Hapvida Participacoes e Investimentos SA

BOVESPA:HAPV3

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Hapvida's Fourth Quarter 2021 Earnings Conference Call. Joining us today are Mr. Irlau Machado and Jorge Pinheiro, co-CEOs; Mauricio Teixeira, and Marcelo Moreira, CFOs; Guilherme Nahuz and Glauco Desiderio, Investor Relations Directors. [Operator Instructions] Be aware that you have the option of muting original audio in Portuguese. To do so, please click on mute original audio. We would like to inform you that this conference is being recorded and will be made available in the company's IR website, ri.hapvida.com.br, where the complete earnings release materials are already available both in English and Portuguese. And you can download the presentation.

During the company's presentation, all participants will have their microphones disabled. After the company's remarks, there will be a question-and-answer session. [Operator Instructions]

Before proceeding, let me mention that the information in this presentation and any forward-looking statements that may be made during this conference regarding the company's business perspectives, projections and operational and financial targets are based on the beliefs and assumptions of Hapvida's management and on information currently available to the company.

Forward-looking statements are no guarantee of performance. 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'd like to turn the floor over to Mr. Jorge Pinheiro, who will begin the presentation.

[Jorge Fontoura Pinheiro de Lima, executive]

Good morning, everyone. Thank you for joining us to the earnings release conference call for the fourth quarter of 2021 and full year of 2021. I would like to start by mentioning how happy we are to be gathered here in our office on Paulista Avenue. And I would like to give special thanks to Irlau and the team for structuring the building in record time to welcome Hapvida's management team here.

I would like to thank Irlau for the room and [ Candido Junior's ] room. We're now all working together here. It's great to be able to be here together physically in the same building. And I would like to say here publicly that we've been welcomed here with a lot of warmth, and we're very happy that we're now working together physically and spiritually. Thank you, Irlau. The infrastructure here is wonderful.

And this infrastructure is enhanced by the telegovernance that we planned in the past through different committees and initiatives. And now having the teams working side by side here, Marcelo, Mauricio are here, Glauco, Guilherme and all other executives from Hapvida and GNDI now one single company, working side by side, trying to find what's best for our business combination. This physical infrastructure has given us speed, traction and momentum to make the most of all the possibilities that arise from this business combination.

On behalf of Hapvida's management, I would like to thank you for welcoming us and creating this great infrastructure and amazing work environment. But we're gathered here today to release Hapvida's fourth quarter '21 results. At the time, both companies were operating separately. But since we're working together today as one single company, we have here information about each company isolatedly and a few pieces of information about the business combination. Starting next quarter, we're going to have consolidated numbers for our company.

So last month, our team completed successfully the largest merger in Brazilian history, the business combination between Hapvida and GNDI. These are the 2 companies that participated the most in the consolidation process of the health care industry in recent years. As we released to the market last month, this business combination will generate huge synergies that are already being captured. We understand that this company now combined will be transformational for the country.

The creation of a verticalized and integrated player with a national footprint is unique, and it will accentuate our capacity to continue expanding and democratizing access to high-quality health care.

Now let me mention the full year and Q4 2021 results. They have proven once again how solid and resilient the business models of both companies are, which were still operating separately in Q4 amid times of challenges and uncommon features faced in the last 2 years. Q4 was no different. We felt the operational impact with the arrival of the Omicron variant together with an out-of-season influenza epidemic, which significantly increased the demand for urgency services at our units and telemedicine visits. So once again, I would like to thank the hard work and efforts of our tireless team of employees and health care professionals for yet another quarter. The third wave of the pandemic has affected us in the months of December 2021 and January and February 2022. But it has already dissipated, with the volume of service going back to baseline levels in the month of March.

Looking at the latest trends and the evolution of the pandemic in the country, we can affirm that we have overcome this new wave of COVID. We would like to thank our customers for choosing us and giving us the opportunity to continue fulfilling our mission, which is to provide high-quality, person-centered health care in an affordable way.

Now I would like to turn the floor over to Irlau, who'll give us further information about what we're going through.

[Irlau Filho, executive]

Thank you so much, Jorge. Good morning, everyone. Indeed, we have started a new chapter in the history of private health care plans in Brazil. Democratizing access to high-quality health care was a purpose of GNDI and the purpose of Hapvida and it continues to be the purpose of this new combined company.

This is an inspiring moment. I would like to thank you for being here because this strengthens our commitment even further. We're working here side by side, day after day, the 2 teams together with hard work and dedication in order to create something unique in the health care industry worldwide. The integration process has already started with teams working together to make the most of opportunities to generate values and the committees of the company managements are already happening, all in a planned and agile way to make the most of this window of opportunity to consolidate the market where we operate. It is indeed a unique moment.

About the results of Q4. As said, it was a challenging quarter. We were hit by Omicron in the last month of the quarter. We were still paying for the bills of the previous quarter. But as you said, so well, the wave has dissipated and the month of March had less than 1 patient per hospital in the group. That is the lowest number of patients we had since the beginning of 2020. So the best month in the last 2 years. We're very happy with the evolution and very excited about what we have ahead of us in terms of synergies and growth.

Now I'll turn the floor over to you. Back to you, Jorge. Thank you so much.

[Jorge Fontoura Pinheiro de Lima, executive]

Perfect. Thank you, Irlau. That was great. Okay. Let's now start with our slide deck. We closed the year 2021 with 7.5 million customers, 4.3 million of them in medical hospital plans and 3.2 million of them in dental plans. In the year, we had a net addition of 534,000 health care members and 192,000 members in dental plans, both through organic growth and through acquisitions of operators, Samedh, Plamheg, Promed and Premium.

