Good morning, and welcome to the Atento Third Quarter 2022 Results Conference Call. Today's call is being recorded. All participants will be in 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. Hernan van Waveren, Investor Relations Director for Atento. Please go ahead.
Thank you, operator, and welcome everyone to our fiscal third quarter 2022 earnings call to discuss Atento's financial and operating results. Here with us for today's call are Carlos López-Abadía, Atento's Chief Executive Officer, and Sergio Passos, Chief Financial Officer. Following a review of Atento's financial and operating results, we will 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. 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.
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 be advised that unless noted otherwise, all growth rates are on a year-over-year and constant currency basis. I will now turn the call over to Carlos.
Thank you, Hernan. Good morning to all of you. Good afternoon. 2022 has proven to be a more difficult year than we expected initially. However, I'm happy to report that the measures that we've taken during the first half of the year are beginning to show results. We are focused on five key areas, continued to build our sales capabilities, accelerated operational efficiencies, improved our cost structure, advanced in facing inflation pass-through management, and significantly improved our cybersecurity. As a result, we have improved EBITDA margin sequentially by 3.3 percentage points, grown sales by 10.3%, initiating our expansion to the Philippines, and locked in the commitment of our major shareholders. We expect these actions to continue to impact positively the business into Q4 with EBITDA margin between 14%-15%.
Despite this improvement, we have seen some of our customers to reduce some volumes in Q3 and Q4 due to uncertainties in their business environment, particularly in Brazil. This leads us to expect an overall EBITDA margin for the year in the range of 10.5%-11%. While we're just beginning to see the impact of our actions in the results of the second half of 2022, we do expect to have a significant ongoing effect and position us as well for a much stronger 2023, continuing the trend and the exit rate of the second half of 2022. Let me take you through the actions taken and the impact expected. As a key component of our transformation plan, expanding our sales capabilities is essential to grow into the right segments and geographies.
Among other things, we have started a new partner channel. We have started an inside sales program. We have improved account management with a particular focus on platinum accounts. As a result, we've seen an improvement of 10.3% growth year-on-year after a record Q2. We expect to finish Q4 with sales in excess of BRL 60 million total annual value, placing us in a much better position to start 2023. As you also know, we place significant emphasis on the continued improvement of our delivery capabilities. In addition to efficiencies of BRL 27 million achieved during 2022, which are focused on program-level improvements, we have launched a new phase of operational improvements with broader focus on areas such as attrition, absenteeism, or shrinkage. We call it Project Breakthrough.
We have tested the new processes in 10 centers, showing improvements between one to two percentage points of EBITDA margins. We expect the full rollout of this program to be completed before the end of Q2 next year. I want to emphasize that these improvements are not simply cost takeout. They represent genuine operational improvements resulting in better service to customers as well as higher margins. We have completed our consolidation of three regions with a reduction of more than 700 support roles and have improved our vendor management. As I mentioned in our Q2 call, we took a lot of the one-time costs of these measures in Q1 and Q2, while the bulk of the benefits are beginning to accrue now in Q3, Q4, and beyond.
We have also accelerated the improvement of our inflation pass-through, reaching close to 90% IPT, as we call it. All new contracts now have a standard IPT clauses, and we have improved our management of the negotiations of those legacy contracts that do not have these clauses yet. Finally, making virtual out of necessity. Our investments in cyber infrastructure have been noticed externally and publicly. You can look us up on sites such as SecurityScorecard, a security rating company where we figure significantly ahead of the competition. I'm also very happy to announce the launch of a new operation in the Philippines on the back of new demand of existing clients and Philippines, Philippine-specific new clients. We expect revenue in the first year to be between $20 million- $30 million.
Also this quarter, we announced the lock-up commitment of our major shareholders, representing more than 70% of the company ownership. Now, 2023 will be our last year of abnormally high financial expenses. We have a 2023 business plan that should sufficiently cover our financial obligations. In order to provide additional reassurance to customers and investors of our ample liquidity, we are evaluating a number of offers for financing alternatives from existing investors and also from international banks. The proceeds, in addition to provide additional liquidity if needed, could be used to improve our capital structure, including repaying or repurchasing part of our existing debt, taking advantage of current market prices. We expect to make an announcement on this over the next few weeks. I would not like to finish without sharing with you our progress in ESG.
