Atento SA (ATTO) 2019 Q3 法說會逐字稿

Good day. And welcome to Atento's Third Quarter 2019 Results Conference Call. The call will begin with prepared comments by management, followed by a question-and-answer session. (Operator Instructions) Today's call is being recorded.

I would now like to turn the call over to Shay Chor, Corporate Treasurer and Investor Relations Director for Atento. Please go ahead.

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Thank you, operator, and welcome, everyone, to our fiscal 2019 third quarter earnings conference call. Here with us for today's call are Carlos López-Abadía, Atento's CEO; and José de Azevedo, our newly appointed CFO. Following the review of Atento's financial and operating results, we will open the call for your questions.

Please turn to next slide. Before proceeding, please note that certain comments made on this call will contain financial information that has been prepared under International Financial Reporting Standards. In addition, this call may contain information that constitutes 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 here on the second slide of our earnings call presentation. Our public filings and earnings presentation can be found at investors.atento.com. Please note that unless noted otherwise, our growth rates are on a year-over-year and constant currency basis.

I will now turn the call over to Carlos.

Thank you, Shay, and good day, everyone. Thank you for joining our earnings call. We're very pleased to share with you our Q3 results which show solid improvement in our key operating and financial metrics. While it's still early days for our transformation in Atento, we are beginning to see traction in our initiatives. We have delivered in Q3 quarter-on-quarter and year-on-year improvement in both top and bottom line, along with strong sales and cash flow.

Let me address revenue first. We have grown revenue 3% year-on-year driven by very strong Multisector growth in excess of 9%, showing strength in all 3 regions. Very pleased with the quality of the growth, which, in addition to being broad-based geographically, is very strong in attractive sectors with higher growth and margins such as born-digital companies and health care. In other words, we're growing in the right places.

We're also making progress on our sales transformation. We are delivering very strong sales with the results that exceed last year's by more than 40%. We continue to pivot the company to more attractive segments and next-generation services with higher margins and more adaptive to the current and future needs of our clients.

As I have shared with you in the past, we're prioritizing the long-term profit improvement of Atento. But importantly, we are making progress here as well. We have improved our EBITDA run rate in Q3, both quarter-on-quarter as well as year-on-year, proving our EBITDA has a broad base. Now on the cost structure side, we're beginning to see positive results of our cost efficiency initiatives. In fact, we've also seen the improvement in profitability of our client operations. The beginning of a fundamental transformation of how we deliver services with increasing and long-lasting benefits for our clients and investors. We have been and we'll continue to prioritize long-term profit improvement over top line results. As a result, we have been following a policy of reviewing nonperforming contracts and improving the results or phasing them out. We have seen the impact on the top line. We're seeing the benefit on profit. Expect to continue this approach and report positive results to you in the next quarters. We've also seen a strong improvement in free cash flow, which has allowed us to continue to aggressively fund our transformation as well as to continue the execution of our share buyback plan.

I will focus my comments today on Q3 results and refer mostly to our operational improvement initiatives that are part of our Three Horizon Plan. For those of you interested in a more in-depth discussion of our initiatives and multiyear forecast, we will be covering those at our Investor Day on Monday. We intend to cover on Monday all 3 horizons. Particularly, I want to introduce our substantial work and results in building next-generation capabilities and digital acceleration. As we make progress transforming our core, accelerating digital sales and expanding further into the verticals, we're beginning to see a change in our financial performance, not just quarter-on-quarter, but also year-on-year. Though we expect this growth then to continue, our transformation plan will likely present priority challenges that may lead to bumpy quarters. I am sure the recent macro events in Argentina and Chile have not gone unnoticed here. We see these bumps as issues that, although impactful, it is the responsibility of this management team to successfully navigate the unprecedented opportunities in our market. We strongly believe we have the right strategy to effectively leverage Atento's market leadership and capabilities to lead next-generation customer experience.

Before I turn the call over to Shay, who will provide a more detailed review of our third quarter results, I want to introduce our new CFO, José Azevedo.

