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Edited Transcript of ATTO earnings conference call or presentation 13-Nov-18 3:00pm GMT

Q3 2018 Atento SA Earnings Call

Grand Duchy Of Luxembourg Dec 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Atento SA earnings conference call or presentation Tuesday, November 13, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alejandro Reynal Ample

Atento S.A. - CEO & Director

* Mauricio Teles Montilha

Atento S.A. - CFO

* Shay Chor

Atento S.A. - IR Director & Corporate Treasurer

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Conference Call Participants

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* David John Koning

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Vincent Alexander Colicchio

Barrington Research Associates, Inc., Research Division - MD

* Vitor Tomita

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Presentation

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Operator [1]

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Greetings, and welcome to Atento S.A. Third 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 your host, Shay Chor, Corporate Treasurer and Investor Relations Director. Please go ahead.

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

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Thank you, Hector. Welcome, everyone, to our fiscal 2018 third quarter earnings conference call. Here with us today are Alejandro Reynal, our Chief Executive Officer; and Mauricio Montilha, our Chief Financial Officer.

Alejandro will discuss our quarterly performance and conduct a strategic review, followed by Mauricio, who will provide details about our quarterly results and review fiscal 2018 guidance.

During the question-and-answer session, we will answer any questions you may have, and then Alejandro will have a few closing remarks. Before proceeding, please know 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 risk 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 presentations can be found at investors.atento.com. Please note that unless noted otherwise, all growth rates are on a year-over-year and constant basis -- constant currency basis. I will now turn the call to Alejandro. Please go ahead, Alejandro.

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Alejandro Reynal Ample, Atento S.A. - CEO & Director [3]

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Thank you, Shay, and good morning, everyone. Thank you for joining us today. Please turn to Page 4 of the presentation. We are very pleased to say that we delivered a margin turnaround in Brazil during the third quarter of the year, thus advancing our profitable growth agenda for 2018.

Another highlight for the period is our robust margin improvement in EMEA. On a consolidated basis, revenues increased 0.9% in the quarter and 4.2% year-to-date, very much in line with the expectations and our guidance.

Top line growth was accompanied by bottom line improvements as well, with EBITDA growing 2.4% and EBITDA margin flat at 10.9%. Also, recurring EPS expanded by 17.3% to $0.25. Let me emphasize that our results were achieved within the context of a tougher macroeconomic environment in some of our geographies such as Brazil, Argentina or Mexico.

From a regional perspective, the quarter was aligned very much with our business seasonality and expectations.

In Brazil, revenues grew 2.8% year-on-year, and we saw strong margin expansion quarter-on-quarter, with adjusted EBITDA margin up 3.3 percentage points to 11.9%.

The turnaround in Brazil margins reflects the impact of our first half operational improvement plan.

In the Americas region, revenues declined 1.2%, 9-month revenues increased 6.5%. The region's adjusted EBITDA margin declined 0.6 percentage point to 11.3%.

Potential for continued outsourcing remains high, with third quarter performance impacted by macro-related pressures in Argentina and Mexico.

In EMEA, we delivered strong profitability expansion and top line growth. Revenues were up 2.1%, with Multisector up 6.8%. And there was a strong margin expansion with adjusted EBITDA margins up 3.9 percentage points year-on-year to 10.3%.

This was the second consecutive quarter of revenue and margin increases in EMEA, signaling the transformation of our business to win in a mature and increasingly digitalized market.

From a client and commercial perspective, our quarterly performance continues to benefit from the sustained performance of our Multisector business and the rollout of our expanded and enhanced value offering.

As such, Multisector clients remain Atento's growth engine with revenue expanding 1.2% in the quarter and 6.1% year-to-date.

Our sustained Multisector growth drives revenue diversification, pushing non-Telefónica revenues to over 61% of total revenues.

We continue to be Telefónica's reference partner for CRM/BPO services and to increase our share of their spend. Telefónica revenues expanded 0.5% in the quarter and 1.4% year-to-date.

In addition, we expanded our BPO and digital solutions revenue mix in the third quarter, as we keep deploying Atento's expanded value offering across our geographic footprint.

Revenues from higher value-added solutions represented 27.1% of total revenues in the third quarter, up 0.7 percentage points compared to second quarter.

Importantly, an encouraging demand for our value-added solutions, including digital solutions, represents around 1/3 of our qualified pipeline, as mentioned in our previous earnings calls.

This reflects the ongoing transformation of our business to become the leading provider of a higher value-added customer experience and BPO solutions in the digital age.

