Atento S.A.
Q3 2016 Earnings Call Transcript

Published: 10 Nov 2016

[Operator:]

Greetings and welcome to the Atento SA Third Quarter 2016 Earnings Results Conference Call. [Operator Instructions] I’d now like to turn the conference over to your host Ms. Lynn Tyson, VP of Investor Relations. Thank you Ms. Tyson please go ahead.

[Lynn Tyson:]

Thank you. Good day and welcome to Atento’s third quarter 2016 earnings call. The call will begin with the prepared comments by management followed by question-and-answer session. With me 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 performance and strategy and Mauricio will review our quarterly results in more detail. Afterwards, we'll open the call for questions. Following the Q&A, Alejandro will have a few closing remarks. 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 financial 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. In addition our revenue growth rates for our consolidate results and segment excluding impacts of divestitures [indiscernible] which occurred in our third quarter. Now let me turn the call over to Alejandro.

[Alejandro Reynal:]

Thank you very much, Lynn and welcome, everybody, to our call. Please turn to page 4 of the presentation. I’m very pleased with the solid operating and financial resource our team delivered in the third quarter and year-to-date especially our ability to grow selectively well protected margins and generating cash in a challenging economic environment. In the quarter adjusted EBITDA margin was up 13% an increase of a 160 basis points sequentially supported by our proactive efficiency initiatives and an improved mix of high value add solutions. In addition we generated approximately $47 million in free cash flow before interest of approximately $22 million year-over-year, the third consecutive quarter of improvement. Today in addition to reviewing our results we would like to highlight the following items. First the strong progress we’ve made on the delivery of our strategic growth priorities resulting in revenue diversification. Also how we have reaffirmed and extended our relationship with Telefónica. Our plans to accelerate the payment of our higher cost profit debenture strengthening with these our balance sheet and earnings trajectory. And finally, our domestic outlook for Latin America in 2017 and high confidence in our competitive position and execution capabilities. So let me start first with our strong progress on the delivery of our strategic growth priorities, then Mauricio will cover in more detail that we felt in this section. Please turn to page 5. During the last quarterly earnings call we unveiled the three strategic areas of focus to drive sustainable growth going forward. I wanted to provide you with an update on progress to-date. The first area of focus is consolidating our leadership position in Core Voice. Voice is approximately 88% of the market and it will remain the largest channel for the foreseeable future growing by an additional incremental $2 billion in revenue to 2021. In this regard our commercial pipeline in core services remains very strong evidenced by roughly 3,500 workstations we won in the quarter up 10% from the prior year. 39% of these workstations came from new clients. Such strong commercial momentum is enabling us to continue to diversify our mix of revenue from non Telefónica clients with 67.8% in the quarter up 370 basis points year-over-year. We’ve also sharpened our focus and rapidly growing 2.4 billion U.S. nearshore market companies increasing the leverage in Latin America with competitive strength and also react to the political uncertainty in Philippines. This market is now expected to grow 5.8% through 2021 adding an incremental $1.4 billion in revenue. In the quarter revenue from U.S. nearshore business grew 23.7% supported by new client wins in financial services and telcos. As you can see from the slide the secondary focus is to drive continued growth in higher value-add solutions particularly in the telco and financial services which comprise 75% of the market in Latin America. As we’ve commented in the past typically these solutions are 200 to 400 basis points higher in margin of our core services and they now comprise 24.7% of our revenue mix, a 90 basis point improvement year-over-year. In order to accelerate the growth and increase our capabilities in the higher value-add solutions space we’re acquired R-Brasil during the third quarter of this year. R-Brasil is the leading player in the collection space in Brazil. The total collections market in Latin America is $2.7 billion of which 75% or $2 billion is late stage collections where we have now very low penetration. [Indiscernible] last stage roughly 1.5 billion is in Brazil. Our R-Brasil is the perfect entry for Atento into this market and it also gives us a platform