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

Hello, everyone, and thank you for waiting. Welcome to Hapvida's Second Quarter 2025 Earnings Conference Call. Joining me today are Mr. Jorge Pinheiro, CEO; Luccas Adib, CFO; and Mr. Guilherme Nahuz, IRO. [Operator Instructions] This event is being recorded and will be made available on the company's IR website alongside the full earnings materials. You may download the presentation by clicking on the chat icon. Please note the disclaimers governing this release at the end of the presentation. [Operator Instructions] I will now turn the call over to CEO, Jorge Pinheiro, to begin the presentation. Jorge, please proceed.

Good morning, everyone, and thank you for joining Hapvida's Second Quarter 2025 Earnings Call. . Joining me today are Luccas, Guilherme and our IR team, Renato, Ana Luiza and [Jefferson]. I'd like to highlight key messages from today's presentation. With our integration process now complete, we're steering Hapvida toward long-term strategic objectives that will guide our company going forward. We are placing our customers at the center of all company decisions with significant investments in our health care delivery capabilities. In addition to that, we are expanding and upgrading our own clinic network, a critical pillar for ensuring long-term accessibility. Investments in our own network will enable us to continue organic growth of our covered lives with quality and sustainability. And finally, we're leading initiatives to advance technology and artificial intelligence to transform health care in Brazil, accelerating our tech and innovation efforts. Starting with care quality. We are increasingly centering our focus on our members, a principle that has permeated our discussions from our Board level down. Customer experience has become a genuine obsession with our investments focused on serving them better and better. Our quality metrics continued to show sequential improvements. In the latest ANS published IGR, General Performance Index, we've again delivered spectacular numbers. Our NDI Saúde operator focused on São Paulo reached its best level in years, consistent with the improvement trajectory that we've signaled in previous calls. We continue to advance with discipline in our investment agenda, expanding our own network and increasing verticalization. In line with what we planned and announced in late 2024, we recently unveiled our master plan for Rio de Janeiro, highlighted by the new high-complexity hospital in Cidade Nova, among several other units in the metropolitan region. Investments in owned infrastructure ensure greater control over quality indicators -- care quality indicators and enable our responsible, sustainable growth. It's a virtuous cycle. Regarding organic growth, we added 58,000 health members in Q2 with controlled cancellations and increased corporate plan sales, while individual and group plans, affinity plans also grew. After unfavorable seasonality and integration impacts in Q2, we've vigorously resumed growth. We maintain our positive outlook for the second half of the year based both on recent commercial performance indicators for new sales and churn, which align with our expectations. And on tactical decisions with short-term impacts like incentive campaigns, pricing policies and process simplification. Looking further ahead, we also expect improvements from initiatives such as launching our new product grid, revising the broker journey and redesigning new contract implementation processes, among others. Moving to MLR. We've maintained strict cost management discipline, increasing predictability and demonstrating the strength of our vertically integrated business model. Before discussing the quarterly numbers, a brief note. After completing the integration process, we conducted a comprehensive review of our cost base and identified certain admin expenses directly tied to care delivery. Starting this quarter and going forward, these expenses will be reclassified as health care costs. Prior periods have been adjusted pro forma for comparison purposes, and Luccas will provide more details about this later. Under this new approach, Q2 2025 cash MLR was 73.9%, 2.1 percentage points above Q1 '25, representing an improvement when considering the implicit seasonality that typically raises this indicator by about 2.5 points from the first to the second quarters. Note that we've also begun including judicial claims in costs starting this year. Excluding this effect, the quarter would have actually shown a 0.7 percentage point year-over-year improvement, an excellent result for a period that was further impacted by higher frequency of viral infections and respiratory syndromes plus new unit openings. Finally, on judicial claims, we had another quarter of positive signals. New net injunctions remained stable compared to Q1 this year. However, excluding duplicate injunctions, the amount decreases by approximately BRL 7 million against the first quarter of '25. Our dedicated cross-functional team, which initially focused on preventing new injunctions has recently expanded its work to address the existing injunction inventory, seeking reversals, recoveries, settlements and elimination of duplicates. We continue accelerating our digital and AI agenda with multiple initiatives like [indiscernible]. [indiscernible] stands for a Center of Excellence in AI for health care in Portuguese, developed in partnership with leading universities. This center of excellence has successfully combined data scale, academic rigor and practical application. We have proprietary AI models that have already been incorporated into routine care to prevent diseases, support diagnosis, personalize treatments and optimize resources. The results are visible. 72% accuracy in early detection of chronic kidney disease versus only 22% with traditional methods. Breast cancer risk prediction up to 5 years in advance and our virtual assistant MarIA, with a capital -- I and A standing for AI, which has already handled over 50,000 interactions with nearly 99% approval. Initiatives like these are being prioritized and monitored by our Board of Directors given their strategic importance. To wrap up, I want to say that I will be traveling to Recife after this call to launch the Federal Program called Now With Specialists at our newest hospital in the city, Ariano Suassuna. I'll be joining the Presidency and Health Ministry in supporting this program that expands access to specialist appointments, tests, surgeries and treatments by coordinating public and private sector capabilities to reduce waiting times and ensure timely care. We'll align our offerings with the program's priorities, directing capacity from our own care network to areas of greatest need. Many thanks to all our employees, doctors, dentists, brokers, suppliers and Board members, and a deep-felt thanks to our customers for their trust in our company. We continue firm with our purpose of providing affordable, high-quality health care to resilience. Now let's proceed with our financial highlights. Luccas, you have the floor.

