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

Good morning, everyone. Welcome to the First Quarter Earnings, well, Conference Results from Rede D'Or. We have Paulo Moll; we have Paolo Lascano; and we have Mauricio Lopes, VP, Executive VP. We have the VP of Operations, Leandro Reis; Medical VP, Raquel Reis; CEO of Health and Odonto -- and Dental. And Marcelo Lima, he is the investor -- responsible for investments. Now this call will take 1 hour and it will be available at the RI, Investor Relations website of the company. After the presentation, we're going to start the Q&A. Before we continue, I would like to make clear that any statements that might be done throughout this earnings call regarding the business perspectives of Rede D'Or, projections, operational goals, are based on beliefs and premises of the Board of Directors based on information that is currently available. These are not assurances of performance. They involve risks and uncertainties. They are referring to events or circumstances that might or may not occur. General economic conditions and industry conditions and other operational issues might affect the future of the company and might lead to results that are materially different from what we expect. I'd like to give the floor to Mr. Paulo Moll. The earnings call will start. The floor is yours.

Thank you. Welcome, everyone. Welcome to our conference call results. Let's start by the operational highlights. In the first quarter, BRL 12 billion in revenue, BRL 304 million in revenue. Great result. I would like to say that we delivered this result still with the high interest rates, were pressured by the interest rates. And also, the loss at SulAmérica that is still at a high threshold. We have better numbers than the fourth quarter of 2022. Also, if we adjust the amortization, accounting amortization by the M&A of SulAmérica, there is an amortization that has a cash flow effect and also other effects that are recurring for the optimization of structures. We also have a net revenue of BRL 374 million in that period. Looking at Rede D'Or in and on itself. We registered BRL 6.8 billion of gross revenue, 14% growth in regards to the first quarter of '22. Growth of the average ticket, if you compare to 2022, 10.7%. This is due to the readjustments and a better mix of procedures as well as a few exclusions of not so profitable contracts, on average occupancy, that is 0.4% above what we had in the first quarter of 2022, and it's aligned with the performance of the company in the pandemic period. The number of patients today, we have a growth also in regards to the first quarter of 2022, as you can see on the slide. Well, the capacity to execute. This is very important characteristic of this company. We have a focus, and we are highlighting over the last earnings call in gains of efficiency and profitability. We have an EBITDA of BRL 1.5 billion, a growth of 28% in regards -- while year-on-year, first quarter of '23, an EBITDA margin of 23.8%. So above the first quarter of '22. And these are Rede D'Or numbers stand-alone. SulAmérica, we have a growth in net revenues, 18.3%. In regards to the first quarter of '22, we got BRL 2.64 billion. So we have a growth of beneficiaries of 12.1% membership evolution, reaching 5.1 million in health and dental. Loss ratio, still a bit high. but with an improvement in regards to the fourth quarter of '22, when we had reported 92.5% of loss ratio. Now we have 88.6%. We hope to have an improvement, but it's still a very challenging scenario for SulAmérica loss ratio. Some indicators that we would like to highlight. Speaking of the first quarter of this year at SulAmérica. We managed to have a reduction of the administrative expenses. They were at about 8% of the revenue in the first quarter of '22 and now we give you 6%. We have done our homework, the administration of SulAmérica. And also synergies for corporate, daily operations. These synergies are getting to BRL 412 million. This is always taking a look at annualized data over the last 12 months, and we have subdivided it in 3 parts. Reduction in administrative expenses or structures. So we're talking about BRL 175 million, always year-on-year. We also have the second part, which is material and medicines. If we use the scale of Rede D'Or here, applying this threshold, BRL 108 million. I know we'll have a third part. Our third pillar, which are our contracts that we already renegotiated, that we have defined, such as the change in the headquarters of the company, but still respecting the last months of the contract for rent. But this is executed and it will impact positively our results in BRL 129 million, also year-on-year. Before we go to -- give the floor to Otavio, he will continue with our presentation, I'd like to highlight the launching of Hospital São Luiz Campinas. City of Campinas is 100 kilometers from São Paulo. This is a great reference for the interior of the state of São Paulo. We had a great reception from the local population in the region, 325 beds. 160 of these are equipped for operations. 12 floors. 47,000 square meters. And we are offering the pediatrics, maternity, 40 medical specialties. We continue firm in the purpose of Rede D'Or of broadening the access to quality medicine for more Brazilians. I will remain here for the Q&A, and I will give the floor to my colleagues. Thank you.

