U.S. Markets closed

Edited Transcript of ATTO earnings conference call or presentation 20-Mar-19 2:00pm GMT

Q4 2018 Atento SA Earnings Call

Grand Duchy Of Luxembourg Apr 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Atento SA earnings conference call or presentation Wednesday, March 20, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Carlos López-Abadía

Atento S.A. - CEO & Director

* Mauricio Teles Montilha

Atento S.A. - CFO

* Shay Chor

Atento S.A. - IR Director & Corporate Treasurer

================================================================================

Conference Call Participants

================================================================================

* Amy Sheng

Equinox Partners - Analyst

* Beltrán Palazuelo

Santalucía - Analyst

* Diego M. Aragão

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Vincent Alexander Colicchio

Barrington Research Associates, Inc., Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the Atento S.A. Fourth Quarter 2018 Earnings Results Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Shay Chor, Treasury and Investor Relations Director for Atento. Thank you. You may begin.

--------------------------------------------------------------------------------

Shay Chor, Atento S.A. - IR Director & Corporate Treasurer [2]

--------------------------------------------------------------------------------

Thank you, and welcome everyone to our fiscal 2018 fourth quarter earnings conference call. Here with us today is Carlos López-Abadía, Atento new Chief Executive Officer and also a new member of the Company's Board of Directors. Carlos joined the company 7 weeks ago and this will be his first earnings call.

He will discuss his top priorities and his initial views on the company followed by Mauricio Montilha, Atento's Chief Financial Officer, who will review our fourth quarter and full year financial results.

We will then open the call for your questions. Before proceeding, please note 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 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, all growth rates are on a year-over-year and constant currency basis.

Please turn to Slide 3, and I will turn now the call over to Carlos.

--------------------------------------------------------------------------------

Carlos López-Abadía, Atento S.A. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Shay. And good morning, everyone. Thank you for joining us today. I would like to start the call by sharing with you how excited I am to have joined Atento as its CEO. As Shay noted, this is my first earnings call with Atento and I look forward to interacting with many of you in the analyst and investor community over the weeks and months to come.

Please turn to Slide 4. Since this is the first time many of us in the call are meeting, I thought it would be helpful to kick things off with a quick overview of my professional background. I have spent the vast majority of my 30-year career in the technology sector, spanning strategic, operational and advisory leadership roles at some of the world's top companies.

Throughout my career I have been responsible for leading the digital transformation of global organizations, leading major lines of business, transforming businesses and driving growth as well as operational efficiencies. I believe, my experience and expertise fits well with Atento in terms of where we are today, but particularly, where we're heading.

As part of my overview today, I would like to briefly share my initial observations and assessments, made during my first 7 weeks at Atento, including highlighting some relevant financial results of fiscal 2018, while letting Mauricio cover the details of the results.

Most importantly, I would like to discuss with you my approach to the business and the direction in which we intend to take the company. Although we're not providing guidance today, during the first quarter earnings call in May, I will provide details of our strategic plan, along with our performance outlook for 2019. We also plan to host an investor conference in September to focus in-depth in the long-term plan and particularly, on our digital and new services strategy.

Please turn to Slide 5. To begin, I'm extremely proud of the strong leadership position that Atento has in the markets where we compete and the solid long-standing relationships with our clients. I have spent quite a lot of time meeting with many of our clients over the last few weeks. I left those meetings very impressed with the strength and depth of Atento's relationships, including relationships of the senior most levels of these companies. It's clear to me that they have great confidence in Atento, consider us a trusted partner and to be honest, every conversation included a discussion about what else we could be doing for and with them.

I have been visiting our operations throughout Latin America and Spain, talking with and learning from, colleagues working in all capacities at Atento. I was struck by the energy, talent and commitment of employees at all levels in Atento.

While these are very strong assets to build upon, I would be remiss if I did not acknowledge that Atento is not achieving its full potential, particularly, in terms of growth and profitability.

This management team intends to address Atento's performance issues with utmost urgency. Prior to going through my priorities for improving the business near and long-term, let me highlight some of the key financial results for fiscal year 2018 that I view as opportunities to build upon for the future.

