Atento SA (ATTO) 2016 Q3 法說會逐字稿

Greetings and welcome to the Atento SA third quarter 2016 earnings results conference call. At this time of the visits are in a listen only mode a question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn conference over to your host, Ms. Lynn Tyson, VP of Investor Relations. Thank you, Ms. Tyson. Please go ahead.

Thank you. Good day and welcome to Atento's third quarter 2016 earnings call. The call will begin with prepared comments by management followed by a question-and-answer session. With me today are Alejandro Reynal, Atento's Chief Executive Officer and Mauricio Montilha, Atento's Chief Financial Officer. Alejandro will begin with a brief review of performance and strategy and Mauricio will review our quarterly results in more detail. Afterwards, we'll open the call for questions. Following Q&A, Alejandro will have a few closing remarks.

Before proceeding, let me mention that certain comments made on this call will contain financial information that has been prepared under international financial reporting standards. The financial information is unaudited. In addition, this call may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties. Certain results may differ materially from those in the forward-looking statements as a result of various factors.

We encourage you to review our publicly available disclosure documents filed with the relevant securities regulators, and we invite you to read the complete disclosure included on the second page of our earnings presentation. Our financial filings and earnings presentation can be found at investors.atento.com. Please note that unless noted otherwise, all growth rates are on a year-over-year and constant currency basis. In addition, our revenue growth rate for our consolidated results and EMEA segment, excluding impact of our divestiture of Morocco, which occurred in our third quarter. Now, let me turn the call over to Alejandro.

Thank you very much, Lynn, and welcome everybody to our call. Please turn to page 4 of the presentation. I am very pleased with the solid operating and financial results our team delivered in the third quarter and year-to-date, especially our ability to grow selectively well protected margins and generating cash in a challenging macroeconomic environment. In the quarter, adjusted EBITDA margins was up 13%, an increase of 160 basis points sequentially. Supported by our proactive efficiency initiatives and an improved mix of higher value add solutions.

In addition, we generated approximately $47 million in free cash flow before interest, up approximately $22 million year-over-year, the third consecutive quarter of improvement. Today, in addition to reviewing our results, we would like to highlight the following items. First, the strong progress we've made on the delivery of our strategic growth priorities, resulting in revenue diversification. Also, how we have reaffirmed and extended our relationship with Telefonica. Our plans to accelerate the payment of our higher cost Brazil debentures, strengthening with this our balance sheet and earnings trajectory. And finally, our domestic outlook for Latin America in 2017 and high confidence in our competitive position and execution capabilities. So let me start first with our strong progress on the delivery of our strategic growth priorities, as Mauricio will cover in more detail the results in his section.

Please turn to page 5. During the last quarter earnings call, we unveiled the three strategic areas of focus to drive sustainable growth going forward. I wanted to provide you with an update on progress to date. The first area of (inaudible) consist consolidating our leadership position in core voice. Voice is approximately 88% of the market, and it will remain the largest channel for the foreseeable future, growing by an additional incremental $2 billion in revenue through 2021. In this regard, our commercial pipeline in core services remains very strong, evidenced the roughly 3,500 workstations we won in the quarter, up 10% from the prior year. 39% of these workstations came from new clients.

Such a strong commercial momentum is enabling us to continue to diversify our mix of revenue from non-Telefonica clients which reached 67.8% in the quarter, up 370 basis points year-over-year. We have also sharpened our focus on the rapidly growing $2.4 billion US near shore market as companies increasingly leverage Latin America's competitive trend and also react to the political uncertainty in the Philippines. This market is now expected to grow on a CAGR of 8.8% through 2021, adding an incremental $1.4 billion in revenue. In the quarter, revenue from the US near shore business grew 23.7% supported by new client wins in financial services and telcos. As you can see from the slide, the second area of focus is to drive continued growth in higher value-add solutions, particularly in the telco and financial services, which comprise 75% of the market in Latin America.

As we have commented in the past, typically these solutions are 200 to 400 basis points higher in margin than our core services. And they now comprise 24.7% of our revenue mix, a 90 basis point improvement year-over-year. In order to accelerate the growth and increase our capabilities in the higher value-add solutions space, we acquired R Brasil during the third quarter of this year. R Brasil is the leading player in the collection space in Brazil. The total collections market in Latin America is $2.7 billion, of which 75% or $2 billion is late-stage collections where we have now very low penetration. A majority of late stage or roughly $1.5 billion is in Brazil.

