Instituto Hermes Pardini S.A. (FLRY3) Earnings Call Transcript & Summary

My name is Pedro Meneses and I'm a coordinator for RI at Hermes Pardini. Today, we're going to talk about the merger between Pardini and Fleury Groups. Everyone will be on listen-only mode, and you'll be able to listen to the presentation. By the end of our presentation, we'll have a Q&A session. [Operator Instructions] You won't be able to unmute to ask a question. So please write your questions and add your name to them. You can find our slide deck at www.hermesperdini.com.br/ir. Before proceeding, we'd like to say that any forward-looking statements regarding business forecasts, estimates and operating and financial forecasts are based on beliefs and assumptions by our Board of Directors as well as on relevant information currently available to the company. These forward-looking statements are not a guarantee of performance. They involve risks and uncertainties, and they depend on events that may or may not happen in the future. Overall, economic conditions, industry conditions and other operating factors could have an impact on our future results of the company and could lead to results that materially differ from what we have shared here. Today, we have Mr. Roberto Santoro, our CEO; Mr. Camilo de Lelis, our CFO and IRO; and Alessandro Ferreira, our Marketing and Sales Director. Let me now hand it over to Mr. Roberto Santoro, our CEO.

Hi. Good afternoon, everyone. Let's now start talking about this merger. We just announced this merger just this morning for the Fleury Group and the Pardini Group. Our biggest hypothesis for this new merger is that we'll become one of the leading players in health care. This is what we want. And through this merger, we grew even stronger in core diagnostics medicine, and we become one of the biggest players in health care, which is really important in this value chain. Diagnostic medicine is one of the biggest pillars for primary care, secondary care, chronic disease monitoring, among others. This is extremely important and extremely foundational for the health care supply chain. And by doing this merger, we actually make both companies much stronger in our addressable market because both of them have been acknowledged for diagnostics. We can also truly expand our work in new parts of the value chain, especially by combining products and services from the Fleury Group with ours, thereby introducing this to a big network, which the Pardini Group holds with many networks and groups in Brazil. We complement each other really well. We have a B2B focused business with a large network of companies and clients, good logistics and high efficiency in our B2B. We have a B2C operations as well. And then on the other hand, we have the Fleury Group with all of its operations, all of its brands and all of its relevance in the supply chain. We've also hugely expanded our geographic markets. We're talking about 12 states plus the federal district. We're also talking about different business model for a supply chain in health care, which likes different models. Sometimes, we have different verticals. We have insurance companies, we have health insurance. We're talking about different players in different products for health care coverage all over Brazil, which means that we can interact with these models in different ways, not only for payment sources but also for other players in this industry. Let me now share the strategic rationale behind this transaction. First and foremost, we're talking about robustness. We're talking about combining companies and reaching BRL 6.1 billion in revenue and BRL 1.6 billion in EBITDA. This is a cash structure that gives us more robustness and a better ability to grow, not only organically but also inorganically through other acquisitions. Our combined portfolio is also relevant. Pardini is already part of the benchmark for its field of work. We give access to people all over Brazil to specialize exams. On the other hand, we see a very good portfolio by the Fleury Group with very specialized exams with genetics, oncogenetics and other fields, especially when it comes to personalized medicine. This adds really well to what we can offer to our clients all over Brazil. We also have a multi-brand approach with very good targeting in this industry according to different regional trades, different types of population in different players in different