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EVO Payments, Inc. (EVOP)
Q3Â 2020 Earnings Call
Nov 5, 2020, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the EVO Payments Third Quarter 2020 Conference Call. [Operator Instructions].
I would now like to hand the conference over to your speaker today, Ed O'Hare, Senior Vice President, Investor Relations. Thank you. Please go ahead, sir.
Ed O'Hare -- Senior Vice President, Investor Relations
Good morning, and welcome to EVO Payments Third 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. In an effort to provide additional information to investors, today's discussion also includes certain non-GAAP financial measures.
An explanation and reconciliation of these non-GAAP financial measures to their nearest GAAP financial measures for the third quarter can be found in our earnings release available on our Investor Relations website. We have also posted slides on our website detailing recent volume trends for the company to further assist with today's discussion. Today, we'll discuss our third quarter performance and provide an update on the impact COVID-19 is having on our business. Joining me on the call today 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.
Jim Kelly -- Chief Executive Officer
Thank you, Ed, and good morning, everyone. In the third quarter, we delivered strong financial performance as we continue to actively manage our business through this challenging environment. Compared to last year, constant currency revenue declined 4% due to a shift in customer mix toward larger merchants, coupled with significant declines in cross border activity. As a result of our continued expense management and after normalizing for certain COVID-related charges during the quarter, constant currency adjusted EBITDA increased 5% from the prior year and margin expanded 300 basis points to 37%. Compared to the second quarter, constant currency revenue increased 24%, and adjusted EBITDA increased 34%, which reflects the strong rebound in volume and our ability to successfully manage our business through this crisis. With respect to our volume trends, total volumes increased 25% sequentially and were flat compared to the prior year. We demonstrated sequential improvement across both Europe and the Americas despite COVID-related restrictions, particularly related to cross border activity, impacting certain of our industry verticals.
Volumes steadily improved in July but began plateauing in August as economic activity was constrained by lingering government restrictions and lower consumer demand. As you are aware, many of our markets have experienced recent spikes in COVID infection rates. We are closely monitoring the increases in infections and the associated government restrictions in our markets. For October, volumes were down slightly from the prior year. And it is likely that our volumes could continue to exhibit volatility as the effects of the pandemic extend into next year. Despite the ongoing uncertainty regarding this pandemic, we remain confident in our ability to manage our business through this crisis and position the company to capitalize on the accelerated adoption of digital payments. Turning to our expense management. I continue to be pleased with the decisive actions we have taken since the onset of the pandemic to reduce our costs. These actions have allowed us to realign our expenses while also continuing to invest in our business and support our customers. Given our financial positioning, we have elected to reinstate salaries for those affected employees beginning in December. I would like to especially thank them for their sacrifices which aided the company during this unprecedented period. Tom will discuss our cost structure and margin improvement in more detail later on the call. Even though this year has been extremely challenging, I believe we are well positioned for growth, both organically and through an M&A as economies recover from the crisis.
I will now turn the call over to Darren to discuss our European business. Darren?
Darren Wilson -- President-International
Thanks, Jim. For the quarter, European segment revenue declined 2% year-over-year on a currency-neutral basis, which reflects the impact of the COVID-related restrictions, including sharp decreases in cross border activity. As you can see from the volume slides, our European payment volumes demonstrated a significant rebound in improvement beginning in June as restrictions were relaxed across our markets. During the third quarter, volumes were approximately 5% higher compared to 2019. And if we exclude Spain, which continues to be the hardest hit by the travel restrictions, volumes grew 17%. As broadly reported in the media in the latter portion of September, infection levels across Europe began increasing. Governments responded by reimposing restrictions on movement and commerce, which has caused volumes to begin to decline, although not to the same degree as the declines in the second quarter. For October, volumes were 2% below 2019. Despite the ongoing challenges from the pandemic, we continue to see positive business trends across our markets. We remain focused on leveraging our bank referral relationships to sign new merchants and securing tech-enabled partners to meet the evolving consumer demands. For example, in Poland, we've been able to capitalize on recent market trends that include accelerated cash-to-card tailwinds, increased adoption of tech-enabled solutions and higher utilization of e-commerce.
We recently extended our relationship with a national grocery store chain to include processing for additional locations and signed a new relationship with a national tax administration to enable tax collections via card payments. Our local sales teams were also able to develop and execute on tech-enabled opportunities, such as enabling M-commerce solutions for a range of merchants and extending our relationship with my pinpad to enhance security measures for SoftBox offerings, which are downloadable point-of-sale solutions for mobile phones and tablets. Lastly, we launched an e-commerce campaign with Mastercard to enable SMEs to establish online shops and accept card payments via Snap. This promotion leverages our new exclusive referral relationships with several end market online platforms and will drive new e-commerce merchants to our proprietary gateway. In Germany, we also broadened our tech-enabled capabilities by enabling our new Snap solution, EVO Connect for in market insurance businesses. EVO Connect is an integrated payment solution that recently launched in our Irish market and provides merchants with request-to-pay capabilities via text and email to simplify the collection of funds and improve cash flow. Turning to Ireland. By working with our bank referral partner, we integrated to direct route and National Toll Road operator and launched card payment acceptance, including contactless at two of the 10 toll plazas in the country, which were previously cash only.
