Hapvida Participacoes e Investimentos SA

BOVESPA:HAPV3

Earnings Call Transcript 2023-Q1

[Operator]

[Foreign Language]

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] Hello. Good morning, everyone and thank you very much for participating in our first quarter 2023 results conference call. I, Mauricio, Guilherme are gathered here with our IR team. Today, we're sharing with the market the results of a single company each day, more integrated, stronger, building a unique and relevant business in the Brazilian health care sector.

Later on, when we break down the numbers, including comparative periods on the same basis, we will see that our business model remains solid, resilient and disciplined.

Starting here on the first slide, Slide #2 of the presentation available to you. We present our main financial and operational indicators. As we had been communicating to the market, we maintained our strategy of ticket replacement and intensification of cost control.

We know that this is a long-term process but some of these actions have already showed some results in the first quarter, such as the slight reduction in the loss ratio in the quarter against quarter. There was a significant increase in adjusted EBITDA in comparison with the same period of previous year.

We also concluded the acquisition of HB Saúde in [indiscernible] in January this year, adding just over 100,000 lives to our portfolio. We also performed an important step in integration process, optimizing our administrative and operational structures. As we had informed, the focus on this quarter was executing our plan, including, among others, a strict implementation process of the price adjustment, reviewing and optimizing our product and service portfolio, the continuation of the integration process of Hapvida with NDI and the integration of newly acquired company.

On this last front, I'd like to inform you that we successfully implemented systems at the Centro Clinico Gaúcho, CCG in Porto Alegre, Rio Grande do Sul. We also maintained our plans to increase the verticalization integration and optimization of our network with the opening of new units in strategic locations.

Also in line with what we have been signaling to the market, we had an important improvement in cash generation in the first quarter. Between April and May, we successfully carried out 2 capital raising operations. Our third follow-on and a sale and leaseback operation raising approximately BRL 2.3 billion.

With this, we rationalized our leverage and remain even more solid to go through this period of high interest rates and volatile economy. After these 2 capital raising events our leverage in terms of net debt [Audio Gap]

The purchase and sales process of São Francisco Resgate for an enterprise value of [ BRL 100 million ]. This transaction, together with 2 recent capital raising actions is also part of the context already informed by the company to optimize and strengthen our capital structure as well as the focus on our strategic priorities in our core business.

I now turn over to Mauricio, who will go into more detail about our operation and financial data. Mauricio, please.

[Mauricio Teixeira, executive]

[Interpreted] Well, thank you, Jorge and good morning to everyone. I will start on Page 3, talking about the integration between Hapvida and NDI. And I will highlight 2 very important aspects where we have evolved a lot. First of all, the standardization and optimization of business practices, both in the areas of [ pricification ], which is a very relevant topic.

We have also aligned processes, concepts, profitability and governance. The second aspect is the reorganization of our activities, including vice presidencies with recurrent gains of [ BRL 8 ] per month. The third aspect, which Jorge has already mentioned, was the first wave, where on May 1, we also included CCG in our system. And we're going to have other waves, so that by mid '24, we'll have a single and integrated platform, consolidating different protocols, centralization of purchases, all of this will help us -- will -- including our better efficiency.

On the next page, we will talk a little bit about the capital structure and focus on the core business. The first one was the follow-on of a little bit over BRL 1 billion, where we had a record index of priority subscription of over 60%, a demand of over BRL 2.6 billion and a lot of quality in our level of offer.

I also thank all of our shareholders for their support, including the new ones who have started by means of our offers. And the second operation was the sales of [ BRL 1.5 billion ] where we sold 10 hospitals, who started paying rent at a cost of 1.5% per year below the current market price.

Also with the commitment of the Pinheiro family. This was a competitive process. And the third item, we have just concluded last weekend and announced to the market yesterday was the sales of São Francisco Resgate company, which is a lead in its sector but it wasn't part of our core business. With this resource, we can concentrate on the management of our core business and integration of the companies we have acquired.

And now moving on to the results of the quarter in Slide 5, starting with our revenue, we've had an increase of 12.8% in the year-over-year revenue and we also increased our beneficiaries and an average ticket increase of 8.3%.

And this is the price recomposition that we've been pursuing since last year. And then in the next page, we can see the specific activities for 2023, where we purchased HB Saúde with 160,000 lives in inorganic manner. We also had the turnover, reflecting the macroeconomic environment.

