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

Good morning, and welcome to the audio conference of Oncoclinicas. [Operator Instructions] And you should remember that this audio conference is being recorded. I'd like to now pass the word over to Dr. Bruno Ferrari, Founder and CEO of Oncoclinicas Group. Dr. Bruno, please go ahead.

Thank you. Good morning, everyone, and welcome to one more teleconference results for Oncoclinicas. If I had to define the year of 2024 for the company, I would say that it was a year of transition and necessary adjustments to have a company that's more healthy and solid for the coming years. We started the year in the beginning of a very difficult scenario for the health sector, but we ended with a reduction -- organic reduction of our net debt and leverage under control and larger -- higher diversification of our revenue. In first [Foreign Language] -- in first place, we completed an important increase of capital of BRL 1.5 billion in the middle of last year, already foreseeing a macro scenario of more difficult cost -- capital cost for the country. The increase of capital, as we said, was priced at a premium significantly above the price of our shares in the stock exchange. This brought us a more tranquil capital structure that we see on Slide 3, reducing our net debt and -- from the first to the second quarter of last year. At the same time, we were able to finalize payments for relevant capital expenditures, which will sustain our next cycle of growth during the -- coming the next few years. In parallel, we saw the increase of capital giving us more -- greater liquidity, helping us to do our initiatives for redirection of -- commercial redirection involved -- temporarily reducing our exposure to more intensive working capital to buy with longer periods of receivables so that we can migrate from a dynamic of cash burn to generation of cash. Several quarters later, we believe that this strategy has started to become more clear to everyone once we've delivered an organic reduction of net debt of approximately BRL 112 million in the fourth quarter of 2024 in relation to the third quarter as was also shown on Slide 3. We're able to see the reaction of the transformation another way through the Slide 4. You will see that Oncoclinicas has presented a higher rate of consumption of cash during the first half of last year, not just as the commercial scenario was very difficult in terms of receivables, but also through the cycle of CapEx, which was already under contract, which pressured our cash flow. Starting in the third quarter of '24, this tendency inverted drastically. Consequences of all of this, as we see on Slide 5, was a relevant reduction in the leverage in the second half of last year and a tendency for stability going forward. The trajectory of the leverage not only has been going down as well as our EBITDA was penalized by the deceleration [ selective ] in our growth of our revenue and by the additional expenses related to the restructuring and realizing that we did in the second half of the year, looking for a higher level of operational efficiency. Nonetheless, there's a series of initiatives underway, both commercially as well as operationally, which need to be addressed, maintaining as a priority the sustainability and cash generation. 2024 was also a year of accounting adjustments, which were necessary due to the environment, which was more challenging which we were going through. We're always looking for the best practices of governance and higher accounting practices and transparency for the market. Cristiano, our CFO, will cover this topic in more detail going forward, but it's something that also I would like to mention. In the context of the current year, which we do for the test of recoverability of its balance of goodwill and intangibles, we identified the need to make an impairment, noncash and nonrecurring expense. It's a photograph of the moment of our cycle in which the administration [ can judge ] that it would be correct -- to correct and revise this in light of its future operations and projects in line with transparency and the conservative look at which we have always used in our relationship with the market. Finally, we saw that there was an improvement -- a gradual improvement in this sector and our provision for doubtful receivables, a tendency which we see as encouraging on Slide 6. Before passing it over to Cristiano, who will cover the rest of the presentation, I would like to once again thank all of our patients, clinicians, workers and partners and investors who have supported us our daily job of conquering cancer, defeating cancer. Thank you.

