Atento S.A.
Q2 2016 Earnings Call Transcript

Published: 7 Aug 2016

[Operator:]

Welcome to the Atento Second Quarter 2016 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host Lynn Tyson, Vice President of Investor Relations. Thank you. You may now begin.

[Lynn Tyson:]

Thank you. Welcome to our fiscal 2016 second quarter earnings call. Before proceeding, let me mention that certain comments made on this call will contain financial information that has been prepared under International Financial Reporting Standards. The financial information is unaudited. In addition, this call may contain announcements that constitute 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 securities regulators and we invite you to read the complete disclosure included in the second page of our earnings presentation. Our public filings and earnings presentation can be found at investors.atento.com. Please note that, unless noted otherwise, all growth rates are on a year-over-year and constant currency basis. Our presenters today are Alejandro Reynal, Atento's Chief Executive Officer and Mauricio Montilha, Atento's Chief Financial Officer. Alejandro will begin with a brief review of our strategy and highlights from the quarter, after which Mauricio will review our results in more detail. Afterwards, we'll open the call for questions. Following the Q&A, Alejandro will have a few closing remarks. I'll now turn the call over to Alejandro.

[Alejandro Reynal:]

Thank you very much, Lynn and welcome, everybody, to our call. Please turn to the page 4 in the presentation. Let me first start by saying that we're very pleased with the performance in the second quarter. In the face of a challenging macro environment, we successfully delivered the optimal balance of growth, profitability and liquidity. Starting with growth, consolidated revenue declined 40 basis points as a 10% macro-driven decline Brazil was almost completely offset by 13% growth in the Americas. Although we continue to lead the Brazilian market with a higher share of the CRM BPO spend and outstanding relationships with our key clients, the prolonged negative macroeconomic environment has had a direct impact on overall volumes. We have been able to offset this impact with a focused growth strategy which has resulted in a positive and continued revenue diversification from a geographic, client and higher value-add solutions perspective. More specifically, we achieved record levels in the quarter of revenue mix from the Americas at 41.8% and revenue mix from non-Telefonica clients at 57%. In addition, each of the regions, we increased our mix of revenue from higher value-add solutions. Growth in the Americas has been particularly strong with non-Telefonica clients which grew at a rate of 17.8%, supported by [indiscernible] gains and new client activity in financial services and telco verticals. This strong growth resulted in a 340 basis points increase in the mix of revenues from the Americas. Additionally, revenue from non-Telefonica clients in EMEA was up 1.7%, the first growth in five quarters, demonstrating a clear improvement in the trajectory and the stabilization of our Spanish business. All three geographies posted increasing revenue mix from higher value-added solutions, showing solid progress in one of our key strategic aspirations. Brazil continues to lead the Group in percentage of revenue coming from higher value-add solutions, now at 39%, supported by an increase in volumes from back-office-related solutions in financial services clients. The strength of our commercial pipeline reflected in the amount of business won remains very solid. In the quarter, we won approximately 3,150 workstations, 300 more than the same period last year, with roughly 80% coming from non-Telefonica clients. More than 50% of the new workstations came from non-Telefonica vehicles led by financial services, where we had gains in each region. Relative to profitability, in the face of macro pressures, our proactive focus on cost and efficiency initiatives, wage inflation pass-through, especially in Brazil, as well as the successful execution of our strategy to increase our mix of higher value-add solutions allowed us to deliver a stable EBITDA margin of 12%. This performance not only demonstrates the resilience of our operating model, it also demonstrates the opportunity we have to expand margins as growth improves over time. Protecting our margins is a priority for us. And we succeeded in achieving this, this quarter. Turning to liquidity, our strict working capital management and rigorous focus on disciplined capital allocation yielded free cash flow before interest of $39.4 million in the quarter, a $56.7 million improvement year on year. And we ended the quarter with an ample liquidity of $250 million and an adjusted net debt-EBITDA of two times. Cash flow generation is another important priority for us. And through disciplined management, we have also achieved it this quarter. Our performance gives us the confidence to reaffirm our full-year targets for this year for revenue growth in the range of 1% to 5% and for adjusted EBITDA margin between 11% and 12%. Both of these targets are on a constant currency basis. Please now turn to page 5. During our earning call, I typically touch on the three pillars of our long term growth and shareholder value creation strategy which includes above-market growth, best-in-class operations and people. We unveiled this framework along with the supporting strategic priorities during our IPO in 2014. Recent market trends, including the pullback in Brazil which is the largest CRM BPO market in Latin America and the accelerated adoption of open channel and digital capabilities prompted us to examine the priorities that support our long term strategy. The ultimate goal of this exercise or strategy refresh was to ensure that we had the right focus and capabilities to capitalize on industry trends and leverage our scale and financial strength to selectively broader and diversify in key verticals, countries and solutions. Today, I want to share with you how this refresh impacts our focus areas relative to growth and the enablers we will use to achieve this. We've defined three priorities where we can capture profitable growth and drive higher returns. The first focus area is consolidating our leadership in core voice services which is the traditional CRM BPO market. Despite our number one market position with about a 20% market share, we have identified large white spaces with existing and new clients across our geographic footprint, specifically in telcos and financial services. Telcos and financial services are the key verticals since they make up roughly three-fourths of the CRM BPO market in Latin America. Through a very focused commercial effort, we will address over the next years all the top target opportunities identified which are a combination of organic and [indiscernible] business opportunities. Latin America continues to be one of the most attractive CRM BPO markets globally. And as the industry leader and one of the few scale operators in the region, we're uniquely positioned to capture future growth. The second focus area is expanding into higher value-add solutions for financial services. This opportunity would enable us to expand our addressable market by more than 25% beyond the traditional $10.4 billion Latin America CRM BPO market. Specifically, credit origination and late-state collections hold great growth potential for us. With credit origination, we have already developed solutions for several key clients. Our opportunity here is to scale these capabilities across our existing blue chip client base. Our goal is to be the Latin American leader in managing outsourced credit origination processes. Our opportunity with late-stage collection is slightly different. In this case, we already have strong relationships with institutions that drive this $2.2 billion market. However, we have gaps in our capabilities. This market is ready for consolidation by Atento. It is highly fragmented, as no one service provider has the scale advantage or superior end-to-end capabilities. Our opportunity here is to augment our capabilities and leverage our scale to become the partner of choice for our clients in late-stage collections. The third area of focus is on accelerating profitable growth with a mainstream digital offer. While digital is just 10% of the market, penetration in Latin America is accelerating and growing faster than voice, with the consolidation of new digital technologies into omnichannel platforms. These omnichannel platforms drive the need for more analytics and services. We have put together a very strong digital team, whose mandate is to augment our capabilities and consolidate our offerings into a true global omnichannel platform. By focusing on these three profitable higher-return opportunities, over time, we will achieve sustained growth and rebalance our revenue mix towards digital and higher value-add solutions, while voice will continue to be a significant portion of our revenue base. We have also set four strategic enablers to achieve this. First is leveraging our scale in the design and delivery of solution offerings. Second is driving improvements in operational efficiency and service delivery. As we have done in recent years, we will continue to innovate in the way we deliver our services in order to guarantee best-in-class in terms of quality and efficiency. Third is optimized cash conversion and our capital structure to ensure we have the financial flexibility to invest in higher-return opportunities and the fourth is leveraging shared services and the unique talent and culture. Please now turn to page 6. Before I turn the call over to Mauricio, let me close with what I say each quarter. First, we once again successfully executed against our focus set of priorities highlighted by an optimal balance of growth, profitability and liquidity. Our focus on cost and efficiencies, our resilient business model, strong balance sheet and improving cash flow provides us with the flexibility to deploy capital where its value is the highest in support of our long term targets for growth, profitability and cash returns. We're confident that, this year, we can once again outperform the market and increase our leadership position in Latin America and continue to be the reference partner for the CRM BPO needs of our clients. Thank you. And let me now turn over the call to Mauricio.

[Mauricio Montilha:]

