long-term growth and investment strategy. In return for these assets, Popular is exchanging EVERTEC stock with approximately $197 million. This [ sale ] demonstrates our desire to focus on higher-growth segments, while reducing our exposure to single-client products consistent with our long-term strategy.

Third, we expect to eliminate the regulatory hurdles necessary to execute M&A and investment activities. Popular has agreed to reduce their voting interest in EVERTEC to 4.5% over a period of 3 months after the close of the transaction through either the sale of shares or conversion to nonvoting preferred shares. At that point, we believe EVERTEC will no longer be deemed to be a subsidiary of Popular for purposes of the Bank Holding Company Act. And thus, we will no longer be subject to regulation and oversight for the Board of Governors of the Federal Reserve System.

Given the increased competition for M&A transactions and our possible interest to make investments beyond what the regulations permit, this is a key aspect of today's announcement and should provide increased flexibility and agility to pursue growth.

Turning to Latin America highlights on Slide 8. We're excited about the success of our 2 key partnerships implemented in 2021. The first is Mercado Pago, the payment subsidiary of Mercado Libre. As you recall, we had a very successful debit card launch in Mexico, where we exceeded our projections for cards issued by over 300%. Based on the success of this initiative, we are confident that we will have further opportunities in the region with Mercado Libre.

Second, as you recall, Santander's payment arm, Getnet, in Chile has exceeded their projection for enrolled merchants by over 17,000. Consequently, we have now expanded our relationship with Getnet into Uruguay, again using our proprietary technology to enable the bank to acquire merchants in the country. These announcements are a gratifying testament to the progress we've made to organically expand in the region.

Additionally, in Latin America, today we announced the acquisition of BBR, a transaction that we expect to close by mid-2022 subject to customary regulatory approvals. This acquisition will allow us to expand our capabilities in Chile, where BBR services over 30,000 terminals. It also gives us direct access to larger retailers in the country to use a more integrated and customized form of payment acceptance. BBR also services over 12,000 terminals in Peru, which opens a new country for us. Peru is a country dominated by a duopoly, which we believe will provide further opportunities of growth for EVERTEC as that market opens.

I would now like to turn to the constructive environment we see ahead in Puerto Rico and Latin America that we believe will provide a backdrop to fuel our future growth.

Starting on Slide 9. The Puerto Rico economic environment is better than it has ever been. As you can see, economic indicators continue to improve, and in some cases, have now surpassed pre-pandemic levels. I will point out 2 key statistics on this page. The first is the labor participation rate of 44.2%, which is at the highest level since 2010. As we have mentioned in the past, 2021 benefited from the inflow of pandemic-related federal stimulus funds, resulting in increased consumer spending. We are now noting that good portion of that federal funds received in Puerto Rico were deposited in local banks. As such, perhaps the most impressive indicator on this page is the individual and commercial bank deposits in Puerto Rico, which have increased 41% over the past 2 years from $42.2 billion to $59.6 billion. These are additional funds that should translate into future spending that will continue to drive growth for EVERTEC.

Turning to Slide 10. We'll provide an overview of federal funding for Puerto Rico. As you can see, 2021 was an exceptional year in terms of funding given the significant impact from COVID-19 relief. As we look forward, we are encouraged that federal funds are expected to continue to flow into the island.

This detail shows you the economic disaster funds, COVID-19 relief, other federal benefits and inflows related to the infrastructure bill are expected to provide approximately $10 billion in stimulus that will flow through the economy in both 2022 and 2023, which represents approximately 15% of the island's GNP. We believe that this level of funds flow should remain a strong stimulus for the economy.

And finally, turning to Slide 11. As many of you may have read, Puerto Rico debt restructuring has been approved by the bankruptcy judge assigned to the PROMESA proceedings, and this will cut the island's debt roughly in half from $70 billion to approximately $34 billion.

The left side of the slide shows you the components, which provide stability to the economy while reducing the annual debt service from $3.9 billion to $1.15 billion. This will allow the Puerto Rican government to get back to making investments that will improve areas such as education, health and public safety and continue to work on measures that make Puerto Rico a better place to do business.

Now turning to Latin America on Slide 12. We highlight some data that shows the region is primed for growth. As we have noted in the past, Latin America continues to be underbanked when compared with more mature economies around the world, presenting a significant opportunity for us as these markets are on average twice as large as Puerto Rico. Credit card penetration and consumer spend on cards in our core markets is significantly lower than that we see in the U.S. As an example, Chile, Mexico and Colombia are particularly interesting and areas of focus for our company.

