Atento SA (ATTO) 2015 Q4 法說會逐字稿

Greetings, and welcome to the Atento fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Lynn Tyson, Vice President of Investor Relations for Atento. Thank you, Ms. Tyson. You may now begin.

Thank you, and welcome to our FY15 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 un-audited.

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, growth rates have been adjusted for the divestiture of our check 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 I year, after which Mauricio will review our results and FY16 guidance in more detail.

Afterwards, we'll open the call for questions. Following the Q&A, Alejandro will have a few closing remarks. I'll now turn the call over to Alejandro.

Hello, everybody.

I'm very pleased with how our Company performed in FY15, both financially and operationally. Particularly in the midst of a very challenging macroeconomic environment, as we know, especially, in Brazil. For the year, we achieved our growth and profitability targets, with a strong 9.6% increase in revenue, adjusted EBITDA 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. Our net debt to adjusted EBITDA was just 1.6 times. The ultimate validation of our financial strength was the reaffirmation, 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 assesses companies that provide customer management contact center business process outsourcing services.

These achievements are particularly noteworthy, when you consider that when we initially gave guidance for FY15, 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 effects were compounded by currency devaluation and double-digit inflation. Our strong top line growth, improving mix of higher 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, above market growth, Best-in-Class operations, and our people, who outperform 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, are evidence of our long-term strategy is on track.

Today, we'd like to cover three primary points. First, the measurable and sustained progress we made against our strategic initiatives in FY15. Second, our inherent competitive advantage and operational levers that allow us to outperform the market in 2015, despite macroeconomic headwinds. And third, how we will execute in 2016, to ensure the optimal balance of growth, profitability and liquidity, our ability to make targeted investments to improve returns and pay down debt.

Turning to our results in more detail, the fourth quarter revenue grew 8.4%, supported by 16.3% increase from non-Telefonica 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-Telefonica clients in Americas.

Adjusted EBITDA showed a modest decline in the quarter, as effects in Brazil of (inaudible) clients in volume from Telefonica, and inflationary pressures continue. Adjusted EPS was $0.31 in the quarter, up 16.2% versus last year.

Looking ahead to FY16, we expect a challenging growth environment in 2016, particularly in Brazil, where market pressures are costing some of our clients to minimize cost increases by adjusting their CRM/BPO service levels, and other clients to have declines in [available] volume. 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 services they outsource. And in both Brazil and the Americas, we're driving strong growth in key (inaudible) accounts, such as non-Telefonica telco and financial services.

Our Best-in-Class operations are driving cost and operating efficiencies. However, we're not completely immune to the protracted adverse macroeconomic pressures, especially inflation in Brazil, its impact on our clients, their customers, as well as the impact on our cost structure. In this environment, Atento's commitment 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 the optimal balance between growth, profitability and liquidity.

This focus ensures we drive long-term value creation, even in a challenging macro environment. For FY16, we're targeting a revenue growth in the range 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 6. 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, growth, Best-in-Class, and people. I will also touch on a few areas where we're making targeted investments, to enhance our capabilities and proactively capitalize on long-term CRM/BPO growth opportunities. Overall in the quarter, growth was supported by commercial momentum across most verticals, as we acquired new business, grew our share of wallet with existing clients, and further diversified our client base.

We were awarded close to 3,700 workstations, with 73% coming from new clients, and 85% of those coming from non-Telefonica verticals, such as financial services. As the CRM/BPO market continues to evolve in Latin America, clients increasingly demand providers with deep financial expertise, who can take more of a strategic role and provide personalized, complete, end-to-end solutions. These solutions span areas such as technical support, collections, back office, and even marketing activities. Digital channels, automation and analytics are essential foundations in this revolutionary process, and we're making targeted investments in all of these areas.

For example, as part of our IT transformation, we are consolidating data centers, moving capabilities to the cloud and developing predictive analytics focused on a specific customer experience drivers. These strategic investments enable us to be more agile in the market, deliver global solutions across regions, and add a measure of flexibility to our IT operations.

