Bradsaúde S.A. (ODPV3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for holding. Welcome to the OdontoPrev conference call to discuss the earnings of the second quarter of 2020. Today, we have with us Mr. Rodrigo Bacellar and José Roberto Pacheco. We would like to inform you that this event is being recorded. [Operator Instructions] This event is also being streamed on the web via webcast and can be viewed at www.odontoprev.com.br/ri, where the respective presentation is also available. You can control the slide presentation. The replay of the event will be available right after the conference call is over. [Operator Instructions] Before proceeding, let me mention that statements made during this call relating to the OdontoPrev business perspectives, projections, operating and financial goals are based on the beliefs and assumptions of company management and on information currently available to the company. Forward-looking statements are not a guarantee of performance as they involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that overall conditions, industry conditions and other operating factors could also affect OdontoPrev's future results and therefore, could lead to results that materially differ from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. José Roberto Pacheco, IR Officer of OdontoPrev, who will begin the presentation. Mr. Pacheco, you may begin.

Good morning, everyone. Welcome, and thank you very much for your interest and trust. We are OdontoPrev. I would like to thank you for attending the company conference call to present the results of the second quarter and first half of 2020. Starting the disclosure for the sector in Brazil. Looking at Slide #3, we summarize our initiatives in relation to COVID, given the pandemic. First of all, with the home office policy that was implemented for all our employees and all the appropriate adjustments in technology and procedures. Second, we delivered, at no cost, over 5,000 personal protective equipment, PPEs, to selected accredited dentists throughout Brazil. Third, we have also implemented, and fast, in the first weeks of the pandemic, an accredited network for essential urgencies and emergency services to be performed 24/7 in all regions of Brazil. Finally, we were the first company in the market to implement teledentistry, an innovative differential for our customers, enabling access to specialized dentists to our employees to provide information and answer any questions to service over 7 million customers. As you will see on our next slide, #4, we see that the second quarter was impacted by the economic slowdown, with a decrease in the portfolio in all segments with -- which was never seen before in our records. In the quarter, we had a net loss of 274,000 members in the quarter, highlights of -- loss of 106,000 members in the month of May, which was the most negative point in the period. It's worth noting, of course, linked to our next slide, #5, that the corporate segment presented a decrease of 110,000 members or 2% of the portfolio, showing that it is a more resilient segment compared to the 164,000 less members in the noncorporate segment, meaning a 6% drop in SME and 9% in individual plans. It's worth noting that in the individual plans segment, the retail channel accounted for 78% of the decrease in the period or 12% of the portfolio, which will lead to less acquisition costs and bad debt in the next quarters, if this remains. On the next slide, #6, we show the evolution of our annual consolidated net revenues and the breakdown per segment with the highlights of the noncorporate segment with an average annual organic growth rate of 15% in SME revenues and 23% in individual plan revenues in the past years. These levels are much higher than the industry and our main peers. On Slide 7, in 2Q, we observed a slower pace in the request for authorization from dentists, and frequency and appointments scheduled by members, resulting in a significant lower cost of services, an improvement of 31% quarter-over-quarter and 29% year-over-year, thus achieving the lowest historical level of loss ratio in a quarter of 33.1%, as we can see on Slide 8. The individual plan segment presented a loss ratio of 45.9% in the quarter due to nontechnical provisions of BRL 15 million related to the open enrollment plans in the bank channel. If we exclude these provisions, the loss ratio would have been 31.5%, as we can see on Slide 9. On the next slide, #10, we can see that we have gains in efficiency in lower administrative expenses at BRL 11 million lower. On the upside, we had lower personnel, advertising and rental expenses of offices in addition to advertising expenses. On next slide, #11, we see that bad debt was limited to 3% in the quarter, the same level as 1Q '20 and actually the lowest level in 5 years as a result of the continuous transition of individual plans and a drop in the portfolio of department stores with lower margin and more resilience in individual plans from the bank channel, which has a higher return compared to the others in the company. Moving on to cash generation according to Slide 12. We see, first of all, a drop in cost of services; second, continuous gains in administrative efficiencies; and third, lower bad debt; and fourth, lower sales expenses. In that manner, according to Slide 13, we have registered an increase in the adjusted EBITDA by 68%, achieving $171 million in the quarter, with a margin increase from 23% to 40%. On the next slide, #14, we see that the company generated BRL 148 million in cash in the quarter, which added to the generation of BRL 127 million in 1Q 20, enabled us to have a historical record in cash generation in the first half of the year, ending the period with net cash of BRL 798 million, and low debt. On Slide 15, we can see the cash flow since the IPO, and the discipline in capital allocation where the company presented cash generation of -- up to the time being of BRL 3.2 billion with a priority to compensate shareholders, especially in dividends, achieving BRL 2.3 billion. The proposed dividends and cash dividends already paid, total BRL 97 million in the second quarter. We're also proud to highlight the continuous growth in the number of individual shareholders, as you can see on Slide 16. And our globalized investor base according to our last slide, #17, with approximately 88% of shares in free float with investors from over 30 countries. Once again, I would like to thank you all for your interest and trust in OdontoPrev. And now I would like to move on to the Q&A session, in our common practice of a 45-minute earnings conference call. Thank you all.

