EVOP (2020 - Q1)

Good morning and welcome to EVO Payments First Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the call over to Ed O'Hare, Senior Vice President of Investor Relations for EVO. Please go ahead, sir. Ed O'Har

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, particularly due to the impact of COVID-19 on our business.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 today’s press release and the risk factors discussed in our periodic reports filed with the SEC, including our most recent 10-K available on our website. And in addition 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 the nearest GAAP financial measures can be found in our earnings release available on our Investor Relations website.Today, we will discuss our first quarter performance and provide an update on the impact COVID-19 is having on our business. Joining me on the call is Jim Kelly, Chief Executive Officer; Tom Panther, Chief Financial Officer; Darren Wilson, President of the International segment; and Brendan Tansill, President of the Americas segment.I will now turn the call over to Jim.

Thank you, Ed and good morning everyone. In the first quarter, EVO delivered 4% normalized revenue growth and 12% normalized adjusted EBITDA growth, which reflects the company’s strong performance in January and February offset by the impact of COVID-19 beginning in early to mid March. While we are pleased with the strong start of the year, our early success has been overshadowed in many respects by the COVID-19 pandemic that has engulfed the world. The virus’s rapid spread has proven devastating to the global population and economy profoundly affecting our daily lives. EVO reacted quickly as the crisis unfolded in our markets implementing our business continuity plans to ensure the health and safety of our employees and the continued support of our merchants and partners. I am very proud of all our employees for quickly adapting to the situation, the dedication and professionalism and enabling our operations to continue without interruption.As many governments have now begun to ease the COVID-19 related restrictions, we are complying with the local government guidelines and regulations to safely enable our employees to return to the office. We have posted on our Investor Relations website a timeline of the decline in our volumes beginning in early to mid March when government restrictions began to be implemented in our markets. As you can see, the slides reflect the initial declines in our volumes in both Europe and the Americas and also the recent improvements beginning in late April as the number of jurisdictions in Europe and United States allow a limited number of businesses to gradually reopen.While our overall volume remains depressed, we are seeing some positive indicators of economic activity resuming. One such illustration is the number of active merchants, which we believe will be an early indicator of business activity resuming. As of May 1, the number of active merchants has increased nearly 30% from the mi-April low as certain jurisdictions began the reopening process. Darren and Brendan will provide details on how the COVID-19 virus has affected our segment later on the call.Also, as we began to see our volumes rapidly decline in mid-March, they took three decisive actions to significantly lower our fixed cost and strengthen our balance sheet to address the potential of a deep and prolonged economic impact due to the pandemic. First, we moved it to protect and improve our cash flows by aligning our expenses with the recent decline in revenue. We implemented expense reductions across the company, including personnel cost and third-party spends and eliminated non-critical capital expenditures.Beginning on April 1, we have reduced our payroll costs through a combination of furloughs and salary reductions and we have also significantly cut many of our non-payroll expenses. Second, we strengthened the company’s balance sheet with $150 million investment from our long time investor, Madison Dearborn Partners. After receiving these funds in mid-April, we were paid the balance of our revolver and are holding the remaining proceeds in cash. Our pro forma leverage has been reduced to 3.1x as a result of this transaction.Finally, as we announced in this morning’s press release, we amended our leverage covenant to 6x EBITDA through March 2021 given the uncertain timing of the global economic recovery. Tom will discuss the various impacts of these three actions as well as our cash flow and leverage objectives later on this call. Taken together, these actions provide us financial flexibility ensuring we will be able to weather the current crisis and emerge well positioned to resume our growth plans. We are committed to actively managing your cash flows and supporting our employees and customers as we work through this challenging situation.I will now turn the call over to Darren to discuss our European business. Darren?

Thanks, Jim. As you can see our European segment against the impact of COVID-19 in early March, as government implemented social and commercial restrictions to slow the spread of the virus. We experienced widespread declines across all of our markets. Spain was our first market to feel the impact of the economic disruption, followed by Poland, Czech Republic, Ireland, and the UK. Our diverse management portfolios has helped soften our volume declines as the largest portion of our European volumes are derived from large big box merchants, such as national supermarket chains, home goods and supply stores and gas stations.Prior to the pandemic, travel and lodging represented approximately 5% of our European volumes and are primarily concentrated in Spain, which is the market most significantly impacted by the government restrictions. With the widespread government actions abruptly closing most borders and businesses, the curve rapidly declined to approximately 50% versus the prior year. We have been carefully monitoring the government decisions regarding the easing of restrictions and are now seeing certain businesses within our markets reopen and begin the recovery process. For example, Poland, Germany and the Czech Republic are allowing certain businesses to reopen while adhering to government guidelines related to social distancing and wearing protective equipment.As business returns, we anticipate card usage to increase as consumers and merchants opt to use credit and debit cards rather than cash. Our merchants are well equipped to respond to this anticipated shift in consumer behavior through the use of contactless, mobile terminals and e-commerce solutions. As you can see from the slide, we have seen a multi-week improvement in our volumes, which are now down roughly 20% compared to last year and that it appears that we are on an improving trajectory. We are also seeing the number of active merchants increase across many of our markets, which provide further encouragement that trends are improving. For example in Poland, where volumes decreased nearly $0.50 at the low point, we have begun to see a recovery with volumes currently approaching flat versus 2019 and the number of active merchants increased in nearly 75% of pre-COVID-19 level after bottoming around 50%. Additionally, we have been actively managing our merchant portfolio during this period and have remained in contact with our network, trade and industry organizations to ensure we remain well coordinated across industries to assist our merchants through this challenging time.Finally, I would like to provide an update on our expansion into Portugal, which was delayed as a result of a banker’s announcement to acquire EuroBic on February 10. We began initial discussions with the banker following the announcement, but unfortunately, these discussions were interrupted by the pandemic and we have agreed to resume discussions next quarter.I will now turn the call over to Brendan who will provide updates on our Americas segment. Brendan?