Thank you, Bruno. Good morning, everyone. Starting with Slide 7, I will comment about our growth of volume and average ticket. The volume of procedures in the fourth quarter grew 6.2% year-on-year, a deceleration in relation to previous periods, principally due to our strategy of reduction of exposure to payers that are more capital intensive. The strategy adopted by the company principally starting in the third quarter of last year had as its objective the prioritization of the generation of cash for the company, aligned with the desires -- long-term desires for sustainability and financial discipline. As a consequence of this strategy, the average ticket was treated -- was reduced sequentially, but has maintained its tendency for growth year-on-year in line with the inflation -- with medical inflation in our segment of oncology in this period. On Slide 8, the gross revenue of the company reached BRL 1.7 billion in the fourth quarter, a growth of 9.2% in relation to the same period of the previous year. During the annual period -- during the period of the year, the growth was 13.5%, below our CAGR of 32.5% of recent years. But it's important to remember that in previous years countered with an inorganic growth coming from acquisitions and new partnerships -- new commercial partnerships as well as growth -- organic growth were more accelerated and deliberately reduced in the recent -- last 2 quarters. Similarly, on Slide 9, we see the growth of net revenue in the same levels as gross revenue once that our doubtful receivables was in line with that which was observed in 2023, 2.6%, as we see in Slide 10, returning in direction of the levels that were closer to our historical levels. On Slide 11, gross margins reached 32.4%, below those levels observed in previous years, principally due to the political -- commercial policy, which is more restrictive adopted by the company and also the mix of medications, which have been incorporated. Looking at 2024, for the entire year, the gross margin was 33.3%. On Slide 12, we see the operating expenses still impacted by the restructuring of the company, which we implemented starting in the third quarter of '24, which helped together with our revenue -- lower revenue that was [ obviously ] resulted in a lower leverage -- operational leverage and an increase of this indicator as a percentage of our top line growth. As a measure, we have substituted this volume with new clients, this relation should return to a descending trajectory. On Slide 13, the adjusted EBITDA was BRL 272 million with a margin of 17.4%, principally due to the factors mentioned previously. In other words, less revenue and onetime expenses, which were higher. On the period for 2024, full year, the margin was 18.5%. Net revenue ex-PILP and ex-impairment was BRL 42.6 million, an improvement in profitability when compared to the previous quarter. In the annual period, the net revenue on this basis was BRL 106.3 million. It's important to mention that the company realized annually a test, a recoverability impairment test, referring to the goodwill paid in its recent acquisitions. The management revised its expectation for some of its operations due to results below those expected initially and initially projected as far as the retrospective acquisitions due to a sectorial ambition and macroeconomic, which is more difficult, which impacted our projections for growth and profitability. In the period of 12 years ending 31 December 2024, the test indicated that the value -- recoverable value of these operations was below their accounting value. Therefore, we recognized a loss, nonrecurring loss, noncash by impairment in the amount of BRL 796.1 million. This is, again, an adjustment, which is noncash and nonrecurring adjustment, which reinforces our commitment to conservative and transparency in our accounting -- in the company's accounting. Slide 15, the company reached a cycle of working capital net of 40 days in the fourth quarter, the best cycle of the year, showing the results of diverse initiatives, internal initiatives as well as the prioritization of the commercial relation of the more demanding payers who were more demanding of capital -- working capital. On Slide 16, we demonstrated an operating cash flow of BRL 291.6 million, the best of the year. This cash flow -- operational cash flow was enough for the payment of interest, annual and half, and yearly and semi-yearly interest payments. It's worth remembering that the second and third -- the second and fourth quarters are the highest in terms of payments of interest, since our debts have semiannual and annual coupons. In relation to CapEx, which in the quarter was BRL 32.8 million for the period, the lowest level for the year, reflecting our -- as we already mentioned, the discipline -- financial discipline in the company's investments. On Slide 17, due to the generation of cash of the company, we had a reduction -- organic reduction of our net debt of a little bit more than BRL 110 million sequentially. This is the priority of the company, and we continue firmly in this direction of the financial sustainability of the business. Finally, on Slide 18, we have a chronogram for the payment of the financial debt and of our acquisitions. We see that we have a position, which is comfortable cash position enough for the cover of the payments during the coming years. With that, we close here the positive part of our presentation, and we open the session of questions and answers.

[Operator Instructions] First question comes from Vinicius Figueiredo from Itau BBA.

