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

[Foreign Language] [Interpreted] Good morning, everyone. Thank you for waiting. Welcome to the conference call to release the results of the third quarter of 2025 of Viveo. [Operator Instructions] This conference call is being recorded and will be made available on the company's Investor Relations website at www.viveo.com.br/ri, where the complete material of our earnings release is available. You can also download the slide deck at the chat icon even in English. [Operator Instructions] Information contained on this presentation and any statements made during this conference call related to the business perspectives, projections, operational and financial goals of Viveo are beliefs and assumptions of the company's management and are based on information currently available. Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions because 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 may lead to results that will be materially different from those expressed in such forward-looking statements. Now we have here with us Mr. Leonardo Byrro, CEO; Frederico Oldani, Financial -- Frederico Oldani, Vice President for Finance and Administration and other Executive Directors. Now I would like to turn the conference over to Mr. Byrro, CEO. Please, Mr. Byrro, you may start.

[Interpreted] Good morning, everyone, and thank you very much for being here for the announcement of the results of the third quarter of 2025. First of all, I would like to tell you at the beginning of the year, what it was like. We closed 2024 and started 2025 with full focus on the operational turnaround that we defined in 2024. And they are based on 3 pillars: working capital, with going year -- recovering our cash generation that was the top priority, quality versus -- and after many years of very fast growth, both organic and through acquisitions, we understand now the time is to focus on quality, quality of our sales, internal processes, delivery, service level. And last, operational excellence. So to do more with less, to be able to improve our processes and our systems so that we will recover the service level during 2025. Based on that priorities, we defined a few goals and improvements expected during the year. Number one, reduce the growth pace adjusting our operation, focusing on efficiency and cash generation. Number two, we needed to look at all the businesses we joined and started operating over the past few years to understand which ones have below expected ROIC and to focus on those with better margins and improve the margins of all our business lines. Number three, reduce expenses and costs in line with the efficiency project that we designed during 2024 in partnership with Galeazzi. This was only going to be possible after all the mergers and integrations that took place after 2025. It was more than 18 new companies, 9 distribution centers. A lot happened in 2024, and this would enable our cost reduction and efficiency process. Number two, rebalancing our working capital, focusing on improving the cash conversion cycle. Number one, reduction of absolute inventories of the company. While accrued revenue dropped by 3%, absolute inventory reduced by more than BRL 200 million or 13% if we look at the snapshot 1 year ago. All of that improving service level that is acknowledged by our customers on the front end. And we recover excellence in service at the same time as reducing inventories significantly. At the same time, we wanted to extend our permit payment terms to suppliers. Now we have the funded inventories. We want to reduce accounts receivable. We renegotiated most of our contracts with our customers and partners along the second quarter, reestablishing terms and times that were much more sustainable and appropriate to the reality than our business today. And lastly, the result of everything is a gradual improvement of our EBITDA margin that we saw happening along the first and second quarters but now more markedly after Q3. Many actions are still going on. And the main strategic projects, we still have many captures that will come along future quarters. And I would like to highlight some here. Number one, inventory management. We have come a long way. Today, we have inventory levels appropriate to our level of activity where we should be, but there is still room to improve even further our efficiency in inventory management. Portfolio and pricing. We have improved the gross margin of all our businesses. In addition to improving margins through the mix, we also had individual improvements in each one of them, but we still have lots of room for more intelligent pricing to improve the group sales of so many products that we have. Contract renegotiation with customers, especially in accounts receivable, we have benefits to capture, especially in 4Q this year, and we are going to go into 2026, seeking renegotiating even better and more sustainable levels. SG&A reduction. We still have other opportunities to further reduce our expenses along future quarters, not just to optimize freighting where we have invested a lot in technology along 2025 to improve visibility and management of freight, but also in-sourcing a trading partner that we did in the second half of the year. We still have many benefits to capture from that along 2026. So many of these projects are still going on and still producing gains, not just in the fourth quarter, but also in the beginning of 2026. As highlights of the quarter, and Fred is going to give you more details about this. Number one, the gross margin, we have reached 1.4 percentage points in expansion in the gross margin as compared to 1 year ago and the fourth improvement in a sequence, so improving pricing, improving profitability of each one of our businesses and still grow in those ones with better margin. So this leads to continuing improvement of our gross margin. And then combined with expenses that grew below inflation this year -- for the fourth quarter in a row, we see the EBITDA margin going from 5.2% in Q3 '24 to 6.1% in 3Q '25. Cash cycle once again was 2 days shorter than it was in the second quarter of 2025 and cash generation was BRL 167 million in the third quarter of 2025. If we take all advances of receivables and everything else, we had almost 29% increase in cash generation in 3Q versus the same quarter last year. And our net debt, which peaked in March this year at BRL 4.5 million. And as a reminder, we asked for a covenant waiver up to BRL 5 million, but we never got there. We have reversed the curve. We are at BRL 4.17 million and we are sure that this curve is in a downward trend. Last, DIFAL, which is an important piece of news this quarter, and we have always had a great trust in the recommendations of our lawyers, and we always understood that this was not a due charge. But at the end of '24, despite that understanding, we were conservative and we provisioned more than BRL 350 million in Q4 last year for that. And now with definitive decision in line with what we always believe we are reversing almost BRL 315 million this quarter. This not only gives us the assurance that this is not something that will come back in the future, but also we know that what we were doing is what we believed in. And then the team can give you more details about the main differences, how we allocated DIFAL. And now I would like to give the floor to Fred to go into the details of the financial results, and I'll be back for the Q&A.

