Atento SA (ATTO) 2016 Q4 法說會逐字稿

Greetings and welcome to the Atento S.A. fourth-quarter 2016 earnings results 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. Thank you, Ms. Tyson, you may now begin.

Thank you and welcome to our FY16 fourth-quarter earnings call. With me today are Alejandro Reynal, Atento's Chief Executive Officer; and Mauricio Montilha, Atento's Chief Financial Officer. Alejandro will begin with a brief review of our performance and strategy, and then Mauricio will review our quarterly results and guidance for FY17 in more detail. Afterwards, we'll open the call for questions. Following Q&A, Alejandro will have a few closing remarks.

Before proceeding, let me mention that certain comments made on this call will contain financial information that has been prepared under international financial reporting standards. This financial information is unaudited.

In addition, this call may contain announcements that constitute forward-looking statements which are not guarantees of future performance, and involve risks and uncertainties. Certain results may differ materially from those in the forward-looking statements as a result of various factors. We encourage you to review our publicly available disclosure documents filed with the relevant securities regulators, and we invite you to read the complete disclosure included in the second page of our earnings presentation. Our public filings and earnings presentation can be found at investors.Atento.com.

Please note that unless noted otherwise, all growth rates are on a year-over-year and constant-currency basis. In addition, our revenue growth rates for our consolidated results and EMEA segment exclude the impact of our divestiture of Morocco which occurred in our third quarter of FY16. Now let me turn the call over to Alejandro.

Thank you, Lynn. Good afternoon and thank you for joining us today.

Please turn to page 4. I am pleased to report that we delivered on our key goals for FY16. We expanded our leadership position in the Latin America CRM/BPO market, we delivered on our margin and cash commitments, and we made targeted investments to accelerate our growth initiatives. We achieved these solid results while facing stiff macro headwinds in several of our key markets.

In the fourth quarter, we continued to meet our 2016 objectives of protecting margins and generating cash. Revenues were $442 million, down 4.2%, driven by a decline in Telefonica. The rest of the Business performed well, as revenue for multi-sector clients increased 2.4%. In particular, in Atento Brazil, our multi-sector returned to growth in the fourth quarter, with revenues up 2.2%, evidence of our strong commercial momentum in Brazil and positive signs of recovery in the market.

Adjusted EBITDA margins were 13.3% in the quarter, as we continued our focus on disciplined management of our operations. We also benefited from an improved business mix.

Free cash flow before interest was very strong in the quarter, at $90 million, due to the implementation of more favorable payment terms with Telefonica and our strict CapEx and working capital management. As a result, we were able to accelerate the paydown of our Brazilian debentures, our most expensive debt, which we reduced by $30 million in the quarter, lowering our interest expense and improving our earnings trajectory in future years.

Other notable developments in the fourth quarter include the elimination of our contingent value instrument, or CVI, related to Argentina. With all of these actions, we have strengthened our balance sheet, reducing our leverage ratio to a low 1.5 times adjusted EBITDA to net debt.

For the full year, revenues were down 1.4%, adjusted EBITDA margins were 12.6%, and we generated $136.3 million of free cash flow before interest. These are very solid results, given the macro context, as we achieve our key goals of maintaining margins, generating cash, while also diversifying our revenue base.

Please turn to page 5. Looking forward to FY17, we see improvements in the macro environment, especially in Brazil, but believe 2017 will continue to be difficult, as we expect recovery of consumer spending to be slow and our clients to remain focused on managing costs.

Within our client base, we expect revenues from Telefonica to decline. With the extension of the master service agreement last year to 2023, we feel very good about the health of our relationship with Telefonica. There are new business opportunities to support an even higher share of wallet, particularly in sales, retention, and collection services. However, like in 2016, in 2017 we are forecasting an absolute decline in revenues.

Beyond Telefonica, we remain very encouraged by the growth opportunities with both our existing and new clients, where we expect healthy growth in 2017. We continue to be focused on our three strategic growth pillars. First, consolidate our leadership in core voice services, particularly in the telecommunications and financial services verticals; second, continued growth into higher value-add solutions organically and to targeted investments to build capabilities; and third, accelerate profitable growth with a mainstream digital offer.