Thank you, Jorge. Hi, everyone. Thank you for joining us. It's a great pleasure to be with you for another Hapvida earnings call. Before discussing our results, I want to address 3 important topics for this quarter. The SUS reimbursement, judicial claims, and the cost/expense reclassification I've been discussing with you for some time now, and we've just finalized. Starting with SUS reimbursement or ReSUS on Slide 3. This material will explain this process. Let me take a brief step back to give you some background information. Everything begins when one of our members uses the public system, whether for convenience or legal requirements such as emergency care in public hospitals for traumas and traffic accidents as well as dialysis, child birth and others. On average, just over 1 year after this utilization in a sense to each operator, the beneficiary identification notice or ABI. From there, we have a period for analysis and admin discussion to contest these ABIs, covering issues like waiting periods, covered scope and so on. When contested, time lines can extend up to 2 years. After this, still at the admin level, if ANS determines the charge is valid, a federal payment guide is issued. GRU, this is the federal payment guide. Upon GRU receivable, we make a deposit into a judicial action that disputes only the IVR, which is 50% above the SUS table. We don't dispute the base SUS table values or ReSUS itself. Everything is deposited and the federal government can withdraw the uncontested amounts at any time. What we dispute is only the SUS table surcharge via IVR. It's upon receiving the GRU that the collection history or HC is recognized, which is simply the quotient of GRU divided by their respective ABIs. In the table on the upper right, I show the combined ABI and GRU numbers for all Hapvida's group operators, combined because each operator is treated, individually. Under ANS GAAP methodology, the required provision per operator is the balance of all ABIs multiplied by the HC percentage, as I mentioned earlier. We've been receiving ABIs normally for all group operators. However, ANS stopped sending GRUs for NDI Saúde over the last 2.5 years. This caused NDI Saúde's HC ratio to become outdated. Consequently, reducing the combined provision to 57% in the weighted calculation between operators with high HC and NDI Saúde. Does that mean that our provision was incorrect for the last 2.5 years? No, because the methodology is automatic under ANS GAAP and conducted by ANS itself. And this discrepancy results from latency on the regulators part. During Q2 '25, we received most of this backlog causing this GRUs to impact results due to the HC ratio lag in ReSUS provisioning. At quarter end, we had an ABI balance of approximately BRL 440 million and HC ratio of 71.2%, which is the ratio between total GRUs and total ABIs with a time displacement relative to the balances you see in the table because there will always be a balance of GRUs to be received for ABIs already acknowledged. To eliminate exposure to this volatility and latency in receiving ABIs and GRUs, starting this quarter, we created our own IFRS methodology for calculating combined ReSUS provisions to reflect operational reality based on basic statistics. The new approach considers 3 main factors: dispute history; admin request approval history; and actual ABI volumes received. With this methodology, the combined coverage ratio reached 86% requiring an extraordinary provision this quarter of BRL 65 million, as highlighted in the table and chart at the bottom of the slide, enough to cover all GRUs use not yet sent by ANS. Let me repeat this, because this is an important takeaway. We recognized in Q2 '25 results, all effects, both already accounted for and to be accounted for related to the GRU backlog already sent and yet to be sent by ANS. In other words, for those concerned about what might still impact company results in coming quarters regarding this matter, the answer is, everything has already been recognized this quarter and will have no more resource-related one-offs going forward. The lower chart shows the evolution of total SUS provisions, which is ReSUS plus [SUS] IBNR. Over recent quarters, we've had between BRL 58 million to BRL 72 million. In Q2, there was an extraordinary impact of BRL 202 million, BRL 137 million from retroactive charges received through June 30, plus BRL 65 million additional provision mentioned earlier. The BRL 96 million includes the second quarter 2025 ABIs with higher HC ratios plus slightly elevated IBNR due to SUS utilization history. With this matter resolved looking backward, let's look forward. I estimate that using this new methodology, the quarterly run rate for combined ReSUS and IBNR should range between 1.2% to 1.5% of net revenue, assuming historical utilization patterns remain stable. So first topic addressed and properly anchored. Let me take this opportunity to add. In December '24, you recall we communicated to the market our agreement with ANS regarding historical ReSUS values in fines. Last month, we made the GRU payment for Hapvida Assistência Médica related to this agreement, concluding all discussions involving this operator. The amount paid was BRL 92 million below the BRL 168 million provision for Hapvida in December '24, which accounted for the greatest amount provision. Additionally, the company received ANS communication with a different interpretation about the accounting timing for the agreement. In ANS' view, recognition should occur only after actual offsetting of judicial deposits and GRU payments. Our management believes this accounting difference stems from a specific conceptual interpretation by ANS. The company maintained its 2024 financial statement recognition audited without qualifications by our auditors, including an opinion from Brazil's leading accounting expert, but temporarily reverse this effect. In June 30, 2025, regulatory filings submitted to ANS with no impact on the agreements, legal validity or market transparency. As ANS sends the remaining GRUs and payments