[Interpreted] Good morning, everyone. I'm going to start on Slide #9, talking about the revenues of our main businesses. So starting in hospitals and clinics, there was a reduction of 8.6% with BRL 2 billion in revenue. And we talked a lot about this, that this movement would happen, especially after the third quarter, considering that during the second quarter, we implemented the renegotiation of new contracts and then we decided to give up contracts that in our understanding, did not have good terms in terms of times, profitability or ROIC, they are not providing the returns that we thought were the best for us to continue with them. So this was very much expected, anticipated. And you can see that the effect despite the drop in revenue, the gross profit was higher with an increase in the gross margin as you're going to see. Now in laboratories and vaccines, we are robust. We have been growing over the last few quarters. And here, the growth has been driven especially by many launches that we are having on this segment and also most of this is focused on adults, which is not so common. Vaccines are usually very much focused on children, but we have launches for the adult population, and this explains the robust growth that we are having on this channel this year. Now continue, you can see retail. So in retail, we resumed a more robust growth along the third quarter. And here, there are many categories where we are seeing a significant growth. And this segment has gross margins that are much higher than what we see in other business lines. And we are confident that we are on a significant path for growth in this business line. Lastly, the Service business line, we saw some resumption below the potential in our opinion. But I think we see indications that we have been able to stop the drop in revenue that we have been seeing along several quarters. So service is an important channel -- it's smaller, but it is a channel that is part of our strategy, and we really bet on the future of this segment. Now continuing our gross profit. As I said before, we grew 6.5% despite the shrinking in revenue. So here, we can clearly see our trajectory of growth in gross margin. So here in this chart, you can see ex-CMED, we have been growing consistently from the beginning of this year. So we were flat in the second half of last year. And as I said, with all the actions, we have been growing consistently quarter after quarter in gross margin. It's also important to mention here that we are not increasing gross profit because of mix. What we see here is the growth in gross margin that we have grown in practically all segments in addition to the mix helping because of the growth in retail. And in the year, you see a growth of about 0.8 percentage points, a growth that is quite significant and in line with the company's strategy a strategy that we have been adopting since late last year. So as to expenses, so here on expenses, considering the effects that we have the DIFAL. So the lines are kind of messy, but part of DIFAL goes to different lines, especially legal fees going into SG&A. So the lines in the quarter are kind of polluted. But when we look at the expenses ex-nonrecurring effects and depreciation, you can see a growth that's significantly below inflation. We grew 1.8% in the quarter. And in year-to-date, we grew 2.3% -- so expenses are very much under control. And as Leo said, we are still seeing opportunities to capture additional savings in expenses and especially in some specific lines such as freight. We still have in logistics, we're still reviewing our distribution structure, and we believe we still have space to be able to capture more efficiencies in our expense lines. In EBITDA, in a sequence, we have been improving EBITDA margins. So we went