And R Brasil is the perfect [entry for attending this market] and it also gives us a platform to one day export across our geographic footprint. R Brasil's business model, and this is very important, is predicated on business intelligence built on proprietary customer data and actual collections experience. This powerful and effective combination of business intelligence, multichannel capabilities, and systems can now be scaled across our financial and telco clients in Brazil. Already we have introduced our new capabilities to the top 50 late-stage collection companies in Brazil, and we won new business with three financial service companies increasing our share of wallet.

The third area of focus is accelerated profitable growth with a digital offer. We have now assembled a strong digital team led by the former head of digital for Atento Latin America. The team's mandate is to augment our capabilities and consolidate our offerings into a truly scalable global omnichannel platform. We now have highly specialized teams with industry and process-differentiated knowledge, focus on understanding client issues, and delivering business outcomes. We can also point out two key client wins with our digital offer this quarter.

Please now turn to page six. This is one of the key highlights that we wanted to include in this quarter's presentation, and we are pleased with how we reaffirmed and extended our relationship with Telefonica. This is a very important milestone and a very positive one for Atento. As you are aware, revenues with Telefonica have been decreasing over the last quarters and even though we have not lost share of wallet of Telefonica CRM BPO spend, both companies felt it was the right time to establish a series of constructed agreements for the business relationship going forward.

First, we negotiated another three-year contract in Brazil with Vivo maintaining volume levels through the expansion of our business with them and improving profitability supported by changes in our operating model. This agreement is very relevant. Vivo represents the largest individual contract we have now with Telefonica. Separately, we have also renegotiated our broader master service agreement or MSA, with Telefonica, normalizing and improving the conditions going forward. The changes to the MSA include first, the MSA for Brazil and Spain are extended to 2023, currently until 2021. Therefore, with these aligning revenue targets to current operating conditions, and very importantly, maintaining the total level of revenue commitment.

Very important too, we have now the guarantee that Atento will maintain at least its current share of wallet over the duration of the MSA. With this, Atento for sure will remain the largest service provider to Telefonica, again, till the end of the duration of the MSA. Additionally, we have negotiated an agreement on payment terms and invoicing processes improvements in all key markets. And also very importantly, we have agreed to eliminate our $24 million CVI obligation in Argentina.

The benefits to Atento this agreement are significant. First and foremost, the importance of Telefonica as a long-term partner is reaffirmed. We have now a much more solid base going forward adopted to the current business environment. Additionally, we've improved any payment terms and invoicing process. We will now have the material improvement in our DSO, which will impact our working capital positively over the next 18 months. Finally, the elimination of the CVI will strengthen our balance sheet in the fourth quarter of this year.

Please turn to page 7. Before I turn the cal over to Mauricio, let me close with why I'm optimistic about our prospects heading in FY17. First, I have the confidence in our competitive position. Recent Latin America CRM BPO market data released by Frost & Sullivan shows that in 2015, we maintained our leadership position with 18.3% share of the market, a full 9 points ahead of our closest competitor.

In addition, we held or extended our number one share position in key markets such as Brazil,, Mexico, and Argentina. Also, we continue to place a premium on highly engaged workforce, a key enabler for our success. In fact, just last month, we were recognized for the fourth consecutive year as one of the 25 world's best multinational places, the only CRM BPO company included in the ranking. Second, the overall economic climate in Latin America is more benign, though there is some uncertainty. Analysts now expect the region to contract by just 50 basis points for the full year supported by signs of a stabilization in Brazil. These improving trends give us increased confidence in 2017, especially since Brazil is expected to return to growth next year, particularly in the second half.

Third, we are well-positioned to deliver higher growth earnings and cash flow supported by our strategy, disciplined capital deployment, and improving capital structure. I will come back at the end with some concluding thoughts, but now let me turn over to Mauricio, which will cover the results. Thank you.

Thank you, Alejandro. Please turn to slide 9. As a reminder, I will be referring to growth rates on a constant currency basis and year-over-year basis. I will let you know that otherwise. In addition, as a result of our divestiture of Morocco in September, this business is now in discontinued operations and the revenue growth rates for our consolidated and EMEA results have been adjusted to reflect this.

