Atento S.A.
Q3 2015 Earnings Call Transcript

Published: 12 Nov 2015

[Operator:]

Greetings, and welcome to the Atento’s Third Quarter 2015 Earnings Conference Call. At this time all participants are in a listen only mode. A question-and-answer session will follow the presentation. [Operator Instructions] As reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lynn Antipas Tyson, Vice President of Investor Relations for Atento. Please go ahead, Ms. Tyson.

[Lynn Antipas Tyson:]

Thank you. Good morning and welcome to our fiscal 2015 third 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. 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 may 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 document 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 on investors.atento.com. Please note that unless otherwise noted, all growth rates are on year-over-year and constant currency basis. In addition, growth rates have been adjusted for the divestiture of our Czech business in December 2014. Our presenters this morning 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. At that point, we will open the call for questions. Following the Q&A, Alejandro will make closing remarks. I will now like to turn the call over to Alejandro.

[Alejandro Reynal:]

Thank you, Lynn, and good morning everybody. Please turn to page five. We have to start by saying that it’s been a year since our IPO, an important milestone and a good opportunity for us to reflect on the progress we’ve made in executing our long-term strategy and how this progress strengthens our competitive position now and in the future. To this end, we will cover primary three points today. First, the measurable and sustained progress we have made against our strategic initiatives, just one year after the IPO, as I mentioned; two, the competitive advantages and operational levers we’re using to help navigate microeconomic headwinds, particularly in Brazil; and third, our results reaffirm that our strategy is on track. Our vision enhance well or above industry growth and balanced performance in the future. At its core, as you might recall, our strategy is to deliver sustained above market growth and long-term value creation for shareholders, at the same time as we work to become the number one customer experience solutions provider in the markets we serve. This strategy is supported by three important pillars

[Mauricio Montilha:]

Thank you, Alejandro. I’d like to thank all of you for joining the call. 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 and have been adjusted for the divesture of our Czech Republic business in December 2014. We are pleased with our balanced operating and financial performance during the third quarter. Revenue increased 9.4% with an 11.7% increase in Latin America. Adjusted EBITDA increased 4.2%, driven our strong broad-based growth in revenue during the quarter. Adjusted EBITDA margin of 13.8% was down 120 basis points and this decline was driven primarily by two factors

[Operator:]

Thank you. We’ll now be conducting the question-and-answer session [Operator Instructions]. Our first question today is coming from Susana Salaru from Itaú. Please proceed with your question.

[Susana Salaru:]

Actually the question -- we have two questions here. The first one is related to CapEx guidance. The first quarter of the year and the second quarter, the guidance was 5% CapEx to sales and now it’s 6% because of the growth of new clients. I was wondering if you could elaborate if the growth was higher than expected and then you have compensated that with the higher CapEx guidance. That would be our first question. And then the second question is related to Argentina. You mentioned that there is a neutral impact year-to-date. So, does it mean that in the first half of the year the margins were little bit higher because of that and now it’s being compensated, just want to clarify how is that neutral impact year-to-date? Thank you.

[Mauricio Montilha:]

Well, first question Susana on the CapEx side when we put the guidance at the beginning of the year of revenue between 6% to 9% and CapEx at 5%, we all said -- at the end of the year or close all of the year, if you would be at top of the range, probably the CapEx would be a little bit higher. And what we are seeing even with Q3 numbers and the recent wins, we’re being successful in turning the pipeline into reality and therefore we being at the top of the range, CapEx will be slightly higher for the year. The second point related to Argentina, in fact in 2015 we are much more I would say normalized. So, we actually are pressing prices in Argentina according to the contract, so with Q2 we have price increase in Q3. What happened is that last year in 2014 the price increase in Argentina with some clients was agreed in Q3 and a lot of that price increase had some retroactive impact in Q3 that was supposed to be in Q2. Actually this year ‘15, the price increase has been done along the contract’s anniversary. So ‘15 is a very normalized, ‘14 was retroactive impact in Q3 related also to some price increases in Q2 given prolonged negotiations with the client.