from 5.2% of margin in the third quarter last year, and we are getting slightly above to that with a growth quarter after quarter, also a significant growth in nominal EBITDA, BRL 153 million in the third quarter last year, BRL 173 million in third quarter this year. So it's slightly below the second quarter. But this quarter, there's no CMED. So this is a very good result. It's very good, and it is in line with what we have been saying in terms of gradual recovery of results along the year. So it's 3 consecutive quarters of better performance, and this is very much in line with everything that we discussed along the year and at the end of last year when we implemented the plan to recover the company's results. So BRL 510 million of adjusted EBITDA in the first 9 months of this year, a growth of 4.6% and the margin expanding from to 6.1%. And then financial results, it was affected positively by 2 effects, so partly by the DIFAL and partly correction and then the correction affects the net investment income. And there are other factors that helped improve the investment income. And when we look at the last line, the adjusted net income, even if we clear out all nonrecurring one-off effects of DIFAL, so the adjusted result is BRL 42 million this quarter, significant improvement compared to the third quarter last year and in the year-to-date numbers are also better than we had last year despite interest rates that are considerably higher, which somehow harm the bottom line of the company. Now going into the cash generation indicated in working capital. We generated about BRL 167 million of free cash this quarter, even discounting and adjusting in advanced receivables. It was the same as we had the previous quarter. There's no difference in cash generation, cash generation ex-receivables -- advanced receivables. This is better than the third quarter last year, almost 30% improvement also in year-to-date numbers, BRL 211 million cash generation versus BRL 169 million last year, 25% increase in cash generation, and we continue with expected cash generation that is very solid for the fourth quarter this year. And cash generation that, in our opinion, is sufficient to cover all the service of the debt despite the highest interest rate levels that we have had in the last decade at least. So numbers today are solid. Our cash generation has gotten better and will continue to get better. And we still have benefits to capture in working capital management, which will help even further the results of the fourth quarter. As to cash cycle, we have had an improvement of about 2 days in our cash cycle ex-accounts receivable anticipation and 1 day in the same period last year. So when we look at our working capital over net revenue, we're also getting better. We were at 18% last year, and now we are almost 1 percentage points better. So we are at about 17% -- low 17% in terms of working capital over net revenue. And this is a significant improvement in relation to previous quarters. Now our debt. So the net debt ended at BRL 2.8 billion. So this is important. We reduced almost BRL 50 million the company's debt. And here, there are some positive effects in terms of the repurchase of debentures. And what we are seeing is that the company's net debt is already in a downfall trajectory. Of course, it's still small, but combining the reduction of the debt with better operational results, we have a leverage that is BRL 4.17 million, well below what we have -- well below our covenant for the fourth quarter, and we are on the right track to go back to a leverage of BRL 3.5 million in the middle of 2026, which is what we have negotiated with the debentures last year. So as to the results, these are the main highlights. Now we can move to our question-and-answer session.

