Atento S.A. (ATTO) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to Atento's First Quarter 2021 Results Conference Call. Today's call is being recorded. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Mr. Shay Chor, Corporate Treasurer, Investor Relations Director for Atento. Please go ahead.
Shay Chor: Thank you, and welcome, everyone, to our first quarter 2021 earnings conference call. Here with us for today's call are Carlos Lopez-Abadia, Atento's CEO; and Jose Azevedo, 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.
Carlos Lopez-Abadia: Thank you, Shay. Good morning, ladies and gentlemen. We have started 2021 with very solid results and an acceleration of our transformation, which makes us optimistic for the rest of the year 2021 and confident of meeting or exceeding our three-year plan objectives. In Q1, we have been able to deliver significant growth on revenue, sales, EBITDA and cash flow. We've seen significant demand for our services in all the geographies where we operate, which has allowed us to deliver Q1 revenue ahead of plan with a growth of 8% year-on-year. We have also significantly improved our sales over the same quarter last year with a 50% growth. We have been able to increase EBITDA by 6.7% despite start-up costs due to growth, particularly in Brazil and U.S., and increased wages in Brazil. We expect the profitability to further increase in Q2 as the revenue from the telecom contracts catch up with the start-up costs. Very importantly, operating cash flow in Q1 has been the best since 2017 and almost $12 million higher than 2020. As many of you know, Q1 is our weakest EBITDA and cash flow quarter due to the seasonality of our business. This is why it is very important for our annual results that we have started with strong Q1 results. Along with the financial results, I would like to highlight some of the qualitative aspects of our results, which also reflect the progress in our business transformation. We're achieving growth in all the geographies and industry segments. Multisector is leading the growth with an 11% year-on-year, but our Telefonica account has also grown 2.2%. New generation services continue to be a significant portion of our sales, around 30%. As we have discussed in the past, in addition to extending our leadership position in Latin America, and particularly Brazil, we continue to emphasize the U.S. market and improve profitability in EMEA. As a consequence, we continue to grow at a fast pace in the U.S. with 52% growth, helping us reach the level of 25% of our revenue in hard currency. We believe that this industry will be significantly different in the next five years from what it has been in the last five. This is why we continue to prioritize innovation in everything that we do internally and externally as we have done with Atento Next, our start-up accelerator, which is running four programs in parallel right now, providing us with disruptive capabilities focused on improving the customer experience.
Jose Azevedo: Thank you, Carlos, and good day, everyone. I will start by presenting to you in more detail how we started the year, delivering healthy profitable performance. On Slide 9, you can see our first quarter figures. All the regions performed very well year-over-year, with revenue growing high single-digits, boosted by Multisector that expanded double-digits, almost 16% in both EMEA and Americas and nearly 6% in Brazil. Telefonica revenues resumed a growth of 2%, followed by Brazil and Spain. In terms of profitability, we delivered a very strong EBITDA growth in Americas and EMEA. EBITDA in EMEA more than doubled, with margin reaching 12.3%. EBITDA in Americas went up 25%, with margin of 11.1%. The improvements in both regions come from operational efficiencies, coupled with revenue growth, especially the expansion in the U.S. In Brazil, EBITDA went down 9.5%, mainly reflecting $1 million implementation costs related to the new client programs and higher personnel expenses coming from the minimum wage adjustments of 5.5% as of January 1, representing an impact of $6.6 million. We expect this increase to be largely passed on to prices as we adjust contracts to inflation throughout the year. If we exclude these impacts, EBITDA margin in Brazil will have been 17.1%, bringing consolidated EBITDA to the 12.6% level.
Operator: We will now begin the question-and-answer session. Our first question comes from Vincent Colicchio with Barrington. Please go ahead.
Vincent Colicchio: Yes, Carlos. I'm curious if you could give us some color around the significant improvement in the U.S. market. What were the drivers there? Was it sales? Was it changing up the offering?
Carlos Lopez-Abadia: Yes, all of the above. And it's nothing that hasn't happened in Q1. You may recall that from, I guess, my first time we spoke, I indicated that one of the priorities we're going to have was to emphasize the U.S. market. U.S. market has been traditionally very small for us. But we saw a significant opportunity, both in terms of growth, margin, and also very importantly, the fact that it's, so far, denominated. And over time, it will help us to balance to dampen our foreign exchange fluctuations. So it's the result of a continuous improvement. If you're thinking in terms of one-off, Q1 is not. And it's been every focus, first of all, on sales and growth in the market. To the – some of the refocus that we've done globally in terms of sectors and new services have played very well in the U.S. market. And we continue to improve also our sales motion in the U.S. So we expect to continue progressing in the U.S. That's part of the plan for and this is just quarter-after-quarter results on the U.S. Did I address your questions, Vincent?