During the third quarter, we once again delivered balanced financial performance, driven by our persistent focus on selective growth, especially in countries where strong macroeconomic headwinds persist. Margin protection, driven by our proactive and constant focus on cost and efficiency initiatives, including investments in restructuring as well as the effective pass-through of inflation. And finally, the frequent working capital management and improving the cash flow, including a rigorous focus on disciplined capital location.

Starting with revenue, we delivered solid topline performance in the context of the challenging macro. Our topline declined 3.3%, which was a sequential deceleration of our growth. Two dynamics drove this. First, our growth [for filing] Brazil improved this sequentially by 206 basis points, the first sequential improvement in growth in six quarters, supported by the very early stage of economics stabilization, which we expect to continue. Second, our Americas segment grew 2.8% of acceleration growth versus our second quarter, driven also by the macro declines in volume, particularly related to Telefonica, both in Argentina and Mexico.

Our revenue diversification is on track with our mix of revenue from all Telefonica clients to 370 basis points to 57.8%. And our commercial pipeline remained robust, evidenced by the roughly 3,500 workstations won in the quarter, supported by growth from new clients including financial service. Despite the topline pressure, I'm very pleased with the adjusted EBITDA margin of 13.6%, which was up 160 basis points sequentially. This is further validation of our effective concentration on profitable growth, proactive cost, and efficiency initiatives including restructuring as well as focused inflation pass-through. Nonrecurring items total $11.1 million this quarter. Most of this related to investments to align our cost structure with impact on macro pressures in some of our regions including Brazil, Argentina, and Spain.

In addition, nonrecurring items included a $3.1 million reserve related to the sale of our operations in Morocco in September, as well as $2.9 million of several related to overhead cost reduction program. Adjusted EPS was $0.20, a decline $0.11 driven mostly by FX and increasing net interest expense and a higher share account.

Please turn to slide 10. We will start looking at our segments. In Brazil, our growth profile improved sequentially with revenue down 7.5% as greater political certainty and more modest improvement economic data points to a stable to improving growth environment.

For example, in the second quarter GDP reported the smallest quarterly decline in the year. In addition, business confidence hit a two-year high in September and consumer confidence reached its highest level since September 2015. Revenue from Telefonica declined 14.3%, a significant improvement over the second quarter when revenue declined 21.4%. We do expect further stabilization, aided by our new contract with Vivo. Revenue for another client declined 2.6%

We made significant progress with revenue diversification, as our mix of revenue from non-Telefonica clients increased 270 basis points to 65.8%. In the quarter, we won 1,790 workstations with new and existing clients, the largest gain since the fourth quarter of last year. Roughly 54% of these workstations came from multisector and financial service clients. Our mix of higher value-add solutions increased 107 basis points to 38.7% of revenue. Adjusted EBITDA margin improved also 180 basis points sequentially to 15.2%, supported by our proactive actions to restructure and align across the structure with volume levels, effective wage inflation pass-through as well as the improvement mix of the higher value-added solutions.

Please turn to slide 11. Looking at the Americas now. We delivered growth in a difficult macroeconomic environment, especially in Argentina. Revenue grew 2.8%, a declining growth rate versus our second quarter driven by the market pressures in the Argentina and Telefonica's exit of a specific sales channel in Mexico. Revenue from Telefonica declined 4%, driven by declines in Argentina and Mexico while revenue from other clients grew 8.7%, led by Columbia and also by our US near shore business, which grew 22.7% in the quarter. Revenue diversification is on track. In the quarter, we won 1,261 workstations with our new and existing clients with 67% of this from both sector and financial service clients. In addition, our mix of revenue from non-Telefonica clients increased 390 basis points to 56.5%. Adjusted EBITDA decreased 40 basis points, which is 60 basis points decline in margin to 13.5 %. Prior profitability was impacted by the market-driven declines in volumes. We are moving swiftly to realign our variable cost structure to new volume levels.

Please turn to slide 12. In EMEA, revenue declined 4.8% driven by a 10.6% decline in Telefonica. Importantly, growth in revenue from other clients facilitated to 15.8% in the quarter supported by strong growth from new clients especially in financial service and utilities. In the quarter we won 411 workstations, a majority of which came from new clients especially in [new sector] and financial service. Our mix of revenue for higher value-add solutions included 420 basis points to 13.9%, a (inaudible) high in the region. Adjusted EBITDA margin increased 60 basis points year-over-year to 10 %, supported by our aggressive management of cost and efficiency relative to decline in revenue from Telefonica.

