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

Good morning, and welcome to the audio conference of Oncoclinicas. [Operator Instructions] The audio conference is being recorded. I would like to pass the floor now to Dr. Bruno Ferrari, Founder and CEO of the Oncoclinicas Group. Dr. Bruno Ferrari, you may begin.

Good morning to everyone, and thank you so much for your presence in our teleconference on earnings with the market. It is a pleasure and privilege to talk about another important quarter, in which we had the capacity to transform many lives through the Oncoclinicas Group. A little more than one year has passed since we concluded our IPO, and we are very proud of what we have concurred until now. During this period, we doubled the numbers of units than what we had before the IPO, and we consolidated the basis for a very strong growth, most already hired in function of the acquisitions that we are integrating. We made a series of very high synergetic acquisitions. And besides that, we are experiencing an acceleration of organic growth, delivering the expansion of our gross margin consistently quarter after quarter through our gain of scale and synergies. On the second quarter of 2022, we concluded the acquisition and began the incorporation of f Itaigara Memorial in our platform. Although it was done only one month in our results and the earnings that it is operation of a day hospital leader in Salvador, which will allow us to integrate in a more efficient way the journeys of our patients in that city. In parallel, we began the operation and operation of our cancer center, also in Salvador in partnership with the Hospital Santa Izabel. This cancer center has what the best technology can offer and oncological treatment, leveraging our [indiscernible] support that we already have in Salvador and was reinforced even more in the quarter -- in the last quarter by the incorporation of the group CAM/Clion. More recently, by the end of the month of July, we concluded the acquisition of Unity, the largest -- second largest company, dedicated exclusively to cancer treatment in Brazil with 35 units that are highly synergetic and complementary to the Oncoclinicas Group. So after this conclusion, we were able to reach the number of 129 stores -- 129 units in 33 Brazilian cities with more than 1,900 of dedicated physicians. The process of integration of Unity was hired immediately and was already inside of our schedule. We gained a new dimension after this strategic acquisition. It's important to highlight that Unity's earnings are not included in the numbers we will look at. Currently, the company is in the process of integration of the acquisitions that were concluded this year, and Rodrigo will give us more details about this process. And we will always keep the market informed on how the units have been functioning in an integrated way according to our long-term strategy. On the financial aspects, the second quarter of 2022 was one more quarter of a record performance for the company. During this period, we accelerated our already resilient growth, and we reached 111,000 procedures. When we look at the last 12 months, we have reached approximately 415,000 procedures in our units. This is a historical number for our company. This growth in the number of procedures during the quarter reflects an increase of 19% in relation to the same period of the last year with an expansion of 8% compared to the first quarter. Our net income in the quarter grew 41%, against the previous year. Our gross margin expanded 610 basis points in the quarter versus the previous year, making our gross profit jumped to 69%, reflecting our capacity of control of costs. The adjusted EBITDA reached BRL 159 million in the second quarter, where we have record performance for the company. It's important to mention that we are doing a series of acquisitions that are still in the process of synergies and operational efficiency. Even though we have maintained ourselves in a solid level, in line with the last year and slightly above the first quarter of 2022. In the first semester of 2022, we reached BRL 300 million in EBITDA -- an adjusted EBITDA, another number that has been unprecedented for the company. We continue to stand strong in elevating the quality of oncological treatment in Brazil, expanding our presence with a disciplined way and in an accelerated rhythm with consistent results. Our journey is just getting started. We are working in a highly fragmented sector, and we are sure that we will still transform many other lives. I'll pass the floor now to Rodrigo Medeiros, who will give us more details on the operations and the integrations of our new units that are in the works.