We also integrated Snap to a market-leading mobile contactless ordering app for bars and pubs to enable e-wallet acceptance and launched a partnership with Savi, a leading gift card program provider based in Dublin to expand our loyalty acceptance solutions for merchants in Ireland and the U.K. Tech-enabled adoption trends also significantly accelerated in our U.K. business, which contributed to the approximate 30% volume growth for the business this quarter. For example, we signed two of the largest pharmacy ISVs in the market, expanded Snap gateway capabilities to sign a new and attended ISV partner and increased our e-commerce business through our proprietary solutions and new referral relationships. Finally, in Spain, we continue to see positive business trends despite the impact of the pandemic on this market. In our bank referral channel, our relationship with Liberbank has generated over 2,500 new merchant adds this year. Additionally, in our tech-enabled division, ClearONE continues to demonstrate success in both gateway and acquiring sales. In the third quarter, we signed additional partners in the market and outside of Spain, leveraging our ClearONE capabilities, including a large restaurant chain in Portugal and new ISVs in the U.K. Across all of our markets, we've been able to respond to the increased demand for tech-enabled solutions. Our ability to quickly enhance our existing tech-enabled sales strategies will not only continue to enable us to withstand the current environment but will bolster our ability to capture additional growth opportunities once economic activity returns to normal.
I will now turn the call over to Brendan, who will provide updates on our Americas segment. Brendan?
Brendan Tansill -- President, the Americas
Thanks, Darren. For the quarter, the Americas segment revenue declined 5% on a currency-neutral basis, which reflects the steady improvement in our Mexico business, coupled with the flattening of payment volumes in our U.S. business. Our U.S. revenue continued to be strengthened by the performance of our tech-enabled divisions. Turning to our volume slides for the Americas. In the U.S., volumes for the quarter improved to within approximately 6% of last year and remained at that level through October. We continue to see positive new business trends within both our direct and tech-enabled divisions by signing additional referral partners, including e-commerce gateway and ISV partners, to capture the accelerated shift toward tech-enabled solutions. For example, in August, we announced a relationship with on-track innovations to process payments for unattended retail merchants as the need for card acceptance in this underpenetrated vertical continues to increase. In our B2B business, gateway sales increased as more businesses continue to embrace accounts receivable automation tools in this remote work environment. We signed new customers for gateway and acquiring solutions, looking to quickly adopt and onboard to our Microsoft integration by way of our Payfabric B2B gateway, as these mid-market merchants have demonstrated agility to enable card acceptance within relatively short sales cycles.
Further, we continue to see strong sales for our SAP integration, again, leveraging our Payfabric gateway and have been successful in cross-selling acquiring services for these customers. Additionally, in the quarter, we launched Express deposit, a new solution that enables real-time payouts for merchants through the integration of Visa Direct. Our timely launch of Express deposit will provide our merchants with increased flexibility to help them withstand the impact of COVID on their cash flows. We believe the availability of this fast and secure solution will generate increased merchant satisfaction, and we are excited to expand this product throughout the U.S. and internationally. Turning to Mexico. We have continued to see steady improvement in our payment volumes since June, when volumes were down 19% year-over-year. For the month of October, volumes were up 2% from last year, which demonstrates the resiliency of our merchant portfolio in this market. Our performance in Mexico was also helped by our tech-enabled division, which demonstrated revenue growth of 13% in the quarter. Further, we signed a new ISV partner, continue to grow our e-commerce business and signed new bank referral customers, such as work play whose remote work business platform has grown as a result of the pandemic.
Lastly, I would like to provide an update on Chile. As we approach regulatory approval, both shareholders have now funded the JV with the requisite amount of regulatory capital, and the JV has identified certain members of senior management. EVO's processing systems in Mexico have now been enabled for operations in Chile, and we recently took the significant step of boarding our first live test merchant. We expect to finalize our connectivity to Visa and Mastercard within the next week, at which point, we will have also submitted all required materials to the local regulator in order to be approved for operations. Based on this progress, we anticipate receiving approval before year-end.
With that, I will turn the call over to Tom, who will cover the financials in more detail. Tom?
Thomas E. Panther -- Chief Financial Officer and Executive Vice President
Thanks, Brandon, and good morning, everyone. For the quarter, EVO's constant currency revenue declined 4% compared to the prior year. FX negatively impacted revenue by 80 basis points as the U.S. dollar strengthened against the peso, but weakened against the euro and polish zloty compared to the prior year. On a currency-neutral basis, adjusted EBITDA declined 2%, while margins expanded 40 basis points to 34.5%. However, during the quarter, we recognized certain COVID-related losses, including fully reserving for a potential charge back related to a large merchant in Europe. Normalizing for these charges, adjusted EBITDA increased 5% and margin expanded to approximately 37%. The expansion in margin reflects the impact of our active expense management. Since the beginning of the pandemic, we have realigned our cost base to drive greater efficiency without jeopardizing customer support or future growth opportunities. Based on these actions, we estimate that we have reduced our cost structure on a go-forward basis by approximately 10% of our core SG&A expenses, which translates into approximately a 300 basis point improvement and our annual EBITDA margin, assuming stable volumes. These cost management actions improved our margin, providing us the confidence to return those affected salaries to pre-COVID levels. In addition, the rebound in volumes in the quarter, coupled with our cost realignment, gave us the financial capacity to record a compensation reserve that approximates the effect of returning to our historical compensation structure.
