Odontoprev S.A. (ODPV3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the Odontoprev Conference Call, where the results of the second quarter of 2025 will be discussed. I am Catarina Bruno, IR Supervisor. And today, I have with us: Elsen Carvalho, CEO; and Jose Roberto Pacheco, our Finance Officer and IR Officer. This event is being recorded and also streamed on the web. You can see the presentation on the company website at www.odontoprev.ri.com.br (sic) [ ri.odontoprev.com.br ] This conference has simultaneous translation. To view, you have to click on the Interpretation icon on the bottom right part of your screen, and pick your preferred language, Portuguese of English. [Operator Instructions] Before we proceed, we'd like to clarify that any statements made during this video conference regarding the business perspectives of Odontoprev, forecasts, operational and financial goals are based on company beliefs and assumptions as well as information currently available to the company. Future considerations are not guarantees of performance as they involve risks, uncertainties and assumptions relating to future events and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that conditions related to the industry and general conditions as well as other operational aspects may affect future results of Odontoprev, which may lead to results that differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. Jose Roberto Pacheco to begin his presentation. Pacheco, you may begin.

Hello. Good morning, everyone. Welcome to this video conference to comment on the results of the first quarter and also focusing on the second quarter of '25. We have the main metrics that we will address today. Starting off top left, the evolution of net revenue with highlight going to the average ticket, not only in the variation of the quarter, half year and LTM, we have a balanced portfolio different than the competition, considering all the business segments and achieving BRL 2.4 billion in net revenues, and we'll see that in this presentation. This is much different than the rest of the market. On the top right of the slide, we can see the specific growth of the brand, Bradesco Dental in the SME segment. You can see the word record that was used, which is the case in the growth of 170,000 new SME clients in 12 months; and 90,000 new clients for the half year; and for the quarter, 54,000 new clients with a ticket that's higher than corporate, which is our main portfolio and more competitive DLR. On the bottom part of the slide, the 2 -- these 2 metrics starting off with the EBITDA and cash growing at 15% in 12 months, BRL 171 million year-to-date June. And specifically into the second quarter, we had a growth of 29% to 34% and a 27% growth in EBITDA. And on the bottom right, net income that grew 24% in the quarter and 18% LTM, achieving BRL 569 million in the year-to-date of 12 months considering June. So those are the metrics that we will go into details now in the presentation. So this is the data of the National Health Agency, the ANS, and you can see 53 million beneficiaries or members in medical plans, similar to what we've seen in other months and quarters. And here, you can see based on the growth angle, a growing share in Brazilian population limited to 17% of citizens. And there was a relevant growth in the decade of 14,000 members showing an expressive development that we can see in the Dental segment in upcoming years. On this next slide, we're showing and selecting some of the main players in dental plans. The company is the leader not only with 1, but 2 portfolios that add to each other, starting off with corporate with BRL 1.3 billion net revenues in these past months, and we've developed and have almost BRL 1 billion in revenues in SME and individual plans. So those are the 2 main portfolios in the Brazilian market that total BRL 2.3 billion, BRL 2.4 billion, as you can see on this chart. I'd like to mention the average ticket of the SME and individual plans, which is far from the rest of the industry, as you can see on the chart. Now moving on to our next slide. This is specific for the Bradesco Dental brand and specific for SME clients. It's worth noting that this is a very relevant addressable market in our opinion and even greater than corporate, given the formal jobs in Brazil that are very much connected to small businesses and SMEs. As you can see in Europe and the U.S. and Brazil, it is no different. You can see the share and relevant growth. Starting off with the quarter, 37% more ads compared to 2Q '24. And then we have 62% growth. So the company is achieving traction in a very efficient channel that not only translates into a higher ticket, lower DLR and even bad debt when we consider the credit filters in the bank channel, which is a clear differential in our P&L. On the next slide, we can see the evolution of net revenues, which is very much favored by the average ticket. A year ago, it was approximately at 1%, now a significant relevance of 5% given the discipline of substitution and sales mix with products that are higher value added. Those are the sponsors of the growth of 8% to the revenue