Our industry leadership in these areas has gathered us recognition. As I mentioned earlier, in the fourth quarter, we were named, for the third consecutive year, as a leader in Gartner's Magic Quadrant for customer management contact center business process outsourcing services. And for 2016, we were recognized as having the highest execution ability among those participating in the research, and also the global player with the best trajectory, in terms of competitive positioning amongst the Magic Quadrant leaders group.

Among other things, in this report, Gartner describes that leaders demonstrate market-defining vision, and the ability to execute against that vision through contact center BPO services. Leaders also have superior investments in innovative contact center BPO service offerings, business and pricing models, and service delivery models.

And also, leaders have service delivery models that have superior understanding of client needs and current market conditions. Also, are in fact actively building competencies to sustain their leadership position in the contact center BPO market, across multiple channels. And finally, are also generally have strong global original delivery operations, and deep technology to leverage, and they deliver above market customer experience. And Atento clearly is in this ranking.

We're extending, as well, our leadership position in the US near shore market, which has significant potential for Atento. As some of you know, analysts expect the US offshore market to reach $17 billion in revenue by 2018. While Latin America is the third offshore destination for US companies, in terms of volume, after India and the Philippines, the region has the highest projected growth rates, with a CAGR of roughly 11%.

In terms of our second pillar, which is a key enabler of profitable growth, our Best-in-Class operations. Five initiatives facilitate this. Operational productivity, HR effectiveness, global procurement, efficient IT, and site optimization. We leverage our scale to drive consistency in operations, enhance productivity and profitability, while also providing industry-leading solutions to our clients.

Highlights in the quarter include 390 basis point increase in our billable versus payable ratio, a key measure of operational productivity. And turnover, which has a direct impact on employee cost, dropped 20 basis points, below 7%, a record low for the Company. And as you might recall, a 1 point decline in (inaudible) saves us roughly $5 million a year in hiring and training costs.

Of course, we could not achieve this success without our most important pillar, our people. We continue to execute a series of initiatives to ensure we constantly have the type of culture and organizational capability required to satisfy the needs of our clients and their customers. In the fourth quarter, we were recognized as one of the best companies to work for in Colombia, Peru and Argentina, and for the sixth year in a row, we were recognized in Spain as the top employer, the only customer service company to receive this distinction.

Please now turn to page 7. Before I turn the call over to Mauricio, I'd like to close with this. First, our results in 2015 demonstrate Atento is uniquely positioned to win new business, grow our share of wallet with existing clients, and increase our penetration of higher value-added solutions. Second, macroeconomic pressures will create a challenging growth environment in 2016, particularly in Brazil. However, we believe we can once again outperform the market, and increase our leadership position in Latin America, and continue to be the reference partner for the CRM/BPO needs of our clients.

And third, our focus in 2016 is to drive the optimal balance of growth, profitability and liquidity, to ensure we drive long-term value creation, even in a challenging market environment.

Thank you. I'll come back later for the Q&A. And now, I turn it over to Mauricio.

Thank you, Alejandro, and I thank you -- I thank all of you for joining us today.

We are on the chart number 9. As a reminder, I'll 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 divestiture of check business in December 2014. As Alejandro mentioned, we are very pleased. We delivered strong growth in FY15, 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 faced in 2015, especially in Brazil and Spain. Turning to the quarter, revenue was up 8.4%, with 10.2% growth in Latin America, and a 16.3% increase from non-Telefonica clients.

Adjusted EBITDA declined slightly, as our strong growth in revenue was more than offset by 160 basis point 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 devaluation of Brazilian real. In Brazil, profitability was impacted by the macro-driven decline in revenue from Telefonica, which places short-term pressure on our margins until we align our cost structure, and also double-digit inflation.

In the Americas, margin pressures came mostly from our shifting country and service mix, the ramp-up of new clients, and some inflationary pressures. We do expect these factors to impact our margin in FY16, especially country mix and the level of inflation, we will be able to offset through price increases, cost reductions, and efficiency initiatives. For the full year, adjusted EBITDA margin was down 60 basis points, to 12.7%, of which half was due to the change in country mix, due to currency devaluation.