Please turn to Slide 6. We delivered significant progress in our flagship operations, especially in the second half of the year, ending 2018 on a high note with a strong revenue expansion and solid EBITDA margin improvement. Also, while growing our key Telefónica account, our Multisector clients grew at a faster rate improving the diversification of our business. In addition to delivering solid growth in this important line of business we also generated a strong cash flow in 2018, providing a basis for making strategic investments and preparing our company for more predictable results and a more profitable growth path. Lastly, we continue to expand our market penetration and it strengthened our relationships during 2018, growing in the right areas.

We had some exciting new logos. For example, in Brazil, we announced a partnership with Samsung for a customer relationship center with more than 1,200 workstations and the Unimed Rio carveout, a strategic move into the fast-growing healthcare sector. Other examples include digital strategy to enhance Kia's customer experience in Mexico along with expanding our partnerships with several major organizations in banking and financial services, insurance, technology, media and several verticals.

As I mentioned earlier, we have great assets to build from, but we are far from reaching our potential. Therefore, I would like to share with you the immediate business priorities that will form the basis of our near-term plan that we will share with you during our first quarter earnings call. Please turn to Slide 7.

I believe that urgency accountability, business agility and meritocracy need to be the basis of Atento going forward. You will see these guiding principles underpinning the following immediate priorities. Our focus this year will be, first and foremost, improving our execution. We need to start with reliability in our results to our clients and investors, predictability of our results and meeting commitments by a measure of our sense of accountability. We are starting here. A new incentive compensation system for our operating and financial management teams will be directly tied to reliability of our results.

The second and most important area for operational improvement is profitability. We have already identified and are in the early stages of implementing cost optimization initiatives with the streamlining operations in our traditional business and adjusting our cost base where there has been declining volumes. We anticipate that these actions would put us on a steady path to returning, to improve EBITDA margins in the medium term.

Once we have our operational improvements fully underway, we cannot ignore the future of Atento, that is digital growth. With trucking a path to lead the digital transformation of CRM and BPO in our markets, we serve the large market that remains underpenetrated across verticals in Latin America. And I believe these strong prevailing digital trends present a tremendous opportunity that for us -- that we have not even began to tap.

As you know the typical areas of our business, I have found important assets in Atento Digital and solutions factory. (inaudible) driven digital sales and customer care as well as Digital back office and collections solutions. Our focus in 2019 will be the transformation of Atento along the both priorities. We are aligning management incentives and planning to make the necessary investments to place Atento on a different growth and profit trajectory, oriented to supporting our clients on their digital journeys.

I see our competitive advantages as well as our passionate culture of innovation as the right mix to extend our market leadership and to accelerate our penetration of the digital space. Ultimately making our company a more durable, long-term winner. In turn, I believe this will lead to a more consistent profitable business for our shareholders.

As we're still developing our retail plans, we believe that it is prudent to refer our 2019 guidance to our Q1 earnings release. To be clear, this decision in no way reflects the lack of confidence in Atento's long-term opportunities. In closing, I would like to reiterate how excited I am to be Atento's CEO. As I hope you can see, we believe that we have a tremendous opportunity ahead of us. Overall, I am committed to working with Atento team, our clients and our partners to build on our strengths and our market position, to maximize our potential.

I will now turn the call over to Mauricio who will discuss details of Atento's fourth quarter and full year 2018 financial results.

--------------------------------------------------------------------------------

Mauricio Teles Montilha, Atento S.A. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Carlos. Please turn to Slide 9. Good morning, everyone. I'm glad to be here today to talk about Q4 and full year 2018. Before I discuss the details of Atento's results, I would like to highlight a number of key performance areas.

As Carlos mentioned, Atento is delivering growth in the right areas, with 11.4% revenue growth in Brazil, our most important market. Also, the implementation of our operation improvement plan in the first half of 2018 led to back-to-back margin expansions in the third and fourth quarters with the later quarter being particularly strong at our flagship operation. With sales growing just over 6% in the quarter, Multisector continues to be a growth engine for Atento and now represents nearly 61% of total revenue. Total revenues were 4.4% higher than the -- in the quarter and 4.3% on a full year business, which was within our guidance range. Atento's EBITDA margin was 9.2% in the fourth quarter and 10.2% in the year. These margins include $10 million in one-off comps related to changing our management team. Excluding this cost, our EBITDA margin would have been 11.6% in the quarter and 10.7% in 2018, slightly below the guidance range for the year that we gave in our third quarter 2018 earnings call.