region. Furthermore, both on Fleury's and Pardini's sides, we have extremely highly competent Boards of Directors with directors who have led our companies to this point. Through enjoying our synergies, we expect to generate BRL 160 million to BRL 190 million in additional EBITDA year after year. We're also focused on logistics, infrastructure and a production platform based on a lot of innovation through our enterprise model, which was created and stabilized as of 2019. We are highly capable of expanding to cater to new volumes of exams and tests, which is really important when we're trying to complement each other's operations all over Brazil. We also stand out. We know that Pardini stands out in the Lab-to-Lab segment, which is our B2B operation and Fleury also standouts in B2C. They're extremely relevant in a number of markets, especially Sao Paulo and Rio de Janeiro. Also, Fleury and Pardini can work together for new B2B relationships with hospitals. Fleury is very active in that and Pardini can also join forces with them so that we become even more relevant in the future. Through this, we can make for a very robust company with a lot of strength in diagnosis and with a number of opportunities to complement each other's operations as time goes by. Let's see a few figures now. I've already mentioned a combined net revenue of BRL 6.1 billion and a BRL 1.6 billion EBITDA. Together, we have almost 490 locations in 24 Technical Areas. So when we look at how we complement each other, we see that potentially, we can produce a lot of value. We can expand our capacity to offer testing all over Brazil in a lot of states, which could boost both B2B and B2C aspirations. And when I talk about technical areas, I'm not talking about hospitals. We are present in 12 states plus the federal district. We're talking about over 20,000 employees among the 2 companies and over 4,300 medical service providers. When we think about our scale in testing production, by combining these companies, we're talking about over 245 million tests. It is also hugely important to invest in a relationship with our clients. And among the 2 of us, we have 39 brands all over Brazil. In medicine, especially diagnostics, we rely a lot on our reputation before physicians, clients in HMOs, which is really important to take into account. We also have our history as Fleury and Pardini. Our history encompasses quality, respect towards employees, respect towards clients, innovation and a great reputation. Fleury has had over 90 years of existence, and Hermes Pardini has had over 60 years, and we do represent a very good fit for each other when it comes to our reputation. So let's see our geographic distribution. Just by looking at the maps, you can clearly see how well we complement each other with our B2B locations and their B2C locations. We're talking about 315 locations from the Fleury Group and 172 locations from the Pardini Group reaching almost 490 locations. We've also mentioned the number of employees. And with these brands, we are working with the premium segment, the middle segment and also the low income segment. Right now, with the range of. [Audio Gap] We also have a range of products that we should be offering. So it's important to have brands catering to different groups so that we can truly create an ecosystem to provide these services in diagnostic medicine. On this slide, we can see how we complement each other. We have 24 technical areas when we combine Fleury and Pardini. And I find this really interesting when it comes to synergy. When we have a production strategy with big hubs, for example, our enterprise project or our [ NTOs ], which are the operating technical centers, this leads to a lot of synergy in our production models. We also work with high volumes of exams and tests not only for B2B, but also for B2C. Fleury is more focused on B2C and Pardini has over 50% of its revenue focused on B2C. Now I would like to turn over to our CFO, to talk about the history of growth of our companies and to provide you with more details and more figures. Camilo?

Good afternoon, everyone. [Technical Difficulty]

I'm sorry we're not getting any audio from the CFO. We are facing some technical glitches here. We are fixing those problems, and we will resume soon. So just 1 second, so that we can share the slides again and resume our presentation. Okay. Camilo, now we can hear you and see your presentation.