Finally, our strong balance sheet and solid cash flow generation enabled us to capitalize on accretive growth opportunities.

Please turn to Slide 5 of the presentation. Following a challenging start to the year, Atento delivered a solid margin turnaround in our flagship Brazilian operation as a result of the operational improvements we made during the first half.

Our sales operations remain at the forefront of our growth strategy, with focus on evolving the value offering. Atento's Brazil solutions factory is helping accelerate the group's move into digital services and leading the standardization and rollout of digital solutions, which include data-driven digital sales, data-driven customer care, digital back office and digital collections and also include analytics and business process outsourcing (sic) [consulting] offering.

Our Brazil business is leading the way in terms of Atento's revenue diversification, with the Multisector mix up 4.9% year-to-date to 70.3% in the third quarter, but also continue being Telefónica's reference partner for CRM/BPO services and solutions. Telefónica revenues increased 1.5% in the third quarter and 2.8% year-to-date, with Atento delivering the first digital solutions for Vivo within the Telefónica group.

I would also like to highlight 2 key achievements during the quarter. First, the Unimed carve-out, which accelerates Atento's penetration of Brazil's healthcare segment, one of the largest and fastest growing vertical for CRM services in the country.

And second, the strategic partnership with T-Systems for the management of data centers in Brazil, which accelerates Atento's transformation into digital BPO solutions provider, enabling us to have faster and easier rollouts of new services and solutions for clients.

Before I turn the call over to Mauricio, let me emphasize that this margin turnaround makes us optimistic about our Brazilian business prospects for the next quarter. It is important to note that given the challenging macro environment in 2018 and uncertainties related to the new political administration in the short term, future expectations will be made with caution. Mauricio, over to you.

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

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Thank you, Alejandro, and good morning to everyone on today's earnings call. Like Alejandro, I'll be referring to growth rates on a constant currency and year-over-year basis, unless noted otherwise.

Please turn to Slide 7. As Alejandro noted, we continue to diversify our revenues, which grew by nearly 1% in the quarter and 4.2% in year-to-date.

Multisector revenues increased 1.2% in the quarter and 6.1% year-to-date. Our operations in Brazil and EMEA drove Multisector revenue, which represented a nearly 62% of consolidated quarterly revenues and about the same on a 9-month basis.

One challenging aspect of the business has been the volume and price pressures in our more massive CRM programs across all regions. Our commercial teams have been working hard to convert an encouraging pipeline, and the growing number of Multisector clients are forming the base for future revenue growth.

Telefónica revenue rose likely in both, in the quarter and 9 months, accounting for 38% of the group revenue, while value-added solutions reached just over 27% of revenues.

Brazil 3.3 point of percentage sequential adjusted margin increased, as Alejandro highlighted, in addition to EMEA's year-over-year margin expansion, explaining group level profitability that we reported in the quarter.

We delivered a strong 17.3% growth in recurring EPS of $0.25, but it's important to highlight that we had a pretax gain of $7.6 million that resulted from a market-to-mark -- mark-to-market of real to U.S. dollar hedge related to the interest on Atento's 2022 senior secured notes.

Please turn to Slide 8, where we will begin reviewing our performance by region.

The nearly 3.5% growth in Multisector revenues that's drove our top line in Brazil was fueled by financial service clients.

Year-to-date, Multisector revenues increased nearly 5% in the country. As a percent of total revenues in Brazil, they rose 0.4 percentage points to just over 70% of the end of the quarter.

Telefónica revenues in Brazil increased 1.5% and 2.8% on a quarterly and 9-month basis, respectively.

Regarding the margin recovery at our Brazilian operations, this was the result of the operational improvements that we made during the first half of the year, as Alejandro pointed out at the beginning of his remarks and as discussed in our previous earnings calls.

Please turn to Slide 9. In the Americas region, overall revenues were down in the quarter along with Multisector revenue as a result of lower volumes in the more massive CRM programs, especially in telco space.

In the financial services space, we saw a mixed results, with important client wins in Chile, offset by volume and price pressures in Mexico.

On a year-to-date basis, revenue was up 6.5%, fueled by nearly 8% expansion in Multisector revenues.

As a percent of regional revenues, Multisector revenues decreased slightly to just over 58% and were up just over 1% nearly to 60% of regional sales. Telefónica's revenues were flat in the quarter, but up nearly 3% on a 9-month basis.

Adjusted EBITDA in our Americas operations declined 0.6 point of percentage, and we believe the 11.3% margin is the expected normalized level.

On top of the already mentioned lower volume in the more massive CRM programs, we also faced tougher business environment in Argentina due to declined economic activity.