to one day export across our geographic footprint. R-Brasil is a model and this is very important, it’s dedicated on business intelligence, built on proprietary customer data and actual collections experience. This powerful and effective combination of business intelligence will publicity and systems cannot be scaled across our financial and telco clients in Brazil. Already we’ve introduced our new capabilities to the top 50 late stage collection companies in Brazil and we won new business with three financial service companies increasing our share of volume. The area of focus is accelerated profitable growth with a digital offer. We’ve now assembled a strong digital team led by the former head of digital for Central Latin America. The teams mandate is of mental capabilities and consolidate our offerings into a truly scalable global omnichannel platform. We now have highly specialized team within the processes and acknowledge, focus on understanding client issues and delivering business outcomes. We can also point the key client wins with our digital offer in this quarter. Please now turn to page 6. This is one of the key highlights that we wanted to include in this quarter’s presentation and were pleased we’ve reaffirmed and extended our relationship with Telefónica. This is a very important milestone and a very positive one for Atento. As you are aware revenues with Telefónica have been decreasing over the last quarter and even though we have not lost share of wallet of Telefónica CRL BPO spent, both companies felt it was the right time to start the constructive agreements for the business relationship going forward. First, we negotiated another three year contract in Brazil with Vivo. Maintaining volume levels through the expansion of our business with them and improving profitability supported by changes in our operating model. This agreement is very relevant Vivo represents the largest individual contract we’ve now with Telefónica. Separately we’ve also re-negotiated our broader master service agreement or MSA with Telefónica normalizing and improving the conditions going forward. The changes to the MSA include first, the MSA for Brazil and Spain are extended to 2023 currently until 2021. Therefore, with these aligning revenue targets to foreign operating conditions and very importantly maintaining the total level of revenue commitment. Very important tool, we’ve now the guarantee that Atento will maintain at least its current share of wallet over the duration of the MSA. With these Atento will remain the largest service provider to Telefónica again till the end of the duration of the MSA. Additionally we’ve negotiated and agreed on payment terms and invoicing processes improvement in all key markets. And also very importantly we’ve agreed to eliminate our 24 million CVI obligation in Argentina. The benefit to Atento this agreement are significant. First and foremost importance Telefónica as a long term partner is reaffirmed. We’ve now a much more solid base going forward as offset to the current business environment. Additionally we’ve been proven in payment terms and invoicing process we will now have a material improvement in our DSOs which will impact our working capital positively over the next 18 months. Finally, the elimination of the CVI will strengthen our balance sheet in the fourth quarter of this year. Please turn to page 7. Before I turn the call over to Mauricio let me close with why I’m optimistic about our prospects heading in fiscal year 2017. First, I have the confidence in our competitive position. In Latin America CRM BPO market data released shows that in 2016 we maintained our leadership position 18.3% share of the market, a full 9 points ahead of our closest competitor. In addition we held or extended our number one share position in key markets such as Brazil, Mexico and Argentina. Also we continue to place a premium on highly engaged workforce a key enabler for our success. In fact, just last month we were recognized for the fourth consecutive year as one of the 25 world’s best multinational workplace, the only CRM BPO company included in the ranking. Second, the overall economic plan in Latin America is more benign but there are still some uncertainties. Analysts now expect the region to contract by just 50 basis points for the full year supported by signs of the stabilization in Brazil. This improving trends give us increased confidence in 2017 especially Brazil is expected to return to growth next year particularly in the second half. Third, we’re well positioned to deliver higher growth, earnings and cash supported by our strategy, discipline, capital deployment and improving capital structure. I’ll come back at the end with some concluding thoughts but now let me turn over to Mauricio which will cover the results. Thank you.

[Mauricio Montilha:]

