CM Hospitalar S/A (VVEO3) Earnings Call Transcript & Summary

[Operator Instructions] Thank you for waiting. Welcome to the Second Quarter of 2025 Earnings Release Video Conference of Viveos. I would like to point out that those who need simultaneous translation that this tool is available on the platform. [Operator Instructions] This video conference is being recorded and will be made available on the company's IR site, www.viveo.com.br/ri, where the complete material of our earnings release call is available. [Operator Instructions] All questions would be preferably at once. We emphasize that the information contained in this presentation and any statements that may be made during the call related to the business perspectives, projections and operational and financial goals of Viveo are beliefs and assumptions of the company's management as well as information currently available. Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operating factors may affect the future performance of Viveo and lead to results that differ materially from those expressed in such forward-looking statements. We have here with us today, Mr. Leonardo Byrro, CEO of Viveo; Federico Daga, Financial Administration VP and additional Executives. I would like now to hand it over to Mr. Byrro, CEO, who is going to start the presentation. Mr. Byrro, you may start now.

Good morning, everyone. Thank you very much for being here for the earnings release call of the second quarter '25. I am going to make the key highlights and the considerations of the quarter. Then I'm going to hand it over to Federico to go into the financial results and also the specificities of some business units, and we are going to be here for your questions. Now starting with the highlights of the quarter. We've maintained our disciplined execution, and we have all strategic plans defined from 2024 and we talked about that in the first quarter of '24. We have been focused on executing each of the priorities, both operational and reviewing the commercial policies in each of our business. Total sales were somewhat stable. There was a minor growth of 2.5% in the second quarter over the second quarter last year, which is very much aligned with our proposal of growing in some business of better ROIC and margin and renegotiating the terms in businesses that do not have the right ROIC or the one that we believe is the best level for the company. Our business dynamic differed in each business unit. We have had an increase in vaccines, Prevena and even retail, and there was a decrease in sales of some businesses such as renegotiation of some contracts in hospitals and clinics where we thought there would be a need to improve the contract basis. We've also been focusing on improving the quality of our businesses. After years focusing on quantity and growth, now we are focusing on quality. The main indicator that we share is the improvement of gross margin, which was observed in nearly all businesses of the company. Even excluding the c-Met effect, we've been seeing the gross margin improving in nearly all business units, which is a key indicator to ensure improvement of quality of our business and our operational deliveries. Third priority, reduction of expenses. We have defined the expense reduction in the end of '24, which can only be done after integration and incorporations done throughout the past 2 years. Now we've started to capture the synergies. SG&A had a 4.5% decrease over the second quarter '24. If we exclude the effect of the bad debt provision because now we have that projection of bad debt provision that we didn't use to do in the past. So we still had a reduction in our expenses below what we had reached. One of our priorities is now to work on reducing the expenses of freight. We still see opportunities in upcoming quarters. We've been making significant investments in changing the model of freight and adding technology to improve our management model. We believe we are going to bring further improvement and reduction of freight in upcoming quarters. It has led to sequential improvement of EBITDA margin. We reached CME 5.9% as opposed to 5.3% 1 year ago. The same thing observed with gross margin, as I mentioned. C-Met effect. Let me tell you what happened this year over the same period last year. If you compare c-Met this year, the price list in '25 as opposed to '24 and '23, the main difference was factor X. It's defined by the government, which hadn't been used in the previous 2 years. It was included this year. So c-Met difference