Thank you, Paolo. Once again. Welcome, everyone. So let's start with the graph on the left. We have the first quarter of 23%, an average rate of occupancy, 78.5%, 4 percentage points -- 3.4 percentage points above year-on-year and still above if you compare it to the previous quarter. This occupancy rate is aligned with the average occupancy rate reported for the first quarter -- any first quarter in the -- if you look at 2015 through '23, which is 78.3%, the average. The company also reported, while the production day, patient day evolution, we have 73,000 increment, also stability in the quarter-on-quarter comparison. And on the graph on the right, we have the patient day evolution for the COVID Rede D'Or units, the -- from March '21 and April '23, you can see the numbers for yourself. Next page. We're going to start with the graph on the left. The company reported the evolution of total number of surgeries, 121,000 in the first quarter of '23, a growth of 10.1% if you compare it to the annual. Well, a growth of 5.1% if you compare it to the quarter. These big surgeries, we have had a growth of 7.5%, if you compare it year-on-year and a growth of 1% if you compare it to the previous quarter. On the graph on the right, we present the same data statistical and the same asset base. Company reports a growth of 8.6% in the number of surgeries in the same basis of assets and a growth of 7.2%, if you compare it quarter-on-quarter. Let's see the next page. The company reported in the first quarter of '23, the total beds, 11,500; operational, 9,500. About a growth of 45% and 31%, respectively speaking, when you compare it to the number -- total number of beds and operational beds in the first quarter of 2020. Next page. On your left, we have the total growth revenue of Hospital Services of almost BRL 6.9 billion. This is a growth of 14.5% if you compare it year-on-year, a result of the average ticket of 10.7% combined with the growth of volume of 3.4%. Here, quarter-on-quarter, the revenue increased 6%. This is the result of the growth of the average ticket of 6.6% and stability in volumes. Next page. On the left, we report the BRL 656 million in gross revenues of oncology and infusion therapies, first quarter of '23. This is a growth of 30.3% year-on-year, an increase of average ticket of 22.5%; and an increase of volume of infusion, 6.4%. If you compare it quarter-on-quarter, the revenue grew 6.2%, which is an increase of the average ticket, 2.6%; and an increase of volume of 3.5%. 59,000 infusions that were done in the first quarter of this year. Next page. If you start on the left, company reported in the first quarter of this year, cost with Hospital Services, 4.7% -- BRL 4.7 billion, a growth of 4.3% if you compare it to the previous quarter, and 10.4% if you compare it to year-on-year '22. Paulo already mentioned the SulAmérica M&A. If you adjust those numbers to show the noncash effect, the growth of average cost would be 2.7% if you compared to quarter-on-quarter and 8.7% if you compare it year-on-year, much below -- much lower than the growth for these periods in the gross revenues of the company for the same period. If you see in the first quarter of '23, BRL 256 million -- BRL 265 million of general and administrative expenses, you can see the comparison with the previous period. We have here BRL 50 million of provisioning for profit sharing in '23. I would like to say, in the second quarter of '22, we didn't have the complementary provision in regards to the FY of '22 given the scenario that was more challenging, and given a budget for '22 that was very challenging. But we have BRL 17 million. A few IT licenses that will justify the differences in the number for the first quarter to the fourth quarter. If you see year-on-year, a growth of 25.1%. But if you just look at the first quarter of '22, we had the reversal of contingencies of up to BRL 30 million. The message here is that, regardless of these one-offs, the company has administrative expenses, BRL 230 million, regardless of the rate of inflation and regardless of the rate of growth of our company, which is growing. So if you look at the next page. Company reported the EBITDA for Hospital Services, BRL 1.4 billion. Paulo already mentioned this, it's almost 28% growth if you compare it year-on-year or 20% if you compare it quarter-on-quarter on EBITDA margin accounting of 23.8%. Next page. We have a few data for SulAmérica. On the left, we have the net revenue of BRL 6.4 billion, a growth of 18.3% given year-on-year on '22. On the right, the consolidated loss ratio, we have a drop of 4 percentage points since the last quarter of '22. And on the right at the bottom, 5.1 million beneficiaries of growth, that is substantial, since the previous quarter and if you compare it year-on-year on '22. Next page, debt profile. Company reported the cash and cash equivalents, BRL 32 billion. Now once we remove the technical reserves, we have a net cash of BRL 17.2 billion. If you're taking into consideration the gross debt at March of '22 of BRL 2.7 billion, we have a net debt of BRL 15.5 billion. So if you just assume the net debt over LTM EBITDA, 2.7%, 2.7x, this is growing as reported at the end of the previous quarter. In the center of the page, we have the average term of our debt, 5.4 years. The CDI, plus 0.8%. We also have the schedule for amortization of the derivatives. That -- amortization schedule, sorry, on the right. Almost at the end. We have the managerial cash flow. We will start on the left. Reported EBITDA for the first quarter of 2023, BRL 1.346 billion. We have the managerial operational cash flow; we have the SulAmérica provisions, BRL 1.1 billion; we have a negative impact of BRL 38 million in other balance sheet items; we have a negative effect of BRL 177 million in leasing; we have the payment of taxes, BRL 232 million; and working capital, BRL 163.5 million. Once again, with net operational cash flow, BRL 1.061 billion with the EBITDA and managerial operational cash flow, above 100%. And on the right, we have some statistics on the average day for receivables. DIOs and DPO, an improvement. And the receivables for -- to 116 days -- 49 days, I apologize, for the average inventory days. And the Hospital Service payment stability, and an improvement in regards to what was reported in the previous quarter. So I will finish the presentation now, and I open the space for the Q&A session. Thank you very much.

