Rede D'Or São Luiz S.A. (RDOR3) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the earnings call of the first quarter of 2021 of Rede D'Or São Luiz. We have here with us today, Mr. Paulo Moll, President; Otávio Lazcano, Vice President of Finance and IR, Investor Relations; Mauricio Lopes, Vice President and Executive Vice President; Rodrigo Gavina, Operations Vice President; and Leandro Reis, Medical Vice President. This event is being recorded and will be available at the IR website of the company. After the initial presentation, we will start with a Q&A session. Before we proceed, we would like to clarify that any information that might be provided during the earnings call regarding the company perspectives of Rede D'Or São Luiz' operation -- operating results, market share, competitive positions are substantially -- they are as stated and forward-looking statements that express the opinion of the company. Many factors and values may impact these results and go beyond the ability and control of the company. General economic conditions and industry conditions and operational conditions might affect the performance of the company and might lead to results that differ from those expected forward statements. Now I would like to give the floor to Mr. Paulo Moll. He will start the teleconference.

Well, good morning. Thank you for your presence. Thank you to our shareholders and our analysts. We've had great results that we will present to you. Let me start by the update of the COVID, okay? I think that the company has shown a lot of operational resilience, showing the capacity to adapt and flexibility, either with a higher number of patients who are COVID-19 patients, and with the reduction of the COVID-19 demand, the allocation of those beds for the non-COVID patients through segregated areas in our hospitals, and we are keeping the good services for the other pathologies and keeping the care even with a lot of oscillation, high occupancy rate for keeping the operation updated. We've had over 1 million patients that were symptomatic. Out of the -- 300,000 were confirmed cases that generated over 40,000 patients that were admitted to the hospital. Our general mortality rate is around 1.7%. Only the best centers in the world have this index. And we would like to highlight our mobilization in support to the public health site system, and we opened over 1,350 beds, 4 hospitals, 4 philanthropic hospitals, public hospitals to service the public health care system ex U.S. We have BRL 260 million that we invested from with another BRL 100 million that also contributed -- partners that contributed to this cause. And finally, in the research line that is related to COVID, we understand that it is our duty, and we have one of the biggest databases and historical data series of servicing and taking care of these COVID-19 patients in the world. Even throughout the pandemic, we are evolving in the process of training. Our objective is to have until the end of the year, all hospitals accredited. The -- still a lot of accredited hospitals were the ones that were acquired recently or they haven't been launched yet. We also have the accreditation by the Joint Commission in [ cobrastar ] and [ telenovastar ]. We have -- and the hospital has only been launched for 3 years, and we've been accredited by Joint Commission. In expansion, we want to increase the access to our services. We are accessing 2 new markets. I would like to highlight our entry in the state of Paraiba with the acquisition of Nossa Senhora das Neves in the state of Paraiba. It's a great platform, and it's a second hospital that is called [ Team ]. It has its own diagnostics units, and we have the platform to expand in the state of Paraiba and also Rio Grande del Norte. I would also like to highlight our entry into the Minas Gerais market, where we acquired a very traditional 350 beds in the city of Belo Horizonte. It really highlights our entry in this market, and we will have an enormous opportunity for growth through M&As and through brownfield in this very attractive market. I would like to highlight our discipline as well in our M&A and our acquisitions. We acquired these assets with very attractive values and an ROI that is very good, aligned with our historical numbers are -- and the 2 M&As that we commented, these were processes that were noncompetitive. These were processes basically of the partners choosing Rede D'Or as the partner. In aggregated numbers, we have 9 hospitals that have been acquired since October, bringing a total of 1,290 beds, hospital beds, surpassing our expectations. Commercial partnerships. I would like to highlight a partnership that is very relevant for our year. We signed an agreement with Amil, which is the third biggest health care operator in Brazil, and we have 20 hospitals here in 3 states, Sao Paolo, Rio Janeiro and the Federal District. These are 82% of the beneficiaries of Amil, and within these 20 hospitals, we have 5 hospitals that were never accredited at Amil are the 3 star, the Sao Paulo, Rio de Janeiro and Glória D’Or and Niterói D’Or. These are hospitals that have a great capacity, and this will bring a lot of growth to the hospitals. Let's talk about ESG. We talked about the sustainability and the social fight against COVID, and I would like to show you -- tell you that we're going to publish our sixth annual report on sustainability that will detail all the actions regarding ESG in 2020. And I would like to highlight the recognition that we received at the beginning of this year as a sustainable company, the sustainable company of 2020, the award of sustainable [ additive ] by the industry, commerce and services chamber in Brazil. It's a recognition that shows that we are on the right path. Now let's talk about the digital platform and the importance that we are doing on the investments, investments in technology and innovation. I would like to highlight that we already have robust results. We've had a relevant that is higher -- ever higher in Rede D'Or. All of the -- most of the appointments are done through the digital channel. And this has a good growth. From the first quarter 2020 to the first quarter of 2021, we had 169 appointments done through the platform. We more than doubled compared to last year, 132%. So we are providing more -- it's better for our patients. Just to give you data on our website, for appointment, we had 2 million accesses. In the first quarter of 2020 -- in 2021, we got to 6 million appointments, 6 million accesses to our website. And I would like to highlight MSCI. We have 54 -- we are 1 of the 54 companies, those are companies that are in the emerging markets, the index, and we are just at the inception of our path here, and we are very happy with the support that we are receiving from the market and with the recognition of our investments. Last but not least, but before I give the floor to Otávio to continue with our presentation, I would like to once again thank all the collaborators, all of our employees that have worked drivenly in this fight against the pandemic. To me, it's a privilege to be part of this excellent team. The floor is now with Otávio. Thank you.