[Susana Salaru:]

So Argentina, basically in third quarter [ph] that was the domain problem here when you compared to the previous year’s, not specifically 2015, right?

[Mauricio Montilha:]

Absolutely, 2015 is -- last year that was Q2 [ph] and this year we end up having better process or negotiations and in every quarter.

[Operator:]

Our next question today is coming from Diego Iñigo from Morgan Stanley. Please proceed with your question.

[Diego Iñigo:]

Thanks for taking my question. The first question is regarding the Americas business if you could elaborate how you are doing the nearshore business and how fast is this growing? Thank you. This is the first question.

[Alejandro Reynal:]

The overall evolution of the business is as planned. I did mention in my comments that we have now 1,300 workstations since we launched this initiative, which basically is the plan that we have. This quarter interestingly we closed -- we won two business opportunities that were not in the financial services or telco vertical. So I think it’s quite remarkable that we are now expanding our appliance [ph] outside what we traditionally have in the U.S. nearshore, which were mostly telco financial services. I would say that this is also very positive that most of the locations in where we are nearshore in capacity, we are getting upto capacity in terms of our ability to provide services. As you might recall, we established call centers in Guatemala, El Salvador, and Puerto Rico to service the U.S. nearshore and the ones in Puerto Rico and El Salvador are very filled up upto capacity and Guatemala is progressing very well. So, I would say that we are very pleased where we are and with the progress. And one of the things that we did as well in the third quarter is that we have brought a Chief Commercial Officer which is focused together with the existing team is to continue to push harder into the U.S. nearshore market. So in summary, very pleased where we are and looking forward to end of this year and next year to have more commercial wins in this space.

[Diego Iñigo:]

My second question is regarding your working capital. If you could just elaborate a little bit more about the trends, I guess when we compare to 2014 look very different from what you had in that year. So, if you could just give as a sense of your expectations for the working capital, this will be very helpful. Thank you.

[Alejandro Reynal:]

Mauricio, please go ahead.

[Mauricio Montilha:]

As we spoke last time in the second quarter release, generally speaking I’ll just give you an overview. Our working capital especially, the receivables -- big part of receivables be navigating between 10% to 12% of the revenue. This year particularly at the begin of the year, we had some I’d say delays in payments, as this improved in Q3 that’s also generating better cash flow results that we have. It’s not completely I’d say reverted, we’ve been working with some clients and also November and December getting much healthier by the end of the year. As you know we have [indiscernible] so the credit risk or receivable. As you also -- when we did the IPO -- and we have some final adjustments with Telefónica standard of credit term as part of the agreement. And that will happen in Brazil probably this year that we increase our receivables little bit more moving from 30 days to 60 days time. [Ph] After that we don’t see -- we see our working capital all over the year coming back to the normal that will be about 12% of the revenue. So, we had a pick up this year, especially in Q2 related to the some overdo [ph] especially working progress and receivables. So, this is getting back to normality and you will see some results. There will be small increase related to the adjustments to Telefónica, but we don’t see this -- we see this coming back in the future. So, I’ll say just historical levels.

[Operator:]

Thanks. Our next question is coming from Vera Rossi from Goldman Sachs. Please proceed with your question.

[Vera Rossi:]

My question is about Brazil and statement that Maurice you made about the margins. Could you expand on what will be driving the margin pressure in the next quarters in Brazil? Thank you.