Vincent Colicchio: Yes. Thank you. And curious about your wage inflation, do you think you'll be able to pass through most of that this year?
Carlos Lopez-Abadia: Yes. I'd like to comment on that. So particularly in terms of the impact we had in Q1 in terms of – so we improved significantly very much every number, as you heard, including EBITDA versus Q1 last year, et cetera. The percentage EBITDA – the profitability in EBITDA terms took a bit of hit for some of it, for good reasons. Because we have a number of – we've been very successful in the sales activity, and we had a number of contracts starting up. And we have costs ahead of our revenues, which we will see the positive impact in subsequent quarters. So that's a good cause. The other one is, as you are focusing on, rightly so, is on the wage inflation in Brazil. We expect to fully absorb that over the course of the year. So that's not – we don't see that as a problem in terms of delivering the plan and delivering the results we've committed to you guys. In terms of specifically how we do it and specific of pass-through, we keep on improving our pass-through capabilities. We've gotten over the last couple of years more and more systematic about passing through inflation in many countries, but Brazil being very important for us, of course, but in – across the board. So we keep on doing better.
Jose Azevedo: Only to accomplish, Carlos, important to say that the amount that we have impact this year represents two years, yes, that is very important to say because, mainly, we don't have any adjustments, and we have to adjust now. And another important thing is, historically, the inflation pass-through, we have around 70%. This year, we expected to target between 80% and 85% at least.
Carlos Lopez-Abadia: Yes. Those are two very good points, Jose. I neglected to mention particularly the first one, which is the impact this year was disproportionate compared to the past, but still, we would expect to fully absorb it in our operation.
Vincent Colicchio: And Jose, how meaningful can the second phase of the cost savings plan be compared to the first phase? I'm sorry if I missed that, if there was a number around that?
Jose Azevedo: The difference between the both is, in the first moment, the first wave, if we can say coming through this bidding was more simple to cut, if I can say. They are simple process that we have changed. I'll give you an example. We have implemented – for example, in finance, we have implemented a shared service center. We have reduced some quantity of people. We digitalized and we're still ongoing digitalize our processes. We paid less for systems like ERP and so on. This is this kind of thing. When we look for this wave now evolves all lines. We're speaking about revenues, for example, inflation pass-through increment is one of them. We have some efficiencies in terms of bulk, for example, shared services center in operations that we start now. The excellence centers, we start now to deploy worldwide. And we still have some opportunities in terms of fixed operational costs, yes? And we're speaking about sites that we have and the model, how we operate, for example, WAHA. WAHA, for us, at this moment, is more – we have parties emerge and show because we want to accomplish and attend all clients, yes, the demand that we have for our clients. And the – another point is WAHA has a new product. We have already worked on it, and Carlos have a big funds on that. It is to say WAHA has a product, yes? We have – create a model and we had – will allow us, for example, to close some sites in the future, yes? It's a more long-term, but that is our expectation. This is why we speak about efficiencies in profit – to get profitability in terms of the contracts. And that is the reason. It's a bit more long-term. It's not that we go today and cut and that's it. No. We need some time. We need to invest. We need to make some investments. For example, to close sites, we have to do it in order that we can have a better cost structure in the future.
Vincent Colicchio: Thank you for answering my questions.
Carlos Lopez-Abadia: You’re welcome.
Operator: I would like to turn the call over to Mr. Shay Chor for additional questions received via webcast.
Shay Chor: Thanks, Sarah. So we have a couple of questions here. First of the questions related to results versus the guidance for the year. So when you develop your projections for 2021 in the guidance, how is Q1 compared – the Q1 delivered compared to your internal expectations?
Carlos Lopez-Abadia: Yes. As I mentioned in my prepared remarks, we are ahead in most metrics in Q1. As I said, it's very important for us because the weakness that – the traditional weakness of the Q1 due to seasonality. So that allows us to feel very confident about the guidance that we gave you.