Our annual net revenue reached BRL 9.9 billion in 2021 and BRL 2.6 billion in Q4 '21, up 15.5% and 14.3%, respectively, when compared to the same periods the previous year. Even with relevant impacts such as higher medical hospital expenses related to COVID-19 and also influenza in the end of the year, the acquisition of operators that are still operating with MCR levels that are way above Hapvida's with impacts in our numbers as well as the impact of the negative readjustment of individual plans that will happen up until April, that is next month, so there will be recomposition.

Our cash MCR was 65.2% in full year 2021 and 64.9% in Q4 '21. This is a spectacular performance with an MCR that is significantly lower than that of the rest of the market. We continue highly efficient with great management of expenses, selling expenses reaching 7.3%, and administrative expenses reaching 10.5% in the year. With that, our EBITDA in 2021 reached BRL 1 billion -- BRL 1.5 billion.

Now I turn the floor back to Irlau to give us the numbers related to GNDI.

[Irlau Filho, executive]

It's interesting to see how these companies are similar and have felt the same impacts with the reality here in Brazil, but we had net revenue that grew by 16% compared to Q4 2020. In 2021, BRL 12.6 billion in net revenue, up 17.9% vis-a-vis 2020. And we also had a growth in health care members, reaching 4.4 million members, up 17.5% compared to 2020. And we also had significant growth in terms of organic growth.

We usually get around 150,000 members a year through organic growth. And this has been a record year of acquisitions. We had the closure of 8 companies during that period of time. And whenever we bring in a new company, we clean up the portfolios, which is something natural in the process. If we were to exclude that, we would have over 200,000.

In terms of dental members, we have reached 3.3 million, a robust growth of 20.4% vis-a-vis 2020. In terms of cash MCR, our fourth quarter was still impacted mainly by accounts coming from the third quarter due to the natural operational cycle of a health care operator. But we were all surprised in the last month of the year, in December, with the Omicron variant. That brought additional volume of patients, especially to the ERs and to our test facilities, and that had an impact on our MCR. But we were able to reach 76.1%, which is even better than the previous quarter and 79% for full year 2021. But only in Q4, we had almost BRL 120 million of expenses with COVID-19 patients, and we don't expect the same level from now on due to the dramatic drop in the COVID-19 numbers, especially what's going on now in the month of March.

In SG&A, we had 14.4% in Q4 '21. That is slightly above Q4 '20, especially due to the recognition of the collective bargaining agreement started in May, a retroactive. But we're now going back to normal levels with the possibility to dilute costs of the recent acquisitions, so the 8 acquisitions we did in the year.

In terms of adjusted EBITDA, we reached BRL 265.7 million, down 35.4% compared to Q4 '20, but double that of the first quarter of the year. We're very hopeful about 2022 now having COVID in our past, putting COVID behind us.

So Jorge and I decided we would speak together to give you an idea of the magnitude of what we have in hand. This is a company with a net revenue combined of BRL 22.5 billion a year, 8.7 million health care members. This number -- I mean the second-ranking company doesn't have half of that. We have an unbeatable scale and a national footprint. This is a new landmark in the history of the company -- having the history of the country, having a company of this magnitude working throughout the whole country.

In terms of dental members, we have 6.5 million. That's very robust. And cash MCR in Q4 of 70.5 but we know that this is going to go down. And for the full year of 2021, that was 72.3 And adjusted EBITDA of BRL 659 million in Q4 and BRL 2.2 billion for the full year of 2021, a company of an amazing volume that will go back to normalcy. And health care provided and COVID-19 costs being reduced now, this had a huge impact in 2021. And we'll now go back to the growth levels that we experienced in the last 8 years. You have the floor back, Jorge.

[Marcelo Moreira, executive]

Thank you, Irlau. Good morning, everyone. Well, I think that we should now move on to Slide #6. Jorge and Irlau have given us the main highlights of the quarter and full year 2021, and we're now kick starting this new journey of the 2 companies combined. But I would also like to draw your attention to the best trajectory of both companies.

I have no words to describe what this image can tell us. These 2 companies are extremely focused. And in the last 5 years, they both had very robust growth, above 24%, 25%. Both of them able to explore their markets, making the most of opportunities and capturing either through organic growth or acquisition all of those opportunities and with an extremely sustainable result. And that's the trajectory.

If you look at the right-hand side, the bars here show the trajectory that inspires us to seek for more. I can tell all of you who are here today that there's not one single person in the company that is not completely engaged to continue such a wonderful trajectory.

And why is that? Well, the reason why is on Slide #7. The company makes available the most complete health care structure in the country, number one, by far. And that goes way beyond our 84 hospitals and 7,000 beds. This is indeed a holistic view of the health care industry that we have since it covers primary health care, through clinics, offices, telemedicine visits. Telemedicine has been an extremely important tool. And it also covers our walk-in emergency units with a high degree of resolution. Our diagnostic centers, clinical analysis, labs that are constantly being enhanced and evolving. Right now, we have 9 hospitals being built, from the planning phase to the last stages of construction.

So if you look at the map of Brazil, you'll see that our national footprint covers almost the whole country. Actually 92% of our GDP in this infrastructure with our 70,000 employees, thousands of doctors, nurses and dentists are the ones that are going to be able to deliver the growth we expect for the coming 5 years.

So Irlau, I was talking about the sustainability of our numbers of our result, our profitability. And now I would like you to talk a bit about ESG.

[Irlau Filho, executive]

Thank you, Marcelo. These were great comments. I have talked about this in the past. ESG is a topic that is very close to my heart. It matters a lot to me. I am a conservationist. I am involved with the conservation of the environment, wild fauna preservation. I'm completely engaged and committed to this. So I was extremely happy to realize right at the beginning of the relationship with Jorge and when we were starting to combine our companies to see that this is also something very alive within Hapvida. And together, we'll be able to advance even more in that area.