Thank you, Alejandro. Please turn to slide 9, as a reminder I’ll be referring to growth rates on a constant currency basis and year-over-year basis unless noted otherwise. In addition as a result of our divest of Morocco in September this business is now in continuing operation and the revenue growth rates for our consolidated EMEA results have been adjusted to reflect this. During the third quarter we once again delivered balanced financial performance driven by our persistent focus on selective growth, [indiscernible] macroeconomic headwind persists, margin protection driven by our proactive and focus on cost and efficient initiatives including investments in restructuring as well as the effective best tool of inflation. And finally, working capital management and improvement in cash flow including rigorous focus on disciplined capital allocation. Starting with revenue we delivered solid top line performance in the context of challenging macros, our top-line declining 3.3% which was sequential declaration of our growth. Two dynamics drove this, first, our growth profile in Brazil improved sequentially by 260 basis points, the first sequential improvement in growth in six quarters supported by the very early stage of economic stabilization which we expect to continue. Second, our America segment grew 2.8% acceleration growth versus our second quarter driven also macro declines in volume particularly related to Telefonica both in Argentina and Mexico. Our revenue diversification is on track with our mix of revenue from non-Telefonica client at 370 basis points, a 7.8%. And our commercial remained robust evidenced by roughly 3,500 workstations won in the quarter supported by growth from new clients including financial service. Despite outlined pressure I’m very pleased with the adjusted EBITDA margin of 13.6% which was up 160 basis points sequentially. This is further validation of our effective concentration on profitable growth, proactive costs and efficient initiatives including restructuring as well as focused inflation pass-through. Non-recurring items totaled $11.1 million this quarter most of this related to the investment in line of cost of structure with the impact market pressure in some of our region including Brazil, Argentina and Spain. In addition non-recurring items included a $3.1 million reserve related to the sale of our operations in Morocco in September as well as 2.9 million sovereign related to overhead cost reduction program. Adjusted EPS was $0.20 a decline of $0.11 driven mostly by effects and increase in interest expense and higher share count. Please turn to slide 10 and start looking at our segment. In brazil our growth profile improve sequentially with revenues down 7.5% as greater political uncertainty and more modest improvement in the economic data point were stable to improving growth environment. For example, in the second quarter GDP recorded a quarterly decline in the year. In addition business confidence hit a two year in September and consumer confidence reached its high levels since September 2015. Revenues from Telefonica declined 40.3% a significant improvement over the second quarter – the client 21.4%. We do further stabilization aided by our new contract with Vivo. Revenue from other clients declined 2.6%. We made significant progress with revenue diversification as our mix of revenue from non-Telefonica clients included 270 basis points to 65.8%. In the quarter we won 1,790 workstations with new and existing clients, the largest gain since the fourth quarter of last year. Roughly 54% of these workstations came from multi sector and financial service clients. Our mix of higher value-add solutions included a 107 basis points to 38.7% of revenue. Adjusted EBITDA margin improved also 180 basis points sequentially to 15.2% supported by our proactive action to restructure and cost structure with volume level affected the inflation pass-through as well as the improving mix of the value-added solutions. Please turn to slide 11. Looking at Americas now, we delivered growth in the macroeconomic environment especially in Argentina. Revenue grew 2.8% a decline in growth rate versus our second quarter due to the macro pressures in Argentina and Telefonica is obvious sales channel in Mexico. Revenue from Telefonica declined 4% driven by declines in Argentina and Mexico while revenue from other clients grew 8.7% lead by Columbia and also by our U.S. Nearshore business which grew 23.7% in the quarter. Revenue diversification is on track, in the quarter we won 1,261 workstations with new clients with 67% of this from multi-sector and financial service clients. In addition our mix of revenue from non-Telefonica clients included 390 basis points to 56.5%. Adjusted EBITDA decreased 40 basis points which is a 60 basis point decline in margin to 13.5%. Profitability was impacted by the market – we’re moving swiftly to realign our variable cost structure with volume levels. Please turn to slide 12. EMEA revenue declined 4.8% driven by a 10.6% decline in Telefonica. Importantly, growth in non-TEF clients – 15.8% in the quarter supported by strong growth from new clients especially in financial services and utilities. In the quarter we won 411 workstations a majority of which came from new clients especially multi-sector and financial service. Our mix of revenue from higher value-add solutions increased 420 basis points to 13.9%, high in division. Adjusted EBITDA margin included 60 basis points year-over-year to 10% supported by our aggressive management of costs and attritions relative to decline in revenue from Telefonica. Please turn to slide 13. Look at cash flow and capital allocation, we’ve delivered a third