Next, turning to Slide 13. Given the nature of the opportunity that we have outlined, EVERTEC is as well positioned as we have ever been in Latin America. Since 2015, we have doubled our offices in the region, more than tripled our employees and increased revenues from $37 million to $106 million, a compounded annual growth rate of approximately 19%.

Additionally, with the BBR acquisition, our presence will grow into Peru. This is quite a contrast to what this map looked like in 2015 when we had no presence at all in South America. We believe EVERTEC is well positioned to be the regional payments processing leader.

We have now extended and reestablished our relationship with Popular, creating a road map for growth in our main region. We've also established an enviable footprint of people and products in Latin America and a more flexible structure for M&A going forward. Given the state of our key markets and the expected benefits from the transactions announced, we are more optimistic than ever about our company's future.

In closing, we believe that our employees are the key ingredient for successful innovation and a high-performing workforce. I want to thank all of our dedicated team members for their commitment throughout 2021 and for building a strong foundation for growth in 2022 and beyond.

I'll now turn it over to Joaquin to provide some comments on our 2021 results and our 2022 outlook.

[Joaquín Castrillo, executive]

Thank you, Mac, and good afternoon, everyone. Turning to Slide 15. I'll first review the fourth quarter and full year results for EVERTEC. Total revenue for the fourth quarter was $155.2 million, up approximately 16% compared to the prior year. Fourth quarter results were above our expectations as transaction revenue in Puerto Rico increased as a result of a return to more normal seasonal spending patterns, the continued benefit of federal funds as well as onetime hardware and software sales in the quarter. Revenue in Latin America continued to grow very well at 29% for the quarter as we continue to see benefits from client implementations completed early in the year as well as healthy organic growth.

Adjusted EBITDA for the quarter was $75.9 million, an increase of 19% from the prior year quarter, while adjusted EBITDA margin increased by 130 basis points to 48.9%. The higher margin was mainly driven by revenue growth in our Payments segment, both in Puerto Rico and LatAm, which are highly scalable, partially offset by higher personnel costs and cost of sales related to hardware and software sales.

Adjusted net income for the quarter was $52.6 million, an increase of 23% year-over-year. And adjusted EPS was $0.72, an increase of 22%. For the full year, total revenue was $589.8 million, an increase of 16% from the prior year, a record level that represents a substantial increase from the 5% growth reported in 2020.

The strong year-over-year growth in Puerto Rico was driven by the inflow of COVID-related federal funds early in the year, higher ATH Movil and ATH business transactions, the impact from the expansion of our relationship with FirstBank and the continued benefit in our Business Solutions segment from higher volumes in our digital channels. The increase in Latin America reflects the acceleration of new clients, organic growth from existing customers and the expansion of our payment gateway Place2Pay, which we have now localized and rolled out in many of the countries where we have a presence.

Adjusted EBITDA was $294.8 million, an increase of 23% with an EBITDA margin of 50%, a 290 basis point increase from the prior year and an all-time high for EVERTEC. The increase in margin was driven primarily by revenue growth in our scalable payment segments and efficient cost management across all categories. Adjusted net income was $199.7 million, an increase of 32% from the prior year, and adjusted EPS of $2.74 also increased 32%.

Moving to Slide 16, I will now cover our fourth quarter results by segment, beginning with Merchant Acquiring. Revenue increased 27% year-over-year to $37.2 million, driven by an increase in sales volume of approximately 27% as we saw a return to more normalized holiday season spending patterns that also shifted volume towards higher spread verticals. We also saw the benefits of the FirstBank expansion earlier in the year and which we will anniversary in Q1 2022. We continue to have a higher-than-normal average ticket, which also drove a higher spread per transaction.

Adjusted EBITDA for the segment was $18.6 million, and adjusted EBITDA margin was 50%, up 30 basis points from the prior year. The margin increase was primarily driven by the strong revenue growth and high spread per transaction, consistent with what we have been seeing all year.

On Slide 17 are the results of the Payment Services, Puerto Rico and the Caribbean segment. Revenue in the quarter was $41.8 million, an increase of 22% from the prior year. The revenue increase was driven by POS transaction growth of approximately 18%, reflecting a return of seasonal spending patterns and an increased level of confidence by consumers going back to physical shopping.

ATH Movil and ATH Business continued to grow well at 27% year-over-year and contributing an incremental $1 million in revenue. We also benefited from the effect of intercompany revenues as we deliver processing services to our Latin America segment supporting their growth.

Adjusted EBITDA was $23.7 million, up 24% from the prior year quarter. And adjusted EBITDA margin was 56.8%, up 80 basis points over the prior year quarter. The increase in margin was due primarily to the higher revenue, partially offset by an increase in personnel costs, third-party processing fees and cloud-related expenses.

