Atento S.A. Ordinary Shares

Good morning, and welcome to the Attento second quarter 2021 results conference call. Today's call is being recorded. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. If you are at your computer, please use the submit a question box in your webcast viewer. I would now like to turn the conference over to Mr. Sheikhor, Corporate Treasurer and Investor Relations Director for Attento. Please go ahead.

Thank you. Welcome everyone to our second quarter 2021 earnings conference call. 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 forelooking statements, which are not guarantees of future performance and involve risks and uncertainties. Certain results may differ materially from those in the forelooking statements as a result of various factors. We encourage you to review our publicly available disclosure documents, follow 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. Unless noted otherwise, all growth rates are on a year-over-year and constant currency basis. Here with us for today's calls are Carlos Lopez Abadia, Atento Chief Executive Officer, and José Azevedo, our CFO. Following their prepared remarks, we will move to a Q&A session. As we have been doing in recent calls, we do our best to answer all questions received. We believe the Q&A session is a relevant part of the call, so we encourage you to ask your questions over the phone, through the webcast system, or even by sending us emails. I will now turn the call over to Carlos, which will do today's call from our office in Madrid. Carlos, go ahead.

Thank you, Shai, and good morning. Good afternoon to all of you. Yes, I'm speaking to you from our Madrid office. I've been in Mexico and Madrid over the last few weeks. I like to be with clients and our operations in as much as possible. And as markets return to normalcy and meetings are again possible, I am returning to my usual travel schedule. But we're here today to discuss our results and progress during Q2. We have finished the first half of the year with strong results. In Q2, we have continued our growth trajectory with significant improvements in revenue, EBITDA, and continued cash flow discipline. Despite the continued impact of the COVID pandemic in some of our regions still severe during Q2, we have delivered revenue growth of 17.6% in constant currency, 21.7% in current currency, and 50.7 million of EBITDA at 13.3% margin, more than doubling our EBITDA last year. These results have allowed us to continue the leveraging, putting us already within the full year guidance of 2.5 to 3x net debt to EBITDA ratio. This higher EBITDA in H1 and solid expectations for H2 which as you know, due to the decisionality of our business is when we generate higher profitability and most of our cash flow, have allowed us to be confident to catch up on some capex and tax deferrals that we did last year while investing in growth for this year. We continue to improve our hard currency mix, US dollars and euros. We're delivering around 25% of our revenue and 30% of our EBITDA, 15.8 percentage points more than last year. in hard currency. This is thanks to continued growth of our US business and improving profitability of our EMEA operation. We feel that our sales engine continues to improve. We have more than doubled sales in the first half of 2021, and we expect to finish this year with a strong book of business leading into 2022. Despite the fact that we continue to be vigilant and we continue to invest in COVID-related safety measures. With these results, we feel that we have fully recovered from the impact of the pandemic in 2020, amply exceeding the results of 2019, and being fully on track to deliver our three-year plan. Now while delivering the day-to-day, we continue to focus on our transformation. This quarter, we have added a new chief human resources officer, a new CIO, a new chief of information security, and a new ESG director. For the people-intensive business and the quality of our HR processes and talent management is key to our results. And further, as we change the company, we need to pivot to new skills, new talent profiles, and work culture. And the new HR leadership is paramount to these objectives. We're also placing more and more emphasis on the technology that we use and that we bring to our clients. Among these of particular importance is cybersecurity these days, both for our internal use and as a differentiator in our market offer. We will continue to add talent to our technology, innovation and cyber areas. ESG has always been very important to attend to. We feel that we have done a lot in the past in this area, but we did not have a formal program at the right level. We have a structure, a formal ESG program and a new leader And we have elevated the visibility to the Board of Directors and the New Compensation and Sustainability Committee. We will be presenting our ESG plan and commitments publicly in Q3. As we approach the third year of our three-year plan, we will be focusing progressively more on our third horizon, growth. Our U.S. strategy continues to gain momentum. We have achieved in Q2 33% growth in revenue, 53% growth in EBITDA. We continue to achieve wins in both the commercial and government sectors with important new contracts, important wins, one of them serving the U.S. Department of Homeland Security. Although the majority of our employees work and are expected to continue to work from home, we are opening two new centers, one in Florida and the other one in Utah. thus giving us better times on coverage. Our strategy to focus on new sectors and global accounts continues to gain traction. We continue to grow in all of our geographies and in our new focus verticals, such as media, tech, and more data, advancing their share from 8.6% to 10.9% of our total base. We are launching new services and expanding profitable ones. We're expanding our multilingual services with partnerships such as the one we recently announced with Manpower Group. Now, having finished a strong H1 with a strong Q2, we feel increased confidence to meet or exceed the guidance that we provided for the year. We expect to finish the year strongly, on track to meet the objectives of our three-year plan for 2022. As I said to you, from my first presentation, this management team will work hard to earn your trust, and I cannot think of a better way than consistently delivering on our commitments to you. Let me turn this over to José that has more details on our results.