I have 2 questions here. The first is in relation to the expectation for margins -- EBITDA margin for '25. We have some several parts that are moving -- several moving parts, as you mentioned. And upfront, we have the revenue, a growth in revenue, which is more focused on the payers who have higher quality in terms of cash conversion. And this also winds up having an impact on the gross margin. At the same time, you mentioned that the process of optimization of G&A. I wanted to understand how these 2 things talk to each other. And what's your expectation for EBITDA margin for the company in '25? And another question, I wanted to mention in a -- more of a long-term question is we have here in Sao Paulo a partner who the Porto is -- which has been growing quite a bit in the base of beneficiaries and a very relevant part in the network of -- and also Hapvida. If you could comment a little bit on the Hapvida, if that would be good. And also another point would be what do we think -- what can we think about for growth in Sao Paulo if we need to open, an additional investment in relation to put more clinic -- to set up more clinics, changing perhaps the cancer center plan and an update in this area would be very good.

Vini, this is Bruno Ferrari. Let me start and then Cris, can help -- can complement -- can add. I'm going to start at the end, Porto already has 700,000 lives and we've seen here this week in their post a plaque for the help in the oncology project, recognizing this growth. Hapvida is a project that we have been negotiating with them for several months, almost 6 months for us to find a way -- a formula in which we could become a cost-effective supplier, not only in Sao Paulo, but also nationally. Since we are doing this now and planning this hydrotherapy, we want to be rational for them from the standpoint of oncology. And we also have been discussing, and as I mentioned to him, in my presentation about the CapEx in the first half of the year -- the first half of last year and part of this CapEx with our units here in Sao Paulo, in the peripheral areas of Sao Paulo, outlying areas, to attend what we already had for repressed demand and 2 new units, which are under construction, Angélica, 12,000 square meters and Augusta, 15,000 more meters. These are being concluded in May. In other words, we won't need -- we don't need anything. It's all ready to start receiving all of these new patients. Everything that needed to be done is done. So this converges us a little bit with the first question, which I'm going to speak a little bit. We want to -- we had a huge airplane, which is slightly empty and this affected our margins. Now we have a large airplane and we're going to be able to fly with a full cargo, which will help us to improve our margins and bringing a higher number of clients from Porto going to new markets. And then Cris -- as Cris usually says, we're doing a change -- a paradigm change going into verticalized payers to be their preferred supplier of oncology services for them. We wind up have an addressable market, which was never -- which we never considered. Only Hapvida has millions of clients in the private market, which are not even considered as possible to be attended by us. So this will wind up improving our gains of scale, together with the pharmaceutical industries, our operational efficiency. At the end of the day, a plane, which is a larger plane flying with more passengers, more clients, and we think that this will be reflected in the medium term in better margins. And I wanted Cris to add and perhaps he has some more technical numbers.

Vini, adding to the points of -- Bruno's points, when we look at this combination of revenue -- top line growth, which has been softer rather than what we have seen in practice. What we saw was a reduction -- what we have done is made a reduction of about BRL 30 million per month, BRL 30 million to BRL 35 million per month, in the reduction of our exposure to a series of health care plans and operators, this new commercial policy of prioritizing cash flow and preserving our cash -- working capital. The net impact was not that bad because we have been substituting this volume with new volumes coming from new clients, but it's clear the deceleration that we had in the growth of revenue if you look at the second half of last year compared to the same period of the previous year versus the first half of the year, in the first half of '23, for instance. And we will take a little while to -- it's nothing that we can do from one day to the next to replace this volume. But initiatives like these, like -- such as Hapvida will come to address these questions. And we hope to have an interesting ramp-up of this new commercial agreement. Just to give you an idea comparison from the size of this operation, it's in line with what Bruno said, Hapvida has 600,000 beneficiaries just here in the Greater Sao Paulo region, which is where our scope will initially be concentrated. Remembering that radiotherapy is national, it's an agreement nationwide since the beginning, so we're starting already with a volume of beneficiaries almost the same as the size of Porto today just for this initial phase. The expectation is that we will have -- we will return to a reacceleration of our top line growth over 2025. We don't have any number or guidance for that, but just because of this dynamic, we should have a reacceleration of this top line growth. At the same time, due to that, we should return to gain operating leverage -- operational leverage even though we have reduced through a rightsizing program and restructuring in the second half of last year, more than 400 head counts, which were reduced in the company -- over the whole company. And this impacted in fact, our G&A with -- in our severance costs and restructuring expenses in the last 2 quarters of last year. This also has been -- has already been, sorry, in the past. We should not have a repeat of this going -- starting in 2025 going forward, where we retake the growth of the top line in a more robust way. And we hope -- which is what we're hoping for. And we hope that management is -- our ambition is that we will recover our margins during 2025.