Let me give you some highlights for both companies. We have an important program on diversity with affinity groups that have been set up and are being interviewed and coordinated so that we can have an increasingly inclusive environment. And we are now part of some important indices. EBITDA has been included in the FTSE4Good Index. and we are now part of the B3 Carbon-efficient Companies Index. We had the Carbon Disclosure Project. We got a B-. And this project is now going to start representing our company through this ESG committee that I participate in and coordinate. So we're going to start the same process in Hapvida right now.

In terms of energy efficiency, we had many partnership. A partnership with EDP to build solar farms that is equivalent to 1,800 (sic) [ 2,800 ] houses and will not emit 2,360 tonnes of CO2. We're on the right track and the diversity journey at Hapvida was strengthened with the joining of the LGBTQIA+ Forum joining and the UN Women and the Social Inclusion Corporate Network. We have done our greenhouse gas protocol inventory, contemplating all of GNDI's units with an external audit. And for the first time in history, we have offset 100% of our emissions, so we have become a carbon-neutral company. This is something that will be implemented in Hapvida as well.

Now as a combined company, we're coordinating all of our efforts related to governance, social activity and environmental protection in a unified way. The strength of our company, 166,000 employees, 84 hospitals, all working together with the same philosophy in mind to protect what we have enhanced from the perspective of ESG. And this is going to make all the difference in the country. We are a citizen company, a citizen company of Brazil and of the world as a whole.

[Unknown Executive]

Good morning, everyone. In the coming slides, I'll give you further details of Hapvida's results without the consolidation of GNDI's numbers since the closure of the operations happened in February, actually on February 11. The teams are working together to consolidate the numbers to present the variations and analysis of the first quarter of '22 with the combined company in our next earnings release call.

On Slide #9, you can see the variation of Hapvida's revenue and its main growth drivers. Net revenue in Q4 '21 grew by 14.3% when compared to Q4 '20. And the revenue for the full year of 2021 grew by 15.5% vis-a-vis 2020, mainly driven by the organic growth of 87,000 lives in health care and 186,000 lives in dental in the year.

In the last quarter, we had a growth of 34,000 lives in health care and 73,000 lives in dental. These are the numbers of organic growth, excluding the churn of the recently acquired Premium and Promed. This was also influenced by the client portfolio of the consolidated companies in Q1 '21 with 10,000 lives of Samedh and 11,000 lives of Plamheg. And the revenue coming from the acquired companies, Medical Sao Jose, Promed and Premium that did not exist in 2020, and also the growth of the medical and hospital services provided to third-party and companies Resgate and Maida.health, our healthcare.

Now talking about cost. On Slide 10, we have our COVID-19-related service curve. As Jorge said in the beginning, there was a significant increase in the number of visits in the second half of December due to the dissemination of the Omicron variant in Brazil, together with an influenza epidemic that impacted Q4 as well as the month of January and February 2022. But in March, we had a normal level -- normal month with baseline volumes of visits throughout the month. But this third wave of COVID did not lead to an increase in admissions unlike previous waves. So we had a lower impact on costs compared to previous waves of the pandemic.

On Slide 11, in the chart at the top, you can see the composition of our MCR in recent quarters on the left-hand side, end of the year on the right-hand side. Our cash MCR in Q4 '21 was 64.9% and 65.2% in 2021, a 5.4 percentage point increase year-over-year and a drop of 3 percentage points quarter-on-quarter.

The main impacts on MCR were the increased volume of service due to the dissemination of the Omicron variant and the influenza epidemic happening at the same time. And in the fight against COVID, we had additional expenses with personnel materials, drugs, localization and working, third-party services, in our own network and costs of our accredited network, a total of BRL 14.3 million in Q4 '21 against BRL 27.8 million in Q4 '20. And for the year, it was BRL 349.1 million in 2021 and BRL 127.2 million in 2020. The negative readjustments of the individual plans had an impact of BRL 31 million in Q4 '21 and BRL 56.8 million in 2021.

We also had the higher level of MCR of the acquired companies, Medical, Sao Jose, Promed and Premium that are making up the consolidated numbers of Hapvida in Q4 '21 and full year 2021 but that were not present in the comparative period. The MCR of the recently acquired companies is in a downward trajectory due to the integration and standardization of procedures initiatives, respecting the seasonality of the quarters.

Premium and Promed, that together had a cash MCR -- together had a cash MCR of 86.6% in Q4 '21. Medical and Sao Jose before being incorporated, they had a cash MCR of 78.3%. And they are already going into the level of MCR of the mature operations we have, an increase of 8.8 percentage points. And the cash MCR of the year is explained by the temporary suspension of elective procedures in Q2 and Q3 2020, which did not happen in 2021, which offset the higher levels of MCR of the acquired companies. That benefited the MCR numbers of 2020, distorting the comparison with 2021, which was impacted by the factors I just mentioned.

On Slide 12, we have a simulation of what would have been our cash MCR had we disconsidered the extraordinary effects of the period, which are the additional COVID expenses of BRL 14.3 million in Q4 and BRL 349 million in 2021, the higher MCR levels of the acquired companies and the negative readjustments of individual plans. Excluding those effects, this rate would have been 61.2% for Q4 '21 and 59.5% for full year 2021, in line with our historical MCR.

Now on Slide 13, I'll give you a breakdown of the provision for SUS reimbursement. In Q4 '21, we received a new lot of ABI and invoices. The net impact of the SUS reimbursement provisions in Q4 was BRL 24.1 million, in line with the expectations of a normalized collection flow. For the year, the provision was BRL 186.2 million.