[Mauricio Montilha:]

Well, Vera, as we referred out at the beginning of the year when we did our guidance, we had our perspective in Brazil and as we all know today, the Brazilian economy, not only the actual economic environment has deteriorated as well as the projections of this environment has deteriorated. One of the things that happened especially already for us up to date is high inflation that we expected. Although as I also pointed out in the call in the Q3 numbers, we still are doing better. However, we are facing already Q1, Q2, and Q3, for example the high energy costs, or higher rental than we expected. So the inflation has been higher than expected is already taking down some margins. So far we’ve been able to offset but as we said this deterioration has been far beyond our expectation and will start impacting our numbers moving forward. The other consideration here, as our clients also in this environment, our clients also facing some volume declines that although we don’t see completely in our numbers because we have up to Q3 significant wins of the commercial side. We continue to gain share of wallet but there has been some underlying into some existing contract volumes declines up to now, as you can see already in Brazil numbers for example for Telefónica. So, these are the two trends currently in our numbers that if the Brazil economy continue to deteriorated its performance, probably we’ll continue to be seeing in coming months.

[Operator:]

[Operator Instructions] Our next question today is coming from Leonardo Olmos from Santander. Please proceed with your question.

[Leonardo Olmos:]

I have two questions, the first one is with the most of macro scenario observed, have you been feeling an advance in M&A talks, I mean both from Brazil and outside? And the second one is regarding Brazilin margins, how much of the expansion was generated now, came from pass-through [ph] and how much by new contracts or new services? I mean I am asking because specifically in 2015 we had close to 10% inflation. Can we still think of two thirds being pass-through even with 10% increase in a one-ff year like that? Thank you.

[Alejandro Reynal:]

Let me -- I’ll take the first question and Mauricio will comment on the second one. You’re right, I think what the current macro environment is creating is more opportunities on M&A and I would extend that to carve out as well. We see, and I think this is to our advantage that Atento has strengthened its position in Latin America with the growth we’re clearly outpacing market growth and our competition. And we clearly have a very strong financial position versus some of our competitors. So to an extent, to me this is what has enabled us to strengthen our position in the market. Having said this, we are very strict in terms of analyzing M&A opportunities. For us, it has to cover two criteria from an strategic perspective, first it needs to be able to add capabilities to our current business and also on the second piece, accelerate our geographical footprint, if it’s aligned with our strategy, for example the U.S. nearshore component. And we’re looking into M&A with those two lenses. And from the perspective we’ve been approached with different opportunities. But up until, they’ve been our strategic criteria, and of course our financial criteria, we will not proceed. The other thing that we’re actively looking into couple opportunities with the current macro scenario for clients as we discussed last quarter, it’s an attractive option to dispose some of the internal assets they have in call centers and give it to us to manage it more effectively and provide with efficiencies. And we’re also looking into these type of deals and having proactive conservations with our clients. So, in summary, yes, I mean we see an increased level of M&A activity, we see competitors which have less strong position due to the macro crisis. But we would always take decisions based on our strategy and what we believe is more accretive to our financials.

[Mauricio Montilha:]

Leonardo, regarding the second question, just to clarify one thing about specially Brazil, I would say that a more relevant inflation environment or more -- in the case of Brazil, Leonardo, 70% of our cost, generally speaking in the Company, people related. And we actually increase talented people in general. So this year, we are not facing 10% inflation at the Company this year because in general we increase by 6.2% that is reflected in net year [ph] inflation. So, the challenge with this higher inflationary level into the people cost will come at the beginning of next year and after the beginning when we’re going to discuss with our clients. So this year, we’ve been able to pass close to the historical numbers as the same for two-thirds and continue to manage to have with our clients ways to exceed the margins in whole in a good shape, adjusting service levels or improving share of wallet. So, this year is being working I would very close to the average. But we talk 6.2 salaries in Q1. What we are seeing is that the other costs, rental; as you know, we don’t own the building that use and rental, we adjust it in the more I would side the current inflation that sometimes 9.5%, 10%. Electrical energy for example, although it’s not a huge cost for us, cost wise, we’d be facing [ph] depends on the site and location, 65% increase. So, this isn’t hitting us this year but the salaries, will hit us in the next year. So, the biggest challenge inflation for sure, definitely will be next year.

[Leonardo Olmos:]

And Mauricio, just a follow-up, but do you think maybe on the first-half or next year we might see some additional margin pressures on those deals because of that?