Thank you, Carlos. I'm pleased to join such a strong and talented team. I think this is a company with tremendous assets and great potential. I look forward to helping Carlos and the rest of the team drive the transformation process to achieve that potential and to meeting many of you at our Investor Day on Monday.

Thank you, José. Please turn to Slide 8. We increased consolidated revenue 3% year-over-year and roughly 0.5% sequentially on substantially higher Multisector sales, partially offset by lower Telefónica revenue. As Carlos noted, our Multisector revenue grew a strong 9.4% in the quarter and 3.5% sequentially. On a 9-month basis, Multisector sales increased 6.5% and accounted for nearly 64% of total sales at the end of the period. The decrease in Telefónica revenue was 7.3% versus last year quarter and 3.7% on a 9-month basis. Lower volumes in Brazil, Peru, Chile and Spain accounted for the quarterly decline.

Our quarterly profitability improved again sequentially as our transformation plan gains traction. Normalized Q3 EBITDA margin expanded 120 basis points sequentially to 10.2% due to margin improvements in Brazil and the Americas. On a year-over-year basis, margin expanded 20 basis points. Note that our reported EBITDA of $48 million included a $10.6 million positive effect under IFRS 16 and a negative $4.5 million of extraordinary expenses stemming from our transformation plan.

Moving to the bottom line, we reported earnings per share of $0.02 and recurring EPS of $0.10 when excluding extraordinary items. We generated nearly $23 million of free cash flow before interest and acquisitions, although lower than the $37 million that we generated in last year's quarter. This decline was due to higher one-off working capital related to the renegotiation of a specific contract already normalized in the fourth quarter and to the lower reported EBITDA that I just covered. At the end of the quarter, net debt stood at $420 million when excluding EUR 140 million related to the IFRS 16. When excluding the effects of the IFRS 16 and the impacts from extraordinary items, net debt to EBITDA was 2.5x at the end of the quarter. During the quarter, we repurchased 3 million shares for a total of $7.2 million.

Please turn to Slide 9 for a review of our results by region, starting with Brazil. In Brazil, our adjusted EBITDA margin increased 60 basis points sequentially on a normalized basis as our revenue mix improved. Total revenue was flat versus last year quarter and up 3.2% year-to-date. Multisector sales continue to drive revenues, up 3.7% and 6.5%, respectively, fueled by higher volumes at existing clients as well as new contracts kicking in at born-digital customers and those in the health care sectors. Year-to-date, Multisector sales rose 2.2 percentage points to 71.6% of total revenue in Brazil. For the quarter and on a 9-month basis, our adjusted EBITDA margin expanded to 13.6% and 13%, respectively. The improved revenue mix that accounted for the 50 basis point sequential improvement in our normalized margin consisted of born-digital companies amongst other new contracts with higher margins.

Please turn to Slide 10. A nearly 19% increase in Multisector sales drove a profits recovery at our Americas business. Sequentially, they grew 9.7% and just under 7% for the 9 months. Higher volumes in the quarter, mainly new contracts in Mexico and Colombia, drove this growth. As a percentage of total revenue, Multisector sales increased 2.8 percentage points to 62% year-to-date. Telefónica revenues were down 3.1% in the third quarter, mostly from lower volumes in Peru and Chile. Our normalized adjusted EBITDA margin, which excludes the extraordinary items and the effect of IFRS 16, increased by 310 basis points due to higher profitability with Multisector clients, mainly those in Colombia, partially offset by the lower Telefónica volumes in Peru and Chile.

Please turn to Slide 11. In EMEA, we grew Multisector sales once again. Higher volumes, particularly in the utilities sector as well as new contracts with existing clients, drove Multisector sales up just over 15%. At the end of the quarter, Multisector revenue was up 2.8 percentage points year-to-date to 42.2% of EMEA's revenue. A decrease in Telefónica revenue of nearly 14% in the quarter offset Multisector growth and led to a 2.2% decrease in total EMEA revenue. However, the decline in Telefónica volume during the quarter was unusual and is expected to return to normal level. On a 9-month basis, total revenue increased just over 3% with Multisector up 10.5% and Telefónica up 1.7%. EMEA's adjusted EBITDA margin rose to 11.4% and a little over 10% versus last year comparable periods. On a normalized basis, our third quarter margin would have been 7.6%. That level reflects the ramp-up of newly acquired contracts and the unusually low Telefónica volume.