I will talk about the ticket where we can see the effect of the readjustments we had last year, especially in the second half of the year and that have accelerated to a different level and we can see the ticket going up. And when we exclude the M&A rates and others, we have a rate of 9.5%.

On Page 7, we talk a little bit about our cash and MLR over the past quarters. And in the specific quarter, we can see the effects of the ticket recomposition and also the effects of verticalization and the -- I'm sorry, [ EMRL ] activities we've had from the beginning of the year.

And even with the impact of ISS on the revenue, a new effect and we've started using ISS in Fortaleza and also with the inclusion of HB Saúde which has an impact of 0.28% on our MRL (sic) [ MLR ]. On Page 8, we can see administrative expenses with a decrease of 9.4%. And this month, we provisioned BRL 678 million in [indiscernible] before 2023. And we also had a cost that we paid for the administrative restructuring that we've already mentioned, when we had the reorganization of vice presidencies and other administrative levels of the company. And then we will be able to have a decrease of [ BRL 8.4 billion ] from now on.

On Page 9, we can see a dilution of the selling expenses because of decreased revenue. And an important aspect here is that PDD remains stable in the retail market and individual plans. So we have stable provisioning and we have managed really well our default numbers.

And now moving on to EBITDA on Page 10, we can see the best EBITDA level because of the ticket recomposition, the control of MLR and G&A dilution. This even when we have a recurring [indiscernible] as you can see here. And we were able to have an EBITDA in the order of BRL 634 million in the quarter.

And now moving on to net debt and cash flow on Slide 11, we were able to reduce our leverage from 2.44x last year to 1.3x and this is before the liquidity events that we have already commented about. And if we only take cash into account, the follow-on and the sales and leaseback, the leverage would be at about 6x and this is in line with our conservative management.

And now on the next slide, talking about the cash flow. We can see less working capital. We had a decrease of receivables, which were not received and were paid in the beginning of this year. And therefore, last quarter, we also had a migration in the system and it was totally reorganized for this half of the year. And with that, the working capital was even lower.

And this is the difference between rent, which is paid in operation activities in the order of BRL [ 160 million ] because of receivables in the first quarter. I would like to highlight the CapEx reduction. This year, we introduced a threshold and we were able to reduce CapEx in the order of BRL 117 million in the quarter, a reduction of [ BRL 119 million ].

And then in the next slide, we are providing more transparency, which was a question by some investors. First, about the solvency capital. In terms of solvency, we have excess BRL 560 million. We were able to solve the required solvency after we had an external audit where we were in compliance with all of the requirements and meet the required solvency with BRL 400 million.

In addition to that, even with the reduction of the adjusted minimum equity according to MLR [indiscernible], we went from BRL 465 million last quarter to BRL 586 million. And this was before the follow-on and the sales and leaseback which provides a lot of capital in the order of BRL 600 million. They were evaluated in BRL 6 million and this will provide nonrecurring gains. This also reinforces our solvency in addition to the cash that becomes available at the holding after the follow-on.

Looking at the technical provisions, we have BRL 2.8 billion in free cash before considering the follow-on, which is another capital raising for the holding and the sales of São Francisco Resgate. We have to wait for the whole proceedings and the regulatory approvals because this is an entity controlled by Ultra Som and they don't have any solvency requirements or technical provisions. So this cash will also become free cash.

So without even considering the follow-on and the sales and leaseback and the snapshot does not consider any of that, our company had an excess of solvency and an excess of technical provisions. So after the follow-on and the sales and the leaseback, our capital structure will be even further strengthened.

Now I would like to turn the floor over to Jorge, who's going to talk about our strategic priorities for the coming years.

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] Thank you, Mauricio. That was great. I would like to emphasize that we are in line with the plans that we devised in the beginning of the year and that were broadly communicated to the market. The integrated management of the combined company has laser focus on executing all of those plans, implementing the necessary readjustments to achieve a financial rebalancing of all of our contracts, optimizing new portfolios, strengthening initiatives to reduce MLR, increasing verticalization, sharing medical protocols and best practices, as well as continuing with our integration plans and systems deployments in the acquired companies.

So I would like to conclude by emphasizing that we are writing our history in the year of 2023 in a balanced and diligent way, disciplined in executing our strategic and operational plans. I would like to thank our employees, doctors, dentists, brokers, suppliers for their collaboration, the strategic work of our Board of Directors and the trust of our shareholders and mainly our clients.

