Oncoclínicas do Brasil Serviços Médicos S.A. (ONCO3) Earnings Call Transcript & Summary

Good morning. Welcome to the audio conference of Oncoclínicas. [Operator Instructions] You can also remember that this audio conference is being recorded. I would now like to pass the word to Bruno Ferrari, Founder and CEO of Grupo Oncoclínicas. Dr. Bruno, please go ahead.

Thank you very much. Good morning to everyone, and thank you for your presence in our teleconference results with the market. It's a pleasure and a privilege to talk with you about one more exceptional year that we've had. And we had the capacity to continue transforming millions of lives -- thousands of lives and following our mission of winning -- of overcoming cancer. The year of 2021 was a record year for Oncoclínicas in several aspects, starting with the quality of our care, we reached an NPS of 96, proving our excellence in the care and in the experience of our patients. We also have -- we're also proud to share with you that we've been certified for the second consecutive time as a Pró-Ética company, a seal considered by the CGU for companies -- private companies with a high level of ethical excellence in the business world. We finished our IPO in August of '21, raising BRL 1.7 billion for the cash situation of the company. We also have permitted us to accelerate our expansion plan. We announced 7 strategic transactions in the past year. Among them, the acquisition of 100% of Unity, the second largest provider of -- exclusively of oncological care in the country. And we will also -- we'll work together with [indiscernible] as soon as this transaction is approved by the regulators. As far as the financial aspects, we had the best performance in the history of the company with net revenue, EBITDA, adjusted EBITDA and net profit and record net profit, as an example to show how the year '21 was. For Oncoclínicas, our EBITDA, adjusted EBITDA grew by 50%. And here, we'd like to add that 2/3 of this growth came from organic growth. Going to the next slide, we would like to show the evidence of our growth in terms of the number of units. Over the year of 2021, we started -- we went from 69 to 91 units with a presence in 20 -- around presence in 25 cities as compared to 20. Soon, we will open 30 more units in 7 cities. With the transactions that have already been announced were approved by the regulators. On the following slide, we present the evolution of our program of cancer centers. Currently, we have 7 cancer centers in the city of Rio de Janeiro, Belo Horizonte, Salvador and Uberlândia. We had 3 new cancer centers just in 2021. Beyond our entry into the Asian operations of low and medium complexity with the acquisition of Itaigara Memorial in Salvador and of clinics -- specialty clinics and diagnostic clinics with an emphasis in oncology, expanding even more our coverage in the journey of our cancer patients. We are very well positioned from a strategic standpoint, capitalized and with strong fundamentals. Our administration -- we have administered our capital structure with discipline. We are inserted in a sector very resilient and in a sector which is already resilient by itself, which is health. Cancer is the second most prevalent disease in the world and in Brazil, and it will be the first soon. The cancer treatment is not a elective procedure, and it cannot wait. We continue firm in the direction of elevating the quality of the care of oncological care in Brazil expanding our presence in an accelerated rhythm. With a subsequent event of the fourth quarter of 2021, we signed the acquisition of a participant -- relevant participation in [indiscernible]. One of the leading companies in the planning and design of clinical tests -- international clinical tests aimed at the oncology market. This transaction will complement the group of competencies that are [ data ] arm and medicine -- precision medicine arm. The OCPM, Oncoclínicas Precision Medicine, raising us to a higher level from the standpoint of academic and scientific work. Our journey is just beginning. We operate in a sector, highly fragmented, and we are very sure that we will soon transform many other lives. I would like to now pass the word to our Director of Relations with other works in the area who will talk about our financial story.

Thank you, Bruno. Today, I'm going to present the highlights, the financial highlights of the fourth quarter of 2021, end of 2021 as a year -- a record year of growth, which continues quite robust for the company. On Slide 6, in terms of the volume of procedures, we had an increase of 24.6% in comparison with the fourth quarter of '20 and the fourth quarter of '21. In terms of -- '21 -- in terms of net revenue, the growth was 33.7% in the period mentioned. It's -- we can mention the sequential growth of 13% between the third and fourth quarters of 2021. Our adjusted EBITDA grew 18.1% in the period, reaching BRL 140 million in the quarter. In the annual comparison, the growth in the number of procedures was 21.9% versus 2020. Even in a year with still quite impacted by COVID, we demonstrated once again the resilience of the sector of oncological treatment. The net revenue grew 32.8% in the year 2021, reaching a record level of BRL 2.7 billion. As Bruno mentioned, 62% of this growth come -- came organically. In other words, in a base of the same clinics. Our EBIT -- our adjusted EBITDA grew by 50% in 2021 compared to the previous year, reaching the level of BRL 481 million with a margin of 17.8%. There was an expansion of 200 basis points greatly due to the gains in leverage -- operational leverage that we continue to receive once our revenue is growing at a level much higher than our base of operational expenses. Now I'm going to pass it over to Rodrigo Medeiros, who will give you an overview about our performance -- our operational performance.