was much lower than expected. For us, in our product composition was 2.5% as opposed to 5% on average in '23, '24. It has impact our comparison in terms of profitability, and it has also impacted our working capital because of a smaller c-Met increase seasonality of procurement between March and April was very different from previous years, and it had an impact on our inventory and accounts payable, which had some mismatch at first. But now it's fully funded again. Why am I saying that? Our working capital dynamics would have been even better in the second quarter had it been for the c-Met. We've corrected the course during the quarter, and you're going to see it getting even better throughout upcoming quarters. Our cash flow cycle improved about 12 days because of adjustments of our inventory levels and once again, funded by accounts payable, which could have been better had it been for c-Met, but this is something that has already been set in regular pace. Another important thing was the renegotiation of our contracts, especially concerning hospitals. Contracts are discussed during the second half of the year. But we had a different commercial approach this year, setting different priorities of renegotiation. So we've improved profitability of the contracts and reduced significantly our accounts receivables terms. And this is something already observed in our results in June, and we are going to see the benefits of that clearly pictured in the results of the third quarter. What we expect to happen is that accounts payable will be funded -- funding our inventory levels and the renegotiation of our contracts leading to improve in accounts receivables. The main financial highlights, net revenue aligned with our strategy of quality and quantity. In 2025, we have 2.5% increase in the quarter. Gross profit, 6.8% increase with 15% of margin, very significant improvement and adjusted EBITDA, 178 million in the quarter, total growth of 0.2% over the second quarter '24. However, if we exclude the c-Met effect that I've just explained to you, which was relevant in nearly half of previous years, we would have been growing 13% of absolute EBITDA as opposed to the same quarter last year. It's a significant improvement of profitability, quality of businesses and also leverage of our EBITDA by reduction of expenses. It has led to free cash flow of 177 million in the second quarter. And as of the next quarter, we'll be focusing on cash generation by reorganizing our cycle. By mid of the year, we needed to readjust all the different terms of operational cycle. So inventory, accounts payables and now accounts receivables so that we could really generate more cash and have and resume growth of some business with increased margins and increased ROIC, as I've just mentioned in the beginning of the presentation. The last highlight, which is something quite important to us is our new plant of wet wipes. We've been talking about it. It was an investment of BRL 40 million in the past 2 years, and we have consolidated in this manufacturing unit in Blumenau, 2 acquisitions, Daiso and FW, in Blumenau, the other one from Sao Paulo. As of May, we have both operations combined here the most modern and largest plant in Brazil and maybe even in Latin America. Huge potential of expansion of this category, which is the largest category of manufacturing products at Viveo. We really believe in gaining market share, having growth and having synergy. Let me show you a brief video that shows you how the plan works. In Blumenau, we have the new home of Viveo, the result of the combination of the expertise of Daiso and FW -- we introduced the largest and most modern site of manufacturing of wet wipes in Latin America with industrial synergy connected with other plants in Santa Catarina. And by doing that, we increased competitiveness, agility in manufacturing, bringing benefits to the whole supply chain. Verticalized plant equipped with top quality machinery and innovative technology, providing expansion of scale and creating new opportunities for our portfolio, 8,000 square meters producing 11 million packs of wipes per month. And with 250 people, we reinforce our commitment with caring for each life. Get connected to Viveo's team and visit our new home of wet wipes. This is our new home in Blumenau. And as I told you, we are highly excited to develop this category and this unit during the second half of the year. Let me now hand it over to Frederico for the financial highlights, and I'll be back for the Q&A. Fred?

