CM Hospitalar S/A ($VVEO3)

Good morning, ladies and gentlemen. Thank you for waiting. Welcome to Viveo's Quarter 1 2026 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded, and a replay will be available on the company's IR website, www.viveo.com.br/ri where the complete earnings release is also available. [Operator Instructions] We would like to emphasize that the information contained in this presentation and any forward-looking statements that may be made during the conference call regarding Viveo's business outlook, projections, and operational and financial targets are based on the beliefs and assumptions of the company's management as well as information currently available to the company. These forward-looking statements are no 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 operational factors may affect Viveo's future performance and may lead to results that differ materially from those expressed in such forward-looking statements. Today, we are joined by Mr. Andre Clark, Chief Executive Officer; and Frederico Oldani, Chief Financial Officer. Now I'd like to turn the conference over to Mr. Clark to start his presentation. Mr. Clark, you can begin.

Good morning. Welcome, everyone, to our quarter 1 2026 earnings conference call. I would like to spend a few minutes talking about some internal matters relative to the executive structure of the company, and then I will go into what happened in the market in the first quarter of this year and the main highlights of our performance in quarter 1. I would like to start with the recent executive Board structure that was approved in our latest General Meeting on April 30. This is a simplified structure, 3 of the vice presidencies were removed from this structure. It continues to be a functional structure. The 4 VPs have very clear roles. And this will continue until the operational standards and the models in this company are consolidated and closer and closer to excellence. Also from the functional standpoint, going beyond Flavia, our Investor Relations, Strategy and M&A Director. We have Clarissa Rebello, who has now joined our Executive Board, and she is responsible for legal, regulatory and compliance with a very clear investment that we made to improve our governance model, the quality of our processes and so on. This entire team is present with us today in this conference call. And this is a collegiate Executive Board. We are migrating to collegiate and integrated decision-making because this integrated operation model is very important for us at this point in time. The 4 VPs, all of them will be directly in charge of business. So in addition to their functional roles, they also are responsible for important businesses. And here, I'd like to highlight 2 characteristics that are helping focalize Viveo and simplify our vision in 2 types of business. One that services logistics, manufacture, the health care chain and institutional chain in Brazil. So for example, Cris has 26 years of experience, and she will be responsible for distribution and Insuma our compounding business -- compounding pharmacy business. Here, I also would like to highlight in servicing the health care institutional chain, we also have Prevena. Prevena, Artur today -- Artur Avancine is responsible for Prevena. And in addition to his experience with People and Management, he has more than 10 years in Health Care and 8 years in Diagnostics. So he will be in charge of our business division that services the diagnostic chain in Brazil. And last but not least, we have Luiz with his brilliant career in Consumer Goods in different instances, and he will be in charge of our Consumer businesses in addition to his VP of Operations position. And we also have Fred, our CFO, who has a long track record in digital business, and that is why he will be responsible for Humania, our start-up and he will lead Humania to the next level. So this is the simplified structure of our Executive Board after reducing the layers and after the vast investment that we made in governance and management. So simplification, focus continue to be the 2 core aspects here. Now let's move to the external scenario. So this chart explains what happened in the first quarter and quarter 1 is very important because that's when we have the CMED definitions. CMED recorded the lowest price adjustment of the past 20 years. Quarter 1 is also very busy in one specific segment, which is oncology. In Brazil, I think that you've probably heard the news. There's a lot of turnover players, novelties, important aspect in oncology. And it's also important to highlight that the institutional distribution market in Brazil continues to grow according to IQVIA at double-digit rates. So this is a very prominent segment with a lot of events, facts, reaccommodations, plain transformation, sometimes positive and sometimes there are some headwinds, but in a frank transformation. Also, there are changes in the business model in health care. So payers, verticalization, partnerships between large groups. This continues to be a trend and also changes in the business model. The regulatory advancement in Brazil for clinical research is making important changes to this sector and is driving a very important set of innovations. And this will make this segment even more dynamic in the upcoming months and years. Here, I give highlight to the expiration of some patents in oncology and the GLP-1 agonist, which will probably accelerate the dynamics in this market. And finally, we have the macroeconomic outlook. We have pressure -- this pressured by persistent inflation, very high interest rates and also the war. We took some important actions, for example, to hold back the prices of petrochemicals, some decisions to invest in some locations and stock and inventory opportunistically, but also there's a lot of foreign exchange volatility that we should expect looking forward. So this was the start of 2026 in Brazil, and we should see a similar picture in the rest of the year. Finally, I would like to go over the main highlights of the quarter before I turn the conference over to Fred. The first highlight is this idea of a consolidated net revenue. We are now pursuing quality of business margin, ROIC. This is the focus of the organization now. And of course, this leads to a resumption in our results indicators. The gross margin was 15.8% of the EBITDA. And this is an important point. Fred will go into more details. Cash generation also in quarter 1, which is usually a quarter that we do not produce free cash because of the stocking efforts, the dynamic and the change in prices and also control of our leverage with consistent deleveraging ending the period at 3.88x. We still have a lot of work ahead. Our ROIC ambitions are still pretty bold. There's a lot of changes in our management model that we still need to implement. We have a lot of markets for -- to choose from. We have a lot of organizational models that we should make changes to looking forward. But it seems to me that in this highly volatile environment, the company is performing really well. Fred, now I turn the conference to you for a deeper dive into our financial results.