Thank you, Alejandro. Please turn to slide 8. As a reminder, I will be referring to growth rates on a constant currency basis which we believe is a better representation of our underlying performance, given our exposure to several currencies and geographies. Growth rates are year over year, unless noted otherwise. In this particularly tough environment, especially in Brazil, we have successfully delivered balanced financial performance, while maintaining a comfortable level of liquidity. These results were achieved by our relentless focus on three things, selective growth, especially in Brazil, where stronger macroeconomic headwinds persist; margin protection driven by proactive and persistent cost and efficiency initiatives; and finally, strict working capital management and a rigorous focus on discipline and capital allocation. On a consolidated basis, revenue declined 40 basis points. This decline was driven by foreign exchange impact in the mix of countries and a 10.1% and 1.3% revenue decline in Brazil and EMEA, respectively. These declines were almost completely offset by 13% growth in the Americas. In the quarter, adjusted EBITDA increased 20 basis points and margin was flat at 12%. Year to date, adjusted EBITDA was up 2.8% and margin was up 10 basis points. We had tough comparisons in the first half of this year from a profitability perspective. And we expect this to continue through the year, driven by the shift in country mix, ability to offset double-digit inflation in Brazil and our ability to adjust our operations to lower volume levels. Against this backdrop, we were able to protect profitability through our proactive approach to cost and efficiency, our best-in-class operations and the restructuring actions continued to yield expected benefits. It's important to note that profitability in the quarter also benefited from an improved mix of higher added service. During the quarter, we invested $8 million in restructuring, most of which was related to the proactive alignment of our cost structure with the market conditions, particularly in EMEA and Brazil. Year to date, we have invested $19.6 million which is likely ahead of our guidance of $15 million for fiscal 2016. Our priority is to maintain a lean, nimble and competitive cost structure. And we will continue to be opportunistic to better align our cost with prevailing market conditions. Turning to the EPS, adjusted EPS declined $0.13, driven by FX, increases in net interest expense and depreciation and a higher share count. Please turn to slide 9. Now, we'll talk to our segments, starting with Brazil. In the quarter, revenue declined 10.1%, driven by a decline of 21.4% in Telefonica and a decline of 2.8% from other clients. Similar to our first quarter, roughly half of the client with Telefonica was driven by their decision to eliminate a specific commercial channel in response to the macro environment. Despite this change, we continued to maintain our share of wallet with Telefonica. Volume pressures have been [indiscernible] some programs with our non-Telefonica clients, especially related to sales campaigns, credit cards, vehicle financing and mortgage markets. We have made progress with revenue diversification in the quarter as our mix of revenue from non-Telefonica clients was up a full 5 percentage points to 65.5%. In addition, we won roughly 500 workstations with new and existing clients, with 60% coming from financial service. Importantly, our mix of higher value-added solutions increased 330 basis points to 39%. Adjusted EBITDA declined 11.7%, while margin declined by just 10 basis points. In the face of a significant top-line pressure, this result underscored the effectiveness of our focus on inflation pass-through, our cost and efficiency initiatives, as well as the impact of an improved mix of higher value-added solutions. Please turn to page 10, where we're going to focus in the Americas. In the Americas, we delivered another strong quarter with revenue up 13%, supported by 2,500 new workstations, with new and existing clients and a 40 basis point increase in the mix of higher value-added solutions to 12.1%. Revenue from non-Telefonica clients was up 17.8%, driven by new clients wins and share of wallet gains, especially in Mexico, Colombia and our U.S. near-shore business. In particular, revenue from financial service was up 12.1%. Revenue from Telefonica grew 7.9%, supported by growth in Peru, Chile and Mexico. Adjusted EBITDA was flat with 140 basis point decline in margin. It's important to note that profitability was impacted by investment in growth with new clients and expected 13% increase in wages in Peru as well as an increasing mix of revenue from telco clients. We do expect profitability to strengthen in the second half of fiscal year. Please turn to slide 11. In EMEA, our focus on profitable growth drove improvements in the trajectory of both revenue and profitability. While revenue declined 1.3%, this was an improvement on both a sequential and a year-over-year basis. Revenue from non-Telefonica clients increased 1.7%. As we experienced in previous quarters, strong growth from