Congratulations to the team for the excellent work that they have been developing, keeping themselves in line with the proposed deadlines and bringing operational efficiencies. Thank you, everyone. Thank you, Bruno, for the introduction. Moving to the next slide on Page 4. This is an update on the large integrations that the company has been carrying out in the last few months, such as CAM/Clion, Cemise, Microimagem, Itaigara and more recently, the integration of Unity. In parallel, the operation of these operations, the change of cancer center in partnership with Unimed-Rio and Barra da Tijuca has already started to reach patients and is in a ramp-up phase, and we also began the works to develop our cancer center in partnership with the Santa Izabel Hospital in Salvador. All of these integrations are advancing in line with what we had forecasted and they are in the process of extracting the synergies and implementing the best practices and assistances for the processes -- the organizational processes that we have estimated for the company and that will continue evolving in the next few months. We are very -- we are highly online, reinforcing what we prepared for these integrations, so much that the CSO or Center of Shared Services has been carrying out all of the transactions of the holding, and we continue to advance in these integrations and in parallel, integrate Unity extracting the same gains in efficiencies for the other transaction of our group. We exploring -- we are continuing to advance in the centralization of the supply -- of the purchase of supplies, hospital supplies, to continue expanding the margins of the cancer centers and advancing -- and the standardization of the processes of assistance and cooperatives of them all. We are very content with these integrations, which are happening at the right time, maintaining the best practices in all of our units, capturing value for the company, and at the same time, guaranteeing the continuity and assistance to patients without any disruptions. We are very proud of the work that we have been doing, and we are confident that we are going to continue to extract the totality of synergies in costs and expenses with the integration also between the units, which is the case of various units of outpatient units and hospital units in Salvador covering all our journey of the patients and this we will continue to improve our margins. Moving on to the next slide on Page 5, we show the highlights of our financial results in the quarter. In the second quarter of 2022, the company grew 40.6% in net revenue during the same period in the same past year, reaching BRL 900 million. We highlight the historical expansion of 610 basis points and gross margins in the quarter reaching 35.7% compared to 29.6% in the second quarter of 2021. This expansion is the fruit of our constant and efficient work with the pharmaceutical industry and also on the scale up in the purchase of medications besides a growing participation of the cancer centers with margins, given its high complexity. On the next slide, we adjusted the EBITDA for the quarter, which reached BRL 159 million and flat margins in relation to the same period in the second quarter of 2021. There was -- it's important to mention that there was no integration -- no relevant integration of new units during this period and the previous year, and there was a series of integrations. As I mentioned previously, we were able to maintain our margins despite this concentration, which leaves us very confident that these margins will continue to improve according as we capture all of our synergies with SG&A and revenues and earnings, which as we discussed previously, it's a longer process, so that we did not bring any assistance risk or to the continuity of the treatment of our patients. On the next slide, Page 6, we highlight our robust and consistent growth and procedures of the average ticket in the periods analyzed. We can highlight the increase of 19% in the total procedures, reaching 112,000 procedures in the quarter and expansion of 12% in the average ticket. The effect of inflation of 2021 and part of the inflation of 2022, which is going to begin to affect us in the second quarter where a few contracts with our payers are being reprogrammed and adjusted. We will have new readjustments in the third quarter. Finally, on the graph to the right, we can observe in the semester, the same expansion of approximately 70% in the number of procedures and the expansion of 13% in the average ticket with a higher effect of inflation. Now I pass the floor to Cristiano Camargo, our CFO and IR Director, who will present more details on the results of the quarter. Thank you so much.

