Diagnósticos da América S.A. (DASA3) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the earnings release call of DASA to present the results referring to the second quarter of 2026. This call is being recorded, and the replay will be accessed through the company's website, www.dasa3.com.br. The presentation is also available for download. Immediately after, we are going to start. We'd also like to highlight that forward-looking statements that may be made during this call with respect to business prospects, forecast, operational and financial goals of the company are all based on beliefs and assumptions of the Executive Board of the company as well as currently available information. These beliefs and assumptions involve risks and uncertainties since they relate to future events and therefore, depend on circumstances, which may or may not occur. Investors should understand that general economic conditions, the market and other operational factors may affect the future performance of the company. I would like now to hand it over to Mr. Rafael Lucchesi, who is going to start the presentation. Mr. Lucchesi, you have the floor.

Good afternoon, everyone. Thank you for being here with us once again for our earnings release call. I have here Rafael Bossolani, our CFO and Investor Relations Officer, in addition to our Investor Relations team. I'm going to start by giving you an overview of the quarter, and then Bossolani is going to go into financial details. Starting from Slide 3. The message that I would like to share with you is of consistency and disciplined execution. We've been focused on implementing a very detailed plan in addition to bringing important operational and financial improvement in 2026, it will ensure the growth of the company in upcoming years. As we've said in previous calls, our priority is financial discipline and reduction of leverage, especially considering the cost of capital in Brazil. We've been working consistently, but we've also been obtaining very significant operational advances. At the same time, we progress in the economic agenda of the company. Slide 4, numbers of the first quarter. We had 9% growth in diagnosis over a very good basis of growth in 2025. We have highlights for the premium segment, also home care and growth of volume in B2B compared to last year. In terms of costs and expenses, we've been optimizing and obtaining EBITDA growth over 50% in the quarter, considering our current scope. As we've said before, we have grown our volume of revenue with very controlled CapEx using the existing assets with very good operational leverage. At the same time, developing structuring agendas such as the implementation of new production of clinical lab tests, which has brought some impact on costs and very good perspectives of productivity gain, thanks to digitalization, which will probably be accelerated due to AI. Now concerning cash, we've had an operational cash generation, operating cash generation, reducing net debt even in a quarter with negative seasonality. We've also had improvement in our financial leverage. We have completed the issuance of debentures, which helps us extend the debt profile of our company and also meeting our short-term delivery, expanding our financial performance and reinforcing the conditions for best strategy implementation. At the same time, we've been strengthening 1 of our key differentials, innovation in patient experience and medical excellence. The advances that we have had, especially in the launch of new products and the use of AI have been recently recognized as ranking second in Valor Inovação Brasil 2026 in medical services. I would like to acknowledge our medical and technology team for this great achievement. It's also important to highlight the progression of Rede Américas in the quarter. The operation is developing as planned, reflecting our continuous capture of synergy and the progression of operational indicators. It reinforces our potential of creating value for the assets and also the quality of team execution. We got into the second half of '26, reinforcing our confidence on the execution of our team and building DASA, which is becoming stronger, more resilient and prepared for the next cycles of growth. Handing it over to Bossolani, who's going to go into the financial results.