in the variation of 2Q '25 compared to 2Q '24. On this slide, we can see the strategy that's being pursued by the company and actually delivered in the past 10 years. In the lighter color, we can see the numbers for LTM, starting off with the Corporate segment, which, as we mentioned today, brings on revenues of BRL 1.3 billion, having grown 4% in each of the 10 years. This is the more mature segment and higher competition in the Commercial segment. We can see the more recent portfolio on the top right and growing 12% per year in the past 10 years, achieving almost BRL 1 billion with an average ticket that is approximately double than the corporate market. This is a very important thesis. This is a foundation that the company has and very hard to be replicated by the competitors given the technological platform and controls that we have with the smaller clients, especially the SMEs and individuals in addition to exclusive distribution channels of the company that are providing all the support for this expansion and growth. Moving on, we have the details or an evolution of the segments quarter after quarter, starting with the 2Q '24. So the average ticket of 2Q '25 was greater in all segments year-over-year. And on the bottom part in the columns, we can see each segment and the evolution per quarter of the cost of services. The cost of services has remained at competitive levels, lower than the IPCA, which reflects the technological tools that the company has, quality management and understanding the technical behavior of the accredited network in over 2,500 cities across Brazil, enabling the company to deliver differentiated margins at the end of the day, and you'll see this during the presentation. On this next slide, we can see the evolution in 10 years, not a short period, but 10 years of our contribution margin. And it's segmented between the corporate plans. And on the right side of the slide, the growth of the contribution margin in SME and individual plans. Very similar to the evolution of the revenue, as we mentioned, 4% per year. Here, the contribution margin of the Corporate segment, it's identical 4% per year. But on the right, the more recent and newer segment with which has a clear differential for Odontoprev is growing 15% per year. The contribution margin in the past 10 years has achieved 60%, which is much higher, as you can see here than the contribution margin of 45% in the Corporate segment. This cycle of value innovation is not easy to be replicated by the closer competitors and once again, makes us very excited to continue to execute our strategy. On the next slide, we have the consequence of the positive tickets, maintaining costs and higher efficiency in managing customers with different risk profiles. You can see the annual rate of growth, which is practically 12% of the EBITDA of the company [ in ] 2022 in the first quarter, growing 18% and for the quarter, 27%. As you can see that the margin went from 29% to 34%. Our next slide talks about the net income, which is growing since 2022 at a 2-digit rate going from BRL 470 million to BRL 570 million. First quarter, the increase was approximately 13%. And in the quarter, we have approximate 20% growth in the annual variation. The investments in technology, we'd like to highlight that they reached a peak in 2023. In 2024, you can see a level that's slightly lower. And now as we've been signaling, and we expect a rate that's a bit lower in the upcoming periods. The investments in technology are a clear priority at Odontoprev. We've invested a lot in the past years in digital processes and a number of risk management tools and behavioral tools with admin behavior, and we should collect the benefits across the upcoming quarters. Now about the distribution of the quarterly net income and capital allocation. You can see that in LTM ending in June, a profit of BRL 569 million, the payout of 97% broken down into dividends, interest on capital and also share buyback programs. Now specifically in the second quarter, net income of BRL 146 million, we are fully distributing 100%, prioritizing dividends, maximizing interest on capital and also slowly executing the share buyback program. Our next slide is about the company shares that has doubled the daily liquidity from the first quarter to the second quarter now in 2025. We're very happy to observe an achievement of new -- 12,000 new shareholders. A year ago, we had 42,000 individuals, and now we have over 52,000 retail investors. So ADTV of the financial volume of the company was BRL 24 million. On the last slide, we can see the geographic distribution of the free float. So the company has shareholders in approximately 30 countries with highlight in the U.S. with over half of our free float. Before I end this introduction, I have to say that we are very happy with the successful conclusion of the company accreditation where we recently became the first certified and accredited company by the Brazilian National Health Agency as a publicly traded company. So that's our highlight for 2025. I'd like to end the initial comments and move on to the Q&A session. Thank you very much, everyone.

