Sao Paulo Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Fleury SA earnings conference call or presentation Friday, October 25, 2019 at 2:00:00pm GMT
Fleury S.A. - CEO & Member of Board of Executive Directors
Fleury S.A. - Chief Financial, IR and Legal Officer & Member of Board of Executive Directors
* Frederico P. Mendes
UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst
Good morning, and thank you for holding. At this point, we would like to welcome you to the Fleury Group referring to the results of third quarter '19. We have with us today Mr. Carlos Marinelli, the CEO; Mr. Fernando Leo, the CFO, IRO and Legal Officer. We would like to inform you that this event is being recorded. (Operator Instructions) This event is also being broadcast simultaneously through webcast and can be accessed at the address http://www.fleury.com.br/ri, where the respective presentation can be found. You can watch the slides at your own convenience. The replay of the event will be available soon after closing. (Operator Instructions)
Before proceeding, we would like to clarify that forward-looking statements made during the conference call referring to the business outlook, projection, operation and financial goals, are based on the beliefs and premises of the management as well as on information currently available to the Fleury Group. These forward-looking statements are no guarantees of performance as they involve risks, uncertainties and premises and, therefore, refer to events that may or may not occur. Investors and analysts should understand that general conditions, sector conditions and other operating factors could affect the future results of the Fleury Group and lead to results that differ materially from such statements.
We would now like to give the floor to Mr. Carlos Marinelli, who will begin the presentation. You may proceed, sir.
Carlos Alberto Iwata Marinelli, Fleury S.A. - CEO & Member of Board of Executive Directors [2]
Good morning, and I would like to start out by thanking all of you for your presence at our conference results for the third quarter '19. We continue to enhance our brand portfolio. We have observed an organic growth of our service units this quarter, and we have reached the highest level in the last 4 quarters, presenting a growth of 8.7%. This result reinforces our belief in the assertive strategy medically and in terms of care, allied to a culture of efficiency and excellent management.
It is important to highlight that this growth took place despite the timid resumption of the economy. It is true that the recent figures of evolution and the generation of formal employment leave us quite optimistic, showing there is still a trend that have been accumulated since 2012.
In the evolution of our business platform and health, we have not come to a standstill. We are building, testing and implementing technologies and services to guarantee our move forward toward more integrated solution, where the diagnostic sector is a key part of care, treatment and personalized and precision medicine. The foundations necessary to guarantee a robust service platform continue to be a priority of investment for an environment to activate data, intelligent service and agile workflows.
We now go on to the presentation on Slide #3, where we show you the main financial highlights of the third quarter. I would like to underscore that for purposes of comparison, these figures do not present the IFRS 16 effect. Gross revenue had a growth of 10.8%, totaling BRL 818 million. We highlight that this increase, among others, was impacted by an acceleration in the growth of the Fleury brand, with an expansion of 6.7% in the quarter. This is the third consecutive quarter in which we have an enhancement in the brand growth.
Cancellations represented 1.4% of gross revenue and remained stable vis--vis the same period in the previous year. The EBITDA reached BRL 196 million, with a growth of 8.2%. EBITDA margin reached 26%.
Net income attained BRL 96 million, presenting a growth of 4.9%. Operating cash flow totaled BRL 213 million, with an expansion of 22.6%. Return on invested capital without goodwill reached 38%.
We now go on to Slide #4, where we show you the operational highlights for the quarter. Upon the close of the third quarter '19, the Net Promoter Score of our brands reached 77.7%, stable vis--vis the previous year and maintaining that high level of differentiation for which our services are recognized and preferred.
In October, we celebrated a contract for the acquisition of the Diagmax Group in Recife that will be under assessment by the anti-trust agency. Before conclusion, the Diagmax Group acts mainly in diagnoses through images through 6 service units in the metropolitan region of Recife, State of Pernambuco. This acquisition will allow the Fleury Group to expand its presence strategically in the region, increasing its popularity to 17 service units and strengthening its exam portfolio, expanding our share relevantly in terms of diagnosis per image. This acquisition is aligned with our strategy of increasing our presence in markets with an economic growth that is above average, with a great potential of carrying out strategic partnership to guarantee care coordination and a full-service portfolio.