consecutive quarter of cash flow improvement. In the quarter we generated $46.7 million free cash flow before interest up $22.2 million year-over-year, an year-to-date $53 million in free cash flow before interest up $81.8 million year-over-year. This improvement in cash flow has been driven by ongoing companywide improved cash conversion. This program has two major aspect, the first is a disciplined approach to investment in profitable growth and more balancing investment maintenance. This discipline is giving us a flexibility to invest in profitable growth including CapEx and acquisition, and also proactively realign our cost base within market one especially in Brazil, Spain and Argentina. For example, during the third quarter we divested in Morocco and we acquired R-Brasil. We invested $9.4 million in CapEx and $6.2 million in restructuring. Year-to-date CapEx were under our annual target of 5% offsetting this however, we’ve invested more in restructuring to proactive and aggressively reset our fixed and variable cost structure to align with one and also become a leaner and more agile and competitive organization heading to fiscal 2017. The second aspect of our companywide program is our focus on working capital which has been the main drive of the increase in our cash flow. This has been supported by the improvement in our dealing and collection process especially reducing billing cycle and overdue payment. Please turn to page 14. Look at the balance sheet, I’m glad to say we continue to have a strong balance sheet and started to deleveraging process and alignment with our strategy and we’re now taking opportunities to accelerated the reduction from the most part of our debt. In the quarter we had liquidity of 234 million which includes cash and cash equivalents and revolving credit facility and low leverage of 1.9 times net debt adjusted EBITDA. Net debt with third parties totaled $436 million. In the fourth quarter of this year we expect to make the regular scheduled debt payments of $32 million mainly related to debentures in Brazil. In addition to that the improve in our cash flow will drive a one-year program of accelerated payments of our higher cost Brazil debentures. We will start this in the fourth quarter with an anticipated payment of $30 million which we will lower our interest expense in fiscal 2017 by $5.8 million pre-tax or around $0.06 per share on adjusted basis. Just turn to page 15. Before we open the call for Q&A let me review our guidance for fiscal 2016. Our focus on profitable growth trending as a low end of our revenue growth range of 1% to 5%. Value trend has a high end of adjusted EBITDA margin of 11% to 12%. Looking at non-recurring items we expect to be roughly in-line with our guidance of $15 million. There are two drivers to this item, the first is the $24 non-recurring benefit in the fourth quarter from the consultation of CVI in Argentina. The second driver are incremental costs in the fourth quarter that will bring our total restructuring costs and other costs for the year. We continue to adjust our operations within market reality and have been running three major programs for that. The first one includes the investment for lower variable cost structure in line with the impact exceptional circumstances generated macro declines in volume particularly in Brazil, Argentina and Spain. As you know about 70% of our cost structure is labor, volume declines is that we take a swift action by adjusting our cost structure and protect profitability. Year-to-date we’ve invested $11.2 million in this activity. This was the macroeconomic of 2% Brazil and Argentina we expect to include more cost in the fourth quarter then we do not expect this cost to continue in 2017. The second program are investments in Brazil to relocate and consolidate our site into lower cost location. We started this program in 2014 when 53% of our centers were in tier 2 series. When we end this program at the end of this year, 54% of [indiscernible]. Year-to-date we invested [indiscernible] this program will be pretty much completed by year end 2016. The third initiative is our investment to drive a sustainable lower cost in more competitive operating model. This is key enabler of improving margin for us in the future. This year we implemented trends by mid fiscal 2017, we reduced direct cost mainly overhead by 12% to 15%. Year-to-date we’ve invested $6.4 million to these activities and expect to invest additional $15 million over the next four quarters. Looking at interest expense, we expect net interest expense to be in the range of $70 million to $75 million for the year. As you consider the GAAP net filing in our P&L which is a combination of net interest and impacts. Please remember that there are adjusted net income and adjusted EPS excludes this non-cash effect of net foreign exchange gain on financial instrument, intercompany balance and foreign exchange impact on cash position held in the U.S. by local dollars, by local operation. These adjusted numbers more clearly shows the line trajectory of our business. In relation to CapEx we’re now trying to below our target of 5% of revenue which is worth roughly $24 million for the year. We expect an effective tax rate of approximately 32% and a fully diluted share count of approximately 73.8 million share. Our guidance does have the impact of our divestiture from Morocco and acquisition of R-Brasil both of which occurred in third quarter. Our guidance does not assume any further opposition or changes in the current environment. FX structure, foreign exchange rate movement of the financial into U.S. dollars. I’d like now to turn the call over to the operator and take questions from the audience.

