Hapvida Participações e Investimentos S.A. (HAPV3) Earnings Call Transcript & Summary

Welcome to Hapvida's conference call regarding the material fact for the acquisition of equity interest and lease disclosed to the market this morning. Today with us, we have Jorge Pinheiro, CEO; Bruno Cals, CFO; and Guilherme Nahuz, Investor Relations, Director. We would like to inform you that this event is being recorded [Operator Instructions] Today's live webcast may be accessed through the Internet address at www.hapvida.com.br/ir. Before proceeding, let me mention that forward-looking statements made during this conference are based on the beliefs and assumptions of Hapvida's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Hapvida and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. Jorge, who will begin the presentation. Mr. Jorge, you may begin your conference.

Hello. Good afternoon, everyone. It's great to have you here with us today to talk about the transactions that we announced this morning. The transactions took place in 3 different states. But before I dive into that, I'd like to tell you that our member of the Board, Roberto Mendes, has passed away. It's a great sorrow to tell you that. He's been with us for a bit over 1 year, but he has made a great contribution to our company. But we are sure that he is in a better place right now. Now going back to our transactions. We have just announced 3 transactions that we had been talking about to the market. The country is about to consolidate certain market conditions. We've been working very successfully. And today, we announced a set of acquisitions in the State of Minas Gerais with assets from Promed Group and Vera Cruz Hospitals. They have a vast book of beneficiaries, 3 hospitals, 1 day-hospital and 7 ambulatory care units. In Ribeirão Preto, São Paulo, we have signed a lease agreement for the Sinhá Junqueira Hospital, and we are negotiating a book with 18,000 beneficiaries in the State of Goiânia. Now let's go to Slide #5. You can see here the shareholding structure for the Promed Group. The enterprise value is of BRL 1.5 billion, with a payment of BRL 500 million in cash and the rest in shares to be issued. And implicit EV/EBITDA transaction multiple of 13.2x post total synergies. Of course, we still need the authorization of CADE, ANS and our assembly's approval. About this transaction, I'd like to add that these are spectacular assets and unique in the city of Belo Horizonte. These are 3 operators that used to operate independently and a set of hospitals. They were not integrated, but they were all located in the metropolitan region of Belo Horizonte of and one of the largest markets in Brazil. Now we're going to invest a lot in technology and broaden our own network, especially ambulatory and imaging, diagnostics, as well as hospitals because they were not integrated and they were operating independently. We will have several synergy opportunities ahead of us. I'll give you further details about them during my presentation today. Now moving on to Slide #6 about the Sinhá Junqueira Hospital lease. In the City of w Ribeirão Preto we have the largest market share in the region because of the São Francisco acquisition, so we have a 20-year lease contract now to acquire the largest maternal children hospital in the region, which will be part of our own network from now on, and we'll be able to implement full verticalization in such strategic area: obstetrics, pediatrics and this is an operation that is really interesting to us that will make Ribeirão Preto, a city with full verticalization like we have in many other cities. Now about Samedh. They have 18,000 lives in their books. This is part of a project that aims to create a cluster of growth in the Midwest. We have acquired the América's Group and we started operating in the beginning of the year. Last week, we received the wonderful news that we have just implemented our ecosystems in the América's Group, very successfully and now after we have expanded our own network with ER units being opened, many new beds being made available, we have announced the acquisition of Samedh. This is a project that sees the Midwest as one of the most resilient and important clusters in the Brazilian market, where we're also going to be a leader. Now to Slide #8, before I turn the floor to Bruno and Guilherme. I would like to inform you that we we're talking about our pipeline with 15 different operations and that we were working really hard on all of our assets. These are high-quality assets with an amazing growth potential. So we have announced the first package, and we have fulfilled all operating and financial conditions to continue consolidating these units in our pipeline. From the operational perspective, you can see that all of the acquisitions that we made and are already -- it's back now. So capturing synergies -- we are capturing synergies more than expected. I'm talking about América, São Francisco and all of our other acquisitions. So from the operational perspective, considering everything that we have acquired, we feel that we are prepared when it comes to peoples and infrastructure to integrate all of these assets, including the ones that we have just announced. From the financial point of view, for these acquisitions, we saw favorable multiples that will generate a lot of value for the company. After we pay for all these transactions, we're still going to have a robust cash flow that will enable us to be agile and aggressive to seize this opportunity. We're very happy to be able to announce these strategic acquisitions right now that will add a lot of value to our company. Now I'd like to turn the floor over to Bruno and then Guilherme. At the end of our presentation, we will be available for questions. Thank you very much.