Please turn to page 6. Particular areas of growth related to our strategy in key verticals include: first, in the telecommunications vertical, which is a $3 billion market, excluding Telefonica, and where we have an underpenetrated market with approximately a 3% share.

Our heritage and expertise make us a reliable partner to telcos, evidenced by our rapid growth in recent years. There remain attractive opportunities to continue to capture share of wallet, particularly in areas that drive average revenue per user. Examples include services such as sales, cross-selling, and retention.

Telco clients are increasingly looking to optimize these interactions via digital and analytics, while also ensuring a high-quality customer experience. Atento digital is a key enabler for these services.

The second area is growth in financial services where we have a 22% share of a $2.5 billion market. Here to reduce costs, financial services companies are trying to drive more self service of simple customer interactions, and they are looking to CRM/BPO operators to support them through the application of these technologies. They are also looking to increase sales, leveraging digital channels. Once again, Atento digital is playing a key role here.

Additionally, financial services players are rethinking what is core to their business and are exploring higher levels of outsourcing. In this context, the areas of biggest opportunity are collections and other BPO activity historically done in-house, such as credit origination, which are increasingly seen as relatively high cost and inefficient.

Through our acquisition of R-Brasil, we have become a leading player in the $2 billion Brazilian collection market in which we have only a 2% share. And this morning, we announced an agreement to acquire a majority stake in Interfile, a leading provider of credit origination BPO services in Brazil. This is a $0.6 billion market, where we now have a 10% share after this acquisition.

The third area is growth in other industry verticals where penetration of outsourcing is less. This represents a $2 billion market in which we have just a 10% share. These verticals, such as retail and healthcare, have the highest growth potential in Latin America.

In several cases, we have carve-out, in-house CRM activity to speed up the migration to Atento. The opportunity to both professionalize customer experience and deliver at a lower cost presents attractive outsourcing prospects for us.

Furthermore, here there's an opportunity with new disruptive players in the regions, which are experiencing fast growth and require a strong Latin American regional partner that can support them through mainly digital channels to serve their customer base. For example, in Brazil we are leveraging our Atento digital capabilities as we ramp a large new contract with the leading provider of transportation services in Latin America.

Four is growth in US nearshore, a $2.5 billion addressable market in which we have only a 2.8% share. We continue to invest in our US nearshore business, which we see as a very attractive market. The political developments in the Philippines and depreciation of the Latin America currencies have increased the attractiveness of US nearshore to US firms. We have made very good progress here with relevant client wins in 2016. And finally, we continue to evaluate tuck-in and adjacent M&A activity to accelerate building capability and growing scale in attractive segments.

Please turn to page 7. Our objectives for 2017 are to return to top-line growth, as well as to continue maintain margins, drive cash generation, and net income growth. In terms of guidance, we expect revenue growth in the range of 1% to 5%, as the strong growth in the multi-sector will offset declining Telefonica revenues. These will remain stable through 2017 at fourth-quarter 2016 levels, consistent with the renegotiated and extended master service agreement.

Relative to margins, we are focused on maintaining underlying operating margins at the same levels as FY16, with a continued focus on disciplined inflation pass-through and efficiency initiatives. We also plan to make targeted investments to accelerate our growth initiatives, for example, investments in Atento digital, as well as investments to ramp up new services. Due in part to these investments, we expect the overall adjusted EBITDA margins to be in the range of 11% to 12%.

We expect another year of strong cash-flow generation, with cash conversion of about 40% of adjusted EBITDA, supported by our rigorous CapEx and working capital controls. Our cash-flow generation will continue to support the program to accelerate the paydown of our higher-cost Brazilian debentures.

Let me also comment on the shape of our financial and operating results in 2017. As you know, there is normal seasonality to the Atento business, with the second half stronger than the first. Although we are not providing a specific quarterly guidance, as we look at the timing of business ramp-up in multi-sector, growth in the second half of the year will be even more pronounced.