Thank you, Lucchesi. Good afternoon, everyone. Thank you for participating in our earnings release call for the second quarter of 2026. Lucchesi has talked about our strategic view and the key highlights, now going to go over the financial and operating results, which have supported our performance during the period. The message of the quarter is the quality of the progression of our results. We are confirming an improvement that we have started observing at the beginning of the year with expansion of margin, good results and management with discipline, especially of the company's cash position in our key operation diagnostics. Slide 5, fourth quarter of consistent growth. Gross revenue increased 9.2% over the comparable scope and reaching BRL 2.2 billion. The growth is still driven by increase in volume, especially B2B and premium. It is important to highlight that the growth did not require expansion of capital. In terms of profitability, adjusted gross margin was 33.2%. It's important to show 1.6 percentage point decrease which can be explained primarily by accounting allocation between cost and expenses aligned to our new organizational structure and one-off effects on production costs due to the implementation of new equipment in our new diagnostic centers. Part of this variation also shows the effect of the mix because of an increasing participation of B2B channels in our business. Even though B2B has percentage margins which is smaller. It contributes to nominal gross profit. It helps us dilute fixed cost of the platform, and it's an efficient growth vector requiring very little investment. We're also moving on with our initiatives of digitalizations, favoring our installed capacity and improving patients' journey. We've been growing sustainably, with efficiency and attractive return on investment. Now moving on to Slide 6. to present the results of hospitals and oncology Northeast, Hospital da Bahia and our Clínica AMO. A very good example of our strategy to identify profitable growth. Gross revenue observed 4% decrease to BRL 208 million as a result of restructuring of our payers especially in the operation of oncology and more commercial discipline overall in the area. And we can see the result here in profitability. Gross margin expanded 1.5 percentage point, going to show our focus on improvement in procedures, reduction of cost in provided services and optimization of our operating structure. In the hospitals, we've been moving on in bed management, occupancy rate and operational efficiency in Hospital da Bahia, there was a 7% increase and an average increase of ticket of 15%. So average ticket increased 15%. As you can see, we want to grow with discipline and always improving return on investment. This quarter reinforced this path, more efficient, well balanced operation with better profitability. Moving on to Rede Américas, Slide 7. Before going into the numbers, I would like to make a clarification about comparability. As Rede Américas was created as of the second quarter of '25, this is the first quarter where we present quarter-over-quarter comparison in venture still presenting a very positive operational development. We had 12% increase in net revenue. EBITDA increased 9% in relation to the second quarter '25, getting to BRL 441 million, 2.6 percentage point expansion of margin reaching 13.7%. And it shows our strategies of integration, capture of synergy and improvement in procedure mix. In addition, we also have ongoing initiatives to improve the digital journey of our patients, in addition to review of commercial conditions and progression of all the process related to the revenue cycle. We have a program where we are going over in processes and standardization of system, contributing to reduction of denials and gradual improvement of days of payment outstanding or DPO, the result of Rede Américas is accounted for as equity equivalents. Even though the last line is still marginally negative. The operational progression of the asset shows the potential of generational value in this long-term partnership. Cash operating cash generation, we had BRL 435 million in the [ first month of EUR 26 million ], showing up ready profitability and self-sustained joint venture, even though there was some one-off consumption in that specific quarter. Net financial debt closed the period at BRL 2.8 billion, financial leverage was 1.69x, aligned with the previous quarter. Now moving on to Slide 8 for expenses. This is a point that deserves a highlight. Selling, general and administrative expenses, excluding depreciation, total BRL 179 million or a 25% decrease compared the second quarter '25 current scope. It shows a number of structural gains in efficiency and strong discipline in cost management. At the same time, it's important to have the right comparison. The base last year was subject to more pressure because of the doubtful debt provision. So we would have a reduction of about 50% in expenses. The message is we are really creating a lighter, more efficient structure because in the line of other expenses and upgrading expenses, we can see a positive balance of BRL 8 million compared to BRL 25 million in the comparable base of last year, which shows a lower revenue of shared service because of the joint venture. In general lines, the understanding is still very positive. We are moving