Please turn to slide 13. Looking at cash flow and capital allocation, we have delivered a third consecutive quarter of cash flow improvement. In the quarter, we generated $46.7 million in free cash flow before interest, up $22.2 million year-over-year and year-to-date, we generated $53 million in free cash flow before interest, up $81.8 million year-over-year. This improvement in cash flow has been driven by our ongoing companywide programs to improve cash conversion. This program has two major aspects. The first is a disciplined approach to investment in possible growth and more balanced investment in maintenance. This discipline has given us the flexibility to invest in profitable growth including CapEx and acquisition, and also invest to proactively realign our cost base with the new market volumes, especially in Brazil and Spain and Argentina. For example, during the third quarter, we divested in Morocco, and we acquired R Brasil. We invested $9.4 million in CapEx and $6.2 million in restructuring.

Year-to-date CapEx running well under our annual target of 5%. Offsetting this, however, we have invested more in restructuring to proactive and aggressively reset our system variable cost structure to align with volumes, and also to become a leaner, more agile and competitive organization head into FY17. The second aspect of our companywide program is our focus on working capital, which has been the main driver of the increase in our cash flow. This had been supported by improvements in our billing and collection process, especially reducing billing cycle and overdue payments.

Please turn to page 14. Looking at the balance sheet, I'm glad to say we continue to have a strong balance sheet and started the deleveraging process in alignment with our strategy and we are now taking the opportunity to accelerate the reduction of multi-spend part of our debt. In the quarter, we had liquidity of $234 million, which includes cash and cash equivalents and undrawn revolving credit facilities and low leverage of 1.9 times net debt to adjusted EBITDA. Total net debt with third-parties total $436 million.

In the fourth quarter of this year, we expect to make the regular scale of debt payment of $32 million, mainly related to debentures and (inaudible) in Brazil. In addition to the sustained improvement in our cash flow, we will drive a one-year program to facilitate payments of our higher cost Brazil debentures. We will start this in the fourth quarter with an anticipated payment of $30 million, which will lower our interest expense in FY17 by $5.8 million pre-tax or around $0.06 per share on an adjusted basis.

Please turn to page 15. Before we open the call up for Q&A, let me review our guidance for FY16. Our focus on profitable growth has trending at the low-end of our revenue growth range of 1% to 5%, while trend at the high-end of adjusted EBITDA margin range of 11% to 12%. Looking at the number carrying items, we expect to be roughly in line with our guidance of $50 million. There are two drivers to this item, the first is a $24 million in non-recurrent benefit in our fourth quarter from the cancellation of CVI in Argentina. The second driver, our incremental cost in the fourth quarter that will bring our total restructuring costs and other costs for the year to $37 million.

We continue to adjust our operations to market reality and have been running three major programs for that. The first one includes the investment to lower variable cost structure to align with [impact] the exceptional circumstance generated by micro declines in volume, particularly in Brazil, Argentina and Spain. As you will know, about 70% of our cost structure is labor. When volume declines, it is imperative that we take [a swift] action such as our cost structure and protect profitability. Year to date we have invested $11.2 million in these activities. Due to a [deception] of economic circumstances Brazil and Argentina, we expect to include more cost in the fourth quarter and we do not expect this cost to continue in 2017.

The second program our investments in Brazil to relocate and consolidate our sites into lower cost locations. We started this program in 2014 when 53% of our centers were in [tier 2 cities]. When we end this program at the end of this year 64% of our centers will be tier 2 cities. Year to date we invested $7.9 million in these activities, this program will be pretty much completed by year-end 2016.

The third initiative is our investment to drive a sustainable lower cost and more competitive operating model. This is a key enabler of improving margins for us in the future. This year we implemented plans that by mid FY17, we reduced our direct costs, nearly overhead, my 12% to 15% percent. Year to date we have invested [$6.4] million in these activities and expect to invest additional $15 million over the next four quarters.

Looking at interest expense, we expect interest expense to be in the range of $70 million to $75 million for the year. As you consider the GAAP net financing line in our P&L which is a combination of net interest and FX, please remember that there adjusted net income and adjusted EPS excludes the non-cash effects of net foreign exchange gains on financial instruments, intercompany balance and net foreign exchange impacts on cash position held in US dollars by local dollars by local operations. We exclude this from our adjusted numbers to more clearly show the underlying health and trajectory of our business.