José. Thank you, Carlos, and good day, everyone.

I will start by presenting to you in more detail how we continue to deliver on our turnaround. I would like to highlight that while we still have some challenges ahead, we are happy to say that the most difficult part of our financial transformation is behind us. As we enter the last phase of our transformation, we will now focus more on accelerating our profitable growth. Before discussing the results, I would like to emphasize that this is the first quarter in many years in which FX played in our paper, and the reported results are better than constant currency. Going to the numbers, here you can see our second quarter figures. All regions performed very well year over year, with revenue growing almost 18%, busted by both Telefónica and Multisector that expanded double digits each. Telefónica revenue growth was positively impacted by the full impact of the program one in Brazil in Q1 and higher volume in Americas, mainly Peru and Colombia. The 14% revenue growth from Multisector was mainly driven by Americas and India. In America, the highlight was the 33% increase in the US, which is consistent with our strategy to expand our results in hard currency. In EMEA, the 15% revenue growth was followed by utilities, transportation, and government services. In terms of profitability, we delivered very strong EBITDA growth in all regions. reflecting the success of the efficiency initiatives implemented during 2020 and in 2021. The 51 million EBITDA we delivered in Q2 puts us on track to deliver at 200 million in full year. EBITDA margin in Brazil increased to 15.5% from 12% in Q1, validating the strong stationality that we record in the first quarters as we explain in our Q1 earnings call. In Americas, we expect margins to continue expanding as further penetrate the U.S. market. Programs in the U.S. are showing margins closer to 20%. Moving to the next slide. Agile 21 is the best first half for a year since the three-horizon plan was implemented in 2019. EBITDA margin increased when compared to the one reported in H1 2019, and moreover, it was 120 basis points higher when compared to the one excluding the extra items related to the transformation plan, attesting the success of the financial transformation But the key message I want to discuss in this slide is that the 11.9% EBITDA margin we delivered in the first half of the year, combined with a strong session in H2, make us confident in our ability to deliver on our 2021 guidance, or better, especially in terms of top line, considering the high demand for CX services. As I said before, the main challenge now is to use the solid foundation to accelerate profitable growth. And the key areas are continuing expanding our U.S. business and increasing exposure to hard currencies. As Carlos mentioned in his prepared remarks, our revenues in hard currency already represents 25% of total while the contribution to EBITDA is even higher at 30% of total. Now let's take a look at our cash flow. If we recall, we discussed during the earnings call Q2 and Q3 last year that some governments offered companies the opportunity to postpone the collection of certain taxes during the pandemic. We were also able to initiate extensions with some suppliers. As those payments were due in H1 2021, we had unusually high working capital requirements in the first half of the year that, combined with the one-off expenses related to the debt refi process, led the free cash flow in H1 to be negative 37 million. For a better comparison, trying to look into our run rate cash flow for H1 by excluding the one-offs I just mentioned, and also the working capital in CapEx related to the growth, our free cash flow for the ongoing operations in H1 was positive for almost 7 million, as you can see in this chart. In any case, given the positive sessionality, We have, in the second half of the year, we expected free cash flow to be at breakeven for the full year 2021. Cash capex was 3.5% of revenues in H1 2021, compared to 2.7% in the same period of 2020, reflecting many investments in IT to allow for an acceleration of future growth. Important to highlight that the company entered in H1 into new programs with clients that already represent 70% of the full year growth capex that we had budgeted. As most of the payments are scheduled for H2, we reiterate our guidance of capex payments to be between 4 and 4.5% of revenues for the entire year. Finally, and an important topic, our capital structure. We ended the quarter with our net debts at 561 million and a cash position of 154 million. Given our MTDA generation and our expectation of a slightly positive cash flow for the year, we started to repay our revolvers to optimize our cash balance. In April, we repaid the 10 million line in Brazil, reducing our drone lines to 50 million. Out of the 80 million, we have available. While the full repayment of the revolvers will depend on how the pandemic evolves, we expect to reduce the interest paid on revolvers by 1 million in 2021 versus 2020. Our leverage ended the quarter already within the full year guidance range of 2.5 to 3 times. This is a direct result of consistent improvement in EBITDA that we have delivered in recent quarters. As we have been saying since our investor day in November 2019, improving the capital structure is one of the key elements of our re-rating process. And we are confident in our ability to deliver the long-term targets of net leverage between two to 2.5 times at the end of 2022. This concludes my preparatory remarks. Thank you for your interest and support.

