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

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

Good morning to everyone, and welcome again to one more results earnings call of Oncoclinicas. We're very content to announce our advances conquered during the third quarter, fruit of an intensive and extensive value of organizational restructuring of the company. We will discuss the sale of hospital assets to lead the company to future commitments or investments, among other things. I do not remember of any other quarter in the history of the company in which so many fronts were executed at the same time in which we have seen, been able to deliver so much in such a short time. This performance on Friday, we concluded the increase in the capital of private capital, which totalized approximately BRL 1.4 billion, an important part of this turnaround, the strategic turnaround and commercial turnaround and operational turnaround of the company. The increase in capital is bringing an important deleveraging and leaves our balance in our capital structure. Speaking about this, all of the -- I speak about all of these deliveries going ahead. Before that, I would like to point out the hard work of all the people who have from our doctors, our directors and the executives have all remained aligned in the same goal of reconquering the profitability of the company always has a promise to the client -- the patient as the center of everything. This is of our strategy. So I'd like to thank all -- everyone. We look today at a company which is very different than that which we saw a few months ago, much lighter, much more focused. And again, with its business of oncology, which we know how to do very well and without any onus about our margins and future commitments of the capital payments, which would affect our future earnings. We continue to be the most attractive for doctors and oncologists to work in every level of seniority. We have no doubt of that. Since the beginning of this year, we have added more than 100 doctors to our base, which demonstrates with facts the continuing attractiveness, which the company is and continues to be, which -- with us in this journey. On Slide 3, we start with the highlights of the third quarter. I'd like to point out the highlights of this turnaround, which I referred to earlier, which is evidenced in our adjusted EBITDA in the quarter, which added up to BRL 241 million with a margin of 17% and 246 basis points higher than the previous quarter. There was an operational gain of BRL 246 million and a significant advance in relation to the previous quarters, as you see in the lower part of the screen shows. Cristiano will detail this going forward. This was generalized by the -- all across the P&L, not just because we are looking at the performance of the company on a base and recurring basis. In other words. On Slide 4, we can see that there was a strong gain of -- and the best dynamic of capital, which brought us to generation of cash of a free organic cash of BRL 62.4 million in the quarter with a highlight of how quickly we are delivering our back to core agenda, a repositioning of the company. We already announced the sale of the 3 general hospitals of the company, which the company maintained in our base of assets and the recision of contracts of BTS for future cancer centers in Sao Paulo and Belo Horizonte along with the renegotiation of the contract in Goiania. This bring us back to our basic core business exclusively of oncology. It changes in an important way the level of profitability, remembering that the third -- the 3 hospitals responded a negative EBITDA of almost BRL 26 million in the third quarter and important CapEx commitments in the future. I would like to mention that the thesis that this cancer center continues valid within our model of business with our business model, but need to be executed within a successful model of partnerships with hospitals and not just oncology hospitals where we will not commit relevant capital. We have to mention also in Slide 6, the conclusion of our increase in capital in last Friday which raised a total of approximately BRL 1.4 billion in capital, reducing the level of leverage of 3.0 pro forma and the leverage in the third quarter has already been reduced in relation to the second quarter, even prior to the pro forma effect for the increase in capital. To give more details and impacts about the numbers in this quarter, I'm going to invite Cristiano Camargo to give you -- to take over the microphone going forward. Cristiano?