Good afternoon, everyone. Let's go to Slide #10. These are more details about our Belo Horizonte transaction. Some of you asked us about the registry problems. Up until the month of [Audio Gap] with the Promed Group at ANS website, the National Regulatory Agency. But the acquisition of these companies don't yet explore the participation in the retail market, individually speaking, which will make this a very interesting opportunity. Considering our business model and a higher average ticket, the individual plans are the most profitable in the company. But we think that we have the potential to increase verticalization. As we said previously, these companies are working independently. They are not integrated and this shows a great potential for us. We are acquiring this spectacular infrastructure as you can see in the pictures on the right-hand side of the slide, with Hospital Vera Cruz, which is a reference in the city. And this enables us to replicate our business model in the city to increase our scale and our verticalization and integration to implement our business model. Another important point is that we have become the second largest operator in Belo Horizonte and the third largest operator in the state of Minas Gerais, which puts us in a relevant position to operate in these locations. In Slide #11, we can see that these operations are concentrated in the metropolitan area of the City of Belo Horizonte. The number of beneficiaries in that area is very large. So we're going to enter the region with 10% market share and 5.3% market share in Minas Gerais. So 10.7% market share in Belo Horizonte and 5.3% in the state of Minas Gerais. So this is an interesting situation for us to replicate our business model. And the metropolitan region of Belo Horizonte can become one of our major places of operations. In Slide #12, you can see the potential of health care in the region of Belo Horizonte and Minas Gerais. There are 5.5 million inhabitants in the health region of Belo Horizonte, 2 million beneficiaries in our health plans and 1 million in our dental plans. And the penetration of health plans, there is of 36% and 18% -- and dental plans, 18%. In Minas Gerais, 15 million inhabitants with 3 million having a health plan and 1.2 million having a dental plan. And the penetration of health plans has 19.3% in the Minas Gerais state and the dental plans have a penetration of 7.6%. The graph -- the pie chart shows you the market share in the Belo Horizonte region on the left and in the Minas Gerais state on the right. So we're going to compete with local players, and we believe that we can grow throughout history if we consider the history of growth that we've had so far. Now on Slide 13, it's important to look at this to understand our position compared to our competitors in the market. So we have a great position in the Belo Horizonte City, 3 hospitals, 186 beds and 6 outpatient units, which gives us a good infrastructure to compete with the other players in the region, including players like Unimed Belo Horizonte and Vitallis, which don't have such a good infrastructure as we have just acquired. In these operations, as I said earlier, are not integrated. So we can act even faster when trying to replicate our business model. Just a note here, we think that we have a great opportunity to work in retail channels, especially in individual health care plans, which are not well represented in these acquisitions in Belo Horizonte. Considering our reality, 20% to 30% of our users have individual health care plans, and we believe that we can grow in that area in Belo Horizonte because we are quite experienced and mature, and we feel we are prepared to serve this audience in a verticalized environment. So this is going to give us a great opportunity to grow in the retail channel and more specifically in individual health care plans. Now let's go to Slide #14. A few details about the infrastructure I just mentioned. The Vera Cruz Hospital with 148 beds, HVC Day Hospital with 18 beds, and a great opportunity to expand and the Vital Brasil Hospital with 87 beds and Progroup Hospital with 20 beds. Now the outpatient units on the right-hand side, you can see the numbers there as well and the great potential that we have to grow. In Slide #15, as I said earlier, the Belo Horizonte Health region is quite concentrated when it comes to health assets. And it can be compared to what we want to do, which is something we're used to doing. In major cities like Fortaleza that has a great number of beneficiaries and great verticalization like Recife, Salvador and Manaus, the Belo Horizonte region is now the sixth largest city where we operate. So this is where our sixth largest operation is located now. Now we can have another important region; where to operate, where to increase the verticalization of our company reducing the MLR and having a great margin like we have in other locations where we operate here in Brazil. In Slide #16, you can see our history. This acquisition that we're making in Belo Horizonte is not something new for our company. We did something similar in Pernambuco. When we entered Pernambuco, we had 18% market share and now we have 36% market share. Now another case of study is Bahia. We entered the state with 7.8% market share, now we have 24.8% market share. So once we acquire an infrastructure, we can increase our verticalization, increase the integration of the portfolio with our sales platform as well to create this single, accelerated growth platform that will bring us better revenues. Now Slide 17, the triggers for accelerated growth. The average ticket we're the main player in the region is BRL 298 against BRL 147 Promed. We already provide Hapvida's service through other locations, and we can make these people become Hapvida's customers. And we're also aiming for cross-selling with dental plans, which is an important growth leverage for the company. So through this structure, we can increase our verticalization, decrease in MLR. And you can see here some G&A amounts, just so you have an idea of the G&A expenses of the different operators. And of course, we can reduce this G&A once we implement our business model in these 3 operators. So, now I'd like to turn the floor over to Guilherme so that he can give you further details about the other 2 transactions, and then we'll open for questions.