Let's move to the Q&A. Thank you.

We will now begin the question and answer session. If you would like to ask a question, please press star, then one. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. If you are at your computer and you would like to ask a question, please press submit a question box in your webcast viewer. At this time, we will pause momentarily to assemble our roster. The first question today will come from Vincent Colicchio with Barrington Research. Please go ahead.

Yes, Carlos, nice quarter.

Thank you.

I'm curious, the new Telefonica business added this year, how do the margins there compare to existing business with that client?

Compared with that client, they're better. Compared with the rest of the business, they're not as good.

And a little more color on the manpower partnership. Are they bringing clients to you? Is there any of that? How does that look?

No, we are expanding our multilingual, not just capability, but go-to-market. We're getting some traction in that area. It's a market, as you probably know, is growing and is very – synergistic is very related to our emphasis with global companies. Typically, these are the ones that tend to buy more multilingual capabilities in one location. So we're expanding the place in which we want to provide those services from. One key one that we're thinking about expanding from is Portugal. And one of the ways we do this in an intelligent way is with partnerships until we build the sufficient volume, et cetera. That's the nature of the manpower partnerships.

So it's a way to get to market faster as opposed to building it yourself.

That's correct. On the delivery side, the product capability and sales, et cetera, is us. Okay.

And what portion of wage inflation do you currently expect to pass through to clients this year? I don't know. I guess this might be for Jose.

Yeah, Jose probably has the number. Let me tell you up front, I know this was a question in Q1 earlier, We told you that we expected to have a significant amount of pass-through, and that's coming to pass. We used to pass through in the order of 60%. Now it's much higher, and we have a much tighter process to manage the pass-through. But just say you probably have the figures.

Your U.S. business is growing very fast now. Will you – I mean, it's hard to complain, but do you have any plans to increase resources there, such as expand the sales force?

Oh, we are. We have, and we will.

Okay. I'll go back to the queue. Thank you.

Sure. Again, if you would like to ask a question over the phone, please press star, then 1. Again, that is star, then 1 if you would like to ask a question over the phone. At this time, it appears we have no further questions in the audio queue, and I would like to turn it over to Mr. Shekhor for any questions over the webcast.

Thanks, Sean. So first question, great quarter. In the first quarter, you were already pleased with the results. How do you feel about second quarter results and how they did against your internal plan?

We are very happy with Q2. I think we completed a very strong Q1, sorry, first half. And even some of the doubts that I think some people expressed on this call regarding EBITDA margin and Inflation, ability to pass through that inflation and so on and so forth. Hopefully we put that to rest with the results, not with the explanation. So we are very happy with the results. We feel that this puts us in a very good position to deliver the full year results. And even more importantly, we're always looking not just at the past quarter, but we're looking forward, right? So we are keenly focused on delivering the third year of our 33-year plan, which is 2022. So we feel that this also puts us in a good position to start 2022 with very good traction.

Okay, next one. Congrats on a very solid set of results. From a top-line perspective, very encouraging sales data. It seems like the company has changed gears from a sales perspective. Can you talk qualitatively about what have been some of the drivers behind this and should investors expect this to remain in place?

