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Edited Transcript of SONDA.SN earnings conference call or presentation 23-Jul-19 4:00pm GMT

Q2 2019 Sonda SA Earnings Call

Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Sonda SA earnings conference call or presentation Tuesday, July 23, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Affonso Nina

Sonda S.A. - CEO of SONDA Group Brazil

* Christian Onetto

Sonda S.A. - VP of Transformation Services

* Patricio Garreton

Sonda S.A. - Head of IR

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Conference Call Participants

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* Marcelo Peev dos Santos

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Welcome to the Sonda Second Quarter of 2019 Earnings Release. My name is Jenny, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Mr. Patricio Garreton, Head of Investor Relations. Mr. Patricio Garreton, you may begin.

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Patricio Garreton, Sonda S.A. - Head of IR [2]

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Thank you very much, Jenny. Well, good afternoon, everyone. Thank you for joining us in the earnings call for the second quarter and first half of this year 2019. And as such, we are going to be discussing the main aspects of the trends of the quarter and the first 6 months of the year.

To get started, I would like to remind you that our corporate presentation is available in our website in the Investor Relations section.

In this occasion, similar to previous calls, we will be having special guests. In this occasion, it's accompanying us Christian Onetto, which is the Corporate VP, Vice President of Digital Transformation at Sonda; and Affonso Nina, which is Chief Executive officer of the Brazilian operation. They will be giving you some call-on details about the progress of the digital transformation initiatives in the case of Christian Onetto. And Affonso will be talking about new trends and progresses about the Brazilian operation across this year.

In summary, this first half of 2019 and the second quarter of this year was a good year -- good period in terms of results driven by better performance in most regions, especially if you compare to the previous year, in the case of Brazil. It's important to highlight the acceleration in terms of revenue that we -- and EBITDA that we have registered across the first 6 months of this year. In terms, Brazil results improving in all lines in terms of revenues, EBITDA, EBITDA margin, net income compared to both 6 months of previous year and second quarter of the previous year.

In terms of revenue, we have increased our revenues in 10.6% in the first half of this year, which is around growth in all regions in Chile, Brazil, especially in Brazil and OPLA.

In terms of EBITDA, the EBITDA grew 15.7% in -- compared to the same period of this -- of last year, while the EBITDA for the second quarter of 2019 did it in similar levels, posting 16% of growth regarding second quarter of last year.

In terms of EBITDA margin, we have reached an expansion of 50 basis points during the first half of this year. And in the comparison -- in the quarterly comparison, the EBITDA margin remains flat on a year-over-year basis.

Going directly to the main regions. In the case of Chile revenues, highlighted with the growth of 7.3% of growth in terms of revenues in reporting currency compared to the 2018 and -- during the first half of this year and the 9.1% in terms of the quarterly basis against 2 -- second quarter of 2018.

In the case of Brazil, during this year, the first 6 months, in reais terms, revenues increased 11%, while EBITDA more than duplicated compared to 2018. In terms of EBITDA margin, the Brazilian operation collected an EBITDA and a margin expansion of 330 basis points year-over-year. The second quarter of this year posted similar performance, accelerating in terms of revenues where they were higher by 20.6% compared to the second quarter last year. The EBITDA did it in similar way, growing 78% in a year-over-year comparison basis. And margins expanded 250 basis points compared to the second quarter last year.

In the case of Mexico, EBITDA and revenues, they both -- collected growth, and we are -- during this first half, we are going to talk or discuss further this in -- later in the presentation. But here there's -- we are still in a transition progress, improving and making some way the changes needed in order to unlock the opportunities that the Mexican market give us (inaudible).

In terms of -- in the case of OPLA in reporting currency, revenues increased 24% in the first half of this year and accelerated across the second quarter, posting 28% of growth compared to 2018 EBITDA remained almost flat in a year-over-year basis.

The net income total approximately $18.8 million in the first half of this year, posting important recovery compared to the last year. And here in the business close aspects, the commercial activity posted an important half, increasing 8.7% compared to 2018, where it stands out the performance of the Brazilian operation and the Chilean operation registered in this period, Brazil growing 40% in the first 6 months and Chile 10% in the same period.