In relation to CapEx, we are now trending below our target of 5% of revenue which is worth roughly $24 million for the year. We expect an effective tax rate of approximately 32% and a fully diluted share count of approximately 73.8 million shares. Our guidance does assume the impact of our divestiture in Morocco and acquisition of R Brasil, both of which are current in our third quarter. Our guidance does not assume any further acquisitions or change in the current operating environments, (inaudible) structure or exchange rate movements on the translation of our financials into US dollars. I would like now to call over to the operator and take questions from the audience.

(Operator Instructions)

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

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

Hi Susana, how are you? And thanks for the question. Yes with regards to R Brasil, I think it's an acquisition more on the side of acquiring capabilities. Basically when you're getting to the late-stage collection market, this is one in which you require certain levels of analytics and multi-channel delivery capabilities which we had some, but in order to develop, and particularly the business intelligence and analytic requires for the collection market, would have taken us quite a bit of time.

So in order to accelerate the capability building, our view was that the best path forward was to move via the acquisition. The acquisition in terms of size, I would say is not material, we actually did not disclose the financial terms of the acquisition because it doesn't really impact our revenues. But again, we did it more for the fact that we were acquiring people, human capital, and technological capabilities that enable us to get into the late-stage collection market. I think the interesting piece to me of this is that since we acquired the business, and this was two months or so ago, we have been able to take the experts from R Brasil together with our commercial team and actually go and cross-sell these to our client base. And just in two months we have been able to win three new contracts with clients in the financial services sector specifically for late-stage collections.

So I think it proved a point to us that bringing capabilities in house and leveraging our client base and the reach that we have, we can actually penetrate this market and provide the latest collection solution. So very successful from that perspective.

In terms of the second question, yes, you bring a good point, the reality is that this is the market highly fragmented. There is lot of small niche companies that actually do this. So we continue to assess the market for us, playing the role of a consolidator is attractive, therefore that would mean, as you are pointing out, additional M&A. Again, never these types of acquisitions are going to be material in terms of size, but more would be for to continue to augment our capabilities. And there are several players in Brazil that have similar capabilities and plan base compared to R Brasil.

The other point I would make is that with the acquisition, one of the things that we're doing is of course first addressing the Brazil market which is the largest one and where we see a lot of potential. But our view is that we can then export these capabilities into other countries in the region. So they're (inaudible) address market such as Mexico, Peru, Columbia in where the late-stage collection market is also attractive. Again, very strategic acquisition from a capability using perspective, and so far the results very positive and point out that we're going in the right direction.

Great, thank you, very clear.

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

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

Hi Leo, how are you and nice talking to you too. It's a combination, as you point out, a combination of factors in Brazil. The first one in terms of the pass-through, the inflation at this stage of the year we're pretty much done with that. So the impact of that was mostly reflected in the second quarter, partially in the third quarter. But the impact of that is not that material at this stage, and as we have mentioned this year we had a tougher pass-through of the inflation because inflation was high. It was in the range of 10% to 11% where we needed to pass to our clients.

So we were able this year to pass between 50% to 60% of that, so basically that's already done, there is no further improvement expected from that piece. What is driving the margin expansion in Brazil is, first, I would say the expansion into higher value-add solutions. If you look at the case of Brazil we have expanded in terms of the mix of services coming from higher value-add solutions. Here we are seeing a very good progression with back-office services specifically for financial clients, therefore this is driving a better mix of services in Brazil.

On the other piece there, I would say that the team in Brazil has done an extremely good job on managing the cost base. We are very efficiently managing productivities in the operation and that is clearly contributing to the improvement of margins in Brazil. So, I think that most important items, the two important items are the revenue mix, which is improving year-on-year, and also the productivity on cost initiatives. One thing I want to add on Brazil which I think is very important, and it was mentioned during the presentation, but we're also very selective on growth, seriously because we could have actually grown on the faster pace in Brazil, but we're being very selective on the projects that we pick up.

Because I think one thing that we want to avoid is participate in projects that at the end of the day are low margin projects, and what they do is of course impact our margin profile, but also consume cash. So we have been particularly easy and that's pretty much in line with what we guided earlier in the year, being very focused on the types of projects that we participate and that these are projects that are margin accretive. Therefore that means to an extent sacrificing a big growth profile, but with that we have been able to obtain, it's a very solid margin performance, and I would say in other regions, more particularly in Brazil.