Please turn to Slide 12 for a view of cash flow. As I explained earlier, the renegotiation of a specific contract resulted in higher use of working capital in the quarter which has already been normalized in October and will positively impact Q4 working capital. Also impacting cash flow were the accelerated items related to our transformation plan. Thus, third quarter free cash flow before interest and acquisitions was $22.6 million. Importantly, the cash we are generating continues to fund both the various strategic initiatives under our transformation plan and our share buyback program. Cash CapEx as a percentage of revenue declined 10 basis points to 2.6% for the 9-month period. This is below our 3.5% and 4.5% guidance as we reevaluate the priorities of our transformation plan.

Please turn to Slide 13 for a look at our balance sheet and funding picture. We continue to maintain a solid balance sheet and financial flexibility. At the end of the quarter, we had cash and cash equivalents of $105 million. Combined with the revolving credit facilities of approximately $95 million, of which $90 million remains undrawn, our implied liquidity is roughly $200 million. Again, net debt without the effect of IFRS 16 was $420 million. The average maturity profile of our debt is 2.7 years, and no relevant principal payment is due until August of 2022. The average cost of our debt is 7% per year. Finally, our leverage was slightly higher compared to the level at the end of the second quarter at 2.5x, net the effect of IFRS 16 and when excluding extraordinary items.

That concludes our review of our third quarter performance. Operator, please open the call for questions.

(Operator Instructions) Our first question comes from Susana Salaru with Itaú.

We have 2 questions. The first one is related to the transformational plan. If you could let -- give us an idea of how far has it evolved and how much more could we expect for margin expansion coming from the transformational plan. That would be our first question. And the second question is related to the market agreement with Telefónica. How much is being used? Is it above the threshold or below or in line with the threshold?

Susana, this is Carlos. I apologize. There was a lot of distortion on the line. Could you repeat the questions? I'm not sure I got them.

Okay. The first one is related to the transformational plan. How much more savings can we expect to come?

And the second one was about the MSA, but I didn't catch the whole thing.

The second -- the next, the agreement with Telefónica, in which level you've been here with-- at the very limit, it's below the limit established or above the limit established?

Very well. So let me start with the last first. We are at the -- above the limit. In other words, we're not reaching the limit of MSA, and we don't anticipate to do that. The one thing that I mentioned regarding the Telefónica business, I think, is reflected in the financials and the trajectory that you see and we expect to see in Q4. And we take a look at the Telefónica business as well as the rest of our portfolio, and we're looking at critically at things that don't add a lot of value to our clients or to us and therefore, are either not sufficiently profitable with the impact on our strategy or P&L is not what we would like to see. And we're working with our clients, in the case of Telefónica, with Telefónica to either improve the performance of those contracts or to phase them out. And I think you're seeing some of that.

So all that, we feel are within the -- in the set, but we're focusing on the quality of those revenues, the value to the clients reflected in margins but also in terms of the type of services that have more runway, are more in line with the current needs of the market and the legacy type of business that's in the [pipe].

On the question of savings. I think you can probably do your own math. We started the transformation plan probably in earnest in Q3. We were planning it in Q2 but really, we started seeing some of the impacts in Q3. We expect an acceleration of that -- of those impacts. And also, obviously, as the different initiatives have more months to impact, you can see that the -- not only new initiatives will impact to the existing initiatives to increase, both for Q4 and way into next year.

The only thing I would describe here -- the only thing I would add is that, as we discussed in the Q2 earnings call when we were asked about it, we expect the payback of that -- of the transformation plan that we are spending the $25 million to $35 million that we guided, we expect the payback to be between 2 to 3 years. So you do the math on how much we expect of savings as of next year.

Our next question comes from Vincent Colichio with Barrington Research.

Yes. Carlos, in Multisector and some of your new areas, born-digital companies and health care, could you give us some color on what's driving the healthy margin? Is it that there's more automation involved in some of these new deals?