Thank you, Paulo. Once again, good morning, everyone. Thank you for taking part in our earnings call for the first quarter. I'm on Page 4, operational indicators. Results for the first quarter, the first quarter are, once again, we have new historical records. The consolidated results show more -- once more the strong recovery of the operational results and financial results of Rede D'Or. And I highlight that the results do not reflect the M&A, the investment recently announced as the accumulative adjustment [ to the ticket sales ], the negotiations where the [ 3 ] parties take part through the fiscal year. Now I highlighted in the second quarter and until the -- today, Rede D'Or has a favorable business environment characterized by the coexistence of COVID-19 patients and a growing number of surgeries and high occupancy rate. Until the current date, the results of the second quarter are higher than the expectations. Now let's start with the graph on the left. The company reported 553,000 patients per day in the first quarter 2021, 21.9% higher than what was reported for the first quarter of 2020 and 10% higher than the fourth quarter 2020. So we go to the center of the page. The company registered a hospital bed occupancy rate of 1.9% higher than the one reported for the fourth quarter of 2020, 9.8% higher than what was reported for the first quarter of 2020. And in the same way, 2.6 percentage points higher than what was reported for the first quarter in 2021. And the company is presenting occupancy rate that is growing in the last 3 quarters. Third graph on the right, the company reported 52,000 procedures of oncology, basically, infusions on the ambulatory setting. And it's 12% higher than what was reported to the first quarter of -- 10% higher than the first quarter of 2020 and 4% higher than the fourth quarter of 2020, another record. Let's talk about the next page. I'm in Page 5, still with operational indicators. Actually, 5 and 6, we have messages that are basically the same. Operational indicators, they highlight the leverage and operational adaptation of Rede D'Or combined with our corporate competency to actively administer patients and optimize the allocation of resources that are very limited by definition. The graph on your left. We can see the evolution of total surgeries and hospital beds average occupancy rate, the historical data and the occupancy rate. As well, you can see, so -- the surgery, you're going to see in 2021 is very similar to the third quarter, fourth quarter 2020, quarters where the company also reported good positive historical results. And just so you don't have any doubts, on the right, we have the same information in the same-day total surgeries and occupancy rate. Now on the next page, we can see the graph of the evolution of COVID-19 patients and total surgeries. Coincidentally, we can see the resources in high occupancy rate. We have a portfolio that has good operational growth. And you can see the graph on the right, the patient-day evolution from March, April and May. We have the daily average of patients. We have -- even though we had a 26% reduction of COVID patients, today, in the same period, we have an active management, and we have the capacity of the community to immediately allocate the best resources and maximize the results for our shareholders. Let's go to Page 7, evolution of hospital beds. Since September of 2020, even though we're facing all the challenges of COVID, we had the addition of 1,200 beds. 4more acquisitions, as we know. We have the additional Cárdio Pulmonar capital acquisition. And we also have the participation of [ the accord in Minas Gerais ] and Nossa Senhora das Neves in Paraiba. In the same way, in September of 2020, Rede D'Or has implemented, in an organic way, 1,082 beds, of those -- where most of them were in the first quarter. The company reported the operational beds at the end of the first quarter of 2021, 8,191 beds, 10.8% [ over ] what was reported for the fourth quarter of 2020, as you can see on the numbers, or 18.5% higher than the third quarter of 2020. Once again, the company has reported great results. Let's see Page 8, revenue. Once again, we have the information on your left, We can see the total gross revenue of BRL 5.3 billion. This value is 13.2% higher than the fourth quarter of 2020. 