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

Good morning. And welcome to the results call for Oncoclínicas. [Operator Instructions] Remembering that the audio conference is being recorded. I would now like to pass the microphone to Dr. Bruno Ferrari, Founder and CEO of Oncoclínicas Group. Dr. Bruno, please go ahead.

Good morning to everyone, and thank you for your presence in our teleconference of results with the market. It's a pleasure and a privilege to talk with you about one more important quarter which we've had the capacity to continue transforming thousands of lives through our constant mission of overcoming cancer. In the first quarter of 2022, we concluded the acquisition and we started the incorporation of the CAM/Clion Group in our platform. A leading clinic in specialties -- specialties and oncological care located in Salvador with lots of operational synergies with our units in that city. We also concluded the acquisition of Cemise, which is in the process of integration. The most important network of clinics, specialized clinics and medical screening and diagnostics located in the state of Sergipe, with 10 units. We also mentioned that these 2 acquisitions contribute to our strategy of covering the entire journey of the oncological patients from prevention in diagnostics and our specialized medical offices to our palliative care. For now, we're advancing in the line of integrated care through the implementation of our service centers and makes total sense for us to be present in prevention and diagnostics for oncological diagnostics. We're still waiting to finish the finalization of the conclusion of approval by the regulators for the acquisition of Unity. We'll add 34 more units to our platform, Itaigara Memorial in Salvador and our cancer center in partnership with Santa Izabel Hospital also in Salvador, which will cooperate with our strategy of integrated care for patients for -- in Bahia. As far as financial aspects in the first quarter was one more quarter of record performance for the company. In spite of the impact, we're still prison of the Omicron variant at the beginning of this year, in the month of January. This factor did not impede us from offering more than 103,000 procedures through our 91 units currently in operation. Growth of 14.8% in relation to the first quarter of 2021. Our net revenue grew by 31.5% compared to the previous year. Our gross margin expanded 190 basis points in the quarter compared to the previous year, growing by 39% and our EBITDA adjusted EBITDA reached BRL 141 million in the first quarter, a record performance for the company. In comparison to the last 12 months, the adjusted EBITDA reached BRL 512 million, representing a growth of 31% compared to the same period in the first quarter of last year. We continue firm in the direction of raising the quality of oncological care in Brazil, expanding our presence with a great deal of discipline and a rhythm -- accelerated rhythm and with consistent results. Our journey is only at the beginning. We operate in a sector that is highly fragmented, and we are certain that we will transform many other lines. I'm now going to pass it over to Rodrigo Medeiros who's going to give us more details about the operations and about the things that are under our new units, which are underway. Congratulations to the team for the excellent work that's been being done in line with the chronograms and proposals, they're bringing operational efficiencies to the group. Rodrigo?