In summary, before I hand it over to Mauricio, let me say that I feel very good about we have achieved in 2016, given the macro context. And although we believe the macro environment will remain difficult in 2017, we are very confident of our ability to return to top-line growth, maintain margins, deliver strong cash flow and net income growth. I remain very excited by the prospects for the Business as the leading customer experience solutions player in our market. Mauricio?

Thank you, Alejandro. Please turn to slide 9. As a reminder, I'll be referring to growth rates on a constant-currency basis and on a year-over-year basis, unless noted otherwise. In addition, as a result of our divestiture of Morocco in September of 2016, this business is now in discontinued operations, and the revenue growth rates for our consolidated and EMEA results have been adjusted to reflect this.

We delivered balanced results for FY16, aided by our performance in the fourth quarter, predicated on selective growth, margin protection, strict working capital management, and improvement in cash flow. Looking at our consolidated results, growth in our multi-sector business has started to accelerate, up a healthy 2.4% in the quarter, aided by new client wins and share-of-wallet gains. This growth, however, was more than offset by a 12.7% decline in Telefonica, particularly related to Brazil, Argentina, and Mexico.

Our diversification strategy is progressing well. Our mix of revenue from multi-sector clients increased 470 basis points for a record of 60%. In fact, over 80% of our workstations won in the quarter were with existing and new multi-sector clients, mainly financial service and telecom industries.

We [haven't] been able to protect margins as result of performance on disciplined growth, inflation pass-through, and proactive cost and efficiency initiatives. These initiatives include the investments to align our cost structure with the impact of volume of macro pressures in some of our geographies, including Brazil, Argentina, and Spain.

Non-recurring items were a gain of $22.3 million, and expense of $8.6 million for the year. Both include $41.7 million adjustments for the gain on our CVI in Argentina, which was eliminated in the fourth quarter. This gain was recorded as other gains in our financial statements. The elimination of CVI had no impact in our adjusted results. Adjusted EPS was $0.19, a decline of $0.17, driven mostly by foreign exchange impacts and increasing net interest expense and a higher share account.

Turn to slide 10. When you look at our segment in Brazil, our growth profile continued to improve sequentially with the revenue down 4.6%. Importantly, multi-sector returned to growth in the quarter, up 2.2%, driven by existing financial service clients and new client wins. We are encouraged by the improving growth profile in Brazil, as declines in GDP continue to moderate, and consumer confidence strengthens. Revenue from Telefonica declined 17% as a result of macro pressure, and elimination of certain trade marketing programs.

Our mix of revenue from multi-sector clients increased 460 basis points to 69%. In the quarter, we won 1,436 workstations, with 74% coming from existing and new multi-sector clients, including other telcos than Telefonica. Our mix of high value-added solutions increased 606 basis points to a record of 41.2% of revenue. Adjusted EBITDA increased 5%, while adjusted EBITDA margin of 16.7% was supported by our proactive actions to restructure and align our cost structure with volume levels, effective wage inflation pass-through, as well as improving mix of higher value-add solutions.

Please turn to slide 11. Looking at the Americas, in the quarter, revenue declined 4.1% reflecting a deceleration in growth in both our multi-sector clients and Telefonica. Multi-sector grew 1.2%, supported by double-digit gains in US nearshore, Colombia, and Peru. These gains, however, were moderated by Mexico due to lower volumes with some large clients in the financial service sector. Telefonica declined 10.2%, driven by macro pressures in Argentina, and their exit of specific sales channels in Mexico.

In the quarter, we won 802 workstations with new and existing clients, with over 60% of new clients' wins coming from financial service clients. Our mix of revenue from multi-sector clients increased 320 basis points to 56.7%. And finally, adjusted EBITDA margin decreased 300 basis points to 11.3%, as we absorb the impact of declining revenue. Proactive restructure is under way to further align our cost structure with the new volume levels.