And regarding -- I'm moving to Slide 3 regarding the results. We already mentioned the main trends and performance there. In that sense, revenues totaled $312 million in the second quarter, posting 16% of growth compared to 2018. EBITDA accelerated as well 16% of growth compared to last year, totaling almost $35 million in the quarter. While net income totaled $11 million compared to previous year that we recognized a loss on this period.

In constant currency, we also have similar -- or with these similar trends where revenues grew almost 14%, EBITDA almost 14% as well and net income growing more than 20% in a year-over-year basis.

In terms of margin, the EBITDA margin remained flat at a consolidated level in this quarter, but we would like to highlight the improvement of 270 basis points registered in Brazil.

If we move to Slide 4, the results for the first half of this year, revenues posted a 11% of growth totaling almost $600 million in the period; EBITDA almost totaled $65 million, which is on 16% of growth compared to the previous year, in similar trend with the quarterly performance. And net income, as I said before, totaled 18%, which is on a (inaudible) more than 800% of growth compared to the previous year.

EBITDA margin expanded 50 basis points as a consequence mainly in Brazil and Mexico. The core business improved 60 basis points within the first half of this year. The core business, you have to remember that it's not including the distribution business that we have in Chile, the retail business and the wholesale business.

If we move to Slide 5, there is a summary of the company's results -- our quarterly results where we are comparing the first quarter of this year with the second quarter of 2019. In all lines, you can see sequential improvements. This is -- this reflects or represents some way and a higher dynamism in all lines, sequential expansion in terms of EBITDA and net margins in line with the guidance that we have been giving you, and in similar terms, the trends that -- or the performance as we collect last year across the full year.

Highlighting -- again highlighting the profitability improvements and the higher dynamism in terms of revenues that has been boosting the EBITDA generation (inaudible).

In Slide 6 and 7, (inaudible) in terms of the revenues and EBITDA growth across the business operation. We're going to move quickly on this slide. Just to highlight the performance that had Brazil and also in terms of the revenue growth in the case of Brazil, higher revenues boosted by the conclusion of outsourcing contracts. In the case of OPLA, I would like to highlight the improvements and the better performance that we have been having collecting in Argentina, Costa Rica, Ecuador, Panama, Peru and Uruguay.

And in case of EBITDA, it highlights the performance for the EBITDA generation concluded by Brazil, which is proven or explained by higher revenues and better mix of contracts and operating improvements that the Brazilian operation has been delivering since 2018.

In the case of OPLA, there is a mixed performance, with better results coming from Argentina, Costa Rica, Panama and Uruguay, offset by the higher comparison base that we had approximately $1.5 million of an extraordinary effects that was [regular] asset in the second quarter last year and lower results in Colombia and Peru.

In terms of the first half performance highlight, similar aspects in terms of EBITDA generation or contribution to this quarter coming from Brazil and -- mainly from Brazil and the mixed trend in the case of OPLA.

If we move to Slide 8, the Chilean operation presented or collected growth in most business lines in terms of the first half of this year in Platforms and Applications totaling or posting growth in terms of revenue close to 7.3%. The EBITDA remained mainly flat. In the case of the quarterly comparison with the previous year, all lines increased within the quarter. In the sequential comparison, Platform, Applications posted important growth. IT services decreased 5%, totaling a revenue increase of within the sequential quarter of 5.9% in revenues and 10% in terms of EBITDA.

Regarding the commercial activity, business closed totaled close to $244 million, which represents an increase of 10% in a year-over-year basis. We are presenting an important pipeline of almost $500 million of opportunities. And the last part corresponds to the core business, which doesn't -- is not including the retail business and the wholesale business in Chile, which meets an EBITDA margin of 20.8% in the first half of this year.

In this case, if we move to Slide 9, in the case of the Brazilian operation, we'd like to highlight growth in almost all lines for any comparison that you can make. In the case of the first half of this year, revenues growing 11%, EBITDA almost duplicating the EBITDA generation in a year-over-year comparison. In the case of the quarterly comparison, all lines growing. In the case of revenues, growing faster than the accumulated figure posting on a consolidated revenue growth of almost 21% year-over-year, and an EBITDA growth of 78% compared to the 2018.