Thank you, Bruno. Good afternoon, everyone. So we were talking about the 2 new transactions. In Slide #19, you can see further information about Sinhá Junqueira leasing agreement. We're very satisfied with this new agreement. This is one of the most traditional assets in the region. It's located in the home city of São Francisco Group. So this is an asset that is very dear to our heart. We think that we can verticalize there and meet our needs of pediatrics and women's health, and maternity in the region. We're going to make important investments in infrastructure, updating as well as expansion of the capacity. We're going to invest around BRL 11 million at first. We have 100 beds, 42 rooms, neonatal ICU, pediatric ICU, 140 doctors, 400 employees. And this hospital, Sinhá Junqueira has become a reference in high-risk management as well as high-complexity children service as well as OB/GYN, like Jorge mentioned earlier. This operation has come to reinforce our continuous verticalization plan. And it's also part of our organic expansion plans. So expansion not related to acquisitions in these regions. So in our pipeline, we have a few openings planned for the first quarter of 2021 with 3 new hospitals, 1 in Barretos, 1 in Bauru and the other 1 in Sao Carlos. So 3 cities in the countryside of the State of São Paulo, which we announced earlier this year. And in addition to the building of these 3 new hospitals, I'd like to remind you that in recent months we have announced 2 relevant acquisitions of Medical in Limeira, state of São Paulo, with 80,000 members, 1 hospital and a few clinics in the São José Group. And the Paraíba Valley, with 2 hospitals and a few clinics as well. So this lease is yet another effort to expand our operations in the State of São Paulo. The state with the largest population in the country, so to reinforce our operations there. Now on Slide #20. Samedh's acquisition. As Jorge said previously, we're very happy with the acquisition. They are made up of corporate plans, mostly. Samedh was the last independent health care operator in the Midwest region. So we continue to consolidate our growth strategy in the Midwest region with this acquisition. Last year, we acquired the América Group there, which brought us major advances. This is also a synergic operations. We have 220,000 beneficiaries in the region that are serviced through our own network, our 3 hospitals. And then -- an emergency unit called Cora Coralina and Goiânia, 14 clinics and 17 imaging diagnostic units and labs. So in addition to this M&A expansion, we also have plans for a robust organic expansion in the Midwest region. So we're planning to open new health care units, including a brand-new hospital that is being built in Dourados, Mato Grosso do Sul, another ER and a few clinics and imaging clinics that are planned to be opened in the first half of 2021. So the cost of acquisition is of BRL 20 million, which can be adjusted by the closing day. So now we would like to open for questions from the investors and analysts.

[Operator Instructions] Our first question is by Mauricio Cepeda from Crédit Suisse.

I actually have a few questions. All of them about Promed. So about the favorable multiple, I know that you usually talk about post-synergy multiples, but what are you taking into account when it comes to synergies? Is it the loss ratio only? Or are you taking growth into account as well? What is part of that? Now my second question is about the competition in the region. You talked about Unimed and the [indiscernible] acquisition. They don't have a good infrastructure there, and you do. So you think that you are relatively protected in that region compared to the competitor? What can you tell me about that? Now the third question is about capital increase. You're making significant investments, and how are you going to deal with that? And now fourth question about the average ticket value. This is a lower average ticket value at Promed. So what are you planning to do about that?

