Atento S.A.
Q4 2015 Earnings Call Transcript

Published: 10 Mar 2016

[Operator:]

Greetings, and welcome to the Atento Fourth Quarter 2015 Earnings 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 reminder, this conference is being recorded. I would now turn the conference over to Miss Lynn Tyson, Vice President of Investor Relations for Atento. Thank you Miss Tyson, you may now begin.

[Lynn Tyson:]

Thank you. And welcome to our fiscal 2015 fourth 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 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 at investors.atento.com. Please note that unless noted otherwise, 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 today are Alejandro Reynal, Atento’s Chief Executive Officer; and Mauricio Montilha, Atento’s Chief Financial Officer. Alejandro will begin with a brief review of our strategy and highlights from the quarter and fiscal year, after which Mauricio will review our results and fiscal 2016 guidance in more detail. After which, we will open the call for questions. Following the Q&A, Alejandro will have a few closing remarks. I will now like to turn the call over to Alejandro.

[Alejandro Reynal:]

Thank you very much Lynn, hello everybody. I am very pleased with how our company performed in fiscal year 2015, both financially and operationally, particularly in the midst of a very challenging market economic environment as we know specially in Brazil. For the year, we achieved our growth and profitability targets with a strong 9.6% increase in revenue, adjusted EBTIDA growth of 6.7% and adjusted EBITDA margin of 13%, all in constant currency. In addition, our balance sheet and financial flexibility continued to strengthen. We ended the year with $238 million in liquidity and net debt to adjusted EBITDA was just 1.6 times. The ultimate validation of our financial strength was the reclamation [ph] in our fourth quarter of our credit ratings by the rating agencies. This was in sharp contrast to recent downgrades in Latin America, both corporate and sovereign issuers. Separately in the fourth quarter, we were named for the third consecutive year as a leader in the Gartner’s 2015 Magic Quadrant which assist these companies that provides customer management, contract centered business process, outsourcing services. These achievements are particularly noteworthy when you consider then when we initially gave guidance for fiscal year 2015, it was expected that the GDP in Brazil our largest market would contract by 150 basis points. In fact, GDP contracted by more than 3 percentage points and the effect were compounded by currency devaluation and double digit inflation. Our strong top line growth improving mix of high value added services and best-in-class operations have helped us navigate much of these pressures. We applied our strategy which is based on three pillars; our market growth, best-in-class operations and our people who outperformed the market and extend our leadership position in the $10.4 billion Latin America CRM/BPO market. We remain the reference partner for the CRM/BPO needs of our clients. Our financial and operational achievements especially in contrast to the macroeconomic environment our evidence of our long term strategy is on track. Today, I would like to cover three primary points. First, the measurable and sustained progress we made against our strategic initiatives in fiscal 2015, second, our inherent competitive advantage and operational leverage that allow us to outperform the market in 2015 despite macroeconomic headwinds and third, how we execute in 2016 to ensure the optimal balance of growth, profitably and liquidity, our ability to make targeted investments to improve returns and pay down debts. Turning to our results in more detail. In the fourth quarter, revenue grew 8.4% supported by 16.3% increase from non-Telefónica clients who comprise now 55% of our revenue in 2015. Importantly, our mix of higher value added solutions increased 80 basis points versus last year. Latin America delivered another strong quarter with revenue up 10.2% driven by a 26.2% increase in revenue from non-Telefónica clients in Americas. Adjusted EBITDA showed a modest decline in the quarter as it sets in Brazil of macro-driven declines in volume from Telefónica and inflationary pressure continue. Adjusted EPS was $0.31 in the quarter, up 16.2% versus last year. Looking ahead to fiscal year 2016, we expect a challenging growth environment in 2016, particularly in Brazil where market pressures are causing some of clients to minimize cost increases by adjusting the CRM/BPO service levels and other clients to have declines in real volumes. Positively though in Brazil and in the rest of the Americas, some clients are now considering using CRM/BPO services for the first time or increasing the amount of service they outsource. And in both Brazil and the Americas, we are driving strong growth in non- Telefónica non-telco and financial services. Our best-in-class operations are driving cost and operating efficiencies. However, we are not completely immune to the contracted upwards market economic pressures specially inflation in Brazil. It’s impacting our clients, their customers as well as the impact on our cost structure. In this environment, Atento's committed to a differentiated business model and best-in-class operations will allow us to once again outperform the market on behalf of our clients. We will achieve this by driving [Indiscernible] our wallet between growth, profitability and liquidity. This focus ensures we drive long term value creation even in the challenging macro environment. For fiscal year 2016, we are targeting a revenue growth in the rate of 1% to 5% and for adjusted EBITDA margin to be between 11% and 12%. Both of these targets are in constant currency basis. Relatively to liquidity we do expect to show a meaningful improvement in free cash flow before net interest driven by an improvement in our working capital. Please turn now to page six. Now let me share with you a few comments on our accomplishments in the fourth quarter and full year in the context of our three strategic pillars

