Atento S.A.
Q3 2018 Earnings Call Transcript

Published:

  • Operator:
    Greetings, and welcome to Atento S.A. Third Quarter 2018 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Shay Chor, Corporate Treasurer and Investor Relations Director. Please go ahead.
  • Shay Chor:
    Thank you, Hector. Welcome, everyone to our fiscal 2018 third quarter earnings conference call. Here with us today are Alejandro Reynal, our Chief Executive Officer, and Mauricio Montilha, our Chief Financial Officer. Alejandro will discuss the quarterly performance and conduct a strategic review followed by Mauricio, who will provide details about our quality results and review fiscal 2018 guidance. During the question-and-answer session, we'll answer any questions you may have and then Alejandro will have a few closing remarks. Before proceeding, please know that certain comments made on this call we will contain financial information that has been prepared under International Financial Reporting Standards. This financial information is unaudited. In addition, this call may contain information that constitutes forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties. Certain results may differ materially from those in the forward-looking statements as a result of various factors. We encourage you to review our publicly available disclosure documents filed with the relevant security regulators, and we invite you to read the complete disclosure included here on the second slide of our earnings call presentation. Our public filings and earnings presentations can be found at investors.atento.com. Please note that unless noted otherwise, all growth rates are on a year-over-year basis and constant-currency basis. I will now turn the call to Alejandro. Please, Alejandro.
  • Alejandro Reynal:
    Thank you, Shay, and good morning, everyone. Thank you for joining us today. Please turn to Page 4 of the presentation. We're very pleased to say that we delivered a margin turnaround in Brazil during the third quarter of the year, those advancing our profitable growth agenda for 2019. Another highlights for the period is our robust margin improvement in EMEA. On a consolidated basis, revenues increased 0.9% in the quarter and 4.2% year-to-date, very much in line with the expectations and our guidance. Topline growth was accompanied by bottom line improvement as well, with EBITDA growing 2.4% and EBITDA margin flat at 10.9%. Also, recurring EPS expanded by 17.3% to $0.25. Let me emphasize that our results were achieved within the context of the top macroeconomic environment in some of our geographies such as Brazil, Argentina or Mexico. From a regional perspective, the quarter was aligned very much with our business seasonality and expectations. In Brazil, revenues grew 2.8% year-on-year, and we saw strong margin expansion quarter-on-quarter with adjusted EBITDA margin up 3.3 percentage points to 11.9%. The turnaround in Brazil margins reflects the impact of our first half operational improvement plan. In the American region, revenues declined 1.2%, nine-month revenues increased 6.5%. The region's adjusted EBITDA margins declined 0.6 percentage points to 11.3%. Potential for continued outsourcing remains high with third quarter performance impacted by macro related pressures in Argentina and Mexico. In EMEA, we delivered strong profitability expansion and topline growth. Revenues were up 2.1% with Multisector up 6.8%, and there was a strong margin expansion with adjusted EBITDA margins up 3.9 percentage point's year-on-year to 10.3% This was the second consecutive quarter of revenue and margin increases in EMEA, signaling the transformation of our business to win in a mature and increasingly digitalized market. From the client and commercial perspective, our quarterly performance continues to benefit from the sustained performance of our Multisector business and the rollout of our expanded and enhanced value offering. As such, Multisector clients remain Atento's growth engine with revenue expanding 1.2% in the quarter and 6.1% year-to-date. Our sustained Multisector growth drives revenue diversification, pushing non-Telefónica revenues to over 61% of total revenues. We continue to be Telefónica's reference partners for CRM/BPO services and to increase our share of their spend. Telefónica revenues expanded 0.5% in the quarter and 1.4% year-to-date. In addition, we have funded our BPO and digital solutions revenue mix in the third quarter as we keep deploying Atento's expanded value offering across our geographic footprint. Revenues from higher value added solutions represented 27.1% of total revenues in the third quarter, up 0.7 percentage points compared to second quarter. Importantly, an encouraging demand for our value added solutions include digital solutions, represents around a third of our qualified pipeline as mentioned in our previous earnings calls. This reflects the ongoing transformation of our business to become the leading provider of a higher value added customer experience and BPO solutions in the digital age. Finally, our strong balance sheet and solid cash flow generation enabled us to capitalize on accretive growth opportunities. Please turn to Slide 5 of the presentation. Following a challenging start to the year, Atento delivered a solid margin turnaround in our flagship Brazilian operations as a result of the operational improvements we made during the first half. Brazil's operations remain at the forefront of our growth strategy, with a focus on evolving the value offering. Atento Brazil's solutions factory is helping accelerate the Group's move into digital services and leading the standardization and roll out of digital solutions, which includes Data Driven Digital Sales, Data Driven Customer Care, Digital Back Office, and Digital