And now we're available for any possible questions you might have. Thank you very much.

[Operator]

[Operator Instructions] Let's start with our first question by Vinicius Figueiredo, sell-side analyst at Itaú BBA.

[Vinicius Figueiredo, analyst]

[Interpreted] You've been working strongly to control costs related to therapies with strong verticalization, opening new clinics for children in the autistic spectrum. So do you have any estimates of how this impacted the company's results in Q4? And how much of the verticalization that is ongoing was responsible for the improved in the MLR that we see in the consolidated numbers of Q1 '23?

And another question, the second half of the year has a seasonal effect with a worsening of 200 bps in the MLR in the quarter-on-quarter comparison. Since you are making efforts to verticalize regionals 2 and 3 and you're cutting costs and we can see some first effects of your stronger readjustment policy. Does it make sense for us to think that the quarter-on-quarter effect can be lower than your history in the quarter?

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] Vinicius, thank you for your questions. Let me start with your first question about the new autism therapies. Last year, the regulatory agency increased the number of sessions for children in the autistic spectrum and there was a strong increase in the number of therapy sessions as a result. But our company reacted really fast, which is very typical of our company by implementing many of our own units that have already been opened. And we still have in our pipeline, another 13 units that will be implemented by the end of the year.

These are quick works that are already part of our CapEx plans. And we've been using up mostly ready units for that. But yes, there was an impact of the volume of new autism therapies but we've been able to buffer that with our actions. We have groups to define better protocols. And we also opened up new care units, as I told you earlier and we've been able to buffer such impact. And that's one of the strengths of our company to be able to manage MLR in a reasonable and efficient way.

Now about your second question, yes, the second quarter, as you well know, usually has an MLR between 2 to 3 percentage points higher than the first quarter of the year. This is the dynamics of the health care market, as you know. So it's only natural that we would only work hard in order to mitigate those effects. But it's important to mention and how we've been talking to the market broadly. We do have a very robust plan involving not only ticket recomposition through the necessary price readjustments, also reviewing portfolio that's on the side of expenses but we are also integrating systems. And the whole cycle takes a year. So that will take place up until mid-next year. And most of the effects will be seen starting in May.

That's the case of the readjustments, for example, with a higher readjustment policy, we'll see positive impacts starting in May, as part of that cycle that will continue up to the second quarter of next year. So yes, historically speaking, there is a higher pressure in the second quarter but there are also other things that start coming stronger in the second quarter. And in the annual cycle, they will be complete. So yes, we will try to mitigate the effects of a higher MLR level in Q2 but yes, they do exist.

[Operator]

Moving on to our next question by Gustavo Miele, sell-side analyst at Goldman Sachs.

[Gustavo Miele, analyst]

[Interpreted] And I also have 2 questions. The first question is related to mix. In recent quarters, we've seen new types of contracts gaining relevance and the company's consolidated portfolio. You've been talking a lot about co-participation plans as an important tool to retain some of your clients. And you also have a national solution that has been gaining momentum in the combined portfolio of the company. So I'd like to hear from you about the economics of these new contracts compared to the more mature portfolio.

Co-participation, for example, we're talking about a product with a more affordable ticket. Can you tell us about the frequency of those members as compared to the legacy members that you have in your portfolio, just so we can understand the MLR of these new products vis-a-vis your existing products. So that was my first question.

Now my second question, if you allow me, I would like to understand about provision for lost debt and working capital. Considering this very challenging macro scenario, you obviously had a higher impact on certain numbers but provision for bad debt had actually a good performance. What helped it? Did you have any changes in your collection policies or any other external factor? Any changes in the health care plan operations as compared to last year? So can you talk about receivables and provision for bad debt? Why were they relatively stable considering this very challenging macroeconomic scenario?

[Mauricio Teixeira, executive]

[Interpreted] Thank you for your question. So starting with your question about mix and pricing. Indeed, co-participation and changes in our products, our tools that we use in order to adapt the readjustments to the customers' reality that oftentimes cannot afford higher readjustments but with the profitability that we need. So if we talk about the readjustment of 15% and the customer didn't have any co-participation in the past but now they accept co-participation, we could have an increase of like 12%. So there is an equivalence of co-participation and changes in product. So this leads to changes in products, inclusion of co-participation or franchises for service in order to mitigate the higher prices that members would have to pay. So that's actually a common tool that has been used for a long time and especially now in this new moment of the company in which we are increasing our readjustment levels.