Okay, thank you very much Alejandro.

(Operator Instructions)

Now our next question comes from the line of Luis Adaime, Newfoundland Capital Management. Please go ahead.

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

Hi Luis, Mauricio speaking. If you look our capital structure, Luis, just to remind, we have two major vehicles, one is US (inaudible) bond that we have that is backed by what we called restricted group. Everything else other than Brazil and Argentina, and this is a bond that's coupon 7.3%, 7.5%, is a bullet 2019. So if you look at the market today we are pretty much aligned to the market issued today, although more recently you can see in the market there is more interest on the high yield bonds. But we are not a bond that breakeven that is worth it to refinance this. It's a good facility in place is still, at this time, is to be kept.

The other part of that is primarily in Brazil, most important one is the debentures. On the debenture side, if you look carefully we have in the debentures two major tranches, one that is protected by a fixed into swap instrument that currently we are growing at 14.2 % a year on this part that is protected by the fixed rate, and this one is a floating rate. So it's about $90 million that is not protected by swap that's accruing at market rates. In our case in Q3 it's [17.7]. And the third tranche is BNDS that we have, much smaller, but BNDS, the weighted average of this cost is around 8% to 9%. So really the biggest part is the uncover, unprotected part of debentures and that's the piece that we are start prepaying now, anticipating the amortization scale now in Q4 where we are going to invest $30 million to start doing it.

So our priority in terms of the prepayment is this unprotected part of the debentures. Generally speaking, the Brazilian market is now starting having some, I will say openness to refinancing, a few -- very short period of time the length is two the three years, that's exactly what we have. So there is the window to do a major refinance is still not there yet and at the right pricing. That's why we decided to anticipate accelerated reduction of the really most part of that, that's the debentures unprotected by the fixed interest swap coupon that we have.

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

If I say, if you think of it today, out of my total, my bad debt is $440 million, so the $90 million of this amount that's accruing, almost 18% a year debt, I will say that's -- if you look at the regular payments we will do next year or so, we are bringing forward this $30 million was supposed to be paid in December 2014. If we continue that we will take down this piece of our number, so I need to do the math how this will flow through our P&L. But basically that's the piece we start anticipating. Just to remind everyone our capital allocation strategy is continue to fund growth as we are doing with acquisition of select acquisition, still funding the opportunity we have in the market and that's continuing to be our priority. But as Alejandro mentioned at the beginning, as we're making a very good progress in the cash generation, we are getting in a, I will say more stabilization for large growth we are having in the past and the economic circumstance in Brazil. We are now have much more flexibility to start taking down this, so we are starting now as the year progresses and confirming the sequence of good results we expect for the next quarters and improving conditions in the market. We are going to continue to accelerate those payments after, of course, funding growth.

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

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

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

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

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

Perfect, thank you very much.

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

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

Thank you Diego, let me take the second question on Telefonica and then Mauricio can come back to the revenue piece on Brazil. I think he -- because to be fair, we've had this question several times when the former CEO of Vivo made the comment, and I think he was more into an inspirational comment from their part. Because we have very good visibility of Telefonica's business and the fact that we have been able to renew and extend the agreement with them just ratifies the partnership. So, the truth is that, as you know, we're actively working Telefonica to be much more efficient in the way we manage calls, also we're adding value to them through implementing digital channels and other solutions that we have in our portfolio. And that to an extent is driving core volume down, and that's what you see in the numbers when you see quarter-on-quarter projection of Telefonica.

That they're going to be able to reduce two-thirds, my opinion is that that is highly unlikely because in reality why it's happening is that the level of interactions more and more are more complex, requiring the more use of agents, but also other channels to be able to serve them. And again, I think the fact that we've been able to extend the relationship with Telefonica two additional years and get a guarantee from them in terms of the total (inaudible) business to us for the extended period and also getting guarantee in terms of the share of wallet that we will have with them, give us lot of peace of mind in terms of the future business going forward with them. And to be fair and to be honest, they would have not agreed to these new terms if they didn't believe they could deliver on the business. So, I think the fact that we have this discussions now, I think they are a great outcome for Atento. It was something we started having conversations with them and we feel very positive about because to an extent we have been able to reset the terms with them. We have adopted conditions to the current operating environment but also look into longer term view of the relationship, so the MSA for Brazil and Spain is extended into 2023 will give us a lot of visibility on their business, plus all the other conditions that I mentioned.