Thank you, Bruno. Good morning to everyone. On Slide 7, I think it's important to give a detailing of the principal accounting write-offs that the company wrote in the quarter, in function to the quick advance that we've had in the plan of sale of assets and the process of turnaround overall beyond other recurring events of outside events. The first item, the write-off of the hospital assets of BRL 466.2 million is a consequence of the agreement signed for the sale of the Marcos Morais in Rio de Janeiro, BTS in Belo Horizonte and Vila da Serra in Nova Lima. This last -- announced last week and the 3rd of November and therefore, a subsequent event after the third quarter. As the company has moved very quickly in the execution of these investments, these assets be classified as available for sale. It's important to remember that all of these transactions are still depending on closings due to the compliance with specific requirements. The third item, the BTS write-offs refers to the value, therefore, previously registered as intangible assets reference to rents -- anticipated rents for future projects of cancer centers. As the company broke these contracts and to these contracts within the strategy of leaving these noncore assets and that commit to a great deal of future CapEx, these future rents were used to reduce the values of the fines paid on the [indiscernible] contract. So we had no cash payouts to rearrange the contracts. And the third item, we look at the provision of 100% of the conversion of debt from the Unimed FERJ of BRL 864 million. The administration decided to make this provision understanding that there were new facts determinant, which happened in the third quarter, which justified this decision. For example, the interruption of the attendance to clients are not accept in a limited capacity and subject to previous payment in an event of renegotiation of the balance of this debt instrument, indicative by itself of a deterioration of the credit of the counterpart. We should also mention that the question occurs due to the observance of the accounting norms, but does not implicate in any announcement of this credit by the part of the company. And the third item of the most relevant item, the administration decided to provision part of this balance with Banco Master due to the deterioration in the rating of that counterpart. This provision, and we should mention, impacts negatively not only the P&L in the quarter, but also the cash on hand -- the accounting cash on hand of the company. And as a consequence, the imposition of net debt, which reflects in the negative impact of this provision. It's important to mention that all of these things were nonrecurring and noncash and are being added back to the numbers to the adjusted numbers presented, so it will be possible to see how the company has behaved in the operational way and recurring way during the third quarter. Looking at Slide 8, we can see the evolution of our procedures, average ticket. In the third quarter of 2025, the number of procedures reached approximately [ 151,000 million ] with a small sequential deceleration, reflection of this more selective commercial strategy and the end of the contract with Unimed FERJ. On the same comparison, sequential comparison, the average ticket grew by 5.7% attenuating the smaller volume and the higher quality of the revenue in this period after changing our portfolio of clients. On Slide 9, the gross revenue of the company reached approximately BRL 1.6 billion in the third quarter of this year, presenting a small reduction of approximately 4.7% in the sequential as a result of the interruption of the services added offered to Unimed FERJ. You should remember that this operator was up until August, the biggest client of the company, representing more than 10% of our sales. So that a fall of 4.7% shows that the company has been successful in the replacement of this revenue, which it has given up. Going to Slide 10, the net revenue presented a small fall of 3.5% in relation to the quarter immediately prior, smaller than the reduction of gross revenue due to the improvement in the PCLD during this quarter when compared to the previous quarter. As you see on the following slide, on Slide 11. We see a sequential reduction by -- pushed by a more -- a better base of clients and better quality clients and with a better dynamic of receipts. As a consequence, the PCLD was 6.1% in the previous quarter, went to 4.4% now. On Slide 12, the gross margin -- cash margin reached 32.3% in the third quarter of 2025, an important advance in relation to the previous quarter with a sequential expansion of 200 basis points. The profit -- cash profit reached BRL 456 million at the end of the period, demonstrating a tendency of the recovery of profitability as we see on the graph on the left. This is due not only to the initiatives -- commercial initiatives of improvement in our portfolio of clients, but also in the management of costs. If we exclude the hospitals from this account, the gross margin went -- comes to 35%, which reinforces that the direction of the company of leaving the operations -- of hospital operations and focus only on our core business of oncology is the correct route to take. In the analysis of the last 12 months, the cash profit -- gross profit was BRL 1.8 billion with a margin of 30.7%. Looking at the next slide, #13, you see the operating expenses reflected in the efforts of the restructuring plan and cut of expenses executed by the company over the last quarters. This is the first quarter in which we can see the numbers based on a normalized basis without the relevant impacts of these rescissions. The result is a reduction of almost BRL 30 million when compared to the third quarter of 2025 with the same period of the previous year, a delivery of savings of BRL 710 million on an annualized basis. As a result, the operating expenses have represented 17.9% of net revenue a reduction -- a sequential reduction of 300 basis points. But we should remember that we are still running with a gross revenues almost BRL 80 million lower in this quarter when compared to the second quarter. In other words, even with the deleveraging -- operational deleveraging, reducing drastically this ratio. If we exclude the effects of the hospitals, the operational impacts represent 17% of net revenue. Looking at the adjusted EBITDA on this following slide, #14, we can see a growth -- a sequential growth of 30.4% at the end of the period in BRL 241 million, an expansion of 450 basis points EBITDA margin -- adjusted EBITDA margin by ending the quarter at 17.1%. This expansion of the margin is solid and quality -- high quality. It's not just due to the elimination of the hospitals. It would have gone from 12.7% in the second quarter of 15% in the third quarter, even with the hospitals included in these numbers. In other words, 270 basis points of expansion due to the gains in gross margin and efficiency and cuts in expenses. On Slide 15, the loss of BRL 39.7 million without the hospital shows an evolution -- a relevant revolution in a sequential basis, but remembering that in the context of a capital structure, which is not adequate with many financial expenses weighing on the bottom line. Going to the next slide, #16, we present the working capital, which shows an expressive improvement sequentially, ending the third quarter in '25 with 25 days of capital -- of net capital -- working capital, an improvement of 16 days with a highlight for the days of receivables, which ended the quarter at 88 days, a sequential improvement of 8 days. On Slide 17, we show the generation of the cash flow -- free cash flow -- organic free cash flow of 62.4% in the quarter. On Slide 18, we see the reconciliation of the cash flow between quarters. And finally, on Slide 19, we have the leverage -- the financial leverage. And we should mention that on the third quarter, even with the accounting cash affected by BRL 217 million in provisions for part of the CDBs, the net debt grew less than that, less than BRL 10 million -- [ BRL 160 million. ] This shows an organic cash flow in the period. Even so there was a reduction in the leverage of the company in the sequential comparison of 4.4 to 4.2x, a pro forma basis for the increase in capital of BRL 1.8 billion -- BRL 1.4 billion included on the 14th of November, the leverage will go down to 3x the adjusted EBITDA on an annualized basis. With that, we close here the position of our results, and we open now for the questions and answers.