We've reported recurring EPS of $0.21 in the quarter and $0.77 in 2018, which was a nearly 25% increase versus 2017. Our fourth quarter recurring EPS was impacted by certain events, which I will explain in detail in the next slide.

We generated strong free cash flow before interest and acquisitions of $45.2 million during the quarter and $88.8 million for all of 2018. Cash conversion was 48% for the year, above the 40% at the top end of our guidance range. Cash generation brought net debt down 9.7%, sequentially, to $326 million, with net debt-to-EBITDA ratio finishing the year at 1.8x.

Under Atento's share repurchase program, we bought back 400,000 shares during the quarter at a total cost of $2.9 million. But since the approval of the program in July, at the end of 2018 we purchased 1.1 million shares at the cost of $8.2 million.

Before I move to the next slide, I would like to highlight that our capital allocation priority continues to be focused on delivering profitable growth. As we expect to encourage preliminary cost and make investments during the year, we have not been executing share buybacks thus far in 2019. It does not mean we are canceling buyback program, it only means that we are waiting to assess the actual size of these costs and investments before resuming the program.

For the same reasons, we did not announce a dividend for fiscal year 2018. We remain focused on returning capital to shareholders, but it is important to align expectations in the short term while we make the adjustments needed to prepare the company for delivering profitable growth in the future.

Please turn to Slide 10. Fourth quarter sales were driven mostly by our flagship business, with higher volumes among existing clients in Brazil. There were also higher volumes generated by new clients in Spain and this growth was particularly offset by lower Multisector rev volumes in the Americas. For the year, Atento's sales increased 4.3% within our 3% to 6% guidance range. Sales of higher value-added solutions accounted for 26.6% of full year revenues versus just around the 26% in 2017. Atento's EBITDA margin was 11.6%, 6% in the quarter and 10.7% in 2018, when excluding the onetime $10 million charge for management changes.

Our recurring EPS of $0.21 was negatively impacted by a $3.3 million pretax loss, related to market-to-market Brazilian real hedge on the interest in our bond. The negative $10 million pre-tax impacts of one-offs related to management changes and a positive $10 million adjustment for hyperinflation accounting related to Argentina. Excluding those -- these effects, return on EPS in the quarter would have been $0.19.

Although, there are clear signs that Atento's recovering and we performed well against most of our 2018 targets, EBITDA margin fell just short of it. As Carlos said, we need to improve profitability in our traditional business and in Americas, in particular. Weaker volumes in Argentina and Mexico again impacted the EBITDA during the quarter. Following the leadership changes that were made in Brazil last June, our Flagship business is leading Atento's digital transformation. And the performance results there have been encouraging with our second half EBITDA margin of nearly 13%. Our margin in Americas deteriorated in the second half of the year, reflecting the challenging environments in Argentina and Mexico. As we go into 2019, we will rightsize our operations in Americas to adjust to the new reality of the market environments there.

Because Telefónica represents 60% of EMEA revenues, our margin in the business is still subject to volatility, hence the weaker fourth quarter. Nevertheless, full year profitability was [redeemed] to expect a normalized level of 8% to 9%.

Please turn to slide 11. In Brazil, I would like to highlight a combination of revenue growth and improved profitability as a sign of what we've been -- of what we are targeting for Atento's future. Revenue growth was fueled by Multisector clients, especially financial service, most from the volume ramp up in the new contract signings throughout the year. The strong growth -- this strong growth in Multisector clients led to further revenue diversification, with Multisector sales up half a percentage point to 69.6%, which can -- you can see in the bottom left of this slide.

The diversification of our revenue mix also resulted in improved profitability in Brazil, where our adjusted EBITDA margin increased 70 basis points in the quarter to 13.9% and by 200 basis points during the year.

In addition to the operational improvements we have implemented in the first half of 2018, favorable seasonality in the second half of the year also contributed for the higher profitability.