new clients, especially in financial service and utilities more than offset the expected decline in the public sector as we chose to exit less profitable contracts. Revenue from Telefonica declined 3.1% as we approach a more stabilized revenue level in Spain. In the quarter, we made progress with revenue diversification as our mix of non-Telefonica revenue reached 39% of the mix, up 110 basis points. In addition, revenue from higher value-added solutions grew 27.3% and now represents 9.8% of our revenue mix in the region. Adjusted EBITDA increased 44%, while adjusted EBITDA margin increased 170 basis points. This solid and sustainable improvement in profitability reflects our disciplined approach to profitable growth opportunities as well as the benefits of our proactive and persistent actions to control cost and enhance efficiencies. Now, on the slide 12, as cash flow is a critical lever in the value creation as it gives us the flexibility to invest in higher-return opportunities and strengthen our competitive position. We have focused on improved cash generation through strict working capital management as well as striving for more balanced growth, protecting profitability and keeping healthy liquidity, all of which we achieved this quarter. In the quarter, we generated $39.4 million in free cash flow before net interest. This is an increase of $57.6 million year over year and reflects our commitment to an improvement in cash conversion, supported by stricter working capital management. Our actions span from a heightened focus on invoicing and collections to how we negotiate and structure contracts. In addition, this improvement reflects our rigorous focus on capital allocation. Year to date, free cash flow was $13.1 million, an improvement of $60 million year to date. From seasonality perspective, our business is typically stronger in the second half of the year which drives stronger cash flow. We do expect same seasonality this year. However, the year-over-year improvement in cash flow will narrow as we overlap the significant improvement in working capital achieved in the second half of the last year. In the quarter, we had the liquidity of $215 million which includes cash and cash equivalents and undrawn revolving credit facilities and low leverage of two times net debt to adjusted EBITDA. Total net debt with third parties totaled $459.1 million. Please turn to page 13. Before we open up for Q&A, let me review our guidance for fiscal 2016. We continue to target revenue growth in the 1% to 5% range. While our guidance range incorporated our pragmatic view on the macro environment in Brazil, protracted pressure from inflation and contraction in GDP are proving to have long-lasting effects on volume that make top-line growth for this year very challenging. Turning to profitability, we're targeting adjusted EBITDA margin to in the 11% to 12%. This range incorporates several factors, including country mix, as Brazil which is a higher-margin region, becomes a smaller percent of our total revenue and inflationary effects. Relative to liquidity, we expect to continue to improve our management of working capital which will drive an improvement in free cash flow for the year. We will continually reevaluate our cost structure and take actions when appropriate to ensure a competitive cost structure. Nonrecurring items which are add-backs to adjusted EBITDA, were $19.6 million year to date versus the $15 million we originally disclosed in our guidance, as we took further measures to adjust cost structure, mainly in Brazil. Our initial guidance for net interest expenses was the range of $60 million to $65 million which reflects the impact of $27 million debt payments this year. This forecast was based in our plan for FX rates at the beginning of this year. Since then, several currencies, including the Brazil real, have appreciated which drove a higher net interest expense number for us when translated into U.S. dollars. Assuming the second quarter FX rate holds through the rest of the year, our net interest expense will be in the range of $70 million to $75 million. As you consider the GAAP net financing line in our P&L which a combination of net interest and FX, it's important for you to remember that our adjusted net income and adjusted EPS exclude the noncash effects of net foreign exchange gains on financial instruments, intercompany balance and net foreign exchange impacts in cash position held in U.S. dollars by local operations. We exclude this from our adjusted numbers to more clearly show the underlying health and trajectory of our business. We're targeting a cash CapEx of approximately 5% of revenue, driven by investment in both growth and maintenance and effective tax rate of approximately 32% and finally, a fully diluted share count of approximately 73.8 million shares. As a reminder, our guidance assumes no acquisitions or change in the current operating environment, capital structure or exchange rate movements on the translation of our financial statement in the U.S. dollars. I would like now to turn the call over to operator and take questions from our audience.