[Operator Instructions] First question is from Gustavo Miele from Goldman Sachs.

I have 2 questions. Two about DLR. So first of all, when we look in details to DLR in Q2, there's a highlight in cost per member in all segments. So I'd like to hear from you how much of this is coming from a higher share of new, more efficient products? And how much of that could be a frequency when we look at the outside of that, which is a bit better compared to other second quarters? We had less business days in the second quarter. Was that relevant to your performance? So that's the first question. And the second question, we've heard from the company that 2024, now thinking of a full year could be a challenging base for comparison when we consider DLR for 2025. So considering that, I'd like to hear from you if you believe that there could be any relevant challenges for DLR in the second half because the second quarter had strong performance. So I'd like to know if that would be offset in the third and fourth quarter. Those are the 2 questions.

Gustavo, thank you for your question. I'll start with the second part, the comparison to 2024 that had a lower DLR of our entire journey into 2025. In the first half, we have some highlights, especially in the cost of services year-over-year, as we've just seen. It's important to give a little bit more depth so you can understand the dynamics. So there are 3 businesses in the Odontoprev portfolio, and they have very different DLRs. In Corporate close to 50%; SME, half of that; Individual plans, a bit lower than SMEs. So what actually happened in the first half is that the Corporate portfolio shrunk. So that 50% DLR was less observed, and we have the excitement of the dynamics, and we'll definitely talk during this presentation about the second half. So we'll probably see new corporate contracts. And therefore, during the second half, we'll have a classic DLR of 50% in the bigger corporate contracts. That's what we observe. And specifically in other plans in the noncorporate, meaning SME and Individual plans, the level of DLR is lower because of a conservative pricing. And we also must remember that the company is increasingly more efficient in the electronic tools that manage risk and manage quality of the services that are provided. So the company has been more efficient year after year in investigating fraud and maximizing the quality. So that's a continuous learning experience and development even of the investments that we mentioned recently. So that said, there's a possibility of once again in 2025, having costs that are similar to 2024. That game isn't easy. So the first half was victorious in that. We had a very positive performance. But given that profile of recovering the corporate portfolio across the second half, we expect that 2025 would be similar. But once again, it's not such an obvious game. It's not a given that we would have that margin increase sponsored by lower DLR across the second half of the year.

Next question is from Raphael Elage from XP.

Actually, we also have 2. The first one is about SG&A expenses and focusing on SME specifically. So given the growth profile of the company and the focus that you have for upcoming years, should we expect a participation of those expenses in revenue similar to the levels that we've recently seen? That's the first one. And the second one is bad debt. Two first quarters of the year, we saw lower levels of bad debt compared to company history. So how does the company see that level of bad debt that's lower looking, moving forward? What should we expect?

Great. I'll take part of that question, and then Pacheco can talk about bad debt. So what we expect according to the company growth profile is that the corporate profile is very big. And we've been able to grow that even though it's already very big. In that, the sales cost is lower, and it's more stable. When you go into the noncorporate segments, first of all, there's the baseline of commissioning is higher. But overall, there are channels that have to be constantly encouraged or incentivized. So you have the market broker and you have distribution channels such as banks or partnerships. And those are segments that you always have to incentivize that channel. In the brokers channel, you have the challenge of the competition. And when you don't have competition and you're distributing, you're competing to other products. So you need to have incentives, campaigns and -- to heat up the sales. So the level of sales in corporate is higher -- excuse me, in noncorporate is higher than corporate. So when you have a bias towards noncorporate, we've been seeing an increase in the past quarters. And we've reached the current level that we believe is a level that's a good reference of what we can observe moving forward. So we don't expect that to grow, but the current level is already higher than the recent levels and given the change in the growth -- or sales profile and growth. We have a strategy with a bias towards noncorporate, and that's led by SME with a strategy that's highly just focused on bank distribution as it's a possibility that we have and our competition does not have. So different than corporate that's already mature, we are -- we continue to lead corporate. That's our biggest portfolio in members, and it alone is bigger than all our competition. But the future of the company goes through the growth of noncorporate, especially SME focusing on distribution in bank channels.