With respect to our segment performance. In Europe, constant currency revenue declined to 2% and adjusted segment profit declined 3%. Our European segment was impacted by the ongoing effect of the COVID-related restrictions, including a sharp decline in cross border activity and the previously mentioned chargeback reserve. Excluding these COVID-related headwinds, European adjusted segment profit increased 25% compared to last year. The tech-enabled strategy, Darren described earlier, along with the untapped capacity of certain of our industry verticals, namely travel and hospitality, provides strong organic growth opportunity, as economic activity gradually improves. In the Americas, constant currency revenue declined 5%, consistent with the decline in volume. Adjusted segment profit increased 14% as we were able to maintain most of the cost reductions that we implemented at the beginning of the pandemic. Across both of our segments, our performance reflects the active management of our business and the accelerated adoption of digital payments. We are optimistic that this cash-to-card tailwind will provide further long-term organic growth. However, as previously mentioned, beginning in August, our volumes began to plateauing, and more recently, many European governments have reimplemented restrictions that are likely to dampen the seasonal growth we have historically experienced in the fourth quarter.
We are well positioned to weather this near-term disruption to the economic recovery that was under way and we'll continue to manage the company to deliver sustainable long-term growth. Adjusted corporate expenses for the quarter were $5 million, which declined approximately $1 million from the prior year, excluding the previously mentioned compensation reserves recognized during the quarter. Adjusted net income of $18 million increased 9% compared to last year. Adjusted net income per share was $0.19, which declined from $0.20 compared to last year due to the preferred share issuance in April. At the end of the quarter, diluted shares totaled 93 million, an increase of 10 million weighted average shares compared to the prior year. During the quarter, we actively managed our cash flows by limiting our capex spend to $4 million, a decrease of 64% versus the prior year. More than 2/3 of our capex spend related to point-of-sale terminals in our international markets to meet the strong merchant demand, which persisted in the third quarter. We also generated approximately $30 million in free cash flow this quarter, including a $4 million decline in interest expense. Further, our free cash flow conversion rate was 74%, an improvement of 25% from the prior year. During the quarter, we paid down our senior credit facility by $50 million while continuing to maintain over $150 million in operating cash. The combination of these actions resulted in a leverage ratio ending the quarter at 2.9 times.
Our strong liquidity and low leverage, coupled with $200 million of available cash on our revolver provide us the financial resources to capitalize on M&A opportunities. Another notable transaction during the quarter related to actions to convert a portion of its Series C preferred shares into Series A preferred shares. As you may recall, in 2016, Visa Inc. bought Visa Europe, and EVO received Series C preferred shares as a member of Visa Europe. In the third quarter, in conjunction with Visa's partial conversion of these shares, we recognized a $16 million gain. Given the ongoing global economic uncertainty, we will not be providing guidance for the fourth quarter. However, we have provided recent volume and expense management information to help you model our financial performance. We anticipate resuming our financial guidance once the uncertainty surrounding the economic impact of the pandemic has abated.
With that, I'll turn the call back over to Jim.
Jim Kelly -- Chief Executive Officer
Thank you, Tom. I'm pleased with the progress the company has made during these extremely difficult times. We were able to continue to sign new merchants and roll out new products despite the overhang of the current environment. We remain focused on growing our bank relationships and our tech-enabled channel by leveraging our suite of products and solutions and our network of referral partners. We look forward to launching our business in Chile with BCI and are excited about our growth potential in the market. We will continue to generate opportunities to expand our distribution through our existing relationships and through M&A.
I will now turn the call over to the operator to begin the question-and-answer session. Operator?
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Tien-Tsin Huang from JPMorgan. Your line is open.
Tien-Tsin Huang -- JPMorgan -- Analyst
Good morning. Good to connect with everybody.
Darren Wilson -- President-International
Good morning.
Tien-Tsin Huang -- JPMorgan -- Analyst
So the results were -- obviously, you're tracking well, better, if not a little bit better than -- similar if not a little better than some of your peers on the revenue side. I'm just curious, is there a way to frame some of the impact of the cross-border piece to revenue? I think you mentioned large merchant shifts and everything else. I'm just curious if there's a way to sort of frame some of the impacts there are normalized for cross border, for example?
Jim Kelly -- Chief Executive Officer
I don't know if Tom wants to give more of a specific number or range of numbers. But I would say, clearly, the strength of the quarter was the rebound in volumes, volumes in some of our bigger markets with bigger merchants consistent with what we've seen in other places for the -- during this pandemic. Cross-border is expensive to us, not having it DCC in particular. We did get some DCC. An example, German is crossing the border to Poland and buying gas. I think we have four of the top five guests providers in Poland. So there was some, but it was nowhere close. I think what hurt us the most in the quarter and still down would be Spain, the travel that would have otherwise been expected over the summer months. It didn't occur for obvious reasons. And so that market is still down. It was down kind of at the low, low in April, May of 80%. It's down half of that. So it's down high-30s to 40%. And and I think that's going to continue to be a drag. As Tom said in his comments, if you ex out Spain, the business in Europe was doing quite well. Our ISV business in U.K., very strong. Ireland, extremely strong.