on in our discipline of expenses, capturing operational synergies considering growth of our operations. This combination of growth, efficiency and profitability leads to consolidated EBITDA in Slide 9, BRL 446 million, 53% growth as opposed to second quarter '25 current scope. EBITDA margin expanded 5.8 percentage points, reaching 21% growth results from the operation of diagnostics, improvement in profitability of hospitals and also the capture of efficiency and cost discipline that we have just shown in the previous slide. Moving on to Slide 10 about investments. As we anticipated in the previous quarter, the investments are now getting at an expected rate, executing all projects that we have planned for. The investments totaled BRL 59 million in the quarter, a 43% increase over the comparable period last year, with gradual resumption of some initiatives, which tended to be slower in the beginning of the year. With such normalization CapEx level and within appropriate levels with selective allocation of resources and prioritization of projects that have better return and impact on efficiency, productivity and quality of our services. Resources were directed to technology, modernization of infrastructure, which are initiatives that improve profitability and improve also the experience of our patients. We can show that our business model can grow without required too much capital, prioritizing projects that have a high potential of return on investment. Assets were concentrated primarily on diagnostics and some corporate initiatives, which are correlated with productivity, digitalization. It's important to highlight that part of the investments in our service units, the so-called NTOs is being made through strategic partnerships. So it's reduced the need of making use of capital without impacting modernization and expansion of the operation. Clear logic. We've been investing selectively with discipline, focusing on productivity, value generation, efficient management, preserving the level of our businesses. Slide 11, free cash flow operating cash generation went from BRL 44 million to BRL 197 million. It was due to greater operational margin because of EBITDA and efficient management of working capital. It's important to bear in mind that the first half of the year historically is more subject to pressure of working capital, especially because of money is coming from the operation and some specific expenses during this period. Despite growth of the operation, our cash conversion cycle had a reduction of 7 days, showing a structured improvement of our accounts receivables. Free cash flow line, there was even more relevant data. We went from a consumption of BRL 18 million in the second quarter '25 to positive generation of BRL 292 million in the second quarter this year. BRL 310 million plus in the period. It shows a structural improvement in cash generation, sustained by our operating model, which is lighter, more efficient and less capital intensive. Going into Slide 12 about capital structure, at all the operating structure, cash conversion. Our debt was BRL 6.4 billion, average maturity of 3.7 years and average cost of CDI plus 2.14%. In the end of the period, our cash position and investments totaled BRL 959 million, maintaining appropriate liquidity for the profile that we have, net financial debt as a consequence after acquisitions payable and advanced on receivables closed the quarter in BRL 5.6 billion. In terms of leverage, looking at our current comparable scope. The second quarter '26 leverage was 3.52x below the 3.09 observed in the first quarter '26. It's a consistent as of reduction. It's also important to observe that the total leverage has different trends, and it does not show at all deterioration of our performance. It is a result of the EBITDA of the past 12 months because it's a different comparison base because of the hospitals that migrated to Rede Américas and some disinvestments that we had last year in addition to accounting effects related to all these actions. Mathematical effect and should be observed in upcoming until LTM EBITDA can reflect the new operating structure of the company, which will be in the fourth quarter this year. When we analyze comparable basis, the trend of deleverage maintains still very clear. Regarding covenants, the leverage closed 3x below the limits that was expected in our debt covenants. Moving on in active management. In July, we concluded the 23rd issuance of debentures, BRL 700 million average term of 2 years resources were used for anticipated redemption of the 26th issuance of debentures, which was approximately BRL 708 million. It has refunded our short-term obligations, reducing the concentration of the maturity dates and helped understand the predictability of our operations, including all relevant payments to be made in '26 and '27. As you can see, very positive perspective, we are still moving towards deleveraging of the company, building on 3 main pillars: growth, expansion of EBITDA cash generation and active management of our liabilities. We observed improvement in cash conversion cycles, as shown in the previous slide. Combined with a well-balanced maturity and liquidity has created a solid basis to reduce leverage through all time. I close the presentation of our figures and now we can go into the question-and-answer session.