So whenever we have price increases, we have like like-for-like price increases for the same product. And depending on the customer's reaction, we can just readjust their structure, offering co-participation so that they can feel they can have a lower readjustment on their plans. So that's a common tool that has been used by the whole industry. That's a natural movement and the goal is to keep the same level of profitability. So there is an equivalence considering that the MLR of the contract will be the same. So we will have changes in the top line, in the adjustments or the changes in the customers' MLR. That's our goal when we implement those tools.

Now about working capital and provision for bad debt, we are working hard to understand the market conditions and implement our policies and collection procedures. So I talked about commissions and prices but there's also a lot of governance and collection rules that were unified in both regionals so that we don't have any disruption in service in cases of delinquency. And we're talking about corporate customers and small and medium businesses. Now for individuals, we call them, we send them reminders, and we have a stricter collection policy to make sure that these customers that have a lot of pressure on their income can continue paying us and our services can be kept for them because high-quality health care is a very important item for Brazilians today.

Now about working capital, the first quarter was benefited by the loss that we had in Q4 in receivables. The loss that I mean are the increase in receivables that were offset in Q1. So that was smaller than the working capital receivables. But in terms of provision for bad debt, we've been working really hard and strictly to make sure that we are paid on time.

[Operator]

Our next question is Joseph Giordano, sell-side analyst at JPMorgan.

[Joseph Giordano, analyst]

[Interpreted] I'd like to talk about 2 topics. The first one is, you're investing in your product grid. So what are the opportunities that you see today to expand and gather new lives and new contracts, considering your national product or maybe a possible verticalization in certain areas and a higher integration level between the 2 companies. Where do you see the greatest challenges in terms of contracts and portfolios today? Now my second question is, you talked a lot about capital raising to decrease your debt with the sales and leaseback and increase in capital. Do you see a chance to reschedule your debt amortization schedule to have -- to reduce the pressure on the cash flow that you might have with a more -- with a harsher scenario or something like that?

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] Thank you very much for your questions, Joseph. They were very good. We have worked intensively this year so that we can prioritize what we have that is the best. So we have about 90 hospitals scattered throughout the country. And we have almost 2,500 beds that are closed. They don't have the required staff to operate there and this is the result of the different acquisitions we made thus far and also the expansions we've had. And therefore, we have reviewed all of our projects. This is ongoing work. And this is done by the new business vice presidency, and we have a very active team in the commercial area. And we have also created new products that are adequate for the different regions, in the regions where we have our own network.

In addition to that, we have a plan to open new units. We are going to expand existing hospitals. We're building new ones. This is in our plans so that we can increase our presence or create a presence in new markets. And therefore, the first new movement we've had was in reviewing our product grid and also, we are reinforcing our media efforts and marketing in the regions where we're going to have a better return so that we can guarantee a better growth. But more than that, more efficient margins, since we will have a control of our own network. Furthermore, where we have our own network that is not being used, we'll be able to reduce our costs. This is activity that is being held with a lot of discipline and we have different products that are being created so that we can achieve this goal.

In addition to that, we have the integration of Hapvida and NDI and all of the acquisitions we've made. And I will give you some examples now. In the state of Minas Gerais, NDI [indiscernible] with the accredited network. And today, they use our own network, [indiscernible] And therefore, we no longer need to use the [indiscernible] network.

In Belo Horizonte, we have just implemented, just this month, we just released an emergency department in [indiscernible] and today, Hapvida and NDI users can have access to this wonderful service. The users of NDI who used other hospitals in Joinville, now use our hospitals. We have just spent our portfolio to São José dos Campos, where we already had a verticalized operation. And the same thing happened in the state of Pará, in Pará [indiscernible] , where NDI used an accredited network and they are now using our [indiscernible] owned hospital.

And the same thing is ongoing in Brasília. Part of the portfolio is now using according to an established schedule. They will use our hospital in that city, which has a low occupation and our portfolio in Brasília has increased. In other words, we have a series of synergies among our own networks. Many of them have already been implemented and the others have been scheduled. And therefore, we have opportunities in creating our portfolios, using our own resources, expanding our own resources and using the synergies of the companies in the integration program, also the integration process with which we have been very successful and disciplined. In December 2022, we implemented all of the systems with standardization and information, intelligence, performance indicators, so on and so forth in Belo Horizonte.