On Slide 14, you can see the percentage of the SUS reimbursement provision that has been dropping compared to the total medical cost of the company up until Q1 '21. The cost of the company in the second quarter of '20 and the third quarter of '20 was extraordinarily lower due to the suspension of the elective procedures in our network, and so the percentage went up. But considering the ABI we received this quarter, that of number 88, about the procedures that happened mostly in Q4 '20, the nominal amount is similar to that of the last 15 quarters.

On Slide 15, you can see our operating expenses. Our selling expenses was 8.4% in Q4 and 7.3% in 2021, an increase of 1 percentage point and a reduction of 0.5 percentage point, respectively, compared to the same periods of the previous year. The main impact was the deferred expenses of net commissions related to the incorporation of Hapvida of the operators that were part of the Sao Francisco Group. The duration of contracts the Sao Francisco Group was longer, and therefore, the selling expenses were deferred for longer. After incorporation, the deferred selling expenses of the acquired companies started to be paid more quickly since the average duration with Hapvida is shorter.

The administrative expenses rate was 11.3% in Q4 '21 and 10.5% in 2021, a 2.2 percentage point increase and 0.9 percentage point increase, respectively, compared to the same period the previous year, impacted by the collective bargaining agreement, hiring of new employees and labor indemnization, provision for fiscal risks, labor risks and civil risks and an increase in expenses with traveling and accommodation due to the return of corporate traveling.

On Slide 16, you can see our EBITDA ex LTIP of BRL 394 million, a decrease of 8.8% compared to Q4 2020. The EBITDA margin in Q4 was 15.2%, a 3.8 percentage point reduction in the same comparison. EBITDA ex LTIP of 2021 amounted to BRL 1.5 billion, down 26% compared to 2020. All the comparisons in the reductions compared to previous year are mostly explained by the impacts of the pandemic on our business as we explained earlier. Excluding COVID-19-related medical costs of BRL 14.3 million in Q4 and BRL 349 million in 2021, our EBITDA margin would have been 15.7% in Q4 and 18.7% in 2021, still with the negative impact of the Promed and Premium acquisitions and the negative readjustment of individual plans.

Adjusted net profit totaled BRL 347.1 million in Q4 '21, a reduction of 51.5% compared to Q4 '20 and of BRL 1 billion in 2021, a reduction of 11.8% compared to the same period the previous year.

Now on Slide 17, you can see our free cash flow ex acquisition, which was negative BRL 109 million in Q4 '21, impacted by the reduction in EBITDA, which was reduced by BRL 43.4 million, and the negative variation of our working capital and an IBNR variation of BRL 22 million as well as the time to recognize our own medical cost and the backlog and writing off of bonds of the acquired companies, also the negative impact of the payment for the property of Hospital Viventi Brazilian and amortizations related to our business combination.

Finally, we would like to highlight that we are making the most of the opportunities in the market to rebuy shares and generate value to our shareholders because we believe that the current price of our share does not reflect all the value of Hapvida. In Q4, we repurchased 18.1 million shares, and in 2021, 23.2 million in shares.

We're now available for questions.

[Operator]

We're now starting the questions-and-answer session for investors and analysts only. [Operator Instructions] Starting with our first question by Leandro Bastos, a sell-side analyst at Citi.

[Leandro Bastos, analyst]

I actually have 2 questions. The first one about the commercial part. I would like to hear from you what do you see in terms of the sales dynamics in the market both of Hapvida and Intermedica GNDI? And now the second question is about the average ticket trajectory. What do you expect for the year? And what are your perspectives in terms of passing through price increases?

[Irlau Filho, executive]

Jorge, would you like to start? Or should I start?

[Jorge Fontoura Pinheiro de Lima, executive]

No, go ahead, Irlau.

[Irlau Filho, executive]

Okay. Well, we're very excited about the year because we think that the competitive dynamics will be quite favorable for a company with national coverage like ours. As we said previously, we have already started developing a national plan. We have the database for that transformation after sales department already set up. And we're starting to offer this product at a national level. We are very excited about that.

We should also mention that due to the geographic expansion, both Hapvida and GNDI had percentages of large customers' portfolio, like a large customer that had 20% of the lives here with us in the Northeast and the other 80% of the lives distributed with other companies. But now these companies will also be able to use our services in other regions of the country.

We have also started selling individual plans in the South and Southeast. That is another landmark. The product is already available, and we're happy with the beginning of production. In terms of passing through prices, if ANS, I mean, ANS defines the rules for the readjustment of individual plans, and that's also a good proxy for corporate plans. And it should be around 15% or 16% for the year.

And for corporate plans, we also expect something at those levels. Of course, that should be done client by client, a very thorough work considering the MCR levels of each customer. So starting in April, we're going to have these readjustments, as Jorge said. So we're hopeful in terms of ticket recomposition.

It should also be mentioned that in the recently acquired companies we are going to remap the products and adjust prices in those companies as well. Now I'll turn the floor over to Jorge.

[Jorge Fontoura Pinheiro de Lima, executive]

Thank you, Irlau. I think your answer was quite complete. I just want to mention that we're also very excited about the synergies that are being captured in the commercial area. I see that many of the initiatives are already implemented. We have created a national cell with teams already in place in the business pipeline for products that cover the whole national territory and the visits are already happening. Based on recent reports, in the short term, 100% of the pipeline has been already designed, and that will generate great growth possibilities for the future. As Irlau said, the individual is already running. This product was created in a partnership with both teams, involving a concept that was already widely used at Hapvida. And now GNDI is also offering this product. And so our commercial fronts make us really excited about the future prospects as sources of new revenue by selling different products.

