Atento S.A.
Q4 2016 Earnings Call Transcript

Published: 22 Mar 2017

[Operator:]

Greetings and welcome to the Atento SA Fourth Quarter 2016 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’d now like to turn the conference over to Ms. Lynn Tyson, Vice President of Investor Relations. Thank you, Ms. Tyson. You may now begin.

[Lynn Tyson:]

Thank you and welcome to our fiscal 2016 fourth quarter earnings call. 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 then Mauricio will review our quarterly results and guidance for fiscal 2017 in more detail. Afterwards, we'll open the call for questions. Following 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. This 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. In addition our revenue growth rates for our consolidate results and EMEA segment exclude the impact of our divestitures of Morocco which occurred in our third quarter of fiscal 2016. Now let me turn the call over to Alejandro.

[Alejandro Reynal:]

Thank you, Lynn. Good afternoon and thank you for joining us today. Please turn to Page 4. I am pleased to report that we delivered on our key goals for fiscal 2016. We expanded our leadership position in the Latin America CRM/BPO market. We delivered on our margin and cash commitments and we made targeted investments to accelerate our growth initiatives. We achieved these solid results while facing stiff macro headwinds in several of our key markets. In the fourth quarter, we continue to meet our 2016 objectives of protected margins and generating cash. Revenues were US$442 million, down 4.2% driven by a decline in Telefónica. The rest of the business performed well as revenue for multisector clients increased 2.4%. In particular, in Atento Brazil, our multisector return to growth in the fourth quarter with revenues up 2.2% evidence of our strong commercial momentum in Brazil and positive signs of recovery in the market. Adjusted EBITDA margins were 13.3% in the quarter as we continued our focus and discipline management of our operations. We also benefited from an improved business mix. Free cash flow before interest was very strong in the quarter of US$90 million, due to the implementation of more favorable payment terms with Telefónica and our strict CapEx and working capital management. As a result, we were able to accelerate that pay down of our Brazilian Debentures, our most expensive debt which we reduced by US$30 million in the quarter lowering our interest expense and improving our earnings trajectory in future years. Other notable developments in the fourth quarter include the elimination of our Contingent Value Instrument or CVI related to Argentina. With all these actions, we have strengthened our balance sheet, reducing our leverage ratio to a low 1.5 times adjusted EBITDA to net debt. For the full-year revenues were down 1.4%, adjusted EBITDA margins were 12.6% and we generated $136.3 million of free cash flow before interest. These are very solid results given the macro context as we achieved our key goals of maintaining margins, generating cash while also diversifying our revenue base. Please turn to Page 5. Looking forward to fiscal 2017, we see improvements in the macro environment especially in Brazil, but believe 2017 will continue to be difficult as we expect recovery of consumer spending to be slow and our clients to remain focused on managing costs. Within our client base, we expect revenues from Telefónica to decline with the extension of the Master Service Agreement last year to 2023. We feel very good about the health of our relationship with Telefónica. There are new business opportunities to support and even higher share of wallet particularly in sales, retention and collection services. However, like in 2016 – in 2017, we are forecasting an absolute decline in revenues. Beyond Telefónica, we remain very encouraged by the growth opportunities with both our existing and new clients, where we expect healthy growth in 2017. We continued to be focused on our three strategic growth pillars. First, consolidate our leadership in core voice services, particularly in the telecommunications and financial services verticals. Second, continued growth into higher value-add solutions organically and to targeted investments to build capabilities, and third, accelerate profitable growth with the mainstream digital offer. Please turn to Page 6. Particular areas of growth, related to our strategy in key verticals include, first in the telecommunications vertical, which is a US$3 billion market excluding Telefónica and where we have an unpenetrated market with approximately a 3% share. Our heritage and expertise make us a reliable partner to telcos, evidenced by our rapid growth in recent years. There remain attractive opportunities to continue to capture share of wallet particularly in areas that drive average revenue per user. Examples include services such as sales, cross-selling, and retention. Telco clients