Thanks, Darren. Our payment volumes in the Americas demonstrated trends similar to our European businesses although the steep decline occurred approximately 1 week later given the progression of viruses spread. As you can see from our slide our Americas volume declined by approximately 40% in mid-April. However, we have seen a steady improvement as businesses have begun to reopen with volumes now down only approximately 20% from the prior year. Our merchant mix in the U.S. is predominantly SMEs. However, these declines have been somewhat offset by our B2B business, which has withstood the crisis reasonably well.In our Mexico business, we processed for many national merchants, including large grocery stores, supercenters and gas stations, which have softened the volume decline in our Americas segment. We are actively working with our merchants to support them through this crisis and have been in regular contact with state and local authorities as we prepare for the government restrictions to ease and economic activity to return. To-date, we have seen many states ease their restrictions to enable businesses to reopen and we anticipate this trend to progress over the coming weeks as most states have issued a reopening plan.We are monitoring volumes and merchant activation rates at both a state and MCC level in order to better understand the market trends and we are encouraged by the rate of improvement that we are experiencing, especially in certain industry verticals. In the U.S. where a number of states have allowed businesses to reopen, active merchants have increased by more than 20% in the past 2 weeks. Importantly, we are also seeing this in states, where stay-at-home orders are still in place as more businesses adapted to this evolving economic environment.Lastly, we continue to make progress towards launching our 50:50 joint venture in Chile with BCI. We are preparing to process payments in the market through our Latin American platform based in Mexico and have established the legal entity under which we will conduct business. As the joint venture will leverage the fixed costs already imbedded in our Latin American platform, it will not require any significant cash investments this year. We are now waiting for final regulatory approval and are in frequent dialogue with the regulators to address their questions as independent merchant acquiring is a new concept in the market.With that, I will turn the call over to Tom who will now cover the financials in more detail. Tom?

Thank you, Brendan and good morning everyone. EVO delivered constant currency revenue growth of 4% in the quarter, when excluding the BNP termination fee from last year. FX negatively impacted revenue by 180 basis points as the peso, euro and polish zloty continued to weaken compared to the prior year. On a currency neutral basis, adjusted EBITDA grew 6% and margin expanded 112 basis points. However, normalized adjusted EBITDA grew 12% and margin increased 209 basis points. Through February, our financial performance was well in line with our previous guidance. However, the steep decline in volume beginning in March significantly reduced our revenue and EBITDA growth.As Jim mentioned, beginning in April, we implemented specific cost reductions that have resulted in a material decline in our fixed costs that we anticipate will allow us to operate on a cash flow positive basis over the course of this economic downturn. Payroll expenses comprised, approximately two-thirds of the reduction and is largely the result of furloughs and salary reductions which went into effect on April 1. We also focus on non-payroll expenses and have significantly reduced these costs. The combination of these actions, have reduced our SG&A spend by approximately 25% or $6 million per month.In addition, we have significantly scaled back our capital expenditures to include only critical projects and expect CapEx to decline approximately 75% compared to last year. The current decline in our processing volume is less severe than we forecasted at the time we implemented our expense reduction initiatives, which gives us confidence that the actions we have taken will deliver the desired results. However, it’s important to keep in mind that the duration of this economic decline and the pace of the eventual economic recovery remained uncertain.We will continue to actively manage our expenses and cash flows based on our revenues as economic activity resumes in our markets. We are also monitoring daily margin activity in order to closely manage our risk profile and minimize charge-back related losses. Thus far, given our diversification, we remain comfortable with the risk profile of our portfolio and have not seen a significant increase in charge-back activity. Across all of our markets, we are also working closely with government authorities to utilize the local assistance programs for merchants and our employees in order to secure any financial benefits from these programs.With respect to our segment performance, in Europe, normalized segment revenue grew 7% and adjusted segment profit increased 19%, while profit margin expanded over 300 basis points compared to last year. Turning to the Americas, constant currency revenue grew 2% and adjusted segment profit increased 12%, while margin also expanded approximately 300 basis points on a currency neutral basis. Adjusted corporate expenses for the quarter were $7 million, which is an increase of $1 million compared to the prior year period due to an increase in general operating expenses. Adjusted net income was $9 million and adjusted net income per share was $0.11, which both increased over 70% compared to last year. This increase was driven by strong operating leverage as we were able to grow revenue by 4%, while maintaining stable operating expenses compared to a year ago. At the end of the quarter, including all share classes and dilutive securities, we had 83 million shares outstanding, which is flat compared to a year ago. Going forward, the shares underlying the convertible preferred stock, which closed on April 21, will be included in our diluted shares outstanding.Turning to our leverage, we ended the quarter with 4.1x the trailing 12 months adjusted EBITDA. Upon receiving the preferred stock proceeds last month, our leverage ratio improved to 3.1x. As Jim noted, we have repaid the revolver which provides us $200 million of available borrowing capacity. As announced this morning, we have received approval from our revolver lender group to increase our leverage covenant to 6x the last 12 months EBITDA through the first quarter of 2021. Previously, the leverage covenant was scheduled to step down throughout 2020 to 5x by year end. The combination of these actions provides us strong liquidity and significant financial flexibility going forward.Lastly, I would like to provide an update on our outlook. Given the current global economic uncertainty, we will not be providing revenue or EBITDA forecast for Q2 or full year 2020 at this time. However, we have provided recent volume trends and specific cost and CapEx reduction details to assist with modeling our financial performance. Until the economic activity in our markets has normalized, we will continue to provide quarterly updates of these operating metrics to help you understand the trends we are seeing in our business.With that, I will turn the call back over to Jim. Jim?