On Slide 18 are the results for Payment Services, Latin America. Revenue in the quarter was $28.3 million, up 29% year-over-year with growth driven by new client implementations that went into production earlier in 2021 as well as organic growth from existing clients. Adjusted EBITDA was $11.5 million, up 29% from the prior year with adjusted EBITDA margin of 40.7%, relatively flat when compared to the prior year quarter as the revenue increase was partially offset by increased fees for transaction processing and monitoring services from the Payment Services, Puerto Rico segment.

Turning to Slide 19, you will see the results for our Business Solutions segment. Revenue was $64.4 million, an increase of 6% from the prior year. The increase was driven by onetime revenue from hardware and software sales of approximately $3 million and an increase in online banking services as we continue to benefit from the shift to digital channels as well as the benefit from the new printing contract entered during the year.

Adjusted EBITDA was $30.2 million, roughly flat with the prior year quarter, while adjusted EBITDA margin was down 320 basis points from the prior year to 46.9%. The decrease in margin was a result of a change in the mix of business as well as higher operating expenses.

Moving to Slide 20, you will see a summary of our Corporate and Other. Adjusted EBITDA was a negative $8.1 million, down 9.8% from the prior year quarter as we continue to manage corporate expenses effectively and 5% as a percentage of total revenues, in line with our expectations.

Moving on to our cash flow overview on Slide 21. Net cash from operating activities was a record $228 million, a $29 million increase from the prior year. Capital expenditures were $67 million, an $18 million increase from 2020 as we continue to invest and innovate as well as refresh existing infrastructure.

We spent $15 million on the FirstBank expansion and received approximately $1 million from the divestiture of our Ticketpop business. We paid down $42 million in debt and returned $39 million through share repurchases and dividends. No shares were repurchased in the fourth quarter. Our ending cash balance for 2021 was $286 million, an increase of $65 million from year-end 2020.

Moving to Slide 22. Our net debt position at year-end was $202.3 million, comprised of $468.6 million in total long- and short-term debt, offset by $266.3 million of unrestricted cash. Our weighted average interest rate was approximately 4.5%. Our net debt to trailing 12-month adjusted EBITDA was approximately 1.4x, down from 1.8x a year ago. As of December 31, our total liquidity, which excludes restricted cash and includes borrowing capacity, was $385.5 million, up roughly $65 million from a year ago.

Now turning to Slide 23. I'd like to review some of the financial impacts of the agreements with Popular. First, we are very pleased that we were able to extend our key agreements with our largest client and shareholder as this creates certainty over the medium to long term with a significant portion of our business in Puerto Rico. These extensions are based on what we consider strategic areas of focus and growth.

As Mac mentioned, we have extended our Merchant Acquiring agreement through 2035, a 10-year extension from the original expiration in 2025 and a term of 13.5 years from today. This extension comes with a revenue share to Popular that will better align our interests as we focus on innovation and work together to expand our share of payments in Puerto Rico and the Caribbean. This revenue share will be treated as an expense and will result in a decline to our MAB segment margin post closing.

We have also extended our ATH network participation agreement with Popular through 2030, a 5-year extension from the original 2025 expiration and an additional 8.5 years from today. This agreement further strengthens the #1 form of payment in Puerto Rico with its largest issuer and ensures commitment to rolling out enhanced debit products that we expect will further advance our network's presence.

Our MSA with Banco Popular has been extended through 2028, a 3-year extension from the original 2025 expiration and an additional 6.5 years from today. This extension gives us the opportunity to continue working hand in hand with our largest client, while also providing them with increased flexibility as they focus on customer experience.

As part of this extension, we have considered the 5% CPI for the 2021-2022 period that commenced on October 1, 2021. We will be retroactively crediting CPI to Popular once the transaction closes. This part of the agreement will represent a margin headwind for 2022, mainly in our Business Solutions segment and to a much lesser extent, in our Payment, Puerto Rico segment.

Additionally, going forward, we have reduced our CPI cap from 5% to 1.5% through 2025 on MSA services, which are mostly reflected in our Business Solutions segment. As part of this agreement, we have also introduced minimums through 2028, aligning both of our interests in working together into the future and allowing us to focus on those areas where we want to grow and invest.

As we execute on our strategic goals, we have also decided to sell back to Popular certain assets that are solely used by them and aligned to their customer experience initiatives and that don't conform to our long-term strategy. These assets generate approximately $30 million in Business Solutions revenue on an annualized basis.