[Operator Instructions] Our first question comes from Caio Moscardini from Santander.

Two from my side. First, in relation to the PCLD, can you please talk a little bit about the PCLD, which still has come in quite high at [ 4.4, ] I believe. And how we should look at that -- 4.4, how we should observe this reduction in the level of doubtful receivables and the number of days of receivables and the quarter-to-quarter, even though it's better. I want to understand where do you think that the days of receivables should stabilize since we now have no longer the hospitals in the base? Just these 2 questions.

Caio, this is Chris. Addressing your first question about the doubtful receivables, though we've seen a substantial improvement on a sequential basis of PCLD going from 6.1% to 4.4%. We still have the impact -- offensive impact of the hospitals. So the tendency is that we will see our doubtful receivables normalized when we have had a closing of the hospital assets in our P&L. Remember that the nonadjusted doubtful receivables for the effect without the hospitals, without receivables, the number that we looked at in the third quarter, if we look at this photo, adjusted without the hospitals of 86 days should be more or less in a recurring rhythm, normalized rhythm going forward, remembering that there are several quarters we have not reached this level. It didn't even show up here on the history on the table if we look back at these levels of 86 or 85 days. It's been a long time since we didn't operate at these levels, and this should be the closest of the recurring operation of the company. It should be very close to the recurring amounts of the company.

Our next question comes from Gustavo Miele of Goldman Sachs.

Two questions from my side as well. The first is a follow-up from Caio's question about the working capital and accounts receivable. How does this -- this can be translated into a performance of net debt looking at the fourth quarter. If we look at this third quarter, adjusted for the -- by the provision for the master -- Banco Master, we see a big fall. The tendency should be to have some effort playing against this delta of net debt in this fourth quarter since these days should encounter stability by the end of the year. So that would be the first question. And the second, just to understand a little bit more about the level of margin looking at the business without the hospitals. As you mentioned, projecting stability of gross margins. This reflects a little bit of the efficiencies that you've had in the business being a little bit more mature. How do you see space for the expansion looking at 2026, just these 2 points.