Please turn to Slide 12. As opposed to the good results that we delivered in Brazil, our America business was pressured by challenging environments in Argentina and Mexico. For the year, revenue from Multisector clients expanded 5.4%, accounting for just over 59% of our total revenue, a 1.2 percentage point increase, this despite the weaker revenue in the quarter. The decline in adjusted EBITDA for the quarter reflected lower revenues and onetime charge related to the management changes. Excluding this charge, adjusted EBITDA margins would have been 9.5% in the quarter and 11.4% in full year.

Please turn to Slide 13. In EMEA, we generated our third consecutive quarter increasing revenue. Sales grew strongly up to 9.3%, further evidencing our ability to compete in this mature and increasingly digital market. New client wins, especially in utility sector, mostly drove an 8.4% increase in Multisector sales during the quarter and an 8.8% increase for the year. This brought the mix 2.1 percentage points higher to nearly 40% of annual EMEA sales. Profitability for the year is aligned with expectations.

Please turn to Slide 14. We continue to generate strong free cash flow while maintaining our healthy balance sheet, both of which we allow to make Atento's digital push as well as pursue other growth opportunities. The $41 million free cash flow that we generated in the quarter, reflects favorable seasonality but our also higher-than-expected revenue anticipation by clients. For the year, our EBITDA-to-cash conversion rate was 48%, above the upper range of our guidance, which was 40%. The lower cash CapEx compared to our guidance reflects optimization of our utilization rates, mainly in Brazil.

Before we move to Q&A session, I would like to point out some of our views related to 2019. As Carlos indicated, we expect that this will be an adjustment year for Atento. In addition to addressing our cost structure time, changes will be made to accelerate innovation at Atento. Additionally, we expect stronger than usual negative seasonality in Brazil in the beginning of the year, reflecting mainly the 4.6% increase in minimum wage and other benefits as a result of the collective agreement negotiated with ENS. Therefore, and although we are not providing full year guidance, we expect profitability in the first half of '19 to be under pressure, recovering in second half of the year.

That concludes our prepared remarks. Operator, you are now ready to start question-and-answer part of our call. Please open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Diego Aragão with Goldman Sachs.

--------------------------------------------------------------------------------

Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

My first question is for Carlos. I know that it might be -- it's too early for you to say Carlos, but I was wondering if you can just comment about what do you view as your main challenge in -- at Atento? And in particular, how do you think you can consolidate top line growth and improved profitability in a moment where the industry is facing the disruption from new technology and digital platforms?

--------------------------------------------------------------------------------

Carlos López-Abadía, Atento S.A. - CEO & Director [3]

--------------------------------------------------------------------------------

Let me try to answer in the order you asked a question. What is the main challenge in Atento? The main challenge in Atento is the same main challenge in just about any one of these situations, so is the people and culture. The challenges and the opportunities created by those challenges come from different immediate sources. But typically, the most difficult one is people and culture. That takes some time to change and -- but that has to start and we have started already.

The second part to your question, how we're going to address the process. I said in the remarks, we will discuss with all of you the detailed plan. Today, we share the main directions and priorities. But immediately, we're going to focus on the operational improvements, in terms of predictability, reliability and above other things, profitability. It's a combination of changes in process, structure and incentives. Some of those are already in place, particularly, incentives. We have already placed in these incentives for the management and the financial management and operational management teams in Atento to align with these objectives and particularly, to align better with the shareholder and investor objectives.

--------------------------------------------------------------------------------

Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [4]

--------------------------------------------------------------------------------

Perfect. My second question is related to recent M&A transactions in the region, specifically, I would like to get your thoughts on the deals related to Telefónica, which fully divested from their operations in Central America. So what should we expect in here in terms of impact? And if -- let's say, if you would lose some of these customers throughout the year?

--------------------------------------------------------------------------------

Carlos López-Abadía, Atento S.A. - CEO & Director [5]

--------------------------------------------------------------------------------

Yes, I'll will let Mauricio answer in detail, but let me answer in general terms. Obviously, there's -- we're smaller -- the bigger news, with our main client, Telefónica in my short tenure, I'm very confident in Telefónica and the Telefónica relationship and business. I've mentioned earlier that one of my most, I won't say surprises, but some of the things that really were positive impressions in the first few weeks was the relationship with clients and specifically, Telefónica. A very strong relation with Telefónica, and we have renewed recently, some of the key contracts and still working on others. But I'm very confident on the short and long-term future with Telefónica.