[Operator:]

[Operator Instructions] And our first question comes from the line of Susana Salaru with Itau. Please go ahead.

[Susana Salaru:]

Hi, good evening. Thank you for taking our questions. We have the questions, the first one Alejandro, if you could elaborate a bit more about R-Brasil acquisition. We just ask you, if you could share with us the economics behind the acquisition and that's our first question. The second one if R-Brasil is enough for what you intend to do in the late-stage collection market or should we expect conditional M&A in the near future? That's it guys thank you.

[Alejandro Reynal:]

Hi Susana, how are you? And thanks for the question. Yes with regards to R-Brasil, I think it's an acquisition more on the side of acquiring capabilities basically when you're getting to the late-stage collection market, this is one in which you require certain levels of analytics and multi-channel delivery capabilities which we had some, but in order to develop and particularly the business intelligence and analytic requires for the collection market would have taken us quite a bit of time. So in order to accelerate the capability, our review was that the best part forward was to move via the acquisition. The acquisition in terms of size, I would say is not material we actually did not disclose the financial terms of the acquisition because it doesn't really impact our revenues. But again, we did it more for the fact that we were acquiring people, human capital, and technological capabilities that enable us to get to the late-stage collection market. I think the interest -- this is that since we acquire the business and this was two months or so ago, we have been able to take the experts for R-Brasil together with our commercial team and actually go and cross sell these to our client base. And just in two months we have been able to win three new contracts, we've clients in the financial services sector specifically for late-stage collection. So I think it was a point to us that bringing capabilities in house and leveraging our client base and the wisdom we have, we can actually penetrate this market and provide the latest collection solution. We're very successful from that perspective. In terms of the second question, yes [Indiscernible] point the reality is that this is the market highly fragmented; there are lot of small niche companies that actually do these. So we continue to assess the market for us, playing the role of a consolidator is attractive, therefore the main – pointing out additional M&A. Again, there were these types of acquisitions [Indiscernible] in terms of size, but more would be for to continue to augment our capabilities. And there are several players in Brazil that have similar capabilities and plant base compared to other field. The other point I would make is that with the acquisition one of the things that we're doing is of course first addressing the brazil market which is the largest one and where we see a lot of potential, but our view is that we can then export these capabilities into other countries and the region, so there are threats market such as Mexico, Peru, Columbia [Indiscernible] the late-stage collection market is also attractive. Again very strategic acquisition from the capability perspective and so far the results very positive and point out that we're going in the right direction.

[Susana Salaru:]

Great, thank you very clear.

[Operator:]

Our first question is coming from the line of Leonardo Olmos with Santander. Please go ahead.

[Leonardo Olmos:]

Hi guys, good night. We noticed a very impressive margin expansion in brazil when compared to the best quarters in 2016 and on the release note you mentioned that they are due to cost and efficiency managers and inflation that's true and better service mix. I want to know which of them is more important. The pricing where you're able to pay through prices which I believe you weren’t so strong on that first half of '16 or the cost cut or the other actions you have been very successful were more effective? Thank you.

[Alejandro Reynal:]