In the quarter, we invested $14.6 million in nonrecurring items, most of which related to the proactive alignment of our cost structure with the market condition realities, particularly in EMEA and Brazil. As you may recall, in 2015, we said that given the projected macroeconomic headwinds, especially in Brazil, we would continue to assess opportunities to adjust our cost structure to match the realities of demand, and we have done just that. Actions taken in the quarter included adjustments in labor force levels and site closures, to accelerate our strategic initiative to relocate call centers in Brazil to lower-cost locations.

For example, at the end of 2015, 58% of our call centers 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 FY16.

In assessing opportunities to align our cost structure, we consider a 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 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 segments, in Brazil, where we continue to expand our leadership position, revenue was up 4.5% in the quarter. Top line growth was broad-based across all measured 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-Telefonica revenue increased 13.4%, driven by a 28.9% increase in multi-sector clients, and helped growth in the financial service segment. The mix of non-Telefonica revenue has steadily increased in Brazil, reaching 64.4% in the quarter, up 490 basis.

Telefonica revenue declined 8.5%, as a result of the macro-driven decline in volumes. Adjusted EBITDA declined 8.9%, as top line growth was more than offset by a 210 basis point decline in margin. Excluding the allocation of corporate costs, adjusted EBITDA margin 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 sheer dollar amount of inflation we and our clients face is significant, and will continue to impact our margin. On the slide 11 now, turning to Americas, revenue grew 18.2%, supported by approximately [3,600] new workstations awards in the quarter, and a 31% increase in the mix of value-added solutions.

Revenue from non-Telefonica clients increased 26.2%, driven by strong growth from new and existing clients in most markets, especially in Mexico, Colombia, Peru, and our US near shore business. Revenue from Telefonica increased 9.6%, supported by double-digit gains in 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 shift in the mix of service in countries, ramp-up of new clients, and some inflationary pressure.

On slide 12, turning to EMEA, where we see EMEA showed steady sequential improvement in FY15. But this is, too, affected by the competitive telecommunications environment in Spain, and the clients in public administration. Our action strategy as to the market condition realities, including in the fourth quarter, have helped to stabilize revenue growth, and our Best-in-Class operations are driving improvements in cost and efficiencies. Revenue declined just 2.9%, driven by 3.2% decreasing revenue from non-Telefonica clients.

These declines were attributed to lower volumes, 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 Telefonica declined 2.8%.

The declining revenue contributed to a 7.8% decline in adjusted EBITDA. However, adjusted EBITDA margin, excluding the impact of corporate allocations, increased 10 basis points to 12.3%, reflecting the benefits of our cost and efficiency initiatives.

Please turn to chart 13. As you know, cash flow and our balance sheet are both critical to enhance 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 expectations. Note that these numbers are before net interest expenses. If you adjust for the cash portion of our full-year nonrecurring items, free cash flow for the quarter would have been $27.6 million.

Our balance sheet remains strong, with low leverage of 1.6 times, net debt to adjusted EBITDA. We have ample liquidity of $238 million, which includes cash and cash equivalents, and undrawn revolving credit facilities. Total net debt with third parties totaled $391.6 million, a decline of $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 issues]. This validates the resilience of our strategy and financial health. As a reminder, we have limited transaction currency exposure, since 98% of our costs are denominated in the same local currency as associated revenue.

In addition to that, our debt is mostly denominated in local currency or hedges against currency fluctuations, which largely insulates us from high-volatility scenarios. The Brazilian debentures, and the BNDES, the Brazilian National Development Bank Financings, are denominated in the Brazilian real currency, and US denominated bond is hedged into a basket of local currencies of the countries that back that 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 invest 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 in most countries, as we win new business, grow our share of wallet with existing clients, and further diversify our client base.