Thank you, Rodrigo. Good morning, everyone. It is a pleasure to speak to all of you once again. On Slide 8, we start by highlighting the growth of 40.6% on net revenue in the second quarter against the same period of the previous year, reaching the record of BRL 900 million. In comparison, the sequential comparison in other words, versus the first quarter of the year of 2022, we had an expansion of 11.4%, showing an acceleration of our already resilient growth. In the graph to the right, on the comparison of the quarter, we had the expansion of 36.1% of net revenue. The next slide shows that from this growth of 41% that we had in our net revenue, 15.5% came organically, in other words, from the base of our same units. This organic growth has been occurring in a context of acceleration in relation to the already solid 11%, which we had delivered in the previous quarter. The most important to mention is that the organic expansion occurs as a result both of the volume as well as the increase in the average ticket, a characteristic of our very resilient business model. On Slide 10, one of the great highlights of the second quarter of 2022, the expansion of 610 basis points of our gross margin, reaching 35.7% of margin for the period, a level that has been unprecedented for the company. This is due to 3 pillars: one, the increase of efficiency in supplies and medical supplies, a constant work that this team has intensified; two, delivery of the gains and synergies of the costs through the integrations that are in the works; and three, growth of the operations of cancer centers in the mix of the company's revenue, remembering that the cancer centers operate with higher margins. These are very encouraging results since they point out that our integrations are going in the right direction, and all of the structural gains in margins that we have communicated that the company is able to deliver, have continued to materialize quarter-after-quarter. The graph shows this clear tendency. To the right, we observe in quarterly basis, we also have a robust expansion at the order of 410 basis points, indicating once again a tend -- trend of expansion of our margin as the company has been communicated on delivering in its results since the IPO. On Slide #11, we highlight the adjusted EBITDA, which reached BRL 159 million in the quarter, with a margin of 17.7%. Here, it's important to make an important point, given the number of the areas that are in the works, of integration that are in their initial phase, we would expect a drop in our EBITDA margin at the first moment. This would usually happen because the acquisitions come in as a higher number of expenses higher than the average of the company and the process of rationalizing the same takes around 12 months. However, that is not what we observed, our EBITDA adjusted margin remained stable against the same period of the last year, even with the pressure of the costs coming from the integrations. Given the size of the success already reached in the delivery of the synergies of costs, which have been reflected in the gross margin and ended up being transmitted to the EBITDA. At the measure, in which the optimization of these expenses coming from these integrations continue, we will continue seeing this on our EBITDA. On the graph to the right, we can observe the adjusted EBITDA in the first quarter of 2020 -- in the first semester of 2022 of BRL 300 million, a record for the company, with a margin of 17.6%, very much in line with the first semester of 2021. It's important to mention; however, that the previous year -- in the previous year, there was no large acquisition of new units that would affect the company's margins negatively, indicating, therefore, a trend of expansion and profitability after the extraction of synergies in the current integrations. On the next slide, we comment on our debt level. We are currently with 1.9x of leverage of our net debt over the adjusted EBITDA, a position which we consider very healthy in the scenario with the increase of the interest rates and capital costs. It's important to mention that the company now has an active liability management program, seeking to constantly optimize its financing costs. On the last slide, our cash flow of the second quarter. We had a consumption of BRL 163 million in operational cash flow. This is something very specific because of a decision of the company to anticipate the purchase of drugs in the first quarter, where most of these purchases, the additional purchases happened along the second quarter, which was very advantageous from the point of view of profitability as well as more intensive working capital because of the strong growth of the company, which should be normalized in the next quarters. We already are seeing this. So besides this, there was a consumption of BRL 110 million in cash flow from investment, especially due to payments for acquisitions that were closed in the quarter already foreseen by the company. And finally, a consumption of BRL 149 million of cash flow of financing, given the amortization of financing and loans, therefore, reducing our leverage level besides paying the interest rates over the acquisitions and loans. With this, we finalize the presence of the earnings of the first quarter of 2022, and we open for the question-and-answer session.

[Operator Instructions] Our first question is from Vinicius Figueiredo from Itaú BBA.

The first topic I wanted to approach, I can even connect it to report a realistic article that came out yesterday about you in Brazil. Can you comment on the cancer center that you are going to open in São Paulo? Should we imagine that the launch will be in partnership with some hospital or a payer? And the second question would be about the dynamic of working capital. I think this was covered lightly, but we ended up seeing once again an increase in the accounts receivable. It could be interesting if you could comment about the motive for the increase in the specific line?

Thank you for that question. The cancer center in São Paulo, just as in the other capitals, are projects that have been managed ever since the pre-IPO period. So in São Paulo, we have one of the most advanced structures, which will be under the [ BTS ] regime. Of course, we have been setting a few strategic partnerships to bring along with us. So probably, it's nothing new, nothing that we haven't already commented on with the market for some more time. But now the project is much more mature and probably in the next weeks we'll have more concrete news for you.

This is Cris. About working capital, there are a few factors that are relevant. I think the first one is that it is very timely, and it is the fruit of 2 variables mainly. First of all, the decision of the company, as we mentioned previously, to purchase the drugs and the medications in a larger volume in the first quarter of this year, which ended up benefiting the company because we were able to get better discount levels higher than the ones that we already got because of this strategy and the result of this is that the reimbursement for the purchase of this medication and this access happened throughout the second quarter, although the purchases happened in the first quarter. So this ended up reducing the average deadline of payables. This appears in our financial statements because of the disbursement and the second quarter, which is an intentional strategy of the company, which has shown itself to be correct. The second aspect is the growth of the company. The company is growing at a very accelerated growth. We grew at more than 11% in the sequence versus the first part of this year. So obviously, an operation that grows at this more accelerated rhythm will demand more working capital during the phase of growth -- the higher pace of growth. And over the dynamic of receivables, we continue to see in the second quarter of this year, a very similar dynamic to what we have seen in the first quarter, which are various payers still suffering from the pressure of the increase of the readjustments -- the negative readjustments that they have been suffering since last year and the increase of claims, you're already seeing this in June. We are seeing some improvements in June at the rate in which the payers are able to transfer the increase of the prices, which started in July, and we are going to start observing this in the first days of August. So our expectation is nothing different than what we have seen in other years. that this will normalize throughout the second semester of the year.

Next question from Gustavo Miele from Goldman Sachs.