Raphael, about bad debt. So everybody probably remembers we had bad debt of 4%, 4.5% of revenues, and that's been increasing 3%, 3.5%, 2%, 2.5%. And now we have a quarter that's a bit higher than 1%. So what's happening is the growing bankalization of the portfolio with credit portfolios that are more efficient than the portfolios of previous years. So that's a factor that does increase the margin. It has a very solid foundation, which is the bankalization process, especially with SMEs that's very solid. So we believe that, that annualized level of approximately 2%, a little bit more, or a little bit less is here to stay. And it is one of the sponsors of that level of return that the company has that's been higher in recent years. We believe that it will stay for a while.

Next question is from Ricardo Boiati from Safra Bank.

My question is about portfolio. We've seen solid growth here. So the question is, can you break that down how the growth has been divided? Because we're talking about the Corporate segment and SME. How does that growth broken down with new companies, new company -- new clients? And how does that -- how about the growth in the existing companies, so we can map out the vectors of growth of the portfolio, which is still very solid? Is it like 50-50, 2/3-1/3? So any kind of comment on that, in that sense, would help us to understand the dynamic of growth in corporate and especially SME. And the second question about ticket. So specifically about Corporate that has a good level there. So the ticket has been growing in line with the IPCA, even though there's a cost per beneficiary, a lower cost per beneficiary -- per member, excuse me. So is it the current scenario that favors that continuous growth of the ticket in line with the IPCA -- or should that slow down in the growth of the ticket, given that the costs are very well behaved? So those are the 2 questions we have.

Great. Ricardo, I'll start off by talking about the portfolio. In general terms, you want us to differentiate the Corporate and SME portfolios. Let's start off with SME. Essentially growth with new contracts, new sales. So the portfolio grew in a very robust manner in the quarter and year-to-date, especially when you compare that to 2024. We don't provide guidance. But when you look at all the windows, the 6-month window year-to-date compared to 6 months year-to-date last year were up, last -- the year -- 12-month year-to-date compared to last year's year-to-date. It's -- we're increasing the speed of growth, that's what we're doing. And my expectation is that when we talk about this in the next call, it will be even faster. And in closing the year even faster. We have a clear strategy of growth in SME, and we almost -- always comment that during the calls. And that growth is essentially of the increase of sales and increase of new clients in the portfolio. And I always like to repeat that the main point of the company's growth strategy, where we're going to explore a market segment that's underserved, reaching new clients with a possibility of share in distribution that our competition does not have because we have access to the bank channel. And usually, our competition only works with brokers and they don't have capillarity to achieve all the SMEs in the country as a bank does. So in SME, it's volume, new members and new contracts. In Corporate, you have both. So the performance of the economy this year in terms of jobs so far is beneficial. It's positive. So we don't have the issue in getting -- registering new people when the economy is poor that we usually see. We had a poor first quarter and the performance of the Corporate portfolio, when you look at it in shorter periods such as quarters, you see some contracts moving in or out, and that strongly interferes in the performance for the period. But when we look at longer periods, like 12 months, we're always positive. The last negative bar in member growth in Corporate was in 2016. And since then, we've been growing every single year even if you only look at organic; [ just ] consider M&As. The first quarter was negative. Second quarter was positive, but we have a negative balance of Corporate for the year. We don't give guidance, but the second half is already contracted and will be very strong. So it will become positive in the second half and year-to-date will be positive as well. And all of that is essentially based on new contracts, retention and getting new contracts. So the economy is not affecting us, but the biggest driver in growing the portfolio is our commercial strength, our ability to retain and bring in new contracts. Pacheco, could you talk about the ticket?