Poland, in particular, we're in the mid- to high teens, and that's without the benefit of what I just described. That's really the movement to card as opposed to cash. Germany, as well, which is predominantly e-commerce for us, did exceptionally well. And then unfortunately, decisions were made in the countries. Fortunately, I guess, for other reasons. But from a business standpoint, unfortunately, decisions were made to pull back. And so we're in that mode. I think if there's a positive there, I think the pullback is not going to be what we saw in the April, May time period. We are seeing a pullback where Poland was in, say, as an example, in the mid-teens, and now they're in the single digits, but we don't see it going. It was at one point down, 35%, 40% itself back in the beginning of the April, May time period.
Tien-Tsin Huang -- JPMorgan -- Analyst
Yes. So from a benchmarking -- that's all really useful. So I think in benchmarking, should we change your thinking at all, given what you've observed, looking at, it looks like you're tracking pretty close to Visa credit statistics in the Americas. Do you expect any...
Jim Kelly -- Chief Executive Officer
I think we are -- yes. The hard part, and it's the reason why we didn't provide any type of guidance for the fourth quarter. It's hard for me to guess how long. I think Ireland is supposed to be locked down for six weeks or do they open back up earlier? Or do they continue to extend. So that's entirely out of our control. I think what we've done very well is maintain control over expenses to kind of manage our way through it. The revenue is not going to return. We don't believe to where it had in the first wave. But right now, I think it's more of a continuation of what you're seeing in the volume trends. That's our expectation for the fourth quarter. We'll probably give up something on margin because fourth quarter would have probably seen some benefits of spend because of the holiday, etc, that it may not reappear.
And then again, cross-border for Europe in particular. I think a positive, you can't see it specifically in the numbers because we don't break it out by country, but Mexico, which was the last to experience the impact of the pandemic back in April following the U.S., they were down the second quarter, say, 13%, and they're now in the black -- barely in the black, but they're in the black, so -- and that seems to be holding. So where we are losing it in Europe in terms of the second wave, it seems that Mexico is showing up pretty strong. Again, same composition, bigger retailers, etc, but still doing well.
Tien-Tsin Huang -- JPMorgan -- Analyst
If you don't mind if I hate to ask one more, but just on a quick question, just tech-enabled mix now, what does it roughly look like? And how do you see that changing here in the short term?
Jim Kelly -- Chief Executive Officer
I would say in the -- in all the markets, I've been incredibly impressed by how strong that business has maintained, for example, in the U.K., which is probably 60%, 70% of our new business is tech-enabled. And again, that's a small market, but it never went into the red. It grew in the teams through that -- through the entire time period, April on, and has continued to perform very well. Spain as well, even with the Santander headwinds in that market, the ISV business has done very well. U.S. business. U.S., we're a little bit more exposed on the ISV side because we're hospitality-oriented primarily. So that has seen more of a retrenchment, but our B2B business has done has done very well. So continues to be -- I think, in Brendan's comments, it continues to be a bigger part of our U.S. business, all our businesses. It's a keen focus for us to partner with leading ISVs in each of our markets.
Thomas E. Panther -- Chief Financial Officer and Executive Vice President
Yes, Tsin, it's Tom. I mean, we've seen a solid 300 points improvement kind of year-over-year on tech-enabled. And as Jim said, it's broad-based in terms of where we're seeing that rotation into more tech-enabled utilization.
Tien-Tsin Huang -- JPMorgan -- Analyst
Your line is open.
Thomas E. Panther -- Chief Financial Officer and Executive Vice President
Your line is open.
Operator
Our next question comes from the line of George Mihalos from Cowen & Company. Your line is open.
George Mihalos -- Cowen & Company -- Analyst
Hey, good morning, guys. And thanks for taking my question. Wanted to start off, just given some of the more, I guess, recent trends that you're in October, maybe this applies a little bit more to Europe than the Americas, should we be thinking that, again, the spread sort of between volume and yield sort of revenue will continue to -- or should expand a little bit more now going forward as I would think maybe there's a bit more spend going to the nondiscretionary-type merchants?
Darren Wilson -- President-International
Thanks, George, Darren here. Yes, I think that's a good observation. I think the strength of Europe has been the diversified portfolio as merchants. And while Jim's already called out, Spain in our other markets, we've not only seen a pivot to digital, but a strong pivot to contactless as well. So the cash-to-card kind of swing has been pretty dramatic, especially in markets that have been more highly cash-oriented. So throughout all of our European markets into kind of the core verticals that have survived well through COVID lockdowns, etc, not only average transaction values increasing, but also volumes ticking up significantly. So I think that's a good observation. I think on spread, I'll hand over to Tom to cover the question specifically. Tom?
Thomas E. Panther -- Chief Financial Officer and Executive Vice President
Yes, sure. Thanks, Darren. I think, George, from a spread perspective, what we saw was a little bit of compression in the third quarter. I think we would expect that to kind of hold in the fourth quarter. You mentioned one of the reasons, but I think as we see a larger percentage of the volume coming from those large merchants where spreads are a little bit thinner, volumes are higher, I think that's likely where -- when government -- when economies are in a bit of a restricted lockdown mode, you see a greater percentage of consumer spend going there. The SMEs kind of hunker down and you don't have as much of your volume coming from those higher margins SMES. And as we mentioned, cross-border, even though it's the holiday season, both in the U.S. and then globally in December, I think the expectation is that you're going to see less cross-border, where DCC and other things generally yield a little bit higher return. So I would be cautious on spreads increasing from here until we see some increased normalization in the economic activity and, frankly, consumer behavior.