I would also like to highlight that this quarter, we began the consolidation of results of 31 service units of the Lafe brand recently acquired in Rio de Janeiro. As part of the integration, in August, we began to process the exams of all the service units at our own technical area in Rio de Janeiro, significantly enhancing the quality of this process in the Lafe brand and guaranteeing a significant evolution of results in this operation.
At the beginning of November, we will conclude the integration of all of the back-office and front office in terms of operation. We understand that the integration of systems and processes is very important for our business and it enables us to attain high-quality and efficiency levels.
With this integration, 100% of our operations will be on a sole system, presenting the same accuracy of image diagnosis at all regions and we will also have real-time access to all the information produced at the service unit. Even more importantly, we will guarantee the integration of information of the Lafe client to our data lake and an integral connection with our digital strategy for intelligence in terms of our data.
For the strategic pillar of personalized and precision medicine, we have taken perhaps the most important step in terms of the supply of services. Previously, the consultations were carried out only in the city of So Paulo. Presently, we are offering this in the cities of Porto Alegre and Salvador.
Genetic counseling is one more element of our health platform with a view to better understand the clinical position of our patient and the risk of developing hereditary diseases and the potential of transmitting these genetic conditions to future generations. All of this within a continuous care continuum with our team of geneticists, offering consultancy, pre and post exam to physicians, patients and partners. The creation of a genetic database and its use is one of the solutions, the genomic solutions of the Fleury Group and a strategic part to leverage our health platform in a future scenario where precision and personalized medicine will not only bring benefits to patients but also more cost-effective clinical outcomes.
Also connected to our platform, through Santcorp, we inaugurated the first of a series of shared sites for primary care. This solution allies convenience, geographic distribution and high satisfaction of clients already present at the a+ units in So Paulo, benefiting the user who is seeking a solution for health without the high cost of complex structure.
This structure has 3 exclusive rooms that are totally dedicated to triage, clinical care and medication for the Santcorp clients. This model places our customer at the center of care, delivering high efficiency for low-complexity care situations that are more frequent day after day. All of this integrated care that is continued and coordinated is always based on the analysis of timely data and the history of patients, and brings into reality that great potential to change the relationship model between patient and the value change of health.
Finally, I would like to mention the awards that were received by the company throughout the third quarter, showing the strength of the company in the execution of excellency. We won the prize, the best in the stock market organized by InfoMoney, in partnership with Ibmec and Economatica in the health category. We were also acknowledged by the award Empresas Mais of the O Estado de S. Paulo journal and we have achieved a second place in the category of corporate governance for publicly listed companies and the second place in the health sector. Besides this, we were in the first position in the best place to work at Infojobs.
I would now like to give the floor to Fernando, who will continue on with the presentation of results. I am at your disposal for questions at the end.
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Fernando Augusto Rodrigues Leo, Fleury S.A. - Chief Financial, IR and Legal Officer & Member of Board of Executive Directors [3]
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Thank you, Carlos, and a good day, to all of you. We continue on with the presentation on Slide #5, where we show you the performance of gross revenue in a consolidated way. The gross revenue in the quarter increased 10.8%, attaining BRL 818 million. The service units had an increase of 11.7%, with an increase in share of 83% to 85% of the gross revenue for the group. B2B operations grew 5.9% in the quarter, representing 15% of the consolidated revenue. In the 9 months, the amount of growth was 8.8%, with an expansion of 9.1% in the service units and 7.2% in the B2B operations.
