Hapvida Participacoes e Investimentos SA

BOVESPA:HAPV3

Earnings Call Transcript 2019-Q2

[Operator]

Good morning. Welcome everyone to Hapvida 2019 Second Quarter Results Conference Call. Today with us we have Bruno Cals, CFO; and Mr. Guilherme Nahuz, Investor Relations Director. We would like to inform you that this event is being recorded. [Operator Instructions] Today's live webcast may be accessed through the internet address at www.hapvida.com.br/ir.

Before proceeding, let me mention that forward looking statements are based on the beliefs and assumptions of Hapvida management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Hapvida and could cause results to differ materially from those expressed in such forward looking statements.

Now I'll turn the conference over to Mr. Bruno who will begin the presentation. Mr. Bruno, you may begin your conference.

[Bruno de Oliveira, executive]

Good morning, everyone. Thank you so much for your presence in this conference. We're very happy to talk to our shareholders and the market about our second quarter 2019 results. Recent months were very intense at our company. And we've experienced a breakthrough. Our operations in Joinville in the state of Santa Catarina was the first in the south region of Brazil, and it's now working completely with a verticalized structure with a general hospital of high complexity procedures, 2 clinics and 2 diagnostic units. In May, we started the acquisition of the San Francisco Group, one of the main companies for private insurance in Brazil. They had a high operational performance, and we also acquired the Cariri hospital in Juazeiro do Norte, state of Ceará to expand our operations in the northeast region of Brazil.

This hospital is being operated by Hapvida since August 1, 2019. In July, we announced the acquisition of América Group in the state of Goiás with hospital diagnostic units and others. And then we acquired RN Saúde in the state of Minas Gerais. These transactions help us to expand our geographic position and gives us leadership in number of members in Brazil. More importantly, these acquisitions are complementary to each other and they will help us develop our business model in other regions of the country. This generates synergies within Hapvida and synergies within the companies acquired. In July, we issued debentures in the value of BRL 2 billion, and [ growths ] of 5 and 7 years which contributes to a better capital composition for our company. We acquired the AAA rating from Fitch Rating, which confirms Hapvida's healthy condition.

In July, we finished the acquisition amounting for BRL 2.6 billion. With these resources, these proceeds will reinforce our own network and the companies that were recently acquired by our group. Now I'd like to give the floor to Mr. Guilherme Nahuz, our Investors Relations Director, who will give you further details about our 2019 second quarter results.

[Guilherme Nahuz, executive]

Thank you, Bruno. Good morning, everyone. I know that you want to ask your questions, so I'll try and be brief during my comments. The presentation is available at our Investors Relation website.

So let's go to Slide #4. You see the evolution of our member base for Health Care and Dental in the last 12 months, so June 2018 to June 2019. You see a robust growth, both in Health and Dental. In Health, we had a 6% growth. According to ANS, the National Private Health Insurance Agency, the industry grew 2% approximately, and we grew 6% in Health Care. In the right-hand side, you see that we have continued growth in our Dental member base, so 8.8% growth. And if we look at the rest of the industry, the growth was of around 5.7%.

So Hapvida is outperforming the market, both in Health Care and Dental, and we continue to gain market share. In Slide #5, you can see the average ticket amount for Health Care and Dental. In Health Care, we had an 8.5% growth, similar for the collective plans and individual plans. And on the right-hand side, you can see the average ticket amount for Dental. So a slight reduction of 2.6%, but there was a change in mix. We had an increase in emergency tickets, which have a lower average ticket amount than the full product. Now on the next slide, you can see the numbers regarding our own service network. Our service continues to grow. We finished the quarter with 27 hospitals, 1,873 beds. This growth is due to the new hospitals that were acquired and started operating and also with -- due to the expansion of the number of beds of our existing hospital units.

We also finished the quarter with 19 walk-in emergency units, 82 clinics and 88 diagnostic units. So you can see that our own service network continues to grow. This is the largest own service network in the North and Northeast regions of the country. And now we're also going into other regions with greenfield operations as well as acquisitions already announced to the market. In the second quarter this year, we started the operations of the general hospital in Joinville, as Bruno mentioned, and we also opened 7 new clinics, 3 of them focused on preventive medicine.