Well, sure. We've done a number of critical things. We've changed leadership. in sales worldwide. We've upgraded a lot of our teams. We have put in place a methodology and processes that we didn't have before, you know, both from the perspective of the, if you want the more the day-to-day pipeline management, incentive management and performance management, as well as more strategic structures and processes around the account management, the integration of service innovation and sales, et cetera. So we have a significantly upgraded sales team, and we're not done yet. I mean, we have a long way to go. As I always say, I'm very happy with the progress we've made in sales, probably one of the areas where I think the results speak for themselves. Clearly, you have to apply an electron microscope to see it. But there is a lot of potential, a lot of potential for improvement. And per the previous question, we continue to invest in our sales capabilities and our go-to-market capabilities.

Can you please talk about the lag between those new sales and the revenue actually kicking in and hitting your income statement?

Sure. So we've talked about different numbers in sales, right? So some of the numbers had to do with the first half. But let me give you about the typical lag. It changes depending on the program and the complexity and the size. But if you think about sales in one quarter impacting the next quarter, and depending on the size, if it's a large deal, ramp up may be more complex, may take a bit longer. If it's smaller, it takes less. But if you think about a few months lag, that's probably a good guidance.

Next one. Multi-sector grew very fast in America's NMEA, not so much in Brazil. Can you provide a little color? Did the Telefónica growth in Brazil constrain multi-sector growth?

Well, clearly we've been very busy with the growth in Telefónica in Brazil. And as I mentioned, it's not only a good – good volumes and growth are always good. With an important customer, just Telefónica is always good as well. And as I mentioned to you, it's the kind of business we want to grow into. We have improved margins there. in Telefonica this year compared to last. So that clearly has kept us quite busy. We used to have a very, very strong multi-sector growth, and I think we should be seeing that on a continued basis in Brazil. I think even if you look at the comparative, we're still growing multi-sector faster than the market, which, as I always point out, You know, for our team in Brazil, it's much easier for us to grow when you're a very small part of the market and grow faster than the market. And when you are the market leader, and in particular in Brazil, we are several times the next participant. So it's a tough thing that we do on a regular basis and expect to continue to do so.

it appears that as margins rise from the 13% level, free cash flow really starts improving. Can José speak about the higher margin on the free cash flow?

Sure, he has to take himself out of mute this time.

Yeah, I can. Basically, what's happening in the free cash flow, we improved the EBITDA, and as we promised, we work very well in terms of revenues, but not only. We still hard on the cost structure. Our intention is exactly that. It's entering 2022 better than we enter in 2021. We have a lot of improvements. And the idea of the free cash flow is creates a buffer in order that we can invest for the future. In the company, as everybody knows, we are very shy in terms of capex. And we need some to invest, yeah. And that is why we have a bit lower free cash flow. If we can make the bridge, if we take the capex that we invest for the future this year, plus the capex for growth, we can get between 25 to 30 million free cash flow. But as Carlos mentioned in some calls, We want to invest, we want to go for the new CX products and so on. That is why we have a bit slower, but the good news are, in fact, we start to have a positive free cash flow, inclusive in the first semester. If you take out the one-offs, the free cash flow will be a positive one. I think that is one of the first times in a decade that it's happening in the first semester.

Okay, next one. Congratulations on the results. Do you have any news regarding the renovation of the MSA agreement, Maturing in 21?

Not a specific news. I think I mentioned that we are discussing with Telefonica an extension of that agreement. As I always mention from day one and I mentioned to my customers as well as to you, I fully believe in earning the business that we have with our customers every day. not to rely on any MSA or contracts. Now, having said that, having one is not a bad thing. Having a commitment from one of your important clients to buy from you, it's very important. So I don't want to minimize that. So the intention is to have a new agreement in October. So stay tuned.

Okay. You mentioned in your release that you are competing for global accounts now. Can you say what services are you providing to global accounts? Examples, names, anything that you can provide on that?