are made or judicial deposits are offset, subsequent regulatory filings will again recognize the agreements effects. This means when September stand-alone operator data under ANS' GAAP becomes public via DIOPS, you'll see reverse PESL for operators as mentioned above. This change is nothing in IFRS, and this approach is fully compliant with accounting standards just as in 2024, but ANS thinks differently, and we're temporarily adjusting this to meet our regulators' requirements. Now the second topic refers to judicial claims. So moving on to Slide 4. Here, you can see Q2 2025 evolution starting from last quarter's disclosed data. Beginning with the upper left of the slide, I highlight judicial deposits movements stable quarter-over-quarter. From the BRL 792 million opening balance in Q1 '25, we had BRL 135 million in new net deposits similar to Q1's BRL 137 million. With improved controls, we identified BRL 18 million in duplicate injunctions during the quarter not yet returned by June 30, plus BRL 11 million duplicates in Q1 '25. So comparing Q1 and Q2 '25, new net deposits, excluding duplicates, we went from BRL 126 million to BRL 117 million. We're working hard to further reduce this in coming quarters. Every week, we adjust variables, and the dynamics remains complex. Our biggest battle now involves care-related claims and mainly fraud and abuses around autism spectrum disorder and home care. We had BRL 110 million in disbursements nearly BRL 20 million above last quarter, reflecting both higher judiciary productivity in April, May, where we have the high season and increased efforts by our judicial team, intensifying settlements and redirecting care to our owned or third-party network. This team has recently begun focusing more on order deposits and injunctions contacting parties to negotiate settlements. This releases provisions for some cases, but accelerates disbursements since these are court-mediated settlements involving releases of historical -- historically blocked amounts. On the lower left, you see our civil provisions. From the BRL 838 million opening balance in Q1 '25, we registered BRL 55 million in new provisions net of reversals, including BRL 16 million legal fees. BRL 77 million in contingency payments and BRL 33 million in monetary adjustment standardized since Q4 '24. As a result, our provision balance at quarter end was BRL 859 million, that is 104% deposit coverage, relatively stable against 106% in Q1 '25. In the upper right chart, we see our contingency expense composition. BRL 56 million refer to labor, tax and ANS fines, up BRL 15 million quarter-on-quarter, BRL 110 million civil judicial disbursements and BRL 55 million in new civil provisions, adding up to BRL 165 million impacting results, down BRL 23 million against Q1 '25. The aforementioned contingencies plus disbursements add up to BRL 220 million, 2.9% of net revenue, stable quarter-on-quarter, as you can see in the lower right chart. Now the third topic, the completion of our cost/expense reclassification project. During the first half of '25, post system integration and accounting plan consolidation, we conducted a comprehensive cost/expense review. Throughout the process, we identified certain admin expenses directly tied to care delivery like Jorge mentioned, that are now reclassified as health care costs or claims. Starting this quarter, these are classified as health care costs with pro forma adjustments since early 2024 for proper comparison. This change brings positive effects through optimized indirect tax allocation and helps in annual rate negotiations by better capturing actual costs by individual and family plans for ANS authorized adjustments, all while remaining fully compliant with accounting standards, which was the project's primary driver. So our next charts for MLR admin expenses show you the comparisons. Additions with the dotted blocks, highlights account group additions and reductions in great dash lines showing pre-adjustment percentages and previously as previously reported. We've strived for clarity, but our IR team stands ready to address any questions that you might have. Now moving on to the company's results. Starting on Slide 5. Net revenue reached BRL 7.7 billion in Q2 '25, up 7.3% year-over-year, driven by health plan revenue coming from our pricing adjustments. Medical Hospital Services revenue was pretty much flat quarter-on-quarter due to reduced third-party bad allocation, prioritizing service to our members amid higher seasonal utilization. On Slide 6, you can see how excited we are by this organic growth resumption and how we expect this trend to continue. We added 58,000 health members led by corporate plans, the strongest segment in the first half of the year with individual and group plans also growing. The SME segment up to 99 lives remains a bit more pressured by regional to competition. The lower slide section shows average ticket growth of 8.2% year-over-year, boosted by a 7.2% net price increase coming from readjustments mainly and significant mix effects. For 2025, we expect more moderate average readjustments than those of 2024, up to 2 percentage points lower consolidated varying by portfolio and market with MLR under control near our annualized targets. Moving on to Slide 7. Considering the cost and expense reclassification effect, Q2 '25 cash MLR was 73.9%, orange line, up 2.1 percentage points quarter-on-quarter, better than the typical seasonal increase, as Jorge explained. We think this is a strong result for the following reasons. First, from a historical and industry perspective, Q2 always sees higher utilization versus Q1. This is just typical seasonality. But in addition to typical seasonality this quarter, utilization was impacted by a later onset and longer duration of the viral season in the north and northeast of the country. Additionally, Early cold weather happened in the South and Southeast, which led to higher incidence of weather-related respiratory and chronic disease cases. Also, over a dozen new units were opened throughout the quarter, including