Our operations In Argentina contributed 14% of the region's adjusted EBITDA versus nearly 22% in the third quarter of 2017.

At the group level, it represented 6.0% versus 8.4% last year. For our EMEA results, please turn to Slide 10.

In EMEA, we delivered revenue growth of just over 2% in the quarter. Multisector revenue grew nearly 7%, supported by non-Telefónica telco clients. On a 9-month basis, they grew nearly 9%. As a percent of the region's revenue, Multisector revenue increased 1.8 point of percentage in the quarter to 40.5%.

Reflecting lower volumes, Telefónica revenues decreased nearly 1% during the quarter and 4% year-to-date. As we pointed out, the EMEA region contributed to group profitability, with its margin expanding 3.9 point of percentage to 10.3% and up 2.4 point of percentage year-to-date to 9.2%.

We believe the year-to-date 9% margin is a normalized level than the 10% delivered in the quarter.

Now for a review of Atento's financial strength, please turn to Slide 11.

During the quarter, we generated $18.3 million in free cash flow. Before interest and acquisitions, we generated twice as much cash flow, $36.7 million. Also, year-to-date, we improved our adjusted EBITDA to cash flow conversion by 5.3 points of percentage to 29.9%.

At the end of the quarter, we had a cash and cash equivalents of $96.5 million, with a total of $100 million in undrawn credit facilities after nearly $200 million in implying liquidity.

Our 9-month CapEx decreased to 2.7% of revenues from 3.5% in last year's period due to optimization of our force utilization rates and lower volumes.

Atento's net debt decreased 3.0% sequentially to $360.2 million, while our gross debt decreased 4.4% to $458 million, due to the debt amortization and lower use of credit revolvers.

Although our net debt was down and we generated positive cash flow, net debt to EBITDA increased to 1.8x versus 1.7x in the previous quarter, reflecting impact of foreign exchange translation on EBITDA.

Before starting our Q&A session, we'd like to give you a brief update on 2018 performance.

Although it has been a challenging year, we are confident we will deliver most of our 2018 guidance, especially for revenue growth, interest expense and cash conversion.

As for profitability, we expect the EBITDA margin to be slightly below the 11% to 12% range we provided as a result of the pressure we faced in the first half of the year, mainly in Brazil. Factors like weaker-than-anticipated macro environment, uncertainty surrounding the elections and the country's truck drivers' strike had an impact on overall business environment in Brazil, which represents around 50% of group margins. On the other hand, on the back of the optimization of force utilization rates and lower volumes, the overall rates of cash CapEx as a percentage of revenue is below the guidance range of 3.5% to 4%.

Operator, we are now ready to start questions-and-answers part of our call. Please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Vitor Tomita with Itaú BBA.

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Vitor Tomita, [2]

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So 2 quick questions from my side. First, if you could elaborate a bit more on the operational improvements in domestic in the first half of the year in Brazil, would you say that there's still room for more improvements there, for improvements in Americas margins through similar measures? And a second question from me, how have the employee turnover rates and client retention rates evolved in the last few quarters? And that's it from my side.

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Alejandro Reynal Ample, Atento S.A. - CEO & Director [3]

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Thank you for your question, Vitor, and let me address them. In terms of the operational improvements in Brazil, we're very happy to see the outcome of the third quarter. And as I mentioned on the first part of the call, we still do see further improvements due to the operational plans in the fourth quarter of this year in Brazil. What we did in Brazil was basically 2 main actions. First, we had some excess capacity that we were not able to cover during the first and second quarter. And this was, as Mauricio pointed out, due to the softer macros in Brazil. So we have adjusted the extra cost that we had because of excess capacity. And that was done during the first and the second quarter. And the second item we executed was that we had a specific programs that were performing below expectations. So we took the corrective measures in terms of operational KPIs, in some case, negotiation with clients. And all of those programs have been corrected. So as of now, we have a very healthy operation in Brazil. I would say that still in the third quarter, we had impacts because of the actions that we took. In spite of that, we have a 3.3% improvement versus the second quarter. And as I said, we have a view that going into the fourth quarter, the performance in Brazil is going to be solid in terms of margins. For the Americas, what you asked, I think Americas is performing fine. One of the things that our business is clearly impacted by is the evolution of the macros. And some of the countries have performed below our expectations and below the expectations when we guided. Specifically, as you know, Argentina really changed from a macro point of view as of August this year with the high inflationary environment and the currency fluctuations, amongst other things. So clearly that is a country that changed for the worst. And to -- in a scenario, it was very hard to predict. Also, in our case, Mexico, although, is performing okay, the macro still for our -- somewhat unstable due to the presidential elections and some of the uncertainties in the market. So they are going to -- we've mentioned this on the call, we feel good about Americas. There's just strong commercial pipeline. We are getting new business. But there are some macro uncertainties related to certain markets in the region. But we do see, as it was mentioned by Mauricio, that the margins should behave on a stable basis as the ones that you've seen on the third quarter. In terms of your second question on turnover, that is stable. We have, of course, year-over-year decreased the attrition numbers in our operations due to a series of operational measures that we've taken. You might recall that 3 years ago, our turnover per month was approximately 8%. Now it's below 6%. So we continue to decrease that number and continue to implement measures to further reductions, but it's very stable right now. And I think that's one positive in terms of the performance regarded to the people management that overall turnover is stable. As you know, we measure employee satisfaction and things are going well. We increased our employee satisfaction numbers versus last year. So I would say that our human capital base, which is over 150,000 employees, is fairly satisfied and loyal and engaged with Atento. Therefore, turnover numbers are stable and coming down.