Good morning, everyone. I'm going to start my presentation, Slide 7, talking about the revenue by channel. First, hospital and clinics, where we had sales of BRL 1.9 billion in the second quarter, 3.9% decrease over last year. This segment is exactly where we had the major negotiations of contracts, the most relevant segment after all. And as we had anticipated, we have successfully renegotiated contracts, and we end up terminating some contracts in which the conditions were not favorable in terms of margins and conditions aligned with our strategy. We had seen that in the first quarter, and we observed exactly the same in the second quarter, but aligned with what we have planned -- and contracts which were left behind had been already planned. I think that the main strength in terms of that, and it has a consequence on gross margin, as you've seen, is that we have renegotiated current contracts. It was one of the main challenges for the year, which was to set up a new basis of contract, new conditions in terms of margins and payment conditions, and we are going to build up on that. We've done our homework, and now we can work on new contract basis in terms of margins and conditions. Now in terms of labs and vaccines, the second quarter was very strong. We had seen good performance in the first quarter. The same remained in the second quarter, especially vaccines and the launch of vaccines for adults, which is a trend that we've been observing. There was a relevant launch in the second quarter, which had significant contribution to our margins by Ford vaccine, which is a vaccine to bronchiolitis, a very interesting and popular vaccine. There were even periods of shortage. So as you can see, there is an increased demand for our product and the market product, of course. But it's a clear example of how the vaccine channel has been developing, showing a potential to keep on growing. Now Slide 8, we can see retail. In retail, we've also had good performance, 20% growth in the second quarter, 5% year-to-date. We've been saying that retail is a channel that we were going to bet our chips because it has high profitability, positive ROIC and we were going to focus on retail to really keep on growing with it. And we've seen that. We've seen growth picking up as of the second quarter, and we have very positive expectations for the remaining of the year. In services, we've been affected by the loss of contract from the second half of 2024. There are a number of new actions being put in motion. We've changed our management, especially of the sterile handling of steriles. So I believe that as of the second half of the year, we are going to resume our performance to try to keep on growing from services. Gross profit. Next slide. Our gross profit improved significantly in the second quarter, 6.8%. We've had margin expansion and even higher if we consider that the CMED price readjustment was smaller than what we had expected. We are talking about something like BRL 17 million, BRL 18 million less than what we had expected compared against last year. And still, we had a margin expansion. And this is associated with contract renegotiation and all price adjustments, portfolio adjustments that we've been doing since the end of last year. It's a positive number for the second quarter and for the whole first half of the year. It shows that we have been successfully renegotiating our contracts. Despite the retraction of revenues, we delivered increase of gross profit and gross margin aligned with what we had planned in the end of last year. We've managed to execute what we had planned during the year. In terms of expenses, I think Leonardo has already talked about that, and I'm just going to reinforce it. We've had some decrease in expenses, expenses with sales, SG&A. Over last year, this year, we have also provision of bonuses, and it explains the increase we have observed during the second quarter. And considering expenses, we have a different model of bad debt provision, different from last year. We've revisited our estimate of losses aligned with the adjustments we had in accounts receivables. And as we have been doing since the first quarter of this year, we have higher levels of bad debt provision. They don't have any cash effect, but they affect, of course, the comparison over last year. But still, we have shown a reduction in the main line of expenses. With the combination of increase of gross profit and reduction of expenses, we've expanded our EBITDA margin. In the second quarter, EBITDA was stable, but with an expansion of EBITDA margin when you adjust it to CMED effect, which was significant. Year-to-date, first half, our gross margin grew at CMED as well as within the reported figures. It is the second consecutive quarter that we can see our plans turning into reality. I think that we've already covered the most critical phase of contract renegotiation. Now we are going into the second half of the year with important challenges for execution, but the main things that we have to do have already been put into action. Financial results. There was a 7% drop the same period last year. It's important to highlight the repurchase of debentures, which have offset partially some of the increases in expenses due to an increase in interest rate, that we've observed throughout the first half of the year. and also the renegotiation of the covenant terms that were made last year. So adjusted net profit shows a loss of BRL 44 million in the second quarter BRL 65 million in the first half of '25. Cash flow. One more quarter of cash generation. There is some seasonality. We tend to be negative in the first half of the year when we consider cash flow and working capital indicators, especially because of forming inventory levels for CMED and others. Still, we have generated BRL 124 million of cash which is very positive, considering that the first half of the year is not the strongest one for cash generation. The second half is where we have cash generation. And the working capital tends to be more stable in the second half of the year. Here, we can show you the progression of our cash cycle. The first half of the year usually observes differences in working capital because of inventory levels due to CMED price adjustments. March is very atypical. We tend to have higher inventory levels. Over 50% of our accounts are due to inventory levels in that specific month. But here, in the second quarter, in terms of cash cycle is that we've brought the inventory levels back to normalized levels. We have 10 days less in our inventory cycles. And our accounts payable is not 100% yet because with the reduction of inventory levels, which was substantial, our inventory to suppliers ends up going into the third quarter. The third quarter months tend to make sales very similar. There's very little seasonality, in other words, but it indicates a very promising next quarter in terms of cash generation. And our working capital over net revenue has resumed very healthy levels of about 17.5% at the end of the second quarter. Now finally. Indebtedness level. Since the end of last year, we've been working diligently in the company to reduce leverage. In the second quarter, there was a small reduction in net debt compared to the first quarter. And combined with EBITDA, which increased because LTM, including pro forma and the backlog has brought us to a pro forma leverage of 4.33x below the covenants that have been agreed for the second quarter of 4.75x. As you can see, there is a reduction in our leverage. As we have told you before, we've created a curve of decreasing covenant. The second quarter was exactly the first drop from 5 to 4.75. And we are clearly showing you that the company's leverage starts to be reduced initially at a smaller amount. But originally, we didn't even expect a reduction in leverage in the first half of '25 because it's not the strongest year have in terms of cash generation. But in the second half, we expect to have a significant reduction of leverage as cash generation improves. And LTM EBITDA will go into more favorable basis. Well, I think those were the key highlights concerning our financial performance in the second quarter '25, and I would like to open the question-and-answer session.