Mauricio, thank you so much for your question. Well, as far as we understand, the set of assets, and this addresses your first and second question. So we believe that these assets are high quality. Each carrier or each operator, individually speaking, has their own market. They've been growing in recent years and so have their hospitals. This is one of the largest and largest in best hospitals in Belo Horizonte. The hospital has been renovated. It has received investments in technology. They have very new diagnostic parks, state of the art. So isolatedly, I mean, each 1 of them is a great asset. But they are not integrated at all. There are no synergies between them. They have independent, administrative teams and each operator in each hospital with separate systems. Users are not referred to one hospital or another. The hospital revenue is very low. And so you can see that this is a huge potential for synergies that can be captured. We're not talking about a verticalized or integrated operator here. And so this gives us an amazing competitive edge. Belo Horizonte is an enormous market, and considering that the hospitals have a capacity that is much higher than the portfolio requires, will give us a great agility for organic growth. Another important factor that will also help us to capture the synergies is that the retail channel is not well explored. I know that the retail individual plans are not for everyone, but we can do it really well. We're also going to focus on group plans. And this is going to increase the average ticket, right? We're going to add individual health care plans, which have a higher average ticket. So once we put our products available there, the prices in Belo Horizonte will be similar to what Hapvida practices in other locations of the country. So the commercial strategy will be adjusted there. And the average ticket will, therefore, be adjusted to our reality and the synergies will come, especially loss ratio. Because once you integrate the assets and you start inviting beneficiaries to use our own network, which are a spectacular assets, then we'll start to see the loss ratio being reduced. We're also going to increase the verticalization of the outpatient units and build new units. But the investment is much lower than building hospitals. The investments required are not as high as it for to build hospitals. So we start our operations in the country with our own hospitals, which are all spectacular. And so the integration process will be shorter, not like in the São Francisco Group, which we estimated would take 4 years to take place. In this case, we estimate the integrations will take 3 years. Now about the multiples. The multiples contemplate all the synergies expected, integration, MLR reduction, sales of individual plans, all of that. The only thing it is not taking into account is the fiscal benefits, the tax benefits. We estimate that we may achieve BRL 200 million of tax benefits throughout 5 years. Now about capital adjustments. Well, this acquisition is being made through our substantial or health care arm, which does not need to consider the intangible assets in the balance sheet. Of course, later, we'll have to incorporate this through Hapvida's, but right now, because of this characteristic of the vehicle that was needed for the acquisition, we don't have to worry about that.

Our next question is by Vinicius Ribeiro from UBS.

It's kind of like a follow-up from our colleague's questions. Do you have a market share target in Belo Horizonte considering the sales of individual health care plans? Is that going to be similar to what you have in other regions of the country? Now my second question, with the hospitals that you're now adding, is it enough for you to reach an optimum verticalization level for you to operate in the same way you do in the North and Northeast regions of the country. That was all.

So I'll start with your last question. The most complex structure in our business model is the hospital structure, which if you start from scratch and you involve the whole regulatory part and the building for you to start operating, it can take from 1 to 2 years after building. Now the hospitals that are being acquired in this transaction will enable us to provide services to almost the whole portfolio and will give us the opportunity to grow in terms of number of beds, but we are going to invest in outpatient units and in imaging clinics as well as lab, collection, which is something we need to verticalize in that area as well. Now when it comes to a market share target, we haven't defined one yet. What we do have is based on everything we've done so far, it's a belief that this acquisition will enable Hapvida to gain market share from competitors, and not only that, but to grow the market. This is something that we've been seeing throughout our history. Whenever we're able to implement a model, like we're going to do, our full operations model with verticalization and state-of-the-art technology in our systems and operations will be very aggressive commercially to gain market share and to create -- expand the market. So we're going to bring in people who don't have health care plans into this market. So we are very optimistic about that, about growing the number of lives in Belo Horizonte because we are going to replicate something that we've been doing quite often buying portfolios, buying hospitals, integrating and doing this organic growth and expand in the market. So this is more of the same. This is something we know how to do. This is something we've been doing throughout the years.