So we will now go back to Slide 7. So ladies and gentlemen, let's resume our presentation. We apologize for the technical glitch we had in our communication system. As you can see on this slide, there is a lot of consistency and similarity between the figures we see for the Pardini Group and for the Fleury Group. So these is -- are the figures for the first quarter. There was a CAGR increase of about 20% in the Pardini Group for net revenue and growth. While at Fleury, in the same period, the CAGR accounted for almost 16% of the revenue and 10% of EBITDA. So we observe consistency and transparency in the numbers presented by both groups. We don't follow this top-down variation that with a lot of changes from 1 year to another, what we see in the case of those companies is that growth has been maintained over time. In this slide, we can see that such growth is supported by acquisitions that have been made. I will tell you specifically about the acquisitions of the Hermes Pardini Group. From 2017 to 2012, there have been 11 acquisitions, such as [indiscernible], Labclass, Labfar, Pardini Toxicology Solution, DLE and recently APC and IACS. Also clinics from Dra. Odivânia, Paulo Azevedo lab and the assets of the Vita in the Sao Paulo region. It's important to highlight that since 2017, we have had 15 new units, including organic growth as well as [indiscernible] Precision Care, personalized medicine, forensic toxicology and parties distributing business, which are new business that have contributed for our growth and the revenue levels we have achieved. The next slide shows how we are strategically positioned in this market. As Roberto Santoro mentioned in the previous slide, we have presence in 12 states that accounts almost for accounts for almost 50% of the national territory. Out of the BRL 48.9 million beneficiaries in the Brazilian diagnostic market that totaled BRL 35 billion in potential revenue. Combined, we will be present in almost 85% of the regions where these beneficiaries are. In Sao Paulo, for example, we can serve to 17.7 million people. In the state of Goiás, we will reach a level of 1.3 million people in each of these states. Now with this merger, this new business will reach a much higher level of potential. So now Mr. Santoro is going to talk about efficiencies. So now I'll turn over to Mr. Santoro, who will talk about our potential synergies. Then I will come back to make additional remarks.

Thank you, Camilo. We observed several points of synergy between our businesses. Some of them have to do with the supply chain. Pardini has very high operational efficiency, a good production model that is also very efficient. It allows us to have more scalability and also more productivity. So these are some of the potential synergies that can be -- can lead us to higher levels of EBITDA. Pardini has several businesses. So for example, it's very strong in forensic toxicology. We can take this business to all Fleury businesses after we complete all negotiations involved in the merger. We also see convergent strategies between B2C and Lab-to-Lab operations in several regions. Some health care operators require a presence in terms of B2B, and they are also hospital-related strategies that can be conducted together. So not only in terms of logistics, production and cost efficiencies, but we can also take more tests to a much higher number of people. We could have new products and services to be provided in our ecosystem, not only in the lab business, but also in relationships with companies and other health care customers. When we estimate our potential synergies, it translates into an incremental EBITDA ranging from BRL 160 million to BRL 190 million per year. This was our initial estimate. Of course, we need to make a more thorough analysis, but we believe this to be a reasonable estimate in the combination of these businesses. As to the transactions and the structure, the ownership structure, I am going to turn over to Camilo again.