are increasingly looking to optimize these interactions via digital and analytics, while also ensuring a high quality customer experience. Atento Digital is a key enabler for these services. The second area is growth in financial services where we have a 22% share of US$2.5 billion market. Here to reduce cost, financial services companies are trying to drive more self service of simple customer interactions, and they're looking to CRM/BPO players to support them through the application of new technologies. They are also looking to increase sales, leveraging digital channels. Once again, Atento Digital has played a key role here. Additionally, financial services players are rethinking what is core to their business and are exploring higher levels of outsourcing. In this context, the areas of biggest opportunity are collections and other BPO activity historically done in-house such as credit origination, which are increasingly seen as relatively high cost and inefficient. Through our acquisition of R-Brasil, we have become a leading player in the 2 billion Brazilian collection markets in which we have only a 2% share. And this morning, we announced an agreement to acquire a majority stake in Interfile, a leading provider of credit origination BPO services in Brazil. This is a $0.6 billion market where we now have a 10% share after this acquisition. The third area is growth in other industries verticals where penetration of outsourcing is less. This represents US$2 billion market in which we have just 10% share. These verticals such as retail and healthcare have a high growth potential in Latin America. In several cases, we have carve-out in-house CRM activity to speed up the migration to Atento. The opportunity to both professionalized customer experience and deliver at a lower cost presents attractive outsourcing prospects for us. Furthermore, here there is an opportunity with new disruptive players in the region, which are experiencing fast growth and require a strong Latin America and regional partner that can support them through mainly digital channels to serve their customer base. For example, in Brazil, we are leveraging our Atento Digital capabilities as we ramp a large new contract with a leading provider of transportation services in Latin America. Four, in growth in U.S. Nearshore, a $2.5 billion addressable market in which we have only 2.8% share. We continue to invest in our U.S. Nearshore business, which we see as a very attractive market. The political developments in the Philippines and depreciation of the Latin American currency have increased the attractiveness of U.S. Nearshore to U.S. firms. We've made very good progress here with relevant clients win in 2016. And finally, we continue to evaluate tuck-in and adjacent M&A activity to accelerate building capability and growing scale in attractive segments. Please turn to Page 7. Our objectives for 2017 are to return to topline growth as well as to continue maintain margins, drive cash generation and net income growth. In terms of guidance, we expect revenue growth in the range of 1% to 5% as a strong growth in the multisector will offset the decline in Telefónica revenues. These will remain stable through 2017, our fourth quarter 2016 levels consistent with a renegotiated and extended Master Service Agreement. Relative to margins, we are focused on maintaining underlying operating margins at the same levels of fiscal 2016 with a continued focus on disciplined inflation pass-through and efficiency initiatives. We also plan to make targeted investments to accelerate our growth initiatives, for example investments in Atento Digital as well as investments to ramp up new services. Do in part to these investments we expect the overall adjusted EBITDA margins to be in the range of 11% to 12%. We expect another year of strong cash flow generation with cash conversion of about 40% of adjusted EBITDA supported by our rigorous CapEx and working capital controls. Our cash flow generation will continue to support the program to accelerate the pay down of our higher cost Brazil debentures. Let me also comment on the shape of our financial for operating results in 2017. As you know there is normal seasonality to the Atento business with the second half stronger than the first. Although, we are not providing a specific quarterly guidance, as we look at the timing of business ramp up in multisector, growth in the second half of the year will be even more pronounced. In summary, before I hand it over to Mauricio, let me say that I feel very good about we have achieved in 2016 given the macro context. And although, we believe the macro environment will remain difficult in 2017, we are very confident of our ability to return to topline growth, maintain margins, and deliver strong cash flow and net income growth. I remain very excited by the prospects for the business as the leading customer experience solutions player in our market. Mauricio?

