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

Good afternoon. We here have today with us, Mr. Jorge Pinheiro, the CEO; Mauricio Teixeira, CFO; and Guilherme Nahuz, Director with Investors. We would also like to inform that this event is being recorded. [Operator Instructions] Today's live webcast may be accessed through the Internet address at ri.hapvida.com.br/en. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Hapvida 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 will turn the conference over to Mr. Jorge Pinheiro, who will begin the presentation. Mr. Jorge, you may begin.

Thank you. Good afternoon, everyone. We're here today to talk a little bit more about the proposal to have a business merger with GNDI. I would like to highlight that we are all very happy. This business has been designed for many years now. When we negotiated and we're very close to having a strategic partnership in a merger, also I have been congratulated on this. And the 2 companies will work together. For some years now, we have discussed this possibility. Because of the history and business models we've had, Hapvida, with its headquarters in the Northeast, was expanded to the North region and then the Center West region and the interstate of São Paulo. In the meantime, Intermédica expanded in the São Paulo metropolitan region, in Rio and Paraná. Here, we can see the geographic complementarily that the companies will naturally have. In addition to that, I'd like to highlight that both companies have very similar business models. For example, their mission is to provide access to the Brazilian population to high-level products. In other words, using high-quality products without giving up finding alternative ways to be accessible, increasing the penetration in the Brazilian private market. With the different possibilities and synergism, I will talk in details about them during my presentation. And therefore, this possibility to merge further reinforces the mission of both companies, which is providing high-quality products in an accessible manner. This merger will enable us to do that and work in a unique way throughout the Brazilian territory. As you can see in Slide #2 of our presentation, the merger allows us to transform and have a positive impact on millions of Brazilians by creating one of the largest verticalized companies worldwide. We're managing the 2 operators that grow the most in the country. And that is done with unique profitability and MLR. This is something the market has been expecting as well as investors and specialists. This is something that has been desired and is corroborated by the complementary characteristics of both companies and because the businesses are very similar with a possibility to provide access to the Brazilian population. So I invite you to give a look at Slide #2 -- actually, Slide 3. In this slide, a very interesting one, we can show you the geographic presence of the company on the left side in blue. Actually, in darker blue, you can see the hospitals and Hapvida. In light blue, you have the owned companies with different types of verticalization, diagnostic units, imaging. And then we also have in the middle our owned network in 5 states. On the right side, we can see the combination of the different hospitals. See how interesting the geographic position of the company is? There is no overlapping or very little overlapping. This creates something unique in Brazil. We have a network of 84 hospitals, 257 units, 280 clinics. And furthermore, since the companies have similar strategies and business models for the verticalization and integration, they share it with clients at a national level. We have Rio, Minas Gerais, Saúde, among others. Whereas in some of the regions, we work with some companies. And GNDI has different regions, and we are creating a unique possibility, operating throughout the national territory, which makes it easier for users, there's less bureaucracy and lower costs. Moving on to Slide 4. In this slide, we displayed the geographic position of the companies. Zooming in the state of São Paulo, you can see we're talking about the 2 largest operators in São Paulo following the following criteria where GNDI is leader in the metropolitan region of São Paulo. Hapvida has a stronger presence in operations in the countryside, in the interstate of São Paulo, including the Paraíba valley. And then we have GNDI in Jundai, Campinas, and it has a significant presence, which is complementary. It is a unique way to create a project in the state of São Paulo, the richest state in the country, having a single brand in all of these regions. And now in Slide #5, we provide further information regarding the performance of the different companies, and I'm talking here about organic growth. In this graph, we can see Hapvida and GNDI. In orange, we see GNDI; and in blue, we see Hapvida. From March 16 to September 2020, you can see that the 2 companies together have 2.3 million beneficiaries organically, whereas the rest of the market has 1 million users. It only shows you how strong the models that the 2 companies have used these and also the ability