From the perspective of ticket, it's important to highlight that the companies continue to implement their action plans to enhance verticalization levels and technological controls through enhancing systems and integrating the network so that we can have the best possible cost structure and, as a result, offer the best quality. In a year in which medical costs made the whole market feel the impact, that will give us much more resilience and sustainability to be able to pass through the prices we need and on the other hand, to be much more competitive, considering not only the synergies that were generated, but also all of the initiatives that both companies already have in their action plans.

So I think that starting in March, having the teams working together, we saw that the pipeline has been quite encouraging.

[Irlau Filho, executive]

Just a comment, Jorge. We're working together and the market sometimes forget that. But we've been working together for no more than 30 working days as a combined company. And in this period of time, more than 20 hospitals of our networks were cross-accredited, so a significant opportunity of verticalization and cost reduction.

[Operator]

Our next question comes from Vinicius Figueiredo, sell-side analyst at Itau BBA.

[Vinicius Figueiredo, analyst]

My question is about in the Southeast. We exclude Belo Horizonte which stands to be commercially active there with consolidated numbers, and once you remove [indiscernible] in the portfolio, [indiscernible] and what are you planning in terms of growth in the region after this 1 type adjustment has been made.

Now my second question, if we includes Sao Francisco and the [indiscernible], Hapvida grew almost 70,000 lives in the quarter if I did my math right. Why is that? And do you see that dynamic happening now in the first quarter of 2022?

[Irlau Filho, executive]

Thank you for your question, Vinicius. That's a great question. We have implemented systems in 3 different operators last quarter. Sao Francisco, Sao Jose and Limeira. Our cancellation was quite low. In 60 days, according to the law, we will cancel the users so that we're not exposed to SUS reimbursement and other things. So as we implemented the systems in Q4 and in most acquired companies, the same thing happened. We have canceled the plans earlier than expected. Companies usually take 120 days to do the cancellation. But we are compliant with the act, and we do the cancellation within 60 days.

If you remember, in March last year, we had a drop of 30,000 lives in Guyana and America because they canceled only with 140 days. So we removed the nonpaying users from our network within 60 days. So we are reducing the portfolio. But that does not have an impact in the cash flow because we were only removing users that were bad payers. So once we implement the system, this is something that we do automatically. So there is no impact on cash. But we removed from our customer base the nonpaying users with the implementation of that rule.

In our mature operations, they're growing well. As you can see throughout the country, we had growth in Q4. And Belo Horizonte, as you said, we are remodeling our portfolio. We stopped selling in some cities. And there are some capital cities in which not -- Hapvida or GNDI have their own network, so we're not selling there. And we're also discontinuing some small towns that, for example, there is a town in the countryside of the state of Minas Gerais. And we have Santa Casa that was part of our customer base, and the MCR was over 200%. So without our own network, using an accredited network, it doesn't makes sense to sustain an MCR at those levels.

So we are making these portfolio adjustments, preparing new products. And still talking about Belo Horizonte, Hapvida and GNDI have already devised a very robust plan for the CD, a plan that enabled us to cut duplicated CapEx that both companies would do. So we rationalized and unified the strategic plan for the city of Belo Horizonte. We have spectacular hospitals there. We're talking about 3 of the best hospitals in Belo Horizonte. We made the acquisition of an important land on Avenida Ducotorno. And the network of labs and outpatient clinics is now being implemented. So we are preparing the ground for an extremely competitive product that will be made available considering the geographic distribution in the region and the quality and complexity of the assets there. So we're very happy with the plan for Belo Horizonte, and we are preparing to have sustainable growth there.

I believe we're on the right track. We are keeping in our customer base clients that will give us the opportunity to achieve sustainable growth in the long term. Any other comment about Belo Horizonte?

[Unknown Executive]

No, I just want to say that I love the city of Belo Horizonte. I was born there. So yes, the city is really important to me. But we're very excited. We have hospitals that are accredited by the joint commission in Belo Horizonte. And we'll have a product that will be competitive after we implement the whole infrastructure we have planned for the city. So yes, Belo Horizonte will go into this completely new phase with a player, with a national footprint and high-quality products there.

[Operator]

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

[Joseph Giordano, analyst]

I would like to address 2 topics. The first one, more focused on the internal work you're doing. We saw a relevant increase of expenses. Is this something that is related to the acquisitions? What are the provisions for contingencies you have?

And the second topic I would like to address is about your brother's strategy. How are you looking at the negotiation of customers you have in common. Jorge said that you have some customers that have been working with you in 1 region and with other operators in other regions. So what are your combined agreements in terms of prices?

Now I would also like to understand where you're focusing on when it comes to market opportunity. Are you planning to have a lower ticket than the average of both companies combined with a more entry-level product? Or are you going to focus on a more intermediate or higher intermediate segment in which you have a greater presence of Unimed?

[Irlau Filho, executive]

Okay. You asked about Intermedica, so let me start by saying that both companies have a very similar profile in terms of product democratization. That is we focus our product for the -- on the emerging middle class. This has always been our focus, and we have always been very successful in doing so. That doesn't mean that in our product portfolio, we don't have products for the Premium market. We do have that available.

One of the things that will be made available is a PPO product for the top management of companies that currently have Hapvida. So we're launching a product for that segment. Now the business combination gives us the possibility of drastically reducing costs by verticalizing operations, simply because there are locations in which Hapvida has a hospital and GNDI had to buy services from third parties. But from now on, we can verticalize the service in that city within our group, and that strengthens the competitiveness of our product.

And there's no doubt that product quality will increase as a consequence, because we'll have greater control on chronic disease, for example, or the work that we can do to reduce preterm labor and so on and so forth. And there is no question that this will compete with average ticket products at Unimed, and we're going to be more competitive in terms of prices.