This continues to be an ongoing priority for Atento. We measure our progress month- to- month and quarter- to- quarter. You can check us out with independent parties such as Sustainalytics that already positions Atento as a leader in the industry. Now let me turn this over to Sergio, who is going to add additional detail. Sergio, over to you.
Well, thank you, Carlos, and thank everyone for participating in our Q3 earnings call. I would like to start slightly different, talking about the change, not from Q3 to Q3 of last year, but just making a very quick comparison between Q2 and Q3. How is our sequential movement in terms of main KPIs? I would start with revenue. In Q2, if we compare Q2 to Q3, we basically had a 1.3 percentage point on constant currency increase on revenue, which is a good sign because we've been evaluating the evolution of a potential recession or downturns in some of the economies.
Having a positive 1.1% revenue base is a result of some of what we told you on Q2, that we had record sales there. Revenue had basically 1.3%, even with all of the recession or downturn on economies. That's a good sign on the revenue side. Looking at EBITDA, that's where we can, let's say, report a significant increase. We had the 7.8 percentage points of EBITDA that we reported last quarter. We talked a lot about accelerating a lot of actions that would hurt Q2 with some incremental costs like site shutdown, like severance costs, and some others. That would benefit our second half of the year.
What Q3 is bringing is that those actions are paying off. We are now very far from the 7.8, so we are increasing 3.3 percentage points of revenue to 11.1% EBITDA, even with all of what we are talking about, the economy and everything else. On the operating cash flow, we are keeping the same trend. We were at 8.1 positive in Q3 of this year. Looking at free cash flow, I have a chart that will explain better to you. We had all of the finance expenses and the bond and hedge payments that we had in August, which drove the free cash flow down for the quarter.
Looking more on the traditional way of looking, now looking at Q3 compared to Q3 2022 compared to what we had in Q3 2021. We see that again on a constant basis, we had a minus 0.4% reduction of the revenue, which again is a good sign because in Q2 we showed you that we had on a constant basis four percentage point down. Q2 of 2022 was 4% down compared to Q2 of 2021. In a way it is, it's showing us a slight reduction or a gradual reduction on the pace of volume reduction that we saw in Q2. Looking again at consolidated, as I mentioned, 11.1% is our EBITDA margin.
Compared to last year, we are down by 2.3 percentage points. We still have some one-off costs like severance costs. Most of that were in Q2, but we still have some in Q3. Not that much, but some of them. We had the main impact Q3 compared to last year was on Brazil, where we had a lot of lingering effects in terms of volume, as we mentioned. We had some volume reduction from clients that had a share of wallet with Atento very big and in a way, when they get back, a part of the volumes did not return. Also, the economic scenario, which is driving volumes down. Looking at more details in Brazil, volumes or revenue are down by 8%.
Out of that 6% in multi-sector. In that 6%, we do have part that relates to the cyber attack volumes related to the cyber that didn't return. Also some price reduction targets that we received throughout the last quarter. That was below our minimum profitability that we could do. In a way, we decided not to participate. On Telefónica, we had a 13.6% down in terms of revenue, mainly driven by the cost efficiency. Telefónica has a huge cost efficiency program that they implemented early in the year, and they continued throughout the entire year. This makes our revenue down. Two components. One is volume.
They are actually reducing volumes, and the other one is adjustment on prices that we did together with them to make sure that they are more competitive. In a way that 8% of revenue reduction partially moved to the EBITDA margin. We are four percentage points down in Brazil. We still have some severance because of that volume reduction there, but we managed to offset part of the volume downturn on the EBITDA margin, which we closed at that 10.8% Looking at Americas, the scenario in terms of volume is completely different. We had a 3.4% increase on the revenue base.
Multi-sector is almost in line with last year, the same quarter last year, which is a good sign because we even with all of the economic downturn that we could see throughout all of the countries in the Americas segment, we continue to have our pretty much in line. That's a good outcome in terms of revenue. Telefónica, we are higher as we recover some countries that took longer to react and to resume growth after COVID and 2021, we basically had that volume increase from Telefónica.
In those cases, we also had a positive impact of the Argentina hyperinflation, which again has a positive effect on the revenue, but a negative effect on the EBITDA as the margins in Argentina are low. That's one of the drivers for the -0.4 percentage points that we do have in Americas. In EMEA, we had a growth of 14% in multi-sector, almost 20%, driven by some contracts. We had contracts in the energy sector, we had contracts in the insurance sector that came in on the multi-sector. Also, in the case of Telefónica, we took over some volumes from other competitors in the beginning of the year, which is showing up here in Q3.