In a sequential basis, Platforms, IT Services posted some increase. In the case of consolidated revenues, they did it at 13% and EBITDA did it at 37% of growth compared to the first quarter of this year. The commercial activity post an improvement in performance. Here we can see that the second quarter business closed totaled almost BRL 580 million, which is -- sorry, Brazilian reais, which is 126% of growth year-over-year.

If we analyze the first half of this year in Brazilian reais terms, business closed totaled almost BRL 1.2 billion, which is almost 60% of growth in year-over-year, having as well on a very important pipeline of almost BRL 5 billion, which represents an increase of 9% compared to December -- the pipeline that we registered at the end of last year.

Here in Brazil highlight the margin expansion, during the first half of this year, which expanded 330 basis points compared to the 2018, in the case of the second quarter, is also expanded, an important period, to 150 basis points compared to second quarter of last year. And it also expanded 140 basis points over the first quarter of this year.

In Slide 10, we can -- you can realize the recovery process that the Brazilian operation has been undergoing across the year. In real terms, this year, we have been improving and growing in terms of revenues in a quarterly and year-over-year basis and also on a sequential basis. Similarly in terms of EBITDA, posting margin expansion in a consistently basis in the year-over-year sequential basis. We are very expectant about 2019, which we think that it's going to be better and probably better than the 2018. Affonso will be discussing this later with you guys.

In the case of Slide 11, the strategic plan that we have been discussing with you guys, the focus on the important terms of the revenue mix. And this slide highlights the performance of the business closed coming from the Group A, which almost contributed 67% in the first half of this year with such an important increase compared to the contribution of the Group A in business closed of 2018, and especially, the contribution of the Group A in terms of revenues during 2017.

This is important to keep in mind that this revenues -- the revenues coming from the Group A are coming from long-term contracts that are going to be recognized in a longer period of time. We're expecting that most of them would be recognized in -- from most of the year.

Going to Mexico, summarizing in a very quickly way. We don't have transition products. We have been -- made important changes in the management in this place in last year. As I said before, we are seeing our transition progress. We can say that the job -- the main job within the company is already done. We are expecting that the commercial activity could be recovering. In that sense, we are having a historical pipeline of new opportunities that do 200% compared to December of last year. This pipeline is more robust and is including important opportunities in terms of Smart City and transparent opportunities, all contracts that we can expect an important contributor in terms of revenues and margin recovery.

Saying that, we also -- and in spite of that, we are also seeing a tough economic and political environment that has in some way impacted the commercial activity. Some business or some opportunities that's been postponed from this first half of 2019 to the second half of this year. But in spite of that, we are seeing, as I said before, a more robust pipeline is more diversified and this should be a good thing, the operating or performance recovery of the Mexican operations in the upcoming periods.

In the case of OPLA, based on its strong growth in terms of revenue in accumulated view or a quarterly view growing 28% in the quarter and 24% in the first half of this year, posting growth -- important growth in all revenue lines across the year. EBITDA has been remained almost flat in the first half and second quarter comparison base. This is a mixed performance. Argentina and Costa Rica, Peru, Panama has been posting better, attractive and positive performance. In the opposite, Colombia and Ecuador have been having more than good performance. We are expecting that in the case of -- especially in the case of Colombia, we will be seeing recovery by the end of this year. That is coming along with a -- and a more dynamic commercial activity expected for the second half of this year.

In terms of business closed, we posted a 9% of growth this year totaling $604 million of opportunities, of contracts that's signed across this first half of this year. The main contribution is coming from Chile, with 10% of growth; and especially Brazil, which posted 40% of growth in a year-over-year comparison base in U.S. In terms of Brazilian reais, constant currency, the growth is higher, reaching 60%, 65% compared to the previous year. It is important to have in mind that there is also $237 million of -- in the backlog of contracts awarded, but those contracts are still pending to be signed. If we have considered those contracts in the growth calculation, the business growth would have been around 30% in year-over-year comparison.