The second dynamic is the negative effect of a protracted 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 [improvement] mix of high value 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 a 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 flow in 2016. On the nonrecurring 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 realities, and a strengthening of our competitiveness, and this will continue into the first quarter of FY16. We also expect net interest expenses in the range of $60 million to $65 million, which reflect the impact of $27 million in debt payments in 2016. As you consider the GAAP net financing line in our P&L, which is a combination of net interest and FX results, it's important for you to remember that our adjusted net income and adjusted EPS excludes the non-cash effect of net foreign exchange gains on financial instruments and net foreign exchange impacts.

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, driven by investment in both growth and maintenance, and an effective tax rate of about 32%, and a fully diluted share count of approximately 73.8 million shares. As you think about our revenue and adjusted EBITDA margin targets for FY16, there are a few things you should consider. Typically, we generate a little bit over 50% of our revenue, and about 60% of our adjusted EBITDA, in the second half of the year, with the fourth quarter being our strongest for net growth and margin perspective.

We would expect this seasonality to be more pronounced this year, for several reasons. First, the macro headwinds in Brazil are still quite strong, especially on a year-over-year basis. Second, we exit 2015 with a lower revenue growth trajectory and adjusted EBITDA margin [we'll have]. And third, the full benefit of price increases normally captured between our second and third quarter, in connection with the annual contract reviews.

As reminder, our guidance assumes no acquisitions or change in the current operating environment, [cap rate] structure or exchange rate movements on the translation of our financial statement in US dollars.

Now, operator, please explain the Q&A process, and poll for questions.

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

Our first question is from Diego Aragao of Morgan Stanley. Please go ahead.

Hi, guys. Thanks for taking my question. Actually, I have two questions, if I may. The first one is, I just want to better understand your guidance. So in 2015, you grew 9.6%, year on year, on local FX. You had 13% EBITDA margin. So my question is, how should we think, and how should we estimate, your revenues declining to 1% to 5%? And your EBITDA margin, this range of 11% to 12%, what will happen and how should we think about the breakdown for region? Thank you.

Sure. Thank you, Diego. This is Alejandro. Let me given you my views, and perhaps, as well as Mauricio, if you want to then follow up. I think, and as Mauricio and I pointed out on the presentation, the best way to think about it is, the effect that Brazil will have in 2016. I think if you think about the regions Americas and EMEA, the trends and the expectation, in terms of gross margins, is very consistent with what we're seeing in 2015.

And to me, really, what we're taking is a more prudent approach for Brazil. And basically, there's a few factors that are impacting this. Of course, there's 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 impacts that we are seeing in 2016, and are actually more marked than in 2015.

And the other issue that is also important to take into consideration in 2016 is how the business with Telefonica evolves in the year. As you know, we (inaudible) the revenues from Telefonica, non-Telefonica, and we experienced a decline in 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 the strategic growth verticals, is going very well, near shore, very strategic verticals in Americas and others. So all of this is very much consistent with 2015. But again, we're taking a more prudent approach, because of the macro and (inaudible) situations, is in the particular case of Brazil. And therefore, when you looking into the guidance that we're providing, where we see most of the change in the year is in Brazil.

Again, we will continue to 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 seeing happening with the market, and with some of our key clients.

Okay. Thanks, Alejandro. So the second question is, just to better understand your contract, your agreement with Telefonica. Volumes are down significantly, at least in the fourth 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?

Yes, good question, Diego. First thing that I will say, that the relationship with Telefonica, it's had a very good standing, and of course, we continue to have the MSA agreement in place up until 2021. And I would also say that the MSA targets for 2015 were met. So -- and again, at a very good relationship level in all the 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, and 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 of 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're taking proactive measures, from reduction in certain types of commercial campaigns, to reduction in volumes with certain services that they provide. And this is a fact, and the reality is that, while we need to at least continue to be able to provide the best services, continue to be number one in the quality rankings, in order to continue to benefit from the highest amount of share from their business. And this will continue to be the case in 2015.

But again, the reality is that, in the particular case of Vivo -- and this is not the -- what we're seeing in other countries with Telefonica. But in the particular case of Vivo, they are reacting to a very tough macro environment, and with that, taking proactive measures on how much they spend. Again -- 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 and CRM services.