42% higher than the one reported for the first quarter of 2020. And so you don't have any doubts in gross sales, gross revenue grew 20.2% compared to the first quarter of 2020. Hospitals and other services, they reported 92.3% of the gross revenue, a growth of 13.2% over the fourth quarter of 2020 with -- or 43.7% over the first quarter 2020. So you can see on the right, the company reported a vigorous revenue in oncology infusions, BRL 406 million, a value that is 26.4% higher than the one reported for the first quarter of 2020. Page 9, costs and expenses. And we can see the information on the left, the cost of services. We can see BRL 3.5 billion, a value that is 32.4% higher than the one reported for the first quarter of 2020. Here, we have the justification, acquisitions, the inauguration of Glória D’Or hospital in the Central Rio de Janeiro and also the personnel hiring as the operation grows. Nonrecurring expenses expected related to the pandemic and the expansion of the oncology business. Going on the right, the company reported that the general administrative expenses, we have BRL 217 million, or value that is 45% higher than the one reported for the first quarter of 2020. The same way, justifications, the subcontracting of third parties related to COVID, the building of new stock option. So we can have the same plans that were preexisting through the IPO. For the executives and collaborators, the IT services and the monetary contingencies for the labor issues within the company. Excluding the nonrecurring effect of stock options, the increase would be 23% year-on-year. And the subline of personnel in terms of administrative expenses was 8.8%. Going to Page 10. Getting through EBITDA, net income and cash generation. Once again, on the left, the company reported an EBITDA of accounting of BRL 1.134 billion, an increase of 86% when comparing to the first quarter of 2020, a record in the company -- the third sequential record for the company. The margin of EBITDA increased 5.5 percentage points to 24%. In the center of the graph the adjusted EBITDA and the margin, BRL 1.330 billion, a growth of 95.3%. When comparing to what was informed in the first quarter of 2020, the adjusted EBITDA margin grew 7.6%, and once again, a historical record for the company. And on the right, we have the net income, BRL 402 million of growth of 254% compared to the first quarter of 2020, a new record for the company. Still on the right and on the bottom, the company informs the adjusted operational cash generation, BRL 777.6 million in the first quarter of 2021. Next page, we can see indebtedness of the company. We reported a gross debt of BRL 21 million. The gross debt average cost, CDI plus 1.3 percentage points. The gross debt average term, 5.1 years. We have the foreign currency exchange debt of 40%, so we also have reported the equivalent of cash of BRL 13 million. Net debt is BRL 7.2 million and a ratio of net debt to EBITDA, 2.4x. And the same as the center of the page, we have the gross debt profile for our investors, and on the right, the amortization schedule of the debt of the company. Last but not least, we are in the last page of the presentation. The RDOR3 performance, we can see the performance related to our shares since the IPO when comparing to the both IBOV index and underwrite from additional information about the shareholder composition. You can see the end of the presentation, and we are open for Q&A. Thank you.