Our next question comes from Caio Moscardini from Santander.

Two quick questions. Can you comment a little bit about what do you expect in way of exposure to your principal client. We saw a falloff of 16% in 2023, 15% of your revenue in '24. What can we expect in relation to this for 2025? And the earn-out of Caio -- of BRL 29 million in the third -- in the fourth quarter, I imagine that this will affect your impairment. So if you could say what is your expectation to have to really pay for these earn-outs?

Caio, I'm going to start with the first question of your question and the exposure -- concentration exposure to our biggest client. We have a strategy being executed since the IPO and going forward and we've said this repeatedly, consistently, which is the idea to increase the diversification of our base of revenue and the polarization of this portfolio of clients. If we were to look at a longer history in the IPO -- at the time of the IPO in August of '21, Unimed-Rio, at the time, which was our biggest payer, was 19% of our revenue. This number today is closer to 10%. It's in the low double digits, much closer to 10%, and we have this as a goal -- we've had this as a goal. During 2025, at some moment, our biggest payer would not represent any more than 10% of our revenue. Now with these initiatives -- additional initiatives that we have accelerated in '24 for the diversification of revenue, this movement should continue remembering that we already were a player with relevant -- diversified revenue. And we had more than 20 health plans due to our capillarity, 44 cities, our exposure to different operators and plans. However, we have the ambition of more than that. We want to have, in fact, a polarization even greater of our portfolio of clients. This should continue to happen. In relation to the reduction of the amount of earn-outs within our sellers and our debts to pay, this is related to the exercise of the impairments because as we have revised downward, the expectation of financial projections of various of these assets, this converses with the expectation of being able to pay or not certain earn-out payments. This dynamic, remembering that the impairment is a photograph of 2024, it takes into consideration these projections revised downward and takes into consideration a discount rate and cost of capital, which reflects a moment in which we live today in the macro universe. So it's difficult to say effectively if these amounts will be paid out going forward or not because this is the dynamic, which could change. This could oscillate. However, if we had to give a photograph today what is our perspective that the management has today, the reduction of these amounts, these earn-out amounts, reflects our expectation of the company at the current point in time.

Our next question is from Gustavo Miele from Goldman Sachs.

I have 2 questions. First, I would like to hear a little bit about your -- the pre increase this year. We see the medical inflation running a little lower than historical levels. I want to hear from you how this has reflected in the level of stocking, which normally happens in the first quarter as a seasonal effect? That's my first question. And my second question, you mentioned the example of what happened in the second semester, the reallocation of part of your receivables is a part that migrates again into the noncash fruit of some renegotiations, which you're doing with specific clients. I wanted to understand, looking at the perspectives for 2025, if you are addressing new agreements in this sense and how we should think about this noncash part during the coming year?

Miele, this is Cris. As far as the pre-increase, it's not something that we think makes sense as this makes sense this year. It was last year. We took a great deal into consideration what is the CMED will be announced the inflation, medical inflation announced during the period, but it's already something [ 0.8 ] versus the cost of capital of making this prestocking, this pre-acquisition. So this cost benefit at this moment in our valuation does not justify remembering that the priority of the company has always been to preserve cash and to be very disciplined in the allocation of cash and working capital. We saw this -- we haven't seen this happening this year in this cycle a prestocking of material as a possible benefit of this pre-increased stocking. In relation to this reallocation of receivables for the long term, this still reflects some of the renegotiations of receivables for the structure of receivables in the longer term, so that this can integrate with the cash flow of the payers that are being under consideration. We had not -- we're not able to have the visibility, and we do not expect at this time that there would be any more movements in that sense. We think that what had to be done of renegotiation in relation to eventual late payments, which were converted into long-term receivables, we concluded these negotiations by the end of 2024 and we don't have any notifications from this -- from what we can see here in the scenario of receivables that there would be more migration of receivables in this line to the long term.