Sure. We -- as I mentioned before, part of our strategy is to pivot the company given what we do towards more effective sectors, next-generation services being very important. There's a combination of factors that the business that we are pursuing that we're beginning to grow and to make it more impacted. In some cases, there is automation and technology. By the way, we'll be discussing this particular area in that -- on Monday in our Investor Day. So for those of you who might be interested, I would encourage you to join us. But that's a component in many cases.

Also, there is the -- a number of inherent needs and therefore services that we provide in companies. A good example [and one that we aim] of that is the born-digital companies, where the digital companies that is pretty much everything that could have been automated was automated from the beginning. It was not a retro automation of final tasks. We were -- that's why we call them born-digital companies.

In the case of those companies, the services that they demand from CX BPO providers such as us, tend to be services that are not -- more high-value to them and also not that easily automatable. Otherwise, they would have been automated from the beginning, right? So inherently, those things tend to be high value. And these type of services tend to be more concentrated, not unique by any means but more concentrated in certain sectors, which are the ones that we are emphasizing. You mentioned 2 of them. Born digital, some people call them technology. They're not just technology companies but are also health care, retail are areas where these type of services with high value that will be concentrated.

And could you give us a sense for how far along you are in reviewing nonperforming contracts? I assume it's still early on, but maybe what portion of this work has been done so far?

Its early on, as you said. In terms of the review, I will tell you it's 90-plus percent completed. By the way, this is not something that you do once and you're done. This is something that you have to continuously manage, right? It's good practice to do this on an ongoing basis because I think they're very -- performing very well. And I think that the [variety] of clients today may not be the case a year from now. But in terms of our initial review, it's essentially done.

We are early days in the execution of that. Obviously, it's easier to say let's get a nonperforming contract to perform or exit, but that takes some time, right? Always our preference is to make a nonperforming contract to perform as we work with our clients to [manage that]. But in some cases, there's not enough value for the clients or for us, and then in order -- a phaseout is [done there]. So all that stuff is in early days. We are seeing -- we are in execution some of our major contracts that [Atento has] we are already in the execution phase and Q3 is beginning to show those effects. And I think we'll be reporting more impact of those initiatives in Q4. But it's early days.

And as I said, it's not something you do once and you're done. This is a good practice to review on an ongoing basis the performance of new contracts and the performance for the [clients].

(Operator Instructions) Our next question comes from [Phil Mowest] with Schroders.

First would be on revenue or EBITDA. Can you provide an updated breakdown per currency, please? And then I'll have a block of questions on free cash flow.

Can you repeat the second -- can you repeat your questions?

Yes. Firstly, can you please provide a breakdown of revenues or EBITDA per currency? And then secondly, I have a block of questions on free cash flow that I'll ask once we have the first one out of the gate.

Yes, let's, if you please, move to the cash flow. And I can, offline, share with you the breakdown on the [currency]...

All right. Okay. So [after] interest on the acquisitions, you had $50 million cash burn year-to-date, and I was wondering where you expect to close the year. And then secondly, you had transformation costs of $4.5 million and share buybacks of $7 million in 3Q '19. What do you expect for these items for the full year? And do you already have a view what you might be spending on this in 2020? And then lastly, can you already formulate range for EBITDA and free cash flow in 2020?

Thank you for your question. So the $50 million that we spent on acquisition was the minority stake that we're going to have in Interfile and RBrasil, so we don't expect any other acquisition this year. We are actually very happy with our cash flow profile. We've spent, so far, $22 million, $23 million in the extraordinary items, and we still are able to generate cash flow to do the buyback. So we are very happy with this profile. We are, at this point -- and for the year, we keep the $25 million to $35 million guidance for the transformation plan, so we're not changing that. And as of now, we are still not providing any guidance for 2020. Usually what we do is, together with the Q4 results that we'll likely publish around March next year, we'll provide [similar] for 2020. But as Carlos mentioned, we have our Investor Day on next Monday, and the idea is to go actually join 2020 and look for more of a long term and not only to the numbers, but as Carlos has been pointing out, more important is how we get those numbers over the long term, not only the numbers per se. So hope you can join us on Monday, and we'll review our long-term plan and the guidance or the targets that we have for this company.