When it comes to costs at GNDI, indeed, we felt the impact of the collective bargaining agreement. We have different unions in different regions of the country. But that collective bargaining agreement happened last quarter, but now we're going back to normal operations. Maybe after Jorge's comment, Marcelo can give you -- for the details about cost.

[Jorge Fontoura Pinheiro de Lima, executive]

Great, Irlau. Just a reminder, the country has less than 24% of the population with the health care plan. The 3 COVID waves that we experienced, that we have just overcome, and we should celebrate that, this makes us believe that in the short term, our operations will normalize. But that makes people want even more to have a private health care plan. Considering all the trust that people have in us in the care that we are providing with different technologies, and I think that the combined companies now have around 400,000 telemedicine visits a month, 360,000 telemedicine visits a month. We are offering a network that has national coverage that provides comfort to users. And the beauty of this combination is the wide range of opportunities and gains that will be generated. And through these different initiatives, all the gains are being mapped and captured. And part of that will be given back to users with smaller price adjustments, giving greater predictability to our customers and being the top choice to get to the other 76% of the population that is not covered by a private health care plan.

And we have this wide range of products. But of course, I have to say that the main product we have is the combined network with a national footprint. That's the main attraction of our company. In all major cities, you have Hapvida and GNDI's hospitals, labs, outpatient clinics. And of course, we want to enhance and expand that even further. But we have -- in Hapvida, we have 3 products, our plan, the mix and the premium with a more open network for diagnostics and other hospitals. And GNDI has the PPO product that will be offered to customers that already have Hapvida and want to have a free choice plan to part of their -- offer to part of their employees. So this is great opportunities of synergies, and that will make our products increasingly better, increasingly competitive and with an enhanced geographic coverage. Now I turn the floor over to Marcelo.

[Marcelo Moreira, executive]

Yes. Yes. You talked about our G&A, Joseph. And I just want to emphasize that if we look at the annual results, we had a significant decrease of 0.7 percentage points going from 9% in 2019 to 8.7% and now from 8.7% to 8%. So I think that our commitment and our efforts to dilute our G&A as we expand our operations is a constant challenge. And of course, we have quarterly variations that are completely normal. And I can tell you that the 2 variations we had in Q4 are not expected to last.

When it comes to contingency and ANS fee, that was something isolated for the restructuring of products in new locations and closure of certain products so that we could focus on launching the Connect product in the South region and Minas Gerais, so you also have some marketing fees associated to that. And of course, personnel. We had the collective bargaining agreement with -- and we also had a correction of provisions for vacations, 13th salary and so on and so forth. So you usually have a higher impact in a certain period of time, but we're committed to continuing diluting our G&A.

[Operator]

Our next question is by Vinicius Ribeiro.

[Vinicius Ribeiro, analyst]

I hope you can hear me. So I would like to follow up on something that Irlau commented about this cross-verticalization, so to speak. At different times of expansion in both companies, you had to expand your network and increase your footprint in terms of the service network. So I just want to understand, in light of the additional demand that your national plan will bring about, do you feel like you need to adapt your structure or the existing structure is enough to cover that new demand?

And now a second point, still talking about your national plan. When we think about price and verticalization level, when compared to the baseline of both companies, should we expect that the national plan will bring lower ticket? Or should we expect a similar pricing to what you have today and that would generate additional efficiency to you?

[Irlau Filho, executive]

Jorge?

[Jorge Fontoura Pinheiro de Lima, executive]

Okay, I'll start. Today, we have a product that we can call national product because it is present in all main regions of Brazil with our own network. But naturally, I don't have the exact numbers, but this is a product that is present in over 86% of the Brazilian GDP. I think that's the exact number. So with our own network, we will be present in all of the locations where we have the greatest income concentration in the country, so the largest consumption market. So now with both networks, yes, we can offer a national product present in all 5 regions and in almost all Brazilian capital cities and other major cities. But of course, this is not a product that will have our own network available in every city in Brazil. That's going to be unattainable and inefficient to have our own network in every Brazilian city. But we have a huge competitive differential here because of the geographic coverage that we currently have. Once again, I would like to emphasize that both companies are working really hard to expand our own network organically and through acquisitions. I know that GNDI, and Irlau can give you further details later, but they are building 7 ERs. Hapvida has 3 hospitals being built in Sao Paulo, 2 in the Midwest, 3 in the North and Northeast regions and acquisitions that we have announced recently in the Northeast region. And in the coming days, we're going to open a hospital in Brazilia. GNDI has just announced an acquisition in Rio de Janeiro. So as part of our strategy, we are expanding in a consistent way and qualifying this with better architectural designs at the best addresses with the best technology and the best professionals to make our product increasingly competitive and offering something that is not available in Brazil. This is the creation of a new concept with a new product that only Hapvida and GNDI can offer to the Brazilian market.

Now about pricing, this is a bit more complex because pricing depends on the concentration of lives in each region. Of course, Brazil is so large and so different in different regions, but the average cost also varies. Medical costs in Salvador, Manaus, Joinville, Sao Paulo or Rio are completely different from each other. So when we do pricing, we need to check not only geographic location, but age, group, type of product, whether you have copayment or not, if the user participates or if this is base part of the price or if it is 100% paid by the company. So there are many things that are taken into account during the pricing process. We already have an initiative, and both pricing teams are already working together in this national cell to be able to quote the new products in a speedy way.

[Irlau Filho, executive]

I just want to add something here, Jorge. Thank you for your comment. But yes, when we develop the network, and it's now a national product and the greenfield pipeline is huge, as you said, this is all done to fulfill our goal of verticalizing our services more and more throughout the whole national territory. And while we verticalize, usually the cost, depending on the region of the country and the city, when it's done in-house, it can be 50% lower than what you pay elsewhere or even more depending on the location. So that gives us extra competitiveness at reasonable prices.