The 0.8 percentage points down in terms of EBITDA margin on EMEA is mainly as a result of a mix between onshore and offshore. We are slightly more onshore than offshore. The expectation is that in Q4, that situation would revert because we are growing now. We can see growth throughout the last weeks, more on the offshore than on the onshore. Looking at our cash flow, we basically, as I mentioned, a lot of the indirect costs and operational improvement that we did in Q2 paid off. We had $28 million in Q2. Now we have $38 million. It's a $10 million increase in terms of EBITDA for the quarter.
Taking out leases, we reached $25 million of cash EBITDA or U.S. GAAP EBITDA. We had a negative $5 million in changes in working capital. I mentioned in Q2 that we implemented an efficiency program in the billing, in the bill to pay process, which is going very, very well. The main issue for that - $5 million is that exactly in the closing of the quarter, we had the last wave of implementation of the new SAP basically Mexico, Colombia, Peru, and some of the southern countries. In a way that delayed a little bit our billing procedures, so delaying also collections. We expect that more to compensate in Q4.
Not only compensate that $ 5 million, but actually have a significantly positive change in working capital as a result for all of these actions. Combined with what we already discussed when we had the Q1 closing, that Q4 is always our best quarter in terms of collections. Some clients actually anticipate payments to December, so in a way, we expect a very positive Q4 in terms of free cash flow. CapEx, we continue the same level of control that we discussed in last quarter. Everything that relates to growth, security, cybersecurity, we are doing, but as we have availability in our sites, some investments are reduced because of that.
That's basically what drove our operating cash flow to the positive $80 million and the $46 million of negative finance expenses. Basically, in August, we have bond plus hedge. The bond was $20 million, hedge $22.5 million, and around $4 million that are other finance expenses that we usually have on our quarter that would make our free cash flow down by $38 million. For Q4, the good thing is that we don't have any payment of bond hedge, which would make that bar of $46 million pretty close to the $3 million. Better EBITDA expected for Q4 and a very positive change in working capital will show a Q4 free cash flow very, very positive. That - $38 million is basically what drove cash.
We, as we reported in the closing of Q2, had $103 million of cash. We are down to $66 million of cash this year. Again, as I mentioned, the expectation is that the positive free cash flow of Q4 will make us back to the range of $100 million, and that's our expectation to close the year. From the leverage standpoint, we are closing Q3 with all of the numbers as reported at 6.1x EBITDA. What I did here is just a simulation of what would be the leverage if we exclude the cyber effect of Q4 last year.
Remember that in the net leverage we used the last 12 months EBITDA, and the last 12 months basically is from Q4 of 2021 to Q3 of 2022. I just did a simulation adjusting for cyber in Q4 of 2021, which would be pretty much what we would have automatically when we close the year, because when we close the year, it will enter the new Q4 and Q4 of last year will go out of the last 12 months. That's a good simulation for what we expect to have in the year-end. On the debt payment schedule, what I would like to report is that we basically renewed all of our facilities.
The one that is shown there on 2022 was basically at closing of the quarter, but we already renewed, so we don't have any, let's say, repayment commitment for the last quarter. The other thing that I would like to point out is that inside the 2023, which is considered as short-term debt, is included our super senior facility with IDB, which is a $43 million drawn facility, which is a nearly renewable facility based on the covenants. We keep very close control of the covenant and we are okay in all of those covenants, so renewing would be a kind of an automatic action.
Another thing that is important to comment is that we are, of course, well aware of concerns about our financial obligations and increased finance costs. Based on our market forward rates, we expect that 2023 will be the last year of high financial expenses, as Carlos showed in his chart. What we did is first ensure that we recover the business. What we are showing is that we accelerate all of the cost efficiencies and make sure that EBITDA is back on track. We brought new customers, so new sales, particularly from currencies you saw EMEA. We have some new sales in U.S. and shortly, as Carlos also presented in the Philippines.
Another important comment is that we are continuously evaluating any source of finance, refinance, and any alternatives to enhance our capital structure, of course. We are very close to the maturities under the existing debt, and we are looking for other sources, including receivables finance that could, let's say, improve our liquidity scenario. The last thing that I would like to mention to you is of equity. We reported in Q2 a negative equity of $131 million. Now we are reporting $165 million at negative equity. Again, operating profit is positive. Even the hedge actually in the quarter had a slight positive impact.