The sale of assets and the MSA changes described will all result in a decline to our Business Solutions segment margin post closing. The sale of these assets will result in approximately $197 million in consideration to be paid with approximately 4.6 million shares of EVERTEC at an average price of approximately $43. This represents approximately 6% of our outstanding shares. Popular's ownership of our shares outstanding will decline from approximately 16% to approximately 10% upon closing of the transaction.

Our agreement then provides for Popular to sell shares over the subsequent 3 months in the open market or convert the shares into nonvoting stock to reduce their voting interest to under 4.5%, at which point, as Mac mentioned, we believe we will no longer be deemed a subsidiary of Popular for purposes of the Bank Holding Company Act.

This determination will enable us to be agile as we execute on our capital allocation strategy, which has grown through M&A as its first priority. We expect to close this transaction by midyear 2022, at which point the extensions will also become effective.

This transaction will be executed under our current credit agreement provisions without any need for an amendment. And we expect our leverage ratio to increase to approximately 1.5x adjusted EBITDA on an annualized basis.

In all, the margin impact expected from the transaction will be in a range of 400 to 450 basis points post-closing, distributed relatively even between our Merchant Acquiring segment and our Business Solutions segment. As we have always done, we will focus our efforts on driving efficiencies and growing our highly scalable products across all our regions to increase margin over time.

With that, I will move on to Slide 24 and provide our 2022 outlook, which consider this transaction closing by midyear 2022. We expect our revenue to range between $591 million and $600 million and our adjusted earnings per share to range between $2.47 to $2.56. This assumes an adjusted EBITDA margin between 44.5% to 45.5% mainly impacted by the Popular transaction, a continued decline in the average ticket and spread as consumption behavior normalizes and foreign currency gains that benefited the prior year not expected for 2022.

The effective tax rate is expected to range between 13% and 14%. Our GAAP basis earnings per share is anticipated to be between $1.84 and $1.93, excluding potential onetime effects from the Popular transaction.

I will now highlight some of the key underlying assumptions that we have considered for this 2022 outlook. We expect our Merchant Acquiring segment to generate revenue growth in the low to mid-single-digit range. We're coming off a historic year in terms of overall growth, sales volumes and margin, making 2021 a tough comparable period.

We will anniversary the FirstBank expansion in Q1. And although we continue to expect a benefit from increased sales volume, in part driven by anticipated influx of federal funds, these are anticipated to be at lower levels.

Additionally, we continue to expect our average ticket and the mix of cards to continue moving towards pre-pandemic levels, which will be a headwind to our spread on margin in 2020. Payment, Puerto Rico revenue is expected to grow mid-single digits as we also come off a historic year in terms of transactions and more importantly, the contribution from ATH Movil and ATH Business in the previous year as a result of the pandemic and related relief funds.

In 2022, we continue to expect growth to be mainly driven by POS transactions as well as from our ATH Movil products but at a more moderated pace. Additionally, some of our other business lines in the segment benefited last year from federal programs and stimulus that will not be available in the current year such as enhanced EBT.

Payment, Latin America revenue growth is expected to be in the mid- to high teens driven by a healthy pipeline of business across the region, organic growth and the contribution from the BBR acquisition anticipated for the second half of the year. Business Solutions is expected to have a mid- to high single-digit reset primarily driven by the Popular transaction.

Regarding corporate expenses, we expect these to approximate 5% of total revenue, consistent with 2021 results. As it relates to our quarterly cadence, January revenue grew approximately 6%. And based on the trends to this point, we expect the first quarter will grow mid-single digits. Starting in the second quarter, we expect to see the impact from the Popular transaction and in the second half of the year the effects of the BBR acquisition.

Our operating depreciation and amortization is anticipated to increase to approximately $44 million to $45 million, primarily reflecting our increased CapEx spend, partially offset by the anticipated reduction from the Popular transaction.

We are expecting an increase in our cash interest expense in line with market expectations, partially offset by the impact of scheduled payments as well as the mandatory repayment made in 2021. As a reminder, approximately 50% of our debt has been fixed through an interest rate swap. This guidance assumes average diluted shares to be approximately 69 million for the full year and include the retirement of the shares received in the Popular transaction without any additional share buybacks.

Our capital expenditures for 2022 are expected to be approximately $60 million and reflect our ongoing investment in technology, localization of our products in Latin America and continued investment in innovation. Our capital allocation strategy remains unchanged. We will continue to focus on growth investments internally as well as through M&A.. While the timing of M&A is uncertain and we currently have a higher-than-normal cash balance, we are constantly focused on evaluating our best use of cash.

With that, operator, please open the line for questions.

[Operator]

[Operator Instructions] Our first question today will come from Bob Napoli with William Blair.