And now we've already reinforced and mentioned that on May 1, we had a very smooth transition to our center in Rio Grande do Sul, the CCG. And as we implemented the system, there was a series of gains between the networks and products. And I'm not talking about some additional that we will retain after 90 days. But we have been very disciplined, working hard, on the day-to-day our vice presidency team is very engaged with our plan. Our plan is vast, extensive. We work in different fronts but all of them are going to enable us to be more efficient to reduce costs and have more options for our users.

I now turn over to Mauricio, so he can talk about the reprofiling of our debt.

[Mauricio Teixeira, executive]

[Interpreted] Everything we've done to reinforce our cash was meant so that we can make our payments by the end of next year. We have reinforced our cash so that we do not have to count on the credit market and pay for all of our debts. We have no urgency in reprofiling. We have increased our capacity last year, including our debentures and we also have a mean cost of CDI plus [ 1.2% ] to pay. And then in January this year, we paid BRL 800 million of our debt and we had a cost of CDI plus [ 1.6% ]. And therefore, everything that was able or possible, we did last year and then we have lower cost.

The market today is more limited. It's not as accessible and because of that and because we're very conservative, we chose to reinforce our [indiscernible] so that we can make all of our debts without requiring reprofiling. But if we have an opportunity, we can do that but it's not planned, at least in the short term because we have enough cash to pay for our debts in the next 18 months.

[Operator]

Our next question is from Fred Mendes, analyst from...

[Frederico Mendes, analyst]

I have 2 questions. The first has to do with the price increase policy. We can see that there has been a significant increase in the last few months with NDI running at 13% or 14% and have been in the corporate sector. But I wanted to better understand if this is an optimal level in terms of price increases and taking into account your client basis? Or do you think there's an opportunity for further increase? And this is the first question.

And the second question, could you talk a little bit about your PPO? I think there was a decrease of that in this segment. And I wanted you to better explain this, especially if it's different from the average of the company or not.

[Jorge Fontoura Pinheiro de Lima, executive]

Well, I'm going to -- thank you for the questions, Fred. In terms of price readjustments, we started implementing a price readjustment that was a little bit higher in February this year. We have individual plans but we're waiting for the agencies to inform us of what we should do. But it includes an increase of about 10% in PME, we've already informed about the readjustments and in Hapvida, it's 19.9%. And for NDI, it is 21%. So in average, we have 20%. And in the corporate sector, we've increased it since last year. We reached an average readjustment.

And this year, the suggested readjustment is in the order of 15%. As mentioned before, we propose readjustments 90 days ahead of time. In February, we announced readjustments to be made in May. So what we practice and apply for the clients will be now in May, while we will have the 15% increase with some nuances but there will be compensations when we change the different networks. So the adjustments will be implemented and we've seen that the impact -- there was an impact in the second half of last year. And this year, this volume has increased and we had readjustments at a higher level, aiming at 15% in the corporate area.

About PPO. We have a higher ticket but we also depend more on our accredited network. In PPO, the average readjustment will be of about 15%. And this is what we've seen in this market. And in terms of the PPO strategy, would you like to talk about it, as Mauricio mentioned, PPO is a product that we will keep in our bases, especially in São Paulo. It's important to have a mix of products that can meet the needs of corporate plans in [indiscernible] We have a well-defined strategy and a percentage of participation over the complete portfolio.

But there is no doubt that our main product, our main activities is in the sense of implementing our own products, integrating the network and requalify it more and more so that we can offer an HMO product that has a very high quality, complementing with PPO products in very specific situations, in specific markets, keeping this strategy.

[Operator]

Our next question is from Mauricio Cepeda, analyst from Credit Suisse.

[Mauricio Cepeda, analyst]

[Interpreted] This is Mauricio. I have 2 questions. First, regarding CapEx. I know that you're now prioritizing cash preservation that you have decided to optimize the assets that are already operating. But what happens with CapEx from now on, since you already have some areas that you need to verticalize. What are you considering in terms of CapEx? Because I understand that the control of MLR will depend a lot on the verticalization of the more expensive MLRs.. The next question has to do with your vision on the nursing salaries and how you see these discussions and the possibility to be prepared for that?