Thank you, Cristiano. As they mentioned recently, in the recent months of Oncoclínicas have been a great deal of work and integration and the acquisitions already concluded. With the Cebrom in [ Goiânia ], UMC in Uberlândia. In January of 2022, we integrated the CAM/Clion to our operations, to our care operations in Salvador. And now in March, we are starting our -- the integration of Cemise in Aracaju. All of these integrations are moving along in line with our playbook and continue to demonstrate our capacity -- our execution capacity and the [ cost ] to extract value and -- by adding good practices. We have a profound knowledge of the experience -- proven experience in these integrations, which permits us to continue to expand our presence in new regions and increasing our coverage on the line of oncological care in the cities where we are. On Slide 7 of the presentation, looking at our results in the number of procedures and average ticket, I would like to remember that our growth -- sequential growth in the last quarters. As demonstrated in the graph at the left, we grew by 24.6% in number of procedures in relation to the fourth quarter of '20 -- and we reached a total of BRL 8,000 in average ticket for -- in the fourth quarter of '21. Growth of 6% in relation to the fourth quarter of '20. On the graph on the right, you can observe the expansion in the number of procedures and the average ticket in comparison with the annual numbers [indiscernible] highlighted for the already mentioned growth of 21.9% in the number of procedures year-on-year and an expansion of 8% in the average ticket -- since the middle of the year, reaching BRL 7,600 in the accumulated number over the year. At this moment, I'd like to pass it over to Eric Alencar, our CFO, who will comment on the results of the fourth quarter and for the year of 2021.

Thank you, Rodrigo. Starting on Slide 8. We would like to present our financial results for the fourth quarter of '21 and for the year of 2021. On the graph on the right, it shows the growth of -- the growth of net revenue. It reached BRL 768 million, a growth of 34% compared to the same period of the previous year and growth of 13% when compared to the previous quarter. And for the year, net revenue added up to BRL 2.702 billion, 33% higher in the same period of 2020. Remembering that this growth in 2021 are compared to a base of growth, also solid and consistent, which we've had in 2020 compared to '19, showing the resilience of the market -- of the oncology market even in periods of the pandemic. On Slide number 9, we point out that the gross margin of costs and adjusted expenses for the period. The graph on the right show the expansion of gross margins in the periods mentioned principally due to better commercial conditions and the acquisition of inputs and gains in synergy with the maturation of operations. On the graph on the left, we show that cost and expenses, excluding the effects of the extraordinary items from the period. We note that in relation to the net revenue resulted -- reduced by 2 points, reaching 82% in the year 2021, a reflection of our effort for the reduction of costs and expenses in relation to net revenue. On the next slide, we present the adjusted EBITDA in the value of BRL 140 million in the fourth quarter of 2021, superior in 18% to the fourth quarter of 2020. The margin -- in the year, the growth was even higher. Compared to the previous year, the increase was 50%, reaching BRL 481 million with a margin of 17.8% in relation to net revenue. For the second quarter -- consecutive quarter, we reported a book profit, it was BRL 23 million in the fourth quarter. Excluding the extraordinary items, the adjusted net revenue for 2021 was BRL 179 million. Moving to Slide 11. We're going to talk about debt. First of all, we would talk about our chronogram for the amortization that accounts BRL 358 million in debt -- in bank debt to pay over 2022. On the graph below that, the leverage -- the financial leverage that reached a level of 2x -- 0.2x EBITDA for the year due to our position -- our comfortable cash position, especially with the resources that we attracted during the IPO. On our last slide about the cash flow for 2021. We had 2 major effects of these resources. The first, as I mentioned previously, with the resource from the IPO and the second, was for debt contracted at the end of 2021. Beyond that, we noticed the generation of cash of BRL 240.4 million impacted principally by the higher level of profitability reported for the year and our continuous discipline in the reduction of nonpayment and forgiveness of debt in 2021, we represented 1.8% of our net revenue compared to 2.7% in the previous year. On the line of cash flow and activities -- investment activities, there was a cash consumption of BRL 1 billion due to the payment of acquisitions. The cash flow from financing activities reported a consume of BRL 535 million due principally to the prepayment of several more expensive debts. With that, I finish my contribution to the presentation. I place myself at your service for any questions that you might have.