[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 on a year-over-year basis unless noted otherwise. In addition, as a result of our divestiture of Morocco in September of 2016, this business is now in discontinued operations and the revenue growth rates for our consolidated and EMEA results have been adjusted to reflect this. We delivered balanced results for fiscal 2016 aided by our performance in the fourth quarter, predicated on selective growth, margin protection, strict the working capital management, and improvement in cash flow. Looking at our consolidated results, growth in our multisector business has started to accelerate by 2.4% in the quarter aided by new client wins and share wallet gains. This growth however was more than offset by 12.7% decline in Telefónica, particularly related to Brazil, Argentina, and Mexico. Our diversification strategy is progressing well. Our mix of revenue from multisector clients increased 470 basis points to a record of 60%, in fact over 80% of our workstations won in the quarter were with exist and new multisector clients, mainly financial service and telecom industry. We haven’t been able to protect margins, as results of performance on disciplined growth, inflation pass-through and proactive cost and efficiency initiatives. These initiatives include the investments to align our cost restructure with the impact of volume of the market pressures and some our geographies including Brazil, Argentina, and Spain. Non-recurring items where a gain of $22.2 million and expense of $8.6 million for the year, both includes $41.7 million adjustments for the gain on our CVI in Argentina, which was eliminated in the fourth quarter, this gain was recorded as other gains in our financial statements. The elimination of CVI had no impact in our adjusted results. Adjusted EPS was $0.19, a decline of $0.17 driven mostly by foreign exchange impacts and increasing net interest expense at a higher share count. Turn to Slide 10. When you look at our segments in Brazil, our growth profile continued to improve sequentially with the revenue down 4.6%. Importantly, multisector returned to growth in the quarter up 2.2% driven by existing financial service clients and new client wins. We are encouraged by the improving growth profile in Brazil as the clients and GDP continue to moderate and consumer confidence is strengthened. Revenue from Telefónica declined 17% as a result of macro pressure and elimination of certain trade marketing programs. Our mix of revenue from multisector clients increased 460 basis points to 69%. In the quarter we won 1,436 workstations with 74% coming from existing and new multisector clients including other telco than Telefónica. Our mix of higher value-added solutions increased to 606 basis points to a record of 41.2% of revenue. Adjusted EBITDA increased to 5%, while adjusted EBITDA margin of 16.7% was supported by our proactive actions to restructure and align our cost structure with volume levels, effective wage inflation pass-through as well as improving mix of a higher value-add solutions. Please turn to Slide 11. Looking at Americas, in the quarter revenue declined 4.1% reflecting a deceleration in growth in both our multisector clients and Telefónica. Multisector grew 1.2% supported by double-digit gains in U.S., Nearshore, Colombia, and Peru. This gain, however, were moderated by Mexico due to lower volumes with some large clients in the financial services sector. Telefónica declined 10.2% driven by macro pressures in Argentina and they are exit of specific sales channels in Mexico. In the quarter, we won 802 workstations with new and existing clients with over 60% of new clients wins coming from financial services clients. Our mix of revenue from multisector clients increased 320 basis points to 56.7%. And finally, adjusted EBITDA margin decreased 300 basis points to 11.3% as we absorb the impact of decline in revenue. Proactive restructuring is underway to fully align our cost structure with new volume levels. Please turn to Slide 12. In EMEA revenue declined 2.6% of sequential improvement versus the third quarter than 11.7% increase in multisector was more than offset by 9.2% decline in Telefónica. Supporting our growth in multisector, over a half of workstations won in the quarter came from new financial services clients. Our mix of revenue from