[Robert Napoli, analyst]

A lot going on there. Nice quarter, and good to see the extension. Trying to figure out all the effects of -- now on the EBITDA margin guidance that you gave for next year, 44.5% to 45.5%, does that -- is that a full year impact or only a partial year impact of the change in the Banco Popular agreement?

[Joaquín Castrillo, executive]

Bob, so the 44.5% to 45.5% includes the impact of the Popular transaction taking effect midyear.

[Robert Napoli, analyst]

Okay. Because you said in your release 400 to 450 basis points of impact. I mean, that 44.5% to 45.5% is a full year -- is -- I mean, that would be a reduction of that amount from your run rate. So it's actually a reduction of more than that on a full year basis. So it's more like closer to, on a full year basis, 1,000 basis points. So your ongoing EBITDA margin going into, say, 2023 all else equal is going to be closer to 40%?

[Joaquín Castrillo, executive]

No, Bob. So let me try to break it down for you a little bit better, right? So in terms of our run rate, if you look at where we're coming off Q3, Q4, that kind of gives you a data point as to more or less where we're running at. And what we're saying is post closing, the transaction is going to have an impact of 400 to 450 basis points of that run rate, right? So that kind of gives you a ballpark as to what we're seeing going forward.

[Morgan Schuessler, executive]

On an annualized basis.

[Joaquín Castrillo, executive]

On an annualized basis, correct.

[Robert Napoli, analyst]

Okay. Because you did 49% in '21 on EBITDA margin.

[Joaquín Castrillo, executive]

And I think as part of our remarks -- I'm sorry to interrupt, as part of our remarks, while we kind of gave some highlights, right? One, we benefited from some foreign currency gains this year that we're not expecting for next year. We're also expecting some of the trends in our Merchant Acquiring segment, which are coming back, right, to some of the pre-pandemic levels and -- like the average ticket and the card mix as we start to see more travel. And those have a direct effect on margin and spread.

[Morgan Schuessler, executive]

So -- Bob, this is Mac. So a part of what you're seeing in the margin in 2022 is the transaction with Popular and the impact. Part of it is the fundamentals and some of the changes in the business as we come off a really strong '21.

[Robert Napoli, analyst]

Right. And so as you think about '23, you're looking at an EBITDA margin in the low 40s, a little over 40% or so is kind of what you're viewing as a normalized margin?

[Joaquín Castrillo, executive]

Well, I mean, we're not going into 2023 guidance at this point. We're trying to kind of, obviously, dimension what the impact of this transaction is. And again, I think if you look at where we're running Q3, Q4 and then the impact of the basis points we just mentioned, you kind of get an idea.

[Robert Napoli, analyst]

Okay. So from 3Q, 4Q, less 400 to 450 basis points is what you view as your normalized EBITDA margin. The revenue effect on 2022 from the changes on a full year, if it was on a full year basis, what is, I guess, the primary revenue effect? Is it revenue share?

[Joaquín Castrillo, executive]

Right. So the other component, Bob, just to be clear, right, the revenue share won't impact the top line. So that will be treated as an expense in our Merchant Acquiring segment. And that is the impact that is included in the 400 to 450 basis points post closing that we just discussed. In terms of Business Solutions, the top line effect is about $30 million, which is an annualized number for the assets that we just sold.

[Robert Napoli, analyst]

Okay. In which you're getting the stock reduction -- the share count reduction.

[Joaquín Castrillo, executive]

Right. And in terms of -- just to be complete, right? In Business Solutions, you will also have a margin impact because of the sale of those assets and also the CPI concession.

[Operator]

Our next question today will come from James Friedman of Susquehanna.

[James Friedman, analyst]

Congratulations on a great quarter and a great year, a lot of work here. I remember there used to be some minimums on the Santander contract as well. And then I thought that when you were in full production mode, you relieved those minimums. I may be saying it wrong. But how are you thinking about the Santander because that's a good one for 2022.

[Morgan Schuessler, executive]

Yes. So Santander had some minimums this year and for the duration of the contract. And that was so -- that as the contract ramped, we'd still be able to make money in the first year, given that we're the processor. And so we'll benefit from that through 2022, 2023 for the duration of the contract.

[James Friedman, analyst]

Got it. Okay. And then in terms of some of your comments about the ticket size because that is always real relevant for your yields. Could you just walk through, baby steps, some of the dynamics again? I know you said it already, but if you could kind of refresh how you're thinking about that.