[Mauricio Montilha:]

Thank you, Alejandro. And I thank you; I thank all of you for joining us today. We are going to start from number 9. 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, giving our exposure to several currencies and geographies. Growth rates are year-over-year and have been adjusted for the divesture of our Czech business in December 2014. As Alejandro mentioned, we are pleased, we delivered strong growth into fiscal 2015 and achieved our full year targets with revenue growth of 9.6% and adjusted EBITDA margin of 13%. These results are even more noteworthy when you consider the persistent and challenging macroeconomic environment we stated in 2015 especially in Brazil and in Spain. Turning to the quarter, revenue was up 8.4% with 10.2% growth in Latin America and a 16.3% increase from non-Telefónica clients. Adjusted EBITDA declined slightly as our strong growth in revenue was more than offset by 160 basis points decline in adjusted EBITDA margin to 14%. This decline was driven primarily by Brazil and the Americas and a shift in the country mix due to the material evolution of Brazilian real. In Brazil, profitability was impacted by the macro-driven decline in revenue from Telefónica which places short term pressure on our margins until we align our cost structure and also double digit inflation. In the Americas, margin pressure came mostly from a shift in country and service mix, the ramp up of new clients and some inflationary pressures. We do expect these factors to impact our margins in fiscal 2016 especially country mix and the level of inflation we will be able to offset through price increases, cost reduction and efficiency initiatives. For the full year adjusted EBITDA margin was down 60 basis points to 12.7% of which half was due to change in country mix due to currency devaluation. In the quarter, we invested $14.6 million in non-recurring items, most of which related to the proactive alignment or cost structure with the market condition realities, particularly in EMEA and Brazil. As you may recall, in 2015 we said that given the protective macroeconomic headwinds, especially in Brazil we would continue to access opportunities to adjust our cost structure to match the realities of demand and we have done just that. Actions taken in the quarter included adjusted in lab or force levels and site closures to accelerate our strategic initiative to relocate health centers in Brazil to lower cost locations. For example, at the end of 2015, 58% of our health centres in Brazil were in lower cost sites an improvement of 5 percentage points year-over-year. We expect this to continue through the first quarter of fiscal 2016. In accessing opportunity to align our cost structure, we consider run rate savings, payback period and long term benefits to cash flow. As Alejandro detailed, our commitment to best-in-class operations coupled with our enhanced financial flexibility optimally position Atento to outperform the market and deliver balanced growth, profitability and liquidity even in a challenging macro environment as we face there right now. We will continue to apply rigor to our cost and efficiency initiatives to ensure we can align our cost structure with the market condition realities. Please turn to slide number 10. Turning now to our segment, in Brazil we where -- where we continue to extend our leadership position. Revenue was up 4.5% in the quarter. Topline growth was broad-based across all major verticals as we increased our share of wallet with existing clients and all-new clients. Our mix of higher value added solutions increased 140 basis points, particularly among our non-telco vertical clients. In the quarter, we won business for 2,670 workstations with 72% of them coming from new clients. Non-Telefónica revenue increased 13.4% driven by 28.9% increase in multi-sector clients and helped growth in the financial service segment. The mix of non-Telefónica revenue has steadily increased in Brazil reaching 64.4% in the quarter, up 490 basis. Telefónica revenue declined 8.5%, as a result of the macro-driven decline in volume. Adjusted EBITDA declined 8.9% as topline growth was more than offset by a 210 basis points decline in margin. Excluding the allocation of corporate costs, adjusted EBITDA margins decreased 90 basis points to 16.4%. Brazil has become increasingly challenging for our clients and their customers as the macro environment is both more severe and more protected than expected, while our model is resilient, and we have taken proactive actions. The share dollar amount of inflation, we and our clients faced significant and will continue to impact our margin. On the slide 11 now turning to Americas, revenue grew 18.2% supported by approximately 600 new workstations awards in the quarter, and a 31% increase on the mix of value added solutions. Revenue from non-Telefónica clients increased 26.2%, driven by strong growth from new and existing clients in most markets, especially in Mexico, Colombia, Peru and our U.S. Nearshore business. Revenue from Telefónica increased 9.6% supported by double-digit gains in the Mexico, Peru and Argentina. Adjusted EBITDA increased 6.8% driven by strong growth in revenue. Adjusted EBITDA margin excluding the allocation of corporate costs declined 270 basis points to 15.6%. The decline in margin was mostly due to the shift in the mix of service in the country, ramp up of new clients and some inflationary pressure. On the slide 12, turning EMEA, where we see EMEA shows steady sequential improvement in fiscal 2015, but it is still affected by the competitive telecommunications environment in Spain and declines in public administration. Our action strategy as to the market condition, realities including the fourth quarter have helped to stabilize revenue growth and our best-in-class operations are driving improvement in costs and efficiencies. Revenue declined just 2.9%, driven by 3.2% decrease in revenue from non-Telefónica