Sure. Let me try. You know, this industry, clients are a bit shy about using their names in public. But let me try a sample that may give you an idea. For example, we have a global consumer electronics company where we provide tech support for the clients for their electronics and software products. uh, media and entertainment, a, a very large, um, very successful media, uh, company where we provide, uh, customer, um, uh, food delivery. I can think of a couple of very well known names where we support them. Um, uh, very, uh, a premier, uh, social media, uh, platform where we, uh, support them in the digital advertising sales. Um, gaming, you know, we do gamer support. In fact, I believe we have announced the name of this company, Riot Games. So... I can give you other examples, but I think it gives you an idea of the type of companies, the type of sectors, you know, by and large growth sectors, companies that are expanding and growing very actively worldwide. And also the range of services is not typically traditional old services. They tend to have more value add and more complex services. But that's, as I mentioned to you, that's the kind of segments and the type of services that we're going after.

And the next question will come from Michael Ostrowski with Insight Investments. Please go ahead.

Thank you for taking my question. Can you share with us now any details of your ESG program, which you said will be launched in the coming months?

Thank you. I will be sharing the full plan this quarter. I can share with you the highlights. I believe, as I mentioned earlier, I believe that this company has done a very good job over the years on ESG. We have a very, when I compare with my past experience in other places, we provide a lot of support for diversity, a lot of support for disadvantaged people. We do a lot in the environment, et cetera, that we probably have not communicated very well in the past and more importantly we have not put that in you know under a proper program with proper attention so we have created a group and specifically for ESG and we have a leader in the group dedicated to ESG we are upgrading what we do at the board we have now a new Remuneration and Sustainability Committee. We are including a very significant component in future agendas of the ESG program. And so not only will we be making commitments and obviously communicating results, but also making commitments to you externally, but also having a rigorous process both at the management level as well as at the board level.

Excellent. That's very helpful. Thank you.

So going back here to the webcast, your slide on free cash flow bridge is very helpful. Can you split out working capital versus growth capex in that $17 million, and what sort of cash payback you're expecting on those expenses?

I think this one is for you, Jose, or Shai. I'll happily pass it on to you.

Okay, I'll take that one. So the $17 million is around $15 million is working capital and $2 million, slightly above $2 million is the CAPEX. Important to say that we have already deployed or is under execution around $11 million in growth capex and only $2 million has been paid in the first half of the year. So this is an important reminder that we still have to pay that in the second half of the year. In terms of our payback and other metrics, the average payback on our growth capex is around 12 months. And another question we have here is on the return invested capital and the growth capex. We aim at a minimum of 25% to 30%, but the growth capex projects that we have deployed this year so far, the ROIC is around 150%. Next question we have here. Wages have been rising in the U.S. Can you talk about how Atento can provide cost savings to U.S.-based companies?

Yes, wages, as you well know, have been growing. Not only that, I mean, there's been shortages of, in many cases, in many locations. So there's a number of things we do in the U.S., and I'm particularly happy to tell you that I feel we're doing very well. We've taken full advantage of the work at home, the Atento at home platform that we have deployed, where we have deployed some unique capabilities, like, for example, if you had the opportunity, but if you hadn't, I recommend that you do check out our Digital Hub demo that we did at a recent event. I think it's on our website. So we have invested and we have a work at home capability second to none. That has allowed us to So when we need to serve a particular customer from the U.S., it gives us the opportunity to reach much further than we could have in the past. Also, please remember that we have very significant capabilities in the near shore, Central America, Latin America, Mexico, that also are very helpful for us at this particular time. So we've been able to – I'm not going to say that – It's been necessarily as easy as it used to be, or I hope it is in the future in terms of logistics and labor shortages, but we've been able to manage very well the situation.

Okay. I see your peers reported adjusted EBITDA, some of the costs related to COVID still impacting business. And I noticed you are not reporting adjusted EBITDA. Can you say if you have specific costs that you are considering as normal business?

Look, We have taken the view that it's better to give the full numbers with one of no one else. And you can see sometimes that tends to to to distort the message. So that's not to say that we haven't disclosed when we think there is a very significant one of us. we did last year, but I prefer to give you the unvarnished results. So in our case, if we did adjusted EBITDA, the number will be higher, obviously. We have some significant costs still, not as much as last year, but the significant costs are still in from COVID. I think, Jose, I don't know if you know, off the top of your head, we're talking about in the order of 20 million. And I'm sure there are other one-offs that we could have baked into the into the number and say this is the adjusted EBITDA number, which would be much more impressive number. I prefer to be conservative and give you the unvarnished, everything in one of and so on. That's why we chosen to do it that way.