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Operator [4]

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

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [5]

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Yes. Alejandro, the communications business as a percentage of the mix came down. I'm wondering if you could give some understanding of what portion of that is from product simplification versus automation or maybe just general economic factors.

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Alejandro Reynal Ample, Atento S.A. - CEO & Director [6]

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Vincent, thanks for the call. The truth is, it is a mix of both. The macros impact the volume of calls generated by our clients, and specifically, this is fairly sensitive in the telco space. One of the things that we've seen, for example, in Argentina is the fact that the contraction in demand due to the contraction of the GDP has caused a reduction in the number of calls. Basically, demand then went down. So this is a very clear effect of macro impacts. So that's one aspect that we do see on volumes. The other element, which Mauricio touched upon his commentary, is that for some of the most basic type of calls, there's some degree of automation/digitalization. The good thing is that we're playing an active role on that. We're working with our telco clients in terms of implementing solutions to automate and digitalize some of the most simple calls. So in summary to your question, the impact is both. I mean, some of it is related to macro and with offshoring volumes because of less demand. And the second piece is automation of the simpler call volumes.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [7]

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And then, Alejandro, are there any -- I know it's early, but with the new presidential administration in Brazil, are there any potential policy changes that you would highlight for us that we may want to be on top of for the industry?

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Alejandro Reynal Ample, Atento S.A. - CEO & Director [8]

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Sure. We don't foresee any -- at least as of now, there hasn't been any specific legislation around our sector, so we don't foresee any changes in the short term. It is fair to say that the last few years have been positive for the sector in Brazil in general because of the legislation that was passed, and the view of the current government is pro-business. So I would imagine that, if anything, those measures will continue and/or new measures be put in place. But in terms of the specifics that we have, that we know of, there's nothing at this stage.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [9]

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And then, Mauricio, one for you. To what extent are you able to pass through the inflation levels in Argentina? And what should we expect going forward?

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Mauricio Teles Montilha, Atento S.A. - CFO [10]

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We -- actually in Argentina, we typically pass 95% of inflation. That's actually one of the reasons why Argentina is facing a lot of difficulties to -- as an economy, because it's fully in backseat. It's very difficult to lead this model. So you reflect -- pass inflation prices. So it's hard to break it down. But typically, we pass 95%. What we are seeing in Argentina, of course, it seems that the interest rates went up and inflation has been escalating. There's being a significant drop in demand, particularly, for example, for marketing programs, for cross-sell, credit card sales. All those, I'll say, implications for the middle class spending less money, less penetration or less appetite to open new bank accounts or credit cards really is what is pushing volumes down in Argentina. So everybody is tightening the belt. So this means less consumption and important reduction on the CRM. Inflation continue to impact in the same ways as we saw it back. But the volumes, and it covers our fleet cost, of course, is impacting our business.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [11]

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Okay. And then maybe one more for you. What's the acquisition -- for Alejandro, what's your acquisition focus at this point in time?

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Alejandro Reynal Ample, Atento S.A. - CEO & Director [12]

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Yes, Vincent. Twofold, I would say. First, it's on building capabilities around some of the solutions business, in particular digital. We're looking into a series of assets that would be additive to the current value offer. There's companies that we are exploring in our current geographies that may expand our capabilities in the digital space. So that's one area of M&A focus. The other one continues to be around carve-outs. As we mentioned on the call, we did materialize a carve-out with Unimed, which you see within the healthcare sector in Brazil and something that we see has a lot of room and potential going forward, and we will continue to have an active pipeline of carve-outs in Brazil and in the other geographies. Very much focused on specific industries that have not outsourced much in the past. So in summary, those are the 2 focuses: the capabilities around digital and carve-outs.