to have an M&A strategy and then based on that, have sustainable organic growth. And now Slide 6. Here, we show you a little bit more information on what I believe to be extremely relevant. You can see how the companies, in a sustainable way, have had a performance which is way higher than the rest of the Brazilian market. On the left side, we can see one of the company's business competition is very differentiated. And we can see the different tickets compared to the main operators. On the left side, we can see that the proposal value of the 2 companies is very similar. And this is measured by the National Health Care Agency. And then below, we can see that the 2 companies want to have the best outcomes throughout Brazil having the lowest MLR: GNDI has a little bit more than 70%; and Hapvida, 60%. So it only shows you how the companies have sustainable growth in a virtuous circle throughout Brazil. And now in Slide #7, we have very relevant information. Here, we can see that this combination will have a positive impact on the whole of the Brazilian health care system. We know that 78% of the Brazilian population does not have a private health care plan. In the last few years, we have almost 3 million people who have left the private health care market moving on to the public health care system. We know how difficult it is now while facing the pandemic. And we were able to demonstrate our capacity during the pandemic. Before the crisis, the desire of the population in Brazil, we were the third largest. We think that this has increased during the crisis. And after this combination, I will take into account people who receive between 1 to 5 minimum wages, we have 75 million people. This business merger will significantly increase the possibility to increase the penetration of health care plans throughout Brazil because of the geographic characteristics, the synergism that's been -- has been created and the possibility to share that with possible clients and improve penetration throughout Brazil. In Slide 8, we provide further information on the combination of -- on the merger of the 2 companies. We're talking about very similar characteristics. This is very relevant. Both have financial and operating performance which is way above the rest of the industry. We have 2.3 million users. Their merger would generate a net revenue of BRL 18.2 million. And even if we disregard any synergism, this near merger would lead to BRL 3.8 billion. MLR, without taking synergies into account, would be 73.5%. And now on the next slide, we can share the possible synergism that will be created with this operation. We highlight four. The first one has to do with the commercial area. Hapvida has corporate clients and so the cross-sell is extremely relevant and may increment the organic growth of the company. On the other hand, there is extensive experience in selling individual plans that may be explored. The second source of possible synergism has to do with reducing MLR. We have about 60%. Over the years, we have an extensive experience in verticalization with different technologies, furthering investments in technologies, artificial intelligence and so on and so forth. And that will help us have real and concrete possibilities to significantly reduce MLR. On the other hand, GNDI has a solid experience in offering services to third parties. We're talking about a verticalized company. But there are so many hospitals, we would become the largest hospital network in Brazil. And therefore, this will be very relevant. And then finally, this is something to be expected, the elimination of duplicities in GA and expenses. Since each one of the companies work in different regions and therefore, each one of them have different administrative expenses and will benefit from the merger. Moving on to our last slide now. We have further information on the operation structure. For GNDI, we have a premium of 10% on the last 20 days before December 21. We admire the work done by then Irlau and by everybody at GNDI. Our proposal, of course, favors a synergism with GNDI. And therefore, in our proposal, we want him to keep his strategic position in the company, including the Executive Board of the company. And also for the other executives, we have a plan. And in general terms, we will follow what GNDI has done. We want the whole team to continue working with their business plans. And then finally, the Board would have 9 members; one by Hapvida Board and then the independent members. On the right side in Page 10, you can see the pre-transaction ownership structure and then the post-transaction ownership structure with over 70% of participation in Hapvida, and we would then have a little bit over 37%. Because of the huge possibilities to generate value, because of the unique possibility to increase penetration of high-quality products for Brazilians, we have decided to have less than 50% of the company and will become a reference shareholder. And therefore, we conclude our presentation and are open for Q&A. Of course, we are subject to the assemblies of both companies. And we are now available to answer eventual questions.