The main thing that drove equity down was finance costs, as I mentioned, and mainly exchange rates variation, mainly on the euro change and some of the other currencies too. The closing of the quarter, we have $165. Important to mention that most of that relates to non-cash i mpact. We had the mark-to-market of the hedge, which is now at $170 million. We had all of the exchange variation that is, a non-cash impact on the equity. It's important for you to have that $165 is what we close. I think that's what I had from my end. I think we now should open to Q&A session. Hernan?
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. 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. At this time, we will pause momentarily to assemble our roster. I would now like to turn the call over to Mr. Hernan van Waveren for questions received via webcast.
Thank you, Carlos and Sergio. I have a question from our audience. What is the pricing environment in your key markets, and how competitive are you?
Well, we operate in a very competitive industry. Clearly price, cost is important to every customer. That's a general statement, but it changes from sector- to- sector and geography- to- geography. Our growth, the focus of our growth is in sectors where the value that we can create allows us to get better margins. We can call it less price sensitive. Everybody's price sensitive, but sectors that have the high growth and the value it can create can also allow us to get good margins. There are some legacy sectors that we don't have that are much more price sensitive and therefore much more competitive in price.
One of the things that we're doing to serve those customers, well, as well, is introducing an offering, for example, something we've done in Brazil this year. We call it Atento Lite, but we fundamentally have an offering that has a lower cost structure, allows us to be more competitive price-wise. Of course, there are some contracts, customers or segments where we feel we cannot make the margins that we want to make, that we choose to exit. We think that having those three components to the way we approach pricing and cost pressures is the best for us.
Thank you, Carlos. We have another question from our audience. Please help us understand how can you be reducing so significantly your cost and still expect to keep on growing?
Well, I think as I alluded in my remarks, and let me amplify here. There are certain types of costs that you have to simply cut costs. For example, there's G&A. You always have to try to be more efficient and make sure that costs do not creep in. Those may be more what people are thinking when thinking about cost cutting. We will continue to be vigilant and be more efficient in the way we handle the back office, the G&A, et cetera. But the big-ticket item where the bulk of the value is in terms of efficiencies is in the efficiencies in delivery, in our operation, like in the core operation where we deliver our services to the customer. I've mentioned from the beginning that the...
A big part of our strategy is to be more efficient in that dimension. Also mentioned that it will be a multi-year effort. These are not about doing the same things in the same way with just less people or less assets. This is about changing the way we do things to do them more efficiently. In that sense, it's a win-win-win. You can keep on doing that and not only you get more efficiencies and better costs, but also you provide better service to our customers. As an example, I think I mentioned as part of what we call now Phase II or Project Breakthrough, one of the areas of focus, for example, is attrition. Attrition is a good example.
If you reduce attrition, you reduce costs. You have to, you know, hire less, you have to train less. You reduce your costs and you're more efficient. Further, the customer also benefits because your agents, the employees that you have serving your customers, if they last longer with that customer and they have more experience and they provide a better service. It's a win-win. In doing that, although it's more difficult, it takes more time and it's a multi-year project, you can keep on doing that and of course grow.
Thank you, Carlos. We have another question from our audience. How does the 10.3% TCV increase reflect on the current and future revenue impact?
Perhaps I need to amplify. For us, it's very important, I mean, it's important, very important to distinguish sales from revenue. As you sell revenue, you have a ramp-up time, and then revenue starts accruing. For example, when I mentioned that we feel very positive about the start of 2023 because of the sales in Q4, for us it's very important the sales we have in Q4 and Q1 because those are the sales that start producing revenue earlier in the year and have an impact throughout the year. From that perspective, all the sales that we have in Q3, particularly Q4, are gonna have the biggest impact in terms of increase of revenue during the year, in this case, in 2023, the next year.
Thank you, Carlos. Operator, would you mind opening the questions, let's say, for our panel tonight?
Absolutely. Yes, sir. Our first question today comes from Declan Hanlon with Santander. Please go ahead.