[Operator:]

[Operator Instructions]. Our first question is coming from the line of Leonardo Olmos with Santander. Please proceed with your question.

[Leonardo Olmos:]

The first one is regarding margins. When you reaffirmed the guidance for 2016, it seems a little conservative, as you have presented 12% margins on the top range on this quarter. So, the question is, what to expect the second half of the year if you follow the guidance would be very negative? And the second question is regarding working capital. It was a very good saving you had on the quarter. And the question is, could you detail it a bit more and what to expect going ahead? Is there anything additional for us to see?

[Alejandro Reynal:]

Let me start myself. And then Mauricio will also complement my answers. In terms of the guidance, we've taken since the beginning of this year a prudent view on this year because, as we see it, it's a very untypical year, particularly influenced by the macro situation in Brazil. Typically, what you see and we have seen for years in our business is that there's seasonality and seasonality typically happens in the second part of the year. The truth is that, when you look at what's happening in Brazil and the softness in volumes, we don't see those changing for the second half. Therefore, that means that the typical seasonal effect that you see in the second part probably may not happen. So, therefore, from our perspective, margins would stay relatively stable and don't benefit from the seasonal effect. So, I think that's why we have taken the step of reaffirming the guidance at this point in time because of what we see happening in the market and particularly in the case of Brazil. This, as you know, is, of course, reflected on the fact that we're meeting the growth guidance, but we're right now at the lower end of the range. So, in short, I think it's maintaining the prudent approach around the second part of the year, again mainly because isn't a typical year and where growth in Brazil is softer because of the situation with the volumes and the macro environment. In terms of working capital, I'm sure Mauricio will comment in more detail. I just want to say from the management perspective that we've taken a very disciplined approach into working capital. Of course, you'll see from the numbers that our CapEx this quarter is lower than prior year which is something that we're doing as management to control. Also, from a receivables perspective, we're doing a much better job than last year. So, therefore, there's a lot of discipline from our team to make sure that we generate free cash flow. As you've seen on the numbers, free cash flow before interest is a very positive number and, even after interest payment, is positive. So this is clearly a positive for the quarter. We're very happy with the performance, but again, as a result of disciplined management that we have applied to our business this quarter.