This is pretty much aligned with the company's objectives of expanding the programs of coordinated care, preventive care and management of chronic patients. The main goal is to improve the quality of life of our members and contribute to a good control of medical loss ratios in the long term. In Slide #7, you can see our medical loss ratio chart. So we changed the way these numbers are presented. Now we are also considering total medical loss ratio, which includes all movements of provisions during a period of time, including IBNR, incurred but not reported claims as well as SUS reimbursement provision.

So the total medical loss ratio was 59.9%, so an improvement of 1.1 percentage points compared to the same period of 2018, so second quarter of 2018. When we look at the medical loss ratio, excluding IBNR and including SUS, the public health care system reimbursement provision, then we see a slight increase of 0.5 percentage point. This has positive and negative impacts on the quarter. The earnings release has a detailed section on that. The second quarter of 2018, we experienced a few events that were not repeated in this quarter.

On the right-hand side, you have a table showing you the medical costs at our company. First, we have the cash costs. And then the total medical and hospital costs for reconciliation calculations of our medical loss ratio. Slide 8 now. Let's look at net revenue and gross profit. On the left-hand side, we have a chart about our net revenue. You can see that the trajectory of strong growth continues. We had a 15% growth in the second quarter as well as in the whole year accrual numbers. So we're talking about an increase in the number of members, an increase in the average ticket as well as price adjustments that were implemented and that were needed for this economic balance of our contracts.

In Slide #9, you can see charts of the selling and administrative expenses. So the cost of acquisition on the left-hand side and the administrative expenses on the right-hand side. We've had a 10.1% change in our selling expenses -- level of our selling expenses, which was pretty much the same as compared to the second quarter of 2018. The main variations that impacted these numbers that you see on these charts can be found on the earnings release, but you can see an improvement in the accrual numbers -- a significant improvement, actually. On the right-hand side, you see the administrative expenses. Once again, this is the reason -- the ratio between the total of our administrative expenses and net revenue. So it was 10.3% in this quarter which is compared -- comparable to 11.1%, which was our results for the second quarter of 2018, a significant reduction of 0.8 percentage points compared to last year.

In the earnings release, you'll find the main positive and negative impacts during the second quarter as well as the positive and negative impacts of the second quarter of 2018 for a very fair comparison. But the most important point here is that the company has been showing its ability for operational leverage and its capability of reducing the ratio of administrative experience -- expenses consistently. So when we compared these periods, we can see a reduction in the rate and a slight increase in the current semester. In the earnings release, you will find more details about that.

In Slide #10, you'll see charts about the EBITDA and net income of our company. EBITDA went through a strong growth in the second quarter of 2019 compared to the first quarter of 2019. Accrued numbers, as well, very good, over 10% growth. And we can also see the EBITDA margin there, which is a consequence of the factors that I already mentioned. On the right-hand side, you can see net income and net margin with significant growth comparing the same period, and accumulated numbers with around a 20% growth. And in Slide 11, you can see our free cash flow and CapEx charts. A strong cash generation, over BRL 22 million (sic) [ BRL 122 million ], more than double the cash generation of the second quarter of 2019. And on the right-hand side, you can see our investments, CapEx. This is mainly due to the expansion or building of hospitals, clinics and labs.

Well, that's all. We're now open for questions. Thank you very much, and have a great day.

[Operator]

[Operator Instructions] Mariana Hernandes from Crédit Suisse has the first question.

[Yasmin Brandão, analyst]

This is actually Yasmin. I have 2 questions. First of all, can you tell us about the sales in Joinville? Do you have anything new in your portfolio? Now the second question, can you give us further details about how much of the cost of Joinville is considered variable cost and how much is fixed costs? So that we can plan ahead for the rest of the year.

