Atento S.A.
Q3 2020 Earnings Call Transcript

Published: 13 Nov 2020

[Operator:]

Good day, ladies and gentlemen, and welcome to Atento’s Third Quarter 2020 Results Conference Call. My name is Beatrice and I’ll be your operator. As a reminder, today’s call is being recorded. Now, I’d like to turn this call over to Mr. Shay Chor, Investor Relations. Please go ahead, sir.

[Carlos López-Abadía:]

Good morning to all of you, and thank you for joining us today. In our Q2 call, we communicated that we expected the recovery of the business in Q3 and, in general, for the rest of the year. Q3 results reflect such recovery with sequential and most importantly, year-on-year growth and profitability improvements. Also, we’re happy to confirm that we continue to project the extension of the business improvements through Q4. Although we have experienced a significantly adverse FX rate movement during the last few months, we expect to absorb it, along with the impacts of the pandemic and deliver in 2020 at or better EBITDA levels than last year in current dollar terms.

[José Azevedo:]

Thank you, Carlos. Please turn to the next slide. During the quarter, we continued to make a significant headway in terms of profitable revenue growth, as Carlos noted and nearly 1% increase in Multisector revenues for like a 2% increase in consolidated revenues, which is encouraging as we were able to resume to following a difficult crisis environment. Sequentially, our revenue grew 10.5%. The main sources of growth were Multisector Brazil and the U.S. I should also note that Telefónica revenue grew nearly 17% sequentially. A greater mix of Multisector revenues and next-generation services drove a nearly 14% increase in EBITDA, while our margin expanded 100 basis points to 12.7%. On a sequentially basis, our EBITDA doubled. Our growth in stability also improving on higher efficiency levels that we have been achieving through the operational improvements under our Three Horizon Plan. I will expand on this in a moment. At the end of the quarter, Multisector sales have grown to nearly 78% of Brazil’s revenue. This growth was driven by higher demand for next-generation services. which come mostly from more digital clients in this market. On Telefónica, we continue to see the effects of the programs that we returned in Q4 2019. Although year-over-year, Telefónica revenue decreased, it increased 28% sequentially. More important, by improving the profitability of our revenue mix, we were able to increase EBITDA by a strong 15% with margin expanding by 260 basis points to 16.2%.

[Operator:]

Our first question comes from Vitor Tomita, Goldman Sachs.

[Vitor Tomita:]

Good morning, all. Two questions from our side. And thanks for the time. We – the first question is given that the 3% CapEx to sales guidance for 2020 is below historical levels, could you give us some color on the markets recurring level for CapEx in 2021 and ahead? And second question would be, if you could give us some more color on the very strong margin improvement in Q3 in EMEA, if any of that is related to seasonal or are one-off factors? And if we should expect that 12% margin leverage is sustainable? Thank you.

[Carlos López-Abadía:]

Thank you, Victor. So let me give you a little bit of the philosophy on the CapEx, and I’m going to ask José to give you more specifics on it. And actually Shay is also here, he also – in addition to his duties, in IR, he also manages specifically our CapEx. But let me make a quick comment on that. And let me address the margin improvement as well. So on the CapEx front, I think my philosophy is the same as in other parts of the cost equation, which is you have to do the things that are right and get into results through choking CapEx, you will end up paying the price later on. I think our philosophy is to build the business for the long term. So we have to make – we know we have to make and we do make the investments that we need to do for the long term. So we’re not trying to get through our artificially choking costs to resource.

[José Azevedo:]

Yes. CapEx, I will let Shay answer and then I answer – I complete the second question. Shay, please go ahead with CapEx.

[Shay Chor:]

Yes. Sorry. So – sorry about that. So Vitor, if you look into the three-year plan that we published in November last year in our Investor Day, and we have this in dossiers last – Carlos, sorry, last chart in his presentation. We are targeting CapEx will be between 3.5% to 4.5% on a recurring basis for the next couple of years. So as Carlos mentioned, 2020, very specific. We put everything that was not essential when they freeze in Q2. But we expect going forward for next year is that to be between 3.5% to 4.5% of revenues. That’s pretty much aligned with the industry standards, so you should not expect us to be any different from that. And then just before José go into EMEA, you should expect it to be between 11% and 12%. I’ll let José talk about any non-recurrence. But EMEA should be steady state between 11% to 12%. EMEA is slightly more volatile than other regions because the dependence of Telefónica is still higher. It’s moving fast in more and more into Multisector that’s because of designers, specifically now that EMEA is still more dependent on Telefónica. Telefónica is more volatile than others by design. But you should expect our recurring basis to be between 11% to 12% margin in EMEA.