hospitals, which in the early phases of operations, had pressure on margins. Last but not least, since January, we've incurred costs from out-of-court settlements that aimed to reduce disbursements. Considering all of these additional pressure factors, we are quite happy with the year-over-year reduction we can see. On the chart at the bottom, you can see ANS complaints, which fell 40% since January '24. This comes from investments in technology, management, training and people investments, expanding our service capacity, which you can see on the next slide charts. Our members are more and more on the center of everything as Jorge mentioned. And this is in all of our executive discussions driven by Dr. Candido Pinheiro and Jorge. And we want to see bear the fruit of this in the near future. In the first chart, you can see our per capita appointments and admissions, which is up 8% versus Q1 '24, while maintaining high verticalization levels and improving MLR, as you can see in the lower chart. On Slide 9, you can see our cash admin expenses. The dotted areas show G&A reductions resulting from cost expense reclassification and judicial claim reallocation into costs. This accounted for BRL 75 million in the first quarter and BRL 85 million in the second quarter of '25. In addition, for comparison purposes, we are showing 2024 data, including extraordinary items, like the year-end ANS agreement. With those adjustments, Q2 G&A was BRL 426 million, down BRL 20 million against the first quarter, progressing toward our year-over-year nominal stabilization goal, excluding provisions, and we're on the right track. Now I'd like to highlight the following positives this quarter. We had BRL 37 million in other revenues and expenses, mainly due to the revision of BRL 26 million from an early settlement of one of our acquisitions, and gains of BRL 22 million in arbitration recovery post M&A team successes. This is a one-off effect that has been recognized almost in a recurring manner in recent quarters. And the personnel line, BRL 22 million, mainly due to variable compensation reversals and the streamlining of specific departments after the integration carried out at the end of '24. On the other hand, we also had a few negatives, BRL 23 million in contingencies and taxes impacted by ANS fines, including a BRL 20 million prepayment with 40% discount for admin defense strategy. Most of these fines were not part of the agreement reached late last year because we had not yet received those cases. The contingencies, variations I mentioned earlier also impact this BRL 23 million. Also, we had BRL 18 million of third-party services, mainly legal fees, up BRL 8.1 million because of case wins and injunction recovery and expenses with consultancy firms for back-office restructuring projects, aiming to gain efficiency and review processes for digitalization, automation and the like. Moving on to Slide 10. Let's look at sales expenses. Considering the cost expense reclassification, let me highlight 3 points. First, an BRL 18 million reduction in commissions due to the clawback policy recoveries, a reduction of BRL 13 million in PDD, improved overdue collections better than in the first quarter of '25. We usually get questions about PDD coverage. So I want to highlight that the company is fully compliant to IFRS 9, which relates to PDD regulation, and we analyze the profile of our customer portfolio in each one of the segments. And this methodology was enhanced at the end of 2024 after studies conducted with our auditors, and it replaced the new model, which was not fully compliant to IFRS 9. So looking at [agent] coverage [indiscernible]. Finally, we had an addition of BRL 28 million in advertising concentrated on Q2 brand campaigns, which are focusing on to increase company's organic growth. Now on Slide 11, adjusted EBITDA, excluding the BRL 202 million of ReSUS impact was BRL 905 million, BRL 703 million reported. Similarly, adjusted net income was BRL 300 million, excluding ReSUS. We also had another 2 one-offs impacting our financial results. One of them, BRL 46 million coming from tax deposits of 2 cases involving [ISS and FAP] in São Paulo. The monetary adjustment impacted our financial results. And the ATM to December '24 actually impacted our numbers now. And the other one-off was BRL 26 million in fines that came with the retroactive ReSUS charges. Historically, NotreDame would block 100% of their ABIs, but this practice changed in '24. They now focus only on what should be discussed. So we expect this number to decrease from now on. Moving on to Slide 12. Free cash flow from the BRL 703 million of adjusted EBITDA, we had BRL 6.9 million in tax payments significantly lower than that of the period of BRL 44 million. Payments made in the first quarter covered all the taxes in the second quarter of '25. In the first half of '25, the difference between the current tax and paid taxes adds up to BRL 11 million to be used in coming quarters. We also have other levers available internally. BRL 47 million are net judicial items, BRL 165 million provisions in disbursements which has an EBITDA impact, but no cash effect, less BRL 135 million in new deposits and BRL 77 million in payments. BRL 87 million in noncash ReSUS and IBNR and BRL 103 million in working capital, mainly receivables, commissions and medical provisions. Our total operating cash generated was BRL 507 million, so 72% EBITDA conversion into operating cash. Now moving on to our last slide, Slide 13. We closed the quarter with our net debt down BRL 150 million quarter-on-quarter to onetime adjusted EBITDA, continuing our gradual organic deleveraging. So in spite of the expenses mentioned above, which are part of this journey of transformation, our company's operating indicators show how consistent our business is. Right levels of MLR, complaint improvements, higher quality of care, organic growth and strong cash generation prove that we are on the right track. Thank you once again for your attention. And now we can open for questions. Thank you very much.