client. These declines were attributed to lower volume and our decision to exit lower value contract from public administration in Spain, which more than offset the healthy growth from private sector clients. Revenue from Telefónica declined 2.8%. The decline in revenue contributed to a 7.8% decline in adjusted EBITDA. However, adjusted EBITDA margin excluding the impact corporate allocation increased 10 basis points to 12.3%, reflecting the benefit of our cost and efficiency initiatives. Please turn to chart 13. As you know cash flow and our balance sheet are both critical to enhanced our financial flexibility and strengthening our competitive position. In the fourth quarter we generated $23.9 million in free cash flow bringing full year to $4 million positive in line with our expectation. Note, these numbers are before net interest expense. If you adjust for the cash portion of our full year non-recurring items, free cash flow for the quarter would have been $27.6 million. Our balance sheet remained strong with low leverage of 1.65 times, net debt to adjusted EBITDA. We have ample liquidity of $238 million which include cash and cash equivalent and undrawn revolving credit facilities. Total net debt with third parties, totaled $391.6 million, a decline $23.4 million versus last year. Importantly, our debt ratings have been reaffirmed by rating agencies, amidst downgrades in Latin America debt to market, both in Corporate and Sovereign issuers. These validate the resilience of our strategy and financial health. As a reminder, we have limited transaction currency exposure since 98% of our comps are denominated into same local currency as associated revenue. In addition to that, our debt is mostly denominating local currency or hedge against currency fluctuation, which largely insolate us from high volatilities scenarios. The Brazilian debenture and BNDES, the Brazilian National Development Bank Financing are denominated in the Brazilian real currency and U.S. denominated bond is hedged into a basket of local currencies of the countries of bad debt security. On the next chart 14 and before we open the call up for Q&A let me review in more detail our guidance for 2016. As we have mentioned before we expect 2016 to be a challenging growth environment. To ensure, we drive long-term value creation, our focus is straightforward. Drive optimal balance of growth, profitability and liquidity, opportunistically investment to extend our competitive advantage and strengthen our balance sheet by paying down debt. So, let me start with revenue. We are targeting revenue growth in the 1% to 5% range, which reflects two dynamics we experienced in the fourth quarter. The first is a strong commercial momentum across most verticals and a most sponsors as we renew business, grow our share wallet with existing clients and further diversified our client base. Second dynamic is the negative effect of a protected macroeconomic environment in Brazil. As we balance these two dynamics we believe we can outperform the market. Turning to profitability, we are targeting adjusted EBITDA margin in the 11% to 12% range. This range incorporates several factors including the proven [ph] mix of higher value added solutions, increased penetration of verticals such as multi-sector and financial service, and the benefits of our cost and efficiency initiatives. Offsetting those benefits, though, is the impact of country mix as Brazil, which is the high margin region, becomes a smaller percent of total revenue and having to absorb inflation that’s not passed on through pricing. Relative to liquidity, we expect to continue to improve our management of our working capital which will drive a sharp increase in free cash in 2016. On the non-recurring items which are included as add-backs in adjusted EBITDA, are expected to be approximately $15 million with about two-thirds in the first-half of the year. As we have mentioned in the fourth quarter we took proactive actions to align our cost structure with the market condition, reality and strengthening our competitiveness. And this will continue into the first quarter of fiscal 2016. We also expect net interest expense in the range of $60 to $65 million, which reflect impact of $27 million in debt payment in 2016. As we consider the GAAP net financing line in our P&L with the combination of net interest and FX results, its important for you to remember that our adjusted net income and adjust EPS exclude the non-cash effect of a net foreign exchange gains on financial instrument and net foreign exchange impact. We exclude this from our adjusted numbers to be more clearly – to more clearly show the underlying health and trajectory of our business. We are targeting cash CapEx of approximately 5% of the revenue driving by investment both growth and maintenance, and effected tax rate of about 32% and a fully diluted share counts of approximately 73.8 million shares. As you think about our revenue and adjusted EBITDA margin targets for fiscal 2016, there are few things you should consider. Typically, we generate a little bit over 60% of our revenue and about 60% of our adjusted EBITDA in the second half of the year. With the fourth quarter been our strongest for net growth and the margin perspective, we would expect this seasonally to be pronounced this year for several reasons. First, the macro headwinds in Brazil are still quite strong especially on year-over-year basis. Second, we exit 2015 with a lower revenue growth trajectory and adjusted EBITDA margin level. And third, the full benefit of price increases normally capture between our second and third quarter in connection with the annual contract reviews. As a reminder, our guidance assumes no acquisitions or change in the current operating environment, capital structure or exchange rate movement on the translation of our financial statement in U.S. dollars. Now, operator, please explain the Q&A process, and poll for questions.