In 2022 and beyond, how should one think about free cash flow? What level of operating cash flow are you expecting? Is CAPEX still 4% to 4.5% of revenues? Can you provide some clarity on free cash flow going forward?

I suspect this is for you again, Shai.

This is for José, actually. No, it's for us. No, I can give you the color. As I mentioned before, the free cash flow that we expected is between 10 and 15 million in 2022. because we have to invest. We talk a lot about 4% and 4.5% capex for revenue, but inclusive I prefer to talk about numbers, because otherwise we don't know where the capex goes. But when we look for this year, we have around, we will spend around 70 million. For that, 30 million is in maintenance. The maintenance ongoing basis will be almost between 30 and 35 million. that is the number that we have we invest around 20 million in terms of we can say strategy for the future it means we have a lot of systems we still have a lot of systems on premise we start to move to cloud i give an example sales in finance we we move for software in a three-year basis, we expected to have around 50 million US dollar in savings to move that, but of course we have to pay in advance. In advance not because we have a good agreement with SAP, we pay monthly, but honestly that is the type of capex that we need. And then we have around 5 million for efficiencies. It means in operations we're still improving. That is our idea. We have very and pretty clear where we want to be in terms of variable and fixed costs ongoing basis for that we have to invest to. And we have around 15 million for growth. For growth, I think it could change. It depends a lot on our sales guys. But if they still sell pairs they have done in the last quarter, Against our expectations, because we have a very good pipeline for the future, maybe we have to invest a bit more. It means our target is around, for next year, 80 million, 85 million in CapEx. Yeah? To say that, we can get around between 10 and 15 million in a positive free cash flow, even if we invest 80 to 85.

And I'll just compliment on José, and that brings back previous questions that we had on EBITDA getting to 13%. When our EBITDA goes above 13%, closer to the 14% we expect for next year, that really gives us a high leverage on the free cash flow side. So this is an important level that we need to continue delivering. How are you feeling about the momentum in the sales process over the next – 12 months.

I think I mentioned earlier I'm very happy with the progress we've made in sales. What we see in the pipeline is not one big deal or a couple of big rocks, but a solid and increasingly better solid, deep, and broad pipeline. I feel very good about what we have been able to accomplish, but I feel that there is still much more that we can and we will do. So I'm optimistic of our continued improvement in sales. Sales, like anything in the world, particularly more in the case of sales, you also depend on market trends and all those things. But our own capabilities, what we can do, that depends on us and that we continue to improve. And I think you're seeing the results. I see continued improvement in this area. Yeah.

Great results. And has the company thought about having an investor day later this year?

We have. I don't think we put a specific day. We were playing with a similar date as we had previously. a couple of years ago. I think it was November-ish timeframe. I think it would be a good time to, with the results clearly on the way to deliver the results that we promised back a few years ago, in terms of three-year plan, I think it would be very fitting to to present to the investors our next three-year plan. So probably stay tuned. We'll probably be looking at a November timeframe.

Next one. Now that you have delivered on your improved profitability, is there room for more improvement in margins beyond 22, meaning 23, 24?

The answer is absolutely yes. Again, now we get into the next three-year plan. But look, you know, we're always looking, you know, ahead. You can see competitors that also have significantly higher margins. As I mentioned to, I don't know if I mentioned these calls, but You know, I don't do anything in life thinking about being second or third or fourth. You know, I'm always looking at, you know, how do I become the first, the best? So I think we have a long way to go to reach the long-term potential of Atento, not only in margin per se, but also in margins.

We got no further questions here on the webcast. Sean, back to you to see if we have anybody on the line.

At this point, there are no further questions in the audio queue either, and I would like to turn the conference back over to Mr. Carlos Lopez-Aberia for any closing remarks.

Nothing further from me. Thank you all for being here. and taking the time to have these discussions. As always, Jose, Che and myself like your questions, occasionally your challenges. The part that I personally prefer are these conference calls. So please keep them coming and we'll try to answer them at the best of our ability. So thanks again and talk to you soon.

Thank you.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.