Atento SA (ATTO) 2018 Q2 法說會逐字稿

Greetings, and welcome to Atento S.A. Second Quarter 2018 Earnings Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Shay Chor, Corporate Treasurer and Investor Relations Director. Thank you, please go ahead.

Thank you and welcome, everyone, to our fiscal 2018 second quarter earnings conference call. Here with us today for this call are Alejandro Reynal, Atento's CEO; and Mauricio Montilha, Atento's CFO. Alejandro will discuss the quarterly performance highlights, followed by Mauricio, who'll provide further details about our quarterly results. We will then take any questions you may have, and 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, including 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 basis in constant currency.

Alejandro will now give you his remarks. Please, Alejandro, go ahead.

Thank you, Shay, and good morning, everyone. Thank you for joining us today. Please turn to Page 4 of the presentation. We're very pleased to say that we delivered solid top and bottom line growth across our geographies during the second quarter of the year, continuing the positive trend of the first quarter and advancing our profitable growth agenda for 2018.

Highlights for the period are our robust 9.1% Multisector revenue growth and the strong 19.9% EPS expansion. On a consolidated basis, revenues increased 7.2% in the quarter and 5.8% year-to-date, very much in line with our expectations and our guidance.

Top line growth was accompanied by bottom line improvement as well, with EBITDA growing 15.6% and EBITDA margins up 0.7 percentage points, and as mentioned before, recurring EPS also expanded by almost 20% to $0.20.

Let me underline that these solid results were achieved within the context of a tougher macroeconomic environment in some of our geographies, such as Brazil and Argentina.

From a regional perspective, the quarter was very much in line with region seasonality and our expectations. In Brazil, we saw top line growth of 6.3% in the quarter versus 3.6% in the first quarter, reflecting Atento's solid conversion of the commercial pipeline in the period, with new client wins across several verticals and good demand for solutions. As a result, we continued accelerating the diversification of revenues in our flagship operation as well as increasing the penetration of digital in our business.

Operational performance in Brazil was in line with expectations despite a challenging macroenvironment and the impacts on economic activity of the countrywide truck driver strike in May. As we mentioned in the first quarter earnings call, we have been implementing an operational improvement plan that is on schedule, and we expect to have recurring positive impacts on margins from the second half of the year onwards. Additionally, we have completed a successful leadership transition in our Brazilian business with a new country head, which I'm very confident will continue to steer the business towards profitable growth.

Although we are operating in an uncertain macroenvironment, we remain for the most part optimistic regarding our Brazilian business' prospects for the second half of the year. We anticipate a continued and gradual evolution of our revenues and the expansion of our margins, given the current business momentum.

Our Americas segment confirmed our expectations and continued to perform well in the second quarter, with solid growth momentum pushing revenues up by 11%.

Revenues from Multisector increased 14% in the second quarter, advancing our revenue-diversification agenda in the region. Profitability also improved with adjusted EBITDA margins to 13.5%. We expect our Americas region to keep this positive momentum in the second half of the year.

In EMEA, we delivered the first year-over-year growth in the revenue since the first quarter of 2017. Revenues were up 2.9%, fueled by robust Multisector revenue growth of 12.3%. The expansion of Multisector clients continues to accelerate revenue diversification and drive profitability in the region, with adjusted margins increasing to 9.7% in the quarter.

For the second half of 2018, we expect Multisector business to continue fueling growth and margins in the region.

From the client and commercial perspective, our quarterly performance continues to benefit from the sustained performance of our Multisector business and the rollout of our expanded value offer. As such, Multisector clients, in particular financial services, remain Atento's growth engine across all regions. This sustained Multisector growth increases revenue diversification across all geographies, increasing non-Telefónica revenues to almost 65% in the quarter.

We continue to experience a good conversion of the commercial pipeline and consistent demand for BPO and Digital solutions as we keep deploying Atento's expanded value offer across our footprint.

Revenues from higher value-added solutions represented 26.4% of total revenues in the second quarter, up 0.7 percentage points year-over-year. Important to highlight that the demand for value-added solutions, including Digital, represents around 1/3 of our qualified pipeline. This reflects the ongoing transformation of our business to become the leading provider of customer experience and BPO solutions in the digital age in our region.

In addition, we continue to be Telefónica's reference partners for CRM/BPO services. Telefónica revenues expanded by 4.4% in the second quarter and 1.8% year-to-date.

From a capital allocation perspective, our priorities for the second half of the year are to continue pursing profitable growth by funding accretive organic and inorganic growth opportunities and focus on shareholder return. Our strong balance sheet and solid cash flow generation allows us to confidently execute on these priorities in the months to come.

