Good morning, and welcome to the Atento Second Quarter 2021 Results Conference Call. Today's call is being recorded. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask I would now like to turn the conference over to Mr. Shay Khour, Corporate Treasurer and Investor Relations Director for Atento.
Please go ahead.
Thank you. Welcome everyone to our Q2 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 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, follow the relevant securities regulators, and we invite 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 call are Carlos Lopez Abadia, Atento's Chief Executive Officer and Jose Azevedo, our CFO. Following their prepared remarks, we will move to a Q and A session.
As we have been doing in recent calls, we do our best to answer all questions received. We believe the Q and 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, who will do today's call from our office in Madrid. Carlos, go ahead.
Thank you, Shay, and good morning. Good afternoon, Dolly. Yes, I'm speaking to you from our Madrid office. I've been in Mexico, Madrid over the last few weeks. I'd 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. 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 50,700,000 of EBITDA, a 13.3% margin, more than doubling our EBITDA of last year. These results have allowed us to continue deleveraging, putting us already within the full year guidance of 2.5 To 3x net debt to EBITDA ratio. This is higher EBITDA in H1 and solid expectations for H2, Which as you know, due to the seasonality 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 high currency mix, U. S.
Dollars and euros. We're delivering around 25 percent of our revenue and 30 percent of our EBITDA, 15.8 percentage points more than last In high currency, this is thanks to continued growth of our U. S. 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 twenty twenty one, We expect to finish this year with a strong book of business leading into 2022. Despite the fact that we continue to be vigilant 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 and being fully on track to deliver our 3 year plan. Now while delivering the day to day, we continue to focus on our transformation. This quarter, we have added Enu's Chief Human Resources Officer Enu's CIO Enu's Chief of Information Security and Enu, ESG Director.
We are a people intensive business and the quality of our HR processes and talent management is key to our results. Further, as we change the company, we need to renew skills, more talent profiles and work culture. I think 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 this, Of particular importance is cybersecurity these days, both for our internal use and as a differentiator in our market offering.
We will continue to add talent to our technology, innovation and several areas. ESE has always been very important to Atento. 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 structured A formal ESG program under new leader, and we have elevated the visibility to the Board of Directors under new Compensation and Sustainability Committee. We will be presenting our ESG plan and commitments publicly in Q3.
As we approach the 3rd year of our 3 year plan, we will be focusing progressively more on our 3rd 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 2 new centers, 1 in Florida and the other one in Utah. Thus, giving us better time zone coverage.
Our strategy to focus on new sectors and global accounts continues to bring traction. We 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 3 year plan for 2022.
As I said to you through my first presentation, this management team will work hard to earn your trust. And I cannot think of a better way And consistently delivering on our commitments to you. Let me turn this over to Jose that has more details on our results. Jose?
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 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 Yes, this is the Q1 in many years in which FX plays in our playbook and the reported results Going to the numbers, here you can see our 2nd quarter figures.
All regions performed very well year over year with revenue growing almost 18% busted by Both Telefonica and Multisector, that expanded double digits each. Telefonica Revenue growth was positively impacted by the full impact of the Program 1 in Brazil in Q1 And higher volume in Americas, Medi, Peru and Colombia. The 14% revenue growth From multi sector was mainly driven by Americas and India. In Americas, the highlight was the 33 In EMEA, the 15% revenue growth was followed by utilities, transportation and government services. In terms of productivity, we delivered very strong EBITDA growth in all regions, reflecting the success The efficiency initiatives implemented during 2020 and in 2021.
The The $51,000,000 EBITDA we delivered in Q2 puts us on track to deliver the $200,000,000 in full year. EBITDA margin in Brazil increased to 15.5% from 12% in Q1, Validating the strong positionality that we recorded in the 1st quarters as we explained during 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 slowing margins closer to 20%. Moving to the next slide, And John, 'twenty one is the best first half for a year since the 3 Horizon line was implemented in 2019. EBITDA margin increases when compared to the one we 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 of Atento.
But the key message I want to discuss in this slide Is that the 11.9 percent EBITDA margin we delivered in the first half of the year, Combined with the strong sales 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 a safety board, 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 currency already represents 25% Also, while the contribution to EBITDA is even higher at 30% of total. Now let's stop taking a look at our cash flow. If we recall, we discussed during the earnings of Q2 and Q3 last year that some governments operate companies the opportunity to postpone the collection of certain taxes During the pandemic, we were also able to negotiate extensions with some suppliers. As those payments were due April 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 debts refi process Let the free cash flow in Asia 1 to be negative 37,000,000 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 and CapEx related to the growth, our free cash flow The ongoing operations in Page 1 was positive for almost $7,000,000 as you can see in this chart.