So this is the transaction you were familiar with. The price of this transaction was considered for each Hermes Pardini shareholders for each PARD3 1.21 of the Fleury shares. If you have 100 Pardini shares, you would get 121 Fleury shares, with an additional BRL 2.15 per share to be paid in cash. The Board of Directors will be composed of 11 members. 3 from the Pardini family, 6 doctors -- I'll correct myself, 2 independent shareholders and also 6 from Bradesco and Fleury. So we signed the contracts yesterday. The next stage will take about 60 days when we expect this merger to be approved in extraordinary general meetings in both companies. And there is another stage that involves the Brazilian antitrust authority called C-A-D-E, CADE, which is something we cannot estimate how long it's going to take. We are working on the preparation of data to be provided to them, but we do not believe it's not going to take too long. But usually, CADE asks for 365 days to publish their decision, but we expect this to be done in a much shorter period. Ex to capital increase, Fleury may promote a capital increase of up to 70.6 million shares to reduce leverage and also to give continuity to the expansion plan involving both organic and inorganic growth. On the right-hand side on the top area, you see the pre-transaction structure. So we had Bradesco that accounted for 29.98% of shares, doctors have 19.32% of shares and other shareholders a total over 50% of shares. The Pardini family had about 65% of their shares and other shareholders, about 35%. Now after this transaction, we will have about 45% of other shareholders. The Pardini family will account for 21.9%, Bradesco with 20.2% and doctors were 13% in this new structure we are proposing. These conditions have already part of the contract we signed, and they represent the current conditions. So here are some highlights. Here, we see the main figures of the first quarter of 2022, those figures have already been disclosed to the market. So here you see that this merger will lead to an expansion and size of these companies. The gross revenue of Fleury BRL 4.3 million and Pardini Group, BRL 2.2. So the consolidated revenue -- gross revenue will be BRL 6.6 billion and the net revenue will total BRL 6.1 billion. You see that those companies complement each other. So if you consider Lab-to-Lab, 6.6 million customers. We have presence in all states considering Lab-to-Lab, and we will expand our original footprint to another 12 states, and that will represent almost 50% of the national territory. The EBITDA of the consolidated company considering historic data not considering any efficiencies -- additional efficiencies or without even considering the potential for this new business would already reached BRL 1.6 billion in EBITDA. The net debt of the Fleury Group is BRL 1.5 billion and almost 0 for the Pardini Group. So we see a major opportunity in terms of creation of value and synergies. That's something we can clearly see based on these figures. If we consider a gross revenue of BRL 6.6 billion material cost of about 30% of that, we are talking about BRL 2.2 billion in material purchases in direct -- overhead costs, of course, should be included, but we see many opportunities with these mergers to increase efficiencies and because of the increased EBITDA. And let's continue looking at our time line. These are our next steps. Yesterday, we entered into the final contracts Today, we had a material fact and a notice to the market. And in the upcoming months, we'll be doing internal work so will last for an extraordinary general meeting, both for Fleury and Pardini. Then we'll be working on the condition precedents for our regulations before the Brazilian antitrust authority. As we were saying, we do have a lot of internal experience because we've had 17 acquisitions. So the Brazilian antitrust authority already knows us. They know we're always there. Very soon, we'll be able to complete this transaction. As of this moment, will be able to put into practice all the potential we've described as far as synergy and creation of value goals. Let me now hand it over back to Pedro. Pedro, can you please help us with questions?

Of course. Thank you, Mr. de Lelis. Thank you, Mr. Santoro. Let's now start the Q&A session. We have 2 questions from Vinicius Figueiredo. Vinicius asks, I'm from the Itau Bank, and I want to understand how you put together the range of synergies? How much comes from test processing efficiency? How much comes from logistics? And how much comes from SG&A? Thank you for your question, Vinicius.

Sure. Let me answer Vinicius' question. This is just an initial forecast. Of course, we see big numbers here, but most of it is related to the supply chain and to the increase in volume for our production model. So this is an initial forecast. Of course, some of it comes from our back office, some of it comes from scalability in testing. Some of it comes from our relationship with suppliers and also logistics. So I think the biggest point here is what comes from the value chain or the supply chain, rather.

Vinicius, we've had experience with different types of efficiencies and gains. We have a good technical area. We have an installed capacity of around 200 million tests, and we are at around 140 million tests. So we have the possibility of still working with a lot of operating efficiency with our fixed costs. So we're taking all of that into account for this figure.

Thank you, Camilo and Roberto. Another question by Vinicius. How does this transaction affect the plans that you had to increase the number of locations in Sao Paulo?

Regarding Sao Paulo, of course, we've increased the number of locations, especially in the past 2 years and mainly focused on clinical analysis. However, we are located in different markets, in different geographies even within Sao Paulo. Of course, we mapped it out again, we'll take any convergence points into account. But Pardini has already prepared its expansion, at least its forecast expansion for the next 5 years in Sao Paulo. And this adds really well to what Fleury wants to do. They are also serving this market with the Fleury brand and with other brands. So in Sao Paulo, we're going to join forces. And in Sao Paulo, we have a very specific branding, a very specific position with certain HMOs and with certain insurance companies. So initially, Pardini would no longer expand, but we do have a ramp up to fulfill for our expansion in Sao Paulo.

Thank you, Roberto. We have 2 questions from a minority shareholder called [ Umberto ]. He asks, Fleury doesn't have a majority shareholder with vetoing power in the meeting. Is there any way this merger could be vetoed either by the general meeting or by the Brazilian antitrust authority?