Please turn to slide 12. In EMEA, revenue declined 2.6%, a sequential improvement versus the third quarter, and an 11.7% increase in multi-sector was more than offset by a 9.2% decline in Telefonica. Supporting our growth in multi-sector, over half of workstations won in the quarter came from new financial service clients. Our mix of revenue from multi-sector clients reaches 35.3%, up 230 basis points, while our mix of revenue for high added value solutions increased 140 basis points to 9.9%.

Adjusted EBITDA margin declined 280 basis points to 9.2%, driven by the decline in revenue. We continued to manage cost and efficiency relative to declining revenue from Telefonica.

Please turn to slide 13. Looking at cash flow and capital allocation, in the quarter we generated $90 million in free cash flow before interest, up $70 million year over year, our fourth consecutive quarter of cash flow improvement. And for the year, we generated $136.3 million in free cash flow, up $144.9 million year over year. Our improvement in cash flow and cash conversion this year has been driven by our rigorous working capital focus and capital allocation discipline, as well as the structural one-off improvements in working capital. Including the impact of those one-off improvements, our conversion of cash flow before interest as a percentage of adjusted EBITDA was 36% for the year, up 16 percentage points over 2015. CapEx in the quarter was 5.5% of revenue, bringing our full-year CapEx to $48 million, or 2.7% of revenue, in line with our target.

Please turn to page 14. Turning to our balance sheet, I am pleased to say that our balance sheet continues to get stronger, enhancing our financial flexibility. In the quarter, we had liquidity of $247 million, which includes cash and cash equivalents, and undrawn revolving credit facilities. And we achieved a low leverage of 1.5 times net debt to adjusted EBITDA, consistent with our long-term targets. Our leverage was favorably impacted by our voluntary accelerated payment of $30 million on our higher-cost Brazil debt and elimination of CVI.

Please turn to page 15. Before we open the call up for Q&A, let me review our guidance for FY17. Our focus is to return to both top- and bottom-line growth, drive cash flow, and make target investments that advance our competitive position. We are starting to see some sign of stabilization and recovery in Brazil; however, there is macro (inaudible) Mexico.

As a result of these dynamics, we have a pragmatic view of growth for FY17. We are targeting revenue growth in the 1% to 5% range. We expect to return to normal seasonality this year, which means a modest sequential decline the first quarter from fourth-quarter levels, and a much stronger second half of the year. The relative and absolute performance of our second quarter will be even more pronounced, as we benefit from the ramp-up of new clients and share-of-wallet gains in 2016 and 2017 from multi-sector clients, while we expect Telefonica revenues to stabilize at FY16 fourth-quarter levels.

We are targeting adjusted EBITDA margin in the range of 11% to 12%, which includes ongoing efforts for cost efficiency and strategic investments to advance growth initiatives, and the ramp-up costs as a result of a stronger commercial pipeline. We expect also roughly $13 million non-recurring items mostly related to our program to drive indirect cost efficiencies. We started this program in the third quarter of FY16 and once completed by the middle of the year, we will reduce our indirect costs or mainly overhead by 12% to 15%.

Looking at the interest expenses, we expect net interest expense to be in the range of $60 million to $65 million at current FX rates as of December 2016. As you consider the GAAP net financing line on our P&L, which is a combination of net interest and FX impact, please remember that our adjusted net income and adjusted EPS excludes the non-cash impact of net foreign exchange gains on financial instruments, intercompany balance, and net foreign exchange impacts on cash position held in US dollars by [local operations]. We exclude these items from the adjusted numbers to more clearly show the underlying health and trajectory of our Business.

Relative to CapEx, we are targeting between 3% to 4% of revenue. We expect an effective tax rate of approximately 34% and a fully diluted share count of approximately 73.9 million shares. Our guidance does not assume any change in our current operating environment, capital structure, or exchange rates movements on the translation of our financial statement into US dollars. Now I would like to turn the call over to the operator and take calls from the audience.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session.

(Operator Instructions)

Susana Salaru, Itau.