[Mauricio Montilha:]

Leonardo, as you know, it’s very hard for us to comment on this. But what I can tell you is that as we have a strong relation with our clients, we’ve been discussing with our clients related to this scenario that impacts the Europe business as well. And we’re going to continue to implement our strategy with our clients if completely price is not feasible to the best, so we have to find a way with our clients to keep the margins I’d say comparable or healthy margins for the business. I think this formula has been working for several years. And as we have long relationship with this client, we believe that we have a reasonable chance to succeed. But also having said that, that’s going to be a challenge because of 10% I’d say who knows where we’re going to end. But it will be a challenge for everyone. But we feel confident that quality, positioning our long relation with our clients give us the possibility to continue to do good business with them.

[Operator:]

Your final question today is coming from Alec Turner from Baird. Please proceed with your question.

[Alec Turner:]

Congrats on a good quarter. In terms of CBCC acquisition that you guys made earlier this year and the of last year, what was that contribution in the quarter to total Company in Brazil revenue?

[Mauricio Montilha:]

I don’t have here this number for the quarter. What I can tell you about the CBCC is it continues to be our good business with us. I don’t know if you remember when we communicated the largest retail [ph] in Brazil. And let me provide [ph] that the service we provided to CBCC to support their ecommerce platform, although you’d see the Brazil retail in generally suffering, when you split those numbers, you’ll see that outside physical stores and some part of the retail are worse than others, especially if we take items like automobiles and others. But it’s still the ecommerce is doing well. So, what I can say is that we still have a very good business with them. I know honestly I don’t have detail on that, but it’s still on our expectations for the year.

[Alec Turner:]

And then on solutions revenue, which is 24% of rise, it seems to be doing well. What percent of new client signs is from solutions type of work?

[Alejandro Reynal:]

It’s going well as an opportunity. And just to give you some numbers on new client activity, out of the 3,000 workstations, about 40% of those came from new clients; and then 60% from existing clients. And most of the activity that is coming from solutions come from existing clients because typically what we’re doing there is up-selling services with higher value added. So out of that 60%, around 75% come from solutions. So, a great piece of the new client -- I’m sorry, of existing client activities coming from the solutions business. And I think just to point out here as well the interesting piece is there a lot of solutions business that we have been gaining, comes from financial services, which is an area in where we are investing quite a bit strategically in the development of solutions, and we’re receiving a very good demand from our existing clients.

[Operator:]

Thank you. We’ve reached end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

[Alejandro Reynal:]

Thank you very much. As you can see on the last slide of the presentation, just wanted to finish with a few takeaways. I think the first one is that we are making measureable progress around our strategy and the commitments around growth, best-in-class and our people. Just to highlight a couple of key numbers for me one of them is the fact that in non-Telefónica revenue in Brazil, we grew 17% and in Americas in non-Telefónica revenue, we grew 23%. So, in spite of the macro headwinds that we’re facing, we are growing at a very fast pace, faster than the market. And also in this fast growth environment that we’re experiencing we are able to expand margins on a year-to-date basis. So, we are delivering on our strategy. As Mauricio pointed out and also myself in my comments, we do see that the macro headwinds are reality and that will continue, but to an extent the fact that we have our strategy and we’re executing well, it prevents us from suffering more than some other competitors suffering the market. And I would say that lastly we are on track in terms of our long-term strategy. We’ve made a clear roadmap two years ago. When we define our strategy, a year ago we went into the IPO and we have a clear plan for the years to come in terms of the roadmap to make investments that strengthen our competitive advantage for the long-term and deliver sustainable value for our shareholders. So, I would close by saying that I am very happy and pleased with the quarter that we just had and thank all our employees for the hard work and for the delivery of the results, and look forward to further interactions over the next days and weeks to continue to talk about the results of Atento. Thank you very much and have a great day.

[Operator:]

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.