Hi, and good morning, everyone. Thank you for the call. Couple of questions. First off, I guess while it is concerning that we are witnessing a second decrease in guidance, we kind of understand the backdrop and the macro issues associated with that. As we're, you know, 50% through the fourth quarter, I presume your now full year numbers are built on pretty good visibility. To that end, just doing the math here, I'm assuming that a fourth quarter margin of somewhere in the mid-13s percent is required to achieve that. That gets you to kind of where you're thinking about on the balance sheet and brings cash back up a little bit.
If you can comment a little bit more in terms of granularity on that, I'd appreciate it. The second question relates to what was mentioned by Carlos around liability management. While I understand you can't get into details on that, I'm just thinking broadly here. According to my calculations, you have minimal or basically no availability under your lines under the secured debt test at this point. Just hypothetically, how would you go about an LM initiative at this point? Those are my two questions. Thank you very much.
Sure. On the first question, I think the answer is yes. I'm gonna let Sergio give you the specifics on the math, but I think you're directionally correct, and I think you see that we. I think that's a three-part question. To the first question, do you have a visibility at this stage? I think the answer is yes. We have a month and a half to go, so I think we are pretty close to the numbers. And you can see that our expectation for EBITDA and the EBITDA growth in Q4 be in line and if anything, you know, conservative to the overall.
On the second part, liability management, how do you go about that? As I mentioned, we are looking at a number of proposals we have from institutional investors that are invested in the company as well as international banks. Part of an important component of the different proposals that we're looking at several of them, the structure it has behind them is a receivables pack. We think we have the capacity there to do what we need to do. Not every proposal is identical, but as I said, we're evaluating a number of them. As you correctly mentioned, I think we probably cannot get into a lot of detail while we are doing this. Sergio, on the EBITDA.
No, I think that, Declan, you are pretty right in your assumption. We consider that we're gonna be in the range of 13%-14%, but actually more to the 14%, which would be two quarters in a row of increase. We increased it 3.3% from Q2 to Q3, and we expect to have at least another three percentage point increase in the fourth quarter. To your point, I know it was not a specific question, but probably will come. That would support the increase in EBITDA plus working capital that we expect to have much better and no, it's not no, but very limited finance costs in the last quarter of the year will make our cash back to the range of $90-$100, which was the same one we were when we ended Q2.
Thank you very much.
Thank you.
Thank you.
Thank you. Operator, we have a question from our audience. What is the competitive advantage of going to the Philippines in this moment? What's the CapEx and working capital needed for this? How will this be funded?
Okay, let me answer the last first. This is a self-funding initiative project, whatever you want to call it. We had the opportunity when we entertained going to the Philippines at different points in the last few years, but one of the things we want to do it is in a very prudent way. This particular business scale, the one we're launching right now, is fundamentally self-funding and positive within the year. We, as I mentioned, this is not that we're opening a site and hoping that we'll get the business there. We have customers, both existing and new customers specific for this site. Will pay off within the year and, as I said, is done with a specific business that is going to go into the Philippines. The other part of the question, it was the, was it the competitive, can you read it again?
Sure.
I think it was the beginning of the question. What's the competitive advantage of going to the Philippines?
Of going to the Philippines.
Philippines is an important leg on the stool of competing in the U.S. We have the best infrastructure in the world, second to none on near shore. We've been very successful in selling that and serving customers using that. The Philippines is another capability that is very important in the U.S. market. Now, we're very small in the U.S. market, so could we have grown much more with just the near shore? For sure. This, as I mentioned, a number of customers, existing customers have been asking us and offering volumes for us in the Philippines if we serve them. You know, that's an incremental business for us. Also in terms of new customers, we've closed a number of customers recently, but also we have significant customers in the pipeline that will put us in a very favorable position to win their business, having that capacity.
Thank you. Our next question today comes from Vincent Colicchio with Barrington Research. Please go ahead.
Yes, Carlos, I'm curious, your high value sales, did that increase in the mix year- over- year? Is it increasing in the sales pipeline versus the prior quarter or the year- over- year period as well?
Yeah. Thanks, Vincent. Are you thinking in terms of high growth verticals, or are you thinking of anything in particular?
High value sales. You used to talk about high value sales, you know, automation, things of that nature. Business that's higher than average, in terms of margin.
That tends to be fairly stable. One of the things that we've seen in terms of sales, and I think part of that is putting additional focus on sales. We've seen that the margins and the quality, if you will, of even more traditional services have been moving up as well. As important as is in the high-value sales, because you know, leverages technology positions as well give us credentials with the customers, et cetera, et cetera. We've seen both the high-value and traditional sales improving in terms of margin.