[Foreign Language] [Operator Instructions] [Foreign Language] [Interpreted] Our first question comes from Felipe Amancio from Itaú BBA.

[Interpreted] I have 2 questions. Number one is about cash generation. I remember there was a discussion related to seasonality in the first quarter would take up lots of cash, and this got better and better until you got to the fourth quarter. And even though the seasonality was kind of lost in recent quarters, once you normalize results, does it make sense for us to think that the seasonal dynamics will come back -- this is question number one. And the second question is about profitability. The company has demonstrated an improvement in gross margin along the quarters. But how do you see possible gains in efficiency and also considering the company's mix, what's the structural margin mix that you think is the healthiest for the business?

[Interpreted] Well, Felipe, I'm going to start -- as to cash generation, yes, the business seasonality still exists even though it was not so present. We have a seasonality in the first quarter when we build inventory with CMED turning from March to April. So in the first quarter, it takes up inventory, strong sales in March and then accounts receivable is 60 days. So there is a strong cash generation in the second quarter. And then along the second quarter, these effects are no longer present, and there is a growing cash generation along the year. So that's still there. And as Fred said, we can see in the fourth quarter a continuation of the company's cash generation. As to profitability, yes, we do see room for the gross margin to get better and better along the future quarters. Also maturing some initiatives that we haven't yet captured fully and also better mix. So for example, our retail business. So the wipes factory, our main category, we turned around in the middle of June. We're still ramping up for this operation, and we are going to capture margin improvements that are more pricing initiatives, revision of product portfolio for us to prioritize lines and categories with higher margins. So yes, we can expect improvements in the gross margin in future quarters and in 2026.

[Interpreted] Our next question comes from Gustavo Miele from Goldman Sachs.

[Interpreted] I have 2 questions to ask. Question number one is about the business units of hospitals and clinics. I think that this reduction in growth year-on-year, as you said, is apparently the result of much more of streamlining, so to speak, of contracts that you have on this business line. My question is what about the KPIs in the contracts that you decided to keep? Could you tell us about price renegotiations and maybe increasing the scope of the products that you are distributing to your partner hospitals? So I think it would be interesting so that we have an idea of how this vertical is evolving on a comparable basis versus the quarter -- in the third quarter of 2024. And the second question, more related to leverage and cash position. When we look at the debt amortization contract of the company, not just financial debt, there is something close to BRL 1 billion maturing in the short term for 2026 versus the company's cash position that is still slightly lower. So what are the liability management plans like for future months with the rolling of the debt so that amortization can be met within those times?

[Interpreted] Well, first, the hospital and clinic business units, and then I'll talk about leverage. So this is the business that we have increased the most our commercial discipline and have reduced our sales during the year with a 6% drop in year-to-date numbers in revenue so that we have the necessary commercial discipline and renegotiate, not just considering margins, but also times. And we think that we were very successful in doing that, especially in the second quarter this year. The market is still growing. There is growth to be captured in this market. We decided to organize things not to grow right now. And the good news is that when we look at September and October in September, we are -- even as compared to the previous period in October, we have had a significant growth in hospitals and clinics -- growth in margin levels and with appropriate working capital levels. And now from now on, yes, we can expect a gradual recovery of growth in the segment of hospitals and clinics, considering what is suitable to our cash generation and our deleveraging process. As to the KPIs, well, there are many things that we monitor service level of the contracts that they are very demanding. And the good news is that we have very positive feedback of improvement in our services. So the margins of our -- that compliance with the mix. So if the contracted mix complies or not with the mix that we are selling on a day-to-day and many others that we analyze internally and sit down to discuss with our customers every month. But the overall message is that, yes, we're going to recover growth in this channel at an appropriate ROIC level. As to maturity date after next year. So every period, there are important maturities over the next 5 years, BRL 1 million next year and then a volume slightly below that in '27. In the company's vision, all of this is going to be refinanced. We haven't yet started conversations with our creditors to work on that financing, but our idea is to start this work after the third quarter. And we haven't started these discussions because in our understanding, we needed at least to have 3 or 4 quarters with consistent results considering what we discussed last year when we asked the renegotiation of our covenants. We have been delivering strictly what was discussed and even slightly better. So we think that from now on, we are at a result level that allows us to sit down with our main and to rediscuss the refinancing after 2026. And we are going to start on the fourth quarter, and this will be discussed along the first quarter next year.

[Interpreted] Our next question comes from Gustavo Tiseo from the Bank of America.