[Operator Instructions] Our first question is from Vinicius Ribeiro, UBS.

Congratulations for this transaction. Of course, you won't be able to give us details, but I would thank you if you could tell us what the timing and the proportional representation would be. And then number two, we wanted to better understand how Hapvida's strategy changes for the next 3 to 4 years. When we compare the before and after, what will be the focus for the Board and for the management? What is the value generation agenda in addition to the possible integration of this asset later on?

Vinicius, thank you for the 2 questions. First of all, we cannot quantify, but there are obvious end logic. With all the experience Hapvida has and GNDI with M&A that have been very successful, we have an idea of what will happen in administrative terms. Also in terms of MLR and also from a commercial point of view, we would have a lot of gains on one side; and then on the other side, Hapvida has a lot of assets, which will provide improvements for GNDI. GNDI also has positive aspects that will help Hapvida. And I'm sure that this merger will generate something, which is very superior to what the both -- both companies have individually. We have been studied everything, analyzed everything. And we expect to have more in-depth information over the next few months. Regarding the strategy for Hapvida, basically, what changes is that it accelerates our plan. Since we believe in the value of our product and on the acceptance of the Brazilian population and our commitment in the long term with this company, of course, this possibility anticipates our plans to be the first one to serve Brazil. Together with a single product in all of the regions with a single philosophy making us more competitive, the most important thing of all is to provide further or extended access to the Brazilian population with high quality. What changes basically, Vinicius, is that we are bringing forward a series of possibilities. And in the short term, we will have a strong performance throughout Brazil.

I understand there is some pressure, but could you tell us what of the 4 leverages are the most important?

Naturally because of the representation, MLR has a greater potential. But we should not underestimate the administrative possibilities. Both companies have high expenses and have strong management and I would say that our possibilities are quite significant.

Once again, congratulations.

Our next question is from Freddie Mendes, Bradesco BBI.

I have 2 questions. I wanted to better understand the business aspect. I want to know whether there will be a strong competitive advantage or do you -- do not necessarily see it as a competitive advantage, the fact? That is the first one. Now with the presence of [ new co ], I want to know what it will be like. Perhaps you could have a larger share of this market with the merger or whether the idea is to go a little bit down the chain and try to make better use of it.

Well, thank you very much for your question. From a business point of view, I wanted to remind you that Hapvida has operated with different sizes for many, many years. We have an expertise in manage all of the different channels. Going from small to large companies, this will help our combined company to increase penetration throughout Brazil. But what we are creating that is unique is -- and unbeatable is the possibility to have a product that will meet the needs of large employers. We know how complicated the lives of employers are. When users migrate from one region to the other, it's not easy to deal with the complexities involved. And so we can improve sales. But also with the creation of this new product with a single philosophy, single management, taking into account the improvements we can generate in a strategic manner, of course, the product will become attractive to national employers. It is unbeatable, actually. It is something which is very difficult to replicate in Brazil nowadays. Because of the geographic diversion and the presence of the 2 companies from a business point of view, there are significant gains. Regarding your second question, of course, we will never give up being more and more accessible. And this does not mean -- and I know that GNDI's strategy is to work with different products, but we can benefit from their expertise in providing products which have a different philosophy. But the main mission of this merger would be to create extremely competitive products that can guarantee further access to the Brazilian population. We can capture a significant number of people.

Congratulations for the transaction.

Our next question is from Samuel Alves, BTG Pactual.

Dr. Jorge, I have 2 questions. You talked about the operational synergism. But could you talk to me a little bit about this tax synergism and the benefits of the different transactions? I would like to hear a little bit about that. And I have a second question. Could you talk to us about the time line and what the next steps are? And what do you think will happen once this transaction is concluded? I wanted to know what your perception is.

Thank you very much for your question. Well, first of all, from a tax point of view, of course, we know that the possibilities are huge in terms of obtaining tax credits. But this is something that will be taken care of by the legal department so that we can find the best option for investors, for the companies. Regarding your second question and the time line, of course, our company is ready for the assembly. The proposal was made, it has been approved by the Board of Directors. And we will give the next decisive steps and GNDI is doing whatever is required. But I'm sure that in the near future, it will be able to move forward with its assembly so that we can conclude this transaction.

Our next question is from Gustavo Miele, Itaú BBA.

Dr. Jorge, Mauricio, Irlau, congratulations for the transaction. I have one question. The first one is you showed us there's little overlap in the companies in the state of São Paulo. I wanted to ask you to replicate this analysis in the state of Minas Gerais. We have a feeling that the overlapping is also low in this state. And I want to know what you expect in terms of changes in this state more specifically since this combined company would have a possibility to generate M&A in Minas Gerais. And I also wanted to know what you have to say about organic growth. Could you tell us a little bit about the change in the dynamics in the state of Minas Gerais? And then I have a second question regarding product. Dr. Jorge has already talked about corporate products. But I wanted to give some light to individual plans, especially in the state of São Paulo, Hapvida does not have such a strong presence, and I want to know whether this will change or not. So these are my 2 questions. And congratulations once again.