In addition, which I think is very powerful, is this reset on payment terms and invoicing, I think that gives us a lot of opportunities to improve our working capital and therefore continue to invest on the business and pay down debt. So my view is very positive and again, but I want to highlight that this agreement to us is clearly a milestone in the quarter and we feel very strong and happy about it. (multiple speakers)

Now the only comment I would add on that is that I think when they talk about agents, they're not talk about spending (inaudible) because at the end of the day, they have to serve their clients. And not only with Telefonica, but we owe the mix of our service with our clients is changing with the new channels or not, and our commitment with -- comment with Telefonica have no number of ages is showed spending. Actually if they are make more automation or they are automating more and we've been helping them to do that, actually we shift our revenue to more complex channel (inaudible) capability.

On the R Brasil, we have two months of revenue on that, it's really, as Alejandro mentioned, we're talking about a company that is really small and the total level as a total attempt to this is not significant, and there is just two months of operation under our belt. I think the biggest, again, Alejandro said, is we're bringing capability now, we're bringing human capital analytics and a very good operator that has been ranked one of the top operators by the majority of the clients they work on. So it's really something that now we're going to make it much larger businesses as we combine with our commercial that clouds with our clients and the penetration we're have in approaching clients.

Thank you, thank you guys, very clear. Just one more question, if I may, apologies for that. Regarding the US near shore business, can you provide more color than that? It will be great if you can share with us how this operation is trending, how fast it's growing and what is the outlook for it, that would be great. Thank you.

Good question, Diego, this is something that we mentioned as well, but it's worth highlighting. We feel very optimistic and the operation has grown north of 20% quarter-on-quarter and we've won a few key client accounts over the past quarter. So we feel very positive about it. I think what we're tapping into right now is some political instability and also some tensions around agent attrition in the Philippines. So what we're seeing is that a lot of US clients, and this has accelerated over the past couple of quarters, are considering more and more in Latin America as a near shore destination.

So we have actually at one end increased the size of our pipeline with specific opportunities, and on the other side what we're doing is strengthening our work capabilities and commercial team. So we believe now there is a window of opportunity which is very interesting for us to leverage and therefore, we're tapping into it. So results of today are positive and our views going into the near term even more positive, and we're investing on that to be a good area up close for us going forward.

Perfect, thank you.

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

Thanks very much and to finish on time. I just wanted to make a few comments, to recap the highlights of the presentation, and basically I'm going to go back to the very first messages that I said. First, we're very pleased with the operating performance of the Company, especially the ability to grow selectively while we diversify our revenue base, but also protecting margins and generating cash. Especially, and again, (inaudible) we're very pleased with the $27 million in free cash flow before interest generated in the quarter which is up $22 million year-over-year.

The second is the, which was brought in the question of [the divestiture] progress in the strategic growth priorities. Again, particularly to highlight the acquisition of R Brasil which accelerated the capabilities in the higher value-add solutions category. And point out the fact that we have, because of the acquisition, major wins this quarter due to this. And we see a lot of potential going forward, not only Brazil, but also to replicate this in other countries.

As I mentioned before, another highlight throughout this quarter is that we've reaffirmed and extended the relationship with Telefonica. My opinion is that we have now a much solid base going forward adopted to the current business environment. Additionally with the, as I mentioned, with improvement in payment terms and invoicing processes we will have a material improvement in our DSOs, which will impact our working capital over the next 18 months. And we mentioned as well, the elimination the CBI, the contingent value instrument we had with Argentina, strengthens our balance sheet as of the fourth quarter of this year.

Fourth, the accelerated payment higher cost debentures will strengthen as well our balance sheet and our trajectory. Specifically, as Mauricio mentioned, we are committing $30 million of accelerated payments in the fourth quarter of this year of the higher cost Brazil debt, which will reduce interest expense in 2017 by $5.8 million pretax, or an impact of $0.06 per share on an adjusted basis. Again, very relevant and showing our commitment to cash generation and prepaying the debt.

And finally, just wanted to leave you with our optimistic view and outlook for Latin America in 2017 and the high confidence that I have on our organization and in the competitive position that we have in the market. The strategy on our execution capabilities to deliver high growth, earnings and cash flow this year and going forward.

Thank you very much again for your attention, and we look forward to interacting over the next quarter. Thank you.

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