Hi Leonardo, how are you and nice talking to you to. It’s a combination as you point out a combination of factors in Brazil. The first one in terms of the pass-through inflation at this stage of the year we're pretty much done with that, so the impact of that was mostly reflected in the second quarter, partially in the third quarter. But the impact of that is not that material at this stage and as we had mentioned this year we had a pass-through of the inflation because inflation was high, I mean, it was in the range of the 10% to 11% where we needed to pass to our clients. So we were able this year to pass between 50% to 60% of that so basically that's already done, there is no further improvement suspected from that what is driving the margin expansion in Brazil is first, I would say the expansion into higher value-add solution, if you look at the case of Brazil we have expanded in terms of the mix of services coming from higher value-add solutions. Here we are seeing a very good progression with back-office services specifically for financial clients therefore this is driving a better mix of services in Brazil. On the other piece there, I would say that the team in Brazil has done an extremely good job on managing the cost base. We are very efficiently managing productivities in the operation and that is clearly contributing to the improvement of margins in Brazil. So, I think that most important items, the two important items are the revenue mix which is improving year-on-year and also the productivity on cost in each of these. One thing I want to add on Brazil which I think is very important and it was mentioned during the presentation, but we're also very selective on growth, seriously because we could have actually grown on the faster pace in Brazil, but we're being very selective on the projects that we pick off. One thing that we want to hold is participate in projects that at the end of the day are low margin projects and what they do is of course impact our margin profiles, but also consume cash. So we have been particularly easy on that pretty much in line with what we guided earlier in the year, been very focused on the types of project that we participate and these are projects that are margin accretive. Therefore that means to one extent this is sacrificing a bit growth profile, but with that we have been able to obtain it’s a very solid margin performance and I would say on the regions more particularly in Brazil.

[Leonardo Olmos:]

okay, thank you very much Alejandro.

[Operator:]

[Operator Instructions] Now our next question comes from the line of [Indiscernible] with Newfoundland Capital Management. Please go ahead.

[Unidentified Analyst:]

Hi, a question on your financial expenses could you talk a little bit may be more about or give us little bit more color on your refinancing drives or attempts and how much room for refinancing lower cost do you have?

[Mauricio Montilha:]

Hi Lois, this is Mauricio speaking. If you look our capital structure at least just to remind we have two major vehicles, one is U.S. [Indiscernible] bond that we have that is backed by what we called restricted group everything else other than Brazil and Argentina and this is a bond that’s coupon 7.2 to 7.5 is a bullet 2019, so if you look at the market today we are pretty much aligned to the market issue today, although more recently you can see in the market that is more interest on the high fields bonds. But I feel we are not upon that breakeven and that is worth to refinance this, it's a alternative good facility in place at this time is to be kept. The other part of that is primarily in Brazil most important one is the debentures. On the debenture side, if you look carefully we have in the debentures two major tranches, one that is protected by fixed into swap instrument that currently we are growing at 14.2 % a year on this part that is protected by the fixed rate and there is one is a floating rates. So it’s about $90 million that is not protected by swap, it’s a market rates. In our case in Q3 it’s 17.7. And the third tranche is BNDS that we have much smaller BNDS, the weighted average of this cost is around 8% to 9%. So really the biggest part is the uncover, unprotected part of debentures and that's the piece that we are prepaying now anticipating the more physicians scale now in Q4 where we are going to invest in EB and start doing it. So our priority in terms of the prepayment is this unprotected part of the debentures. Generally speaking the Brazil market is now starting having some I will say openness to refinancing, if you, very short period of time the length is 2-3 years that’s what we have. So there is the window to a major refinance is still not there yet and at the right pricing that's why we decided to anticipate accelerated reduction of the really most part of that, that's the debentures unprotected by the fixed interest swap coupon that we have.

[Unidentified Analyst:]

So with these the payment of these Brazilian debentures, part of it next year may be on the percentage basis, how much would you expect your average interest cost to come down may be in a year or two?

[Mauricio Montilha:]

If I say, if you think of it today, out of my total, my debt is $440 millions, so the $90 million of this amount that's accruing almost 80% a year debt, if you look at the regular payments we will do next year or so, we are bringing forward [Indiscernible] was supposed to be paid in December '14. If we continue that we will take down this piece of our numbers, so I need to do the math how this will flow through our P&L. But basically that's the piece we start anticipating just to remind everyone our capital allocation strategy is continue to fund growth as we are doing with acquisition of selective to fund into opportunities we have in the market and that's continue to be our priority. But as Alejandro mentioned at the beginning we’re making a very good progress in the cash generation. We are getting in a stabilisation for large growth we are having in the past and the economic circumstance in Brazil. We now have much more flexibility to start taking down this, so we are starting now as the year progresses and confirming the sequence of good results we expect for the next quarters and improving conditions in the market. We are going to continue to accelerate those payments after of course, funding growth.