In Slide #6, we see in greater detail the growth of the brand portfolio. The graph to the left shows you the total graph of 11.7% in Patient Service Center, 8.7% in organic growth. The Fleury brand expanded 6.7%, presenting for the third consecutive quarter an improvement in its growth. This performance reflects the mix of internal actions, among which, a strengthening of the medical relationship and an improvement in the conversion of setting up exams. Besides this, we have observed a stabilization in the number of beneficiaries with access to the premium market.
Another important impact in the brand performance was a better mix of exams carried out, along with an expressive increase of revenues with genomic exam. The Rio de Janeiro brands increased 21.1%, 8.2% of this increase was organic. The organic performance presented reflects the entrance of new plans as well as the expansion of offer for diagnosis through images. And the Rio de Janeiro brands this quarter, we consolidated the Lafe brand into our results. With the closing of the acquisition that took place in May of this year, we consolidated 4 months of their results.
In the a+ brands So Paulo, the expansion was 19.9% of revenues, arising mostly from growth concentrated in the units inaugurated between 2017 and 2018. That is still in the initial stage of maturity. The regional brands that takes into account operations in the south, north, east and federal district had a growth of 4.4%. An important part of this increase is due to the brand's IRN in Natal and the a+ in Recife that had a 2-digit growth in the revenues. In the graph to the right, we show you the performance of our brand portfolio for the 9 months.
In Slide #7, we highlight the cancellations and net revenues. In the graph to the left, we observed the cancellation indicator showing that we have maintained a high level of efficiency, reaching 1.4% for the quarter and for the 9 months of the year.
To the right of the slide, we see a growth of 10.6% of net revenue in the quarter, totaling BRL 755.7 million, and 8.7% increase for the 9 months of the year.
In the next slide, we will present the main financial indicators. And I would like to highlight that in January of 2019, we adopted the IFRS 16 leasing with a goal of having better comparability amongst periods. We will show the indicators in the next slide without the IFRS 16 effect. Now if you need further details on the impacts of IFRS 16, please look at our financial statements or the earnings release.
In Slide #8, to the left, we highlight the evolution of costs. In the quarter, we had an increase of 12.4%, representing a loss vis--vis constant net revenues of 130 basis points. The cost with direct material and exam intermediation grew 23.8% with a loss in terms of net revenue of 120 basis points. This effect in this line is related to the mix of exams carried out in the quarter with a reduction in the share of the automation section that has a higher margin and the increase of share of specialized sections and hospitals. The specialized section has a main field, genomic exams. With personnel medical services and occupation presented an improvement in efficiency, mitigating the effects that I have just mentioned.
Medical Services and occupation once again has that improvement in efficiencies. To the right of the slide, we present our operational expenses. This quarter, we obtained, an increase of 7.2%, with a gain vis--vis the expenses and net revenue of 34 basis points. What can also be observed in this slide is the evolution for the 9 months of the year in terms of costs and expenses.
In Slide #9, in the graph to the left, we observed that EBITDA attained BRL 196.5 million in the quarter, with a growth of 8.2%. The EBITDA margin reached 26%, a retraction of 58 basis points vis-a-vis the third quarter '18.
As explained in the previous slide, the pressure on the EBITDA margin arises from the cost of services rendered, partially mitigated by the gain in efficiency and operating expenses. Additionally, the inclusion of the Lafe brand in the results of the quarter has also contributed for -- to the pressure observed in the EBITDA margin. If we exclude the effects of the Lafe brand, the pressure on the EBITDA margin would be 21 basis points vis--vis the third quarter '18, and the margin would reach 26.4% in the quarter.
In the graph to the right, we show you the accumulated comparison of EBITDA. Excluding the nonrecurring events that occurred in the second quarter '19, we reached BRL 583.8 million with a growth of 6.9% and a margin of 26.7%.
In Slide #10, we show you the graph to the left with net income during the period reaching BRL 94.8 million, a growth of 4.9% vis--vis the same period 2018. The net margin was 12.5% compared to 13.2% in the third quarter 2018.