[Operator Instructions] Let's proceed with our first question from Vinicius Figueiredo with Itaú BBA.

I want to talk about growth. The company has been saying it is resuming growth, starting in the second quarter, but with an even stronger second half of the year, when we look at Q2 results, we see that gross sales and churn have improved sequentially. So considering churn and gross adds, what would be the main driver of this improvement in Q2? Can you talk about gross sales? Is there anything in your radar, any contract that you are already expecting for the second half of the year? Or can churn improve even further? We see in the NIPs chart and utilization chart that the level of service quality has been improving quite a lot, so maybe this hasn't yet been fully reflected in your churn rates? And my second question is about the competitive landscape. Looking at the results of the other health care plan listed companies, we see that the ticket has slowed down, not only because of lower readjustment rates but also as a part of a competitiveness effort. How much can this affect your growth dynamics or ticket dynamics in PPO product, do you think that this is one of the drivers that is holding growth in this specific segment?

Vinicius, thank you for your great questions. About growth. Yes, we're very excited about the growth resumption. It was actually part of our plan. Our teams now can stop focusing on the integration agenda and start focusing on growth, and service quality improvement. So our governance is now focusing on these agendas. We are excited about gross adds and churn reduction. In both of them, we see space for improvement. We have several initiatives to reduce churn not only care improvement actions, but also working closer to customers, finding them options whenever they have financial difficulties or things like that. So we also have teams focusing on this, and we think this will lead to improvement in churn. When it comes to sales, yes, we do have some relevant contracts, large contracts, not only for HMO but also PPO that have already been signed and that will be deployed in Q3 and Q4. So the corporate pipeline is quite robust. We're excited also with the retail growth that has been happening all across the country in the South, Rio de Janeiro, São Paulo, things are also heating up. So we see improvement with churn. In addition to a robust corporate pipeline and a heated retail segment, this can lead to an interesting growth in the second half of the year. Now about the competitive landscape, the company has a national footprint. So in some specific cities like in São Paulo, we see more competition than in other Brazilian regions. Many companies are more aggressive in São Paulo. And our main concern is to keep the cost structure and care quality that enable us to be sustainably competitive. We've been reviewing our prices, our network, our products all around the country, but particularly in São Paulo, and the sales have been responding well. So we're quite excited. And yes, there is more competition in some specific locations, but we have the right cost structure to be very competitive.