Well, thank you very much for your questions. First of all, I will talk a little bit about Minas Gerais. I'd like to remind you that the companies, even though they are -- they have an extended presence, they do not have any overlapping. In Minas Gerais, it's a little bit more of the same thing. Of course, we -- in Minas Gerais, we have a strong presence in the capital city, Belo Horizonte. And GNDI has a smaller presence in the capital city, but is scattered in the state of Minas Gerais and in other regions of Brazil, including cities in the interstate. So even in this case, there is some complementary and very low overlapping. Of course, in case this transaction is successful, we will have 2 fronts. We will have organic growth. And we have just shown you that the companies continue growing. And so we will have this differential for the 2 companies, and I hope that they do have solid growth. And of course, Hapvida and GNDI already had an M&A plan, consolidation plans. And I think that this will remain. There is still a lot to be done because of the fragmentation characteristics of the industry in Brazil. We are a very fragmented country. And then we have another possibility to grow in addition to what I had already mentioned regarding synergism, geographic locations and so on and so forth. Now regarding the sales of individual plans, we are very confident about our product. And of course, we know that the product has different characteristics. And then on the other hand, they are very efficient turning these products more effective, more profitable. Everything is very well controlled. And therefore, we expect to be able to implement this.

Our next question comes from [ Joséf Sugano ], JPMorgan.

I want to try to understand what the main triggers are. Verticalization is a little bit more regional, and I wanted to understand how much we could save with this larger scale. I also wanted to understand whether you're considering distribution both from your side and Intermédica for this transaction.

Well, thank you very much for your questions. Hapvida works in different regions. The operation is very scattered. We are leaders in some regions. But you can see that we are distributed among different areas, leading to a geographic diversification. But even so, we are effective and also because of the MLR. But this is only possible when this takes place in large centers. In the cities, we work with a large concentration of users. We admire the work. We think there is a series of tools. And the use of what we're doing and seems to be very efficient. We are also working with the different bases, medical protocols that have been included, with the standardization procedures. I'm also talking about standardizing surgical procedures. Everything is now standardized, and they isolated the more efficient cases. In terms of artificial intelligence, we have also worked with startups. We also have a face identification startup that is working with us. And then we have a company which is focused on artificial intelligence and is supporting us, all of this to improve the client's experience. In other words, we have different tools available. We are sure we will be able to help GNDI to better manage their MLR. We also acknowledge that GNDI has different benefits that will be brought to Hapvida. I have just mentioned one. Imagine a network of 84 hospitals. Throughout Brazil, we have different hospitals that are being underused in the state. And so we have different possibilities of gains. I see huge potential in terms of synergism and the possibility to work in large centers. And that makes it very easy to create a network, a service network for hospitals with different levels of complexity, outpatient wards. And therefore, this customization with a hierarchized network will provide gains combined to technology. Now regarding your second question, Guilherme will answer it.

Good afternoon. Thank you for being here. Mauricio has a technical problem. He has not been able to come in to answer your question. But as Jorge has already mentioned, the corporate infrastructure will be done by 4. But we cannot answer your question right now. We still have to fine-tune it.

Well, I have a follow-up regarding the business synergism and income. I want to know if there are any risks related to synergism that will lead to changes and the cost for the clients. Do you see a risk or there's no risk?

Well, thank you very much. This is a good question. I don't see any risks. Today, our pricefication follows geographic criteria. Each one of the different cities we work at has different pricefication. We also have different costs. For example in Joinville and Manaus, we have different prices, which are, in turn, different from Fortaleza. We also have to take into account the final composition and that depends on the geographic location. And so I do not see any possibility of a negative synergism. We see a possibility of having more users, actually.

Next question is from Mauricio Cepeda from Crédit Suisse.