[Operator Instructions] The first question comes from Mr. Fred Mendes from Bank of America.

Hello, I have 2 questions. First question is the [indiscernible] med. in materials, we had a better expectation is worse than what we had. So if you can talk about that line and your trust in that we can reduce those numbers ever more. And the second question, I think that Otavio talked about the cash flow improvement, a slight improvement. Is that slight improvement coming from the scenario that is more positive from the sector with the paying parties? Or these are -- well, internal initiatives of the company?

Thank you for the questions, Fred. Well, we do have an effect in the third quarter, especially because of OTME. We've been trying to accelerate a few approvals, and that has an effect on income and also a corresponding effect in the average number. We were able to accelerate some of these processes, and that helped us have a higher value in this regard. And also, we have an effect on the income -- on the total income. But when we are looking at the comparison against income, we didn't see that trend that we had in the previous quarters where we are issuing -- usually diluting that. So the idea is that for the next quarters, without that effect, we're going to continue to see that happening. Negotiations are going well right now. We have an extense work of standardization. We're looking for better negotiations, better deals. We've been doing that ever since the pandemic, when we had a lot of pressure in that regard. So it is our idea to continue to improve in that sense. As for working capital, as we said in our previous call, given the current scenario, we are analyzing a few of the requests for delay in payment, especially when it's a monthly request. But we've been trying to look at more efficient processes. We've been trying to do our homework basically. So there's a lot of opportunity still to improve that scenario, even though the current scenario now in terms of claim rates is not the best. We do have many extensions for deadline extensions.

Our next question is from Samuel Alves from BTG Pactual.

Paolo, Otavio, everyone, I do have 2 questions, 2 quick questions. First of all, I wanted to know the following. Could you tell me more about claim rate, what the index is for SulAmérica, so insurance. We've seen a decrease in the first quarter, and I would like to know a few -- space to have still a better reduction in the claim rate index for the next few quarters. Do you think that's going to change according to the tickets or not? Do you think that claim rate is going to go up by the end of the year? And also still on tickets. We've seen an increase in that regard, especially in hospital operations. So could you tell us more on how much of that is connected with higher complexity, or also negotiations with the payers?

Samuel, thank you for the questions. I will start with the second question on ticket, and then I'll turn it over to Raquel. Raquel -- she is going to be talking more about the claim rate index. Well, we have adjusted that in alignment with what we did in the past. I mean, IPCA plus a certain fee. So that comes from a change in our mix. We have more complex surgeries. We have a few reference hubs as well for certain specialties, medical specialties. I think that probably answers your question. We also have a few other specific things that we're doing on certain contracts with lower tickets. We've been able to have a better occupancy, a better patient day index. Now let me turn it over to Raquel.

Samuel, this is Raquel. Well, about the claim rate index, we still see that there is a lot of pressure in that regard. But as we said in our previous call, we thought this was going to improve. And in fact, it did. It is around 4 pps -- 4 percentage points already. Of course, we still have to be very careful. We shouldn't just look at the whole scenario. We have to also deep dive and understand all of the factors. Now for instance, with winter, we might see a certain variation. There is a lot of flu and other diseases during winter. So what we've been doing is with our partners, we've been trying to focus on something that is more sustainable for the market. So right now, in this segment, we -- that's what we're doing. We're trying to look at these deals and we're bringing everyone to the table to think about the best solutions for the future. And for sure, we have a new cycle of adjustments right now. So adjustments in new sales as well. Just wanted to highlight that these figures are very important. P&E, for instance, 24.7%, but that's going to be applied for each contract specifically. So usually for every month, we have an adjustment of 1/12 of that total amount, but still, we've seen a very positive result.

Now we have a question from Leandro Bastos from Citi.

I have 2 quick questions as well. The first one, I just wanted to have an update on the unit in Campinas. How is that working, the registration? How many beds and also for the next few quarters, how is that going to be working? The second question is about the text of the new possible bill that is being processed right now.