Well, about your first question, Vinicius, about whether we would need any additional CapEx. In this case, I think it's actually the other way around. Hapvida had a business plan with an approved CapEx and GNDI had another one. Once you combine both, we were able to identify some investments that will no longer be needed. That would generate an excess of network that we don't need. So as a result, we're going to save CapEx money here.

Just to add to Jorge's answer, the combined national structure will be present in a total of states representing 92% of the Brazilian GDP. An important synergy of the cross verticalization is that oftentimes, the companies already offer national solutions, but they use third-party network or other operators.

Now GNDI has a client in the North that is served by a partner operator that is not Hapvida. But now, we're crossing the data so that these customers can now be served by Hapvida and vice versa. This creates huge synergies. And we are performing this cross-verticalization of operators in installed network.

Yes. Just an example, after the acquisition of Vitalis in Minas Gerais, we had lives in Para, [indiscernible], Manaus, and that is now being taken care of by Hapvida that has local infrastructure to service customers at a much lower price than we were paying previously. And we also acquired operators that had lives in Recife. The same happened with Hapvida and acquired operators. And now we can serve all of those lives with our own network.

That was a great point. That is actually one of the initiatives to capture synergies in the short and medium terms. So this is an implementation that's not highly complex. This has already been mapped. We have our pipelines per city. And in a few quarters, we'll start to see these synergies being captured.

[Operator]

Our next question is by Mauricio Cepeda, sell-side analyst at Credit Suisse.

[Mauricio Cepeda, analyst]

I have a few questions that go back to some aspects that have already been addressed. The first one about the cancellations. You have had great gross adds, but you still have a high level of cancellations. I understand that you've been cleaning up some of the portfolios. But can you give us further details about other reasons that are leading to cancellations that are not cleaning up of portfolios? And when will this trend slow down?

Now my second question, since we're talking a lot about verticalization and possible gaps, where are the main verticalization gaps that you have today? Is this impacting somehow your M&A decision-making process, a trade-off between buying lives or buying infrastructure?

Now 2 unusual questions that I'll try to ask as one single question. In terms of regulation and legislation, we've been seeing that maybe ANS national formulary can become an example. Have you been able to calculate a possible impact on your actuarial numbers? And now the salary floor for nursing staff, how distant are you from this new value that is being proposed and that could create an impact on your payroll?

[Irlau Filho, executive]

Jorge, would you like to start?

[Jorge Fontoura Pinheiro de Lima, executive]

Well, these are many different topics to be addressed. Well, about cancellations, Mauricio, thank you for your question. Well, about cancellations, we basically have 2 reasons. System implementation, as I said, we're now able to shorten our cancellation deadline, and we are able to remove users that were bad payers. This has no cash impact, and we see no change in default behavior. But we're now being more efficient. It's no use having in your database users that are not active or are at default, but the delinquency rates are stable. This is a one-off effect. After you implement the system and you clean up the portfolio, this is not something that will continue to happen. Now a second thing that we've been doing is to discontinue some regions that don't make sense for us to be present in because these are regions where there is no possibility for us to implement our business model, considering the populational density they have. And in the local hospitals, we don't have a lot of room for maneuver to have our best management in place. So we're discontinuing those cities. We believe it doesn't makes sense to have in our base customers that will not have a positive effect for our operations. Basically, these are the reasons.

But the sales levels are great, as you saw. And we can now make these adjustments in our portfolio so that all of the sales done at our company are healthy and sustainable. We're not focusing on short-term results. Irlau and I have been talking about that. Our focus is to have sustainable and safe structure that will give us resilience and high quality of service. And of course, we want this to be predictable for users. We don't want to pass through 30% or 40% readjustments. On the contrary, we want to be able to offer products that are sustainable and high quality.

About ANS' formulary or list, I see a very low chance of that thriving. One of the main foundations of the agency, the regulatory agency is to define the list, the formulary. So if the formulary is no longer working, that would mean closing down the regulatory agency. And they were responsible for making huge advances in the private health care industry in Brazil, so I don't see reasons why this should happen.

When it comes to the floor of the nursing staff, this is still quite incipient. So first of all, I think that we need to value and congratulate our nursing staff. They have worked really hard to fight the COVID-19 pandemic, and it's different waves. So we want to congratulate these spectacular health care professionals that face this on a daily basis. But the discussion in Congress today is funding source for cities, Santa Casas and other philanthropic institutions. And of course, we have the possibility of passing through in case of any new measure. But we have no defined numbers because this is so very incipient, as I said, and many different possibilities are being studied in Congress right now. And since this is not mature yet, we don't have any specific numbers to share with you. Irlau, would you like to add anything?

[Irlau Filho, executive]

Just a final comment about this exemplary list. In addition to leading to the closure of the regulatory agency, that would also lead to the closure of any actuarial calculations because you cannot perform any actuarial calculations without understanding the risk, and that would be very counterproductive for the country and for consumers. So the consumers should have a say in this. So we don't think this type of action will have a chance to thrive.

[Operator]

Our next question is by Fred Mendes, sell-side analyst.

[Frederico Mendes, analyst]

Yes, I have 2 questions. My first question is related to Sao Francisco. Of course, this is a more complex asset, but you have a deadline of 2.5 years for the complete integration. So can you tell us about the performance of that specific asset?

And now a question about GNDI. What can we expect of the new individual products that GNDI has launched in Sao Paulo recently? And these are products that you've been working on for some time, I think. So do you think that this will have a more relevant impact on the second quarter of 2022 already?

[Irlau Filho, executive]

Okay, let me start with Sao Francisco and then you talk about the individual product, okay?

[Jorge Fontoura Pinheiro de Lima, executive]

Sure.