Thank you, Tom. EVO remains focused on delivering on our commitments and responsibilities to all stakeholders during this unprecedented time. While the duration of the economic disruption remains uncertain, the early actions we took to address the impact of the pandemic position us to emerge from the crisis with a stronger balance sheet and the ability to continue our expansion strategy. I am also encouraged by the recent trends we are seeing in our volumes and active merchant counts and remain optimistic that economic activity will continue to gradually resume in our markets.I will now turn the call over to the operator to begin the question-and-answer session. Operator?

[Operator Instructions] And your first question comes from the line of Ramsey El-Assal from Barclays. Please go head.

Hey, guys. This is Ben Budish on for Ramsey. I wanted to ask about your go-to-market in Europe, our understanding is that it’s a little bit more bank based merchants coming to the bank and then being kind of cross hold with other commercial banking products. Have you guys had to make any changes to that strategy kind of with everything going on over there and for how long might you expect that to kind of continue along the same, I think you have been able to switch to virtual selling or telesales things like that?

Hi, there. Yes, it’s Darren here. Thanks for the question. Yes, it is a different operating model in terms of bank alliances across almost all of our European markets. I know the activity has continued with banks. Banks have been very much encouraging their business customers to pivot to e-commerce online virtual terminal type transactions, because of the lockdowns cash usage, cash referrals has fallen significantly through ATMs. So we have been doing campaigns with our banks to their merchant states in terms of leveraging and selling about your terminal e-commerce type solutions and also through our tech-enabled channels strongly in the UK but across all of our markets similarly tech-enabled solutions through omni-channel opportunities have afforded new merchant opportunities and pivot from card present to card not present transactions, so kind of business as usual.

Okay, great. And if I could ask I know you are not giving guidance for the quarter, but in the past you have given some helpful color on sort of the differential between transaction growth and revenue growth, what could we expect kind of the same thing with volumes, would that be a fair assumption?

This is Jim. Volumes to some extent, yes, the reason we gave these charts just so that people could get a good sense of the effect, but also that we are now seeing a recovery. I would say, volume can be a little misleading for example in our petroleum business depending on where gas prices continue to move. They could move up, move down. So one purchase of gas is one transaction, but the value of the cost of the purchase could swing pretty significantly, but I think for purposes of where we are today I think it’s a good enough proxy.

Okay, well thanks so much and hope you are all staying safe.

Thanks.

And your next question comes from the line of Bob Napoli with William Blair. Please go ahead.

Good morning, everybody. Good to talk to you.

Good morning, Bob. Same.

What are your thoughts, Jim or Tom and just on the ability – what type of EBITDA margins assuming that the trends that are in place now are stable or slightly improving as you would think they would be, what type of EBITDA margins do you think you could maintain?

Well, as we described the cost reductions that we have put into place in the beginning of April. We are a combination of payroll and non-payroll, including some furloughs. So I think the EBITDA margins for the foreseeable future are sustainable recognizing though that part of that is the result of pretty significant payroll reduction. So at some point those will get returned back as the business returns. As Tom said in his comments as the volumes return in the in the revenue to kind of normal levels and as these markets open up. There may be inflection points as we return salaries back to where they were before the crisis. So we're really playing it month by month as we see volumes improve I think what's most significant is as Tom said in his comments is in one of our most important international markets Poland worst we've seen a very significant improvement in volumes in that market close to where it where it was last year at this time on a volume basis not necessarily revenue for our EBITDA but on a volume basis as the market started to open up. So I think we like everybody else on this call and around the world are waiting to see the effects of commerce once the government restrictions are relaxed and people feel comfortable to start resuming their normal lives.

That’s fair. I wasn’t clear on the difference in the revenue versus the volume trends where as we look at these volume trends, how is revenue tracking in line to get the revenue would be in line with those volume trends?

Not necessarily, Bob, because.

Yes.