We are initiating a share buyback program, which has been approved by the Board of Directors of up to USD 30 million to be executed in the coming 12 months. By initiating this share buyback program, we are reaffirming our confidence in Atento's strategy to deliver profitable growth, the prospects of our business going forward and the ongoing commitment to share further value creation.

Before I move to Mauricio to explain the quarterly results in more detail, let me stress that for the second half of the year, our key priority remains to deliver profitable growth. We will do that while advancing the transformation of the business to extend Atento's #1 leadership position in the region, and we continue generating value for our shareholders.

I will now move the call to Mauricio. Please go ahead, Mauricio.

Thank you, Alejandro, and good morning, everyone. I ask you to please turn to Slide 6. In the second quarter, our revenues increased by 7.2% with continued growth in our regions, especially in Americas and Brazil, a 7.2% compared to 4.5% growth in Q1 of '18. Year-to-date revenue expanded by 5.8%.

As mentioned before, Multisector clients' revenue increased by 9.1% in the second quarter, with growth across several verticals continuing the trend we have seen over the past few quarters. As a result, revenues from Multisector represents now 60.9% of total revenues.

Revenues from Telefónica continued to perform within expectations, growing 4.4% in the quarter and 1.8% year-to-date.

Our effort to expand high value-added solutions continues to bear fruit, with revenues growing 0.7 percentage points to 26.4% of total.

EBITDA totaled $49.1 million in the second quarter and EBITDA margin expanded by 0.7% point (sic) [0.7 percentage point] year-over-year to 10.4%.

Profitability was positively impacted by higher margins in Americas and in Spain, partially offset by lower margins in Brazil. This 10.4% margin in the quarter compares to 10.1% in Q1 of '18 and is in line with our expectations and guidance provided in both Q4 2017 and Q1 2018 earnings calls.

On adjusted basis, EBITDA grew by 1.5 percentage, with adjusted EBITDA margin dropping by 0.7 percentage points.

As I will detail later in this call, Q2 margins reflect the run rate of the company and includes some negativity [for our costs] in Brazil, offset by benefits from insurance claims in Americas related to Puerto Rico natural disaster.

Recurring net income attributable to owners of the parent company reached $14.8 million, implying EPS of $0.20 versus $0.10 in Q1 2018. The almost 20% EPS expansion year-over-year reflects our effort to improve results below EBITDA line, with lower net interest expenses resulting from last year debt refinancing and a lower effective tax rate in the quarter. The year-to-date effective tax rate impacting recurring income reached 33%, within our guidance for the year.

Moving to Slide 7, we will look at the performance of our segments. In Brazil, it's important to highlight the still challenging macroenvironment with political uncertainties ahead of us and the impact of less -- May's truck driver strike. Despite that, operating performance was in line with our expectations, with revenue growth accelerating to 6.3% in Q2 from 3.6% in Q1 2018. Revenue growth for Multisector also accelerated 6.6% from 4.6% in the previous quarter on the back of robust conversion of the commercial pipeline in the quarter, and now represents 69.1% of the total.

Revenues from Telefónica grew 5.4% in Q2 and 3.3% year-to-date, reflecting higher volumes. As we discussed in our first quarter earnings calls, we have been implementing a series of operational actions to improve profitability. During this quarter, these actions, combined with still higher-than-normal spare capacity and trucks driver strike, had an impact of about 2 percentage points on margins. Additionally, certain clients' programs with low profitability are expected to be terminated in the third quarter. The combined results was the adjusted EBITDA decreased to $19.1 million in Q2 with a margin of 8.6%. We expect these actions will have been fully executed along the third quarter. We believe margins are tracking for the expected improvement in second half of '18, although it's likely that Q3 margins will improve, but will be still below historical seasonality.

On Slide 8, we will look into Americas region. In Americas, we continued to see strong top line growth with a healthy margin. Revenue grew by 11% in the second quarter, with Multisector driving the expansion in Argentina, Chile and Mexico, and now representing 58.8% of the revenues, up 1.2 percentage points versus last year. Revenues from Telefónica also grew by a healthy 6.9% in the quarter and 4.3% year-to-date.

Second quarter adjusted EBITDA margin expanded 1.8 percentage points to 13.5%, reflecting the improving mix from higher volumes of Multisector. Also, as I mentioned earlier, Americas benefited from insurance reimbursement of cumulative losses related to Puerto Rico's hurricane, offsetting lower volumes from domestic operations not totally restated to prior year levels.