In any case, given the positive seasonality, we have in the second half of the year, we expect a 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 have budgeted. As most of the payments are scheduled for H2, we reiterate our guidance of CapEx payments to be between 4% and 4.5 percent of revenues for the entire year. Finally, hence an important topic, Our capital spread.
We ended the quarter with our net debt at $561,000,000 and a cash position of 100 and $54,000,000 Given our EBITDA 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 $10,000,000 line in Brazil, Reducing our drawn lines to €50,000,000 out of the €80,000,000 we have available. While the full repayments of the revolvers will depend on how the pandemic evolves, we expect it to reduce interest paid on the revolvers by 1,000,000 In 2021 versus 2020, our leverage ended the quarter already within the full year guidance range of This is a direct result of constant improvement in EBITDA Yes, we have delivery 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 rerating process. And we are confident in our ability to deliver the long term targets of net leverage between 2 times to 2.5 times at the end of 2022.
This concludes my prepared remarks. Thank you for your interest and support. Let's move
Thank you. We will now begin the question and answer 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 does that how do the margins there compare to existing business With that
client? We compared with that client, they're better. Compared with the rest of the business,
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 that you probably know is growing and is very Synergistic is very related to our emphasis with global companies. Typically these are the ones that Tintu to buy more multi lingual capabilities in one location. So we're expanding the place in which we want to provide those services from.
Q1 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, etcetera. That's the nature of the Manpower partnerships.
So it's a way to get to markets faster as opposed to building it yourself?
That's correct. On the delivery side, The product capability and sales at Cebesha 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 I guess, this might be for Jose.
Yes. Jose will probably have the number. Let me tell you upfront, I know this was a question in Q1. 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 maybe other 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. Will you I mean, it's hard to complain, but are you do you have any plans to
We have. We will.
Okay. At this time, it appears we have no further questions in the audio queue, and I would like to turn it over to Mr. Sheikor for any questions over the webcast.
Thanks, Sean. So first question, great quarter. In the Q1, you were already pleased with your results. How do you feel about 2nd quarter results and how they did against our internal plans?
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 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 We feel that this puts us in a very good position to deliver in the full year results.
And even more importantly, we are always looking Not just at the past quarter, but we're looking forward, right? So we are keenly focused on delivering the 3rd 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 there. 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 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 Account management, the integration of service innovation and sales, etcetera.
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 electron microscope to see it. But there is 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 [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] And the revenue actually kicking in and hitting your income statement? [SPEAKER
UNIDENTIFIED COMPANY
REPRESENTATIVE:] 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 1 quarter impacting the next quarter And depending on the size, if it's a large deal, ramp up may be more complex, it 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 Americas and EMEA, not so much in Brazil. Can [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Can you provide a little color? Did the Telefonica growth in Brazil constrain Multisector growth? [SPEAKER
UNIDENTIFIED COMPANY
REPRESENTATIVE:] Well, Clearly, we've been very busy with the growth in Telefonica in Brazil. And as I mentioned, it's Not only a good volumes and growth are always good with an important customer, such as Telefonica is always Good as well. And as I mentioned to you, is the kind of business we want to grow into. We have improved margins 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 if even if you look at the comparative, we're still growing a multi sector faster than the market, which I always point out, 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 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 Jose speak about the higher margin on the free cash flow?
Surely, he has to take himself out of mute this time.
Yes. I can. Basically, what's happening in the free cash flow is we improved the EBITDA and as We promise we work very well in terms of revenues, but not only. We're 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 have we are very shy in terms of CapEx. We need some to invest, yes. 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 of this year plus the CapEx for growth, we can get between $25,000,000 to $30,000,000 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 Positive free cash flow inclusive in the 1st semester. If you take out the one offs, the free cash flow will be a positive one.
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Okay.
Next, congratulations on the results. Do you have any news regarding the renovation of the MSA agreement maturing in 'twenty one?