[Operator:]

Thank you. We will now be conducting a question and answer session. [Operator Instructions] Our first question is from Diego Iñigo of Morgan Stanley. Please go ahead.

[Diego Iñigo:]

Hi, guys. Thanks for taking my questions. Actually I have two questions if I may. The first one, I just want to better understand your guidance. So in 2015 you grew 9.6% year-on-year on local FX. You had 30% EBITDA margin. So, my question is, how should we think and how should we estimate your revenues decline to 1% to 5%? And your EBITDA margin, you know this range of 11% to 12% what will happen and how should we think about the breakdown for region? Thank you.

[Alejandro Reynal:]

Thank you, Diego. This is Alejandro. Let me give you my reviews and perhaps as well as Mauricio, if you want then follow-up. I think as Mauricio and I pointed out on the presentation, the best way to think about it is the effect that Brazil will have into 2016. I think if you think the regions, Americas and EMEA, the trends and expectation in terms of growth margins is very consistent with what we’re seen in 2015. And to me really we’re taking some more prudent approach for Brazil. And basically there is few factors that are impacting these. Of course as the macro which as we have mentioned macro impacts on volumes and also on inflation which both volumes from our clients and inflation in our costs, those are very clear impact that we are seeing in 2016 and are actually more marked that in 2015. And the other issue that is also important to take into consideration in 2016 is how is the business with Telefónica evolves in the year. As you know with the revenue from Telefónica, non-Telefónica and we experience a decline activity in the fourth quarter of 2015. So therefore we are taking a more prudent approach as well on how do we see the revenues coming from Vivo in 2016. So again, I think we are very consistent with the way we’re executing the strategy, the evolution in terms of strategic growth verticals is going very well. U.S. Nearshore very strategy verticals in Americas and others, So all of that is very much consistent with 2015. Again, we’re taking more prudent approach, because of the macro and time specific situations is in the particular case of Brazil. And therefore when you’re looking to the guidance that we’re providing, where we see most of the change in the year is in Brazil. Again, we will continue be market leaders, grow ahead of the market in Brazil. We will continue to have margins ahead of our competitors in Brazil, but it’s a true reflection of what we’re seen happening with the market and with some of our key clients.

[Diego Iñigo:]

Okay. Thanks Alejandro. Yes, so the second question is just to better understand your contract, your agreement with Telefónica. I mean, volumes you know are down significantly at least in the first quarter. So, the question is how far they can reduce the volumes with you? Should we continue to think that at least like in Brazil, Vivo will cut their volumes by like high single-digit with you guys? So, that’s how should we think about your relationship in 2016.

