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

Hello. Good morning. Welcome to the teleconference earnings call of the second quarter of 2021 of Rede D'Or São Luiz. We have here with us today, Paulo Moll, President; Otávio Lazcano, VP of IR and Finance; Mauricio Lopes, VP Executive; and Leandro, VP Medical. We inform that this event is going to be recorded and will be available at our website. After the initial presentation, we will start with the Q&A. Additional instructions will be provided. Before we proceed, we would like to clarify that anything that may or may not be said during the teleconference about the perspectives of business projections, operational goals, financial goals and beliefs of the Board of Directors based on information that is currently available. This is not guaranteed performance and involves risk and circumstances that may or may not occur. The investors must understand that general economic issues, industry and other operational issues may affect the performance of the company and may lead to results that are different from the future considerations. Now I would like to give the floor to Mr. Paulo Moll. The floor is yours.

Good morning, everyone. Thank you for your opportunity -- for this opportunity to show you the conference call, the earnings call. And before we present the great results, I wanted to update you on the evolution on a few strategic issues. Let's start by our digital platform. It has been an important source for capturing our business responsible for 1/3 of our appointments. We've done 13 million accesses on the portal, again, this -- if you compare it to 5 million in the same period of 2020. According to this platform, we delivered all the data on the patients. We focus in prevention and coordination of service, increasing the -- how much the patients use our services. And also, we are going through a sustainability issue here in the health care sector, but we are moving on. We have a very important relevant strategy. We have surgeries of high complexity, and we do the share of the complex surgeries that has increased quarter-by-quarter. And we can see a very good performance. And we've done our investment in infrastructure, HR, equipment, offering to our physicians and our patients the best structure possible for these complex procedures. In our growth agenda, we've had over the first 6 months of 2021, a CapEx that was record BRL 3.1 billion organic, 43 organic projects in development. Some are in advanced stages, such as [indiscernible] that will be done by the end of the year. We are also -- we have the new tower of the Hospital Villa Nova Star. And we have the increase of the northeast as well region. We are in the advanced building of Hospital Memorial Star in Recife, and in Salvador, we are expanding the Sao Rafael. And we have investments in these 6 months of BRL 610 million. M&A. We've had a lot of investments, BRL 2.3 billion in investments up until the first quarter of 2021. Since October 2020, we acquired 12 hospitals and we added 1,637 beds. This has strengthened our position in Rio de Janeiro and Sao Paulo with the acquisitions of several hospitals. And we have a very good strategy to diversify our geographic positioning exciting new markets, very interesting markets. So here, I would compare that in the same way that we are accessing, by years, market in 2018, acquiring the first hospital. Today, we have 3 hospitals in Salvador and Feira de Santana. And recently, we have the hospital in Feira de Santana, which is the biggest city in the north, northeast and center east -- central west, actually. We have over 1,000,600 beneficiaries. [indiscernible], this market, this platform to achieve an opportunity of organic growth and we will be able to implement in Mina Gerais, 5.3 million people being benefited through the acquisition of Biocor, a hospital with 350 beds. We also have the sale of Paraiba. We bought the company that was the lead in the market. 400,000 beneficiaries in Nossa Senhora das Neves, that's the hospital that we bought. Also Proncor in Mato Grosso do Sul, 136 beds, 600,000 beneficiaries. And this is an opportunity to really open new frontiers trying to achieve leadership in these states. I think that is fundamental for our strategy to rise the standard of care aligned with our purpose of increasing access to medicine, good quality high medicine here in the country. We've already mentioned in the last call the expansion of our relationship with adding 21 new hospitals, over 1,300,000 beneficiaries from the operator. In July, we have a partnership with Vale to the management of 2 hospitals in the State of Para in Carajas to increase the services. But through a joint venture as well, we are positioning ourselves in the city of Parauapebas, either by building a hospital or an M&A that might service the region. That's the strategic vision really, very relevant issue. And we hope that we can repeat this in the future. Now let me update you about the COVID-19 pandemic. We had an expressive reduction of admitted to the ICU patients. We had, at the end of July, 800 patients in comparison to over 3,000 patients before. Regardless of that, we have a high occupancy rate in the growth of service to the other pathologies in a way that we can sustain the occupancy rates that are very high. And it is interesting to deliver our results. I would like to highlight that we are going over -- we've gone over the threshold of BRL 300 million in donations, and we raised over BRL 100 million with partners. We are very pride -- we take a lot of pride in helping the local population. Once again, I would like to thank you all, all the collaborators of Rede D'Or, all of our employees. And also, I would like to thank the shareholders. Thank you for the trust that was invested over the years. Now I give the floor to Otavio. He's going to go over the numbers. Otavio?