Okay. More short term. You had this $50 million cash burn year-to-date. Where do you think will you close the year?

This is the first year, probably, that we are not going to have a positive cash flow [after all]. That's because of the extraordinary items. So we expect that, as I mentioned in my prepared remarks, in the third quarter, we had a slightly weaker-than-expected working capital because of the Visa contract that was under renegotiation. It was already reverted in Q4. So when we move into a combination of Q3 and Q4, we're actually pretty happy with the cash flow that we expect for full year. So -- but in the very short term, Q4 will show an improvement versus what we had in year-to-date.

(Operator Instructions) Our next question comes from Beltran Palazuelo with SANTALUCÍA.

Congratulations for the nice results and the execution of the plan. I have 3 simple questions. First one is in the fourth quarter, how much free cash flow generation do you expect for working capital? It's an early on investment of $83 million, more or less. What range would you situate it? My second question is regarding CapEx. Your long-term plan is 3.5% to 4.5%. If you would be able to find interesting opportunities [where] return on capital employed accretive on the margin, what would that mean for acceleration for the Multisector growth? And then my last question is regarding the execution of the multiyear plan, is there a possibility of showing your confidence, meaning giving back more capital to the shareholders, seeing the attractive valuations and the stock is not really -- will take into account your good long-term prospects?

Beltran, this is Carlos. Thank you for your questions. Let me try to address a couple of those, and I know José will help me with the more technical aspects of the cash flow and working capital.

So on the -- starting with last first, there will be a plan and return to shareholders. As Shay mentioned and I had in my remarks that we've been able to -- very happy with the cash flow we've been generating this year. It has funded the transformation and allowed us to restart the share buyback plan and allow us to return also cash to the shareholders. The 3-year plan fundamentally -- and again, I would encourage all of you who are interested to join us on Monday. But the 3-year plan is a self-funding plan. So it generates its own -- the needs -- the investment needs for the plan are covered by the plan itself. In addition to that, we plan to have capacity also to return cash to the shareholders. So my -- our view right now is to continue the path and improve the path that we set out this year.

We're also -- as I mentioned earlier, we're beginning to see the impact of the transformation in some of the early initiatives are the ones that -- big impact more readily. We can see it on -- some of our fixed costs, we can see them in the improvement of our contracts, et cetera. Again, early days and very early results, but give us the confidence that we want to accelerate what we are doing, both in terms of investment in the transformation, accelerating that transformation and some of the actions that we've been discussing, the balance sheet, the portfolio, et cetera, to -- the early results give us the confidence and the comfort to take a more aggressive stance.

But in direct response to your question, we intend to do -- we see doing that both in this year and in our 3-year plan. We have -- we see the ability of self-funding on that and in addition to that to return additional money to the shareholders. And I think, Shay, I think you wanted to address some of the trends for free cash flow.

Yes. So we are not -- again, we are not providing specific guidance for free cash flow in Q4. But if you look into year-to-date cash flow in 2018, 9 months in '18, our free cash flow before acquisitions and interest was $43 million, and this year is around $9 million. This difference of $30 million is basically the extraordinary items we have for this year.

So if you think of the full year 2019 free cash flow, it will be similar to '18, ex the extraordinary items. That's the way we are looking at it. It will be flat when you adjust for the extra items.

(Operator Instructions) There are no further questions at this time. At this point, I'd like to turn the call back over to Carlos López-Abadía for closing remarks.

Well, simply to thank all of you for joining us. And again, those of you who are interested in getting a little bit deeper on our 3-year plan, particularly how we intend to execute, not just the numbers, on Monday we will be covering that in Investor Day. And very importantly, I want to focus there for a bit of time for you to get to know some of the members of my executive team as well as to focus on the digital acceleration, next-generation services, some of the things that we're already doing now we are accelerating [and depends on which] to give you color on specifically how we are getting the results that we intend to get.

With that, thanks again, and hope to see you, at least some of you, on Monday. Thanks.

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