Okay. Thanks, Alejandro. Very helpful.

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

Hi, guys, thank you for taking our questions. Actually, we have two questions. The first one is related to EBITDA margins. It was mentioned that both in Brazil and in America, there was an effect coming from ramp-up of new clients. So our question here is for this ramp-up of new clients is already concluded, and we should expect margins to go back to reality, to normality? That would be our first question.

And then the second question, if you could comment specifically on Brazil, how the payroll tax hike negotiations are coming along? Thank you.

Thank you, Susana, and nice talking to you, as well. On the first question, yes, 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-Telefonica revenues, and this actually is the highest percentage growth we have achieved in all year. So it's a good reflection of all the different avenues and investments that we're doing in the Americas. Therefore, the impact of ramp-up costs will continue to happen in the first quarter of the year, because we're still ramping up a business that we won.

In Brazil is less of this impact. Of course, we're having a combination of factors, one being the ramp up of new clients. But also, in Brazil, it gets mixed 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 only the payroll tax, but also the [passing of] inflation. We're in the midst of 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 [or the worst fee] at the beginning, and we expect this to happen between first quarter and second quarter of this year. As you know, this year is more challenging, because of the level of the 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 on the payroll 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 it's contractually agreed in many of our clients' contracts. So therefore, with the ones that we have been able to close the negotiations, we have been able to pass. But still early to tell, because we expect this to continue to be negotiated, together with the wage inflation pass-through, between the first and second quarter of this year.

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

It is complex, because the way we have negotiated the agreement with them, it is based on -- it is not based on the full inflation, as you know. Full inflation is under -- is north of 11%. And what we have negotiated with them, it's an increase that goes up on a per-quarter basis.

So therefore, there's an increase of wage conditions for the first quarter, then second quarter, third quarter, fourth quarter. When you do the blended average for the year, it's actually lower than the actual inflation. That's why I referred to the fact that it was a good negotiation, because on this year, we were able to negotiate something that is below the actual inflation, so it's positive from that perspective.

Okay.

It's hard to --

Okay, great.

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

Yes. No, great. Great. Thank you.

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

Good evening, Alejandro, Mauricio, Lynn. Quick -- actually back to Telefonica performance, and then two on guidance for 2016. I was under the impression, which I might be wrong, and please correct me, if that's the case, that the Telefonica minimum revenue commitment was relatively flattish over, perhaps, the period of 2012. And it seems to me -- and it's unclear whether TEF revenues on a consolidated basis were down or not.

But Brazil down, fourth quarter, by 8.5%, while you mentioning that they met all the targets in 2015. Just wanted to see if there was -- what should we expect from TEF specifically, maybe if, on a consolidated basis better, otherwise, on the main regions, Brazil, for example, for 2016? Whether this specific revenue item is declining or not?

And then, fully understand the macro challenge, which is driving the 1% to 5% revenue growth. But in terms of trying to preserve margin, I would have expected margin to be flattish, maybe even higher, in 2016, despite the economic environment, again, to protect profitability. So I'm just a little puzzled by the fact that margins would still be potentially down in 2016. Thank you.

Thanks, Mauricio. Let me start, and as well, allow Mauricio to jump into the question. In terms of the Telefonica MSA, and where growth has been evolving, the MSA actually was set up based on 2012 terms, meaning that it was [the spend] done by Telefonica at that point in time, so it was actually a relatively high bar. And every year, that amount increased by inflation, and it's inflation adjusted, based on all the countries.

And therefore, what has happened is that we have been growing ahead of inflation in all the countries, because we have been ahead of the MSA. This is the case for all the years, including 2015, where we are ahead of the minimal threshold. Reality is that this is, as you pointed out, including the negative 8% from Brazil in the fourth quarter. Therefore, what it means is that we are having -- actually, the growth with Telefonica in the Americas was close to 10%.