[José Azevedo:]

Perfect. About the one-offs, it’s very important to mention that in terms of revenues this year, we have an impact. We expect it to have about 5% in terms of impact in revenue. What we have done was we started some programs to do a rightsizing and the zero-based budgeting that we want to start for 2021. We started a bit earlier in order that we can cover that. But even that, we have some extra costs coming from COVID that we have inside our results. At the end, and to give you an idea, is from the $80 million that we have in terms of rightsizing, we have $60 million in ongoing basis. It means we don’t give any disclosure about the one-offs because that was one thing that we agreed. If you can do some actions to cover the gaps that we have coming from the pandemic, we will try to cover. And that is exactly what we’re doing. But ongoing basis, $60 million for the next year.

[Carlos López-Abadía:]

In other words, just to make sure that we’re clear. We had a number of one-offs, but they were negative. And we’re not – we chose to include them in the numbers. So this is not – the number we quoted to you guys is not excluding one-offs. It’s everything including are negative to the results. So there were not any major

[Vitor Tomita:]

Very clear. Thank you very much.

[Operator:]

Our next question comes from Vincent Colicchio, Barrington.

[Vincent Colicchio:]

Yes. Carlos, could you give us some more color on what’s driving the Multisector strength in the U.S. nearshore market? Is it one large contract? Or is it multiple clients?

[Carlos López-Abadía:]

Sure, Vincent. The – it’s a multiplicity of clients. And there was, in Q2, one significant win that we have. And we did have a spike also in volume in the U.S. because of the pandemic. Given the how much we’re focusing on a different type of sector. Within more digital companies more the digital economy. That was probably pandemic hit, a number of those companies, a number of those contracts increase naturally in volume. So working on that as well. But the portfolio, I expected, maybe we had a little bit of a peak volume-wise, but the vast majority comes from new contracts that we continue to win at pace in the U.S. Did I answer your question, Vincent?

[Vincent Colicchio:]

Yes. Thank you. And then the strong sequential growth with Telefónica and next-generation services, if I heard correctly, the success is tied to new capabilities. First of all, is that correct? And if that is correct, could you give us more color on what those new capabilities are?

[Carlos López-Abadía:]

It’s a mix. It’s not that I want to give the other a wrong impression. Business with Telefónica is very, very substantial. It’s very large. So it’s a mix. The improvement in – first of all, there is a fundamental improvement in volumes. We had a big zip during the pandemic for what we discussed – well, sorry, the pandemic continues. But in Q2, at the beginning of the pandemic, we had with a number of customers. And with regard to I’m particularly happy that we are moving the mix of business that we have with Telefónica also more towards the next-generation services. But it’s very nice business with Telefónica, it will take quite some time to make that mix predominantly. With Telefónica, we won some new contracts, particularly a significant one in Brazil, when we start competing with a completely different set of people. We’ve competed recently with, for example, with Accenture in some of these contracts. Just to give you an idea that they are very different in nature with what we’ve done traditionally. We still have a long way to go to be able to tell you that we are mostly in Accenture services, but we are making very good progress across the board. I mentioned the U.S. Telefónica, I’m very proud to say that we’re beginning to make progress with our most important customer as well.

[Vincent Colicchio:]

And then last question. We’re hearing from some of the U.S.-based cloud players that clients are getting increasingly comfortable with virtual delivery and may become a piece of their business over the longer term. How does it feel in Latin America on the ground? Do you see that happening?

[Carlos López-Abadía:]

That’s a bigger question, Vincent. That’s the million dollar question to tell. There’s no customers. First of all, there is a trend to openness, right? We see – and I think everybody asks to be dealing with the pandemic on an ongoing basis, right? Hopefully, all these vaccines would be in place and things will get better. But we expect to be operating in a pandemic condition. And therefore, the remote and some services from the will likely continue in a very similar way. We’re looking past that, what happens in 2022. That’s because everything passes, right? How much of the business will continue in the at-home model. We see a lot of benefits of having the at-home model at least for a significant proportion of the business. We see that advantages for us. We could consolidate the number of centers, for example. We could provide services in that model that – and we do provide services in that model that are more difficult to provide in the center model. There is some element of cost in the

[Shay Chor:]

Carlos, could you explain that again? Becuase it’s very bad – the audio.

[Carlos López-Abadía:]

Sorry. Hello?

[Vincent Colicchio:]

Yes. Go ahead. Try again.

[Carlos López-Abadía:]

I don’t know what part started not being clear. But there’s a lot of advantages to the at-home model for employees, the best for Atento and for our customers. Now can we – how much can we do, let’s say, 2022? We would like to see a good fraction of the business to move to the at-home model. 30% of the business will be a great – I think it’s early to see. We see openness in our major

[Vincent Colicchio:]

Nice quarter. Thanks very much for my questions.

[Operator:]

[Carlos López-Abadía:]

You still hear me?