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] Cepeda, thank you for the 2 questions. Both companies had been investing significantly with a high CapEx volume as it happened last year and the year before last. And in addition to that, we have made purchases with -- that will bring about assets for diagnosis and outpatient departments. As I mentioned, we have vacant network with 2,500 beds today. Of course, we still have specific needs. We are carrying out our plan as intelligently as possible. We reduced our CapEx for this year. It will be in the order of BRL 400 million. And we've also been able to, within this amount, to expand the existing hospitals, the creation of new hospitals, such as the case in the state of São Paulo, which will be concluded in September this year. We are also creating our new emergency units as was the case in Belo Horizonte.

We have just delivered it but also we are being more flexible and efficient so that some of these units, such as 3 emergency departments that are being built this year and they are in our plans and will be constructed. We are already preparing our budgets for that, as well as the equipment that is required for the verticalization of high-complexity procedures. They're all included in the CapEx of BRL 400 million that I mentioned for 2023.

So now about your second question about the floor for nursing salaries. This is a very important category for us. My sister is a nurse. And one of the major pillars of our company, is the nursing staff and we need to value this category. The decision we were informed last year, this was sent to our association and we still need to understand its effects. But we are very calm about this decision by the Superior Court because their goal was to preserve a category that is really important for the company, keeping employment levels because considering what was happening in the past, there was a risk of mass cuts, job cuts, as mentioned, throughout the country. And the second point was to maintain quality of care.

So the decision that was made by the minister takes into account these 2 points and values the creation of collective agreements in order to keep the jobs, preserve the jobs and the quality of the care provided.

[Operator]

Our next question is by Samuel Alves, sell-side analyst at BTG Pactual.

[Samuel Alves, analyst]

[Interpreted] I have 2 questions. First, a follow-up on the first question in the call about MLR. Can you share frequency indicators from April and May with us? Frequencies are higher and in line with the seasonality of the quarter or not? Do you see any type of accommodation in those numbers? And now the second question is about the loss of customer base in Q1. We know about the unfavorable seasonality for growth in Q1. But what do you expect for the rest of the year, considering the commercial discussions, do you think that you can offset this organic loss of lives in Q1 to have some type of organic stability for the rest of the year? What is your commercial strategy for the rest of the year? And congratulations on the improved results you just shared.

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] Samuel, thank you for your questions. About volumes, we see today a typical quarter for the times we are going through now. You know that the rains start impacting the North region, the Northeast, coming to the Center West in the beginning of the year until May and June when the rains stop. Together with the rains, we have many viral infections that impact those regions. So that's what we saw just along historical levels and seasonal levels as expected. And the Southeast of the country is more impacted by respiratory diseases in the middle of the year. So we're going back to a normal seasonality aspect of viral and respiratory infections now.

As a result, the second quarter usually has an MLR that is under more pressure than the first quarter. But as we said, we've been taking measures to mitigate all of that. Of course, there is a step by step and a schedule to be followed but we're very disciplined in implementing all of the measures in order to mitigate this historical seasonal effects. Now about the loss of lives, that's also usual for Q1 due to well-known factors.

Our customer base is affected by the beginning of the year expenses, with school enrollment and taxes or vehicles and real estate. So historically speaking, that's a quarter during which our customers suffer more pressures on their income. And that's why our customer base is also impacted. But as we communicated to the market, we have a strong indicator to recompose margins. We've been prioritizing the necessary adjustments, this can lead to the fact that we might not have organic growth levels as high as in recent years.

And this is because we are prioritizing margin recompositions, as I said. But it's important to mention that we have a wide range of products that can be very attractive during the ups and downs of our economy because in times of high readjustments by our competitors, we have a more efficient product to offer. And when the economy recovers, we have a product, an entry-level product that can grow a lot in the country. So we are prioritizing margins now but we should not forget that our products can be quite surprising because of this very characteristic dynamic that we have.

[Operator]

Our next question is by Leandro Bastos, sell-side analyst at Citibank.

[Leandro Bastos, analyst]

[Interpreted] Well, I have 2 questions here on my side. So you just said that you're prioritizing margins. Looking at your portfolio today, do you see any contracts that are not a very good fit considering the time -- the times you're facing, do you think they might be adjusted in the short term? And then my second question is about the technical provisions. We saw a mild drop in PSL going back to similar levels to Q3. So what can we expect about this from now on?

