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

Good morning, everyone, and thank you for waiting. You're welcome to Viveo's Second Quarter '26 Earnings Release Video Conference. [Operator Instructions] We inform you that 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 announcement is available. You can also download the presentation from the chat icon even in English. [Operator Instructions]. We emphasize that the information contained in this presentation and any statements that may be made during the video conference related to the business perspectives, projections and operational and financial goals of Viveo constitute beliefs and assumptions of the company's management as well as information currently available. Forward-looking statements are not guarantees 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. Today, we have Mr. Andre Clark, CEO; Frederico Oldani, CFO; and other directors with us. I now turn over to Mr. Andre Clark, who will start his presentation. Please proceed.

Thank you very much. Good morning, everyone, and thank you for your attention. It's been a quarter with very important events for the company. I start with operational comments. In this quarter, we had a small evolution in our revenue with a good performance in the market of Hospitals and Clinics. This market has proven to be resilient with some objectiveness compared to our competitors. The operational indicators only show what we've been promising. We ended the negotiations with CMED with a gross margin of 16.1%, excluding the CMED price adjustment. And this has placed us in a very positive situation in the second quarter. We had an increase of the adjusted EBITDA, closing the quarter with BRL 217 million, an increase of 7.4%, the highest level since 2023. The operational growth of the company is sustainable. We have a free cash flow generation, which totaled a growth of 36.6% quarter-over-quarter, demonstrating that the company has reached operational conditions of a different nature. We have a first event that has been extensively discussed with you. We concluded the renegotiation of our debt. Here, we have a renegotiation based on trust in the company's ability by the creditors. It has enabled us to extend the debt maturities with adjustments of the terms, especially regarding the covenant schedule. This complete readjustment of our debt enabled us to plan for the future. And this very important event was followed by the decision to have a capital increase for the company. And here, it's important to highlight that the negotiation and the governance with a unanimous approval of our independent Board members who were favorable. Subscription and payment with preemptive rights granted to shareholders with payment in cash or through the capitalization of eligible credits. The purpose includes an improvement of the financial results and deleveraging of the company. And since we're talking about deleveraging, we had a baseline of 3.73x. With that, we would -- with a minimal subscription, we would go down to 3.19x. And in a more optimistic view, we would be below 3x. It's important to note that the company has chosen to expand the capitalization term to August 31 for 2 reasons. First, the publication of the results, which was expected by some and I think that this helps us in the decision-making process. Second, the interest of shareholders who see it positively. It's a long process, and they have decided to give some more time, which seems to be beneficial for the company. And now it's important to note here, and my colleague, the CFO, Fred, the company is changing. It's moving from stabilization to profitability. Focusing more on the company focus is a key word here. We will reduce variances, have more accurate EBITDA adjustments. So improving our liquidity indicators will be our next focus. A stable company can make important operational decisions. And therefore, this is where we change our game. And now I turn over to Fred.