[Operator Instructions] Our first question comes from Gustavo Miele from Goldman Sachs.

Good morning, Bruno, Eric, [ Luciano ], Rodrigo. 2 quick questions from my side. First of all, a little bit more operational, what called our attention was the performance of the average ticket of the company with a comparative base, both sequential. I wanted to understand basically, especially with the question of year-on-year. How much of this year-on-year growth is due to recomposition of prices that was pent up with the operators? And how much of it do you believe is due to the increase of high complexity? And my second point is a little more strategic. I'd like to understand how it's evolving the role of the doctor in the generation of the [ fluid ] procedures for the company? Are you able to share with us how much of the traffic that you have today is being generated by the brand and how much is generated by doctors? And how this evolved since the IPO? And jumping on that, adding to the critical clinical team, if you could give us an update in terms of the medical career program? And how is the new doctors that are joining the base of the company, are they joining that program? And which seems to be an important tool for retention of doctors for the company? So these 2 questions.

This is [indiscernible]. I'm going to answer the first question. And I'll ask Rodrigo answer the second. The average ticket was principally recomposition. As we mentioned during the previous semesters last year, especially -- there was that dynamic of some operators due to the negative impact of negative growth in individual plans, and we got these results. So this -- we arrived at the same level as we had in the IPO. So it was a delay, but now we have a catch-up.

Thank you, [ Miele ]. This is a subject which as you know, it's very dear to our hearts. So I think the group here has 3 principal routes of the entrants of our exclusivity agreements with some payers. And more importantly, we'll continue to be this relationship doctor-to-doctor remembering that more and more is interpersonal and becomes institutionalized. So we have created here an environment, a relationship with essential arms with our scientific committees, which is a reference for the industry. And more and more, we are participating in the journey of the patient bringing this into the institution. So even though the doctor-to-doctor relationship is extremely important, we have very strong relationships between the doctors. The medical career was innovative. Some program -- one of the programs is more important in the company's history. And we've always said that our [ motor ] is our doctors. And since 2015, we have concerned ourselves and been very concerned and invested a lot of time and resources so that we can have this medical career program, which would permit us to develop and retain doctors when we make an acquisition. Part of this acquisition is inspired by the medical career program, contributing within this dynamic, and we're seeing this in a way that was a very positive way in the deal with Unity, which wants to bring these doctors into this career -- medical career program. So we don't think we're going to have any difficulties with that.

Our next question come from Vinicius Ribeiro from UBS -- UBS.

A little bit about the expansion of gross margins since the IPO. And also, if you can give us an idea of how much this expansion is related to organic growth and how much is due to the M&As? And the second question is a little bit about the volume. We see that the organic volume came back -- fell off a little bit in the fourth quarter. How do you see this question of volume? And the backlog of procedures that has been left behind?

Vinicius to the [indiscernible] -- this is Eric, I'm going to make the first -- answer the first question about the gross margin. I'm going to pass it over to Rodrigo, who will answer you -- answer your second question. The expansion is principally organic. The gross margin growth because it's the fruit of the work we have been doing. First, for the recomposition of the ticket. As we mentioned in the medications, there was an increase -- a smaller increase in the level of complexity and also better negotiations with the pharmacy industry and our focus on fixed protocols for oncology which has given us a healthy -- very healthy growth in our margin. So it's principally organic growth. It's not -- hasn't been so affected so much by the new acquisitions, which certainly improved our gross margins, but it was not the principal cause.

This is Rodrigo. [ As far as ] the number of procedures, excluding the part of inorganic growth, we had a growth -- a relevant growth in the year of 12% in procedures. Just organically, and in the quarter, also about 10%. We continue to -- it continues to be very robust, as [indiscernible] mentioned in the financial area. The average ticket is the -- the organic procedures.

Our next question comes from Leandro Bastos of Citi.

I want to follow up on the last question. On the part of organic growth, and when you open on the graph. Can you break this down between volume and ticket? How does it behave during this year and during the quarter? And the second question about your margins. The perspectives of margins this year, do you see growth and the vectors for gross margins and operational margins?