[Operator Instructions] Mr. Joseph from JPMorgan would like to ask a question.

Thank you, Paolo. Thank you for accepting my question. Congratulations on the presentation. Two points that I'd like to mention. First, a very relevant evolution in the average ticket of the company. I wanted to understand how much did you reach of the complexity level before the pandemic. So I want to understand how the regular demand has behaved in this first quarter. Second point which you can comment a little bit on, how we are seeing the evolution throughout the second quarter. So the first was very strong. Of course, the pandemic is still affecting March and April. But I wanted to get a few more comments in the -- how the second item has behaved from the standpoint of growth and in this regular demand of high complexity of treatment.

Well, I'm going to answer the first and then -- well, I'm going to talk about the ticket. What we observe in tickets. In fact, the COVID-19 patients, we ended having a ticket that is similar to what we have with the other pathologies. Nonetheless, our profitability, that is less. So our expectation was the reduction of the COVID-19 patients cases that we have observed since the beginning of April until today has been compensated. Through the other pathologies and surgery schedules, it's a positive signal to our results. Otávio, would you like to add anything?

Paulo, I will reaffirm here what I've told you throughout the presentation. The business environment is very favorable, very similar to what we verified in the first quarter. We are having a high number of COVID-19 patients, And the company has corporate competency to fulfill that space to leverage operationally all of our units almost immediately. The results until today are even higher than the expectations of the company for the second quarter. So it's positive.

Mr. Samuel from BTG Pactual.

Congratulations on your results. Two questions. First, the opening on Slide 6, a really healthy issue. But could you talk about the representative net of the COVID-19 admitted to the hospital? That's my first question. And secondly, on a follow-up on the comment of Paulo on the average ticket. We know that the ticket is growing percentage-wise. Of course, Paulo mentioned the similarity in the COVID-19 treatment and general admissions. But I just wanted to see if there is an effect in the ticket because maybe since March of last year, we had a drop in the admittance. And the question is from January to February, the ticket of the company grew with the same magnitude as you mentioned. That's the question.

Thank you for the questions. Regarding the representativeness of COVID-19 patients admitted to the hospital in the first quarter, we'd rather not provide that information. I think that the relevant information for the shareholders, for analysts is that the company keeps high occupancy rates, and the volume of patients per day is very stable regardless with the natural operations and movements of the number of patients that are COVID-19, and we can see very clearly in the presentation in the slides.

How about the evolution of the ticket?

Yes, we've had an evolution of the ticket of 16.6% when we compare to the first quarter of 2020, and 5% when compared to the fourth quarter of 2020. It's very important to highlight that this is a very -- a broad range, a broad mix. And when we compare the first quarter to this year of last year, there was even more evolution in the portfolio. Now we have different [ practice ] by this company. It always follows the base [indiscernible] plus a premium, very small, maybe 1%, that's not payable for all time. And the company goes through it. We have a corporate competency to attract more high complexity, cases which leverages the revenues as time goes by. This is something that has been discussed all throughout the process. And this is a conscious decision of the Board of Directors that allows to target a higher market share. And therefore, we are helping the market to have more sustainability, financial sustainability of the medium to long term so that the market grows.

[ Mr. Gustavo ] from Bradesco Bank.

I have 2 questions on our side. First is regarding the operational beds. What can we observe? What can -- we have better visibility, and what would be a ratio that would be sustainable operationally for the second quarter, third quarter because what we were thinking? There is the impact of COVID that maybe increased the number of operational beds, an increase in percentage. But what can we imagine for the third quarter? Is that sustainable? That's the question. And second question, oncology. The structure of oncology in Rio de Janeiro is very strong. And in Sao Paulo, it's doing a catch-up. With that situation, since the pandemic gives a little bit of a dilution to those numbers, but how can they move forward? Do we have proportion similar to Rio de Janeiro, Sao Paulo? How is the situation evolving?

[ Gustavo ], I'm going to answer on the oncology question, and then I will let Otávio talk about the operational beds. You're right. We had oncology in Rio de Janeiro that was very strong. We grew our oncology. Our oncology is growing in Sao Paulo, basically organically -- well, it's organic growth. We attracted a few big names and Dr. [ Paolo Rossi ] joined the group in 2017. And from that moment on, we are attracting physicians and assembling our services in several hospitals within the city of Sao Paulo itself. Now this growth, very organic growth has been very strong to the point that we are reaching, if I'm not wrong, in March, the number for the first quarter. Volumes are similar in Sao Paulo in chemotherapy than with the numbers that we see in Rio de Janeiro. Of course, Sao Paulo is a fabulous market, is completely different, and we have more opportunity than what we expect in Rio. And here, in Rio de Janeiro, we are still growing. We are growing nonetheless with good rates. But given the fact that we have the opportunity in Sao Paulo and we started to -- from a very low invoicing in 2017, we had a rhythm of growth that is higher, and we have a gigantic opportunity to keep the size of the growth because of the size of the Sao Paulo market, [ Gustavo ].