Revenue is well based, what Elsen mentioned about the members, highlighting SMEs. And why is that so important? Because it gives us a much higher premium to the ticket than Corporate. So an SME average ticket of BRL 26 compared to an average ticket of BRL 18 in Corporate. And Ricardo brought in the question about the price changes, it is more significant in individuals, which is [ 46, it used to be 42. ] So the pricing power that the company has in different channels, not only with brokers, but also in bank channels and different business segments is very different than the industry. So in many different companies, even publicly traded companies, we see lower tickets in Dental in the past 2 years, and Odontoprev has been highlighting itself standing out with growing tickets and much higher than the others. That reflects the discipline in underwriting and bringing in a new risk profile, new customer profile to the company. Once again, small SMEs up to 200 members per taxpayer number is a very relevant addressable market. And the company has been a pioneer in that and opening up those doors through a relevant bank channel that acts in the entire country. So that dynamic in essence, and to conclude, for average ticket that's higher and disciplined is a characteristic of our model, and we're very disciplined in the top line because of that balance of new contracts, meaning new members and pricing in the 3 business segments.

That's great. If I may, I have a follow-up question about SMEs. In the previous quarter, we talked about the potential of the SME portfolio and strong growth. And I asked if it wasn't worth stepping on the gas and investing more to grow faster, that portfolio, specifically given the market and competitive edge of the distribution channel that the company has. And if we combine the discourse that Elsen mentioned of a growing portfolio and that's moving faster and can move even faster for upcoming quarters. And the previous question about the sales expenses that are a bit higher and the comments you made, would it make sense to consider that the company is deliberately taking the initiative of stepping on the gas and making this portfolio grow even faster? Because if we consider shareholder value, that may make sense, disregard a higher margin to build a portfolio faster, healthier portfolio with faster growth. Does it make sense to think that but -- or am I mistaken?

Well, yes, we can do that, and it has been the strategy of the company, but without giving up on margin. Quite on the contrary, the differential of pricing and distribution channels and the technology to control quality and the credit filters in the behavioral risk of these clients is new in the market. So we trust the margin and the return of this type of new client in the Dental market. It brings on risks of default, nonpayment, canceling contracts. But once again, the quality of the sales channel and the strength of the brand, especially Bradesco Dental and the risk management tools make us really excited with the return that the company is building. So we're very careful. We use a lot of discipline and focused on value. That's the major focus of the company.

Ricardo, about focus and expediting that. Considering Pacheco's comments, as we grow, we improve profitability as we have a higher average ticket and similar cost of service, this client is more profitable, and we can be aggressive growing with good profitability. We have interesting consistency in growth. In the past 32 quarters, 25 were positive. And when we look at the annual figures, except for 2020, which was the pandemic, we grew every year. But the interesting aspect is changing the growth level. When you look back 10 years, we grew 50,000 members a year. When we adopted the strategy of the different ranges where we segmented SME in different -- in 3 different sizes. And we're selling to bigger SMEs over 30 members, for instance, that grew over 100,000 members. And now in 6 months alone, we've grown 100,000 members. So we can have a linear projection to see how we can grow up to December. So we are expediting that. Any comparison that you'll have, you'll see that the current growth is greater than the past growth, and we are expediting that. And we'll see that every single call moving forward, we'll see that topic increasingly more present.

Next question is from Eduardo Resende, UBS.

I have 2 questions on my side. The first one, going back to the Corporate portfolio. We've seen a dynamic in the quarter and in LTM with a growth that's mainly coming from the Bradesco channel. So it was very clear to me about SME, but I'd like to understand the growth in Corporate in Bradesco, how that dynamic is coming, if it's an increasing in share in the Bradesco channel. So a flavor on that. And the second one is competition. We see ANS data, some other players reporting net adds that are very solid. So I'd like to know if you have seen any players that are more aggressive in price. So about that dynamic in the industry recently, how has that been?