Not necessarily, because in the volume trends you have right now a lot of large merchants. So for example like Poland, probably 25% of our merchants aren’t active yet although we are back to normal – or prior year volume levels. So, those are more big box type of organizations less DCC. DCC is an important piece of our business in Poland and Spain and other European markets as people cross the border to purchase items. So I don’t think it’s necessarily all the same just because volumes are back, revenue and EBITDA are going to be exactly the same. There is other things that have to come into play, but this is a first good indicator that when the governments reopen, people resume spending and the business starts to recover.

Thank you. Appreciate it.

Good. Thank you.

And your next question comes from the line of Tim Willi with Wells Fargo. Please go ahead.

The questions I guess about sort of the operational side of the business beyond the current sort of environment, I guess, it’s earlier, I apologize I jumped on late, but could you just talk about what maybe you have learned about EVO’s operational resiliency or I guess just sort of what are the learnings here that maybe applicable on the other side of this around efficiency, productivity, customer service? That’s question number one. And then I had a quick follow-up.

Okay. Well, good morning. Probably, biggest learning is whether we need any buildings anymore. It’s been quite amazing that as this started to unfold say it in March and our BCP plans I think like most others were to lose a facility or two, not 26, all within a matter of a week. So I think the resiliency of EVO probably like most companies, but EVO in particular was quite amazing that we were able to pivot, yet the requisite number of laptops and VPNs, so that people could work remotely, at the same time businesses, we are not as active call centers were not as active at least in the early days, but it was quite an amazing feat. I have been in this industry for 20 years and I can tell you over the last say 45 days, I have seen zero comments from employees, customers, partners about service – deterioration in service. So I think the learnings were – BCP was viewed one way and I think now that we have all learned to work remotely, that’s going to be an integral part of how we prepare in the event that this resumes again in the fall or anything like this comes again.

Do you think that are there permanent positives in terms of margin structure or how you think about staffing that probably stay with you in terms of on the other side of this maybe the ultimate profitability EVO would have been enhanced whatever we get back to some semblance of normal?

Yes, I mean, still it is early to see how long it will take to recover, but clearly if you look at the total and we had 2,400 employees, we have furloughed roughly 600 of those employees. So we are continuing to operate at a level much lower than I would have – you would have asked me in the beginning of January that could have happened. So I think when you are pressed into action, you kind of – you learned what your limits are and the limits of the organization. And I meet regularly with the senior team across all markets. Actually I did all that this week with web access. And just to hear how people are feeling and I think get to a person everybody feels unfortunate obviously that we are in the situation, but that everybody has really pulled together. So, I think we have found a new operating model. We are going to return back to offices. I am in the office today, our offices where the jurisdictions are allowing it are open again. It’s on a voluntary basis to come in initially. No, I don’t know all the – the specifics of what’s going on in somebody’s life, but to the extent that they are good to come in know we want to get back to business. But I think as we look forward and this is still early days this is one of the things I heard from the leadership team of the company is evaluating our fixed cost as it relates to our real estate. We have a lot of facilities, because we are spread into a lot of different markets, but the size of those facilities, the efficiency we have seen from people working remotely, the ability to reach out and hire people that might previously not been able to do it, because of mobility issues without question once all this normalizes, we will definitely take a look at deficiencies – the efficiencies that are gained – have been gained here and how we apply them going forward. When you look at the payroll side of the reduction and Tom will keep me honest here, I think two-thirds of this was related to furloughs and a third was related to salary reductions. So we are going to look very carefully and the timing of those as they come back and try to be as efficient as possible going into ‘21.

Great. Thank you very much for the time. I appreciate the thoughts.

Thanks.

And your next question comes from the line of Kartik Mehta with North Coast Research. Please go ahead.

Hey, good morning. I know this is going to sound like an odd question, but I am just wondering what the acquisition environment could be like after post COVID-19. If you think you will have a better opportunity or maybe some assets we will see a reduction in price?

So, now, I think that is a very good question. We highlighted that when we did the equity raise in April that wasn’t the only reason, but clearly that’s part of it. When EVO – EVO has been around since ‘89 but EVO International so to speak in ‘12/13 one of the reasons we were successful early is because the world was still recovering from the ‘08/09 crash or global crash, financial crash. So, I don’t know that we are going to have exactly that although I saw an even market fell for bankruptcy and J.Crew filed for bankruptcy. So there maybe that opportunity and what’s unfortunate I think for us is we had a really strong pipeline going into this year, the M&A team, Brendan and Darren were very busy on new opportunities. We are continuing to stay in touch with those opportunities to the extent that we can. It’s harder to get people obviously on the phone these days for that type of conversation when they are very focused on just operating their business. But we are as Tom said in his comments where balance sheet is in good shape to execute on those opportunities, it’s something that is part of the DNA of the company. And yes, I think there is a chance that those opportunities will be enhanced, because banks will either need, I guess more significantly the capabilities of payments as maybe consumer behaviors change or the banks have otherwise been somewhat harmed because of failures of their borrowers and we will look to raise capital and this tends to be a pretty good business for them to leverage.