[Unidentified Analyst:]

Perfect, and then just one more question may be on your cash flow generation besides the change in guidance, I mean how structural would you say is this lower need for CapEx and what would you say on a recurring basis on it and the annual basis your cash flow generation would be?

[Mauricio Montilha:]

We always, when we started being a public company, we said that’s our I would say our midterm goal was to – when we -- after a long period of growth and opportunities we will generate cash similar to our peers. If you look at our global peers in the market, they typically generate 30% to 35% or in a year or even 40% of EBITDA in free cash flow before interest and I would say this is our target if you look our trajectory we are getting there. So I would say when company continues improving our cash cycle and the improvement we are having this year is very solid, it’s based specifically in the way we are managing the contracts in relation with our clients. I will say that in the next two year we should get to run rate close to this one that is or set a benchmark for all the global competitors in this area.

[Unidentified Analyst:]

Sorry just to get the number again, so 30% to 35% of EBITDA and before interest?

[Mauricio Montilha:]

Yes that’s typical of this business runs or I will say more much your operations that are growing 2% to 3% a year that is the comps that we look at.

[Alejandro Reynal:]

I think just one comment supporting my details of payments of kinds, I mean the fact that we are committing to the prepayment of that. We're kind of specific among this year and then committing to a program going into next year shows that we feel strong about the cash generation potential about the business and specially going into year. I think this is to an extent supported by the negotiation with Telefonica. We have improved payments in terms and invoicing conditions with Vivo and other five markets in the Telefonica geography, therefore it improves our capability to generate cash, improves working capital and therefore they are even on the accelerated debt payments. So I think what we are trying to send you as a very strong message as the company feels comfortable with the cash generation going into this year and next year so.

[Unidentified Analyst:]

Perfect, thank you very much.

[Operator:]

Our next question is coming from the line of Diego Aragao from Morgan Stanley. Please go ahead.

[Diego Aragao:]

Hi guys, thanks for taking my question. Two questions if I may, the first one is actually a follow up on Susana's question regarding the acquisition you made in Brazil giving you the date in September, can you confirm if whether or not there is any revenue contribution in this quarter? And the second question is related to your agreement with Telefonica, during the opening remarks I think Alejandro said that attempt in Telefonica are extending the agreements for two more years which seems very encouraging at this point however we recently saw the sale of Telefónica. In Brazil saying that Vivo wants to reduce the number of employees in call center by let’s say two-thirds. So my question is, how can we reconciliate this trend with your expectations wisdom? Thank you.

[Alejandro Reynal:]

Diego, let me take the second question on Telefonica and Mauricio can come back to the revenue piece on the receipts. I think, because we’ve this question several times when the former CEO of Vivo made a comment and I think he was more into an inspirational comment from their part, we’ve very good visibility of Telefonica, business on the fact that we’ve been able to renew and extend the agreement with them just ratify the partnership. So, the truth is that as you know we’re actively working Telefonica to be much more efficient in the way we manage calls, also we’re adding value to implementing digital channels on other solutions that we have in our portfolio and that one extent is driving core volume down and that’s what you see in the numbers when you see quarter-on-quarter projection of Telefonica. We’ve been able to reduce two-thirds my opinion is that is highly unlikely because in reality why it’s happening is that the level of interactions more and more are more complex requiring the more use of agent but also other channels to be able to serve them. And again, I think the fact that we’ve been able to extend the relationship with Telefonica in years and get a guarantee from them in terms of the total business to us for the extended period and also getting guarantee in terms of share of wallet that we will have with them give us lot of peace of mind in terms of the future business going forward with them. And to be fair and to be honest they would have not agreed to this new terms if they didn’t believe they could deliver on the business. So, I think the fact that we’ve the discussions now I think they have agreed [indiscernible] something we started having conversations with them and we feel very positive about them because to an extent we have been able to reset the terms we’ve been, we’ve a lot of conditions to the current operating environment and also look into longer term view of the relationship so the MSA [indiscernible] extended to 2023 would give us a lot of visibility on their business plus all the other conditions that I mentioned. In addition which I think is very powerful is this reset on payment terms and invoicing, I think that gives us a lot of opportunities to improve our working capital and therefore continue to invest on the business and pay down debt. So my view is very positive and again, but I want to highlight that this agreement work is clearly a milestone in the quarter and we feel very strong and happy about it. Now the only comment I would add on that is that I think when they talk about agents, let’s not talk about pending [indiscernible] because at the end of the day they have to serve their clients and now only with Telefonica we’ve to mix up service with our clients that’s changing with the new channels or not and our committee have those – it showed spending. Actually if they make more automation or they are committing more and we’re helping them to do that actually we shift our revenue to more complex channel to give ability. On the R-Brasil we have two months of revenue on that it’s really automation we’re talking of companies that release [indiscernible] is not significant and that is just two months of operation. I think the biggest again as I said is, we’re bringing capability now, we’re bringing human capital analytics and a very good operator that [indiscernible] operator but majority of the clients they work on. So it’s really something that’s now we’re going to make it much larger businesses as we combine with our commercials that clouds with our clients and penetration we’re having on both sides.