Well, and at last, we have the business growth breakdown, and -- but I think that the most important here is the 2 figures that are at the bottom, they top 10 largest contracts that total almost $150 million, reaching in what is average they should be contributing a gross margin of 30% in the upcoming periods.

In dollar terms, this reflects the overall figure and meets with average margins higher than the past, but in line or aligned with the strategic plan that we are executing right now.

In dollar figures, the another contributions that this business closed should be having in terms of revenues. We are expecting that this business closed should be boosting the revenue generation. In that sense, $117 million will come from renewals. We have to discount the renewals that we have lost, the total $42 million of contribution in terms of revenue. But there is extra and other additional revenues that are coming to new business closed within the core business and contributing $315 million, and in the case of the distribution business, almost $140 million.

Saying that, the net revenue contribution in the upcoming periods should be $582 million coming from this. In terms of the pipeline and new opportunities, we have an average on pipeline of $3.5 billion, which increased almost 8% compared to the similar last year. In that figure, Brazil represented 44% of opportunities and new opportunities coming -- new opportunities and contracts coming from the transformation service lines, which is almost 1/3 of the consolidated pipeline.

Regarding the strategic planning in Slide 16. And before to pass to Christian Onetto and Affonso presentation, there is summary about our strategic plan, highlighting the recovery profitability and recovery in terms of the recognition that we are expecting for the coming years.

In next Slide 17, we're going to say that the plan is in progress. We are moving well based on a change [office] supporting the execution of

(inaudible).

And in Slide 18, we have disclosed a way that we are expecting to structure our operations in order improve and transform our customer business. We will be giving and we are giving special progress in the 2 service lines that are at the bottom, the operating and technological process management, digital operation and technological transformation. We are giving special focus, especially allocating investment in order to accelerate those service lines in the way that we are going to transform our customer business.

So in that, at the right, the focus on industries and the important conclusion that we are expecting, especially from the transport industry, which by now we have a pipeline of close to $700 million of new opportunities that should be a good thing and the growth on market recovery in the front-end years.

Now I will let Christian Onetto, who will be telling you more, giving you more color about the progress in the digital transformation initiatives. And then Affonso will be giving you some colors about the progress in the Brazilian operation.

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Christian Onetto, Sonda S.A. - VP of Transformation Services [3]

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Okay. Thank you very much, Patricio. Good morning, good afternoon to everybody. So I'm going to share with you very carefully our main highlights since our last earning call that fundamentally, I would say, it's summarized by the connecting dots that we are strengthening across our (inaudible) across the countries, generating the insights and the experience, especially the one that we have captured from Brazil in disruptive technologies, and for example, a country like Colombia in security.

So from our pipeline perspective, we have been -- we continue our growth. We see a good momentum, generating new opportunities, about $1 billion. That represents about 7% quarter-over-quarter just in opportunities around transformation. From our geographic drivers, we can say that Brazil and Chile are the main drivers in terms of pipeline growth and our project development; continuing with Colombia that is recovering, especially on the security and core business. And finally, we are working on a very, let's say, aggressive engagement plan with Mexico to increase our visibility and relevance in the market to create more opportunities than the one that we already have captured in the country.

From a customer perspective, we continue working with our customers in the center of all that we do, very focused, very engaged and with a lot of [obsess]. And we are making good progress also developing, maturing our pipeline, but also closing the projects across industries and across countries. Just for instance, we have a couple of examples. In the case of Chile, we are working -- we are currently working just close an important business around security and around cloud, working with a very important healthcare -- private healthcare institution. And the innovative thing about these opportunities that we've been working with the startup -- with the cyber security startup driving very innovative risk management solution for the institution. And also with that, we have been able to close the multi-cloud service working with our and are [asserting] our own Sonda cloud plus AWS cloud as a hybrid solution and working with our important partner around public cloud solution.

From a government standpoint, we are working in a very important project right now with the government of Colombia institution. It's very important one, because it's going to reinforce and it's going to, let's say, strengthen our SOC in the region, our Security Operation Center. And we are currently working on a project above $6 million just with Security Operation Center, services around identifying events in a very early stage. And this has strengthened a lot of our offer to all of our customers around Latin America.