George Mihalos -- Cowen & Company -- Analyst
Okay. That's very helpful. Appreciate it. And just, Jim, one quick one. You mentioned M&A. I think you called out digital within that commentary, at least in the release, just curious, how does the pipeline look? Any sort of color you could provide around that? And is it going to be more sort of European oriented or Americas focused?
Jim Kelly -- Chief Executive Officer
Thanks, George. It's really not a focus one area or the other. It's really Darren and Brendan both have that part of their responsibility to find opportunities. I think Darren's in Europe, in particular, you've got more opportunities for bank relationships because that is really not our focus in the United States. But having said that, and as Brendan mentioned, in his comments, Bci finally is about to go live. Obviously, COVID so that way down for us. So tech-enable in all our markets continues to be a focus and bank distribution in markets really outside the U.S. stays the same. I think on the tech side, much easier to get an acquisition done because you don't have all the other attributes of a 10-year joint venture or 10-year alliance where you're talking about building a business together and trying to do that over Webex is really impossible.
I wouldn't be comfortable spending significant investments in a new market without having opportunity to travel and meet and get to know the potential partner, and I think, likewise, from a seller standpoint. So I think while banks will likely be an opportunity for us in the coming years, I think it's going to be somewhat impacted because we can't travel. I think on the tech side, we have a better opportunity. It's -- these are easier acquisitions to get done. And ours tend to be much smaller as you've seen in the past. So those, I would expect us to continue to talk about those successfully getting done in the coming quarters.
George Mihalos -- Cowen & Company -- Analyst
Makes sense. Thank you.
Brendan Tansill -- President, the Americas
Makes sense. Thank you.
Operator
Our next question comes from the line of Robert Napoli from William Blair. Your line is open.
Robert Napoli -- William Blair -- Analyst
Thank you. Good morning.
Darren Wilson -- President-International
Good morning.
Robert Napoli -- William Blair -- Analyst
EVO team, nice job.
Darren Wilson -- President-International
Thank you.
Robert Napoli -- William Blair -- Analyst
In tough environment.
Darren Wilson -- President-International
Yeah. Thanks.
Robert Napoli -- William Blair -- Analyst
I guess, with the cost cuts that you've made, let's dream that the world is back to normal a year from today, which I think is reasonable. Where do you think the EBITDA margins under their current business mix? What are the right margins for this business? Now do you think those made, I guess, a leap forward in margin expansion from the traditional trend, assuming you're back to your normal growth -- organic growth type of an environment?
Jim Kelly -- Chief Executive Officer
So that's -- I think that's a difficult one to know today because I don't -- we don't know that it will be better in the year, but using that thesis, the model -- our industry leverage is very well. So the bigger we become, the more profitable, generally, a sizable piece of that drops to the bottom line. So what we've said, if you remember, it was 50 to 75 basis points as we -- Tom and I both called out on the call. We're seeing roughly a 300 basis points, so really multiple year growth as a result of the cost realignment we did this year. I think 50 to 75 basis points is still a good proxy going forward. I mean there is a point of diminishing returns at some point. I don't know that, that -- we're that close to it yet. But I wouldn't expect it to be another $300 million or anything close to that in the future?
Robert Napoli -- William Blair -- Analyst
Okay. So if we took kind of pre-pandemic margins added 300 basis points and then put you on your normal trend, that's a reasonable way to think about it, I guess?
Jim Kelly -- Chief Executive Officer
Yes. I think for now, now that steps up with an acquisition of size. You've seen some of our competitors in the past be in the 40s and so, but they also had a different mix of business. They were in a debit processing business. And we're not in processing business stand-alone, so we don't have a situation where we have 90% margins or 95% incremental margins on a business we signed merchants for our own account or account with banks. And so along with signing merchants, you have sales expenses, implementation expenses, etc. So I don't know what the top looks like, but I don't -- I'm not suggesting we're at the top at 37%. I think there'll be a step-up as the volume came back quickly over the last three months from April, May, June into July and then started to level off. We saw pretty impressive growth in margins. So as volumes get back to where they should be in all our markets, I think there's a good opportunity for it to step up again. But at some point, it's going to normalize, and it should normalize around what we described at the IPO.
Robert Napoli -- William Blair -- Analyst
Great. And then just quickly, Chile, what can -- that turns on by year-end. Is that does that get up to run rate quickly once it's approved? What is
Jim Kelly -- Chief Executive Officer
I mean in terms of revenue, I don't think we're there. I don't know that we're providing specific guidance on where we expect the numbers to come out. But I think as we look toward the balance of the year, we're sort of in the very, very late innings of regulatory approval. We've submitted all of our materials. Our processing systems are now enabled. We've identified, as I said, certain members of senior management that are pretty crucial to growing the business. We've built a pretty interesting sales pipeline of large merchants. The bank that we've partnered with their Bci is extraordinarily engaged. And they've been very active in, including us in the dialogue with their most critical customers. So I think whenever we get off the ground, we're going to see some chunky wins early. Our expectation is to hire sales force right away.