And then Darren, just a question for you, you talked a little bit about in Europe use of like cash or credit and debit. So I am wondering, do you have any statistics you could share on the growth you are seeing in contactless and what the pandemic might have done for that?

Hi, Kartik. It’s – again, thanks for the question. Yes, kind of early days in seeing the transition in numbers, many countries have been in lockdown, so kind of lot of the initial transactions through the lockdown period of inevitably being e-commerce and virtual terminal based. As the markets are opening up, we are certainly seeing an increase in the contactless traffic exactly as you are calling out. So I think Poland specifically is where we are seeing the substitution from cash to card and we are seeing the numbers kind of 80% to 90% of contactless from the kind of early reopening of the stores there is still rife in terms of 15 terminal devices etcetera. I think we will see that taper down as kind of transactions normalize, but the kind of – buying post COVID or being allowed out should I say let COVID lockdown is being kind of the odd behavior as we would all expect just caution applying. So, high levels contactless but we will see that probably normalize albeit I think cash this is a big facilitator to the cast-to-card conversions.

Yes. I was food shopping last night at Whole Foods and I used my Apple Pay. So it’s happening here too.

Thank you. I’d appreciate it.

Sure.

And your next question comes from the line of George Mihalos with Cowen. Please go ahead.

Hey, guys. Glad you are all doing well and thanks for taking my questions.

Thanks, George.

I wanted to start off, I think you said the cost savings are about $6 million a month or somewhere thereabouts, just curious what are you going to be looking for to maybe reinstituting some of those costs – those furloughs that have been put in place and do you guys have a rough sense, I know it’s early, but maybe what portion of that might be permanent going forward as we look into ‘21 and beyond?

Yes, thanks for the question. We will continue to carefully monitor our volumes. We are actually monitoring our business on a daily basis. We get daily reports around our volumes and mid counts and things of that nature. So, I think the good thing about how we structured our cost base going forward and blend of payroll and non-payroll costs is that we will be able to dial the expenses back based on what is happening within our markets both from a volume perspective and from a pricing perspective. As Jim mentioned earlier, volume is a good proxy, but it’s not a perfect proxy, because there is a merchant mix elements in there that affects spreads that we earn. And so we will be very mindful of both what’s going on from a volume perspective as well as from a revenue perspective. I am not in a position to give any view into 2021 at this point based on your question that would be premature, but I think where we have positioned ourselves, I think the point I believe with you is that we have positioned ourselves to be very nimble and to be able to adapt to the environment based on what we are seeing happening at the point of sale with our merchants.

Okay, that’s helpful. And just two quick other ones, Tom, is it correct to think from a modeling perspective again as we look at one quarter to – from 1Q to 2Q, the revenue per transaction that should come under tremendous pressure given a mix of larger merchants and then just a question for Brendan, if you could just talk a little bit about the trends that you have seen in Mexico versus the U.S.? Thanks guys.

Yes. So, briefly on that first one, yes, I think that’s fair because what we are seeing in terms of our volume is highly e-com based, big box grocer, superstores, things like that, that’s where our spreads are little thinner. So, while volume trends are encouraging, it will take some time for the SMEs to come back where the pricing was a little bit higher levels. So I think you are right on top of it from a modeling perspective.

And your next question…

George, just for me, good morning. So I will talk quickly here what we are seeing in Mexico. So in Mexico the portfolio make up looks a lot different than what we would have here in the U.S. Mexico because of our bank partner Banamex, we service many of those largest merchants in the industry or in the market rather and our exposure to more defensive industries like grocery is much more pronounced. So, as I am sure you are well aware Costco, we service Costco in the market. The impact on volume at its peak is more moderate than what you would see in the U.S. And you would also see the peak impact on volume. They are probably 3 weeks behind the U.S. The pandemic clearly moved from Asia to Europe and in Europe to the U.S. and then ultimately down into Mexico and then further into Central and South America. So timing, there is a timing difference and then a magnitude impact – the magnitude difference as well.

And your next question comes from the line of Tien-Tsin Huang with JPMorgan. Please go ahead.

Hey, thank you for coming. Good morning, guys. Glad you guys are back in office actually. Jim, curious would you say that there is going to be pent up demand or even the market would open up a little bit more for deal activities with the pandemic being a little bit of a wake up call for banks that might want to consider outsourcing. I know the timing is tricky, but just curious if you agree with that or not?

Yes, I don’t know how quickly it will open up if you look at ‘08 and ‘09 it took a little while, but yes, some of it depends on how long, how deep and how much damage comes along for those who need to do it to raise capital, but without question anybody feels like they are behind the 8-ball relative to a payment strategy trying to build one from scratch not impossible, but nearly impossible. So therefore, partnership is the way to go and again that’s one of the reasons why we wanted to make sure we are well positioned coming out of this both on the cost reductions and the additional equity to be able to capitalize on those opportunities as they present.

And Tien-Tsin, you can also see that the capital raising activity or opportunity for the financial institutions as well. So depending on how long and painful this is from a credit loss perspective for financial institutions, this can also be a very efficient way for them to generate capital.