Hello, guys. Thank you for taking our questions. The first question is regarding the 2017 guidance, specifically the EBITDA margin guidance. It's very similar from what we have for 2016, and the Company actually beat the guidance in 2016.

So we were just wondering if we are assuming that Brazil economy will improve in 2017, if this guidance for 2017 is not a bit conservative and what is the rationale to be so conservative? That will be our first question.

And the second question is regarding volumes in Brazil. We are almost at the end of the first quarter of the year. If you have already identified an improvement in the activity in Brazil. That's it guys. Thank you.

Hello, Susana. This is Alejandro. Thank you for joining the call. Regarding the first question -- couple of comments, first, I will say that we are taking a prudent and a pragmatic approach in terms of the guidance for 2017, reflecting, to an extent, as we mentioned on the call, still a challenging macro environment in the region. So I think from that perspective, we've been prudent and provided 11% to 12%, which is the same range as we provided last year.

The other thing which is true is that we are expecting, and we are actually making additional investments on one end for the growth initiatives. So in my comments, I alluded, in a series of cases, of the investments that we're making on digital capabilities for telecommunications and for financial services companies. And we're making those investments on an organic basis, so we're building capabilities in terms of people and resources.

So there is -- the guidance does imply that there's some increased investment for the digital capabilities, which, of course, there's big return on investment on those in the years to come. But there's some investments that we need to do now. And the other piece of investment that comes with our business, which at the end of day is positive, but is the investment that we're doing to ramp up new business. As we are seeing a better economic activity, and therefore, translated into growth, we are investing on ramping up campaigns which has an impact of the [wi-fi] business.

So in summary, it would be those three. One is a prudent and pragmatic approach towards the year, but specifically in terms of things that we're doing. One is the investments on digital and second are the investments to ramp up new business.

In terms of Brazil and the first quarter, yes. And as I mentioned, we see much more of the activity and growth back loaded this year. But having said that, we are optimistic about what we're seeing in Brazil, and we are seeing the first quarter developing well in terms of increased levels of activity. So from that perspective, some of the forecasts and what we hope it was going to be the case for Brazil in 2017 is panning out well and we're happy because of that.

Thank you, Alejandro. Very clear.

Daniel Federle, Credit Suisse.

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

Thanks, Daniel, for the question and good to have you as well. In terms of the margins in Brazil, I would say that there's a few things that are helping out. One is we have been able to improve our businesses in Brazil. To that extent, Mauricio mentioned that by now, the percentage of business that comes from higher value-added solutions is towards 40%. So as those businesses come at a higher margin profile, and therefore, to that extent, that is helping in the margin profile of our businesses.

Also, we were very proactive, as you might recall, in the first -- end of last year and first quarter of this year making a series of adjustments to make sure that we had a lean and agile structure for the Brazil operation. And now that the business is starting to pick up again, we're seeing that providing those good results in terms of margins. So I would say those two factors are clearly helping out the business mix and made sure that we took earlier in the year to draw efficiencies and make sure that we had very lean and agile operations in Brazil.

With regards to the macro environment, we measure our market share in the region. And the good deals with the latest numbers is that we have consolidated our leadership position. We have actually extended our lead in many of the countries in where we operate.

In Brazil, we are the clearly the number one player and gaining market share in that market. We feel very comfortable and very confident of our positioning there. There's no change in the competitive landscape and no competitive threats at this stage; therefore, with Brazil very comfortable with where we are.

In Americas, we also have a commanding lead. The nature of competition there is highly fragmented as well. There's no other regional players, so at the end of the day, we deal with local competitors in each of the markets, have been the case in Mexico, Colombia, Peru, Chile. And then again, we don't see any competitive threats, and remain at a very solid market share position in those countries.

And lastly, with regards to Spain, also have the market leadership position there. Good news in Spain, as I pointed out on the call and also Mauricio mentioned, we grew 11% in multisector. So one of the things that we wanted to do in Spain was to start diversifying from Telefonica, and we're successfully doing that.