Which I thought was the question, because I thought I've been asked the question by a number of investors recently in terms of high tech and high growth verticals with all the news in the press about layoffs in high technology, et cetera. To take the opportunity also to answer that, a decrease in terms of those high growth companies. Having said that, within the year, we've seen increases quarter-over-quarter. It's a positive trend throughout that. Last year, for example, we had this quarter around 35% in terms of these high growth verticals in terms of the percentage of sales.
This year we have 20%, but we've seen 12% in Q2, 20% in Q3, and we expect that, you know, already just with the sales that we have closed and we're closing a higher than in the 20s for Q4, which indicates that if there was a decrease year-on-year, it's clearly increasing quarter-to-quarter. The other thing I will point out, despite the fact, I mean, that you've seen a lot of the news these days on the layoffs and challenges in high tech companies, we did take the actions.
We saw the problem coming, not necessarily on just those sectors, but seeing the way that 2022 was shaping and potentially 2023, depending on the uncertainties that you see in the world. We took action early in Q1 and Q2 . We took the pain, we took the cost, and we're beginning to get the benefits. In that sense, we perhaps were ahead of the curve compared to those high-tech announcements. Did I answer your question, Vincent?
Yeah, that was helpful. Thanks. Sergio, one for you. If we assume no change to currency rates between now and year-end, how much would the currency headwind be to your nominal revenue in 2023 versus 2022?
Sorry. Can you please repeat? It kind of cut a little bit.
Yeah, yeah. Well, I'm looking for some help in terms of estimating the currency headwind to your nominal revenue in 2023 versus 2022. Any help there?
You mean the expectations of exchange rate?
Yeah. We do believe that our main business is in Brazil, and we believe that after the elections where we saw some upsides on the foreign exchange, that would actually, let's say, make 2023. As the new government comes in, inflation, again, is another topic that I believe is very important. In the case of Brazil, the central bank raised it very early, our interest rates, which as you are well aware, hit us a lot in the hedge because that is a direct impact to us. But on another side, it makes inflation much more under control. The government now expects that inflation for this year, compared to the 10.3% that we had last year, will be around 5%.
In that sense, we believe that foreign exchange should be better than it was actually in 2022. In a way, maybe foreign exchange can be kind of a tailwind, but a headwind for us, mainly in the Brazilian portion of the business. Looking at euros, it's hard, but it's hard to predict. Again, we had a headwind on euro in the last quarter, which is now more stable. We believe that foreign exchange should not be a huge impact. I mean a huge headwind for us for next year. I think that it could be actually a slight tailwind.
A conservative estimate would be no impact, year- over- year, I suppose.
Yes.
Okay. Do you have the contract value of sales growth in the quarter? Was nice to see the 10% I think it was. Do you have a number for the nine months compared to the prior year nine months?
I don't know if I have it here, but definitely we can get it to you.
Okay. Thank you, gentlemen.
Okay.
Thank you, operator. We have another question from our audience. What are the expectations of your cash and free cash flow for the end of the year?
This is for you, Sergio.
As I mentioned, Q4 is a very, very solid quarter for us. We expect first EBITDA to grow compared to the same pace that we had Q2 to Q3 from Q3 to Q4. That's one side of that. Working capital is significantly positive in our Q4. Remember that in Q1 I explained that we had some advances that we received in Q4, which hits negatively Q1 but it is positive in Q4 on top of the same control in terms of CapEx. Overall, we expect a free cash flow in Q4 to be in the range of $40 million.
Free cash flow and operating cash flow, because in a way, the difference on the finance, the interest, is very small compared to what we had, the $46 million this quarter. We believe that our free cash flow should be in the range of $40 million, and that would make our cash balance in this range between $90 million and $100 million.
Thank you. Our next question today comes from Beltrán Palazuelo with Delta. Please go ahead.
Hello, good morning, Carlos, Sergio, Hernan. Thank you for taking my question. I agree. First of all, just it's a little bit confusing. Maybe if I get the number. I think you alluded, Carlos, in your prepared remarks that you expect a strong fourth quarter in terms of margins. I think if I'm not wrong, between 14% and 15%. Then Sergio, more conservatively, said it was 13%-14%. The first question maybe is, what do you expect on margins for the more like-
You know, I noticed that myself and normally I say, well, I'm sure I screwed up because with numbers, I'm sure Sergio knows them better. I think I recall that to be on the slide. That's probably the one that you should use.