Shay Chor: Okay. Next one on hard currency. Carlos, you mentioned about the hard currency being 25% of revenues. Do you have a target for, going forward, how we should look into your hard currency business?
Carlos Lopez-Abadia: Well, this is – it's a very good question. As you very well know, there's a lot of advantages of being the market leader by a long shot in Latin America, but there's some other challenges that come with it. And one of them is that our investors tend to invest in U.S. dollars, look at us in U.S. dollars, and we make a lot of our revenue and income in other currencies. So it's a long-term strategy to dampen fluctuations and to balance, to have more of the hard currencies, the business that we have in Europe, EMEA and U.S. being critical pillars of that. Do we have a long-term objective? Not per se, but we would like to continuously increase that number. I think you will see we will be reporting to you on a regular basis the progress we're making in that – in the remark – sorry, in that regard. And I think you should expect this to steadily improve quarter after quarter and year after year.
Shay Chor: Okay. And a follow-up on the Q1 and seasonality. Can you help us understanding the seasonality? And what is usually the stronger quarter for you?
Carlos Lopez-Abadia: Sure. I think if you look at the number of years going back, you could see that, typically, Q1 is the worst and typically improves more or less steadily throughout the year. So seasonality has a number of effects. In our case, one of them – we mentioned in an earlier comment, which is typically wage inflation in different countries. The union agreements, government agreements that tend to impact our inflation, our costs early in the year, when these agreements come into effect. And over the year, then, as one of the questions addressed, we tend to pass through as much as that possible to the contracts that tend to have clauses – that inflation adjustment clauses, but that happens through the year. And Jose's remark about the percentage that we expect to pass through this year, in the order of 80% or 80%-plus, it's an important – a constant improvement for us. You can never pass 100%. That's a fact of life, but we can, and we will continue improving that percentage. There is also seasonality effects that had to do with a number of contracts. There's a number of campaigns and volumes that are associated with certain quarters, particularly the Christmas season in December or in the ramp-up to the Christmas season. November, December tend to have also higher volumes in a number of contracts. So those are two factors. There are others, but that probably you think in those terms. That gives you a little bit of a picture. And without the risk of repeating myself. If you look at the profile, it tends to be, again, there could be ups and down for different reasons, but tends to be a steady improvement quarter-over-quarter for the year. And as I said earlier, the fact that we've started very strongly this year is very important for us.
Shay Chor: Okay. I got a question here on the results in EMEA, very strong profitability. Can you elaborate? This seems a strong result compared to previous years. What we should expect as a normalized level of profitability in your EMEA business?
Carlos Lopez-Abadia: I'm not sure what you mean by normalized, but indeed, it's a significant improvement, even considering that last year was – not Q1, but later quarters of the year for EMEA were very difficult due to the pandemic. Particular big impact in Spain, you may recall, in the early phases of the pandemic. We – a little bit, as I said, about the U.S., right? This is nothing new. EMEA has been a very steady base for Atento. We see – or we sought to improve that. And one very important thing for us was improving the profitability of Spain. It continues to grow. Spain and EMEA, in general, continues to grow. But one of the things where we've been focusing on is improving also the profitability of the operation, which we are steadily still doing it quarter after quarter, year after year. Again, nothing particularly one-offish on the results. Of course, there will be fluctuations quarter after quarter. But in general, this is a trend that we've been, if you look at our numbers, we've been having over a number of quarters already, and we expect to continue.
Shay Chor: Okay. What makes you most excited about your business as you speak today? And what are your biggest challenge?