[Mauricio Montilha:]

Just one additional comment on the guidance, Leonardo. I think it's important also to -- Alejandro already covered the revenue and EBITDA. It's important to understand and important part of our interest expense are in Brazilian reais. And that's what we mentioned that have some currency restrengthening. So, interest expenses, it will grow in dollars, although they're not moving in the local currency. I think this is very important point to notice. On the working capital, as we've been talking last year, we had an increase in working capital for several reasons. We put a plan together. And this has been improving from Q3 and Q4 as of last year. Q1 and Q2 -- Q1 typically, we have some seasonality and was slightly negative typically as it is. Q2 is also showing a very good improvement versus Q1. I think we continue to have a good trend in working capital management. My feeling is that we still have some room. But, there's an important benefit of the reduction of receivable that has been taken already. There's still some way to go. But, I think the majority, as we started Q3 and Q4 last year, we're getting to, I'll say, more normal working capital levels in the next quarter. We're approaching to that point soon.

[Operator:]

Our next question is coming from the line of Diego Aragao with Morgan Stanley. Please proceed with your question.

[Diego Aragao:]

Two questions, if I may. The first one is related to your revenue from Telefonica. In Brazil, you mentioned that revenue from them declined by 21% year on year. In EMEA, it declined 3% and this was partially offset by an 8% increase in the Americas. So, my question is, how far are you the bottom of the range assumed on the mature agreement signed with Telefonica in terms of volumes? In addition, what kind of margin are you getting from Telefonica at this point? Thank you.

[Alejandro Reynal:]

Yes, the numbers that you mentioned are correct. Those are the numbers from Telefonica. First, I would say that the numbers in Brazil, they're the pure reflection of the business conditions on the market. It's not a loss of share. We actually are maintaining the same share of their spend in terms of BPO CRM. So, from that perspective, we're doing well. And I think this number, as you might recall from last quarter, is highly influenced by a business they decided not to continue to do which was basically a commercial decision to sell prepaid cards to customers of source. And that was a service that we and other suppliers were providing that basically was the end of the commercial channel and that's about 50% of the drop in Telefonica's revenues in Brazil. And the truth is that that effect, you'll see it through the year. So therefore, that's why the steep decline in the numbers. Having said that, there's clearly some volume related as with the other clients in Brazil impacted by the macro conditions. In terms of where we're against the MSA, the truth is that we do the tally of the MSA at the end of the year. Although we do tracking with them on a quarterly basis, the final calculations will be done at the end of the year. Basically, if you do the math in terms of where we're, the agreement stipulates that it's prior year plus inflation. So, therefore, year to date with Telefonica, we're minus four in terms of -- approximately minus four in terms of revenue decline. Therefore, we're not at the target. But, the truth is that the final tally will be done at the end of the year. And that's where the mechanism that the MSA has in place to evaluate if there's a penalty or not will kick in. So, at this stage, what I can say is that we continue to have a very good relationship with them. And we do have the governance mechanisms to monitor revenue activity. We continue to meet at corporate and on local level on a quarterly basis to monitor revenues and levels of activity. And we'll do the final tally at the end of the year.

[Diego Aragao:]

My second question is related to your CapEx. Should we expect investments to pick up in the second half? I'm asking this because your CapEx amounted for less than 2% of sales year to date. And you're still keeping your guidance unchanged at approximately 5% of revenue, right? So, do you mind to elaborate a little bit about this? Thank you.

[Alejandro Reynal:]

Yes, I didn't touch upon on your margins questions on Telefonica. So, let me cover that. And perhaps Mauricio can comment on CapEx which as you said, has been low in the quarter and so far low year to date. In terms of the margins with Telefonica, I would say that there's no impact. I think it's interesting to see the business in Brazil that, in spite of the drop in volumes, we're maintaining margins. So, therefore, margins are coming at decent level. Margins with Telefonica remain at par with other telco companies. So, there's no issues that we're having with having poor margins with them. As a matter of fact, it's the opposite. We have been able to maintain margins in Brazil and the other countries. As far as CapEx, Mauricio will address.

[Mauricio Montilha:]

CapEx, as Alejandro also mentioned in his session, is we continue to grow. So, we've been winning new business with our clients and new clients, especially in Americas and also in Brazil. So, we have expectation that our CapEx will pick up in second half of the year, as some of the opportunities in the pipeline matures and other initiatives we're taking. That's why we're keeping at 5%. We've been working to be more effective on that as well. But, I would say that we still plan, as we already said, that we really want to have a balanced year, so focus on balanced growth and focus on be opportunistic. And we still believe that, eventually, we have good opportunities for the second part of the year. So, we're prepared to tackle them as they come.