The nice thing for us is we can run that business out of our Mexico operation that can sort of serve as the hub to our South American and Central American presence, the same way that we leverage Warsaw throughout Europe. So on the cost side, there really would be no real reason why we would incur material investment or significant operating losses. Think of this as a relatively modest office presence and then a bunch of sales guys running around the market, trying to sign up tech partners and merchants directly. So I do think end of year a reasonable time frame. It will be around a 10. The COVID thing is making it somewhat unpredictable. And then the second issue we're facing is holiday schedules in South America. You get to December, January time frame, and it's a bit like August in Spain. But we're going to give it our best shot, and I'm still optimistic that we're going to hit all the time lines that we've communicated to you.
Robert Napoli -- William Blair -- Analyst
Thank you. Appreciate it.
Operator
Your question comes from the line of Ramsey El-Assai from Barclays. Your line is open.
Ben Budish -- Barclays -- Analyst
Hey, guys. This is Ben Budish on for Ramsey. I wanted to follow-up on Bob's question on Chile, and I guess maybe asking in a slightly different way. You've talked about in the past how Chile is kind of a raw start-up kind of like Ireland was. And so I guess, if you sort of like in the aspirations in Chile what you achieved in the island. So I guess the question is, if you were able to have that kind of success where you're able to take within a couple of years, a material amount of market share in Chile, what would that kind of look like in the P&L?
Jim Kelly -- Chief Executive Officer
Well, look, I guess we launched Ireland in 2015?
Ed O'Hare -- Senior Vice President, Investor Relations
Earlier.
Jim Kelly -- Chief Executive Officer
2014?
Ed O'Hare -- Senior Vice President, Investor Relations
Yes.
Thomas E. Panther -- Chief Financial Officer and Executive Vice President
2014. And I think today, we're around 25% market share, and it's probably high single-digits million contribution margin-ish. So I -- can we get to that level? The spreads in the market are very, very difficult to forecast. I mean, I think right now, there's one incumbent player and Visa Mastercard haven't even enforced the public interchange tables as of yet. So you see Transbank today controlling the entire market. The market is embracing Visa Mastercard as the international brands. Visa and Mastercard have kind of socialized what those interchange tables are going to look like. But the brands haven't imposed the typical switching fees and brand fees that you would incur in every other market around the world.
So this is all happening real time. And for us to have a great sense for where Transbank is going to take pricing for their business, and where we, in turn, are going to be able to price the business and still attract merchants, there's no question it's going to be profitable. It's a question of how profitable. So I -- the market is immature from a cards perspective. So from that perspective, Ireland is actually probably not a great analog, it looks a lot more like Mexico or Poland or the Czech Republic. And so I do expect that there'll be a larger cash to plastic tailwind in Chile than what we would have experienced in Ireland. And so I would expect to experience greater revenue growth. But in terms of the specifics of the dollars at play or what this could ultimately be, it really is early to be surmising.
Jim Kelly -- Chief Executive Officer
The point though about how immature the market is, I think, is something to stay focused on. All these -- other markets that we look at in South America or Brazil aside, have similar characteristics, at least the ones that we're focused on. So I would see this is a very fast-growing additive to our top line and bottom line growth rate. And being able to leverage Mexico as we did in Europe and Poland is the hub for all our satellite countries from a processing standpoint. And the incremental margin that we get under that model is quite significant. So we're replicating that now in Latin America. So I think it'll -- I think it should surprise us on the positive, both on the top and bottom line. And I don't want to under -- and I think I said this on the last call, I wouldn't underestimate also the enthusiasm from Bci. Bci, I've never seen a bank as engaged in something that they've never even been involved in before because they didn't have an acquiring business previously to get this launched and to build a very impressive pipeline of these large accounts, as Brendan said. So we're excited that this is a great start going into the 21 year.
Ben Budish -- Barclays -- Analyst
Okay. Great. That's really helpful. If I could ask one more. I know you're not providing guidance for the fourth quarter, but it looks like in the second quarter, absent a few kind of onetime items, the margins will improve pretty nicely. Is it reasonable to assume, I guess, based on how October went, that sort of margin expansion is likely again. It looks like the Street is sort of a flattish to down on the margin percent year-over-year. And it feels like based on your commentary that's pretty below where you might be expected to come in, but I just wanted to kind of check on that.
Thomas E. Panther -- Chief Financial Officer and Executive Vice President
Yes, Ben, it's Tom. I mean, obviously, the volumes are a bit of a wildcard. But as we mentioned in our prepared remarks, we saw that on a normalized basis, 300 basis point improvement in margin. All things being equal, we would expect that to hold into the fourth quarter. Again, as I mentioned, volumes are going to be the thing that's going to be the bigger variable. We've got our hands on the pulse with respect to expenses and continue to be very mindful there despite some of the actions we've taken to restore salaries and things like that, given the confidence that we have and the actions that we've taken. But I don't think you're going to see an increase from a normalized level. I think what you'll see is barring some of those onetime items not repeating a margin level that's consistent with in and around that 37% that we referenced.
Ben Budish -- Barclays -- Analyst
Very helpful. Thanks so much.
Operator
Your next question comes from the line of Bryan Keane from Deutsche Bank. Your line is open.
Bryan Keane -- Deutsche Bank -- Analyst
Hi, guys. Good morning. I wanted to talk about the volumes and obviously see a little bit of a drop-off in October. Is that all from restrictions being put up by governments and some of the borders closing. I'm just thinking about other factors that are in play here and be interested on your -- in your thoughts on stimulus plans? Has there been less stimulus potentially in October? And then a little bit on the new business sales versus retention as well. Is that having any factors?