multisector clients reached 35.3% up 230 basis points, while our mix of revenue for high added value solutions increased to 140 basis points to 9.9%. Adjusted EBITDA margin declined 280 basis points to 9.2% driven by the decline in revenue. We continue to manage costs and efficiency relative to decline in revenue from Telefónica. Please turn to Slide 13. Looking at the cash flow and capital allocation, in the quarter we generated $90 million in free cash flow before interest, up $70 million year-over-year, our fourth consecutive quarter of cash flow improvement. And for the year, we generated $136.3 million in free cash flow, up $144.9 million a year-over-year. Our improvement in cash flow and cash conversion this year has been driven by our rigorous working capital focus and capital allocation discipline, as well as the structural one-off improvements in working capital, including the impact of those one-off improvements on conversion of free cash flow before interest as percentage of adjusted EBITDA was 36% for the year, up 16 percentage points over 2015. CapEx in the quarter was 5.5% of revenue, bringing our full-year of CapEx to $48 million or 2.7% of revenue, in line with our target. Please turn to Page 14. Turning to our balance sheet, I'm pleased to say that our balance sheet continues to get stronger enhancing our financial flexibility, end of quarter we had a full liquidity of $247 million, which includes cash and cash equivalents and undrawn revolving credit facilities. And we achieved a low leverage of 1.5 times net debt to adjusted EBITDA consistent with our long-term targets. Our leverage was favorably impacted by our voluntary accelerated payment of $30 million on our higher cost Brazil debt and elimination of CVI. Let's turn to Page 15. Before we will open the call up for Q&A, let me review our guidance for fiscal 2017. Our focus is to return to both top and bottom line growth, drive cash flow a make target investments that advance our competitive position. We are starting to see some signs of stabilization and recovery in Brazil. However, there are macro uncertainties Argentina and Mexico. As a result of this dynamics, we have a pragmatic view of growth for fiscal 2017. We are targeting revenue growth in the 1% to 5% range. We expect to return to normal seasonality this year, which means a modest sequential decline the first quarter from fourth quarter levels and a much stronger second half of the year. The relative and absolute performance of our second quarter will be even more pronounced as we benefit from the ramp up of new clients and share wallet gains in 2016 and 2017 from multisector clients, while we expect Telefónica revenues to stabilize at fiscal 2016 fourth quarter levels. We are targeting adjusted EBITDA margin the range of the 11% to 12%, which includes ongoing effort on cost efficient, a strategically investments to advance growth initiatives and ramp up costs as a result of a stronger commercial pipeline. We expect also roughly $30 million non-recurring items, most related to our program to drive indirect cost efficiencies. We started this program in the third quarter of fiscal 2016 and once completed by the middle of the year, we will reduce our indirect costs or mainly overhead by 12% to 15%. Looking at interest expenses, we expect net to interest expense to be in the range of $60 million to $65 million at current FX rate as of December 2016. As you consider the GAAP net financing line in our P&L, which is the combination of net interest and FX impact, please remember that our adjusted income and adjusted EPS, exclude the non-cash the fact of net foreign exchange gains on financial instruments. Intercompany balance and net foreign exchange impacts on cash position held in U.S. dollars by local operations. We exclude these items from the adjusted numbers to more clearly show the underlying health and trajectory of our business. Relative to CapEx, we are targeting between 3% to 4% of revenue. We expect effective tax rate of approximately 34% and a fully diluted share count of approximately 73.9 million shares. Our guidance does not assume any change in our current operating environment, capital structure, or exchange rate movements on the translation of our financial statements into U.S. dollars. Now, I’d like to turn the call over to the operator and take calls from the audience.