[Operator:]

[Operator Instructions]. Our next question is coming from the line of Susana Salaru with Itau BBA. Please proceed with your question.

[Susana Salaru:]

Our first question is regarding the margin expansion, specifically in Brazil. There was three main points. One of the points that was listed was the inflation pass-through. And if we're not mistaken, the anniversary of the majority of the contracts are in the first half of the year. So, I would just like to confirm that. And if that's the case, we shouldn't expect the inflation pass-through to consumers as much as this next half of the year, as it did in the first half. That would be our first question. And second, during the presentation, you guys elaborated on the credit origination and credit collection, how that could be another driver of growth. And you mentioned that it's a very fragmented market that Atento could benefit from the consolidation. Does that imply just a market consolidation or actually an M&A possibility also? Thank you.

[Alejandro Reynal:]

And hope you are doing well. In terms of the first question, you're correct. I think we cited three things. We cited all the cost and efficiency measures we've been taking in Brazil to cope with the decreasing volumes, making sure that we guarantee the inflation pass-through and then the impact of higher value-add solutions which quarter on quarter in Brazil grew 300 basis points. In terms of the inflation pass-through, I would say that we've been -- in spite of the macro situation, we've been relatively successful in passing inflation through clients. You're right that historically, most of the inflation negotiations with clients happen in the first part of the year. This year, I would say that some of those are extended into the third quarter because the negotiations in general are taking longer in the market right now. But, what I can say is that, up to date, we have been able -- you know that, historically, in Brazil, we have been able to pass two-thirds of the inflation into pricing. We're ahead of 50% now of inflation into pricing which is I think a very positive number, considering also the fact that inflation was abnormally high this year, ahead of 10%. So, therefore, to an extent, the team in Brazil has done a very good job in passing inflation. And you're seeing that in the numbers. So, we're pleased with that. And I think, to that extent, that's why you see that margins have been very stable in Brazil. And again, this is very positive news, in spite of the decline in volumes. With respect to the credit origination and late-stage collections, I'm very happy that you asked that question because one of the things that we did over the past six months is spending time on really finding or refreshing our strategy to looking to what are going to be the new areas of growth for the Company going forward. And clearly, one of the three pillars that we saw was expanding into higher value-add solutions with financial services. This is nothing new to us. But, we want to put more emphasis and more focus in actually delivering this. And that basically translates into two very specific opportunities, the credit origination and the late-state collections. We do have right now in the first one, in the credit processing, some good best cases in Atento right now. And we think that we have enough knowledge and capabilities in house right now to be able to package solutions and offset those to other financial service clients. So, we do have quite good capabilities in that particular solution. In terms of later-stage collection, that is a fairly large market. As I was mentioning in the presentation, in the region, it's around $2.2 billion. I think this is very interesting because it would expand the addressable market that we have right now from 10.4, an additional $2.2 billion. And for this one in particularly, we don't have the capabilities in house right now. Actually, we're looking to the share of market share that we have in later-stage collection is very small, is like 1% of that $2.2 billion market. So here, for that particular opportunity, we're looking into players in the market. It's actually, as you mentioned, a very fragmented market. So, they could be a consolidation play here where we acquire those capabilities through M&A. The truth is that doing it would never be through a big acquisition. It would be something that would be fairly modest in terms of size. But, what we would do is strategically to acquire the capabilities that we don't have right now. To be able to do the later-stage collections, what you require is good multichannel analytics to be able to analyze collection patterns from your clients, etc. So, therefore, those capabilities that are niche companies that have them already and it would be interesting for us to bring those by an M&A.

[Operator:]

Our next question is coming from the line of Daniel Federle with Credit Suisse. Please proceed with your question.

[Daniel Federle:]

It was mentioned in the first quarter that part of the wage increases was postponed to the rest of the year. I was wondering if you could remind us about the schedule of the pass-through of the wage increases. And actually, you provided in the first quarter an adjusted EBITDA margin. I saw that, in the second quarter, it was not disclosed. Do you see the second quarter margin at a fair comparison basis to the last year? Thank you very much.