[Joaquín Castrillo, executive]

Sure, Jamie. So I mean in terms of the puts and takes on Merchant Acquiring, right, this past year, and we kind of have put a slide to some of the federal benefits that flow to Puerto Rico. We saw obviously a ramp-up in consumption and a really high average ticket.

In addition to that, because of some of the travel restrictions, we saw a shift towards more local transactions that also yield a higher spread for us and a shift to debit, which is also a more profitable product overall for us. As we start to move into next year, some of those variables like Fed funds, although we're expecting a continued benefit from them, is going to be lower than what we saw in 2021.

We're seeing the average ticket continue to slow down or start to normalize on a sequential basis. And that's something that we are expecting to see going forward. And then obviously, travel has come back. So we're starting to see some of those international cards also hit Puerto Rico, and that is impacting the yields. So I think those are the 3 main things that we're looking at.

[Operator]

Our next question today will come from Vasu Govil of KBW.

[Vasundhara Govil, analyst]

Congratulations on the extension of the BPOP contract. I also love the new slides on Puerto Rico, so thank you for that as well. Just first question for you, Mac, on just the BPOP extension, all good stuff. Just on the slight modification on the exclusivity part. Any sort of comment on what BPOP's thinking was there? And is that potentially a risk long run with the scope of the relationship on the Business Solutions side?

[Morgan Schuessler, executive]

Yes. So let me explain to you how the exclusivity works today. Today -- and then I'll explain how it's going to be under sort of the new contract after we close. Today, there's a set of services that are exclusive to EVERTEC. And that's whether or not we perform the service today or whether or not in that category of services there's something new that they want to do. And if they want to do something new in those services, they actually have to go through a process with us to give us the first right of refusal.

And it may be that we don't have the software that performs the service. We may not have the type of applications. But they still have to go through the process with us, even though that service may be better with somebody else.

So it creates friction in the relationship, right? So under the new deal, if there's stuff that makes sense somewhere else, and it's going to end up at another vendor regardless of going through the ROFR process, they'll be able to do it more quickly. So it's better for the commercial relationship.

On the existing services where we're performing them today, we know there are things that they want to do either with another vendor or themselves. And those are primarily the assets that they purchased. That was why we sold some of the assets. We got a pretty good price for them, and we exchanged shares, right?

Going forward, there may be -- I mean, we worked really hard in the past. We've increased our SLAs. We've invested in infrastructure. And now we've been pretty aggressive on pricing by giving up CPI and making some other accommodations so that in the future, the services that we have today we hope to keep as much as possible.

Now there will be some things down the road that they may want to leave, but there are also things that we're not doing today that we believe would be well performed by EVERTEC. And so those minimums give us the opportunity as now we're performing at a high level. We're performing -- we provide a very competitive pricing that we can manage through that over the next 6.5 years. We ultimately have worked really hard over the last 5 years to be a provider they want to do business with, not have to do business with.

And I think when you look at the fact we were able to get a 10-year extension on MAB, 5 years on ATH and frankly, 3 years on the MSA services, we think we're building a competitive organization that EVERTEC will -- that Popular will do business with for a very long time.

[Vasundhara Govil, analyst]

No. That all makes sense. I guess my follow-up is for Joaquin just on the guidance. I know -- just if you could lay out how you thought about all the variables. Stimulus is obviously a tougher comp issue for you guys. There's some probably inflation impact. Just how should we think about what could be the upside drivers versus downside drivers versus the outlook that you've laid out? But historically, obviously, you have a solid track record of being really conservative.

[Joaquín Castrillo, executive]

Look, I mean, yes, Puerto Rico and all the different moving pieces have been complicated to try and dimension, right? Again, I think we are working off of a backdrop that's better than it's been, and that is a positive. But the reality is we did see a significant amount of funding coming to Puerto Rico last year and a type of funding that were going directly into people's pockets.

I think we've laid out some incremental funding that's expected coming to Puerto Rico this year, like the child tax credit and the employment credit that is also directed into people's pockets. But some of the incremental funding that's expected continues to be reconstruction, infrastructure, et cetera. And these are, again, funds that we've been waiting for some time. We continue to see progress and the government working towards putting a lot of money to work.

And some of the trends that we're showing from an employment perspective, from an economic activity index perspective are starting to reflect that. So I think we're optimistic that we'll see some outflow through in some of our Payment segments. And when we think about Latin America, as we said, we have a very good pipeline. We're still expecting high teens to -- high-teens growth. And -- but those are the main aspects.

[Operator]

Our next question will come from James Faucette of Morgan Stanley.

[Jeffrey Goldstein, analyst]

This is Jeff Goldstein on for James. On the Mercado Libre relationship, now that we're approaching a year since the onset of that partnership, just any sense on the ability to further expand that contract whether into new services or geographies? Just how are you thinking about that opportunity?