Thank you, Andre. Let me start in Chart #7, talking about our net revenue. In quarter 1, our net revenue was slightly higher than BRL 2.8 billion, 1.7% increase versus last year. The first highlight here is that in quarter 1 2025, this number still did not contemplate all the adjustments in contracts and commercial strategy that we started to implement as of the second quarter last year. So the comparison basis here is very different. The management strategies were very different last year. And in quarter 1, we hadn't really applied this level of selectiveness, particularly in distribution, the selectiveness that we started applying starting quarter 2 last year with a full effect in the second half of last year. So this increase is a small increase, but it is fully in line with the strategy that we have been implementing to be more selective and moving away from business with an appropriate return, moving towards adjusting our commercial conditions and everything that we have been seeing for a few quarters now. In quarter 1, 2026, we see the same dynamic in our top line of previous quarters. Now looking at each of the segments. First, hospitals and clinics, which is where we had the highest performance in quarter 1. And here, there are several positive factors that had a role, but this is a segment in which we made the most adjustments last year. So seeing it back to growing against a comparison basis, pre-adjustment comparison basis last year. This shows that despite all the adjustments that we made, we are still very strong in hospitals and clinics. We could be growing at a higher pace, but this was the choice of the company to slow down this growth a little bit. Now moving on to labs and vaccines. Here, there was a slight contraction versus last year. And the main reason here is the incorporation of some vaccines to the public health care system. Remember that we do not operate with vaccines in the public system. So some important vaccines that we used to sell to clinics to vaccination rooms migrated to the public health care system, and that led to a small contraction in our revenue in quarter 1. And we will probably have a lower basis than what we had because this is a portion of the private market that now will disappear and these vaccines -- some of these vaccines are relatively expensive. So the private sector will probably carry on with the smaller volumes in the future. Now looking at retail. For retail, we saw a drop in revenue, but this was fully planned. We made a lot of adjustments in retail, particularly in the end of last year. We had a major price increase. We positioned -- repositioned our portfolio. We decided to move away from some categories and prioritize others. But even with the contraction in our revenue, we had a substantial increment in our margin and gross profit. So despite the drop in net revenue, the gross profit more than compensated for this small contraction. And retail is now starting a different dynamic starting this year. As for services, there was also a small drop in our revenue. Here, we're still seeing the effect of the different comparison basis from last year. For a few quarters now, particularly in Sterile Solutions, we saw some verticalization by important clients that ended up affecting the performance of our services [BU]. Now when we look at the impact on our gross profit, there was a considerable increase versus last year, a 2 percentage point expansion in our gross margin. This result is quite positive. We had high expectations of being able to recover our gross margin as we implemented our strategy. And we see that quarter after quarter, we've been able to operate with better margins at the same time, preserving the volume of business that we want to maintain. So this combination of commercial selectiveness, focusing on specific segments and moving away from businesses that do not bring appropriate return, we see that despite the nearly 0 growth in our top line or very low growth in our top line, we were able to grow our gross profit nearly 16%. So this is the direction that we're taking in our commercial strategy, and this is what we have been reinforcing quarter after quarter, and we're starting to see the results now very clearly. Our adjusted EBITDA shows this very clearly. It was an increase of more than 30% -- more than BRL 200 million in EBITDA, BRL 208 million to be more precise, which is very positive. There was also a major increase in our margin, both compared to quarter 4 last year and also quarter 1 last year. This result is a combination of the better performance in our gross profit due to everything that I already mentioned and also very strong discipline in expense management. And we are starting to capture some major