[Alejandro Reynal:]

Let me call the first question and Mauricio will help me here with the first and the second question as well. In terms of the first question, what happened last quarter is that we were able to time the increase of wages of our employees to the second quarter. So, therefore, we were able to accompany much better the wage inflation pass-through into clients with increasing wages. Therefore, that's why in the first quarter our margins remained relatively stable against last year. This year, second quarter, of course, we have to increase wages because of the timing we actually -- and that was the agreement with the unions. But, the negotiations with clients were to an extent finalized. And as I was mentioning before, some of those will continue in the third quarter, but, with some clients, we have already finished those negotiations. So, what you see in the second quarter is that, to an extent, wage increases because of the agreements with the unions in terms of wage increase, but also, there's some negotiations with clients that have materialized. And therefore, you see the impact in pricing and in revenues. What I was mentioning before is that, so far, we've been relatively successful in Brazil doing it. And therefore, margins have sustained. And to that extent, what we have been able to achieve so far is that we have been able to pass north of 50% of the wage inflation into pricing, still with pending negotiations to happen in the third quarter of this year. So, overall, the management this year, in spite of a very difficult macro situation in Brazil, has been very well done by our team in Brazil. And therefore, we're protecting margins in spite of the volume declines in the country.

[Mauricio Montilha:]

Just one additional comment. This year, as Alejandro just mentioned, we have still remaining wage increases as through July this year compared to last year; everything was done in January, as we mentioned at the beginning of the year. So, some was not done in January, variable around then April was a big chunk of it. We have another increase coming in July.

[Operator:]

Our next question is coming from the line of Eric Ciura with Baird. Please proceed with your question.

[Eric Ciura:]

I guess my first question is, in EMEA, it seems like things are beginning to stabilize there. So, do you expect this geo to be able to grow on a constant FX basis in the back half of the year into 2017?

[Alejandro Reynal:]

Yes, I think EMEA is one of the good news of the quarter because you're actually seeing for the first time in five quarters that revenue -- non-Telefonica revenues are growing against last year. Actually, if you look at the numbers in reported currency, EMEA is actually growing. So, although we look at things in constant currency basis, in this case, FX has played a positive impact in the region. The truth is that, when you look at the business going forward for the second half of the year for non-Telefonica clients, the outlook is very positive. So, we remain confident that, if things remain stable with Telefonica that we're going to be in a situation where EMEA is going to grow. Of course, growth rates in EMEA would always be in the low single-digit rates. But in the very mature markets, such as Europe, that would be very good news. So, we're very pleased with the performance. And as you can see, it's not only from the top line. Also, from a margins perspective, there was a consistent and considerable margin expansion in EMEA which we hope to keep, so again, a good quarter for EMEA in growth and profitability.

[Eric Ciura:]

And then secondly, for potential M&A on the kind of later-stage credit collection side, you mentioned this would likely be relatively small. But, I guess, is there a level of net debt leverage that you would be comfortable with?

[Mauricio Montilha:]

You're going to see that, this year, typically, our net leverage increases beginning of the year and then declines at the end of the year, as typically, we have some seasonality on the EBITDA. And this year, we expect to do the same. Of course, I would say that we have a long term -- I would say midterm objective to get to 1, 1.2 times. And I think our cash generation will allow us actually to get to that point. Of course, we're not expecting a major downturn in Brazil economy this year. So, that's why we went backwards a little bit in leverage. If you look, our trends, we've been improving the leverage over -- since we went public, every quarter, we did better. I think this first two, three quarters of 2016, are really, as Alejandro mentioned at the beginning, are typical. We never had as significant impact as we're having in Brazil. Having said that, everything we've been looking in terms of acquisition, firstly, are accretive for us on the EPS side and second, on a pro forma basis, they will not make any major change on the leverage. So, we do expect to return toward the reduction path and the -- in the next quarters. And the things we've been looking at and the opportunities we've been looking at, they actually are opportunities that will not impact leverage in a big way. Even if you don't look on a pro forma, three quarter, 12-month base or you look at -- in a particular quarter, it won't be a major change, as we're talking about companies that are not huge in size. And also, we want to bring capability. So, sometimes the combination, it won't be not necessarily 100% cash upfront and so on, so forth. But, having said that, it's -- we expect to continue to decline in the future and no major impact for those if we get an acquisition of this capability view, they'll still be smaller in size and no major impact on them.

[Operator:]

Our next question is coming from the line of Mauricio Fernandes with Bank of America Merrill Lynch. Please proceed with your question.