To the right, we show you the accumulated comparison of net income. Excluding the effects that are not recurrent, we reached BRL 281.9 million, a growth of 3.1% and a net margin of 12.9%.
In Slide #11, to the left, we show you the operating cash flow graph recording BRL 212.8 million in the quarter, an increase of 22.6%. The conversion to operating cash into EBITDA reached 108.3%. This quarter, the average term of receivables reached 66 days, a reduction of 2 days vis--vis the third quarter '18, with a positive impact on accounts receivables.
To the right of the slide, we present to you the CapEx for the quarter that totaled BRL 40.40 million, a reduction of 58.4% when compared to the third quarter of 2018. This reduction happens mainly in the new units, the expansion of the offer in existing units and technical areas due to the decrease of investments with the opening of new units.
I would like to inform you that in October, we inaugurated a new unit of the a+ brand in So Paulo in Moema with approximately 680 square meters of service area. This new unit has a complete diagnosis area, including magnetic resonance. The company has inaugurated 54 units as part of its expansion plan, a number equivalent to 74% of the lower point of our guidance until 2021.
In Slide #12, in the graph to the left, the ROIC without goodwill reached 38%. Adjusted for nonrecurring events that happened in the second quarter of 2019 and the effect of the acquisition of the Lafe brand, the result was 39.7%. To the right, we show you the evolution of Net Promoter Score reaching 77.7%.
Finally, on Slide #13, we include the events that have already been confirmed with the market for the coming months.
We would now like to open the floor for questions and answers. Thank you very much for your attention.
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Questions and Answers
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Operator [1]
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(Operator Instructions) The first question is from Mr. Joseph from JPMorgan.
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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [2]
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The first question refers to Lafe. Fernando referred to the impact of consolidating Lafe. I would like to ask you when you expect that Lafe will operate in an aligned fashion in the Rio de Janeiro operation when the margin will become more normalized?
The second question refers to your new avenues of growth. How much does the genomic part represent in your brand portfolio? It has given a good push the Fleury brand. And secondly, how these new initiatives, led by Santcorp and others, have contributed to the revenues of the company?
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Carlos Alberto Iwata Marinelli, Fleury S.A. - CEO & Member of Board of Executive Directors [3]
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This is Carlos Marinelli, and I would like to answer your questions and speak more about our genomic initiatives and then Fernando will refer to what is happening with Lafe.
When it comes to the issue of genomic, we have an enormous pressure of seeing how the market responds to our genomic solution. This is a business unit with a very rapid growth. Nowadays, in 2019, it represents 2% of the revenues of the group, once again, all concentrated on genomics. And we have fast growth. The greater challenge in this area are the effects that we have mentioned, the impact on gross margin. It is a highly specialized section that requires a great deal of investment in equipment but also specialized people. And therefore, it is natural that as we're focused on genomics and growth, at this point, we have greater pressure on our gross margin.
But this is the goal precisely. The goal is to become leaders in genomics throughout Brazil, as we already are, and to continue to grow this market. We're convinced that this is a market that will add to the traditional diagnostic medicine, and it will enhance the outcome for patients in the future connected to our health platform. It will help us in terms of information, how to use information, and we will have an ever more greater participation in the life of the patients, especially in the long term. This is something we will continue to invest in.
At present, it has had an impact on our gross revenue, but everything is under control. And of course, we are working hard on efficiency so that this can become an ever important part of the company.
In terms of Santcorp, we inaugurated the first unit in the shared site. It was working in another way. This is a purely Santcorp shared site, and there will be other inaugurations in the coming months. This is an initiative that we're also focusing on because of the growth. Santcorp is an operation with a dynamic that is different from others. It is highly connected. It has the ability of generating strong business, and we see the enormous attraction on the part of several of our customers in the health area. Companies that offer with post-payment also desire these services. And the leverage of the platform will be very strong. And soon, we will announce another inauguration in terms of the shared site.