Some of the divestitures that Telefónica is in the process of doing, those are things that happen in any business, and we need to make sure that we handle those as they happen. And now, having said that, that represents a relatively small potential impact for us. But the most important thing for me is the overall relation with Telefónica, which keeps on growing, not just from the perspective of the personal professional relationship with Telefónica but also from a business growth perspective.

--------------------------------------------------------------------------------

Mauricio Teles Montilha, Atento S.A. - CFO [6]

--------------------------------------------------------------------------------

I just would like to add 1 -- 2 points on Diego's question. Well, as we always say, our relationship with Telefónica is based on the local contracts and the performance we have with those contracts. So we do expect that those changes -- we do actually -- eventually give us more opportunity when the shareholders change in those units, eventually we can actually get more business for the new shareholder.

Our MSA with Telefónica also has some protection that help us to handle those transitions. So -- and we are working actively with Telefónica to make sure that transition also fits within the agreement we have with MSA. So -- but we -- as Carlos mentioned, I think, the first focus we always have in this is, we are doing very good job with Telefónica in those areas. The new ownership probably opened opportunities for us actually with the new owners. And we -- Telefónica and we've been working with us -- we've been working together, prior to -- before the acquisitions are done in order to protect the minimal requirements of MSA. So I don't see any major downside. Eventually -- potential -- actually new opportunities for us in the future for those deals.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [8]

--------------------------------------------------------------------------------

Yes, Carlos, I'm curious if you -- from what you understand thus far, is the company missing out on growth opportunities due to the state of the current CRM automation capabilities?

--------------------------------------------------------------------------------

Carlos López-Abadía, Atento S.A. - CEO & Director [9]

--------------------------------------------------------------------------------

What I can tell you is that we have a bigger opportunity that we're capturing. We are growing and we have, I think, I mentioned in my earlier remarks, that one of the things that, I think, is a key asset of Atento is the leadership in the markets where we compete. Are we capturing all the opportunities for growth? No. Not by a long shot. Do we have opportunities eventually in other markets as well? For sure. But I would like to underscore the fact that we are growing in the markets where we compete.

--------------------------------------------------------------------------------

Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [10]

--------------------------------------------------------------------------------

And in Mexico, aside from the economy, which my understanding is weak but still growing. Are there any other factors that you might want to mention that are an issue there?

--------------------------------------------------------------------------------

Carlos López-Abadía, Atento S.A. - CEO & Director [11]

--------------------------------------------------------------------------------

We have some issues with some natural disasters that we are recovering from. We've made some changes in management and definitely my early assessment is that things are moving in the right direction. I met with some of our key clients in Mexico. I mentioned, particularly, without exception, all my meetings with clients, including those very large accounts in Mexico are not only good but moving into an even better direction. So I'm positive about the future of our Mexico operation, but we thought it out, we did face some challenges in the not-to-distant past.

--------------------------------------------------------------------------------

Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [12]

--------------------------------------------------------------------------------

And Mauricio, one for you. What vertical did the new clients come from in EMEA? Were they from communications? And what's the margin outlook for the clients that were added versus the average?

--------------------------------------------------------------------------------

Mauricio Teles Montilha, Atento S.A. - CFO [13]

--------------------------------------------------------------------------------

Yes, this year it was good. I think they came more from the utilities than other sectors. Some are the financial sectors as well. But there is a big jump in revenues here coming from the utility sector that we won very good deals on that. As we -- in some of the financial sector. As we always explain it, the difference in profitability between those segments is not that we charge more for clients that are not telcos, is that the mix of service we provide to telcos is largely skewed towards more simple calls or simple service. Though therefore these are more commodity, they have a lower margin.

When we talk about utility and financial sector, you have a mix of service that are higher margin in any kind of client. So the mix of service of the utilities and also on the financial sector, they typically bring slightly better margin and you've been seeing this reflect on EMEA. If you look at 3 years ago, last year and this year we are steadily improving margins in EMEA as the penetration of -- or diversification to move separate clients improves.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Beltrán Palazuelo with Santalucía.