[Shay Chor:]

No, we hear you, Carlos.

[Carlos López-Abadía:]

Okay.

[Operator:]

[Shay Chor:]

So while we wait for questions over the phone. Let me get some questions here from the webcast. We have two questions on the bond and to walk through what happened, what was the decision and what we expect for the next steps on refinancing the bond.

[Carlos López-Abadía:]

Let me – I mean not having heard the specific question. I assume that is along the lines what was the decision and where what the decision was. We had quite a bit of interest. In fact, José shared it, not a quite a long time talking with, I don’t know, I lost track how many investors. Having said that, we didn’t see that – I think we were very clear is that we would only do the refinance when and with the conditions that were satisfactory to all our stakeholders. We see the conditions at that point in time that were satisfactory to the – were satisfactory to us. And quite frankly, as discussed in this call, I’m not obviously to do things in terms that were not – we started to get. So not having that expect continue improvement of the business. Different window might be more interesting to all of us.

[Shay Chor:]

No, that’s it. I don’t have anything to add. I don’t know if José has anything to add. I think the decision was, as you mentioned, Carlos, I think the decision was basically wait for a better moment. It has to be aligned with all the interest of the stakeholders and what we believe is the right credit profile of the company.

[Operator:]

Yes, we have one more. Our next question comes from

[Unidentified Analyst:]

Hello and congratulations on the results. And thanks for taking my question. Yes, mine was related to the previous question. Just in terms of whether you see a window now in terms of issuance because we are seeing – we had total play in Mexico. There was also – there’s a Peruvian health care company that’s in the market that has a similar rating as Atento. So if you’re getting that feedback from the banks, that if you wanted to go now, perhaps you could, if you could comment on that. And then just along those lines, in case market remains closed and basically the yield is – the coupon is not commensurate with what you believe it should be, if you could comment a little bit in terms of the plan B asset sales, how to address, which I think for bondholders is the main concern, $500 million maturing in August of 2022. Thank you.

[Carlos López-Abadía:]

Yes. We do have a plan B as it will be imprudent not to have that. I think we still, to be honest, on planning. I’m not going to put the forecast of markets. I’ll let Shay – in particular, they feel that they have a view on when is the right timing for the market. I definitely don’t have an opinion. That’s not my area. We do have subsequent goals with the banks. In fact, I believe we have one on the matter of fact. And we keep on looking at what would be a good market and good window. From my perspective, my job is to make sure that we have good So I think from a company perspective, we’ll be in a robust better position to do so. But timing – but timing in the market is I don’t have a particular opinion in terms of when that window is likely to be. I trust myself potential likely windows market-wise.

[Shay Chor:]

Yes. And just – thanks, Carlos. And just to add, again, we are ready. There were a lot of interest in the road show that we did in September. So the idea is to continue monitoring the market for all alternatives. So plan A, plan B, we are in no way in any financial distress, right? So we have, at least until August of next year to refinance the debt. And still after August of next year, we’ll still have 1 year to do that. We don’t see now and we don’t expect to have any silver bullet. It’s a negotiation process after all. It is to treat fairly bondholders, shareholders all the time. So we’ll continue monitoring. If there is any good opportunity, we’ll take the chance. That’s the strategy going forward.

[Carlos López-Abadía:]

And guys, good profit of markets. The way I look at things, right now, we are still in a COVID crisis and some element of pessimism in all markets, particularly with Latin America. But my opinion, which is with that and $2, maybe you can buy of the capital. Next, things are going to get much better during next year. We told you, I communicated that we are planning for a COVID to be an issue all through of 2021. But we all know that there’s a number of vaccines that are coming or about to come to the market. It will take a while to distribute and vaccinate and so on so forth. We expect that to take some time. But the sense of loom versus the sense of optimism, my expectation is things will get – start improving in terms of optimism means starting at some point next year. I mean I’m not an economic forecaster so I honestly – I think things are going to get better in the next few months. Sorry, I didn’t answer your question in terms of the specific timing, but with the market since that is the right window. In the meantime, we continue to operate the company to deliver better on the results. I think that’s the right approach and right combination.

[Unidentified Analyst:]

Perfect. No, that makes perfect sense. Thank you very much.

[Shay Chor:]

So let me take questions here from the webcast. Typically, Q4 is the strongest from a free cash flow perspective. What should we expect for Q4? Any material changes, any nonrecurring debt we should effect given that you reported an accumulated $9 million free cash flow in the first 9 months of the year.

[Carlos López-Abadía:]

We’lI let José address this one. I know he’s been our cash flow champion in the company. José?

[José Azevedo:]

So honestly, what we have in terms of expectations in cash flow is to have – still have a positive cash flow at the end of the year. We still improve the operating cash flow in good way. Yes, we have – we closed already October, and we can see we are on the same track. And our expectation is exactly to have a positive free cash flow end of the year. That is our expectation in terms of cash.