Yes, make sense, makes sense. The M&A and it was asked really couple of times, but just from an M&A perspective, how do you prioritize now yet that you would like to go out and acquire that you have done middleware deals in the past. Can we assume that e-com and omni and things of that nature might be at the higher end of the list now?

Yes, that’s definitely learning through this. I mean, we have traditionally aligned with financial institutions internationally. And so that’s been more of a face to face business and you can see our stock and others that are more oriented to face to face. So I think the diversification in markets and in capabilities, buying into the e-commerce platforms, they are not all that plentiful globally, but it's not as though it hasn’t been a focus, it has been. It’s just finding the right opportunity. I think we will continue to pursue technology as we have previously, but we are optimistic too that the bank portfolios which provide as a great entry point into a new market and kind of a base of business to build our capabilities around will probably be one that I am expecting will be more plentiful than it had been years that.

Great. Thank you.

Thanks.

And our next question comes from the line of Tom Blakey with SunTrust. Please go ahead.

Hi, good morning guys.

Good morning.

I think you mentioned some strength, maybe you are seeing in B2B and we have seen that with other peers of yours reporting in the last week or so. I was wondering if you could just provide any industries or different changes in mix as it relates to this disruptive period in terms of your B2B strength would be helpful? Thank you.

Yes, good morning, hi, it’s Brendan here. So you are absolutely right, when we look at first quarter trends and then more recently we see a much, much, much more moderate impact on B2B relative to the balance of the U.S. business and in fact in the first quarter B2B enjoyed one of its best quarters ever in terms of volume and revenue growth. But then as we look past the first quarter where you know I think we provided some insights into how volume performed in April, you would see again that business proving much more resilient. The mix shift has not particularly changed not noticeably, but what we are seeing is that from a volume perspective considerably more defensively positioned than even the IFC or e-commerce businesses.

And Tom, this is Tom Panther. Just to put a little dimension around Brendan’s comment around revenue growth just in the first quarter, we saw revenue growth around 25% in the B2B channel and obviously that based on the timing of the pandemic and when it hit the U.S. that’s somewhat immunized from the impact, but as Brendan said, the volumes were less sensitive too. And so it was a healthy quarter despite the last month of the quarter being distracted by what was going on in the market.

Thank you very much. Just on the heels of Tien-Tsin’s question, with regard to opportunities with the banks, it’s a odd question, but it’s an odd time. How has your go-to-market motion changed in the last kind of 45 days just curious on the pipeline changes in the last kind of 1.5 months there?

Yes, it’s still early. I mean it’s 45 days since the start and most people are still just dealing with the reality and it would be consistent with ‘09 where it wasn’t like banks started phoning people in the middle of the downturn, but my impression is that the top of the house looks around and says we need to raise capital we are going to either do it through an equity raise or sell non-core assets we have been looking at. A payment strategy for some time is now time to pull the trigger. We are going to need to either run our fee or find a partner. I don’t see that happening until we have greater clarity with the pandemic that things are normalizing, people are moving around. Hopefully they are not wearing masks all that kind of stuff, but for the pipeline that was there and the pipeline means where we were actively in discussions. Those discussions obviously hit the brakes for 30 days or so maybe a little longer, but I was just talking to one of the Presidents on the way in at EVO and they are reengaging with the people we were talking about – talking with 45 days ago. So the conversations are resuming where conversations were already in place, but I – and then may with others, but right now, I think for us to start a new relationship, it still might be a little bit early.

That’s helpful. And just a quick question specifically an important market in Poland, we are monitoring I think earlier pressure is on, the merchant discount rate with related investments from smaller players. We have already commented on the call about liquidity potential and I know it’s early, but any changes there with regard to the merchant discount rate in Poland or expectations therein coming out of this crisis will be helpful? That’s all for me. Thank you.

No, again, I would say if you look at the stats that we have published for the weeks preceding the downturn for Europe, in particular, you see that strong growth that’s Poland. So, Poland has been and continues to be a leader in Europe in terms of growth. Pricing it’s a competitive world. So, pricing is always there, but there is – nothing more aggressive. There was one player in particular who I think was sold just prior to the pandemic that was maybe a little bit more aggressive than run of the mill, but we are not seeing anything new specific to Poland.

And your next question comes from the line of Ashwin Shirvaikar with Citi. Please go ahead.

Hey, folks. Good to hear you are all doing fine.

Good morning, Ashwin.

Good morning. Good morning. Appreciate the weekly volume charts by geo, my question is actually in the cost, yes, those are good should make that a regular thing.

I think Tom clarified until the pandemic has subsided. I don’t know we are going to do this forever, but we thought it would be helpful we weren’t giving guidance. We thought it would be helpful we gave you the cost reductions which we have already seen and you can see in the charts that there definitely was a valley there, but we are climbing out of the valley.

Yes, yes, yes. So, on the cost side though, could you remind or talk to what sort of your fixed versus variable cost distribution was before the pandemic and where it is currently? And I understand completely that you know people’s thoughts of what is considered fixed or changed, but I am just trying to think through traditional definitions?