Looking forward, we expect Americas' top line to grow at high single digit in the second half of the year to margins similar to the ones presented in the first half of the year.

If you could, please, turn to Slide 9, we will see some details on EMEA where we had [substantial good sector] revenue growth and increased profitability. As Alejandro mentioned before, this is the first quarter with year-over-year revenue growth since Q1 2017 and the third consecutive quarter-over-quarter expansion. Revenue grew by 2.9% in the second quarter, with Multisector 12.3% expansion more than offsetting the 2% -- 2.3% drop in revenues from Telefónica. The diversification results -- resulting from this expansion with Multisector clients that now accounts for almost 40% of revenue has improved profitability by 2.8 percentage points, with margins reaching 9.7%.

Turning to Slide 10. We will now discuss cash flow and capital structure. Free cash flow in Q2 reached $37.3 million, reflecting the $43.3 million free cash flow before interest and acquisitions. This strong result is explained by [deposit] changes in working capital reverting the one-off impact we had in the previous quarter collections and is in line with our comments during Q1 earnings calls.

Year-to-date, cash flow before interest and acquisition totaled $6.9 million, in line with historical seasonality. CapEx totaled 2.6% of the revenues, which compares to last year's 2.1%. We expect CapEx level to catch up in the second half of the year, with full year CapEx as a percentage of revenues to be in line with our guidance.

As of June 30, 2018, gross debt stood at 47 -- $479 million, implying drops of 12.3% year-over-year and 3.1% sequentially.

We ended the quarter with cash and cash equivalents of $106 million, which combined with the undrawn credit facility of $96 million, implying total liquidity of $202 million.

Net debt was 6.9% lower year-over-year and 5.4% lower sequentially at $373 million. Net leverage ratio was down to 1.7x, reflecting our higher cash position even after debt amortization in Brazil.

Finally, before we move to Q&A session, I would like to emphasize that the first half of 2018 was very challenging and demanded some important actions, particularly in Brazil.

We expect that Q3 '18 will continue showing sequential progress, especially in terms of profitability, with margin trends with in line with our guidance. This will help supporting our capital allocation priorities, namely to continue pursuing profitable growth and shareholders' returns. We are confident in the prospects of the business as highlighted by the up to $30 million share buyback program approved by our Board of Directors to be executed in the next 12 months. We will provide more details of the [implementation] of share buyback program in the next couple of weeks when we are ready for starting execution.

We are now ready to start the Q&A part of our call, and I would like to turn the call over to the operator. Please, operator, you may go ahead.

(Operator Instructions) Our first questions come from the line of Susana Salaru with Itaú.

We have two questions here. The first one is related to EMEA. EMEA to some is going forward. What should we expect in terms of top line growth and margin? What is a stable or [target top line] growth and the target EBITDA for this region specifically? Because we saw that there was a turning point this quarter, so just want to know how should we forecast for the next quarters? That would be our first question. And the second question, there was a lot of discussion about the Multisector relevance in the results and how important of a driver it is. Could you provide a [little bit of more granularity] how -- which sector, which region -- what should -- that we should pay attention to try to anticipate this -- the continuance of these trends?

Thank you for the question, Susana. Good to hear from you. This is Alejandro. In terms of the two questions, the first one, I'm very pleased to say that we are optimistic about [great] performance for Brazil for the second half. In terms of how do we see that evolving, top line should evolve along with the company's guidance. As you know, Brazil represents half of our revenues, so it should be the guidance that we have provided, which is 3% to 6% top line growth. And we are still seeing a recovery materialize in terms of consumer confidence and consumer spend in Brazil. So we are not overoptimistic about the top line growth prospects in Brazil. Having said that, we saw a positive second quarter, and we don't see a reason for that to continue to be the case in the third and the fourth quarter. So top line growth in Brazil should be very much in line with the guidance. And in terms of the EBITDA margins, we do see a [drop-down] improvement. As I mentioned on the call, we have executed the operational improvement plans. I have been personally involved on that over the last couple of months, leading the execution of the plan in Brazil and happy to say that we also made a leadership transition here. We have a new leader for the Brazil organization who's continuing to execute the plan. And therefore, the margins are going to expand, for sure, double digit. As you saw this quarter, we had single digit margins due to a lot of one-off effects. So clearly, we see expanding to double digits within third, fourth quarter. And as it was pointed in the call, more in line with the different seasonality that we see in Brazil, which are better margins than on the first half of the year. So we have an optimistic view, both from a top line and margin perspective for Brazil.