Congratulations for the transaction. The Brazilian market will definitely gain from this merger. I want to ask you something that perhaps hasn't been approached by my colleagues. Regarding the geography, you mentioned we have complementary geographies. But there are some important regions where you're not located. Do you want to continue with this rapid growth? Or are you going to focus on organic growth? So this is one of the questions. I have another question, though. Do you know -- because you know there is not a lot of geographic concentration, would there be a risk of a competitor filing a suit against this merger? Would it be worthwhile doing something to prevent that? And then the next question has to do with the rationale and why you have this proposal, overpricing GNDI shares, decreasing Hapvida shares or the value of Hapvida shares.

Thank you very much, Mauricio. If I do not answer your question fully, please let me know. Of course, the first thing the company will do or the consolidated company will do is to consolidate the market. But of course, this sector is very fragmented to this day and therefore, it should be expected that in our purchase pipeline -- here in Brazil, we have some very good companies where GNDI and Hapvida do not work. They are strategic. We're not going to waste an opportunity to actively participate. In other words, we're going to use a consolidation strategy looking at the consolidation of the sector with high-quality assets. From a candid point of view, we have evaluated it internally. What I can tell you is that right now, the geographic position of each one of the different companies are almost like a puzzle. And we have a perfect fit for the pieces of the puzzle. I do not see any risks in terms of competition, but the other way around. We're talking about a possibility to more create accessible products. We have a possibility to increase our penetration. We're talking about a win-win. Investors win because of the return, which is to be expected. And it's a win for the users who will have more options, more access in regions that do not have such products available. And then finally, the last question regarding dilution. Well, we made a proposal after having studied the different movements and that is in line with what the market has been practicing. We have different feedback and it generates value. Our shareholders are very receptive with the possibility of this merger.

Our next question is from Javier Martinez, Morgan Stanley.

You're talking about scale and a more competitive plan. And this is regarding the individual market. You had different measurements with Interméd. There is an important portfolio. So my question is regarding scale, is it going to be more or less attractive in terms of opportunities?

Javier, thank you very much for your question. Of course, the project is a lot more attractive or it will become a lot more attractive. You're talking about individual plans, you're talking about small companies, people who travel throughout Brazil. And we have a possibility to have a single network with clinics, outpatient wards, hospitals to take care of patients throughout Brazil. I have mentioned this word a lot because there's nothing similar. The geographic location is perfect. Our distribution is perfect. It is a significant advantage. Very few operators have been able to offer this in Brazil with outsourced services. And here, we are bringing in something with a national owned hospital network that will meet different -- the different needs of different channels, including retail. And so I only see positive things. Also in this regard, this is a game changer for the company, but for everyone.

Our next question is from Gustavo Schroden, Goldman Sachs.

Congratulations for the offer. I'm going to ask 2 questions. The first one is a follow-up regarding the dilution, and I wanted to clarify something because there was something very -- there was an important change in the value of shares. If I understood well, the intention of the company is to maintain the original conditions. But I just wanted to understand whether the company has started it and whether the company has considered something in this regard. And I wanted to go back to synergism in my second question. I wanted to understand regarding MLR and administrative expenses. If we look at the recent gains at Hapvida, could you give us an estimate and try to have a proxy of gains and synergism?

Gustavo, thank you for your questions. Regarding our proposal, as I had already anticipated, we have already considered everything. We have similar operations in Brazil. We are very confident that it's going to be very attractive to NDI investors, and it's also going to be very attractive to Hapvida. The shares have valued -- we have had a lot of feedback from investors not only at our base. And so we're confident that the proposal is very well adjusted and is profitable to shareholders in both companies. Regarding the synergism, Gustavo, I won't be able to give further detail on what you asked. Possible synergism regarding MLR are many. The expenses are -- the administrative expenses are very similar for each one of the companies. There are innumerous possibilities to capture synergism. Also in terms of MLR, I had talked about the possibility of decreasing MLR. But I cannot give you further information right now in terms of quantification.

Well, that's excellent and congratulations once again.

I wanted to say that we have received a lot of questions via webcast. We will not be able to answer them in this teleconference, but we will answer them in the upcoming days.

Thank you. We do not have any more questions. This conference is now over, and we thank you for your participation. Please disconnect from your lines now. Good afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]