benefits in our freight lines resulting from all the actions that we took last year. So when we look at the results, I think you can clearly see a very relevant evolution comparing where we came from 18 months ago when we started to implement these adjustments in a more relevant manner and where we're landing now in quarter 1, 2026. And also if you look at the past 6 months, they all point to significantly better results than what we had in '24 and the first half of '25. Of course, we understand that there's still a lot of improvements that we must make. But it is clear that the commitments that we took on with the market to improve our profitability, focus on cash generation and reducing our leverage, we are delivering successfully. Now on Chart #11, we have our financial results. Here, we saw an increase in our financial expenses in quarter 1. I think there are 2 important highlights here. First, in quarter 1, '25, we had some nonrecurrent gains in our financial results due to the buyback of debentures in line of what we had agreed upon with our lenders in the end of 2024 and also because the base interest rate was -- is higher now in quarter 1, 2026 than in quarter 1, 2025. Now when we compare our operational results with our financial results, we can say that we ended quarter 1 with a net loss of BRL 35 million. Now the next chart shows our cash flow. We had a very positive performance in our cash flow in quarter 1, cash generation was a positive BRL 45 million, generating cash in the first quarter is always a huge challenge in our business because there are seasonal aspects that have an influence here. First, we have a very strong demand in March right before the price -- the annual price adjustment by CMED. So the company needs to increase its inventory in quarter 1, and this usually consumes working capital. So there is an unfavorable seasonality in quarter 1. So it is always expected to have cash consumption in quarter 1. But this year, with all the efforts, we were able to generate BRL 45 million in cash, which in our opinion, is a very positive result. Now when we look at our cycle indicators, we also see very positive points here. Our cash cycle ended at 54 days when we look at the normal cycle, and we adjust by the anticipation of receivables, 65. Now when we look at -- when we compare with quarter 1 last year in both scenarios, there's a relevant improvement between 4 and 5 days of improvement. And these 4 or 5 days mean about BRL 100 million to BRL 150 million in impact of these 4 days of reduction in our cycle. So this is a relevant impact on the company's working capital. And the company has been working really hard to have more contained and more efficient levels of working capital. And we can see this very clearly based on the evolution of our cash cycle indicators. When we look at our working capital over the net revenue, it's 16.6% for quarter 1, it's a very appropriate level. Now our net debt. There's something important to highlight here. There was a slight increase in our net debt this quarter, and this was basically because cash generation in quarter 1 tends to be weaker. So this is totally expected. But when we look at the company's leverage, there was a major reduction in our leverage in quarter 1, once again in quarter 1. We ended the quarter at 3.8x the net debt over the EBITDA. And here, it's important to highlight that we had a major drop of the covenants from quarter 4 '25 to quarter 1, '26. Our covenants in quarter 4 last year were 4.5 and now they dropped to 4. And we went even further with 3.88 and so after renegotiation of our covenants. And on the right, we clearly see how much the company is evolving in terms of its leverage in the past few quarters. It is clear that our net debt is stable. Of course, there are some small seasonal variations, but it's very clear that we have reached stability and operational results have improved greatly in the past quarter. So these are very positive news. And also yesterday we announced that we're going to hold 3 general meetings to extend the term for the fourth, fifth and sixth issuance of debentures because considering the results we have been delivering and all the commitments that we are delivering quarter after quarter, we are now in a very favorable position so that during those meetings, we can effectively roll over the debt maturing in the first half and second half of this year, and also next year. So we will be finalizing that phase of major adjustments that we started implementing in the end of 2024. And now we can certainly say that we are very close to having a company with stable leveraging indicators and with operational results already recovered. I stop here, and we will open now for questions.