Collections, and also include Analytics and Business Process Outsourcing offerings. Our Brazil business is leading the way in terms of Atento's revenue diversification with the Multisector mix up 4.9% year-to-date to 70.3% in the third quarter for also continued being Telefónica's reference partner for CRM/BPO services and solutions. Telefónica revenues increased 1.5% in the third quarter and 2.8% year-to-date with Atento delivering the first digital solutions for Vivo within the Telefónica group. I would also like to highlight two key achievements during the third quarter. First, the Unimed carve out, which accelerates Atento's penetration of Brazil's healthcare segment, one of the largest and fastest growing verticals for CRM services in the country. And second, strategic partnership with T-Systems or management of data centers in Brazil, which accelerates Atento's transformation into digital BPO solutions provider enabling us to have faster and easier roll-outs of new services and solutions for clients. Before I turn the call over to Mauricio, let me emphasis that these margin turnaround makes us optimistic about our Brazilian business prospects for the next quarters. It is important to note that given the challenging macro environment in 2018, and uncertainties related to the geopolitical administration in the short-term, future expectations will be made with caution. Mauricio over to you.
  • Mauricio Montilha:
    Thank you, Alejandro, and good morning to everyone on today's earnings call. Like Alejandro, I'll be referring to growth rates on a constant currency and the year-over-year basis unless noted or otherwise. Please turn to Slide 7. As Alejandro noted, we continue to diversify our revenues which grew by nearly 1% in the quarter and 4.2% in the year-to-date. Multisector revenues increased 1.2% in the quarter and 6.1% year-to-date. Our operation in Brazil and EMEA drove Multisector revenue, which represented a nearly 62% of consolidated quarterly revenues, and about the same on a nine-month basis. One challenging aspect of the business has been the volume on price pressures in our more massive CRM programs across all regions. Our commercial teams have been working hard to convert an encouraging pipeline, and the growing number of Multisector clients are forming the base for future revenue growth. Telefonica revenue rose likely in the both - in the quarter being nine months accounted for 38% of the group revenue, while value-added solutions reached just over 27% of revenues. Brazil, 3.3 point of percentage sequential adjusted margin increased, as Alejandro highlighted, in addition to EMEA's year-over-year margin expansion, explaining group level of profitability that we reported in the quarter. We delivered a strong 17.3% growth in Recurring EPS to $0.25. But it is important to highlight that we had a pre-tax gain of $7.6 million that resulted from mark-to-market of Real to U.S. dollar hedge related to the interest on Atento's 2022 senior secured notes. Please turn to Slide 8, where we will being reviewing our performance by region. In nearly 3.5% growth in Multisector revenues that's drove our top line in Brazil, once fuel by financial service line. Year-to-date Multisector revenues increased nearly 5% in the country. As a percent of total revenue in Brazil, they rose 0.4 percentage points to just over 70% of the end of the quarter. Telefonica revenues in Brazil increased 1.5% and 2.8% on a quarterly and nine-month basis respectively. Regarding the market recovery at R Brasil operation, it was the result of the operation improvement that we made during the first half of the year. As Alejandro pointed out at the beginning of this remarks and discussed in our previous earnings calls. Please turn to Slide 9. In the Americas region, total revenues were down in the quarter along Multisector revenues and a result of lower requirement in the more massive CRM problems, especially in telco space. In the financial service base, we saw mix of results with important clients mainly in Chile offset by price pressures in Mexico. On a year-to-date basis, revenue was up 6.5% fueled by nearly 8 percentage expansion in Multisector revenues. As a percent of regional revenues, both revenues decreased slightly just over 58% where up just over 1% in nearly 60% of original sales. Telefonica revenues were flat in the quarter, but up nearly 3% on an nine-month basis. Adjusted EBITDA in our Americas operations declined 0.6 of percentage, and we believe the 11.3% margin is the expected normalized level. On top of the already mentioned lower volume in the more massive CRM progress, we also faced tougher business environment in Argentina due to the client economic activity. Operation in Argentina contributed 14% of division adjusted EBITDA versus nearly 22% in the third quarter of 2017. At the group level, it represented 6.0% versus 8.4% last year. For our EMEA results please turn to Slide 10. In EMEA, we delivered revenue growth of just over 2% during the quarter. Multisector revenue grew nearly 7% supported by non-Telefonica clients. On the nine-month basis, they grew nearly 9%. As a percent of regional revenue Multisector revenues increased 1.8 point of percentage in the quarter to 40.5%. Reflecting lower volumes that Telefonica revenues decreased in nearly 4% during the quarter and 4% year-to-date. As we pointed out, the EMEA region contributed to grew profitability with its margin explaining 3.9 point of percentage, 10.3% and up 2.4 point of percentage year-to-date 9.2%. We believe the year-to-date 9% margin in the more normalized level than the 10% delivered in the quarter. Now for a review of Atento's financial restraint, please turn to Slide 11. During the quarter, we generated $18.3 million in free cash flow. Before interest and