In terms of the second question, which is related to Multisector, we are seeing solid performance across the regions. I would say that, clearly, Americas is the one that is leading the pack with the Multisector performance. There, we're seeing positive evolution in various countries. Argentina, despite of the fact that we had some difficult macro exposure during the second quarter, is performing well. We haven't seen yet [a deceleration] on the top line. Peru, Chile, Colombia, Mexico are all performing well. So the Multisector growth in Americas is well backed up by the different countries in the region.

The next country that has been a very positive surprise for us has been Spain. Spain has been a growing Multisector, up double-digit rates. That [one extent] is a reflection of how the economy in Spain is doing much better than the prior years, and we'll see that flowing into consumption and therefore increased revenues. So in terms of Multisector, I would say that it's all across the regions. Americas for sure, Spain and also Brazil, more mildly, but we're seeing the recovery as well, and that is being driven by Multisector growth.

Our next question comes from the line of Vincent Colicchio with Barrington Research.

Alejandro, I'm curious, could you parse out the weakness in Brazil on the communication side amongst automation versus maybe general economic factors?

Yes, well, on the overall, I would say that most of what we're seeing in Brazil is very specific to operations. So the 2 issues that we had, first was idleness, we didn't see the top line growing as expected in the first and second quarter. So we had excess capacity, which we adjusted for during the first and the second quarter. Therefore, that was mainly operational and, again, related to lack of top line growth, which I point more to the economy versus the automation. And the second issue, which is also related to operations, is that we had certain client programs that were not performing as expected in terms of margin, and we've taken the actions as well from an operating point of view to make sure that you go back to the target margins. So I would say that, for the most part, what we are seeing in Brazil in the first and the second quarter are things that are related to operational actions that are co-related to things that we, to an extent, control with our action plan. So therefore, we adjusted for the idleness and we adjusted for the nonperforming programs.

Automation we see playing a role, and therefore is something that we are actively proposing solutions to our clients through our Digital business area. But it has not been the driver for the performance in Brazil in the first and second quarter. That's why, by the actions that we took, we do see a better performance -- or we expect a better performance for Brazil in the third and fourth quarter. So it's part of the automation that, again, we're managing that proactively. With the operating plan that we've put in place, we see that reflecting in better performance for Brazil in the third and fourth quarter.

And a question on Argentina. Are you -- you just mentioned that your demand situation remains healthy. Curious on the high inflation levels. Is that causing any problems in terms of passing through those rates of the contracts?

Yes, that's a good question. I mean, the inflation, of course, does put pressure on our margins, and in the case in Argentina, of course, where you're having inflations around 30%. The good thing about Argentina is that the country and the clients are used to operate in this environment. Therefore, the discussions in terms of [the impact of] inflation, they are easier than in other countries. The challenge is that as inflation has increased every quarter, we have to have multiple conversations with our clients, and therefore it becomes more challenging. But I wouldn't say that we're going to have a hard time passing that through because, again, it's a country where these conversations between us and the clients are fairly customary. So we don't expect any major problems or any big issues in the second half of the year with passing up the inflation in Argentina. Might cost some pressuring margins, but for the overall, we will be able to manage.

Okay. And then lastly for me, the -- what does the pipeline of acquisition opportunities in terms of carve-outs in Brazil look like? Is that healthy? And may we see something happen here in the second half?

Yes, it is healthy. We are -- most of the carve-out pipeline right now in Brazil is concentrated on less traditional industries. So we're looking into opportunities in the retail, healthcare, among other verticals that are less penetrated in terms of outsourcing. And yes, our expectation is to materialize at least 1 carve-out in the second part of the year in Brazil.

(Operator Instructions) Our next questions come from the line of Matheus Nascimento with Goldman Sachs.

My question is related to top line guidance for the full year. I mean, at this point, after a very solid top line growth in the first half, what are your expectations regarding potential upside with the guidance at this point?

Yes, of course, we are maintaining our guidance for top line. We are not adjusting it. The truth is that we've had a first quarter in line with expectation and second quarter ahead of expectation. We do expect third quarter and fourth quarter to be within the guidance. Therefore, at this stage, we don't see a need to update the guidance.

Commercial pipeline remains solid. Performance across the regions in terms of commercial activity remains solid. But at this stage, given how the macroeconomies in the region are evolving and (inaudible) in our -- in the call, there are some uncertainties as well. We feel more prudent in maintaining our estimation for the year in terms of top line growth. But again, the truth is that we have good pipeline, good prospects, good dialogue with our business, and we feel optimistic about the second part of the year within that respect.