Thank you. I'm going to start now with the question-and-answer session for investors and analysts. [Operator Instructions] Question by Flavio Yoshida with Bank of America.

I have 2 questions. CFO referred to the diagnostics area. First, growth. We see there was a slowing down of growth compared to the previous quarter. Operating at good levels but below what had been the first quarter comparing year-over-year. Is there any specific impact? Is it market share loss? Should we start considering this level of the second quarter as being the recurring 1 from now on. Second question concerns gross margin. There was a reduction quarter-over-quarter. You've talked about the mix effect application between lines. Please tell us how much each of these facts have impacted that and to what extent the mix can still impact margins.

Lucchesi speaking here. Thank you for your questions. I'm going to talk about growth, and then Bossolani can talk about gross margin. We've been showing good growth years all organically based. There was a reduction in number of service units, especially small units, which were not very productive. But same-store sales, basically, are doing quite fine in the main avenues of growth such as premium care, home care and B2B compared against last year, somewhat smaller than what we observed in the first quarter, but still doing okay. The second quarter of '25 had a base that had grown significantly compared to '24 because of the seasonality of the second quarter. Considering all these points, therefore, I think we've reached a very good growth rate. Without the impact of the World Cup in June and July, even though the games were at late hours, it impacted somewhat the business, especially the next day, early in the morning. [ part to the coating. 1.5 point I would ] but we are very confident in the growth that is coming. July was a very good month. We've seen some acceleration in recent weeks. There are some additional initiatives that are very consistent with good commercial agreements and we expect growth in all segments. We are very confident despite the impact we have had in the second quarter. So we believe that we can have this positive perspective of numbers from now on.

Bossolani speaking. Thank you, Flavio. That's the first point that we observed that expansion of revenue and decrease of profitability does not mean that they are related, not at all. There was a different allocation between cost and expenses, which amounted to 1 percentage point of net revenue. This is a result of what we've been doing in our organizational structure, focused on productivity. There is 1 second effect, which is less relevant, which is associated with some duplicated costs resulting from the installation of new equipment, which are more efficient. It's the initial cost, right? Idly and less relevant. There is the effect over the channel mix. We've observed growth of B2B now the percentage margin of B2B is lower than some premium channels. But it's not the right metric to use to consider the financial attractiveness of the business. It adds volume on the installed infrastructure. It requires low incremental CapEx and generates incremental gross profit, which leads to dilution of fixed costs. Our priority is to optimize everything and return on capital and not really just focused on the percentage margin of each channel. Effect and the expenses for total profitability of the company, we can see a very material expansion excluding our total equivalent of 300 basis points.

Just a quick follow-up on Lucchesi. You said, Lucchesi, that July has picked up. Do you think it's just a result of the repressed demand that you had because of the World Cup? Or do you think that more than that, it is more than what you had expected.

It doesn't seem to be just the appointment, so to speak. It has been strong since the beginning of July. It seems to be consistent and also a result of other initiatives that we have put in place. So we can see a positive trend overall.

Next question comes from Leandro Bastos with Citi.

Good afternoon. I have 2 questions. First diagnostics. Just a follow-up on what has been said. So you understood all your explanations about gross margin and some of the offenders, right, that you've reported are kind of temporary. But what will be an expected recurring margin for the diagnostics to be using our modeling. Secondly, concern Rede Américas. We've observed an improvement in the EBITDA in terms of margin, but there was some cash use in a cash position, which was kind of low for the size of the company. How can we reconcile the best EBITDA, the debt levels? And what would be the expected liquidity levels that you could have to run at a comfortable base.

Leandro, I'm going to just answer the first 1, and Bossolani will pick up. We are not going to talk about the trend of gross margin, but we can talk about the impact of the second quarter between expense and cost, there is 1 percentage point in the change of geography. The centers, the overlap of cost because of implementation of new modern lines, but there is a ramp-up for the nice, that would be 0.5 percentage point, and the mix between B2B and B2C, you can project based on what Bossolani has said. It tends to be more volume of B2B with a lower percentage margin, even though it's very positive, in terms of return on investment and profitability at large I think that with this overall information, I believe you can have a good prediction of how the margins will be. Now a question, your question to Américas.

Thank you, Leandro, for the question. Let me tell you about the performance of Américas. First, Américas had a very positive performance in terms of results, growth, EBITDA expansion, wide 40% in comparable data. It's an operation that has been following the financial plan in a very diligent fashion. Going over 1 small or 1 single quarter, it may not really show the best picture because hospitals' cash has some relevant volatility in terms of working capital especially because of commercial negotiations that may impact receiving in 1 single month or period. So considering the second quarter, we can see a consumption of BRL 60 million of operating cash which is associated with the working capital dynamics of the period. It is a phase within the half year. And analyzing the 6 months, it generated BRL 435 million of operating cash. And this is really important it shows that despite quarterly volatility, it is a platform that can really sell fund into debt in 2 when compared to the beginning of the year, it has been in line in BRL 2.8 billion been growing nearly 40%. So we can see a very strong deleveraging 1.5x the company EBITDA. In terms of liquidity, though we are a company with comfortable liquidity position. Close to BRL 360 million in cash, and we are actively working on managing our liabilities and future maturity bonds, which is not what is really require most of our attention right now.