I have 2 questions here on my end. First, in relation to the gross margin, you commented the best terms of purchase that you were able to get in this quarter. I would like to understand if this is, in fact, again in scale or if somehow you are able to expand the array of suppliers that you have in your space? Could it be that the improvements come from new suppliers, which may also help you in the purchases of the company? And according to the gross margins, could you comment if there is any benefit from the mix in this improvement? My second question is about the top line. So thinking about volume and ticket, I would like to understand how much the organic transfers have been if it actually brings higher complicit -- higher volumes in the hospitals, which has been contributing to the increase in the ticket. I wanted to understand how the organic growth, if it's something that's going to contributing the long term to the company or if it's something more timely? Those 2 points.

Thank you so much. Rodrigo speaking. Thank you for those questions. According to the costs of medications, the main point is really scale. As we incorporate the new acquisitions and gain more bargaining power with the increase of volume, but the gross margins also come from the improvement of the mix because the cancer centers have a higher margin and a higher level of complexity. And this also brings the synergies in our revenues as we always comment from the outpatient centers to the hospital centers. So the revenue never leaves the group. We're able to capture their entire journey, the hospitalization where the cancer centers ended up being something where we would not capture value. So on the gross margins, those are the main points on the organic volumes, yes. The main element of contribution for growth in the organic, comparing it to the volume, the volume also brings a similar interesting mix, and it also contributes to this improvement. And with time, this will be a concept more and more because it's the logic of 360, we don't only capture the improvements that I mentioned earlier, but we accompany the patients throughout their cancer journey, elevating our attendance and our service standards. So we are able to capture value in all the phases.

Rodrigo, that's the main point. So the patient is already within our environment, receiving oncological treatment. So -- it's not that we have to find new patients and expand our base of patients. We are talking about the patients that we already have in our journey.

That was clear Rodrigo and Bruno, if you allow me, can I ask one more question? So from what I understand here, this growth of organic volume comes more from the cancer centers and from the journey of the patients inside of the Oncoclinicas network, but there is no actual generation of new patients in the group. Is that correct? That is just to reinforce the outpatient.

No, no, that is not correct. There is a gain of market share, especially in our outpatient services. So that is not correct. We continue to expand our base of clients and more than that, now we are controlling the patients in our own house with the expansion of new outpatient centers is very significant.

Next question from Joseph Giordano from the JPMorgan Bank.

I want to explore the first numbers that we received on the results. If you could help us to quantify what was the real level of increase in the leverage levels because you made a very high payout compared to last year. I wanted to be able to quantify that a bit, just to understand exactly where we should -- what we should expect for the third quarter? My second question is about SG&A. So you already commented on some of this about integration. When should we imagine the level going back to the levels of 12% or 13%, which we saw in the last year, which was another very important point? And finally, looking at the structure I wanted to understand how you see the inorganic growth increase in the group. Should we look more to hospital operations or to the cancer center operations.

Thank you, Giordano. I'm going to address the gross margin issue and then I'll speak with Bruno and Cris to comment on the rest. But the gains in margins that come from the anticipation of the purchase of the medication is not a number that we disseminate. Now having said that, what is expected for the next -- for the period of the next 6 years and the second semester of the year is that we will see something that follows the same lines of what we have been seeing in the first quarter of '22. If we look at the margin perhaps you would opt for this level. Remembering now that we are entering the second semester with the integration of Unity that has a base that is predominantly outpatient centers. So that effect of the cancer centers and the mix. It is a bit diluted in the second semester. But we should probably see something closer to what we saw at the levels that are closer to 34% to 36% of gross margins in the second semester of the year.

The second point about SG&A, how do we see it the evolution of SG&A for the next quarters? If we look at where we were last year, during the same period of the last year, we were between 12% to 13% of operational expenses in relation to our net revenue. And now because of the reasonable number of acquisitions, which came in and came in relatively recently. We have a base of expenses that are still a bit distorted. We have 17% of operational expenses in relation to our net revenue because of all of those factors that we talk about a lot of the acquisitions, they come in immediately with a higher level of expenses that we are used to dealing with. And then we also have a process of extracting the synergies through SG&A, which takes a longer period of time. The synergies of cost, we can deliver relatively quickly between a process of 60 days and our gross margins also this quarter have shown the same thing with the process of delivery of the synergies in SG&A, they take a longer time, so we estimate that it's a period of 12 months for us to be able to deliver the complete synergies and SG&A which will be reflected in the next period and the inspection of our EBITDA during the next quarters. I'm going to pass the floor to Rodrigo now, if you would like to comment on this point.