[Operator:]

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Susana Salaru of Itaú. Please go ahead.

[Susana Salaru:]

Hi, guys. Thank you for taking our questions. The first question is regarding 2017 guidance, specifically the EBITDA margin guidance. It’s always similar from what we have for 2016 and the Company actually beat the guidance in 2016. So we were just wondering if we are assuming that the Brazil economy will improve in 2017 if this guidance for 2017 is not a bit conservative and what’s the rational to be so conservative? That will be our first question. And the second question regarding volumes in Brazil, we are almost down at the first quarter of the year, if you have right identified an improvement in the activity in Brazil? That’s it guys. Thank you.

[Alejandro Reynal:]

Hello Susana. This is Alejandro. Thank you for joining the call. Regarding the first question, couple of comments first, I will say that we are taking a prudent and a pragmatic approach in terms of the guidance for 2017 and reflecting to an extended as we mentioned on the call still challenging macro environment in the region. So I think from that perspective, we’re being prudent and provided 11% to 12%, which is the same range as we provided last year. The other thing which is true is that we are expecting and we are actually making additional investments on one end for the growth initiatives. So in my comments, I alluded in a series of cases of the investments that we are making on digital capabilities for telecommunications and for financial services companies and we’re making those investments on an organic basis. So we’re building capabilities in terms of people and resources. So there is – the guidance those implied that there is some increased investment for the digital capabilities, which of course there is return on investments on those in the years to come, but there is some investment that we need to do now. And the other piece of investment that comes with our business, which at the end of the day is positive, but is the investment that we are doing to ramp up your business. As we are seeing better economic activity and therefore translated into growth, we are investing on ramping up companies, which has an impact at the ways for investment. So in summary, will be those three. One, prudent and pragmatic approach towards the year, but specifically in terms of things that we are doing, one is the investments on digital and second are the investments to ramp up new business. In terms of Brazil and the first quarter, yes and as I mentioned we see much more of the activity and growth back loaded this year. But having said that, we are optimistic about what we are seeing in Brazil and we are seeing the first quarter developing well in terms of increased levels of activity. So from that perspective some of the forecast and what we hope it was going to be the case for Brazil in 2017 is spending out well and we are happy because of that.

[Susana Salaru:]

Thank you, Alejandro. Very clear.

[Operator:]

Thank you. The next question is from Daniel Federle of Credit Suisse. Please go ahead.

[Daniel Federle:]

Okay. Thank you very much for taking my questions. The first one is if there is any [indiscernible] reason to see if the margin much higher in Brazil than in the Latam region. And my second question is if you could describe the competitive scenario in each one of the three regions if competition is increasing, decreasing, any color would be very good. Thank you very much.

[Alejandro Reynal:]

Thanks Daniel for the question and good to have you as well. In terms of the margins in Brazil, I would say that there is few things that are helping now. One is, we’ve been able to improve our business in Brazil. To that extent Mauricio mentioned that by now the percentage of business that comes from higher value-added solutions towards 40%. So those businesses come out of higher margin profile and therefore to that extent that is healthy in the margin profile of the business. Also we were very proactive as you may recall in the first – end of last year and first quarter of this year, making a series of adjustments to make sure that we had a lean and agile structure for the Brazil operation and now that the business is starting to pick up again. We're seeing that providing us good results in terms of margins. So I would say those two factors are clearly helping all the business mix and measures that we took earlier in the year to drive efficiencies and make sure that we had a very lean and agile operations in Brazil. With regards to the macro environment, we do measure our market share in the region and the good news with the latest numbers is that we have consolidated our leadership position. We have actually extended our lead in many of the countries in where we operate. In Brazil, we are clearly the number one player and gaining market share in that market. We feel very comfortable and very confident of our positioning there and there's no change in the competitive landscape and no competitive threats at this stage, therefore with Brazil very comfortable with where we are. In Americas, we also have a commanding lead. The nature of competition there is highly fragmented as well. There is no other regional player, so at the end of the day we deal with local competitors in each of the markets and that’s been the case in Mexico, Colombia, Peru and Chile. And then again, we don't see any competitive threats and remain at a very solid market share position in those countries. Lastly, with regards to Spain, also have a market leadership position there. Good news in Spain as I pointed out in the call and also Mauricio mentioned we grew 11% in multisector. So one of the things that we wanted to do in Spain was to start diversifying from Telefónica and we're successfully doing that. So to that extent, we are gaining share in the market in other verticals and such as utilities and financial services and without consolidating our lead. And then again, we don't see any competitive threats in the region. So in summary, we're very happy in terms of where we are from a competitive standpoint and working very hard to continue to increase that lead in 2017.

[Daniel Federle:]

Okay. Thank you very much.