So to that extent, we are gaining share in the market, in other verticals such as utilities and financial services. And with that, consolidating our lead. And then, again, we don't see any competitive threats in the region. So, in summary, we're very happy in terms of where we are from a competitive standpoint and working very hard to continue to increase that lead in 2017.

Okay. Thank you very much.

(Operator Instructions)

Valder Nogueira, Santander.

Telefonica has been speaking about these new client relationship models that they call AURA. How does this impact your business? Is this a threat, is this an opportunity, how do you see it?

Hi Valder, this is Alejandro. Good question. Generally speaking, what we're seeing in the market is that Telefonica, other telcos, and financial services segments are trying to make the transition into the digital space. And with that, change the way they serve their customers. And from that perspective, what we did last year was to establish a business unit named Atento Digital to basically address those things.

And what we're seeing specifically with respect is that on one end, clients are -- and Telefonica is looking to grow and therefore, exploring digital channels to do that. So from that perspective, anything that we are doing on digital sales channels is helping us supporting their strategy.

And the other piece, which is more related to AURA is things that are related to serving the customer and doing that in a more efficient manner and with a higher customer satisfaction. And to that extent, we have been developing platforms that address multichannel servicing, and also automation as well as [bots].

So what I would say is that we are partnering with them, and not only with Telefonica, with other clients in making sure that the things that we develop through Atento Digital help them achieve their digital strategy. Which again, in some cases, has to do with increasing sales and we're supporting that through digital channels, and also helping them through improve the customer experience and reducing cost as well. And to that extent, we are doing that through multichannel platforms, so servicing customers not only via voice but also via mail, chat, bots, et cetera.

So at the end of the day, my stance of this and the Company's stance is that we got to embrace the digital revolution, we've got to be proactive, and with that, we've got to be able to develop solutions in the digital space that address our client needs. And with that, we're partnering very closely with Telefonica, with their strategy around digital and also with other clients in other verticals.

On this digitalization, do you perceive the value to be added to your average ticket coming from these telecom clients, coming from inside the customer's house or up to answering a customer's house. So is it a gain on the [infra] side or is it a gain on the final service as you went to the door of a client's premise?

Yes, if I understand the question, Valder, I think I am seeing probably two different types of clients that we are dealing with, which is very interesting. We are now dealing with digital-borne companies, so we have the cases of Uber, Cabify, Airbnb, amongst others, which, what they require is 100% digital servicing.

So with those, the migration is not there. Basically, you need to provide them services in a digital way and we're doing that. So it's interesting because now you go to some of our wholesalers and it's not a call center anymore; it's a platform which is 100% digital.

So it's emails, it's chat, there's no voice. So I think there is one type of clients that are growing a lot in the region, which we're servicing which are [etho-grown] companies and it's 100% digital.

And then you have the other dimension, which is, I would call it the more traditional clients, which is the telcos and financial services, which are trying to make that shift into the digital world. And to that extent, those are the ones that we're also helping migrate by providing digital solutions. I think at the end of the day, there is going to be a situation with [them where] we're going to have to live in both worlds, in the world in where we still provide a lot of voice service, because they're going to need it, but also increasingly be able to complement that with more channel digital service offerings.

And to an extent, I think we're addressing both. We are addressing more demand than they have in house, but also demand that has been outsourced, so we're addressing both.

Okay. That's clear. Thank you.

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

Page 16 basically is a recap that I just want to thank everybody for the questions and for being part of the call. Just as a summary and very briefly, first, I want to say that we delivered on our key priorities for 2016, which were selective profitable growth, margin protection, and cash generation. And given the macro context in FY16 were solid results.

Second, for FY17, we're targeting a return to both top- and bottom-line growth. We are, as mentioned during the call, very confident on our ability to return to growth based on our existing and new client business, and also the investments we're making on our strategic growth pillars. We are also very confident on our capacity to deliver on strong cash flow generation, which will support our earnings expansion.

Thank you again, and I look forward to our next interaction.

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.