Well, Leandro, thank you for the question. in Campinas, just like the other greenfields, what we're doing is we usually think about around 80 beds per year. So we have approximately 4 years to have the complete amount, the full number. We are very optimistic right now about Campinas. We had -- we're already doing the registration with SulAmérica, Porto Seguro, Omint, Vivex, which is also important in the state of São Paulo. And we see some other companies and local companies very interested in taking part. They have visited the hospital, and they seem very interested in having access to that structure. It is going to be a very good structure for Campinas and other cities close to Campinas. As for the possible bill. Well, we know that that's still going to be processed, and it's going to be valid as of June 1, if that's the case. We are usually focusing on Rio and São Paulo. So the largest capitals, so that's easier for Rede D'Or, but I'm sure it's going to be complicated for average -- for actually medium-sized hospitals. So any hospitals that are still looking at certain difficulties in terms of sustainability, that's going to be complicated. But for us, it is an opportunity to accelerate our consolidation. So again, small- and medium-sized hospitals might have an issue with that new text, but we'll have to see if the court is going to approve that text.

Our next question is from Joseph Giordano from JPMorgan.

Paulo, Otavio, I wanted to talk to Raquel about SulAmérica. We've seen -- well, we've been working with the expenses of the company. You've been talking about BRL 400 million approximately for the future. So I wanted to understand if you can still work on internal efficiency and also on strategy. I actually wanted to know more about your strategies. Do you think now, we'll have more of a customized scenario for SulAmérica, depending on the region where we are working, so that we can have more share from a number of customers perspective? Also, another question for Otavio. When it comes to liabilities, liability management. Is there something that we can still do with SulAmérica? I mean, working with regulatory affairs, working with that scenario.

Joe, on that first question about SulAmérica. Obviously, we still have around 5 months into the operation. So the speed that we've been able to execute here is very impressive. I think it's something that we always try to do. The figures that we've shown already in SG&A, et cetera, is very -- are very good. But of course, in 5 months, you can't really map all of the opportunities. So we still expect to continue to evolve and dilute. As I was saying before, all that, comparing with the total income, but it is very good for SulAmérica, historically speaking. And our focus is going to be the claim rate index. Even if we have a better SG&A scenario, we're still looking at a certain or an important percentage of the total income. So we are going to continue to focus on the claim rate, and this is the entire team working on that. Now as for product, we have a great mix of products now, new products that are being launched. We're focusing on the commercial area. And I just wanted to highlight 2 things here, 2 references that we have right now. There are very good opportunities for SulAmérica to launch new products in Fortaleza and in Aracaju, in the northeastern region of Brazil. So we see very good opportunities to capture market share and in is something that is going to be very beneficial for the services that we have in that region. We're going to also lever more sales in these important hubs in those cities. Raquel, let me turn it over to you.

Thank you, Paolo. When it comes to capital, I think it's important to remember that we have that limitation of BRL 600 million. And as for products as Paolo mentioned, we have these 2 launches in Fortaleza, in Aracaju. So we're no longer just looking at Rio and São Paulo. I think now it's easier to see this commercial momentum, I would say. We have addressed the potential of this region, and we've been able to bring SulAmérica as an important brand to these places. Another important thing, Joseph, is that right now, we're looking at a new management cycle, so to speak. So anyway, we're starting this new journey with these new products and better pricing, more solid pricing for sure. We're also working with other new partners and vendors, and we expect to have very good results over the next few months, and also new products.

Joseph, this is Otavio. I think we still have this great opportunity to restructure the capital of the company, especially when it comes to indebtedness. For instance, we -- what we've been doing is we had the BRL 2.7 billion in debt that we had stand-alone before. So we inherited that, and now we're working with certain bonds to deal with that. I'm talking about some of the real estate certificates specifically. And there are a few other processes in the time line of the company, so we are trying to cut on certain expenses. There is a very good planning process for that, of course. And finally, we have the possibility of using some other assets of related work to try and have more liquidity. We have some advanced studies right now ongoing. We are still awaiting conclusion of those studies. And we also believe that there is going to be a tax reform approved by the Congress in Brazil. So we want to wait to see how that's going to work.

Our next question is from Gustavo Miele, Goldman Sachs.

Paolo, Otavio and Raquel, I have 2 questions. The first one is on the cost structure and hospital operations. You were talking about that -- and I want to know more about staff, about the third-party companies that you're working with. We've seen an important reduction in quarter-over-quarter. So I wanted to understand what the expectations are for this year. Do you have any ongoing initiatives right now to have better results for 2023? I know you've talked about some opportunities of working with third-party companies for certain services. You mentioned that in previous calls. So I wanted to know if that's an initiative for the next few quarters. Also on CapEx, I know the sector has been discussing pressures related to inflation, the inflation rate right now. So for CapEx for greenfield and brownfield, what are the negotiations that we have -- that you have right now with your main partners? So thinking about also construction for your hospitals in the next few quarters.