[Morgan Schuessler, executive]

Sure. So we're very focused on with Mercado Libre specifically, not announcing deals until they're actually in production. But what I can tell you is we've exceeded our expectations and exceeded theirs as we talked about earlier on the call. And we're very, very confident that that's going to lead to both geographic and product extensions with that partner. So it's -- we're incredibly excited about working with them.

[Jeffrey Goldstein, analyst]

Got it. That's helpful. And then just -- and thinking about your internal investment priorities for '22, can you just talk about key focus areas, whether it's new capabilities or new geographies? Just how should we think about that?

And then if I could sneak one more in. Just thinking about the margins for next year, any broad strokes on how we should think about margins by segment?

[Morgan Schuessler, executive]

Sure. So I'll take the first part of the question and then let Joaquin sort of give his thoughts on that and then answer the margin question.

So capital allocation, we are very focused on growth. As you notice our footprint, we now have a great footprint in South America and Latin America generally. We're excited about our products, the PAYS platform that we've rolled out for Mercado Libre, for Santander in Chile, and now we're going to roll it out within Uruguay. Place2Pay, our gateway, we've localized in many countries throughout the region.

So we do feel like we have a more competitive product set than we've had in the history of the company as it relates to Latin America. We are still very focused on M&A. And we do believe now that we have such a good balance sheet. We have -- now with these extensions, we have great certain cash flow that we can continue to lever.

And now that we get rid of this regulatory contingency, we will be very focused on M&A, and M&A in the region that -- same to historical things. There are 3 types of M&A we always look at, one that takes advantage of the leverage and scale that we have, the other that gets us into new countries and the other provides new products.

Outside of that, we'll also be focused on -- we just authorized or increased our buyback to $150 million. So we'll be focused on capital allocation throughout the year.

[Joaquín Castrillo, executive]

And then on the margin question, just to clarify, right, the 400 to 450 basis points that we mentioned on the call, is the impact of all the different factors in the Popular transaction that we just walked through, right? So that is the post-closing impact of the whole deal.

Now in terms of how to look at this going forward and kind of going back to what I mentioned to Bob, if we take that post-closing impact and we take a look at kind of where we're coming off in Q3, Q4, that kind of gives you a baseline as to what our overall margin should be post deal.

Now in addition to that, the way we're looking at it going forward if we break it down into a couple of buckets from a revenue perspective, about 25% of our revenue is really subject to these reduced CPI cap. The other 75% of that is comprised of our Merchant Acquiring revenue, our ATH Movil business revenue, which actually have a hedge against inflation because sales volume continued to increase. We have our ATH revenues, which are subject to our 5% CPI cap. And then all of our other business where we have pricing levers that we will continue to use strategically when needed.

From an expense perspective, our plan is to continue leveraging our footprint and labor arbitrage, getting some jobs in different regions where we can maximize our presence in some of these countries and then work with suppliers locally, some of our key suppliers as we've been doing actively to try and get better terms for longer contracts, as has been the case even with our landlord here in Puerto Rico, which we're working with to reduce our CPI cap going forward.

And look, if we look strategically what we've done, we've always been very margin focused. We've been able to expand margins. And that's been done because we've been investing in our [ proprietary ] technology and in our Payments segment. So the plan here is to get ourselves in a position to again expand margin over time.

[Morgan Schuessler, executive]

And I think, Joaquin, an important point is investing in things that we can leverage. A couple of quarters ago, we sold Ticketpop. That was not a scale business. It didn't have a lot of opportunity. The 4 assets -- I mean, the assets that we sold today -- it's more than 4, but the applications that we sold today to Popular were things that didn't have leverage and scale. We couldn't use them with other customers. We couldn't use them outside of Puerto Rico. So as we invest in PAYS and Place2Pay, the margin on those should be accretive because we can leverage those throughout the region.

[Joaquín Castrillo, executive]

The only thing I would add, and I know you mentioned the margin by segment is, right, the -- and we said this in the remarks. Most of the impact here is between our Merchant Acquiring segment and our Business Solutions segment. The Merchant Acquiring segment because we have the rev share, and then on the Business Solutions segment because of the sale of these assets plus the impact on the lower CPI cap.

And just to kind of give some ballpark, I mean, our expectation post-deal is for MAB to have low to mid-40s type margin and for Business Solutions to be in the low 40s margin. So that kind of gives you a ballpark from a segment perspective of where we're going to see the impact.

[Operator]

[Operator Instructions] Our next question today will come from John Davis of Raymond James.