Carlos Lopez-Abadia: Well, I've been accused of being a pessimist. So being a pessimist, I'll tell you, first, the biggest challenge. The biggest challenge is the one that we all have is the pandemic. We started very strongly in the year, but I always look at unique circumstances as we have right now with caution, right? And we – I'm optimistic in terms of how the pandemic will evolve, and meaning that we expect to improve from here. But clearly, we have a significant impact in most of our major economies or the major markets where we operate. So the evolution of pandemic is a concern. There are reasons to believe that things are going to improve from here, but we are cautious. And we – I always believe or hopeful the rest of the portfolio works. So as I mentioned in my prepared remarks, we are much better positioned to manage this situation, as the result show. But nevertheless, we are attentive to how things evolve. And particularly, we do not – we don't get complacent. So we were very focused on making sure that we protect our employees, that we protect the continuity of the operation and that we protect the overall business of Atento and the investment of the shareholders. What makes me very optimistic? You can probably see it from my prepared remarks. Some of the challenges that we started tackling on a couple of years ago are beginning to yield to the continuous improvement. I'm very happy every time I can answer the question and say, "Look, that is not a one-off." We – that shows the steady progress quarter after quarter. I'm very happy with what we've been able to do commercially in the commercial front, not only in being able to grow our sales capability, but also the type of sales, that we have refocused the company in new sectors, new lines of business, new services that are higher margin than our traditional ones and have much more growth in the next two, three, five years. That makes me very, very excited. The fact that we put emphasis in our traditional markets, such as Brazil, we continue to improve our position there. But also, we – when we focus on very impactful markets, we touched on two of them, U.S. and EMEA, that we're doing there – we're doing well there. And particularly in the U.S., we're very, very happy with the increasing progress that we made there, which have not been, in the past, a big market for us, and you can see that we'll quickly become one. So all those things on the market side, on the sales side make me very, very excited. Also, on the operations side, Jose touched on that. Sometimes, it goes like this, we talk about cost and cost reduction, which is important. But cost reduction is not what is going to make you great in the long term. Efficiency improvement year after year after year, that will change, over time, our cost position in a sustainable way. And that's what we have been focusing on. And you're beginning to see, again, in some of these calls. When Jose talks about we had x number of cost savings, x percent of which will be recurring, you can read probably most of the time into that, that we've made changes to the way we do business that allow us to have a better cost structure. So that is very important. Again, we make steady progress. None of these things are easily done, particularly in the middle of a pandemic, where we had to make significant investments to protect our employees and the operation. But you can see this happening. So two things that are most exciting to me is the progress we've made in sales and markets and the progress we're making steadily on changing the way we operate to little by little, but steadily improve our cost structure for the long time. That was a long answer, but I feel very strongly about what we're doing. And I'm very optimistic about the future of Atento.
Shay Chor: I got a couple of questions here about contracts. I'll try to summarize and put them all together. So how will the – can you elaborate on your average contract tenure? How do you enforce inflation pass-through? Is inflation in contract? Or inflation is negotiated in the renewal of the contracts? Can you elaborate a little more about inflation in the contracts?
Carlos Lopez-Abadia: Sure. The average tenure of the contract tends to be around a three year mark. Sometimes – and you have to distinguish, there's a huge variation, right? The standard deviation is huge. We have contracts that have been in place for 10 years or longer, right? And some others that could be three to six months, rarely any shorter than that. But if you think two to three years, it's probably a good average that we use for planning. Because although after two or three years, in many cases, we continue to have the contract, things change and modifications are made and the type of service, the terms and so on, so forth. So if you think in terms of two or three years, it's not a bad average. In terms of inflation pass-through, first of all, there's no hard and fast rules, right? But if what we've been doing over the last few years is ensuring that every contract that we have, we – it has an inflation pass-through clause. In some cases, that's not possible, but we bake that into the pricing, so that we take into account the expected inflation. Just because you have it or because you don't have that clause in the contract, this make your life easier or more difficult, but not guaranteed. As anything in life, in many cases, you have a clause for inflation pass-through. And it happens automatically and things work the way they're supposed to. Not always the case. These events, and particularly in a situation that we live today, there's always exceptions. These last number of months was the pandemic. There are a lot of things that ought to happen automatically, maybe they don't happen, and that requires some element of discussion or negotiations. Nothing there is hard and fast, whether you have it in the contract or you don't. But you obviously prefer to have it on the contract. If not, we bake it into the pricing.
Shay Chor: Okay. Still on the contracts, do you have any substantial contract renewals in the near term? And can you elaborate on the negotiations with Telefonica on the MSA?
Carlos Lopez-Abadia: Very good. We always have – we have 1,000s of contracts, so there's always a slate of contracts that are important, that are being renewed in the year. This year is not particularly unique. We have some large contracts that have been renewed. We have full expectation that we will. The – you can never win – let me be clear, you can never win 100%. But our record of – in contract renewal is stellar. The same way that I talked about the – how happy I am about what – all the improvements that we've done on the sales front. I have to always recognize not only what our current team is doing, but past teams in Atento, but great relationships with our customers. The length of our – the tenure of a customer base is second to none, and the relationships are phenomenal. So we have a very good track record in terms of contract renewal. I forgot, I don't know if it was a two part question or maybe it was just one?