Now the next question is by Thiago Macruz from Itaú.

Well, this is actually Emerson speaking. My question is about the organic growth. It's clear that you have this growth opportunity because you want to offer more individual plans, the retail channel. But I'd like to understand, when it comes to organic growth in this new growth platform, what is the potential to grow with existing assets? So that is 1 question. Now my second question is, how do you intend to implement a strategy to gain market share from Unimed, for example, since they already have a lower value average ticket. So how is this going to take place since Unimed has a lower ticket value? Now another question about the time line of the integration. How long is this going to last in your opinion? How long for the integration to take place?

Thiago, thank you for your question -- Emerson, sorry. Well, most of the Brazilian retailers are served by us. And many of them ask us to enter new regions. And that's actually one of the main reasons why we do go to other regions. I remember we went to the South region in the past or to the State of Bahia with a -- working with a major call center company. I mean, the client is asking us to go to those regions because they want to have our product there. So the high-quality care that we provide is something that these companies want and the predictability as well of our quality and cost balance makes customers become growth partners, and they invite us to go to these regions to provide services to them. So we, of course, have mapped all of our customers who operate in these new regions, but we don't know exactly how many employees each of our customers have in their plans in Belo Horizonte and in the metropolitan region of the city. But of course, our commercial team is already working on that. So we're going to offer individual plans as well as group plans because we want to grow in the market. There are strong competitors there like Unimed, but we believe that the market is enough for everyone. We are offering high technology, and we want to make the market grow. We want to offer users another alternative. We want to offer affinity plans. And I'm sure that all operators will continue to grow there. I think there is space for everyone, including Hapvida. Now about the time line. We believe that this integration will take around 3 years. The most significant part of the integration will probably take place in the second year. Of course, we're going to revise this as we go by. We're going to try and approve new products, implement systems, and integrate the assets. And later on, we intend to expand our network. And by the end of the third year, this project will be completed, at least according to our estimates.

Next question by Gustavo Tiseo from Bradesco.

My question is related to the previous one. I'd like to understand a bit more about your integration pipeline. Or what can we expect in the next 2 to 3 years of integration? So first, you intend to grow the diagnostics part, or what? Just so we have a better idea of what to expect in the near future. Congratulations on this acquisition.

This is Bruno speaking. Thank you for your question. Well, Gustavo, we have actually already created a methodology for integrations, which is very clear. We have already established which are the synergy items that we can have in the short, medium and long terms, for costs and for beds, or delays. Delays can have a more important part of the synergies, which will depend on the implementation of the systems. But of course, we're going to renegotiate contracts for purchasing of materials and drugs. We are establishing treatment protocols, especially for high-complexity procedures. And we're also working to prepare the incorporation or implementation of our systems, our ERP. So we know exactly how to implement this integration process because that's what we've been doing in the recently acquired companies. And then depending on the operating structure of the new acquired company, and the shareholding structure, we adapt to conclude the integration with the implementation of our system and our unique business model, which is different from other companies that keep on using the systems of the acquired companies. So we have this protocol already established, this whole step process already established for the integration. This is what we did with the América Group. We implemented our systems, and the synergies will be captured soon. We are working to implement our system in other new companies as well. So this is how we plan our integrations, of course, depending on the structure of each of the acquired companies.

[Operator Instructions] Thank you. If there are no further questions, I'd like to turn the floor back to Mr. Jorge for closing remarks. Mr. Jorge, you have the floor.

I would like to thank all of the attendees today. We're really happy to announce the spec of acquisitions and our plan to consolidate the sector. And our commitment is to serve people with high-quality health care and affordable prices considering the reality of our country and of the companies. So I'd like to thank our team who's been working really hard to bring spectacular results to us and our investors as well. We are committed to delivering everything we promised this is our main commitment to promise what we can do and to deliver more than we promised. This is what we've been doing. And this is another proof of that. So thank you very much, and have a great afternoon. If you have any other questions, just get in touch with our team, and we can help you. Thank you. Have a good day.

Thank you. This concludes Hapvida's presentation. You may disconnect your lines at this time, and have a nice day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]