Thank you, Bruno. Good morning to everyone. If we look at Page 4 of the presentation, the status of the integrations, which we did in recent months, such as, for instance, CEBROM in Guyana, and UMC, our cancer center Uberlândia both units are running together with our operations in Centro, we also transformed the principal for our service center. This unit is already running in the same margins at the Grupo Amco Cliniques Group and is integrated with our administration. The UMC is also running on the same margins of the group. And actually, we are centralizing the activities of supplies in our central shared services center so that all of our hospitals and cancer centers will be standardized and centralized. For the expansion of capture synergies and various processes that facilitate our hospital operations in the future, we're very content with these integrations that have happened at the right time maintaining their best practices of these units and capturing value for the company. Currently, we are inventing in the CAM/Clion integration, which is already quite integrated to our NOB, our clinic in Salvador. And after a very wider range of care with the acquisition of Itaigara, our Day Clinic and the Cancer Center announced in partnership with the traditional hospital in Santa Izabel. Our expectation is that all of these integrations in Salvador will be announced in the third quarter when Itaigara in the Cancer Center have already been approved by the CADE by the regulator. Finally, we are currently integrating our Cemise, our clinic specialized clinic in Sergipe in Aracaju with NOS, our oncological clinic in the same city. The micro imaging in our precision medicine unit. We also concluded the reorganization as with important changes in the marketing, IT, commercial, financial and CSO, along with other reinforcements and our different teams and involve these integrations. We're very well positioned with a management structure more and more robust and we're prepared to offer the continuity in the next integrations and the increase of complexity in our operations. Both with initiatives of organic growth as well as the capture of synergies in the existing operations as well as in the upcoming acquisitions. We're also, in parallel, revising our processes and costs to be able to confront the inflationary pressure and the increase in the cost of capital, maintaining our financial discipline during this process of growth. Going to the next slide, on Page 5. We can several financial highlights in the quarter. In the first quarter of '22, we grew by 31.5% in net revenue compared to the same period of the previous year, reaching BRL 808 million. We'd like to also point out that with the expansion of 190 basis points of gross margin in the first quarter, which reached 33.3%, even with the [indiscernible] reaching [ 33.6% ] of gross revenue compared to that of the first quarter of '21, which is 0.6% of net revenue. This is a very normalized and basis of comparison. Even with this normalization for provisions for non-payment, we're still expanding our gross margins fruit of our work together with the pharmaceutical industry and the gains of scale in the purchase of medications. On the same slide, we show the adjusted EBITDA of the last 12 months, which reached BRL 512 million with a flat margin in relation to the same period of 2021. It's important to mention that there is no integration of new units during this period last year since we had a series of integrations, as we mentioned previously in this current period. Which makes us hope to believe that we have in the next period, the continuity of the process of gaining of leverage, operational leverage, both through the organic growth as well as inorganic growth and integration and capture synergies and contributing to the continuity of the expansion of margin and adjusted EBITDA. Going to the next slide, on Page 6, we point out our robust and consistent growth in the number of procedures and average ticket in the annualized period. We have to highlight the increase of approximately 15% in the total of procedures, reaching 103,000 procedures in the quarter. An expansion of 13% in the average ticket and effective inflation in 2021 and part of the inflation of 2022, which is already having its effects on the first quarter since several contracts with payers have already anticipated the repass of inflation in the beginning of the year. On the graph on the right, we see a growth of 22% in the number of procedures in the 12-month period ending in the first quarter an expansion of 8% in average ticket. Now I'm going to pass it over to Cristiano Camargo, our CFO and Director of IR, who will give you more details about the results in the first quarter of '22. Thank you all.

Thank you, Rodrigo. Good day to everyone. Today, for the first time as CFO of the company, I'm going to present the results of the first quarter to you. On Slide 7, we started with an expansion of 31.5% in net revenue in the quarter compared to the previous year, reaching BRL 808 million compared to the fourth quarter of '21. In other words, in the sequential route, we had an expansion of 5.2%. In the graph on the right, in the comparison of the last 12 months, and an expansion of 31.8% in net revenue, being that approximately 70% of this expansion came through organic growth. On the next slide, we present the growth of 190 basis points of gross margin, reaching 33.6% for the period. Even in basis of PCLD different bases, as was mentioned by Rodrigo differently -- previously. Our growth in the first quarter of '22 was in line with the levels normalized lines of the company to 2.3% compared to 0.6% in the first quarter of 2021. It's a result that is very, very encouraging result once it reflects the growing gains of scale in our platform. On the right-hand side, we observed on basis of the 12-month period that we've had an expansion -- an important expansion in the order of 60 basis points indicating clearly a tendency for the expansion of margin growth as the company has been mentioning since its IPO as a tendency for our results. On Slide #9, we point out the EBITDA -- adjusted EBITDA, which reached BRL 141 million in the quarter with a margin of 17.5%. It's the highest EBITDA -- adjusted EBITDA for one quarter in the history of the company. It's also worth mentioning that this margin in the quarter is being pressured by the integration of several new operations that did not exist in the first quarter of 2021 and that these operations traditionally come into the company with lower margins due to [ principal ] to relational expenses compared to net revenue higher than our average. Over the process of integration with the capture of gains and synergy and efficiency. This relationship is converging to the average of the company -- of the rest of the company. On the graph on the right, seen adjusted EBITDA of BRL 512 million, a margin of 17.7%, in line with the same 12-month period ending in the first quarter of '21. But it's worth mentioning that again that in the previous year, there was no large integration of new units, which pressured the margins of the company. On the next slide, commenting about the -- our level of our debt. We're currently with 1.3x of leverage -- financial leverage, net debt to adjusted EBITDA. It's important in this scenario of an increase in income of interest rates. On the last slide on the cash flow in the quarter, we had a consumption of BRL 127 million of operating cash due to a working capital more intensive principally anticipation of the purchase of medications in the first quarter. And also by the growth -- accelerated growth of the company added to any seasonal effect of an increase in the day of receivables, which tends to be transitory and converges to the average over the next quarters. We had a consumption of BRL 303 million in cash flow and investments, principally due to the payment for acquisitions and payment of participation of minority participations. In the cash flow of financing, we consumed BRL 123 million in cash due to the amortization of loans and financing and payment of interest on loans and acquisitions. With this, we finish our presentation and results for the first quarter of 2021 -- 2022 and we take advantage to open for the questions and answers. Thank you all.