--------------------------------------------------------------------------------

Beltrán Palazuelo, Santalucía - Analyst [15]

--------------------------------------------------------------------------------

I have a couple of questions. First of all, it's in the buyback program. The board approved a $30 million buyback program because they thought of a -- they saw as the intrinsic value of the share was not reflecting the fundamentals who made the decision to stop the buyback around half of October. When you see how it's priced it looks like the buyback was stopped in the half of October of 2018. If you could give more color on that?

The second question is, of course, you're new here Carlos, you need to go over everything to give a guidance and to give a plan. But -- I was willing to have more color, for example, when we see a good quarter in Brazil in constant currency growth, is that going to keep going into next year? And for example in Americas, are we able to maintain margins this year? Or the situation in Mexico and in Argentina, is it tougher than we think? And in EMEA, is it just a one-off quarter of strong growth or is it going to continue? Then with working capital, when I analyzed, for example, last year, we grew 5.1% and the cash consumption was $32.8 million. This year, we are growing 4.3%, that's less but our consumption of working capital is higher. So if you can give us a little color of what is happening? Why we are consuming more working capital than last year 2017?

Then fourth question is interest rates. What do you think the cost will be next year? Is it efficient to have $133 million in gross cash position without doing anything? And how much cash do you need to actually manage the business efficiently? And then my last question comes from the cost from the management change, why is it put in Americas? As far as I know the management team is in Brazil, so why is it budgeted in Americas? So that are my questions.

--------------------------------------------------------------------------------

Carlos López-Abadía, Atento S.A. - CEO & Director [16]

--------------------------------------------------------------------------------

Okay. First of all, thank you very much for the questions. I think the vast majority of those I'm going to let Mauricio take a crack at it, including the ones regarding the decision-making back in October since I wasn't here. I'll tell you however, with the Brazil and you asked about the prospects in Brazil market and EMEA, again, we're not providing guidance today but I was very -- I'm very happy with what has happened in the second half of the year in the Brazil operation.

A quite an (inaudible) we are already executing on in Brazil. We are going to replicate in other parts of Atento. So I think, quite a few things that we have going on there will be not only durable in Brazil but extendable and will be extended in the rest of Atento. Also, very happy with the trend that we have in EMEA and it's not a quarter-to-quarter trend, that's an operation that -- again, this is very -- I find it to be solid and as well as in many other places, we have one very large client, Telefónica. That relationship is particularly close there for obvious geographical reasons as you know.

So again, without giving a specific guidance, those 2 markets, I'm very happy, and we would like to extend some of the things that we're doing there in other places. Mauricio?

--------------------------------------------------------------------------------

Mauricio Teles Montilha, Atento S.A. - CFO [17]

--------------------------------------------------------------------------------

Sure. Hey, Beltrán, well, I will start with a question on the buybacks. First just to remind all of us, we got our buyback approval last year with a mandate up to $30 million and for year to be completed. So we are within the framework of the project, and we've been focusing -- also we said the buyback will be executed as we see opportunities and also in -- if the cash flow of the company permits. So our priority in capital allocation continues to fund growth and to fund the initiatives that we will put the company back on the profitable way. So it was management's suggestion to the board that given the change we are -- to [try to start] the business and the initiatives we are taking, as Carlos mentioned, in terms of focus on the business and moving to improve profitability to hold on the buyback and to focus more in those first priorities that we laid out.

As I was just reminded, we have 22 [minutes] still to be done and this will be revised. There's an efficient plan as we go along Q1 as the results of those initiatives have already started and also the needs for the new initiatives and this will be decided as we go.

So the second point if I'd say, in terms of working capital. I need to probably take a look on this -- on the constant base. But if you -- we have, I'll say, a larger growth happening in the end of the quarter. So the end of the quarter, when you measure the working capital versus your other quarter that has some increasing revenue particularly in Q4. And also as you're looking, there's currency moving between last year or not. So generally speaking, our DSOs, I would say, our working capital primarily is composed by the receivables. The DSOs are stable if it's not slightly declining. There is more seasonality on the revenue in Q4 but also there is a significant exchange moving between the beginning and the last year balance. But the working capital is completely under control and actually, as I mentioned, we actually got some anticipation replies even further reducing the DSO in December this year, for example.