[Mauricio Fernandes:]

Two questions. So, first, it doesn't look like you're seeing any pickup in activity in Brazil specifically, obviously, ex-Telefonica. Just wanted to check whether you've seen any signs of improvement, not only in the second quarter, but in July. There's certain industries in Brazil that are seeing some pickup in activity. Just wondering if that has already been reflected in any of your ongoing businesses with clients. And the second, just wondering about the differences between EBITDA and adjusted EBITDA. There are restructuring costs and then it's absolutely fine the way it's done. You have to adjust because it's really not part of the business. I'm just wondering if there's any visibility into whether we could potentially estimate whether there will be any further restructuring costs relative to what we saw in the first half, whether that -- those should be expected to happen by around the same amount in the second half of the year or even in 2017. Thank you.

[Alejandro Reynal:]

And nice talking to you and hope you're doing well. In terms of the first question, the truth is that we're not seeing yet the pickup of activity in Brazil. If you look at the second quarter numbers and let's take aside Telefonica and just focus on revenues from clients other than Telefonica, those declined 3%, 2.8%. And when you incorporate the fact that we're passing inflation into pricing, therefore, you see that on revenues and you see a decline, what it means is that volumes are coming down because, on the other hand, we haven't lost any major client. We haven't lost share. And I think, if anything, we've been gaining share with clients. And they're fairly satisfied with our service offering. So, what is happening for a fact is volume declines versus last year. Again, to an extent, this was mostly expected. And that's why we provided the guidance that we did provide. The truth is that we have fairly good level of visibility since clients, they do their three months' forecast. So, to an extent, they give us what amount of business they do expect for the next three months and this is how regularly call center volumes are scheduled. So to an extent, we cannot know -- and this could change, but not materially, based on the forecast that they provide us in terms of volumes of calls that they expect. And from the majority of the clients and majority of the clients being telcos and financial services, we don't see a pickup of activity right now in the market. So, therefore, that's why, from a top-line perspective, we still remain very prudent in the case of Brazil. In terms of the adjusted EBITDA, perhaps Mauricio, do you want to comment?

[Mauricio Montilha:]

No, I think, just to -- as we said, we -- although we were not surprised, as you remember, at beginning of the year, we already projected -- we took proactive actions to align cost structure to the -- what we saw. The volume was coming in Brazil. And that has been -- I'm glad that we took very proactive way in that because we're seeing the benefits and the health of the business. I would say that we continue to look. Of course, as Alejandro said, we're not seeing a major improvement in Brazil. But, it seems at least as generally speaking that we're maybe or hopefully approaching some stabilization, so in the volumes of Brazil. It's very hard to read Q3 yet, as you see several industry. You have companies doing well. Some start doing -- so, I would say that we're still not conservative; we're being pragmatic. We're going to continue to look over cost structure as usual. Of course, I would say that we don't have as much restructuring to do as we had in the first part of this year. So -- but, we will -- given the conditions, if necessary, we're going to continue to look over cost base and the way we operate to adjust to the reality. We don't -- honestly, we don't expect that reality to be as tough as we had in Q1 and Q2 as actually Q3, Q4, the last four quarters were really, really rough in Brazil. And we've been managing very well. But, definitely, it's a -- I would say, a completely different -- very different scenario from now onwards, more getting to a stabilization. And we continue to invest in streamlining the business to make sure we have a very good exit rate this year and we pick up in the benefits of potential opportunities coming in the fourth quarter.

[Operator:]

Thank you. We have reached the end of our question-and-answer session. So, I would now like to turn the floor back over to Mr. Reynal for any additional concluding comments.

[Alejandro Reynal:]

Thank you, everybody. Some of the concluding thoughts are on slide 14. So, first, want to emphasize that, even in a challenged macro environment, we have successfully delivered the optimal balance of growth, profitability and liquidity. Some of these market conditions will persist, as we have mentioned in this call. But, we will maintain focus on driving this balanced growth, profitability, liquidity going forward. The second is that we -- as Mauricio was mentioning, we're committed to driving through cost and efficiencies. Also, our business -- Brazilian business model, strong balance sheet and improving cash flow provide us with the flexibility to deploy capital where its value is the highest in support of our long term targets for growth, profitability and cash returns. I want to emphasize this point on the refresh of the strategy. We're very excited about the growth opportunities going forward. And here, clearly, our focus is on profitable, high-return growth opportunities. And we're going to ensure that we have the capabilities to capitalize on what we see are the industry trends and leverage our scale and financial strength to continue to diversify, as we have done in this quarter, in key verticals, countries and solutions. And fourth, we're very confident that we can again and we will again outperform the market and increase the leadership position that we have in Latin America and that we will continue to be the reference partner for the CRM BPO needs of our clients. Want to thank you very much, again, for your time and look forward to provide you further updates in the next quarter. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation. And you may disconnect your lines at this time.