[Bruno de Oliveira, executive]

Yasmin, this is Bruno. Thank you for your question. About Joinville, our sales are within the predicted levels. We started selling only on the 1st of May and the hospital's operations started on April 25. Our sales team started working on the 1st of May. So this is all within the predicted levels. We've been talking to potential customers who have come to visit our units and they're really liking what they see. Some of you have been there and you see that we have a very modern operational unit there, so all within the predicted levels. Throughout the next months, we intend to add contracts with larger companies, companies with over 5,000 lives as well as individual contracts. But this is all within the expected levels for this period of the year, considering that we started sales on the 1st of May.

I cannot give you the exact data of our -- that operational unit because our release is only about consolidated costs. But what I can tell you, though, is that, generally speaking, approximately 80% of the costs of our own service network are fixed costs. So these are physicians, rent, water and power. This is basically fixed -- as well, nursing, administrative personnel.

In the beginning of the operations, you have a higher percentage that will impact the revenue of that region, but in a consolidated manner, that would account for about 80%. In the next years, we expect Joinville to join the same level of operations of our -- the other units we have in the regions of North and Northeast of the country.

[Operator]

Next question by Thiago Macruz from Itaú.

[Vinicius Figueiredo, analyst]

My name is actually Vinicius. My first question is about the organic growth in your member base. What are the main drivers of this organic growth for -- is this more related to a growth in market share or a growth in the corporate market in the regions you already operate? Or this number can also be boosted by the North and Northeast regions in which you are starting operations? And can you also comment on collective ticket adjustments? What was the behavior in recent months?

[Bruno de Oliveira, executive]

Vinicius, thank you for your question, this is Bruno speaking. Organic growth. When we look at the North and Northeast regions, the economic environment there has not started to improve as in other regions. In the South and Southeast regions, we see a better employment level but that does not apply to the North and Northeast regions yet. We've been growing there by growing our market share, basically, in cities we already operate, like Salvador. And we've been also going into new regions. I've just announced our hospital in Juazeiro Do Norte which has already started operations. Our sales team is working hard in this region which is a new region for Hapvida in the North and Northeast part of the country.

So talking about the next 12 months, we'll have a few drivers that will impact our growth. First of all, the economic scenario. We'll have to make sure, if, in the next 12 months, we'll start to see a better employment level in the North and Northeast regions, which we expect to grow -- to be better. So it is really important to start our operations in new cities there. And after the acquisition of our companies, we'll have a better platform to start selling more in those locations and do what we do best, which is to implement our business model and grow in each location that we start operating. So this is the plan for the next 12 months.

Now about the collective ticket that you asked. I was talking to Guilherme about that earlier today. We've been working hard with our relationship team and our pricing team to find alternatives that we can use so that we don't overwhelm customers with price adjustments. One of the alternatives we found was to start co-participation in our plans for customers that are already part of our member base. In June 2018, approximately 34% of our collective Health Care customers had some type of co-participation in their products, and in June 2019, this number was 37%. So in 1 year, we can see a change which shows how much we've been working to insert co-participation and decrease readjustments for our customers. We know that we had double-digit readjustments in the last few years, as you well know, based on our company numbers. So the ticket readjustment was a bit smaller this time, but the medical loss ratio was really, really good considering that we have new units, Joinville with its high-complexity unit and this reclassification of expenses for a cost of BRL 3.6 million, and our loss ratio was around 69%, which is a very good result in our opinion. So ticket readjustments were not as high as in recent years but we are trying to work with co-participation, cross-selling of dental plans, franchisee programs, so we're trying to find alternatives for our customers so that we can have a long-lasting partnership with them. This will help us to control costs and keep our profitability level.

[Operator]

Moving on, Vinicius Ribeiro from Bradesco.

[Vinicius Ribeiro, analyst]

About MLR, Bruno, if we look at 2019, as a whole, can we expect improvements in MLR? Because Joinville will start diluting these numbers more from now on because of the fixed costs. Now have you presented any gains of scale? Are you expecting the MLR to improve in the rest of 2019? That's my question. Now I have a second question which is also related to another one that you already answered. Looking at the North and Northeast regions, the 2019 evolution of sales, is that aligned with your plans that were defined in the beginning of the year? Or are there any major changes?