Jim Kelly -- Chief Executive Officer
Thanks. I'll have Darren take the first part as it relates to European volumes.
Darren Wilson -- President-International
Thanks, Jim. Brian, yes. I think the volumes have been directly linked to government activity in terms of close down, lockdown, restricted activity in all of our markets. As you saw, as Jim commented, volumes bounced back pretty quickly as the kind of market restrictions opened up. And yes, there's been a tightening through October in most markets now in Europe. It's nowhere near as severe as the kind of March, April time line we saw. Because I think businesses, small businesses, large businesses have got used to click and collect, the takeaway solutions, etc, and work around to what has been a restricted environment. Equally, the lockdowns have not been as severe and as tight public movement for exercise or otherwise has been -- or is permitted. So we're hopeful that are these -- and the lockdown finally a shorter term. So we're hopeful as the ease up for the holiday season that we'll see the volumes recovering.
Thomas E. Panther -- Chief Financial Officer and Executive Vice President
And then on the new side or the net new business, the sales results across the board rather have been fantastic. I mean, the net new sales activity is very, very strong. As Jim referenced in his comments and Darren, I think in his as well, Ireland, England, Poland, the sales across the board over there are great. And then here in the U.S., the tech-enabled division. E-commerce has performed incredibly well for a variety of reasons. But the ISV business, we continue to have a very robust partnership with EPOs now, which is performing incredibly strongly. The B2B business has proven to be as or more resilient than we potentially expected. So the net new business in that channel has been very strong. And then in Mexico as well, the monthly sales numbers and the referrals coming out of the bank continue to be strong. I would said -- I would caveat the comments of strength, though, with the note that it's still relatively down year-over-year. We just did a U.S. business review here on Tuesday. And the numbers are down 30% net new merchants across most of our business lines. That said, attrition is also down. Merchants aren't moving around from provider to provider because they're focused on other things. So we're holding on to the merchants that we had in ways that potentially exceeded past norm. But we're overall very pleased with the sales activity.
Jim Kelly -- Chief Executive Officer
And then, Bryan, in Europe, merchants are actually up year-over-year, high single digits. So we've actually seen growth in the merchant portfolio despite some of the -- obviously, pandemic-induced challenges.
Bryan Keane -- Deutsche Bank -- Analyst
That's great. And then when you guys talk about the cross-border, just remind me, is that all basically for you guys going to be in that travel and hospitality? Or is there -- or does it cross over into some of the other segments as well? I'm just trying to get a sense of percentage of revenues for you guys on cross border?
Thomas E. Panther -- Chief Financial Officer and Executive Vice President
Sure. It's not exclusively travel hospitality, as Jim outlined, Germany residents crossing the border to get to the gas in Poland, etc, so -- and there has been continued tourism travel that we've seen in the Czech Republic, in Poland, for example. So as Jim also outlined in Spain is heavily travel and hospitality related because a lot of the economy is centered around kind of those verticals. But otherwise, there's ongoing business activity. And then social activity that's not exclusively vacation driven, where we're seeing some cross-border revenues continue. But inevitably, yes, the headwinds have been predominantly kind of vacation-driven on that cross border.
Jim Kelly -- Chief Executive Officer
And just to add to that, we actually have some cross-border in the room. We have in New Yorker who flew down here to Atlanta for the conference call. So because the governor apparently cut back the quarantine from whatever days to three days. So even the U.S. is seeing some cross-border.
Bryan Keane -- Deutsche Bank -- Analyst
All right. Good to hear. Thanks so much.
Operator
Our next question comes from the line of Kartik Mehta from Northcoast Research. Your line is open.
Kartik Mehta -- Northcoast Research -- Analyst
All right. Good to hear. Thanks so much. Jim, we've heard a lot about what the industry might look like after COVID-19. Obviously, there's greater card usage. But I'm just wondering, from an industry perspective, from a selling perspective, use perspective, do you think there's going to be much of a change once we get through the pandemic?
Jim Kelly -- Chief Executive Officer
Well, I think the biggest change is what you mentioned, which -- and we don't have a great empirical data to prove it. But just looking at the results, second quarter and into the third quarter, card usage versus cash, we don't see cash usage, but we can see the growth in the business, and that's without all our merchants, open, for example, in some of our markets were very strong. But as Brendan mentioned, our business review for the U.S. business was on Tuesday here in Atlanta. And there was a slide that was put up on e-commerce, and it showed how strong e-commerce was during kind of the height of the pandemic, but we've also seen it come back. So merchants that we're doing take out, drive-up, you would pay online, you pick up your order and you leave, you can now dine-in. And so what was somewhat a blip -- now we're still getting the business, but it's shifting from e-commerce back to what is traditional face-to-face type of business. So I think some of the trends may stay in place from a consumer standpoint. I think others will likely change. I think the ISV business -- I think this is only helping the ISV business. I think we'll continue to see more, if not accelerated growth. We're seeing it in Europe and here in the United States. So I think that will be more permanent, and we're well positioned now in all our markets to be able to take advantage of that trend.