In terms of cash position we are -- we ended the year with $133 million just to give -- generally speaking for the day-to-day transactions, we need $100 million more or less in cash giving we are a very decentralized company and in Latin America it's not very easy to do cash flowing, giving leakage impacts. So the cash typically is $100 million that we would need to run smoothly the day-to-day operations. The excess cash in the quarter will be utilized in the next less -- in the coming year and we will lay the result clearly when we do Q1, which are the priorities of the business and how the cash will be allocated.

Although, going back to the same point, our priority will be to support the business, growth and improving efficiency to the business and return to the shareholders after we guarantee that the company has the proper funding to deliver on the objectives.

The question about the interest rates, as you know, our capital structure is very much -- was renewed last year in 2017. So we continue -- as, of course, look at the market if there are opportunities for debt management, we will take them along the road as you -- the first $400 million bonds we have is a 2-year pulse. So if there's an opportunity further down the road when we pass this 2 year. But we will continue to offset the capital markets and to see if there is a more efficient way to adjust our CapEx structure. At this point, there is nothing, I'll say, material that can be done. In this area, if there is, we will go for that.

I think, that's all I had to provide -- oh, sorry. Then there's the final question on the Americas. It's just to the accounting, as we do, because some part of the management is -- we split the cost of management through several regions. There are a lot of cost that we do and the allocation was just done in Americas historically. So we keep it for comparability. There is nothing to do with the Americas specific but majority of the changes or the impact of the changes was the America for -- as compare with this things with the IPO there is no particular reason that was all the reason that was in Americas. That's why we also communicated what will be their results excluding those charges.

--------------------------------------------------------------------------------

Beltrán Palazuelo, Santalucía - Analyst [18]

--------------------------------------------------------------------------------

And if I may, maybe a last question for Carlos. You're new here, of course, you are focusing on other opportunities the company can achieve and can improve. But mainly that's not on the operational side. On the financial side, is the share price going to be a priority for you? You are happy with the valuation? You think the price reflects the intrinsic value? Do you think there are some things that are making the stock trade where it is? You're happy? Is it going to be a priority? You're happy with those minus, I don't know another, 50%? Are you going to do something? Or you're happy and you let the market put the stock where you think it should put it?

--------------------------------------------------------------------------------

Carlos López-Abadía, Atento S.A. - CEO & Director [19]

--------------------------------------------------------------------------------

I think there were several question there but I think, they all revolve around the same topic, the share price. I'm definitely not happy with the share price. And I think we have the potential of being a much higher value, no question about it. What am I doing about it? I believe that, the number one thing that we can do, that I can do is to improve operations that I said earlier, improve the predictability of our forecast and the reliability of our results. And particularly, focus on the profitability in the short-term. We have had pressure on profits for quite some time. I believe that setting Atento in a different growth and particularly profit trajectories, the number one thing we can do for Atento in the short-term.

Medium-term is the focus on the digital growth. If we are successful on those accounts, I believe that the share price will follow. At that point, we can talk about many other options. But my number one responsibility and priority is to affect the stock price through the improvement of the operations of Atento.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from line of Amy Sheng with Equinox Partners.

--------------------------------------------------------------------------------

Amy Sheng, Equinox Partners - Analyst [21]

--------------------------------------------------------------------------------

Just 2 questions. One is a slight follow-up. You mentioned that you wanted to pause the share buybacks as you evaluate other investment opportunities. I was wondering if you could elaborate on what some of those opportunities look like. What the return do you -- if there is a return hurdle you expect from those opportunities given where your share price is trading today? And then if you think about, sort of, the share buybacks versus the dividends, sort of, how you balance those two as well?

The second question is on Brazil. I know you're not giving guidance but I was curious if you could talk a bit more on expected wage increases and the union negotiation. And how much you expect to be able to pass on to customers.

--------------------------------------------------------------------------------

Carlos López-Abadía, Atento S.A. - CEO & Director [22]

--------------------------------------------------------------------------------

Yes. Thanks for the question. Let me try to take a crack at that. I'm going to underscore what Mauricio said in an earlier question.