[Operator Instructions] The first question is from Felipe Amancio, Itau.

I have 2 questions. First question is about the seasonality of your cash cycle. You really highlighted this point during your presentation, the seasonality of your working capital in quarter 1. But can you please remind us of the trajectory of the seasonality between quarters during the year and what you expect for 2026? This is my first question. And the second question is about the competitive environment. We are seeing some recent movements and changes in the sector involving other players. So how do you see the competitive environment? And is it somehow helping your good results in hospitals and clinics?

This is Fred. Thank you for your question. The seasonality, usually, the first quarter is a cash consumption quarter. Then quarters 2 and 3, you recover what was consumed in quarter 1. And quarter 4 is not so different from the others. But the excess working capital that you consume in quarter 1, you recover throughout quarters 2 and 3. This is the regular -- the usual seasonality. When we look at our cash generation this year, we don't give any formal guidance. But our view is that we are generating sufficient cash to serve the interest rate -- to service the interest rates and with some clearance here. So this is how we are piloting the business. So if we need to decelerate our growth, we will be piloting the business so that we can generate the cash that we need to pay our debt with some clearance. Now as for the competitive scenario, yes, we believe the competitive scenario is very favorable right now. And this is one of the reasons why in hospitals and clinics, we have been able to improve our margin and resume our growth despite our highly selective commercial strategy. We are not tapping all opportunities that come our way. We have been declining some businesses that we don't think have an appropriate margin or working capital below the minimum hurdles that we established to run our business. So yes, we believe the competitive scenario has been favorable to our strategy.

The next question is from Guilherme Vilela, JPMorgan.

Can you please help me better understand the dynamics of your gross revenue and net revenue? The gross revenue increased 2% and net revenue was down 2%. So I want to understand what are the rebate effects and tax effects that may have influenced this revenue in quarter 1? And a follow-up question about your gross margin. Can you help me understand the grid of your gross margin from 3.8% to 15.8%. What in this is pricing, what is mix, procurement, any efficiencies or commercial conditions or even one-off items that may have influenced?

Well, in respect to our gross margin -- gross revenue and net revenue, there are some effects here. One is structural. We have a much lower level of returns. We are working on a set of improvements in our operational indicators to decrease the number of mistakes in our orders or deliveries that are off deadline. So part of it is explained by the lower level of returns and also the mix because within drugs, we have some drugs that are exempt, tax exempt. You have drugs that have a tax rate of 18%, 19%, 22%. So yes, there's an important participation of the mix. So product mix and also channel mix. Because the taxes over consumer products and distribution can be quite different. So yes, there's a product mix. There's a business mix and the lower returns. Now about the gross margin, the important point here is that we had a significant growth of our gross margin in all our segments, particularly in Consumer. In Consumer, it's where we saw the greatest growth in our gross margin. There are many reasons for that. We changed our portfolio. We changed our prices. We moved away from some segments and prioritize others. We changed our commercial policy. So there are different effects here. And we are now running our Consumer business with structurally higher margins than what we used to have in the past. Now when we look at distribution, in distribution, we also have higher margins. And here, what I can tell you basically is that this is an effect of price. We are focusing on improving commercial conditions. We are declining businesses. We are exiting contracts that have a very low margin. So when we look at distribution, yes, I think pricing is the main reason -- is the main effect here. Now when we look at the other business units, in some of the businesses that we lost are businesses with that had a much lower margin than the average margin that we operate with. So despite the drop in revenue, margins are higher. So in sum, we are trying to operate at higher margins in all our segments. It's not necessarily that the margin in quarter 1 will be exactly the same in the coming quarters. I think there are some one-off aspects also, for example, a positive foreign exchange effect in some of our inputs, and we are now assessing whether we're going to transfer that to the price or not. So there are some points here that helped the growth -- helped us having a slightly higher gross margin in quarter 1 than we usually see. But this is what's happening. Yes, we should operate with significantly higher levels of gross margin than in the past.

[Operator Instructions] We have no further questions, this question-and-answer session is now closed. I'd like to turn the conference back for the company's final remarks.

Thank you very much for attending. The company will continue on this trajectory of focus, simplification, selectiveness and certainly transformation of its culture and its organizational structure. Thank you very much for attending, and have a great day.

Viveo's earnings conference call is now closed. The Investor Relations department will be at your service should you have any further questions after this call. Thank you for attending, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]