We will now start the questions-and-answer session. [Operator Instructions] Our first question is from Gustavo from Goldman Sachs.

Good morning, Bruno, Rodrigo, Cristiano. Two questions from our side. First, about the organic performance of volume. See that the growth year-on-year of organic growth was 12%, while the ticket was close to 13%. I understand that the ticket growth is not a 100% organic, but we understand that there shouldn't be such a huge difference in the average of the legacy units. So we wonder if the volume performance may have been more and compared with the first quarter of '21. I'd like you to comment a little bit on this dynamic. Do you see a higher level of competition. Have you dividing some of this volume with other players due to the pandemic, I want to understand a little bit this recovery of organic volume that -- that's my first question. The second question is in relation to gross margin up 2% that you had year-on-year. Can you comment a little bit about these gains of acquisitions of inputs, but I want to understand if this is a natural gain of scale or if you're expanding your scope with the pharmaceutical companies that are your partners perhaps buying in different drugs as the protocols evolve and how does this affect your cost. These 2 points on it.

Good morning. I'm Rodrigo. I'm going to cover the first question and pass to Cristiano to answer the second one. When we -- as we mentioned, in fact, in this first quarter, the comparison is a little bit atypical both because the first quarter of last year, we had a window of a cooling off of the pandemic. The increase, which right after that, started to be reduced again as people came back to started to going out for the checkups and so forth. So the base of comparison is atypically high. And this year, we've had the inverse effect in the month of January was highly impacted by the volume that we saw a typical lower due to the Omicron variant. We had many cancellations, many reschedulings even so, we had organic growth, both in number of procedures as well as average ticket. And we see a tendency to January was very weak, but March was very strong. And April and May, we continue with a positive tendency. So this is our vision. As far as your first question on the organic, and I'm going to ask Cristiano to answer the second part.

Good morning. As far as the expansion of our gross margin, we see this expansion of 190 basis points in the quarter -- in the first quarter of this year compared to the first quarter of '21. And this in spite of the fact that we've had an average base of -- which is not apples-to-apples as we can say, our PDD. We've come back to a -- to normalize the company. We had a PCLD of 2.3% of our revenue compared to in the past, it was only 0.006%, which was a PCLD atypically low when we equalize this on the same base, our expansion of gross margin would actually have been even higher than this 190 basis points. And this has a lot to do with the gains of scale in the platform. And obviously, this is reflected -- is a reflection of better terms. The procurement terms in the basis of [indiscernible], which is our main input is an important factor, which I'm going to ask Bruno to mention to comment on is exactly as a result of the standardization in the use of preferential protocols.