[Alejandro Reynal:]

Yes. Good question, Diego. First think that I will say that the relationship with Telefónica had a good standing and of course we continue to have the MSA agreement in place up until 2021. And I would also say that MSA target for 2015 were met, so, and again at a very good relationship level in other countries including Brazil. The fact that volumes came down in Brazil is not a reflection of how we are performing. If you look at our share of wallet in Brazil, it actually has increased. We’re getting more share and this is because we are the service quality rankings for all the businesses that we provide or services that we provide to Vivo, number one. Therefore, we continue to have the highest share, growing that share with Vivo in Brazil, because we’re providing the best quality. What you see in the overall of the group is that some countries are compensating their clients that we see in Brazil. Therefore in the overall scheme we met the MSA targets for the group in last year. Reality is that in the case Brazil the situation of Vivo is a reflection of the market environment that the company is seeing in Brazil and also the fact that they are taking proactive measures from reduction in certain parts of commercial campaigns to reduction of volumes with certain services that they provide. And this is a fact and the reality is that we need to – at least continue to be able to providing the best services, continue to be number one in the quality of ranking. In order to continue to benefit from their highest amount of share from their business, and this will continue relocate in 2015. But again, the reality is that in the particular case of Vivo and this is not what we’re seeing in other countries with Telefónica, but in the particular case of Vivo, they are reacting to a very top macro environment and we are taking proactive measures on how much they spend. Again, at all and by no means the relationship that we have with them which is very good and also the fact that we have a very high share of their spend in terms of BPO CRM services.

[Diego Iñigo:]

Okay. Thanks Alejandro. Very helpful.

[Operator:]

Thank you. The next question is from Susana Salaru of Itaú. Please go ahead.

[Susana Salaru:]

Hi, guys. Thank you for taking questions. Actually we have two questions. The first one is related to EBITDA margins, and it was mentioned that both in Brazil and in Americas there was an effect coming from ramp-up of new clients. So our question here is with this ramp-up of new clients already concluded and we should expect margins to go back to real to normality that would be our first question? And then the second question if you could comment specifically on Brazil how the payable tax hike negotiation are coming along? Thank you.

[Alejandro Reynal:]

Thank you, Susana and nice talking to you as well. On the first question, yes, I mean, we are seeing impact on the ramp-up of new clients. I would say it’s more pronounced on the Americas. As we mentioned which I think is quite remarkable. In Americas we grew at a rate of 26% in the fourth quarter in non-Telefónica revenues and these actually the highest percentage growth we have achieved in a year, so the second reflection of all different avenues and investments that we’re doing in the Americas. Therefore, the impact of ramp-up cost will continue to happen in the first quarter of a year, because we’re still ramping up a business that we want. In Brazil is less of this impact, of course, we’re having a combination of factors, one been the ramp up of new clients, but also in Brazil it gets mix with this effect of inflation and some other adjustments that we’re having to make with other clients that is just the opposite case in terms of we’re seeing some volume declines. So in Brazil it’s mostly a mix of effects in terms of ramp-up of new clients but also the pressures we’re seeing in inflation and some decline in volumes as well. In the case of the second question, we are and actually this speaks for both, not the payable tax, but also the past [ph] growth inflation. We’re in the midst of the negotiations now. We just closed a few weeks ago in Brazil the agreement with the unions which ended up being a good and positive agreement for both parties, for us and for the unions. And now we are in the process of the negotiations with our clients in terms of the passing of the inflation and the tax. Actually it’s going well over the worst period of the beginning and we expect these two happen between first quarter and second quarter of this year. As you know this year is more challenging because of the level of inflation that we need to pass into pricing, but again the benefit of a good negotiation with the unions together with the conversations we’re having. With clients we’re optimistic in terms of reaching good results here. Specifically at the payable tax, we are as you know following a different approach here. From our perspective this is something that we just need to pass through, it’s not a negotiation and is contractually agreed with many of our client contracts. So therefore with ones that we have been able to close the negotiation that has been able – we have been able to pass. That’s been early to tell because we expect this to continue to be negotiated together with a wage inflation pass-through between the first and second quarter of this year.

[Susana Salaru:]

Great. Thank you. Just one clarification. How much was the collective bargaining agreement with the unions, is it possible to say?

[Alejandro Reynal:]

Yes. It is complex because the way we have negotiated the agreement with them is based on – its not based on the full inflation, as you know full inflation is under north of 11% and we have negotiated with them. It’s an increase that goes soft on a per quarter basis. So therefore there is an increase of wage conditions for the first quarter, then second quarter, third quarter, fourth quarter. So when you do the blended average for the year its actually low than the actual inflation. That’s why I refer to the fact that it was second negotiation because on this year we were able to negotiate something that it’s below the actual inflation, so it’s positive on that perspective.