[Shay Chor:]

Beatrice, any other questions from the phone?

[Operator:]

From the phone at the moment, not.

[Shay Chor:]

Okay. So let me take another one from the webcast. I see you have almost $200 million in cash position. What is essentially the minimum cash flow for you to operate? And when we should expect you working on revolvers? When we should expect you to return the revolvers as probably you have a negative carry now on those revolvers that you’re using.

[Carlos López-Abadía:]

Yes. I – when I came to the company, I was a bit uncomfortable and as it turned out, this was two years ago on the cash levels and how we manage things. I’m being much more comfortable right now in terms of levels and management of the cash flow that José and Shay are carrying out. So we think we are in a – we have a good level. The specifics over the next few months, we’ll have to see. But let just say I’m shy to be more specific about this, but I can tell from my perspective that I’ve been very comfortable with the management of the cash flow and the evolution of the cash flow under José. And at the moment, it’s just a question of what is more efficient rather than perhaps in Q2 where we were being more, let’s say, risk-averse basis – on the basis of the pandemic. So José, Shay, you may want to comment on what you think is the most efficient way to handle in the next few months.

[Shay Chor:]

Yes. Okay. Thank you, Carlos. So just to put numbers, we need approximately $70 million, 7-0, $75 million as minimum operating cash of this company. This is slightly less than our monthly payroll. And then we need an additional $75 million, $80 million in credit lines available. So the total liquidity is probably around two monthly payrolls. That said, we actually already repaid part of the revolvers in July. One line was very expensive in Brazil. And we are renegotiating some of the lines we have in Brazil for lower rates now that it seems that the liquidity has improved in the system. And we’ll play as we go. If we continue to generate free cash flow as we are above of what we originally expected for the beginning of the year, we may start releasing the revolvers in a way that will probably be in the year-end and in the first half of next year, probably closer to the minimum operating cash that we need and reduce the interest that we are paying this year. But as Carlos mentioned, we took a prudent approach. We thought it was better to spend a little more in interest expenses this year and make sure that – and ensure that the liquidity was proper to any need that we have throughout the crisis. I have another question here from the webcast. The $80 million savings that you planned in this year and already delivered around $65 million, how much do you expect to be carried for next year? And how much you believe is recurring on the business?

[Carlos López-Abadía:]

Yes, there’s nothing – 100% is a gradation, and I like a chart that José put together in terms of indicating some things are very structural, and some things are one-off and some things are in between. Rough estimate, 60 of the 80 are structural, meaning that they are relatively easily recurring. Nothing comes easy in business. You have to continue to work and making sure you maintain things properly. But $60 million of $80 million are probably recurring. We’ll have to work to Can you hear me? Am I still connected?

[Shay Chor:]

Yes, you are.

[Carlos López-Abadía:]

Okay. So the short answer is probably in the order of $60 million of the $80 million are probably recurring.

[Shay Chor:]

Okay. Carlos, can you describe if any preparation are made to a second wave of the pandemic?

[Carlos López-Abadía:]

Yes, for sure. As I mentioned, we are counting on the pandemic to continue into – well into 2021, right? So one thing I can tell you is, again, it’s very difficult to forecast how much worse or better things are going to get. One thing I can tell you, I feel like extremely confident that even in the difficult – even in very difficult scenarios, we’re much better prepared right now than we were in Q2. That’s probably true of the whole world. But it’s particularly true of us. We managed to go from zero to – at the moment, we have in the order of 80,000 employees working at home. We’ve deployed already the first version of the – our permanent platform to do work-at-home. So it’s not anymore just doing through the effort of our employees. We are testing and probably be deploying in the next couple of months the – a second version of the platform with more capabilities. We intend to make this the way we do business. As I mentioned, we expect this has a lot of value for customers, for Atento and also for employees. So we need for this to be the way we operate. So we are in a much better position to handle a second wave than we ever were at the beginning. So although I cannot – you can never say that it will have no impact on us because, again, these things are very difficult to predict, I can tell you with a much, much more solid position to deal with a deterioration of the pandemic. We are counting on the pandemic to continue well into 2021. Anything else, Shay?

[Shay Chor:]

We don’t have anything else here on the webcast.

[Carlos López-Abadía:]

Okay. In that case, we don’t have any more questions from the phone, we can probably close.

[Shay Chor:]

Beatrice, any other question over the phone?

[Operator:]

No, we don’t have any more questions from the phone.

[Carlos López-Abadía:]

Very good. In that case, let me thank everyone for joining us today, and wish everyone a great rest of the day and the week. And as the times are these days, stay safe. Thank you.

[Shay Chor:]

Thank you all.