Thank you, Chris. Thank you, Miele. Your question is very correct. The adoption of part of the preferential protocols has meant that we do an analysis of the economic factors of each protocol and a pharmacoeconomic analysis. Obviously, there's a higher level of competition in the pharmaceutical companies who offer treatments for the same disease with different drugs, there are different protocols from the different manufacturers, and this has given us some leverage to us in our negotiations, and we see this intensifying more and more. So this is an important part of that equation. And the other part, of course, is the operational efficiency as was commented both by Chris and Rodrigo in their speech of integration, which have been happened at a velocity at a faster velocity and with more regularity. Just to reinforce this, we should -- it's important to reinforce that the 2.3% of growth in the nonpayment, which is above our normal rate in the first quarter of '21 is well below the average of the sector. So we have come back -- we simply came back to our normalized volumes. This is the history of the historical average of the company. But even so, well below the average of the health sector overall.

Our next question comes from [ Obaise Beatrice ] UBS,.

I have 2 questions here about the volume. What's the expectation for the growth of volume for 2022 related to procedures? And the next question, as far as average ticket, we understand that the average ticket could have some volatility during this quarter -- from quarter-to-quarter is your expectation is that this level of ticket in the first quarter will maintain for the rest of the year? And what are your expectations as for average ticket.

This is Rodrigo, and I'm going to give you a general view and Cristiano can add or Bruno, if they have anything to add. First of all, we're still running after, as I said, March was very strong as well as we had -- January, there was weak. February was more or less in April and May, we see an increase in the sequence. We still can see clearly, but we're optimistic in terms to this repressed numbers from the pandemic. There's a delay in a period that was more a gradual recovery as far as recoveries and routine tests come back in that the number of procedures will increase. In the average ticket, we hope we'll be in line with the signals that we we've given in our history, which is approximately 20% of expansion of revenue. As far as when you asked about the effect of average ticket, I think it's more the mix. We had this effect at the beginning of our readjustments, which was still very timid and which will now come on as adjusted now in April, some in June and some in July. So we'll have a capture a gradual capture of this in our revenue, which will get an increase over the next few quarters. I'd also thank you, I would just add on the question of the procedures that this dynamic -- this quarterly dynamic, it oscillates. It's not homogenous quarter-on-quarter. We have historically quarters in which the volume of procedures, the growth in the number of procedures compared to the first semester of the previous year is more -- comes in more strongly. There are quarters in which it's -- it comes in more softly. And when we add the conjunction of quarters. We see this historic which we're able to deliver of growth. The organic growth in the number of procedures always in line with the low double digits. However, it's not it's not exactly like predictable quarter-by-quarter. Consistently, we have been able to deliver growth, organic growth of revenue. And in some quarters, the biggest contributor to this has been the volume of open procedures and in other quarters, it's the average ticket. And in some cases, it's the mix. However, looking at the several quarters overall at a more annualized basis, sense to converge to the mix, which we frequently mentioned, which is growth, average growth of and low double digits for procedures and average ticket always historically between 8% and 10% per year in growth.

Our next question is from [ Luca Marine ] from Itaú BBA.

Good morning, everybody. In relation to working capital, you had some increase in stocks in receivables. Is this something temporary? Or if you see that it will stay like this going forward. Do you see that as a constant going forward?

Luca this is Chris. The dynamic of working capital is transitory. It's due to basically 2 major variables. The first is an increase in the average period -- average amount of stocks of inventories that we have on hand. In the first quarter of '22 went to 21 days of stock on hand. When we look at the inventory quarter the first quarter of '21, that number was much lower. This is a decision that we made strategic commercial or anticipating the purchase of medications prior to the readjustment. It is a commercial decision and will be benefit the cash position of the company so that we could capture and make an inventory of these medications prior to the annual readjustment of medication prices. Beyond that, we also have a dynamic, which is seasonal to the -- and have hit us at the beginning of the year in relation to the number of days, average days for receivables. So we also had an increase of approximately 10 days in the average period of receivables for receivables due principally to the dynamic of the payers of making a management of their cash flows based on the amount of service providers, which is not specific to Oncoclínicas it's something that we've seen happening in the sector overall. So it's a combination of these 2 factors, which winds-up taking us to this intensity of working capital in the first quarter of '22.