The discussion of the share buybacks and many other similar angles, we would like to have a discussion after we have in place our transformation plan, as we said earlier. We'll be in a position to discuss at the Q1 earnings. And the long-term plan, we could probably give you also -- if you in that timeframe, particularly, we will be discussing in depth the long-term plan in the September conference.

With having a fully formed plan and having the intention on transforming Atento significantly, I think it's prudent to defer decisions on share buybacks and similar until we have cleared the funding needs for the different initiatives that we are undertaking. Mauricio, any additional?

--------------------------------------------------------------------------------

Mauricio Teles Montilha, Atento S.A. - CFO [23]

--------------------------------------------------------------------------------

No, I think you hit it. The program was designed that way. We have a mandate, and we will always reassess what are the first priority to the company. And as Carlos said, the priority for the company is profitable growth. So as you -- Carlos also mentioned in his remarks, the fact that, yes, we have to invest some money. There's -- in streamline organization also just synchronization to new volume reality particularly in Americas. So these are the key priorities.

And the other priorities, as Carlos mentioned, we are developing this transformational plan to Atento, and we will reassess it as -- after Q1 when we provide the guidance. This is the normal part of the program as we disclosed it in our September last year.

--------------------------------------------------------------------------------

Carlos López-Abadía, Atento S.A. - CEO & Director [24]

--------------------------------------------------------------------------------

The good news is we have a solid balance sheet and solid cash flow generation. So we have a variety of options both in terms of funding the transformation of Atento and returning value for shareholders.

--------------------------------------------------------------------------------

Mauricio Teles Montilha, Atento S.A. - CFO [25]

--------------------------------------------------------------------------------

Amy, just about your -- can you repeat your second question, Amy? I was...

--------------------------------------------------------------------------------

Amy Sheng, Equinox Partners - Analyst [26]

--------------------------------------------------------------------------------

Yes, my second question was just on your previous comment on Brazil. You mentioned that they are going through wage increases. I was just curious on how much you can pass on to customers and has that changed from the past few years?

--------------------------------------------------------------------------------

Mauricio Teles Montilha, Atento S.A. - CFO [27]

--------------------------------------------------------------------------------

Yes, thanks for your question. It's a very important topic, typically, in our seasonality, impacting our seasonality toward the business. The agreed inflation was 4.6%. That is already implemented in Brazil actually in Q1, as usually. Typically, we implement the prices -- the cost increases not only in Brazil but in also all of the other countries that have either minimum wage laws or they have important unions. Typically, in January and February, those wage increases they happen. And we pass the price over the year. So that's actually still -- well put the pressure in seasonality of our business, lower profitability in Q1, Q2 and more in Q3 and Q4. One of the key elements of that.

In the case of Brazil, we typically being able to pass 2/3 on pricing and that's what we are shooting for again. Of course, the good news is, this is less relevant, you have years we have 14% to pass the prices. That was really challenging, 4.6% is also very challenged because everybody is looking at profitability or efficiency in their business. But we continue to focus in past 2/3 in price but also we continue to work with our clients to help them to be more efficient overall, particularly with the tools that Carlos mentioned, with the digital, chat bots and everything else we can do in technology that we can help them to have a better service for their clients with a lower cost base.

But on the individual business and ones we operate that there is important cost elements related to depot, serving the client. We're going to continue to focus on 70% and the rest, we need to have our clients to be more efficient. For this, 4.6% is an important number. That's why we made it higher than last year and the implementation is when you compared to last year that's why I mentioned also that seasonality in '19 is going to be more skewed towards second half. One of the reasons is because this increase is higher than we had in last year, that's the implication of the accrual. So there's a lot of [effect]. But we expect recover it over the year as we've been doing the last couple years.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

That does conclude our question-and-answer session. At this time, I'll turn the floor back to Mr. López-Abadía for any final comments.

--------------------------------------------------------------------------------

Carlos López-Abadía, Atento S.A. - CEO & Director [29]

--------------------------------------------------------------------------------

Okay. Thank you very much to all of you for your time, attention and your thoughtful questions. Looking forward to interact with you in the next weeks and months. Looking forward to working with you. And as always, our Investor Relations team is available to you with any further questions and clarifications. So thank you very much.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

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