Yes. So fixed is obvious rents. So we were not able to affect rents, there was a early hysteria that people are going to give you 3 months off and you would just put it at the end of the lease term. That didn’t really – at least for us that didn’t really happen. And we have other contracts that you would view as fixed, but those are volume-based. And so as the volumes came down, while it is the fixed contract, it is variable in the sense that it’s related to volumes. I think the biggest cost that would otherwise be viewed as fixed is payroll. And that was the first area that we focused on was the payroll structure to get the sizing right, because we saw the volumes coming down. These charts are the same charts I was looking at and we adjusted based on this to really size the organization based on the new reality. And so we took on average say a 25% between the highs, the lows between the directors and the executive team down to I think the lowest level is 5%. For vast majority of the employees that stayed with the company and then where we had opportunities to furlough where they were government programs to support employees that were furloughed as I said earlier that was roughly two-thirds of the payroll side of the cost reduction. On the non-payroll side, we literally took out the top 100 or 150 vendors assigned them to each of the EVPs and worked through those vendors specifically to either eliminate the service altogether or try to renegotiate the cost related to it. All-in, I think it’s roughly 25% of our SG&A was impacted, I think it’s…

Yes. Yes, about 25 % of our SG&A was impacted. As we said on the comments one-third, two-third between non-staff and staff and Ashwin back to your question kind of a structural question around how do we think about fixed costs versus variable within our overall cost base. Our Q will be filed later this morning, so looking back at our K and you look at just the components of our expense – total expense, the cost of services line item, we view that as you heavily variable that drive – that fluctuates based on revenue that’s about 20% of that overall expense base. SG&A is about 50% to 60% of the expense base and that was the area that we really focused on when we took out the 25%. Some of that is variable, but we think of that as predominantly fixed base. So within the total expense base, we think 20% of it is fairly variable and the rest of is fixed. Obviously, depreciation and amortization is what it is, that’s just going to roll off as necessary over time as we tighten up on CapEx and have some higher spending years roll off and our lower spending years stay on, you could see that rotate down over time.

Okay. Now this is quite useful information. And one quick clarification, the pace of your own internal initiatives on the systems consolidation productivity, those sorts of things, those are still continuing right, I mean the stuff you are done is incremental it might be temporary but it’s incremental?

That’s correct. So we didn’t stop operating the company. We adjusted and maybe you know Europe had 80 projects and we cut back on a number of them that in some instances required people to touch stuff and leave their houses. So those obviously couldn’t afford, but anything related to integrations conversions, there has been a lot of work to standup Chile. And I think the testing will be ready by the end of this month. So, Chile has moved forward as fast as we could. Part of it too, especially when you are dealing with regulators and those offices have been closed, Chile was close borders, etcetera. Some of it just got naturally slowed down, but no, there is no – this has not been a vacation. I have heard that anecdotally from employees that they are more efficient now than ever, because you know they are sitting at their home and they can easily be contacted, because everybody knows where they are. So, it’s business as usual – it’s even though it’s a little bit new usual right now.

Yes, thanks. Yes, stay well, guys.

Thank you, Ashwin.

And your next question comes from the line of Bryan Keane with Deutsche Bank. Please go ahead.

Hi, guys. Good morning. I know you were talking about active merchants and some increases there. So I guess I am just thinking about churn in general and what this is going to look like as we come out. So, maybe you could help us understand what percentage of merchants in the U.S. and Europe are still inactive versus the pre-COVID levels? And then what kind of bankruptcy rate or what kind of churn rate you guys think will happen here even as we come out?

So I think that’s a very good question. David Goldman who runs M&A for us, his business kind of slowed down there for a while. He was the one who has been digging into all this data and we were very focused on volume and he shifted two active merchants. And I think what’s very positive there as we have seen almost in lockstep as the volume has come back so is active merchant. So it’s not simply the big box that Brendan was talking about or we see in these – in many of our markets where have large customers, we are seeing the smaller merchants open up and as you speak to like the U.S. the money that was – the government pushed out to our small merchants. We are starting to see the activation rates for our merchants on the restaurant side and the retail side in the U.S. starts to open as the restrictions open in each of the markets. So they are almost the same if you look at the charts and if I gave you the same charts for active merchants they are almost with moving a lockstep. So, that’s a good sign. How many bankruptcies are going to be this is a question actually I asked at the European team yesterday what has been the support by the local governments or in each of the countries and there are programs not just to support the citizens, but like the United States has to support the merchants. So that’s a question that everybody is going to wait to see what the answer is once it’s fully normalized who survived the pandemic and who didn’t. Obviously, there will be some fallout. We have an incredibly diverse portfolio and no one merchant is material to us. So, I don’t know that it’s going to be overly burdensome to us if we have some, but right now we are not seeing that or hearing anything about that.

And Bryan that financial stimulus from government institutions, I think that didn’t exist right here in the U.S. during the Great Recession there wasn’t that level of financial stimulus. So I think that’s the dimension that has yet to play out that you may have an ability certainly I think the government’s intentions is to curb the level of bankruptcies and hopefully those programs will play out that way, so that they are given the lifeline that they need, so that there isn’t the high bankruptcy level.

No, that’s helpful. And then do you guys have an idea how effective the PPP program has been in the U.S. I mean speaking to clients or they are still prostrations there or it seemed to be smoothed out?