[Susana Salaru:]

Okay. Great.

[Alejandro Reynal:]

It is hard to give you a number because it’s a blended average for different conditions for different conditions, but it’s below the actual inflation.

[Susana Salaru:]

Great. Thank you.

[Operator:]

Thank you. The next question is from Mauricio Fernandes of Bank of America/Merrill Lynch. Please go ahead.

[Mauricio Fernandes:]

Good evening, Alejandro, Mauricio and Lynn. Quick, actually back to Telefónica performance and then two on guidance for 2016, I was under the impression, I might be wrong. Please correct me in case that the Telefónica been in revenue commitment was relatively flattish over say, perhaps the period of 2012, and it think to me and its unclear whether tax revenues on were down or not, but Brazil down fourth quarter by 8.5%, while you mentioning the same targets in 2015. Just wanted to see if there was – what should we expect tax specifically, maybe on a consolidated basis better otherwise in on the main regions assume [ph] for example for 2016, whether this new item is declining or not. And then fully understand the macro challenge was driving 1% to 5% of revenue growth. But in terms of trying to preserve margin, I would expected margin to be flattish maybe even higher in 2016 despite the economic environment, again to protect profitability. So I’m just little puzzle with the fact that margins will still be potentially down 2016? Thank you.

[Alejandro Reynal:]

Thanks Mauricio. Let me start and then allow Mauricio to jump into the question. In terms of the Telefónica MSA and where growth has been evolving. The MSA actually was based on 2012 terms, meaning that you will – they spend done by Telefónica that one in time, it was actually relatively high bar. And every year that amount increase by inflation and its inflation just based on all the countries. And therefore what has happened is that we’ve been growing ahead of inflation in all the countries because we’ve been ahead of the MSA. At least in the case for all these years including 2015 where we’re ahead of the meaningful threshold. Reality is that these as you pointed out include the negative 8% from Brazil in the fourth quarter. Therefore what it means we are having actually the growth with Telefónica in the Americas was close to 10%. Therefore that is compensating partially Brazil and partially EMEA. Therefore we expect this kind of dynamic happening in 2016. Realities that in the case of EMEA which is basically Spain, we don’t foresee any growth with Telefónica actually good thing is that some of the declines have stabilize with fields we see a flattish type development with Telefónica in the market. And in the case of Brazil, the reality is that we will see the business coming from there declining. But then again on back of having the majority of the share of their business and on the back of providing the best quality to them, but this is just the nature of their business and again a reflection of macro and also the efficiencies they are looking in their strength. So therefore again threshold for the MSA in 2016 is going to be again increase by the value of inflation what we do sees that some of the growth within different countries and the Americas might compensate what we see in Brazil and Spain. In the case of the question on the margins, again, to me the factor here is mainly Brazil and the issue being a combination of factors, one, volumes which at the end of the day and the kind of volumes insides services basically Telefónica which not brings adjustments that we need to do in terms of operational costs to drive down over capacity and that’s the fact that we need to manage in 2016 and that impacts on the margins. And also as you think about the inflation pass-through, I mean, this year we will need to pass in the range of 10% of inflation to our clients. And historically we’ve been able to pass the service of inflation into pricing, but inflation is this highs, this two third causes the leakage of one-third that we kind of put some of that for efficiencies, but it becomes harder when the magnitude is this high. So, we will again, that was impacted at the group level, the cost projections and margin projections is mainly Brazil and mainly the factors that we mentioned, the macro and the evolution of Telefónica in Brazil. One thing that I would say which to me is positive in the evolution of the company and as we see how 2016 and 2017 and 2018 span out, is that for us the way that Telefónica will continue to decline which is positive in terms of client concentration. And the other thing that I think is very positive is that the weight of the Americas will continue to increase. As we se the numbers spanning out in 2016, Americas is going to weight more than Brazil, which I think this is very interesting for us, because at the end of the day it gives more of a Latin America play and exposure to attend to versus purely a Brazil concentrated business. And I think this is fairly attracted to us. I don’t know Mauricio Montilha if you have anything to add on this.