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Operator [13]

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(Operator Instructions) Our next question comes from the line of Dave Koning with Robert W. Baird & Company.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [14]

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And I guess, my first question just on Americas, you've talked about some of the weakness across different geos in Americas. But did it start to get a little worse, like -- I just remember some of the currency started to really fade in kind of August and through September. So I'm just wondering, do you expect Q4 and maybe early next year to be declines a little worse than the 1% in Q3 and then by the back half start growing again? Is that kind of what we should think about?

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Alejandro Reynal Ample, Atento S.A. - CEO & Director [15]

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Dave, this is Alejandro. Yes, I mean, I think there's 2 things on Americas. I think first, which we didn't specifically highlight and you may have pointed this in the last earnings call, is that on a comparable basis, we have a tough comp in terms of growth third quarter last year, so it's specifically in the Americas. Because last year third quarter 2017, there was an acquisition we consolidated in the Argentinian business, and therefore from a comparison basis quarter-on-quarter makes the growth numbers tougher. So I think that's one issue to point out, which is very relevant in terms of how you analyze the Americas numbers. Having said that, the truth is that the macros are tougher. And as I said and you also pointed out, they change in specific countries, and I would say primarily Argentina and to an extent Mexico as of the summer, basically July, August. So from that perspective, we are seeing some lower volumes because of demand. And the expectation is for that to continue into the fourth quarter and potentially, again, as you said, for the first half of next year, while the economies recover.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [16]

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Got you. Okay. No, that's helpful. In the Brazil margin improvement, that was very encouraging. I know for about 5 years in a row, you were doing kind of 13% to 15% EBITDA margin. And you're kind of on the pathway back. Is that where you think you can land again? And maybe it takes a couple of years or something to get back. But I mean, is that 13%, 14%, 15% where you think can get to?

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Alejandro Reynal Ample, Atento S.A. - CEO & Director [17]

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On a seasonal basis, yes. What I will say, though, is that, remember, the case of Brazil tends to be softer, specifically the Brazilian market in the first half of the year and we will see that happen in, again, next year for the first half of '18 (sic) ['19] because of all the issues are on passing inflation into pricing and there's typically a lag. One of the things, though, that we are seeing with the operational improvement plans is that the second half is stronger, and we posted almost a 12% EBITDA margin in Brazil in the third quarter and we see fourth quarter doing better than that. And therefore, fourth quarter will be on the range that you quoted. So therefore, second half performance is going to be in line with the range you guided. Before the year, you have to take into account the softer first half of the year.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [18]

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Yes, got you. Okay. And then last one quickly for Mauricio. The hedge gain you got in Q3 in the interest expense line, is that something that we'll see hit other quarters in the future? Or should we just assume all the quarters in the future go back to that $12 million, $13 million of expense?

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Mauricio Teles Montilha, Atento S.A. - CFO [19]

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So I think on the, I'll say, on the run rate, it'll be on $12 million to $13 million. If you -- but we hedge it to Brazil reais, all the interest on the bond. If you -- I don't know if you recollect, but in Q1, we had a market-to-market negative of $3 million. Now it's $7 million positive. I'll say that with the currencies (inaudible) but for -- when you think about return, the $12 million to $13 million is probably the best reflection of where we're going to land on a consolidated basis. So...

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Operator [20]

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(Operator Instructions) Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Alejandro Reynal for closing remarks.

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Alejandro Reynal Ample, Atento S.A. - CEO & Director [21]

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Thank you. Atento's evolution from a client and commercial perspective reflects the transformation of our business. We are becoming a well-diversified company with an attractive value offer -- offering to succeeding and expanding digital world. We keep consolidating our position as a strategic partner that delivers higher value-added customer experience solutions that generate competitive advantages for our clients in an increasingly digital marketplace. The recently announced research by Frost & Sullivan, in which we strengthen our leadership position in Latin America, corroborates we are in the right direction.

Although we are cautious about the macro challenges in markets like Brazil, Argentina or Mexico, we are optimistic about the future prospects and expect our business to progress consistently. Our robust balance sheet and strong cash flow generation enable us to capitalize on accretive growth opportunities. We are encouraged by the commercial pipeline and the demand we see for our evolved value offering and are confident that the new plan wins will form the base for future profitable growth. Thank you again, and we look forward to our next call with you. All the best.

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Operator [22]

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