We are also working, for example, with (inaudible) business skill in Brazil, working very, very innovative and disruptive solution, working with IoT and also hand-in-hand with a very important partner like SAP. We are developing a production and selling process optimization, working with those kind of IT solution in terms of transformation. Our RPA, Robotic Process Automation, has become also a very strategic line for transformation in Sonda. We have already -- we're working already currently above $30 million in pipeline across the region and it's becoming a very relevant line because we really want to develop an excellence practice across the region and we want to position from that Sonda as the main competitor in the markets -- in each one of the markets with RPA.

From a Smart City's perspective, we are also doing many initiatives. Right now we are now working with more than 6 main cities across the region in especially around Smart City, working with smart lighting and analytics in images and PDFs. And also, we are monitoring, for example, cars and on fleets around the cities for (inaudible).

Finally, we are also working with other verticals like mining and manufacturing using much recognition plus IoT plus artificial intelligence for productivity improvements across other use cases.

Finally, talking about the ecosystem. We are continuing working with a lot of focus strengthening, we are working in [big bets] with companies like SAS, especially across risk analytics and also with Microsoft or across cloud, looking for very, I think, big plan for our public cloud in Latin America. And we discussed especially around cyber security planning in Latin America. We are -- talk about startups, but this is a very important topic for us because we continue developing and identifying very successful and innovative and with very good potential market startups across the region in each one of the big countries. And we are continuing to making engagements and planning with them in order to strengthen our value-to-market offer in terms of transformation.

And finally, we are also -- we have also closed our partnership with CIS. CIS is one of the main global organizations around cyber security that also strengthen our cyber security offer to the market. They define a very complete framework that has been the base of our framework for the offer that we are offering to the customers. And they're also connected with different intelligence groups around the globe, so we can be able to access very important information and be aware in a very early stage of possible (inaudible) around the region in order to give value to our customers. So those will be our main highlights around transformation. Now I'll give to Affonso for the Brazil highlights.

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Affonso Nina, Sonda S.A. - CEO of SONDA Group Brazil [4]

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Okay. Thank you, Christian. Good afternoon, everybody. This is Affonso Nina speaking. I'd like to start by telling you how we are proceeding with Brazil. We started our road map of transformation in 2018 with a strong focus on the internal organization and operational adjustments, looking for higher productivity and cost reduction. And that has translated in some of the results that we have seen today, like for instance, the increase in our EBITDA by 103% in comparable currency in the first semester of this year versus the first semester of last year.

Then when we come to 2019, there is strong focuses on our commercial activity, leveraging the operational productivity that we were able to deliver. And that has translated into the numbers we saw today, like the increase in our sales in the first half of this year by 60% versus last year and I'm also talking about comparable currency here. We see the revenues also going up by 11% in the first half and our pipeline growing by 9% from December last year to June this year. So these are all results of this strong focus on their commercial activity.

And I also want to highlight the changing mix that comes from both the commercial activity and the productivity and cost optimization that we did last year. So that's why we see our mix of sales growing, the margin of contracts with over 20% gross margin from 40% to 65% -- 67%, which is one of our main goals, which is basically sell more at higher margins. And we do that by increasing our productivity internally, but also by delivering higher value to our customers and therefore being able to produce stronger margins. And that's very much in line, for instance, with all the things we're doing in digital transformation that Christian has just told you.

I want to highlight a few of the deals we had in the second quarter. One of them, we will be formally announcing to the market soon but it's our largest ever data center and full outsourcing, I should say, deal in the region. That includes mostly data center activities, but also mixed with other important services in our portfolio like systems sustainment, AMS, and also end user services, services that (inaudible) bundle it all together in one single contract with this manufacturing client. And that has become one of our largest full outsourcing data center contract ever in the region.

We also had very important contracts in the quarter with Banco do Nordeste, one of the public banks in Brazil. The government has taken on the banks in Brazil, which has been the longtime customer of ours. Also, with Petrobras, we had several new contracts with them. And we have -- we are growing by over 30%, this year our sales closures with Petrobras and its subsidiaries.