Yes. We are, Beltran, we are expecting the range of 14%-15%.
Okay. I don't know if he was trying to be more conservative or just as we put down. Anyway, so that's correct.
Okay, thank you very much. It's better to be conservative than to bid. With those margins and with the free cash flow generation as Sergio is commenting yearly, in the, let's say, net debt to EBITDA, the guidance is also conservative. Let's get to our questions, if I may.
It's okay.
In 2023, if you could give us, let's say, a little. I know it's difficult. You don't know the volumes from the actual clients. You do know the sales. Let's see, what do you know? What are you budgeting for next year in terms of, let's say, constant currency growth, and then a little grasp with these new contracts like the Philippines, suppose with better margins and, free cash flow? It's more or less, of course, everything can change, but.
Yeah, let me see what I can. For real, to be precise, you know, we have on Friday the board meeting to approve the budget. I don't want to comment on the specific budget because until we have that approved, there is no budget yet. Let me give you something directional. From a macro environment, I don't know, you probably have your own assumptions. We are not assuming that the world is gonna get less complicated in 2023 than 2022. In terms of the top line,
I personally think that Brazil probably is maybe a better market in 2023. We have behind an election that got a lot of people nervous about what's gonna happen. As you know, for business, sometimes it doesn't matter who wins the elections. Uncertainty is the enemy, right? I think that's behind us. As Sergio very well commented on, I think the Brazilian central bank has taken action earlier than others. Now, it cost us a fortune in terms of, you know, hedge costs that we did not anticipate. For the economy of Brazil, I think it's good. We expect to see and we're seeing already less inflation for next year than this year.
Hopefully that will also allow the government to decrease interest rates and overall a better business environment. We're not assuming for Brazil or the rest of the world other than, hey, there's a lot of uncertainty out there. Having said that, what do you do in this equation of uncertainty? We've taken a lot of pain this year to make sure that we have a good cost structure, a good. We accelerate efficiencies, and that's the best way you can prepare for uncertainty and potentially, you know, also a complicated year in the markets. If you couple that with, quite frankly, we've seen, you know, stronger sales.
Again, you know, we could, you know, I don't know how many points make a line, right? We're seeing good Q2 sales, Q3. Quite frankly, I think, we're seeing. It's always tricky with sales because whether you close a contract on January or December, it makes no difference in terms of the revenue for the year, but it makes a difference in terms of the numbers for Q4. We expect a very strong Q4 also on sales. If you couple, you know, the important sales for us for the year, which is at the beginning, right, Q4, Q1, and a better cost structure, we definitely expect better results for next year. I recognize that's directional, Beltrán Palazuelo, but probably that's the best I can do before we have a budget approved.
Okay. Thank you. Thank you, Carlos, for the clarity. Maybe the last question, if I may. I think, you- You mentioned in a slide that the last three of five financial costs or non-financial costs would be 2023. You mentioned
Yeah.
2024, your cost of the hedge is $25-$30 million. I think you do not mention that if things stay how they are, that your the maturity of the principal of the hedge also gets a one-off. Just to get that in place, is there still a possibility that on 2024, apart from the $25-$30 million cost, there might be a one-off as you put in the presentation of the second quarter? Page 16.
The positives, if you can take, you know, the, I mean, clearly the negative on the hedge is, we didn't expect such a rapid interest rate growth. That hit us 2022. We're assuming for 2023, even the forward rates, we're assuming it significantly. Beyond 2023, in 2024, 2025 and on, the biggest component of the cost of the hedge, which is the principal, is no more. Regardless of the CDI, regardless of the interest rate, our financial costs drop significantly from that perspective, right? Now, if on top of that interest rates decrease, so much the better. Regardless, the principal component of the hedge expires in 2023. We need to be prudent.
We need to be conservative and manage cash well in 2023, and things get better after that. Was I correct, Sergio?
Yeah, I think.
Thank you.
Exactly. The 2023, based on the current forward rates, is where we're gonna have the biggest impact. We are using forward rates, which again, looking at the scenario for Brazil and the inflationary that probably we're gonna see half of or something ranging half of last year. There may be a scenario where later this year, the interest rates go further down, so benefit us, 2024 onwards. We are not considering that.
Yeah.
We are basically using our forward rates.