Thank you, Miele. As far as the net debt in the dynamic going forward, what we can say is that the company has come back to a model of cash generation, and we are now seeing cash generation -- free cash generation, an organic basis in the third quarter. So we expect a trajectory of net debt, a reduction of net debt, gradual reduction over the next quarters. And that remembering that we have a tailwind in a sense, which is the inorganic nature. But as we follow going forward, concluding the closing of these operations, the transactions of the sale of hospitals, we will have a benefit also related to the debt, which will leave our balance sheet in the case of the sale of the transaction of the UMC and also of a payment to be received in the case of the transaction of the sale of the Vila da Serra. So we expect because of that to have a -- also because of this a deleveraging happening gradually and with a reduction -- nominal reduction of the net debt. Thinking about margins, we think that there's, yes, space to have an expansion because even though the work of efficiency and costs and expenses is quite advanced, not to say that we don't have space. There's always space, but we always see that a large part of this work of efficiency has already been concluded. But when we look at the top line of the company, then we still have a lot of operational leverage to recover. We need to remember that the company has had in its third quarter of '25, almost BRL 220 million less in gross revenue, net revenue if we compare it to the same quarter of the previous year. And this is obviously due to the decisions made, which we deliberately took to make this change in our portfolio of clients. As we continue to recover our top line, and this is happening, when we look at, for example, at the sequential fall of net revenue that we had of 3.5%, this reflects the revenues which we let go of as Unimed FERJ which we let go during the quarter. And it suggests that in this sequential, if it hadn't been the additional revenue that we had, we're substituting with other clients. So this movement to continue growing together with other payers will continue. So we are expecting an operating leverage, and this will give us also a dilution of this base of expenses and therefore, more margin -- more EBITDA margin expansion.

Just to add one thing, recovering is more -- is slower than letting it go. So these movements are done in a way that is -- we stop the losses all at once. But then to the commercial actions are happening, but they come in a little more cadenced way.

Our next question comes from Eduardo Resende from UBS.

Two questions from my side here. If you could -- the impairments that have happened in the third quarter, we want to know if these operations announced up until now have all been recognized in the third quarter or if there's anything that will still show up in the fourth or next -- fourth quarter or next quarters? That's the first question. And also about growth. When we look at the guidance of net revenue that you have compared in a pro forma way that you put ex hospital in this quarter, we see that this has been very relevant for the following year. And so we wanted to see a little bit of the strategy for the recovery of these volumes, which you expect next year. And we're looking at the guidance CapEx in 2026, which is a little bit below the historic levels. And this growth in volume should come with the unused capacity of the current units. What would be your strategy in this sense? Any information you can give us on that would be very helpful.

Okay. Eduardo this is [ Zach. ] Thank you for the question. Starting with the impairments, the adjustments -- accounting adjustments, we understand that everything that we have performed the sale of the hospitals, the cancer centers, all of this is behind us. And so the other adjustments will be more constant in the information that we have now. We should have none that are relevant, no relevant adjustment going forward. Obviously, with everything that we have seen today for growth next year, we have 2 points. Up until now, as Bruno and Cristiano mentioned, we have been adopting this commercial strategy more selective, which gave its signals in the next quarters, next year, more specifically, but we should return to levels of growth close to the market levels, remembering that it's in the low double digits, 10% to 12% in the next periods. And this is translated in our guidance. Also aligned with your point of the capacity, we have quite a bit of capacity to continue growing, and we have relevant investments being made in recent years. It's worth mentioning here that it's very virtuous the partnership that we have in Rio de Janeiro with Sao Jose and that we are inaugurating now our unit next to the hospital, which will be a big catalyst of growth and other agreements -- commercial agreements that we have been or have announced or will be announcing shortly. We're heading towards the finalization of these agreements. There's lots of good things that could be happening to help us deliver this growth in the next periods. So looking at answering your question we have capacity to continue growing without demanding lots of CapEx in next years. And as is translated in the guidance, the CapEx has already been done. The major construction are done or finishing. And in fact, right now, we have the anticipation of operations in some cities such as Sao Paulo and Rio. So this is the first aspect. The second is, yes, other partnerships, hospital partnerships and with health plans with insurers and payers are underway in a way to permit a growth -- sustainable growth. We look -- we're very comfortable with the guidance that we have given in terms of CapEx -- less CapEx and more growth. What had to be done has been done and either has been delivered or will be delivered shortly.