[Operator:]

Thank you. [Operator Instructions] The next question is from Valder Nogueira of Santander. Please go ahead.

[Valder Nogueira:]

Good evening, team. Telefónica has been speaking about this new client relationship model, they call AURA. How does this impact your business? Is this a threat, is this an opportunity, how do you see it?

[Alejandro Reynal:]

Hi, Valder. This is Alejandro. Good question. Generally speaking what we're seeing in the market is that Telefónica, although telcos and financial services [segment, so there is – joint] to make the transition into the digital space and with that change the way they serve their customers. And from that perspective, what we did last year want to establish a business unit name Atento Digital to basically address those needs. And what we're seeing is specifically with the respect is that on one end clients are – and Telefónica is looking to grow and therefore exploring digital channels to do that. So from that perspective anything that we are doing on digital sales channels is helping and supporting the strategy. And the other piece which is more related to AURA things that are related to serving the customer and doing that in a more efficient manner and with a higher customer satisfaction. And to that extent, we have been developing platforms that address multi-channel servicing and also automation as well as both. So what I would say is that we are partnering with them and not only with Telefónica with other clients and making sure that the things that would develop through Atento Digital have been achieved their digital strategy, which again in some cases has to do with increasing sales and we are supporting that through digital channels and also helping them through improve their customer experience and reducing cost as well and to that extent we are doing that through multi-channel platforms, servicing customers not only via voice, but also via mail, chat, box et cetera. So at the end of the day, my sense of these and Company sense is that we got to embarrass the digital revolution, we got to be proactive and with that we got to be able to develop solutions in the digital space that address our client needs and we therefore partnering very closely with Telefónica with their strategy around digital and also with other currency and other verticals.

[Valder Nogueira:]

So on this digitalization, do you perceive the value to be added to your average ticket coming from the historical clients, coming from inside the customers house or up to entering a customers house, so is it a gain on the interest side or is it a gain on the final service as you enter the door of a clients premise?

[Alejandro Reynal:]

Yes. If I understand the question Valder, I think I’ve seen probably two different types of clients that we are dealing with which is very interesting. We are now dealing with digital owned company, so we have the cases of over cabify, air BNB, amongst others, which what they requires 100% digital servicing. So with those the migration is not there, basically you need to provide them services in a digital way and we are doing that. So you’re seeing because now you go to some of our call centers and is not a call center anymore it’s a platform which is 100% digital, so its email, its chat there is no voice, so I think there is one type of clients that are growing a lot in the region, which were servicing which are digital owned companies and it’s 100% digital. And now you have the other dimension, which is I would call it a more traditional clients, which is the telcos or financial services which are trying to make that shift into the digital world. And to that extent those are the ones that we’re also helping migrate by providing digital solutions. I think at the end of the day there's going to be a situation with anywhere – we're going to have to live in both worse in the world in where we still provide a lot of voice service because they're going to need it, but also increasingly be able to complement that with more multi-channel, digital service offerings and to that extent I think we're addressing both, we are addressing more demand and they have in-house, but also demand that is being outsourced, so we are addressing both.

[Valder Nogueira:]

Okay. That’s clear. Thank you. End of Q&A

[Operator:]

Thank you. There are no further questions in queue at this time. I would like to turn the conference back over to Mr. Alejandro for closing remarks.

[Alejandro Reynal:]

Well, Page 16 basically the recap, and I just want to thank everybody for the questions and for being part of the call. Just as a summary and very briefly, first, I want to say that we deliver on our key priorities for 2016, which were selected profitable growth, margin protection and cash generation and given the macro context fiscal 2016 were solid results. Second for fiscal 2017, we're targeting the return to both top and bottom line growth. We are, as mentioned during the call, very confident in our ability to return to growth based on our existing and new client business and also the investments we're making on our strategic growth pillars. We are also very confident on our capacity to deliver on strong cash flow generation which will support our earnings expansion. Thank you again, and I look forward to our next interaction.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your line at this time and thank you for your participation.