[Operator Instructions] Our first question is from Joseph Giordano from JPMorgan.

I'd like to know, during this COVID pandemic, I think nobody imagined that at the end of July, we would still be in this situation. So I'd like to know how you see the recovery movement, demand recovery. I believe it's much lower than the initial expectations. And -- because usually, when we look at the ticket, it's on a dropping trend. So I'd like to know how the cost variation and probably negative in contracts when you look at the past 12 months, how should we think of that in terms of price renegotiation from now on? If it will continue to drop or not? And lastly, when we see that churn, I'd like to know the dynamic behind that, if it was contract or removing members from the contract.

Joseph, this is Rodrigo speaking. The first question is about claims. Well, we mentioned that we didn't expect July to still be in this situation. So in the first week of March, there was a huge drop, which was recovered little by little. And throughout July, we've been observing that we still have a stability of a drop in demand. We call that the authorizations for treatment, from 19% to 24%. It's been going up and down in the past weeks. So it's from 19% to 24%, just to give you a figure about how that's behaving. And obviously, that will depend, of course, from now on, on the state of São Paulo because we have a lot of operations here. And then if we're going to be -- and what status we'll be, red, yellow, orange, and then the second wave, is there going to be a second wave or not. So what I can say right now is that at the couple -- first couple of weeks, we have a stable level from 19% to 24% of a drop compared to what we expected. Your last question, about the dynamics. We have to break that down to answer that correctly into 3 segments. So we've observed that in the corporate segment, the loss and gain in contracts is still normal. Normal commercial activities, companies still have their plans, the brokers are very active. They're working. So there were no big changes in the dynamics to win or lose any corporate contracts. What affected us in corporate, which is widely informed in the press, are terminations, are layoffs. Companies are adjusting themselves, some more than others, depending on the industry, of course, some were more or less affected. And there was -- even though -- and the signatories of the pact of nontermination. But in corporate, you have normal sales. So we won some, and we were also affected by the terminations. When we go into other segments, the SME and individual plans, the dynamic was different. And in that case, social distancing played an important role. So we've observed that -- let me start off with individual plans. In individual, you had to imagine that a portfolio where you have a bucket with a drain on the bottom and a hose on top filling it. So on the bottom, with the -- we expected the cancellations to be higher, but they're at the same level as always. So nothing new in terms of cancellation. But that hose that was filling the bucket, that dried up. So social distancing and restrictions in operations of the bank agencies and also shopping centers where we have important operations with important retailers across Brazil, with the shopping malls closed, that means that, that hose on top wasn't filling up the bucket, but the drain was draining at the same speed. So in individual, that's what we have. That's our snapshot. In SMEs, we have the same situation where you have a decrease in new sales, new contracts and cancellations at the same level. But there, with a touch of extra concern moving forward, which is how many of these SMEs will still be alive post-pandemic. And that also affects -- so how does that affect corporate? Not in terms of survival, but how fast will they have a comeback? And how long will that take? So we know that the BRL 600 allowance from the government has been helping the purchasing power in households. But how long is that -- will that last? What will they do when there -- it's no longer available? When people that are unemployed will look for jobs, what will be the acceptance? What is the demand for the sales force that is no longer working right now? So corporate does depend on economic activities. The SMEs also depend on economic activity and individual plans, even though at a lower level. And then individual plans, they will come back with this slow opening of bank agencies and shopping malls. So that's the dynamic that we've been seeing. And your question in the middle was contract renegotiation, right? So in terms of contract renegotiation, it's normal business. So we consider the time of negotiation that we have, the companies, the competition, you have indicators, which is the frequency but you also have product and material inflation. So nothing really new on that side to highlight. Just normal, everyday business. Just -- when they mature, have that conversation again.

Okay. Perfect.