Thank you, Paulo. Good morning, everyone. Thank you for taking part in this earnings call. Once again, Rede D'Or is announcing very solid results and some records, historical numbers established by the company in the last quarter. Rede D'Or has reported almost BRL 50 billion in assets, BRL 14.6 billion of cash flow immediately available. [indiscernible] net that shows the muscle -- financial muscle to continue to grow. Now if you go to Page 4. Regardless of the drop in 54% in the number of core patients, we can see between March and June, the number of patients has grown -- well, the patient daily average has grown 4.3% and ex-COVID increased 12% quarter-by-quarter. The next page. As you can see, we have the operational indicators, evolution of total surgeries. We also see the diagnostical sales. We can see that actively, we are -- have all the operational costs for surgeries and therefore, we can have a high occupancy rate on -- based on the enormous amount of beds -- operational beds. This is a record number of surgeries and a growth of 6.6% in the same hospital base quarter-by-quarter. Page 6. We had the data in regards to the oncology volume of procedures and patient day volume and average occupancy rate. On the graph on the left, year-on-year, we have 628,000 patient day in the second quarter for 2021, a record 62% higher than the previous year. Average occupancy rate for a set of 58 hospitals has gotten to 83%. On the right, you can see the data regarding ambulatory oncology. 52,000 -- over 52,000 procedures, another record, 21.3% higher than the same period in 2020. Page 7. We can see the hospital bed evolution. We've talked about that, the operational and total beds. 1,500 operational beds were added -- actually 1,578, since the start of the pandemic. 8,788 operational beds are, for the second quarter of 2021, another record, 597 beds higher than what was reported in the previous quarter. And we can see 532 that come from M&A. We have 9,611 total beds. That's a record. 1,500 from M&A by 12 hospitals that were added to the portfolio since the IPO. Moving on. Take a look at the growth revenues. Total gross revenue is on the left. You can see BRL 5.8 billion in the second quarter, 10.7% higher than the first quarter of '21. And you can see almost 89% higher than the second quarter of 2020, another record. Quarter-on-quarter growth of 63.4%. Let's continue on the right. The gross revenues for oncology infusions or ambulatory, where you can see BRL 445 million quarter, 35% higher than the second quarter '20, another record. Quarter by quarter, the growth is 30.5%. In the first 6 months, gross revenue, oncology infusions, ambulatory has reached the landmark BRL 852 million. If we take a look at Page 9 on your left, Rede D'Or has reported in the second quarter of '21, the cost of services, BRL 3.918 billion, a growth of 37.6%. And we have the total revenue and a growth of 42.6% in comparison to the 6 months of '20 when we reported a cost of BRL 2.741 billion. And we have the services for subcontracted parties that has been related to the patient days and the additional beds over 1,800. And those are the impacts over the second quarter of '21 through 2020 and the oncology expansion as well. Now semester on semester, the cost for administrative general cost, there was a decrease of 10%. You can see the decrease here on your right, in expenses. As we have mentioned, the expenses of BRL 258 million of '21, a growth of 16% in regards to the previous quarter and a reduction of 32% facing the same period of the previous year. The growth of impact in the comparison to the previous quarter is the impact of nonrecurring stock options, the high expenses with profit sharing, the collective bargaining agreements that we're mentioning and the acquisition. So the reduction in regards to the previous year, we have less expenses with the stock options and more expenses for the profit sharing for the workers. And those are the provision tallies. Let's see Page 10. We will start on the left. The EBITDA, BRL 2.379 billion for the first quarter of '21, margin of almost 24%, a record, as well as the EBITDA adjusted reported for the second quarter of '21, 1.565 billion, a growth of 607% in regards to the previous quarter. Operational cash flow adjusted, and here, we can see the generation of BRL 887 million. So over BRL 500 million after taxes. Net revenue, BRL 447 million. Now to continue, let's talk about the debt profile on the left. As of June 30, we have a gross debt of BRL 22 million, the gross at average CDI, 1.3%. Gross at average term, 5.7 years. The -- well, a percentage of the foreign currency debt is subcontracting. We have 37.6%. We can see the credit lines. Many companies are affected by the exchange rates. The company, as it was mentioned, has reported a cash of BRL 14.6 billion. We have a net debt of BRL 7 billion. The net debt over EBITDA over the 12 months, 1.7x. The same calculation relates to -- well, if you redo this, it will be 1.4x. We can see the gross debt per index. And you can see on the right, the debt amortization schedule. Last but not least, before we open for Q&A., on the left, we have the performance of our shares in connection to the index of the stock exchange after the IPO. On the right, we have a few more information in regards to the treasury, the average daily traded volume, et cetera. I think that we will stop the presentation now for the benefit of time, and then we will open for Q&A. Thank you.