acquisitions, we generated twice as much cash flow $36.7 million. Also year-to-date, we improved our adjusted EBITDA to cash flow conversion by 5.3 percentage points to 29.9%. At the end of the quarter, we had a cash and cash equivalent of $96.5 million. With a total of $100 million in the undrawn credit facilities after nearly $200 million, implying total liquidity. Our nine-month CapEx decreased to 2.7% of revenues from 3.5% in last year's period due to optimization of our utilization rates and lower volumes. Atento's net debt decreased 3.0% sequentially to $306.2 million, while our debt decreased 4.4% to $458 million, due to the debt amortization and lower use of credit revolvers. Also, our net debt was down and we generated positive cash flow, net debt to EBITDA increased to 1.8x versus 1.7x in the previous quarter, reflected impact of foreign exchange translation on EBITDA. Before starting our Q&A session, we'd like to give you a brief update on 2018 performance. Although it has been a challenging year, we are confident we will deliver most of our 2018 guidance, especially for revenue growth, interest expenses and cash conversion. As for profitability, we expect EBITDA margin to be slightly below the 11% to 12% range we provided as the result of the pressure we faced in the first half of the year, mainly in Brazil. Factors like weaker than anticipate macro environment, uncertainly surrounding the elections, and the country's truck driver strike had an impact on overall business environment in Brazil we represents around 60% of group margins. On the other hand, on the back of the optimization of our utilization rates and lower volumes, zero rates of cash CapEx as a percentage of revenue is below the guidance range of 3.5% to 4%. Operator, we are now ready to start questions and answers part of our call. Please open the call for questions.
  • Operator:
    Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Vitor Tomita with Itau BBA. Please proceed with your question.
  • Vitor Tomita:
    Hi, good morning, Alejandro. Good morning, Mauricio. Good morning, Shay. So two quick questions on my side. First, if you please elaborate a bit more on the operational improvements in the first half of the year in Brazil, would you say that there is a few rooms for more improvements there for improvements in American margins for similar measures? And second question for me, how have the employee turnover rates and client retention rates been evolved in the last few quarters?
  • Alejandro Reynal:
    Thank you, for your question, Victor, and let me address that. In terms of the operational improvements in Brazil the outcome of the third quarter. And as I mentioned on the first part of the call, we still do see further improvements due to the operational plans in the fourth quarter of this year in Brazil. What we did in Brazil was basically two main actions. First, we had some excess capacity that we were not able to cover during the first and second quarter, and this was a small disappointed due to the softer macros in Brazil. So we have adjusted the extra cost that we have because of excess capacity that was undergoing in the first and the second quarter. And the second item, we executed was at - we had a specific program that we're performing below expectations. So we took the corrective measures in terms of operational KPIs. In some case, negotiation with clients and all of those programs have been corrected. So as of now, we have a very healthy operation in Brazil. I would say that still in the third quarter, we had impacts because of the actions that we took. In spite of that, we have a 3.3% improvement versus the second quarter. And as I said, we have - view that going into the fourth quarter, the performance in Brazil is going to be solid in terms of margins. For the Americas with you ask. I think Americas is performing fine. One of the things that our business is clearly impacted by is the evolution of the macros, and some of the countries have performed below our expectations and below the expectations when we guided. Specifically, as you know, Argentina really change from a macro point of view as of August this year with the high inflation, high environment and the currency fluctuations amongst other things. So clearly, that is a country that's changed for the worse. And to a scenario, it was very hard to predict. Also in our case, Mexico, although, it's performing okay, the macro source somewhat unstable due to the presidential elections and some of the uncertainties in the market. So they are going to - we mentioned this on the call, we feel good about Americas, there's some strong commercial pipeline, we are getting new business. But there's some macro uncertainties related to certain markets in the region. But we do see as, it was mentioned by Mauricio that the margin should behave on a stable basis as the ones that you've seen on the third quarter. In terms of your second question around turnover, that is stable. We have, of course, year-over-year decreased the attrition numbers in our operations due to a series of operational measures that we've taken. You might recall that three years ago, our turnover per month was approximately 8% now is below 6%. So we continue to decrease that number and continue to implement measures to further reductions, but it's very stable right now. And I think that's one positive in terms of the performance regarded to the people management that overall turnover is stable. As you know, we do make sure our employee satisfaction and things are going well. We increase our employee satisfaction numbers versus last year. So I'd say that our human capital base, which is over 150,000 employees, is fairly satisfied and engaged with Atento. Therefore, turnover numbers are stable and coming down. Thank you.