[Operator Instructions] First question, Gustavo Tiseo, Bank of America.

Two questions. First, I would like to know more about the strategy. That part of the margin expansion, can we expect something like 15% or something higher than that? Cash generation and paying your debt. Considering these 3 points, what are you projecting? Second point, gross margin was quite high in the second quarter. And what was the main impact? Well, there was an increase in retail, which has really good margins compared to distribution. And we would like to know how much of the increase came from retail and how much came from distribution year-over-year? Those are my 2 questions.

Thank you for your participation. I'm going to start, and then Fred can jump in. Dynamics for the second half. We've done our homework, renegotiating contracts, commercial policies in terms of prices, terms, and focusing on efficiency and reducing expenses. What can we expect for the second half of the year? Increased growth in businesses of higher margin and higher ROIC as contracts have been renegotiated, especially in hospital distribution. Now we are going to focus on having growth with profitability from this business. We want to pick up growth, thanks to the renegotiation of contracts and focusing on cash generation, as Fred pointed out, as the cycles are all properly matched. Inventory will be supported by accounts payable. Accounts receivable will have a different kind of picture in the third quarter. And then growth will be on cash generation and reduction of leverage in the second half. We are very confident in our plan and our deleveraging curve for the company, taking us back in June 27 below 3.5x, which is our original covenant. The curve will start going down in the next half. Yes, we are going to have cash generation and deleveraging resulting from the cycle, cash generation, and the impact of LTM EBITDA going up. We wanted to have the reorganization of our commercial terms in the first half. Second half, we are going to have flat sales, as Fred said, less variation of revenues, but some businesses are going to grow more than others. In terms of gross margin, especially from hospitals. That's where we have the main increase in margin. Retail had a positive margin aligned with what we had in the first half last year, and there was an increase in top line. But the main result from an increase in margin came from distribution, from vaccines, and segments in which we were more emphatic in changing our commercial practice and renegotiating contracts.

The next question comes from Samuel Alves, BTG.

I have 2 questions here. First, about receivables, anticipation actions. I would like to understand because I have the impression that you had BRL 45 million of anticipation of receivables below what was done in the first quarter. Just to validate if I got that straight from your results release. I ask whether the company intends to do it again in the My second question is about your investment agenda. I know the top management is focused on this deleveraging contract. You are working on your debt covenant. Do you expect to have more disinvestments or not?

I'm going to answer the first part. In this quarter, we had BRL 250 million of anticipation of receivables. It had been BRL 210 million in the first quarter, so BRL 40 million more than the first quarter. Thank you for your questions. Reinforcing our plan of operational deleveraging of the company that we've agreed with all of you in the end of last year does not include the investment to include the company in all the operational indicators, but in our covenant below 3.5x net debt over EBITDA. We are on track to deliver that and very confident that we can deliver that in the second half of the year, beginning of next year. This plan that does not depend on the investment, that even executing operational improvements, we still have a company with a leverage level, which will be high considering the interest rates of the market. So we are always paying attention to opportunities. If it makes sense to speed up the curve of deleveraging of the company to release capital to resume investments in business that have better ROIC and investment opportunities, we will consider them, as they can speed up deleveraging. But we don't depend on them to execute our operations.