Kartik Mehta -- Northcoast Research -- Analyst
And then just last question. Is this -- because of what we went through, does this change at all your opinion on the type of leverage you'd want to put on the company or the type of acquisitions you want to make?
Jim Kelly -- Chief Executive Officer
I think on the leverage standpoint, if you go back, if you remember from the IPO, we took all the proceeds to pay down from six to five and then worked at kind of organically, while we were still buying companies down to four but clearly, four was a relative outlier to some of our much bigger competitors. And again, that's why we took the actions that we did in March. So I think from my standpoint, staying in the two to three range feels a lot better than being in the four to five range. So I don't see us going necessarily back that direction. From an M&A standpoint, we remain very active. But as I said, for the bigger transactions that we would like to do, I think COVID is going to need to get a little bit better or a lot bit better before we can see those type of transactions take place. Because, again, it's a 10-year relationship with a bank, it's sharing the same customer base that the bank has, so you just can't you just can't date online. You got to meet in person and make sure that there's a good fit.
Kartik Mehta -- Northcoast Research -- Analyst
Thank you. I appreciate it.
Jim Kelly -- Chief Executive Officer
Thanks.
Operator
[Operator Instructions] Your next question comes from the line of Mike Del Grosso from Compass Point. Your line is open.
Mike Del Grosso -- Compass Point -- Analyst
Good morning. Actually, my question is a follow-up from that one, and it's kind of related to the preferred raise earlier this year. And I understand and appreciate it was a proactive measure. I know in March, we were all concerned about what the environment would look like six months on. But here we are, it looks like things have somewhat normalized or perhaps stabilizing the better descriptor of that. Any commentary about that your current capital composition and how you view that instrument specifically would be appreciated? Should we kind of continue to see that as a buffer for the downside? Or do you envision potentially taking a more aggressive stance on that going forward?
Jim Kelly -- Chief Executive Officer
So I think it's a good question. And I'll start with where you -- what you've commented on, if you go back to when Tom and I were sitting here in March, looking at Ireland down 90% on St. Patrick's Day and staying down 80% to 90% and even pulling down in the 40% range. I mean, it was definitely concerning times. And that's why we took such aggressive actions on our cost structure, and we took aggressive actions with employees. As you heard, we just -- as of December, are going to return roughly 550 salaries back. While we've been taking accruals along the way, we feel comfortable. As you also said, I don't think it's normalized yet, but I think we are somewhat stabilized, albeit we've got these challenges currently being faced in Europe. But the money that we raised we were also somewhat of the poster child of being high on a leverage standpoint relative to our peers. I remember the article, I would call out who wrote it, but it was out in the public purview about ours being at four times and the potential of that raising because of the trends in the business. So the actions we took were at least initially absolutely defensive to make sure that we were able to weather a storm that none of us had seen previously, not just tier divo, but anywhere in the world to make sure that the company was secure through we didn't how long the pandemic would last. But looking at the numbers that we have in the charts, it obviously came back much faster to, say, '19 levels or close to '19 levels.
And we also commented at the time that provided this all kind of normalizes, we're going to use this for offensive measures, i.e., buying businesses to continue to expands into existing market opportunities, but also new market opportunities. The challenge on the M&A side is those markets haven't opened up. And I can't get on a plane and go to Europe. I can't get on the plane, go to South America. I get on and plan go to L.A. and then quarantine or New York and quarantine, but that's about all I can do. So M&A, we're going to have to wait a little bit. And so while we have more cash sitting on the balance sheet than we historically have. That's not there. That's there for acquisition opportunities now. And so as those acquisition opportunities become real, you'll see us announcing investments in tech-enabled capabilities or new bank relationships. And as I said on the last call, my anticipation is that as the dust settles, in particular with financial institutions, even if being well capitalized, there may be some banks that will be looking to raise capital. And there are going to continue to be banks that are looking for greater capabilities and the type of capabilities that we have are not ones that they can easily replicate and therefore, they'll be looking to partner. I think the partnership model type model, whether it's a JV or an alliance has proven itself over the last 30 years as it works. It's a good business structure for both companies like us and the financial institutions.
Now having said that, we also did pay down $50 million of debt this quarter. I think it was this quarter, it was recently, this quarter. But that wasn't any indication of anything more than just we had excess cash. We still have $200 million on our line of credit and $150 million of cash on our balance sheet. So we are well positioned to be able to take advantage of opportunities as they appear without having to come back to the market.
Operator
There are no further questions at this time. I'll turn the call back to management for closing remarks.
Jim Kelly -- Chief Executive Officer
Thank you, operator, and thank you all for joining our call this morning and your continued interest in EVO.
Operator
[Operator Closing Remarks]
Duration: 59 minutes
Call participants:
Ed O'Hare -- Senior Vice President, Investor Relations
Jim Kelly -- Chief Executive Officer
Darren Wilson -- President-International
Brendan Tansill -- President, the Americas
Thomas E. Panther -- Chief Financial Officer and Executive Vice President
Tien-Tsin Huang -- JPMorgan -- Analyst
George Mihalos -- Cowen & Company -- Analyst
Robert Napoli -- William Blair -- Analyst
Ben Budish -- Barclays -- Analyst
Bryan Keane -- Deutsche Bank -- Analyst
Kartik Mehta -- Northcoast Research -- Analyst
Mike Del Grosso -- Compass Point -- Analyst