[Mauricio Montilha:]

Just one additional comment, I think you did cover all the key pillars. I think Mauricio, I think there’s one point is that we mentioned in the Q4, we have the benefit of operating in diverse geography, but one thing that’s happening as you can see the FX is impacting us in a different way. So Brazilian real was almost 50% of [Indiscernible] so the mix effects of the countries impacted us in profitability 30 basis points for the year. For Q4 this mix affects about 60 basis points. So if you think that is something that we are exiting the year with a different structure giving the different – the way the currencies are playing out. Year-over-year we know that probably the average next year will be in Brazil compared to the average this year is still devaluation. We never know. But the exit rate of 2014 if you take Q4 already brings our profitability to structurally in the sense such because of the currency movement. The other aspect Alejandro mentioned I just want to reinforce one is that we’re being very pragmatic is when we have a 6% inflation a year, you will pass two-thirds is four, so you have a gap of two. When you have 11 the gap is 3 point something. So, this is going to be a tougher year and we are – I think we are being very pragmatic in terms of how we are projecting our business in order to go back to the drawing board and see how we can adjust cost base and improve the efficiency, but we are really focusing on a tougher year to adjust the new realities and the volume changes, they also some inefficiency in our business and we see some of this, as we see the exit rates of this year did some of those changes in volumes also coming for 2016.

[Mauricio Fernandes:]

Thank you, Mauricio, Alejandro. Appreciate the transparency.

[Operator:]

Thank you. The next question is from Valder Nogueira of Santander. Please go ahead.

[Valder Nogueira:]

Good evening guys. You have the guidance for revenues for 2016 significantly lower than I believe we had here. However the drop in EBITDA margin isn’t that large, present that you drop from the two lines that are in my view quite different. Mauricio mentioned some potential gains of efficiency and where are those coming from and from where, that’s the first question. And the second question you have a guidance of cash CapEx of about 5%, how sustainable at these lower levels, this level of CapEx can be going forward?

[Alejandro Reynal:]

Thank you very much for the questions. Valder, nice talking to you. Mauricio, do you want to cover these questions.

[Mauricio Montilha:]

Yes, of course. Valder, I think on the efficiency, we – just go back a little bit, when we did the IPO we laid out the plan, more mid-term plan with several levers through efficiency and we are glad that we that well in advance, because this is really giving us the advantage today. What’s happening is there are some of those levers that we haven’t progress it a lot. We’ve made some progress but there’s more progress to come for example the IT transformation that we are I’d say, although we have done already several projects but the book the transformation has still to come. The first wave is for example, in the productivity for example we’re really focus on the staff utilization and we are getting to a very I’d say, high levels on that. We have new ways in terms of investing automation for example; to not only for normal call center operations but as you know we are investing also in automation or in technology to help us due to high end solutions. So I would say that that’s more efficient, kind of more from the technology either IT infrastructure, but I also the application of technology to our baseline business that will help us to come with some efficiency moving forward. What we are stating in the guidance is given the high level of inflation we are seeing in our results as we talk about usually you know labor that’s a more important cost but we cannot forget that leasings are -- we are trying to negotiate leasings now, but they are impacted by general inflation for example. We have electrical energy almost in some case 50% to 60% [ph] increase, so that is being our dilution and some impact of this inflation why we get pricing increase. So, we think the balance for this year is not significant positive, it actually will be some leakage, but we see a lot of opportunities to enhance efficiency in the business with those new ways as I mentioned before.

[Valder Nogueira:]

Okay. And on the CapEx side?

[Alejandro Reynal:]

On the CapEx I apologize for not coming. I’m sorry, I’ve got flu and… If you step back a little bit, if you look at our numbers for example, non-Telefónica business we grew 15.7% in Q4, and that 26% in Americas, 13.4% in Brazil. So we feel I think that’s a good thing, I think this also speaks for the quality and our competitive advantage in the Brazilian market and the Latin America in general. We still see opportunities to grow moving forward. So there is even there is 1% to 5% guidance we are saying yes, there is some [Indiscernible] clients and the base line business as we all -- for example, in the financial sector in Brazil we all have being seeing all the related industry for example, the mortgage industry has dropped significantly credit cards are often sold, this has also impacted the CIM activity. There are also plus in the base line business so collections is going well, several other activities are going well but the net to net in certain case is not positive. In the telecom as we always see outsourcing and telecom market in general is -- thing with a number of subscribers and people with spending less money. So we see the net in the base line, some negatives but we also see the good opportunities share of wallet and new clients. So the CapEx is driven more because we will continue with a good growth, with the new clients and new projects in existing clients. So that’s why we are forecasting about 5% of revenue for next year given the growth that you are seeing in Q4 for non-Telefónica clients despite some volume declines and some challenging volumes in some segments or some problems for example. We still see the opportunities to go there. That’s why the CapEx and 5% supporting those activities. All-in-all, it’s just still as I mentioned the total impact of is not as positive as if we would have a normal year. We cannot forget that you know it’s going to be a second year of GDP very negative in Brazil and we also when we based on what we see in the market as to more on employment to come, so we haven’t you know Brazil hasn’t got the negative go to the bottom of the negative cycle at this point and that’s why we are projecting our numbers as one.