  • Vitor Tomita:
    Thank you. Very clear.
  • Operator:
    Our next question comes from the line of Vincent Colicchio with Barrington Research. Please proceed with your question.
  • Vincent Colicchio:
    Yes. Hi Alejandro. The communications business as a percentage of the mix came down. I'm wondering if you could give some understanding of what portion of that is from products simplification versus automation or maybe just general economic factors.
  • Alejandro Reynal:
    Hi, Vince. Thanks for the call. The truth is, it is a mix of both, the macros impact the volume of coal generated by our clients, and specifically this is fairly sensitive in the telco space. One of the things that we've seen, for example, in Argentina is the fact that the contraction in demand due to the contraction of the GDP has caused a reduction in the number of calls, basically demand that went down. So this is a very clear effect of macro impacts. So that's one aspect that we do see on volumes. The other element, which Mauricio touch up on his commentary is that for some of the most basis type of calls. There is some degree of automation/digitalization. The good thing is that we're playing an active role on that. We're working with our telco clients in terms of implementing solutions to automate and digitalize some of the most simple calls. So summarize to your question the impact is both. Some of that is related to macro and with volumes because of less demand, and the second piece is automation of the simpler call volumes.
  • Vincent Colicchio:
    And then Alejandro, are there any - I know it's early, but with the new presidential administration in Brazil, are there any potential policy changes that you would highlight for us that we may want to be on top of for the industry?
  • Alejandro Reynal:
    Sure. We don't foresee any - at least as of now, there hasn't been any specific legislation in our sector, so we don't foresee any changes in the short-term. It is fair to say the last few years have been positive for the sector in Brazil in general because of the legislation that was passed, and then the view of the current government is pro-business. So I would imagine that if anything those measures will continue and/or new measures being put in place. But in terms of specific that we have with that we know if there's nothing at this stage.
  • Vincent Colicchio:
    And then Mauricio one for you, to what extent are you able to pass through the inflation levels in Argentina? And what should we expect going forward?
  • Mauricio Montilha:
    In Argentina, we keep typically 95% of inflation, that's actually one of the reasons why Argentina is making a lot of difficult for us to as an economy because it's fully indexed. It's very difficult to leave the model. So you reflect that inflation prices. So it's hard to break it in. But typically, we passed 95%. What we are seeing Argentina, of course, it seems the interest rates went up and the interest rate has been - it's colliding. That's been a significant drop in demand particular for markets across sale and credit card sales. All those I'll say implications for the middle class, they're spending less money, less penetration and less appetite dropping new bank accounts or credit cards, really it's what is pushing bonds down in Argentina. So everybody is beckoning the belt. So this means less consumption and important reduction of the CRM. Inflation continue the impact in the same range as we saw, but the volumes and the covers are [indiscernible] of course is impacting our business.
  • Vincent Colicchio:
    Okay. And then maybe one more for you, what's the acquisition, for Alejandro, what's your acquisition focus at this point in time?
  • Alejandro Reynal:
    Yes, Vincent. Twofold I would say first, it's on building capabilities around some of the solutions business in particular digital. We're looking into a series of assets that would be additive to the current value offer. There's company that we are exploring our current geographies that may expand our capabilities in the digital space. So that's one area of M&A focus. The other one continues to be around carve outs. As we mentioned on the call, we did materialize a carve out with Unimed within the healthcare sector in Brazil and something that we see has a lot of room and potentially going forward, and we will continue to have an active pipeline of carve outs in Brazil and the other geographies. Very much focused on specific industries that have not outsourced much in the past. So in summary those started to focus. The capabilities around digital and carve outs.