[Operator Instructions] We have a few questions. Joseph from JPMorgan.

Congratulations toward the presentation. So let's talk about the trend, that seems very good ex COVID. To try and understand the average ticket, the numbers, maybe it will grow in this last quarter. Do you see any accommodation in regards the to average ticket?

And we have to see the profitability rates. We have seen that after there was a drop in the COVID-19 patients. Now from now on, I think that we're going to get better numbers. The M&A is favorable. And I think that the issue of M&A seems to be very low.

Will you continue to do this geographical expansion?

Well, let me start with the M&A, and then I will give the floor to Otavio. And then you can continue with your questions. We are very excited with our pipeline for M&A. And we've been talking about this in our IPO. So I think that this is -- maybe even if we consider the effect of COVID-19 in some of the average size hospitals are having more difficulties in their books, it has an impact in the pipeline, and there's even the issues of expectations. We had an accommodation and a gradual return to levels that are according to the records, and we are very excited, nonetheless, with the size of our pipeline. We hope that we have good news for the next following quarters, Joe.

We don't guide tickets quarter-by-quarter to the market. But if you allow me, we believe that as we manage actively these surgeries, and we use the operational cash flow of the company, we will -- this will compensate the drop in the revenue that comes from the COVID-19 patients. As Paulo has said at the beginning of the presentation, there is a trend in half of these patients. We are here in August, and the company will report the operational best, which is very similar to the occupancy rate that was reported for the period of June. So I think that in that way, I'm answering your question without trying to compromise the company with KPIs or guidance. It all depends on whether you're working with these numbers.

Next question will be from Fred Mendes, Bank of America.

I have a few questions. I think that the next question is just like the 1 from Joseph. The occupancy rate is the same as 2019, now above 80%. So I wanted to understand, from your standpoint, how much of it is sustainable? Can we think that the growth is stronger and you think about that level that is stronger up ahead? And secondly, I wanted to understand if there was an impact, rather an impact or maybe these are more recent data, the biggest impact should take place over the next quarter. What do you think?

Fred, I'm going to start with your second point, and then I will talk about the occupancy. We're having to wrap up is within our year. It's what's expected. Of course, you have an impact for some relevance over the next few months. But it's been on the potential. There is time for the physicians and the population. So we hope that this is a process that will take a few quarters, so we can get to the potential. And remember, as we had said in other calls, earnings calls, this is the first step, and we have to have expectations of increasing our relationship with our investors.

Fred, congratulations for your career. I know that this is another interesting step for you. Now Fred, occupancy, 83% is not a record. In 2018, we had an occupancy rate. I don't remember the number, but it was higher. But here, we talk about the business model that we have. The IPO. So the occupancy rate, 79%, all throughout the investments of the company. I believe that this is a good information for you and the correct way of answering your question. Now Fred, if you look at Page 5, the graph on the right. We can see the total surgeries, the same days. And here, historically, we can accelerate and recover some movement for surgeries with the same administrative base. So as Paulo has said, I am very excited with the results, and we are excited for the future. I think that we will have a good occupancy rate. And we will have the long-term results.

The next question will be from Samuel Alves from BTG Banco.

I have 2 questions for you. First, so about occupancy rate, could you tell us how was the occupancy rate on the second quarter? Did we improve? Or did we optimize this as the COVID-19 cases dropped in your network? And now we saw that there was an acceleration quarter-by-quarter regarding COVID. If you can tell us a little bit more details, expenses with COVID that are being adjusted, the results, just so we can understand the evolution quarter-by-quarter.

Samuel, the occupancy rate throughout the quarter was stable. We had great fluctuations, and we have [ 38 ] hospitals, of course. Now in regards to your question, nonrecurring COVID-19 and the peak of the second wave was manifested in the first quarter. And obviously, we have resources, we have expenses, and we had to mobilize all throughout the second quarter as the number of cases is increasing. So that's the response.

Next question will be from Mauricio from Credit Suise.