I'll then repeat myself once again. One of the more beautiful characteristics of this company is its capacity to optimize the resource allocation almost immediately. At the end of the last quarter, we had 8,191 beds that were operational. We have today approximately 8,230 operational beds. In the presentation, there is the information that, at the end of March until today, the number of COVID-19 patients dropped 26% year-on-year. This is sufficient evidence for my statements here. And it doesn't seem that with the information that we have today that the first semester was monotonous. No -- in regards to COVID. No, we still verify high occupancy rate of COVID-19 patients, and that capacity to allocation and optimization of resources is key to our company.

Mr. Mauricio from Credit Suisse.

Paulo, Otávio, [indiscernible]. Congratulations on your results. Two questions. Now that you have some [ respire ], you have some respite, well, you can -- well, you have the expansion as well of the other operations and not so much the heavy burden of COVID-19, how are you dealing with that expansion? And the second question is the stock options. You have done some corrections for the stock options in the results. The question, do you want to change the dimension of these stock options and have differentiated stock options in the future?

I'll answer the first part. Well, I apologize the connection was poor, and I realize that your question is about the investments of the company. If you can repeat it, Mauricio, please, we couldn't get it, Cepeda.

So the last part of the ratio of indebtedness, do you -- will you finance the extension of the debt?

Well, we do the management of liabilities actively. In the post announcement of our earnings call, we issued a [ a grid, accrete ] 15 years, BRL 1.5 billion. Of course, the expansion of the -- organic expansion of the company and the issuance of debt to 15 years for CRI, but we can see the lines of credit that have eventually a higher cost and a deadline that is shorter. The company has a very robust line of investment, and it's detailed in the Section 10.4 of the reference form, 32 projects of growth, organic growth that will add to 5,200 beds to the portfolio until the end of the fiscal year '25. All this projected growth by the company and in the context of our business plans will be done with the capital structure that is optimized, understood as optimal by the Board of Directors of the company. Have I answered your question?

Yes. And in regards to the stock options, did you get that question?

Yes. The company doesn't have any intention of changing our plan of stock option. I understand that the way that we report, there is enough transparency for the analysts and investors to understand the impact in our financial reports and the cash flow of the company. So it would be the way the stock option is not reported separately because you don't want to change, as I mentioned. It has a return in those levels that we are used to seeing. Yes. And I would like to highlight that we didn't have anything relevant new in regards to stock options after the IPO of the company. The old, what we have new options that are transferred to the beneficiaries of the plan, and of course, this is correctly stated in our financial reports. Eventually, new stock options will be given by the company in the future by what is stated in the financial report, but it is related to the plans of stock options, granting of stock options in the past. So, Otávio. If there is any variation that you are observing, it is due to the valuation of the shares itself. [ Baby Kabra ], our controller, can answer your questions more specifically, but it's based on those -- on that group of shares that you have planned to write.

Mr. Leandro from Citibank.

Quick question on my part, cost. I wanted to know your opinion, especially, and we've had a lot of shortness of materials in the supply chain really, hospital supply chain. So year-on-year, it's not reasonable COVID really impacts a lot. But can you see the scenario cost for the year in materials?

Yes. Leandro, we, in fact, the items related to COVID-19, these items had variations in cost. Some of these items, we depend on imports to guarantee the supply. And our team in logistics has done a brilliant work assuring the safety of our operations and a good supply of all the materials necessary to provide care for patients. And some of these materials have variations that are expressed in the consolidated basis, diluted in -- but when I see the COVID-19 patients compared to the other patients, given the lateral costs associated to these procedures, I have an expense of materials over revenue that is higher. And this is dilutive when you see the numbers of the company as a whole. But as we have a reduction in the invoicing in the COVID-19 patients, as it has been compensated and is growing, the service to the other patients, so we have a gain in profitability because it's an efficiency of costs of expenses of material that is higher than the patients who have COVID.

[Operator Instructions] Without any further questions, we close the Q&A session. I'd like to give the floor to Mr. Paulo Moll for his final statements.

Once again, thank you to all of the shareholders, analysts that took part in our call -- earnings call. And I would like to close by saying that we are very positive in regards to the scenario ahead in the future. Once again, I would like to complement our executives, our employees that have shown the capacity to adapt and a very quick response in a scenario of a lot of volatility. So we are very happy with the scenario ahead. Thank you. Have a wonderful day.

The earnings call of Rede D'Or São Luiz is closed. Thank you for your participation. Have a wonderful day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]