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] Thank you, Leandro. Let me answer your first question and then I'll turn the floor over to Mauricio to answer the second question. About portfolios or contracts that are not a good fit for us right now, what we see is that, yes, indeed, we do have some contracts that have negative margins. And we have 2 differentials here. There are situations in which we have our own service network. And there are situations in which we depend on third-party providers in places where we're not making investments.

So in the second case, where we depend solely on third-party providers and in locations where we're not planning to make any verticalization movement, there is only one alternative, which is passing through the prices, the necessary adjustments in order to recompose our margins. This is where we may decide to discontinue a specific contract. But on the other hand, we've been much more competitive and able to grow, where we have our own network, our own service network. That's where our strength lies and where we have much more flexibility. So what can happen is that we make adjustments where we depend only on third-party providers and we need to recompose our margins.

Now I turn the floor over to Mauricio to answer your second question.

[Mauricio Teixeira, executive]

[Interpreted] Leandro, thank you for your question about accounts payable and our medical claims, that's natural and seasonal. The accounts payable for medical accounts is lower than Q4 because of the seasonal effect, there is no other external effect here. It's just natural and seasonal.

[Operator]

Our next question is by Ricardo Boiati, sell-side Analyst at Banco Safra.

[Ricardo Boiati, analyst]

I would like you to clarify the price readjustment dynamics and how this can impact your average ticket with a higher price readjustments, considering the data you've been sharing, we may see the average ticket prices going up. Prices have gone up about 10% this quarter. So I believe that by the end of the year, we can get closer to 15%, considering the readjustments you are defining. So can you tell us about the demand for your products and how your mix can be affected by a more aggressive price increase or price readjustment, how can price readjustments then impact on your average ticket.

[Mauricio Teixeira, executive]

[Interpreted] Boiati, indeed, this is a year to recompose our margins. We see inflation in medical costs. And this is the year for us to bring back our margins. It's time to rebalance the contracts with the necessary readjustments so that we can have a financial balance once again. This is what we've been doing and this is one of the priorities of the company. And we know that some specific segments, in some channels, this can lead to higher pressure on certain clients, and Jorge has already mentioned. This -- we are aware of this effect and because of that, the organic growth throughout the year might not be as strong as in recent years. But that's part of the dynamics, since we are prioritizing having an optimized portfolio and the profitability of the company right now.

So that's a risk of not growing our customer base but we've seen moments of high inflation and high readjustments in the past. And customers and HMOs sometimes start considering a verticalized product as an option in times like this. So this can attract customers from other HMOs because of the high price increases they are facing and so they decide to have a lower cost and an efficient product in a verticalized HMO. So this can create some friction but it can also be a benefit for us when we look at the market as a whole.

[Ricardo Boiati, analyst]

[Interpreted] I was just trying to understand the effect on the mix. So if some customers accept co-participation or a narrow network so that the readjustments can be lower, the impact on the mix was around 1% in the quarter. I know it's hard to define that but do you have any idea of how much this could be because if you accelerate price increases, how much the line of the mix effect can be impacted to neutralize the effects of price readjustments on your average ticket?

[Mauricio Teixeira, executive]

[Interpreted] Okay. I got your point now. Indeed, when we say that we're going to have a 15% price readjustment, we don't feel that on the ticket because of the tools that we have to offset this to customers that -- this brings the same gross margins but in a different way by reducing frequency and the use of our third-party network in a more verticalized way. But these things are analyzed on a case-by-case basis, depending on the customers' willingness to pay the price readjustments or not.

Would like to comment on this, Jorge?

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] Sure. I just want to say that our pricing team, our after-sales pricing team has been working in line with all of the dynamics. Whenever we see the necessary readjustments, they try to convert to other modalities, reviewing the network. And in places where we don't have our own network, we talk to the customer, maybe to have some type of co-participation. So we convert these alternatives into prices being flexible to user. That's one of the commercial strengths that we have, the ability to offer products that are a perfect fit for the customers' reality and the customers' needs.

[Operator]

[Interpreted] This concludes the question-and-answer session. We are now finalizing Hapvida's First Quarter 2023 Earnings Conference call. The IR team remains at your disposal. Thank you very much for joining. . [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]