Well, we have 2 different questions here. When it comes to the Brazilian antitrust authority, we truly add to each other's operations. So initially, there's no trust. There's no overlap between our operations. Of course, in Sao Paulo and Rio, we do interface in some of our operations, but that's not a problem. That's not a conflict. It all depends on the regulating authority that is going to rule over that. But we do see that we complement each other really well. Now regarding the part of your question on the meetings. We've built up for this moment. And in the case of Pardini, we've been discussing the control executed by shareholders. So I don't think we're going to have a problem with any of these 2 players.

Great. Thank you. Next. Fleury has always seen more keen on growing and accepting debt which is not what we see for Pardini. Do you think the people who manage these companies will be able to reach common ground?

When it comes to our business mix, I don't see differences in our predisposition to leveraging. Of course, when we merge 2 companies and when we reach covenants, if we see big growth opportunities, especially inorganic growth, and of course, we still have a lot of opportunity in this market because everything is really split out, we'll probably get to a consensus. I don't see a lack of synergy in this sense. We'll have a much more robust company with a safer capital structure and a higher potential for leveraging. So if we see good assets and we have good inorganic growth opportunities, I don't think we'll lack in synergy or will have differences when it comes to this kind of inorganic growth.

Great. Our last question is from Rafael. He's an analyst. How long do you expect approval by the Brazilian antitrust authority to take?

Camilo already touched on this. Of course, the Brazilian antitrust authority has up to a year to rule over this. However, since we complement each other really well. And since there's basically low overlapping or basically no overlapping in many of these locations because we are really strong in B2B and we're only active in B2C in other states, except for Rio and Sao Paulo. But we also have huge differences in size and market share between Rio and Sao Paulo. We believe it's not going to take us a year to get approval. But yes, the deadline is up to a year. So something close to that.

Thank you, Roberto. We have another question from Roger, he asks. By merging these companies, will you be able to create more jobs? How is Minas Gerais state going to benefit from this decision? Thank you.

Pardini is a company from the Minas Gerais state. And we have a big market share here. So we are a big employer in this state. We're always growing we're always renewing our employee base. And of course, there's natural turnover for our company and for this industry. But yes, we are a big employer. And I believe there's also a great opportunity when we expand our operations to offer more. This also applies to different career progression tracks. Of course, we have an opportunity to promote people who already work for us and to hire more people from this industry. We're very focused and we have good market share in the state of Minas Gerais. We're always hiring people. We're always renewing our intellectual assets and our human capital at the end of the day.

Thank you. This is the end of our Q&A. Roberto and Camilo, any closing remarks.

First, let me thank everyone. Thank you for being here. I'd like to stress how valuable this merger is both the Pardini Group and the Fleury Group agree on that, especially right now because we are bringing new meaning to the role of diagnostic medicine. I think by joining forces, Fleury and Pardini show how important it is to work on primary care, secondary care, lab imaging, lab tests. Right now, all of that has an impact on medical decision-making. We're also talking about more regulations. We talk about getting prescriptions from physicians to perform these tests. And it's extremely important for us to work on better diagnostic medicine for the whole health care chain. We see different models all over Brazil, and we don't think there's a trade-off compared to other models but having companies which are focused on diagnostic medicine as their core business complementing each other, with good service portfolios and with good opportunities for patients to enjoy better services, we can play a more relevant role before patients catering to their needs. We think this is the path forward in diagnostic medicine. So by joining forces, we're trying to show Brazil and everyone else that it's really important to focus on diagnostic medicine for both of our companies, both Fleury and Pardini. I'd like to thank everyone who attended this conversation in our Investor Relations department is available to you should you have any questions in the future. Again, thank you very much. We do hope we can enjoy this new value that we're creating as soon as possible. [Statements in English on this transcript were spoken by an interpreter present on the live call.]