[Diego Aragao:]

Thank you, thank you guys, very clear. Just one more question if I may apologies for that. Regarding the U.S. Nearshore business can you provide more colors on that I mean, it will be great if you can share with us how this operation is trending, how fast it’s growing and what is the outlook for it that would be great? Thank you.

[Alejandro Reynal:]

This is something that we mentioned but it was highlighted. We feel very optimistic and the operation have grown north of 20% quarter-on-quarter and we’ve one, few key client accounts over the past quarter. So we feel very positive about it. I think what we’re starting right now is from political instability and also from tensions around agents, attrition in the Philippines , so what we’re seeing is that a lot of U.S. clients and this has – over the past couple of quarters. I could see there more and more in Latin America as a nearshore destination. So we’ve actually at one end increased the size of our pipeline, we’ve specific opportunities and on the other side what we’re doing is strengthening our work stability and commercial team. So we believe now there is a window of opportunity which is very interesting for us to leverage under [indiscernible] so the sales today are positive and our views going into the near term even more positive and whatever seen and that to be a good area of course going forward.

[Diego Aragao:]

Perfect, thank you.

[Operator:]

There are no further questions at this time, I would like to turn the call back over to you Alejandro for any closing remarks.

[Alejandro Reynal:]

Thanks very much and to finish on time. I just wanted to make a few comments to recap the highlights of the presentation and basically I’m going to go back to the very first message that I said. First, we’re very pleased with the operating performance of the company especially the ability to grow selectively while we diversify our revenue rate, but also protecting margins and generating cash especially again excited, we’re very pleased with the $27 million in free cash flow before interest generated in the quarter which is $22 million year-over-year. The second is, the question of [indiscernible] in the strategic growth priority. Again particularly to highlight the acquisition of R-Brasil which accelerate the capabilities in the higher value-add solutions category and point out the fact that we have because of the acquisition made this quarter due to this. And we see a lot of potential going forward not only Brazil but also replicate this in other countries. As I mentioned before another highlight for this quarter is that we’ve reaffirmed and extended the relationship with Telefornica, my opinion is that we have a much solid base going forward adopted to the current business environment additionally with the improvement in payment terms and invoicing processes we will have material improvement in our DSOs which will impact our working capital over the next 18 months. And we mentioned the elimination the CBI the instrument we’ve with Argentina strengthens our balance sheet also for the fourth quarter of this year. Fourth, the accelerated payment higher cost debentures will strengthen as well our balance sheet and trajectory specifically of [indiscernible] accelerate payments in the fourth quarter of this year of the higher cost debt which will reduce – expand this in 2017 by $5.8 million pretax or an impact of $0.06 per share on an adjusted basis. Again very well advanced and show our commitment to consideration and prepayment of this. And finally, just wanted to leave you with our optimistic view and outlook for Latin America in 2017 and the high confidence that I have on our organization and in the competitive position that we’ve market. The strategy on our work execution capabilities to deliver high gross earnings and cash flow this year and going forward. Thank you very much again for your attention and we look forward to interacting over the next quarter. Thank you.

[Operator:]

Thank you again. Ladies and gentlemen this does conclude our teleconference for today. We thank for your time and participation and you may disconnect your lines at this time. Have a wonderful rest of the day.