Therefore, that is compensating, partially, Brazil and partially EMEA. Therefore, we expect this (inaudible) dynamic happening in 2016. Reality is that, in the case of EMEA, which is basically Spain, we don't foresee any growth with Telefonica. Actually, good thing is that some of the declines have stabilized, but still we see a flattish type of development with Telefonica, in that market.

And in the case of Brazil, the reality is that we do see the business coming from them declining. But then again, on the back of us having the majority of share of their business, and on the back of us providing the best quality to them. But this is just the nature of their business, and again, a reflection of the macro and also the efficiencies they're looking in their spend.

So therefore, again, the fresh hope for the MSA in 2016 is going to be, again, increased by the value of inflation. And what we do see is that some of the growth rates, in different countries in 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 decline of volume in certain services, specifically Telefonica, which that brings adjustments that we need to do, in terms of operational cost, to drive down operating capacity. And that's a fact that we need to manage in 2016, and that impacts on margins.

And also, as you think about the inflation pass-through, 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 two-thirds of inflation into pricing. So when inflation is this high, this two-thirds causes a leakage of one-third that we can recoup some of that through efficiencies, but it becomes harder when the magnitude is this high.

So reality, again, what is impacted at the group level, the cost projections, the margin projections, is mainly Brazil, and mainly of the factors that we mentioned, the macro and the evolution of Telefonica 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 pan out, is that for us, the way that Telefonica will continue to decline, which is, it's 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 see the numbers panning out in 2016, Americas is going to weight more than Brazil, which I think is very interesting for us, because it gives more for Latin America play, and exposure to Atento, versus purely a Brazil-concentrated business. And I think this is fairly attractive to us. I don't know, Mauricio Montilha, if you have anything to add on this.

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 Q4. We have the benefit of operating in diverse geography, but one thing that is happening, as you can see, the FX is impacting us in a different way. So Brazilian real was almost 50% of [our ratio other currents not]. So the mix effect of the countries impacted us, in profitability, 30 basis points for the year.

For Q4, this makes effect about 60 basis points. So if you think it's something that we are exiting the year with a different structure, given 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 a devaluation. We never know.

But the exit rate of 2014, if you take Q4, already brings our profitability to structurally, in this sense, just because the currency movement. The other aspect Alejandro mentioned, I just want to reinforce one is, we're being very pragmatic is, when you have a 6% inflation a year, you pass two-thirds is 4%, so you have a gap of 2%. When you have 11%, the gap is 3-point something. So this is going to be a tougher year.

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 can we adjust cost base and we improve the [efficiency]. But we are really forecasting a tougher year, to adjust to these new realities. And the volume changes, they also impact some inefficiency in our business. And we see some of this -- as we see the exit rate of this year, some of those changes in volumes also coming for 2016.

Thank you, Mauricio, Alejandro, appreciate the transparency.

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

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. The percentage drop from the two lines 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. On the second question, I have a guidance of cash CapEx of about 5%. How sustainable, at these lower level, this level of CapEx can be going forward?

Thank you very much for the questions, Valder. Nice talking to you. Mauricio, do you want to take over these questions?

Yes, of course. Valder, I think that, on the efficiency, we -- just go back a little bit. When we did the IPO, we laid out a plan, in our more mid-term plan, with several levers for efficiency, and we are glad that we did that well in advance, because this is really giving us the advantage today. What's happening is that some of those levers that we haven't progressed 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 bulk of the transformation is still to come. We -- the first wave, just for example, in the productivity, for example, we're really focused 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 cost center operations, but as you know, we're investing also in automation, or in technology, to help us with [high-end solution].

So I would say that that's more efficient, coming more from the technology, either IT infrastructure, but also the application of technology to our baseline business, that will help us to come up with some efficiency, moving forward. What we are stating the guidance is, given the high level of inflation we are seeing in our results, we talk about, usually, labor that's a more important cost. But we cannot forget that leasings are -- we are -- we try to negotiating these things now, but they are impacted by general inflation, for example.