We are looking also forward -- for this quarter, we have a backlog of important contracts that have been already awarded to us. They are now in the final signature. [Phase] is one of them. Actually I'm glad to announce that was signed yesterday with (inaudible). It's a large contract in the analytics front that was a partnership with SAS. That's the largest analytics SAS contract with government in the region, which has to do with -- doing risk modeling for the bank that has just been signed. And we have some other important contracts to sign also in the next upcoming few weeks, over BRL 350 million in total of 3 main contracts in banking and also in telecom. So that's just to give you highlight of what is yet to come in already awarded contracts we had in the second quarter that are going to be signed now, we expect, in the third quarter.

Also, when we look forward for the second half, of course, Brazil is going through all the economic reforms. We expect them to produce a result in the Brazilian economy later this year. And for next year, we think we're very well positioned for that. We are very confident that our closures -- sales closures for this year will continue the momentum that we had in the first half and we will be with a significant growth year-over-year, basically leveraging a lot of difference things.

One of them is the digital transformation strategy that we have at the regional level. In Brazil, we have on top of the (inaudible) contract that I just mentioned to you. We have several other contracts or prospects in the pipeline in the analytics. France, RPA, robotic automation, France in IoT, Internet of Things, is a much safe, a lot of contracts and prospects in image processing with artificial intelligence. So we are really developing a lot of these new technologies and leveraging our strength in the region and vice versa. Also, we have growing -- we have been growing in data center. I also want to highlight AMS, the systems-sustaining business that is also growing on important basis.

And finally, transportation, which we are now leveraging the acquisition of M2M that we did in Brazil in January. It's one of the most important players in the transportation industry in Brazil, solutions for transportation industry. And we are leveraging that also now to grow our transportation in Brazil -- transportation business in Brazil. It's a very important pipeline already. So basically, I mean, this is the highlights for Brazil, a very strong year in terms of the commercial activity. Thank you. I'd like to pass it over to Patricio.

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Patricio Garreton, Sonda S.A. - Head of IR [5]

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Operator. We come to the Q&A session, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question from Marcelo Santos from JPMorgan.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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My question is regarding M2M. Is this acquisition already fully integrated. And have you been able to sell M2M services as a part of some bigger contract with the other areas of Sonda? Or are the sales of M2M mostly restricted to that particular company? I mean are you being able to bundle this together? This is the question.

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Affonso Nina, Sonda S.A. - CEO of SONDA Group Brazil [3]

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Okay. This is Affonso Nina, and I'm going to take that question. Thank you, Marcelo. Yes, we have already fully integrated the company, including now the branding. It's now M2M Sonda. That's the name we're going to the market, and that's the gradual transformation in the future. It's going to be Sonda Transportation or Sonda Transporters, but right now we have done that integration. And yes, we are leveraging M2M in several ways. One is that we are using M2M technology, bringing it here to Chile to our transportation business. So part of the strategic rationale of the acquisition was to take the technology developed by M2M and use in other countries, and we are doing that already.

And then in Brazil, yes, we are definitely taking the Sonda portfolio to the M2M business. So M2M is mostly a solution provider. They have software, they have system, they have a solution that we are now offering to the clients on a full service basis. That's what Sonda does in the transportation business, and that's what M2M did not do in Brazil. And now that's what we are offering to the market in Brazil, full outsourcing of transportation, operations using M2M and other M2M technology and also technology by Sonda and by other partners of ours.

On top of that, we are also being able to see already some cross-selling of other services that Sonda has into the M2M basis, like for instance, the image processing that I mentioned to you. We have a few clients of M2M buying. There is one contract that we expect to sign soon, where they will be buying this image process technology that we have at Sonda that M2M did not have, but now we're offering to the clients. So that's one example of that -- of what we're doing. We're in full speed mode with that integration leveraging M2M.

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Operator [4]

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(Operator Instructions) And we have no further questions at this time. I will hand it back to Mr. Patricio Garreton for final remarks.

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Patricio Garreton, Sonda S.A. - Head of IR [5]

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Thank you very much, everyone, for your time, for your interest to be joining us in the second quarter earnings call, and have a nice day. In our view or the company, this was a good quarter, good first half of this year, and we are expecting to (inaudible) giving you across the year. Have a nice day.

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Operator [6]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.