Shay Chor: No, we had a – we had another on the Telefonica MSA negotiations.
Carlos Lopez-Abadia: There's always discussions on MSA, like in any contract. I would give to you the same thing. When I say to my team or what I – and I said to Telefonica when I meet regarding the contract, the MSA is very important for us. No question about it. Having said that, more important than MSA is to make sure that we earn the business that we have with Telefonica the same way that we earn the business with any other customer. There is no contract in the world that can save you from a poor service, particularly in this industry, where volumes can change so much from one month to another, from one quarter to another. I'm happy to – I mentioned this last few quarters, and I'll repeat it today. I'm very happy with the relationship with Telefonica. The fact that we have increased our Telefonica accounts and our market share in that account speaks more than what I can say about the relationship. I do believe that the best customer satisfaction poll or test is repeated sales. Now that is particularly important in an industry as it is telecom. Telecom, that is, as a whole. There's no secret to this that, as a whole, tends to decrease the services that they buy from the industry, right? From – in this case, from companies like us. So even with that background, we continue to do not just well, but better with Telefonica, and I'm very happy to say that. So as important as the MSA is, it's more important to deliver good service, to have a satisfied customer and earn the business that you have with any customer every day of the week and every month of the year.
Shay Chor: All right. Next one here. Can you remind us on your three largest shareholders, if there is lock-up, when it expire? And how your conversations with them have been?
Carlos Lopez-Abadia: Probably, I'm going to have to ask you, Shay, you probably remember this better than me, which probably, in a way, answer the question is, it's not something that's upfront in my mind. As always, regarding shareholders, I have to ask you to ask them. I don't want to, I cannot, and I should not represent what their plans are, even if I happen to know them. And in this particular case, the only thing I can tell you is that I haven't had any substantive discussions that would lead me to believe that any one of my – our largest shareholders have any particular urgency to divest of the holdings. But having said that, I cannot know what the plans are, so I would have to refer you to them.
Shay Chor: Yes. And just to add, Carlos, they have a lock-up that was signed for 24 months. That was signed in June last year when they joined the company. So the lock-up is still valid for slightly over a year.
Carlos Lopez-Abadia: Yes.
Shay Chor: One last question I have here on the web is, recently, U.S. shareholders' approval to move out of Luxembourg, the corporate entity, any specific idea that you want to elaborate on this?
Carlos Lopez-Abadia: Not particularly. I think that – I mean, I don't think that has to be still approved by a number of regulatory authorities and the shareholder meeting. So although that is the intention of the company, it's not done just yet. Luxembourg doesn't have, in particular, advantages to attend to. I'm sure it served a purpose whenever that was set up that way. We're looking to be closer to where our businesses are and how we serve our customers and investors, but I cannot put it any simpler.
Shay Chor: Yes. That's it, Carlos. And I'll just complement on that. There's also some cost savings because we already have offices in Spain. So from processes as well, accounting, everything, makes it slightly cheaper to be in Spain. So it's part of our efficiencies program as well. I have no more questions here on the – oh, yes, I just got one more. Carlos, can you elaborate about the competitive environment, market share and where you're seeing the most upside to your business in terms of geographies?
Carlos Lopez-Abadia: Sure. This is a very competitive business, as you know. It's an industry where there is lots and lots of players in every geography, so extremely competitive business. Nothing that has changed particularly recently. We – probably, for us, the second part of your question, which is where do we see more upside. Clearly, we're very strong in many geographies. Brazil is the heart of the company. So we continue to be the leader and expand our leadership position in Brazil. That's very important for us. But in terms of growth, for us, we're relatively small in the U.S., we're growing very fast. It's a very attractive market per se. And we have a good and growing presence there. We get very good margins in the U.S. as well. So in terms of upside, I would say that's one of our – comes at the top of my mind as a market.
Shay Chor: Thanks, Carlos. We have no more questions on the webcast. Sarah, back to you.
Operator: Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Carlos Lopez-Abadia for any closing remarks.
Carlos Lopez-Abadia: Well, to thank all of you for your time, your attention and very good and probing questions. I really like the opportunity to address your concerns, try to do that in the prepared remarks, but not always do that. So I really appreciate the question. We'll talk soon.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