Thank you, Andre. I will start talking about this quarter in Slide #7. The first one is regarding the increase in our net revenue. We had an increase of 3.4% quarter-over-quarter. And it's important to highlight the growth in the Hospitals and Clinics channel. In the second quarter of '25, we had a strong basis because we were in the middle of the first major portfolio adjustment cycles, including our contracts, clients, industries. And you have probably followed it, and this was shown after the third quarter. So the performance in Hospitals and Clinics clearly demonstrates our strategy. We had a revenue which was stable and with some minor decreases. And after that, we've had a stronger growth in Hospitals and Clinics. In the Vaccines and Laboratories segment, it was the only negative results we had in the second quarter, but it's important to highlight here that the vaccines segment had a very strong growth, which was led by innovations. We launched different vaccines, some of them focusing on adults, others focusing on serious diseases such as bronchiolitis. And as of this year, we had 2 of the main vaccines to treat this disease, which had a very relevant contribution for the vaccines segment last year. They have been incorporated in the list of our public health care system, which is important for the population. But with that, the private sector loses this niche. And therefore, we do not think that there's anything that we could have done differently here. These are normal facts which happen in this segment every time new vaccines are incorporated in the list made available by our public health care system. In retail, we had stability in the second quarter, even though we made many adjustments in our commercial strategy. We changed our product mix, channel strategy of commercial actions, changes. We made significant adjustments in the retail portfolio. They had a very positive impact, but we ended up having an impact on our revenue, but that was expected. I would like to remind you that in 2025, we worked very strongly in the area of distribution. We started making adjustments in retail in the fourth quarter, looking at 2026 mainly. So a good part of the adjustments that we can see in retail were decisions that we started implementing last year, and we see the results now. Just as we did with the distribution channel, we are now focusing on better profitability before trying to accelerate growth in this channel. In the Services sector, it is a sector which has some retraction, especially in chemotherapy, which -- whose strategy the company is reviewing. But there's an important factor here. Even though we had a revenue decrease, we can operate with a substantially higher margins, very similar to what we had last year despite this decrease in volume that we can see. So we've lost volume, but the margins are much healthier than what we had before. When we look at the gross profit, the results were very positive. We reached BRL 484 million in gross profit, an increase of 16.1% when we look at ex-CMED. When we compare it to last year, we've had 1.5 points of expansion. This year, once again, CMED was much lower than expected. It was the lowest price adjustment in the past 20 years. But even so, we had an expansion in our gross margin in absolutely every single business line. So this was not caused by any specific segment. We've been focusing on profitability, and we can see this expansion in the margin in every channel. So we're now running at gross margin levels that are much higher than what we had in '24, '25, and they are really new levels of profitability that the company has reached. In the EBITDA, the performance was very positive. We had BRL 207 million of adjusted EBITDA this quarter, 7% of -- basically, we reached our initial objectives, which had been determined at the end of '24 when we had the plan for the company to improve results, reduce leverage. And basically, when we look at where we're now in the second quarter of '26, we understand that we've reached the levels that we had planned to reach. The level of results is superior to what we had in '24, '25. Andre has also discussed the financial aspects. We've made significant adjustments. So I think that here, the EBITDA clearly shows a new level of results that the company has been able to reach. In '26, we were questioned if it was possible for us to navigate, and I think that in this quarter, we can clearly see the new level of performance of the company in 2026. Financial results. Here, we can see the financial results. They have improved compared to last year. In '25, we had some gains. We had the repurchase of debentures made in '25, and that was part of the adjustments of the covenants made and they generated nonrecurring gains. When we eliminate these effects, the revenue is basically stable when compared to last year. The operational results with the financial results, we had a negative net result, which is 52% less than what we had in the second quarter last year. And this does not have any relevant effect, both in debt negotiation -- renegotiation and also in terms of our capital. And therefore, we have expectations of improvement in results. We already know there is a minimum hired, which has been guaranteed by our reference shareholder, but this amount may be substantially higher depending on the other shareholders. But we've had a very positive effect. If you have a minimum capital increase, the results will be good. But if -- I think the results of the company will increase substantially. Regarding the cash flow, we had a consistent free cash flow generation. When we look at the amount accumulated for the year, we have a comparison with last year. But I'd like to remind you that last year, in the first half of the year, we had a significant adjustment in our working capital. And therefore, it benefited from a significant adjustment, which generated positive results in accounts receivables, along with other adjustments we made. We've been able to start working with a lower level of stocks. And therefore, the best comparison basis is to evaluate the first half of this year compared to the first half of last year, where we can show a significant improvement in our working capital -- I'm sorry, in cash generation, which demonstrates once again that the focus of the company with better results, cash generation, focusing on profitability is delivering the results that we had promised when we made the company's adjustment plan at the end of '24. Cash conversion cycle. It's been improving quarter-over-quarter. They are lower than what we had last year because most of the adjustments have already been made, but we continue pursuing improvements in our cash cycle. In the first half of this year, we made important adjustments. They are substantially lower than what we had in the second half -- quarter of last year, but we were able to conclude the plan we had designed. We now understand that our commercial conditions and terms are adequate and in accordance with what we had promised. Part of the improvements we achieved throughout the second quarter, the results will be seen in the third quarter and thereafter. Our net debt is basically stable when compared to the first quarter of '26. Our leverage was reduced from 3.88x to 3.73x. I'd like to remind you that our covenant now for this quarter was -- I'm sorry, 4.75x. So we have a substantially better situation regarding leveraging, 4.75x is comparable to 4.39x. These are different concepts. And in the new model after debt negotiation, we will use our net adjusted EBITDA in the payment of rentals, which is not the way we had been dealing with this before. With this, we have the fifth consecutive deleveraging. And I would say that this is the end of a large adjustment cycle. It is worthwhile going back in time a little bit. In '24, we had a covenant renegotiation. We required 6 quarters to change our results, our leverage levels, which are substantially better than what we had. And the second quarter closes this cycle, it is the sixth one. And in phase of the improved results, we had in this first half, we had an important renegotiation of our liabilities. If you look at it closely, we had a lot of debt, significant debt payments in '26. We were able to expand these terms substantially. Most of our payments are concentrated to '29 and 2033, 2034. That removes a lot of pressure from the company's liquidity for the next 2.5 years. And this, combined with the capital increase that was announced, they place the company at a new level, not only for results, but also in terms of capital restructure, which enables us to change to go from one phase to the other. In the past 2 to 2.5 years, we had a restructuring plan. This restructuring plan has been delivered. It doesn't mean, of course, that we don't have homework to do. We do have a lot to improve, but there has been an important change. We will have gradual incremental improvements, focusing on management, improving different aspects of the operation. The last period was a period of significant adjustments. They focus on management method, process improvement and enables the company to look ahead and think of the company we want to have in 5, 10 years. A significant part of the management focus for the next 2 to 3 quarters is to place the company in this new model, focusing on management and design the company we're going to have in the next 5 to 10 years. This is what we wanted to share with you regarding our results. I would now like to move on to the Q&A session. Thank you very much.

[Operator Instructions] Our first question comes from Felipe Amancio at Itau BBA.

I have 2 questions. The first one is regarding the Hospitals and Clinics segment. We can see that the business had a good acceleration, but I wanted to try to explore with you the main drivers behind it. Has it increased because the market is, in fact, resuming growth? The second question is regarding the gross margin. We saw it increase again. It happens in every channel. I also wanted to understand how much you've been able to capture and how much room you have for it to go up?

I will start and Andre can complement if needed. The Hospitals and Clinics segment has always grown. It continues growing. We see 2 digits for the segment. In fact, the adjustments made last year were significant. We gave up contracts. We changed our price. We lagged behind in '25 because we focused on profitability. The market follows the same dynamics. The difference is that after the adjustments, we are now very competitive in this segment. There is indeed an effect. We think that competition in this first half of the year had some challenges, but the company ended up benefiting throughout this process where our main competitors had a very good -- a very difficult period for different regions. Regarding the gross margin, we no longer have such clear gains to be presented in the future quarters. We've reached a gross margin level that is very good. I would say that we've reached the best scenario that we have anticipated for gross margin. We thought we would reach these results in '27, but we've already reached them. For gross margin, the objectives have been reached. But we have other objectives to work upon. We understand that the levels we've reached are sustainable. They represent a different level of performance.