I just want to add a comment. Mauricio speaking, Matheus. It's that in Q3 last year, we had -- on top of the organic growth, we had the new acquisitions, in Interfile for example, [that is there]. So the comparison also when you look at the Q3 numbers, there is a step-up last year as the acquisition ended, and also a deal we did in collections with another companies that are in Brazil. So the comparison -- comparables for the second part are a little bit tougher. [But as] Alejandro mentioned, the trends in conversion is going solid, but there is a tough conversion, given the step-up that happened in Q3 of '17.

And our next questions come from the line of Dave Koning with Robert W. Baird.

So first of all, my question was going to just be on Brazil first of all. The comp is the toughest in Q3, 11% growth last year. So should Q3 of '18 growth -- Q3 should be the slowest growth in Brazil of the year, and you kind of just said that. Is that fair?

Yes, it's fair. Clearly, that's what happened.

Yes, okay. And then secondly, EMEA margins, what are your thoughts there? The first half of the year, I think we're in the ballpark of almost 9% if you average them out. Q2 was really good. Is that Q2 level stable close to 10%? Or should we just expect the full year to be somewhere in between Q1 and Q2?

Yes, this is Alejandro. Yes, you should expect EMEA to be of the average of Q1 and Q2. The truth is that we're seeing healthy growth, good margins growth and that's summing up to the margin expansion that we are seeing. But for the second part, it should be consistent with what you've seen in the first half of the year. In Spain, you have less of a seasonal business compared to the Americas. So it should be very close to what -- to the average of the first half of the year.

Okay, got you. In the full year, if I remember, the guidance was like 11% to 12% or so. But is that the lower end of that? Kind of what you're thinking now, just given kind of the different parts of guidance?

Mauricio, do you want to take this question?

Yes, can you repeat the question, Dave?

Yes, I think the full -- if I remember right, the full year company guidance for the total company I think was 11% to 12% EBITDA margin?

Yes.

I think you're kind of saying that the second half for Americas and EMEA should look a lot like the first half in terms of margins. Brazil, it sounds like maybe a little better in the back half. But that all implies maybe the lower part of the full year guidance range. Is that fair?

[No], we -- if you -- as Alejandro mentioned, I think the guidance reflects what we expected in the beginning of the year. There is one change, just to put it in perspective, we did expect, for example, for the first half, as we mentioned, the seasonality to be a little bit more compressed versus typically. Typically, [our business seasonality] is lower in the first and better in the second. We also knew that we would have those adjustments to be made in Brazil when we did the guidance, as well in Americas and lower Q1 and better Q2 and offsetting amounts. And so I think we are tracking in a good way to hit the guidance. It's hard for me to say that -- if it's going to be. But it's giving particularly the drop of, say, expectations in terms of Brazil economy. Just to remain -- when we did the guidance last year, everybody thought Brazil economy would grow 3% to -- 2.5% to 3% in '18. Now the perspectives are, I'll say, around 1.5%. And our business it's very, I'd say, linked to seasonality -- to consumption, that is a major part of GDP. So it's hard for me to say today, but we are tracking to be on the guidance. Clearly, I would say that we are slightly behind the average we expected, but definitely, I think the guidance is still a reflection on that. But as I -- as we are seeing the results, yes, if you typically see that we are having good traction, we still have good pipeline to convert to businesses there. I would say that it's fair to say that we are slightly behind, we are not on the top of the guidance. But we are -- let's see how this second part looks like, particularly in the macroenvironment in Brazil that could change a little bit the picture.

(Operator Instructions) We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any closing comments.

Thank you, everyone, for your questions and interest. Before we finish, I would like to recap with the main points of today's presentation on Slide 12. So we see that second quarter results of the company in line with our expectations and reflecting a solid top line and bottom line performance. Multisector plans continue to be the growth engine for the company, while profitability stays in line with our short-term guidance. The ongoing positive evolution from a client and commercial perspective reflects the transformation of our business as we become a well-diversified company with an attractive value offer to succeed in the digital world. We keep consolidating our position as a strategic partner to deliver high value-added customer experience solutions that generate advantages for our clients also in the digital age.

For the second part of the year, we remain focused on delivering profitable growth. Although we are cautious about the challenges, we're also optimistic about the future prospects and expect the business to progress within the expected seasonality for the year as per our guidance. In this, we are confident in the future prospects of the business, and we continue to focus as well on shareholder return. This has led us to initiate our share buyback program. As mentioned, our robust balance sheet and strong cash flow generation allow us to execute on this priority of our capital allocation strategy and, at the same time, keep forming the transformation and growth for our business.

Thank you again, and I look forward to our next call. All the best.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.