Our next question Estella from JPMorgan.

Good morning, people. On our side, I wanted to know how do you see the tendency of normalization of the working capital in the next quarters?

This is the dynamic which we've seen happen in previous years. It's almost invariably repeated year after year. The tendency is that this number will converge with an average for the rest of the year over the next quarters. So there is something that was specifically related to a commercial decision that we made, which as I just explained in the previous question, which was the anticipated purchase of medications. This will already be normalized in the second quarter. And the question of average period for receivables, which also something would you historically see normalizing more over the second and third quarters as the payers receive and are able to implement their readjustments of their plans for their final consumers. This takes us -- it removes this cash pressure on the payers. And we need to remember that they -- last year, they had an average come from that system of negative readjustments, less 8% in the individual plans which brought a tremendous cash pressure for those which are more exposed to the individual plans and the tendency that this readjustment is applied now during the second quarter this also alleviates this cash pressure on them. So the expectation is that in the second or maximum in the third quarter, in the second and third quarters this distortion in the average length of receivables will -- our term for receivables will pass. It's something that's transitory, nothing to be concerned about. It's nothing that we haven't seen previously in previous years.

Our next question is from Hernan from Citibank.

Bruno, Cristiano, Rodrigo. Just a quick question. to see -- how do you think -- how are you thinking about M&A in this year going forward? You have a lot of things to integrate several units to be closed still. And what level of leverage would you feel comfortable with by the end of the year since you'll have some relevant cash outflows from the acquisitions that you've already made.

Hernan. I'm going to start with the end of your question, talking about leverage. And then later, I'll pass it over to Bruno and Rodrigo to talk about M&A and integrations. We imagine the company in the scenarios and our forecasts arriving at somewhere close to 2.5x to 2.8x net debt EBITDA LTM at the end of this year. And that should be the peak of our leverage from which we will start to lower this curve, this leverage curve over the next year. So probably the fourth quarter of this year is something between 2.5x and 2.8x EBITDA is with the peak of our leverage and then we will be deleveraging starting next year. But the degree just to complement, we're very much focused, as I mentioned, in my speech and the integration of these -- of the acquisitions, which you've already made. We're in the process of capturing synergies, which will contribute to the improvement in these indicators the cost provisions, as I commented, we're in the best possible position in terms of looking at CapEx as well as OpEx, SG&A, et cetera. Everything that we're able to prioritize and focus on that, which we really contribute to an improvement in terms of results in this position we're well positioned to continue looking at M&A as Bruno mentioned a little bit here, maintaining the financial discipline and taking advantage of the good opportunities this easier to say as Bruno speaking, due to the capacity for integration that we have today. It's easier to think about a strategy of M&A and acquisitions, obviously we're going to continue to do that, which is related to the oncology business or that we -- that bring synergies to us or to our oncology business. So we have several strategies for growth, in line with care, which will not add pressure to the cash position of the company. In the first moment, and this helps a lot. And obviously, we have several acquisitions, which are very strategic which should happen. However, within this culture of discipline, that -- which we have mentioned.

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

Just wanted to make one quick question. If you could share with us an update about units. How is your -- the process in the Cade. Any expectation for closing?

Miele, this is Bruno. Thank you for the question. I think it's within what's expected. We have an update almost weekly together with our attorneys about this subject. So it's within what we expect between the second and third quarter, the Unity should be brought into our platform.

We now close the session of questions and answers. I would like to pass the microphone over to Dr. Bruno Ferrari for his final comments. Dr. Bruno please go ahead.

Once again, I'd like to thank you all for your participation in our teleconference results and for the questions you've made. With this, we finalize our presentation of results and we remain at your service for anything you might need. Have a good day and a strong hug to everyone.

The audio conference of Oncoclínicas is now closed. We thank you for the participation of everyone. Have a good day, and thank you for using Chorus Call.