Moving on to our next question by Leandro Bastos with Citi.

I also have 2 questions on my side. First, about the commercial front. In his opening remarks, Jorge talked about a new product grid and review in the commission policies. So can you give us further details about that? Have these drivers already contributed to Q2 results? Or are you expecting the results or the effects to be seen only in the second half of the year? Now about judicial claims, we saw the number of new deposits stable. And if we adjust for the duplicates, there's been a slight drop actually. So how do you see the flow of new cases? And have you been controlling this line with your new working group? What can we expect in terms of deposits and contingencies for judicial claims?

Leandro, thank you for your questions. I'll talk about the commercial question, and then Luccas will talk about the judicial claims. We've been implementing different measures in the commercial department. The first one is related to governance. We have many new management rituals for organic growth. Covering debureaucratization of sales with the use of new technologies and process streamlining for this to happen easily so that sales -- our sales team can sell quickly. We are working closely with brokers to understand the dynamics of the market, which require us to act fast. So in order to respond to that, we implemented many changes, including not only bonuses in the commercial area, but also process improvement. And as a result of this, we now have rituals that enable us to customize pricing products almost on a daily basis so that we can meet the demands from our commercial team all over the country. We launched many new products, but we still have other new products to be implemented in August and September. This has been a trend. The company has been able to listen to the local demands and then design new products to meet them. But most new products was launched in August, and we still have some new products to be launched in September, which will help us boost sales. So these are the main initiatives. Now Luccas will talk about the judicial claims.

Great. Leandro, there are 3 things related to your question on judicial claims. First, the flow. The flow is stable. When we look at the number of demands week after week throughout the quarter, it has been relatively stable. It's not dropping or going up. So the flow of new demands continues stable. Our prospective view is that we need to adjust a few things in these negotiations. We are adopting different approaches for settlements, especially for autism and home care, which represent more than half of our cases. So we've been investing in improving the quality of our network in certain locations to have these cases seen in our own network, and we also have support network in certain locations to provide support to autism, home care and also cancer surgery. So we're talking about settlements, regionalization and other ways to approach these topics that impact the judicial claims. So this is actually a living organism. It's very dynamic. There are always new situations arising and we deal with them in a customized manner. So this can lead to an expectation. This is not a promise. It's only an expectation because this is a very dynamic and complex issue with different impacts, but we do have expectations to be able to reduce this in the coming quarters. We've been able to stabilize the numbers quarter-on-quarter and we expect to reduce this from now on. We are investing a lot of efforts and talents in order to get the best results on this.

Our next question comes from Samuel Alves with BTG Pactual.