  • Vincent Colicchio:
    Okay, thanks for answering my questions.
  • Alejandro Reynal:
    Thanks, Vince.
  • Operator:
    Our next question comes from the line of Dave Koning with Robert W. Baird & Company. Please proceed with your question.
  • David Koning:
    Yes. Hey, guys, thank you. And I guess my first question, just on Americas, you've talked about, some of the weakness across different geos in Americas. But did it start to get a little worse like - I just remember some of the currency started to really paid in kind of August and through September. So I'm just wondering, do expect Q4 and maybe early next year to be declines little worse than the 1% in Q3? And then by the back half start growing again? Is that kind of what we should think about?
  • Alejandro Reynal:
    Hi, David. This is Alejandro. Yes, I mean, I think there's two things on Americas. I think first, which we didn't specifically highlight, and you may have pointed this in the last earnings call results. On a comparable basis, we have a tough comp in terms of growth, third quarter last year, so it's specifically in the Americas. Because last year of third quarter 2017 there was an acquisition with consolidated in the Argentina business and therefore from a comparison basis quarter-on-quarter, makes a growth numbers tougher. So I think that's one issue to point out, which is very relevant in terms of how you analyze the Americas numbers. Having said that the truth is that the macros are tougher and as I said and he also pointed out, they change in specific countries. And I would say primarily Argentina and to an extent Mexico, and so the summer, basically July, August. So from that perspective we are seeing some lower volume because of demand. And the expectation is for that to continue into the fourth quarter and potentially again, as you said for the first half of next year while the economies recover.
  • David Koning:
    Gotcha. Okay and that's helpful. In the Brazil margin improvement, that was very encouraging. I know for about five years in a row you were doing kind of 13% to 15% EBITDA margin. And you kind of on the pathway back. Is that we think you can lend again? And maybe it takes a couple of years or something to get back. But I mean as that's 13%, 14%, 15% where you think can get to?
  • Alejandro Reynal:
    On a seasonal basis, yes. What I will say though is that when the case of Brazil tends to be softer specifically the Brazilian market in the first half of the year and we will see that happen in again next year for the first half of 2018 because of all the issues are on pricing inflation into pricing and there is typically a lag. One of the things though that we are seeing with the operation improvement plans is that the second half is stronger, and we posted almost 12% EBITDA margin in Brazil in the third quarter and we see fourth quarter doing better than that, and therefore fourth quarter will be on the range that you quoted. So therefore second half performance is going to be in line with where you guided, but for the year, you have to take into account the softer first half of the year.
  • David Koning:
    Yes. Gotcha. Okay. And then last one quickly for Mauricio. The hedge gain you got in Q3 in the interest expense line, is that something that we'll see hit other quarters in the future? Should we just assume all the quarters in the future go back to that $12 million, $13 million of expense?
  • Mauricio Montilha:
    Hi David. I think the Atento run rate it will be $12 million to $13 million. But we hedge it to Brazil reals all the interest on the bond. I don't know if you recollect, but in Q1, we had a market-to-market negative of about $3 million, now it's $7 million positive. I'd say that with the currencies [indiscernible], but when you think about return, the $12 million to $13 million is probably the best reflection where we're going to land on a consolidated basis.
  • David Koning:
    Okay. That's great. Thanks guys.
  • Alejandro Reynal:
    Thanks Dave.
  • Operator:
    [Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Alejandro Reynal for closing remarks.
  • Alejandro Reynal:
    Thank you. Atento's evolution from a client and commercial perspective reflects the transformation of our business. We are becoming a well-diversified company with an attractive value offering to succeeding and expanding digital world. We keep consolidating our position as a strategic partner that delivers higher value added customer experience solutions that generate competitive advantages for our clients in an increasingly digital marketplace. The recently announced research by Frost & Sullivan in which we strengthen our leadership position in Latin America, corroborates we are in the right direction. Although, we are cautious about the market challenges seen in markets like Brazil, Argentina, or Mexico, we are optimistic about the future prospects and expect our business to progress consistently. Our robust balance sheet and strong cash flow generation enable us to capitalize on accretive growth opportunities. We are encouraged by the commercial pipeline and the demand we see for our evolved value offering and are confident that the new client wins will form the base for future profitable growth. Thank you again and we look forward to our next call with you. All the best.
  • Operator:
    This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.