[Valder Nogueira:]

Okay. Thank you sir.

[Operator:]

Thank you. Our final question comes from Adam Darns [ph] of Robert W. Baird. Please go ahead.

[Unidentified Analyst:]

Hey guys thanks for taking my questions. Quickly on the guidance. If I heard you right, it sounded like you said that for the Americas and EMEA we are going to kind of trend in 2016 similar to how we exited this year, so maybe mid-teen constant effects for Americas down low mid single digits for EMEA. If that’s corrected teams like Brazil, your guidance kind of implies flat to down on a constant FX basis in 2016, did I get that alright?

[Alejandro Reynal:]

Thanks for the question on that, Mauricio you want to fill this one up.

[Mauricio Montilha:]

Yes, I think you are right. It’s mathematically what we are seeing is the exit rates that we are leaving 2014 they are pretty much a good proxy what’s going to happen into 2016. The point is in Brazil is there’s going to be a second year of a deep I’ll say recession and as we always mention that a long summer, I’ll say some challenge in the macro environment actually they helped the CIMB bill but a long period may impact us and that’s what we are seeing. So your conclusion is pretty much what we believe is going to happen next year, that’s implied into the guidance.

[Unidentified Analyst:]

That makes sense. And then you talked about 10% inflation hoping to pass through two thirds of that. Is that call it 5% to 6% revenue, is that in the 1% to 5% guidance or is that something you are still negotiating and potentially upside to the current guidance, if you are able to pass that through?

[Mauricio Montilha:]

That’s a good question, I don’t know Alejandro if you want to comment. I can continue on that.

[Alejandro Reynal:]

Yes, please go ahead.

[Mauricio Montilha:]

The guidance includes our ability to negotiate there for next year. It is included in the guidance, there is nothing excluding that. The only thing excluding the guidance is that we don’t guide about the exchange rates or acquisitions or any other but it is included in the guidance.

[Unidentified Analyst:]

Okay, that’s helpful. And then I guess real quick one last one, you talked about free cash flow improving a little bit. Are we at a point yet where 2016 would see positive free cash flow after net interest or still kind of working towards that?

[Mauricio Montilha:]

Well just going back to our plan as we mentioned before with accelerated there were some consumptions. We -- what we are looking at especially in this difficult scenario being more pragmatic [ph] as well in terms of selective growth. We think that probably next year our target is to get to pay the interest, generate enough cash to be positive after interest payment. [Audio Gap] and this is a trajectory we laid out when we did the IPO, so we want it to be 2017 in a good way, you know heading close to what the competitors or comps have, so 2016 has to be a year that we are going to be able to be on the positive side, slightly positive before interest.

[Unidentified Analyst:]

That’s great to hear. Thanks guys.

[Operator:]

Thank you. That was all the time we have for questions. I would like to turn the conference back over to Mr. Reynal for any closing comments.

[Alejandro Reynal:]

Thank you everybody and not much to add on our end. Once again from the time I’m sure we’ll follow up on equations, you may have and we are very happy to do that as we want to make sure that there is very good understanding on 2016. I would say though that I mean we are first very happy and pleased with 2015. We were able to meet our objectives and also we have very positive progress in our strategic initiatives and the strategic path that we have laid out for the company, so that’s a big big positive for us. Thanks to all the work from our people, but we are very pleased with that outcome. We believe, we have the basis and the competitive advantage and the operational levers to continue to outperform in 2016 despite this macro headwinds that we are seeing and we just spoke about. And again, we are going to be very much focused as we are -- as we speak in executing in 2015, continue to be very much focused on our strategic priorities which are basically to ensure that we have the optimal balance of growth, profitability and liquidity. We’ll continue to make targeted investments to improve the returns, pay down debt, but again here that we are going to continue to be very focused on what are the things that made us successful in 2009 and 2015. Thank you again very much for your time, your interest in our story and look forward to catching up very soon. Thank you.

[Operator:]

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