Not a specific news. I think I mentioned that we are discussing with Telefonica an extension All that agreement, as I always mentioned from day 1 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
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. As you know, this industry Clients are a bit shy about using the 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 Silver Products, Media and Entertainment, a very large, Very successful media company where we provide customer Food delivery, I can think of a couple of very well known names where we support them. Very premier social media platform where we support them in the digital advertising sales.
Gaming, we support the game and 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, By and large, growth sectors, companies that are expanding and growing very actively worldwide and also the range of services It's not typically your traditional old services. They tend to have more value add and more complex. 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 Ostrovsky with Insight Investments. Please go ahead.
Yes. Thank you for taking my question. Can you share with us now any details of your ESG program, which you That 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. We 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 We provide a lot of support for diversity, a lot of support for disadvantaged People, we do a lot in the environment, etcetera, that we probably have not Communicated very well in the past. And more importantly, we have not put that in 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 At the Demuneration and Sustainability Committee, we are including a very significant component in future agendas of the EAC program. And so not only we'll 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.
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 $17,000,000 and what sort of cash payback you're expecting on those expenses?
I think this one is for you, Jose or Shay. I'll happily pass it on to you.
Okay. I'll take that one. So the $17,000,000 is around $15,000,000 is working capital And $2,000,000 slightly above $2,000,000 is the CapEx. Important to say that we have already deployed Or is under execution around $11,000,000 in growth CapEx and only $2,000,000 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
Yes, which is 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 that To tell you that I feel we're doing very well.
We've taken full advantage of the work at home, the attend to home platform that We have deployed or we have deployed some unique capabilities, like example, maybe 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 go after much broader 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 nearshore, Central America, Latin America, Mexico that also are very helpful for us in 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 what 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 as some of the costs related to COVID still 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 offs, no one offs and you can see that sometimes that tends to destroy the message. So that's not to say that we haven't disclosed when we think there is a very significant one offs 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 significant cost is still in from COVID. I think, as I don't know, on the top of your head, we're talking about it in the order of €20,000,000 And I'm sure there are other one offs that we could have 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 ANVARMYST, everything in one offs and so on. That's why we've chosen to do it that way.
In 2022 and beyond, how should one think about free cash flow? What level of operating cash flow do you expect? 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, Sai.
This is for Jose actually.
No, I can give you the color. As I mentioned before, the free cash flow that we We expect that this between $10,000,000 $15,000,000 in 2022 because we have to invest. We talk a lot about 4% and 4.5% CapEx for revenue, but because you have prepared to talk about numbers, yes, because otherwise we don't know where the CapEx goes. But when we look for this year, we have around we will spend around $70,000,000 For that $30,000,000 is maintenance. Demand maintenance ongoing basis will be almost between €30,000,000 €35,000,000 Yes, that is the number that we have.
We invest around $20,000,000 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 results. I'll give you an example, Sales and Finance, we move for South Florida.
In a 3 year basis, We expect us to have around USD 50,000,000 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 $5,000,000 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 We have around $15,000,000 for growth, yes. For growth, I think It will change, it depends a lot on the sales our sales guys. But if they still say it has 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.
Our target is around for next year €80,000,000 €85,000,000 in CapEx. Yes. To say that, we can get around Between $10,000,000 $15,000,000 in a positive free cash flow, even though we invest $80,000,000 to $85,000,000
Yes. And I'll just compliment on Suzanne. That brings back to these questions that we had on EBITDA getting to 13%. When our EBITDA goes above 15%, 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 what the progress we've made in sales. What we see in the pipeline This 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've seen the results. I see
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 A couple of years ago, I think it's November ish timeframe. I think it would be a good time to With the results are clearly on the way to deliver the results that we promised back a few years ago In terms of 3 year plan, I think it will be very fitting to present to the investors our next 3 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 2022, meaning 2023, 2024?
The answer is absolutely yes. Again, now we get into the next 3 year plan. But Look, we're always looking ahead. You can see competitors that had Also have significantly higher margins. As I mentioned to I don't know if I mentioned in these calls, but I don't do anything in life thinking about being 2nd or 3rd or 4th, I'm always looking at how do I become the first, the best.
So I think we have a long way to go to reach the long term potential
We got no further questions here on the webcast. Sean, back to you to see if we
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 Abadia for any closing remarks.
Nothing further from me. Thank you all For being here and taking the time to have these discussions. As always, I just say myself Like your questions, occasionally your challenges, the part that I personally So please keep them coming, and we'll try to answer them
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.