Hello, Leandro, this is [ Cris ] here. As far as volume of procedures, when we look at the number that we heard, which was the growth of 22% in the volume of procedures, approximately 12.5% came from organic -- came organically. So we're talking about approximately half of the growth in procedures came organically. I'm going to pass it over to Eric to talk a little bit about the question of the gross margin part of the question.

I'm going to talk about the gross margin. Did you want to know about the gross margin or EBITDA? I'm going to talk about both. And give you a better -- to make it more -- to improve your understanding. Our group here, we have a strategic -- strategy designed for the second year -- for the expansion of margin -- of EBITDA margin to have this through -- gross margin and through operational [ questions ], which generate savings in SG&A. Our structural point is the maintenance of growth in these margins because the leading indicators of these increases continues to be -- to appear for us, whether they be better negotiations with the payers, operational efficiency in SG&A or the incorporation of new companies to the group, which promotes this gain of scale, which we talk about so much. So for us, it was a question of trying to see impeccable in the second count and have a low, low expense, which helps payers not to waste money as well. Considering all of this, the idea here is that if there's volatility in the next quarters, but that the EBITDA margin of the group will continue to grow, both due to the expansion of gross margin as well as the reduction of SG&A since this new -- these new M&As are absorbed.

And also adding to Eric's comments, not talking about gross margin, but about EBITDA -- adjusted EBITDA margin, but one thing translates into the other, we had an expansion of 200 basis points from 15.4% to 17.8% in the margin and EBITDA -- adjusted EBITDA margin. So this gain of operational leverage, which we're able to deliver during 2021 is greatly due to the growth of our top line growth in a rhythm well above the growth of the base of operational expenses. One of the pillars of the business model of Oncoclínicas in which we imagine shall -- should be maintained during 2022 because we have been able to execute above this margin gain over recent years.

Very good, Eric. Just one quick follow-up. What caused for '22, can we see -- imagine how the numbers will look for 2022?

Sorry his audio is very low. There is some volatility, yes, due to the higher level of profitability of the company itself. In the fourth quarter, we had a 55% growth adjusted by 37% but if you compare it year-on-year, you'll see that there has been a very strong significant just in terms of our TR, and 34% at the end of the year and which converts with each other. So now, next question.

Our next question comes from [ Lucas Magazine ] from Itaú [ BBI ].

On the [ other ] side, in relation to the 11% on the [ other ] side, the ticket improvement in the second quarter, how have the negotiations been going?

Rodrigo speaking. Thank you for the question. A good part of our contracts have this automatic pass-through. There's a negotiation which is already in the contract. As we commented previously, '21 was very atypical due to the negative readjustment in the individual health plans. So hopefully, with the publication of the cost in April, and so starting in April, May, we should start to have these pass-throughs to our reimbursements from the payers.

Our next question comes from [indiscernible] from JPMorgan.

Thank you for the call. We have 2 questions here on our side. You mentioned a little bit of the margin going forward. I just want to know if you can give us a little more detail as far as the structure, analyzing the structure, the integrations and acquisitions that you have made? The second point is how do you consider the impact of the joint venture in your P&L? What will be the impact of this? Is it going to be equity income? Or if this will be part of the top line growth which we see as margin? Just to understand a little bit more at this point.

This is Eric. How are you? Thank you for the questions. As far as the SG&A, we delivered in '21, 14.1%. We had investments to support the new acquisitions, which are happening in '21 or which are now entering. And with the finalizing of these acquisitions, we will come to an average level of SG&A for the company. More than 50% of our SG&A is -- goes through, can be diluted in acquisition. So this is the first item, which is good news. We have a huge pipeline of acquisitions, which are coming in, and this will help greatly our SG&A to be further diluted in -- below the level of 14%, which is [ store ] in '21 to '22. Volatility quarter-by-quarter happens. As you mentioned, as far as the accounting of the JVs, it's consolidated and goes through -- it's treated normally on our accounting. So it comes into the [ consolidation ] that goes through our P&L, and it becomes -- and the great majority of the joint been several partnerships, but that's a very large minority of the situations are outside of our P&L.

We close at this moment, the session of questions and answers. I would like to pass the word to Dr. Bruno Ferrari for his final considerations. Dr. Bruno, please go ahead.

Thank you. Again, we would like to thank all of you for your presence in our conference and for the questions realized that we've finalized our presentation of results, and we want to thank you all for your presence. Have a good day, and thank you very much.

Thank you for using Chorus Call. Have a good day. Thank you for your presence. [Statements in English on this transcript were spoken by an interpreter present on the live call.]