This is still a small operation. It's marginal in our business. But it has that characteristic. The isolated revenues of Santcorp are one thing, but the impact and the future impact on the company growth will become decisive in our business. Therefore, we continue to focus on growth in genomics as well as in the part of Santcorp. And we firmly believe that these are strategic initiatives that are pillars of our growth strategy for our platform. And we believe that they will attain maturity very quickly, showing our capacity to leverage growth.
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Fernando Augusto Rodrigues Leo, Fleury S.A. - Chief Financial, IR and Legal Officer & Member of Board of Executive Directors [4]
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This is Fernando. Regarding Lafe, we have 2 main factors in terms of integration. The first is to have in-house exams that will be processed by the technical area. This already happened in the third quarter.
And secondly, the elimination of systems that will happen now at the beginning of November. In the third quarter, we continue to have costs that relate to the Lafe models of BrandZ, where they work with outsourced services. We're still carrying these expenses, and these expenses were partially mitigated in the last month. This is something that will no longer appear in the fourth quarter. And what will be different in the fourth quarter will be a fuller integration into our system.
We hope that this effect or this carry effect of cost linked to Lafe will be lower compared to the third quarter, and that we will enter the first quarter of 2020 with an operation that is much more similar to what we have in terms of margins.
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Operator [5]
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Our next question is from Thiago Macruz from Ita BBA.
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Thiago Capucci Macruz, Ita Corretora de Valores S.A., Research Division - Research Analyst [6]
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The first question is the following. You mentioned an improvement in the premium market and some in-house measures that you have taken to improve the relationship with physicians or doctors. Could you give us more details on the ramp-up of these initiatives? What will this represent for the penetration of the company? And how will this help other issues in the company?
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Carlos Alberto Iwata Marinelli, Fleury S.A. - CEO & Member of Board of Executive Directors [7]
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Thank you for your question. I -- we do have several initiatives, and we have perhaps a dozen initiatives and we have specific projects to work on the Fleury brand. With this, as we mentioned, there are dozens of initiatives each of which contribute towards the relationship with doctors, consultancy with doctors, bringing customers closer. And we have initiatives such as the intensification of integration. We do have projects that are being intensified by specialty, allowing greater comfort to the requesting physician in terms of the reading of the diagnosis of their patients. We are saving a great deal of time for the physicians in their offices, we're conveying information, communication and generating greater knowledge regarding their patients or customers.
When it comes to our specialized units, in a short while, we're going to be launching a revitalization of the pediatrics area with new personnel in our children's area. And of course, this represents a great deal of comfort for the parents of these children. We have also invested heavily in our relationship with pediatrician. We have a very effective relationship. This is a specialty that demands rapid communication, comfort when it comes to the parents, and this has been enhanced significantly.
Simply to mention one more. This week, we worked in the field of technology on thyroid. This was very successful. We had 200 physicians in So Paulo learning more about our technological evolution. And besides these 3, we have dozens of initiatives, each of which is building higher penetration into the market for the Fleury Group and as we can observe when it comes to our increase in market share in this market segment.
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Operator [8]
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The next question is from Mr. Gustavo Oliveira from UBS.
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Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst [9]
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I would like to go back to the question about the genomic processes and gain an understanding of how you're thinking about this business and the impact it has had on your gross revenue.
2 questions in the short term, especially. Your contribution margin in this product is negative presently. Therefore, I don't truly understand what is happening. Perhaps it is a process of a problem with pricing or because it doesn't have a great scale. And this will not happen in 1 or 2 years when we think about the rollout.
The second question refers to what you're thinking about this project as part of your health platform. It's very easy if you can think that this product will continue to grow with a negative margin. And if you project the gross margin going forward, will this truly continue to grow with this negative impact now? And which will be the impact on the total platform, which are the data that you will collect and the additional services that you will offer?
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