We have electrical energy almost, in some case, 50% to 60% increase. So there's been dilution, and some impact of this inflation, why we get pricing increase. So we think the balance for this year is not significantly positive. There actually will be some leakage. But we see a lot of opportunities still to enhance efficiency in the business with those new ways, as I mentioned before.

Okay. And on the CapEx side?

On the CapEx, apologize for not -- I'm sorry, I'm (multiple speakers). If you step back a little bit, if you look at our numbers, for example, in non-Telefonica business, we grew 15.7% in Q4. And that's 26% in America, 13.4% in Brazil. So we still -- 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's -- even as 1% to 5% guidance, we are saying, yes, there's some volume declines in the baseline business, as we are focusing. For example, in the financial sector in Brazil, we've been seeing other related industries, for example, the mortgage industry, has dropped significantly, credit cards dropped. And so this also impacts the CRM activity. There are also plus in the baseline business, so collections is going well, several other activities are going well. But the net-net, in certain case, is not positive.

In the telecom, as we always see, also are seeing, the telecom market in general is shrinking, with the number of subscribers and people with spending less money. So we see the net, and the baseline, some negatives, but we also see there are good opportunities, share of wallet and new clients.

So the CapEx is driven more, because we will continue with the 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 you're seeing in Q4 for the new -- for non-Telefonica clients, despite some volume declines, and some challenging volumes in some segments or some programs, for example, we still see the opportunities [to go there]. That's why the CapEx is 5%, supporting those activities.

All in all, this is still, as I mentioned, the total impact of -- is not as positive as we -- if we would have a normal year. We cannot forget that 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, there's still more unemployment to come. So we haven't -- Brazil hasn't peaked, got to the bottom of the negative cycle at this point. And that's what we are projecting in our numbers, as well.

Okay. Thank you, sir.

Thank you. Our final question comes from Adam Doms of Robert W. Baird. Please go ahead.

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 trend in 2016 similar to how we exited this year, so maybe mid-teens, constant FX, for Americas, down low-, mid-single digits for EMEA. If that's correct, it seems like Brazil, your guidance implies flat to down, on a constant FX basis, in 2016. Did I get that all right?

Thanks for the question, Adam. Mauricio, do you want to field this one up?

Yes, yes. Yes, Adam, 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 to what's going to happen into 2016. The point is, in Brazil is, that it's going to be a second year of a deep -- I'll say recession.

And as we always mention that along some -- I'll say some challenge in the macro environment, actually they helped the CRM/BPO. 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, and that's implied in the guidance.

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're still negotiating, and potentially upside to the current guidance, if you're able to pass that through?

That's a [good question]. I don't know, Alejandro, if you want to comment. I can continue on that, but --

Yes, please, go ahead.

The guidance includes our ability to negotiate for next year, is included in the guidance. There's nothing excluded in the guidance. The only think excluded in the guidance is that we don't guide about the exchange rates, or acquisitions, or any other -- but it is included in the guidance.

Okay. 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 working towards that?

Just going back to our plan, as we mentioned before, with accelerated growth, there was some [consumptions]. We -- what we are looking at, especially in this difficult scenario, being more pragmatic, 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.

And this is a trajectory we laid out when we did the IPO. So we wanted to be, 2017, in a good way, heading close to what the competitors or comps have. So 2016 has to be a year that we're going to be able to be on the positive side, slightly positive, before interest.

That's great to hear. Thanks, guys.

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.

Thank you, everybody, and not much to add on our end. Thanks again for the time. I'm sure we'll follow up on any questions that you may have. We're very happy to do that, as we want to make sure that there's very good understanding on 2016.

I would say, though, that we are, first, very happy and pleased with 2015. We were able to meet our objectives, and also, we had a 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. We're 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 these macro headwinds that we are seeing, and we just spoke about. And again, we're going do 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 is basically to ensure that we have the optimal balance of growth, profitability and liquidity.

We'll continue to make targeted investments to improve returns, pay down debt. But again, a year that we're going to continue to be very focused on, what are the things that made us successful in 2015. Thank you again, very much, for your time, your interest in our story, and look forward to catching up very soon. Thank you.

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.