Our next question comes from Ricardo Boiati of Safra.

I have a follow-up question in relation to the level of debt. If you could detail for us a little bit more how is the pro forma in relation to the cash position of the company? And how is the position of -- cash position in relation to -- and where this money is applied. In fact, what is the remainder from the Banco Master, if anything is left over from that, which has not been written off? And also looking at the debt what's the breakdown between short term and long term after this restructuring? Lots of moving parts. And so we see if we can get a picture a little more of the pro forma numbers, which help us to understand the position that we should think of the company. And the second point is in relation to the competitive environment. I think that you've given us some very interesting in terms of commercial agreements, partnerships with operators, this position of you. If we look at the scenario -- the competitive scenario, have you seen been more coming from competitors and we see the hospital players moving forward in oncology. So the question is if this is a more challenging environment in a competitive world or if that's under control from the standpoint of management to be able to deliver this guidance for the next years.

I'm going to start here with your first half of your question. And afterwards, I'll let Bruno answer the second, help to address the question of perspectives for growth in the competitive environment going forward. But looking at the pro forma of the cash position of the company at this moment, after the increase in capital, it shouldn't be very different than this photo that we have seen in -- on the 30th of September, remembering that the increase in capital was predominantly underwritten with the utilization of debt of financial instruments, not as creditors converted in relation to the company. And obviously, this is good in the same way because it reduces our leverage, but it shouldn't change very much the photo from the standpoint of positioning of cash. The good news is that obviously, going forward, we have a lot less financial expenses. So the exit -- the cash outlays, which had been previously expected to happen during November and December, especially relative to payments of interest, this number at this moment is revising this number as we receive the final information and we start to tabulate all of this in our projections. We are seeing, obviously, and it couldn't be any different, a reduction -- a relevant reduction in financial expenses and the payment of cash expenditures, which will reflect positively in our cash position over the next few months. The next -- the same thing is being done. We haven't yet finished to have a photo of the of the chronogram of amortization going forward. But what we can say is that it will be something that's encouraging as well. We saw a participation of the debt instruments between all of the eligible instruments to participate in this increase in capital. The debt instruments with due dates in the medium to short terms were those that were most utilized by investors in this process of increasing our capital in a way that this by itself generates a reprofiling of the chronogram of amortization, which will leave the situation much easier for the company, much softer so that we are now in 2026 and basically in '27 and '28, this increase of capital has wind up working to generate a relief about the amortization program, especially over the next 2 years. Sorry, I just wanted to add one thing in relation to the growth. The environment, again, we continue to see a market which residents will increase, new cases will come up. Complexity [indiscernible] with the future -- looking -- in the future, which has permitted us to grow in this market and establish more partnerships, more hospital partnerships. To give you a typical example, Belo Horizonte, the sale of the asset of [indiscernible] strengthens us a great deal in the region. In the city of Belo Horizonte, we're much more competitive. The same thing happens in the Center West with the Santo where we expand together with them, where they create hospitals, where we set up their oncology. So much more focus on partnerships rather than assets that we own, noncore assets and which one of demanding time and energy from the company. At the same time, we are in a platform of franchises, but we're already making the eighth franchise operation, helping us to enter markets where the large networks don't even go close. For instance, there's a market, an addressable market, which is very large, which will pay us to grow in that, which we do well, which is the line of oncological care in all of its aspects. And here also, just to mention one more thing. I spoke about this previously. But if we look at the falloff of revenue -- net revenue sequential, which the company has had in the third quarter, which was 3.5%, and we consider that the third quarter was the quarter in which the company closed and discontinued the payer, which had been up until then their largest client with approximately 13% of our billings. So -- and I didn't go down 13%. I went down by 3% on a sequential basis. I still have July from revenue from this payer. But in August and September, it had already been removed from our base. For this to happen, means that, obviously, the company is growing at a velocity, which is very interesting together with the other payers that we have in our base and obviously bringing new clients. So this is what makes us comfortable -- leaves us comfortable in relation to a vision of this adjustment in this dynamic of reduction of the top line growth. We shouldn't see this more in the next quarters. And as Bruno said, we -- as [ Zachi ] mentioned, in a segment in which we know has been consistently growing, at least in the low double digits, this type of performance that we desire going forward, that we're wishing for going forward.