[John Davis, analyst]

Joaquin, I'm just going to beat a dead horse here just on the outlook and the impact of the transaction with BPOP, but maybe look at it a different way. By our math, as you call it, $24 million of EBITDA, call it, 8%. And so if I think about the $30 million top line, is it fair to say we're looking at like $0.20 to $0.22 of EPS impact or more or less kind of breakeven EPS neutral is the right way to think about it? I just want to put a finer point on the EPS impact that the transaction has on the '22 outlook.

[Joaquín Castrillo, executive]

Can you repeat that, John? I was trying to follow the different...

[John Davis, analyst]

Yes. Sorry. So -- really like so given the $30 million top line and the revenue -- or sorry, the margin impacts you called out, our math is it's roughly a $24 million headwind to EBITDA, which is about 8% of your EBITDA. And so once I take it down all the way to EPS, I'm getting somewhere kind of in the low $0.20 range, like -- call it, $0.20 to $0.22 of headwind from this transaction and the outlook.

I just wanted to kind of maybe focus a little bit on the EPS impact that you guys have included from this. We talk a lot about margins and top line, but I just want to make sure I'm not missing anything on the bottom line.

[Joaquín Castrillo, executive]

No. I mean, we haven't broken it down in that way. And John, I think the way to think about it below EBITDA from a tax perspective, et cetera, when you're getting to EPS, right, there aren't really any significant impacts.

So I think if you're basing -- if you're taking into consideration kind of the impact from a margin perspective, everything underneath and taking into consideration, obviously, the retirement of the almost $5 million shares that we're going to receive, that should give you the EPS effect. But [ giving you ] the absolute number of cents, that's not how we've broken it down.

[John Davis, analyst]

Okay. Fair enough. And then, Mac, bigger-picture question here. Clearly, you highlighted one of the positives here is no longer being considered a bank holding company subsidiary. How much of an impact has that had on M&A over the last couple of years? You guys obviously have a very good balance sheet and really good free cash flow generation. So just trying to understand, like can we expect the pace of M&A to improve? Behind the scenes, how much of a hang-up has that been? And can we expect some of the acceleration from an M&A perspective once that's removed?

[Morgan Schuessler, executive]

Sure. It's a great question. So what I would say, historically, it hasn't been that much of an impediment because we've been very focused on tucking in deals where we could take it exclusive and really leverage those across the company. So we bought great products. We've entered countries. And so it hasn't hindered us in the past.

What I would say in the future that given we do have such a great cash position and a great balance sheet, and now we have these extensions where we have very certain cash flow that we can lever, we believe -- and given that M&A is becoming more and more competitive, generally, we do believe that it could have been a challenge in the future.

So this is the right time to get this deal done, to get the certainty of cash flow, to get this regulatory hurdle out of the way because we think it really does open up opportunities for the future.

[John Davis, analyst]

Okay. And just remind us, I think, comfort range on leverage is somewhere in the 2 to 3x ZIP code?

[Joaquín Castrillo, executive]

That's right. That's right.

[John Davis, analyst]

And then last question for me. Just I think, Mac, you mentioned the success of ATH Movil and Business in 2021. Just curious if you guys have any kind of updates or stats you can share on the success and traction you had there or how that's kind of trended more recently or maybe a full year '21 number? Just any kind of update there would be helpful.

[Joaquín Castrillo, executive]

Yes. I mean, John, what we can say is -- and I think we've been giving some updates as to the contribution. ATH Movil is becoming almost 3% of our total revenue at this point. So it's starting to become a little bit more material. It grew 27% this last quarter. As we mentioned, obviously, we're entering some pretty tough comps just because so much of ATH Movil traffic that we saw when the pandemic was still pretty active, we started to see more kind of physical activity here towards the end of last year.

So I think we are still expecting good growth from these products, right? That digital adoption is here to stay. But we've been clear that we didn't necessarily expect those high growth rates to sustain as kind of we went back to a more normal state.

[Operator]

Ladies and gentlemen, at this time, we will conclude our question-and-answer session. I'd like to turn the conference back over to Mac Schuessler for any closing remarks.

[Morgan Schuessler, executive]

Thank you. Again, I want to thank all of my colleagues. I am incredibly proud of what we've accomplished. As we look ahead, I am delighted the Board has extended my contract with the company for the next 3 years.

Together, we look forward to the growth ahead. Also I want to thank everyone once again for joining us on today's call. We look forward to speaking to you at conferences in the coming future. Operator, please close the call.

[Operator]

Thank you. The conference has now concluded. And we do thank you for attending today's presentation, and you may now disconnect your lines.