Our next question comes from Leandro Bastos from Citi.

I have two questions here. First is about -- if you could speak a little bit about the average ticket, which has been a little bit weaker in this quarter. And the -- is that point the effect of mix? And also a comment where you see an acceleration of top line growth for this year. How should we think about the relation between volume and ticket? Also the question of leverage, if you give us a little direction of how -- what you're working with, if you have any orientation from last year, which wind up not happening as was foreseen? And if you could let us know how you're looking at it now with this focus during this part of the year, if we could see how this -- how this will affect your leverage during the year?

This is [ Zaki ] talking about the ticket. It's clear that our focus from several months up until now has been the prioritization and cash generation. So it's clear that in the last 2 semesters, the direction of -- the stronger direction of our growth for clients with lower working capital cycles. And with that, it's natural that we have some impacts as we've had in this quarter of the reduction of margins and also the average ticket. So some of our clients had a working capital cycle more -- higher average tickets, which were higher as well. So in any event, what's important for us at the moment is that the average ticket for the year has come in above inflation. We've been able to repass the inflation to our final clients and the focus of the company in terms of cash conversion is showing results and is showing a little bit more strength. And it should continue in this way for the rest of the year going forward. And aligning with your second question, as far as leverage, of course, we did not publish any guidance for the year, but the tendency that we see with this focus on cash generation and this higher focus on conversion of revenue into cash is a tendency that we're able to reduce our net debt during the year, and with that, increase our leverage over the next few quarters.

That's very good news, [ Zaki ]. So you take your average ticket in the composition of the mix, which does not pass through inflation to the -- or in repassing inflation. You have not found difficulty in passing through these prices?

That's exactly right. We've been able to accompany inflation with no problems.

Our next question comes from Yan from BTG Pactual.

Two questions from our side. One is the recurring expense of restructuring expenses, we understand that this is at a higher level of these expenses is provisional, it's temporary, but we wanted to understand how long do you think that this effect will affect the P&L of the company? And when will this focus on restructuring should continue? And my second question is recovering a little bit the theme of possible investments even with the crossed part of the hospital for diagnostics, if this agenda is more or less present today in the strategic vision of the company.

This is Bruno. This is -- in August of last year, we started the process of rightsizing in the company, and this started in the holding and begin with the elimination of several management groups, 6 directors and 400 -- and approximately 400 people in the holding and this has cascaded downward. So that's the first aspect. This was during the second half of the year, and we believe that this period has now ended, the machine is now lighter. The structure is lighter, more cost effective. And we didn't change people. This is not -- this is a changing people for a system. We're now more efficient than we were. At the same time, we've been speaking about the process of back-office processes being substituted Oncoclinicas for Accenture and the first phase is concluded, and the second phase is underway and should finish during the year. And I think that the most difficult part has passed and the [ reflection ] of this on the P&L will end now in the first quarter. So now it's ball forward, and we're going to be able to see these numbers better more clearly and more consistently starting in the second half of the year -- starting with the second quarter this year. In relation to -- about the de-investment, it's not even a matter of de-investment. It's a question of realigning what would be the correct word of our investments. It's bringing to some of our investments partnerships, which are more aligned with the practices and activities, non-oncological activities. We're not here trying to sell anything. We're not trying to de-invest in any asset, but to bring restructuring and more body to the assets we have. The correct word, I think, is that the sell is easy. Selling assets is easy, there are buyers, but it's not what we're trying to do. It's not what we're going to do because what we want to do is a realignment of these investments, bringing to us strategic changes for some of them, and it will wind up becoming more robust. And we will care integrally with the oncological line, therefore has a greater expertise in other areas and helping that these structures be more cost-effective for the group.

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

I want to once again thank all of you for your participation in our teleconference results. Have a good day, and thank you very much.

The audio conference of Oncoclinicas is now closed. We thank you for your participation. Please have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]