[Bruno de Oliveira, executive]

Vinicius, thank you for your questions. When it comes to MLR, as you know, we don't provide -- we don't have any type of guidance for the future but we'll continue working hard to keep the same levels, having the best MLR in the country, as we've had in recent years. I cannot tell you exactly what these rates will be for the whole of 2019, though. Now from the commercial perspective, the first quarter was below our expectations. Our commercial team is working hard, and then April was a bit better, May even more and June was great. So we were able to recover from the low numbers of the first quarter, and we were able to achieve the targets defined for the first semester of 2019.

So the second quarter was better when it comes to sales, and we're working hard to continue with this performance.

[Operator]

Next question by Samuel Alves, BTG Pactual.

[Samuel Alves, analyst]

I have 2 quick questions. The first one about the organic growth. You've talked about it, about having a higher level of sales in Joinville, but can you comment on the July performance? And qualitatively speaking, does it make sense to see -- I mean, to have a higher growth of the health care member base in the second quarter of 2019 compared to the first quarter of 2019? And also, can you comment on the evolutions in churns, both for individual and corporate plans, in the second semester?

[Bruno de Oliveira, executive]

Thank you for your questions, Samuel. Well, we cannot give you any guidance about the second semester of 2019, but we forecast growth that -- growth rates that are aligned with our numbers. So I cannot give you any specific numbers for the second semester, and we cannot give you any numbers about June because this release will be made only 45 days after closing, but what I can tell you is that we're going to work hard for the second semester, and we expect to keep the same levels of growth that we've had historically. In terms of churn, we don't see any structural change. Companies have stopped to make major cuts of their employees. So we've seen the traditional churn or turnover in companies, both for the collective health care plans and the individual health care plans. So there was no major impact on our Health Care and Dental plans due to that.

[Operator]

Now next question, Rafael Barros, Santander.

[Rafael Junqueira de Barros, analyst]

Bruno and Guilherme, can you give me further details about the acquisition process? And what can we expect from now on of the synergies between the groups?

[Bruno de Oliveira, executive]

Rafael, thank you for your questions. I'll give you an update about our acquisitions. First, about the acquisition in -- of the San Francisco Group. We've received ANS' approval for this acquisition, and we've received the approval of the general superintendent at CADE for this acquisition, but the law says that, after the general superintendent approves, you need to wait for 15 days because the Board may require a revision. But these 15 days have been suspended by CADE, the Administrative Council for Economic Defense. So we don't know when this will be approved by the organ. And on August 25, we're going to have our general assembly which will decide on and discuss the approval of all these acquisitions. The América Group, while this acquisition is still being analyzed by ANS, the National Regulatory Agency for Private Health Insurance Plans, and CADE, the Administrative Council for Economic Defense, while it has already been approved by its general superintendent and it's been published in the official newspaper. RN Saúde was the last acquisition announced. We've already sent the application to CADE, but we haven't sent it yet to ANS. So this is probably going to take a while. Now the General Hospital of Cariri, this is a hospital unit, so it does not need ANS approval, and because of the size of the acquisition, it does not need CADE's approval either.

So we're starting our operations in the city of Juazeiro Do Norte in Ceará already. So these are the updates of our acquisitions. I cannot tell you exactly when we're going to get the approvals and benefit from the synergies of our acquisitions because of that. So we still need to wait for the next steps in order to define when we are going to start operating with those companies and start implementing our integration plans.

[Operator]

[Operator Instructions] If there are no further questions, I'd like to give the floor to Mr. Bruno, for his closing remarks.

[Bruno de Oliveira, executive]

I would like to thank you all for participating in our conference call. Our Investor Relations team is always available to you. If you have any other questions about our results or about any other information regarding our company, just get in touch. Thank you, once again, and we'll continue to work hard in order to deliver excellent results in the next quarters, as -- just like we had in the second quarter of 2019. Thank you very much, and have a great day.

[Operator]

Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]