Joseph, just to add, this is Pacheco speaking, to add on Rodrigo's comments in relation to individual plans and behavior of the ticket in individual plans. The individual plans, as everyone knows, they have a higher ticket compared to other segments. And it's been going through a change process, where it's already the fourth consecutive quarter where we present a higher share in bank individual plans compared to a lower share of the retail individual plans, which is expected. So that trend will continue for -- moving forward into the next quarters. And we will have the privilege of counting on a higher ticket from the bank channels with lower sales expenses in those bank plans and lower bad debt. So there's a process. We're screening the individual plans' portfolio. And this quarter, it was extremely impacted by the retail chain. Obviously, the stores are closed and shopping malls are closed, enabling us to have a higher-margin in the remaining portfolio. So yes, it's the company's strategy to promote the bankalization of the individual plans' portfolio that has a value generation component that is much higher to the traditional -- compared to the traditional individual plans portfolio from retail. So that impacts the ticket dynamic. And it's important for us to share our impression on that and the dynamic of building this new portfolio of individual plans.

Our next question is from Mr. Samuel Alves from BTG Pactual.

Just one question on my side. Could you comment on the nontechnical provisions of BRL 15 million that we saw in 2Q? You had mentioned last quarter, when we had similar provisions, that it was as a result of a higher intensity of requests of procedures that were still under analysis in January and February. So could you comment if that was something similar to that, if you still had that increase in the intensity and requests for authorization for treatment? And I'd also like to understand if members related to the open enrollment in relating to their procedures. So should we see that from now on, the nontechnical provisions?

Samuel, thank you for your question. That's an event that started in the third quarter of 2019. So back then, we informed the market that it would be an annual cycle, that it would be a cycle of many quarters. And an atypical understanding and adverse selection of brokers and independent dentists that are not part of the credit network led to this -- to bypass here. So it's a different use. So nontypical customers of the traditional products, of a high income product. That cycle is ending. The activities are designed, recognized and understood by the company in the first quarter. In the last quarter, we still had residual provisions of BRL 24 million. And in this quarter, it went down to BRL 15 million. So what's the final stretch? We expect this to end in 2020. It was a learning experience. It was a new product approach, a new type of market. But it is not the characteristic of the business model. Our business model is mainly based on an accredited network and brokers that are connected to the company's distribution channels. So it's on -- we're on the final stretch. It's still early to say if we see any modest levels of provision from now on. But there is an indication that we will end this now in 2020. Okay. Samuel?

Our next question is from Mauricio Cepeda from Crédit Suisse.

So some of my colleagues have already asked some. I have 2 more, though. Let's talk more about strategy and moving forward. Given that, in fact, there's termination, and they may continue from now on, even if the contracts will not be canceled, you do have a number -- a lower number of members. So what are you thinking on the sales front? Maybe put these contracts into a bigger bracket since you're going to having a loss in members. And in the individual plans, we didn't have higher cancellations, actually, you're bringing in less, as you well explained. Would you have to have a more aggressive sales strategy to grow in that sense? And another question, that also influences long-term financials. Congratulations on lowering your admin expenses. Do you think that, that is long-lasting? Can you collect on that moving into the future? Or is that just temporary because of the pandemic?

Mauricio, this is Rodrigo speaking. Thank you for your question. About the sales front that you mentioned in recovering members, as I explained in the first part, the activities of bank agencies with restrictions and retail -- with all these restrictions, when that comes back to normal, since we don't have more cancellations, we should recover sales. Actually, we've clearly observed that, that the more the economy opens up and the restrictions are becoming more flexible, we see more sales activity. Regardless of that comeback and flexibilization, we were very active in these 4 months so far. So active in launching apps, to make brokers' lives easier, to make customers' lives easier, active with campaigns. We were active, with all the ability that we have, to engage and put our sales force out there in line with customers and their needs, so we can bring in results and not just sitting and waiting for everything to come back. So we had a first quarter that was good where we had 60,000 new members. That was an interesting moment. And we still -- we haven't stopped everything that we were doing, and we are speeding up things. And normal sales dynamics, we always have new contracts that are being studied. We have new distribution channels, new partnerships. So the company always has a number of different options. Some will work, some won't, but that's normal work that we have in the commercial area. So we're moving forward with that dynamic. And as soon as things get back to normal, we should reach better levels of production and for the members moving forward. About admin expenses, maybe Pacheco would like to add. But before that, obviously, some are temporary. So there were employees on leave for a period, lower transportation, hotels, travel expenses, all of that counts, but there's also a lot of discipline in-house to do the exercise. So when things go back to normal, a part of those expenses have been incorporated as an actual gain and other parts will come back even to support the sales activity, advertising campaigns and so on. Pacheco, would you like to add?