Yes, I will start it, but I think Brendan might be better positioned as he is closer to the details, but in the early days we – even though it was not for us, but we have got hundreds of thousands of old merchants. We gathered as much information since the size is down and then pushed it out through our dealer network and through our smaller merchants, so that they knew where to go if they didn’t otherwise, if they weren’t up on the latest opportunities since I think it was a first come first serve basis. So, I know we try to facilitate as much as we could. It was really left to the merchants and its banker to put it together, but I don’t know Brendan who is not here in Atlanta with me he is in New York. So we are a little bit remote here. Do you want to pick up from that?

Yes, sure. Yes, so listen we did see at the peak merchant activity declined, active merchant numbers declined by circa 35%. And when those merchants went dormant, we reached out. So, we engaged through our obscene in each of the four channels to talk to merchants and say what’s going on and we weren’t getting huge amounts of closure requests. We were experiencing attrition levels that weren’t particularly elevated vis-à-vis other periods in our history. And what we are hearing in many instances is that those merchants were temporarily dormant and our expectation was to remain open. So I think the PPP plan has generally worked. If you fast forward to today versus that 35% that I mentioned moments ago, we are seeing roughly a third of those merchants now active again, the ones that I previously closed. And that’s great. So we are seeing as sates reopen and obviously our merchant base is concentrated along the lines of where you would see merchants are generally concentrated across the U.S. We are no different than where merchants generally are dispersed. So states that remained relatively close like California and New York are going to impact our active merchant rate. So some of this is TBD, it’s a bit of hypothesis where we are extrapolating trends from smaller sample size, but from our outreach from the dialogue that we have had the experience that we are having is basically that these merchants are temporarily shuttered and many of them will reopen when the states allow for it.

Okay, thanks for the color and stay safe and healthy.

Thank you.

And your final question comes from the line of Mike Del Grosso with Compass Point. Please go ahead.

Good morning. Thank you for taking my questions and appreciate the charts on the incremental disclosure this quarter.

Sure. Thank you.

My questions on the impact of travel in certain geographies, I know historically you have called out a larger percentage in Mexico, but if you could maybe provide an update on that market and then the impacts you are seeing in some of the other geographies as well?

Hey, Mike it’s Tom. Yes, Brendan you go ahead, you can take it.

As it relates to travel in Mexico, we did service, I mean, Air Mexico, the customer of ours and that’s basically it. We do support some hotel chains, but you would have seen in a normalized environment last year, travel represents only less than 5% of a total volume so as that 5% total declined no question, but we were particularly exposed in any real material way to travel and we have got almost no travel here in the U.S. So the travel – the small quiver of travel that was a year ago is largely gone. But you would also say grocery for example a year ago being roughly 15% and today it’s being roughly 35%. So those are the types of mix shifts that we are seeing that Jim was alluding to earlier in the call. When he said volumes and profits don’t necessarily correlate one to one because of that mix shift and volumes migrating to larger merchants, but the impact on travel specific to your questions, Mexico is relatively modest.

Yes. And Mike, it’s Tom, let me pickup off of that and you also see on one of the charts that we posted, I think it’s on the total EVO chart of a callout box that shows some of our you know top MCCs, you will see travel total company was 4%. Of course it’s gone to virtually zero as a result of the shutdown, but you can see it’s a small portion, really the only market where traveled gets above 5% is in Spain and as Darren said in his comments that Spain has obviously been impacted hardest because of just the economy in Spain. I think the broader point I will leave you with is just one of EVO strength is our diversification just the flywheel of all of the different verticals that we are involved in and the lack of specific concentration. I think it’s been a strength of ours through this process where we have been able to weather this. Grocery stores have picked up, but restaurants have fallen back, but that’s what a diversified portfolio enables you to do and certainly something that will be a focus of ours. And one of those learnings of ours from an overall business management perspective on a go forward basis, you can expect us to continue to remain focused on that, because we think it’s a real advantage regardless of the economic environment.

Okay, thank you. That’s helpful. I suppose I should have clarified it when I was talking about travel and then more specifically cross-border what percentage of volume decline that you are seeing is due to cross-border?

Obviously, a fair amount, because there is just not a lot of cross-border activity and in Europe many borders are closed, but that affects our revenue more from a DCC perspective in terms of some of the cross-border activity rather than just necessarily kind of the overall volume, because as we said in what Brendan and I were just talking about the overall volume just isn’t overly sensitive to that. But we will see some impact from just the lack of cross-border activity just from nothing else, the lack of DCC revenue particularly in Poland into some degree, but more modestly in Spain.

Yes. And just to dimensionalize that in Mexico, international cards makeup circa 10% of volume in a normalized period.

Okay, that’s helpful.

Yes. The only market I would say that is heavily cross-border for us would be Spain, because it’s a vacation for Europe tends to head there and Russia and China. So that business because it’s been closed, but also just because of travel restrictions that is the market that is down deepest and probably will be the last to recover.

Thank you. And now, I would like to turn it back over to Mr. Jim Kelly for any closing remarks.

Thank you, operator and thank you all for joining the call this morning and your continued interest on EVO. Please stay safe and thanks again.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.