We are, you know, it's always better to prepare for the worst. We assume that 2023 is gonna be a very high financial cost, but we know for a fact that 2024 that situation significantly improve regardless of the rates.
Thank you, Carlos. Just adding that, I totally understand, but I think you just mentioned that $24 between $25 and $ 30. When I see page 16 of the Q2 presentation, there is a one-off positive of $24. So if I do minus $17, minus $14, and I add $24, instead of minus $25 or $30 for 2024, it's much lower. So my question is there still an expectation that when the hedge matures, the principal, there's still a one-off positive in February 2024?
Yes, Beltrán Palazuelo. The thing is that. Well, we can take you through all of the details offline. Yes, we do. As foreign exchange changes a lot, remember that in Q3, foreign exchange was in the range of 5.5, and now we are in a different foreign exchange level. The benefit changes a lot. We can take, I think, offline the details, but yes, we do expect the benefit in 2024.
Yeah, I think this is an important point, and I think for anyone of you that clearly, you know, the offer. Let me extend the offer for anyone that is interested. Unfortunately, the hedge is something that has taken a big impact, a huge impact on our business and is relatively complex. It took me quite a while, and of course, most of you will take much less. But to understand what are the variables, and you put your own assumptions in terms of, you know, interest rates and foreign exchange rates. But Sergio has some very good analysis, scenario analysis and explanation. Of course.
By the way, both Sergio and I are here in Spain today and through the week, so I'm gonna be around in Spain, but happy to share that with you face-to-face. Let me extend the offer to anyone, which I think is important to understand these very impactful components. Anyone that might be interested, Hernan, let's make sure that if we need, we schedule a workshop or whatever and follow up.
Yeah. Sure. Absolutely. Thank you both. We have another question from our audience. What is Atento's comparative advantage, and how do you keep on being competitive in such an aggressive market?
Well, there's probably some common components and other things that are more specific market-to-market, at some level, even more specific, segment to segment. Let me address the big ones. I think across the board, one thing that is common in Atento is agility. I think you've seen the agility of the company, at least in the form of resiliency. We have a lot of challenges, and we come back out of them stronger. In 2020, we had COVID. It hit us particularly bad in Q2. We had zero employees working at home. We didn't have the technology infrastructure at the time.
Within a quarter, we had close to, if memory serves me right, close to 80% of the employees working from home. We recovered within, you know, a quarter and a half from that thing. Last year, we had a big impact that, you know, trailing into 2022, of a cyberattack. You know, here we are at essentially a 12 months mark, and we recover the EBITDA margin at essentially the level that we would have had without that event. We are at the top of the charts. Look us up.
I was particularly proud when I saw that we were ahead this, that, on cyber capabilities over everybody else. Quite frankly, these are independent sites that are doing analysis on their own. This is not somebody you hired to do it for you. They just do it. You can, I think there is. I don't know if there's a link, but, Hernan, we should provide link to these sites. I think that shows our ability to resiliency well. That translates into the way we work with customers. One of the things that we do is we're very agile in terms of meeting their needs, their evolving needs when things change, et cetera. That is probably across all Atento.
In terms of specific markets, let me touch on a couple of them. Brazil, very obvious, we have a very strong position of leadership in the market. We use that and to give the confidence to our clients. By the way, not only our existing clients, but about 1/3 of our sales in Brazil this year has been robust. Despite the fact that we are the market leader by a long shot, we continue to gain new customers in Brazil.
For example, in the U.S., which is the opposite end of the spectrum in terms of our level of penetration and if you want, of relevance in the market, a customer put it to me that something we use with other customers, we're the best-kept secret in the U.S. We have the largest, most capable nearshore platform bar none in the world. A government, in fact, a federal government client here in the U.S., recently congratulated us because you know, we are the only provider that can rigorously provide a 90% bilingual agents at the top of hat. Now we have the other leg of the stool, as I mentioned earlier, on the Philippines, that's even more so. Again, it changes market-t o- market, but I think the agility or resiliency, ability to adapt, grow and evolve with our customers is probably something that cuts across Atento.
Thank you, Carlos. Thank you all for attending today's presentation. This concludes our third quarter 2022 conference call. We look forward in answering any further questions you may have. I remind you that you can find all the information presented today in our website, investors.atento.com. Operator, you may now disconnect the calls.
Thank you. Thank you for attending today's presentation. You may now disconnect.