Our next question comes from Joseph Giordano from JPMorgan.

Two principal questions. The last question in relation to the rejection of the numbers of oncologists seeing the changes in assets, et cetera. That's my first question. And also my second question is in the question of new agreements. Historically, you work a lot with hospitals and cancer centers such as we're now undoing our relationship with some of them. I wanted to ask you how these new contracts compare to the historical contracts, especially these with Unimed and any profitability of these partnerships that you're leaving with these cancer centers and the outpatient work that you do.

I'm going to start here. Thank you for the question, Joe. This has always been a churn in relation to doctors, nothing that would be different than our historical goals, nothing different this year. We have in our clinical team, specifically, what I want to mean by that, [indiscernible] has been a growth in doctors. We have partnerships. We have the attraction and the model continues to have -- continues to be highly attractive for doctors within our plan of medical careers. And obviously, the franchises as well. We hadn't seen this but much [indiscernible] on the contrary, we also see some partnerships, exclusive partnerships give us even more margin to continue being a magnet of talents that attracts in all levels in a higher level of seniority and in newer doctors, we continue sending these people to Boston to be trained. The model which continues very robust in terms of the medical payments without paying any commissions. I think that's very important that they're attractive for the doctors and for the group, and it's attractive for those who purchased this service, having an alignment between the best practices and the remuneration. We continue to see this market and the hospital partnerships established in this model is not a new model. It's a new way forward for the company to continue -- for the company to continue growing. The CapEx is very low, improvements, which are punctual, onetime making -- offering high-quality oncology at a very high cost effectiveness ratio. The outpatient model continues strong, but with the care for the patient in the area of -- within the hospital continues to be a source of growth, unique and exclusively in these patients. Chris, would you like to complete?

Yes, Joe, I think completing and connecting with what Bruno has said, the assets which leave are obviously offenders from the standpoint of margin. We see this in the combined negative [ EBIT ] of these assets having been less than BRL 26 million in the third quarter. And the offenders also from the standpoint of working capital. These hospital operations have, by their nature, have a much longer cycle of receipts than our operation, our core operation of outpatient oncology, levels of nonpayment, which are much higher than the operations than the outpatient due to the complexity of the payments together with a typical bill for outpatient treatments. And the numbers speak for themselves. We see that we can see in this third quarter how much these operations were affecting our P&L negatively. And remembering that we are not leaving from the thesis of cancer centers. As Bruno mentioned, these models of partnerships -- hospital partnerships, some already concentrated such as the partnership with San Jose in Rio and Santa Isabel in Salvador, in the partnership with Santa Group, in these types of partnerships since the scope is very limited and we're restricted only to oncology, we have margins -- contribution margins and gross margins, which are very much in line with what we have looking at our margins in outpatient oncology. And so that's why we're going to continue following up -- following down that road.

Okay. Thank you very much. We now close at this moment, the session of questions and answers. I would like to pass the microphone back to Dr. Bruno Ferrari for his final comments. Dr. Bruno, please go ahead.

Thank you all for your questions. Have a good day.

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