I think you covered everything our expectation is that it's going to be gradual throughout the next few months. That's in line with our track record, and we are reinforcing our integration team. More and more, we are able to create squads of people that has been focusing only on integrations and they are able to do this in parallel, considering that we have several on different levels. So we are very confident that we will continue to maintain the same progression. All of them have been improving and evolving according to plan. And we have the resources with a lot of experience to integrate this within our time line.

Yes, unity will bring us more scale that will also help us with the industry in relation to the inorganic growth. We continue with a very strategic pipeline of a mix of cancer centers with clinics and outpatient centers, so that keeps our -- we are keeping our discipline in that sense and strategic -- and the strategic means as well as bringing into the group, what will really bring complementary synergies, be it regionally or be it locally or be an expansion to other areas and financial discipline as well. So in other words, the group so has a lot of room to grow organically and inorganically.

The next question from Vinicius Ribeiro from UBS.

I have 2 questions. If you could talk about the volumes. So if we look at the same base of the clinics for the second semester, you will have a larger number of integration. So we would like to understand if in a comparison, should we expect some alterations for the second semester? The second question is about the credentials of the payers, we have seen a scenario where the industry has a higher level of claims per user and our understanding is that the business model that you have may have an interesting way to solve this issue for some payers. Could you give us an idea about how -- this has been how you have been dealing with the payers in terms of the increase in claims?

This is Rodrigo speaking. So on the volume, first of all, we have observed an acceleration. So the expectation is that this will continue. We will continue to observe the acceleration of claims. This isn't in line with the season. The second semester is always stronger than the first. And in relation to the claims, yes, the claims have been increasing. We have been stopped after a lot more with the claims. So we have partnerships, and we think that this will continue to be something that will grow since we are a player with the highest level of specialization and the capacity to demonstrate data in terms of results and outcomes and deliveries to the patients at a good price, which is what the payers have been looking for. This will bring us closer and will help us advance even more in our negotiations and potential partnerships.

Perfect. Maybe just a follow-up point. I understand that maybe -- is it -- should we expect for the second semester to see new payers being a part of your mix?

Yes.

The next question is from [indiscernible] from Citi Bank.

I have a very quick question here, maybe more directed to Cris. What do you expect in terms of leverage for the end of the year? What is the level that you would be comfortable with in terms of liability management? Maybe you could explore that area a little bit?

We have been looking at this in line with what we have been discussing in the last quarters. We are looking towards 2.5x of net debt over the adjusted EBITDA at the end of the year. It's important to highlight that based on an adjusted EBITDA that only considers less than half of the year of results, for example, for Unity and it doesn't consider the entire year of other acquisitions, for example, of Cemise, Itaigara that just entered in June. So when we consider this metric of adjusted EBITDA, pro forma adjusted EBITDA, of course, it would be lower. But if we look at the adjusted EBITDA with no adjustments to perform, especially in Unity, we are looking towards 2.5x where the leverage will be reduced over the next year because of the generation of cash of the company and growth, et cetera.

Next question from Caio Moscardini from Santander.

My question is about the fiscal structure of the company. We saw in the article for Brazil Journal that you want to deliver at least 34% already at the beginning of the next year. So what are you going to do to get so agile? And what should we expect for the closed earnings in your financial statements in the end of 2022?

We are completely on track in our pipeline of optimizing the fiscal structure of the company. This is a legacy because due to how the company has been rationalizing the partnership or share participation structure. It is in the process of being concluded. So with that, we'll be able to make a series of incorporations of acquired identities by the acquirers. It's a process that is completely in-house and it just takes some time because there is a logistical -- there's many logistics necessary, especially from the commercial point of view. When we have to accredit the companies with the same payment sources or the payers. So it is a process that demands more time, but it is going to be finalized on the fourth quarter of this year. So in the fourth quarter of this year, we should probably have an effective IRF of 34%. Of course, this will not be enough to change the numbers of 2022, but 2023 will already begin with the level -- max level of 34%. We have a high stock of agiles in these -- all of these acquisitions, and we're going to start to capture the benefits, 100% of these benefits in the first quarter of next year.

At this moment, we close the question-and-answer session. Now we would like to pass the floor back to Dr. Bruno Ferrari for his final considerations. Dr. Bruno Ferrari, you may begin.

Once again, I would like to thank everyone for their presence in our teleconference -- earnings teleconference. With this, we end our earnings call. We are available if you need us. Have a great morning. Thank you so much.

The audio conference of Oncoclinicas is finished. Thank you so much for your participation. Have a great day, and thank you for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]