[Irlau Filho, executive]

Okay. So as a reminder, the Sao Francisco was the group -- was the greatest acquisition that we made. It was definitely challenging. That was an operator that had a network and customers in 4 Brazilian regions so -- with a very large footprint. And we were talking about an integration deadline of 4 years because we were already considering all the complexities, but we were able to reduce that by half. We're able to do the whole infrastructure, integration, systems integration and operational integration. Sao Francisco is now 100% integrated into Hapvida systems. All the information we have in Hapvida's mature information is already reflected at the same intensity in Sao Francisco's assets in real time. So we were able to reduce by half that deadline, that time line. So what do we still have ahead for Sao Francisco? Only the building of hospitals and the implementation of a wider network of our own assets. This is a continuous process, but the integration has been completed. And Sao Francisco was running with an MCR that was a bit above 70%. But we were able to reduce 5 to 6 percentage points in this period of time, which is something spectacular with this operation that is partially verticalized. Half of Sao Francisco has their own network, and the other half doesn't and probably won't have. We have some projects for hospitals that will increase the verticalization level, that's true. But we already had an amazing gain in 2 years, that is half the time line that we predicted at first. So a very successful integration in that sense. Thank you for your question, Fred.

[Jorge Fontoura Pinheiro de Lima, executive]

Now let me tell you how we launch a comprehensive individual product. First of all, you have to train brokers. You have to register and structure your product. This is all based on our own network. Our individual products are 100% verticalized. And of course, we need to agree with brokers, what the compensation will be and then we can launch a product. This has already happened. We have already started sales for a week now. It's been quite successful. And we expect this to have gradual repercussions. It's like stairs. You sell a group of products today, and you start with the compensation this month. And then the following month, you have the new sales, plus what was sold the previous month. So it's like a stair with steps. So we expect the results -- these results to have impact on our earnings in the coming months, yes.

Now individual products also have a grace period. So MCR at first is a bit more timid and the results are even better, therefore.

[Frederico Mendes, analyst]

Yes. In theory, then it should have a higher price and a greater margin as the products gain momentum, right?

[Irlau Filho, executive]

Exactly.

[Operator]

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

[Ricardo Boiati, analyst]

I hope you can hear me well. I have 2 quick questions. The first about Hapvida and the fine of BRL 15 million defined by ANS. There is a liability of BRL 460 million classified as possible. So can you give us further details about what happened there in Q4 and how that compares to these contingency liabilities so that we understand if there is a risk of that happening again or if that was something one-off. Marcelo commented a bit about GNDI. But if you have anything else to say about this Marcelo, please go ahead. And when will this provisioning become cash? Because once you recognize this provision today, you have expectations for this to become cash in the next 12 months or not necessarily? I know that this is not as significant, but I just want to understand if there is anything else that can impact your P&L in the coming quarters.

Now my second question is for GNDI. Just a clarification about the MCR. You said that you had an impact in the demobilization of COVID-19-related infrastructure. Is that related to the COVID-19 care cost? Or is it something additional?

[Guilherme Nahuz, executive]

This is Guilherme speaking. I will answer the first question about the ANS fine. Well, this is a common administrative process, just business as usual. We have 72 administrative suits. So it's not a fine coming from one suit, one process. These are diverse administrative fines that we got from 2007 to 2013. So these are old suits and that was at an administrative level. Now we are appealing against this at the judicial level. Hapvida has already filed the appeal, and we are waiting. We don't know when we're going to have a response. But the provision had to be made now because these suits were classified by third-party offices as probable loss. So we did this provisioning right now of this -- without knowing exactly when this is going to happen. But that's one-timer, not a recurring effect. And we're talking about a large volume of old fines, and this is part of business. Business as usual. Nothing extraordinary. Now I turn the floor over to Marcelo to answer your GNDI question.

[Marcelo Moreira, executive]

Well, about MCR, we said BRL 126 million of COVID impact. That was the impact of medical costs, medical claims and service costs. Demobilization of assets was not included in those numbers. That would be additional, on top of that because that is related to personnel adjustment, reduction of medical teams to be more in line with our current needs and closure of beds. During COVID, we were opening many new beds and now all of these beds were closed. We no longer have any hospital wards for COVID alone. That is part of the past. We now have gone back to business as usual.

[Operator]

Your next question is by Yan Cesquim, a sell-side analyst at BTG Pactual.

[Yan Cesquim, analyst]

I have 3 questions. First, we have noticed a lower level of net addition in the quarter impacted by a higher churn, especially in recently acquired companies, Promed and Premium. This cancellation dynamic is being reverted in the beginning of 2022 or not?

And number two, how are the sales like in the beginning of the year? Is there an improvement in net additions? And third, when should you start selling the national product?

[Irlau Filho, executive]

I'll start by answering your last question. The national product is already being sold. The offer is already being made. And we have a sales funnel in which we identify a group of possible customers, prospects, right? And we start visiting those customers. We're talking about a huge addressable market, over 700,000 lives. So we've been talking to these customers. And for some of them, we are already at a second stage of negotiation. And some of these customers are already in the signing phase. So this national product is already being sold.

Now about cancellations. In the beginning of the year, we have a lower level because of other expenses that customers have with taxes and school. But we're very hopeful with all the initiatives we have in place. At least, the pipeline is making us very excited about the future.

[Operator]

Our next question is by [ Beatrice Abril ], sell-side analyst at Goldman Sachs.

[Unknown Analyst]

I have 2 quick questions. The first one about the deferred commission expenses related to the incorporation of the Sao Francisco Group that had an increase in the quarter. Can you tell us why that happened and what you expect in terms of those expenses in the future?

And my second question is, can you give us some idea about the tax benefits of this Premium, the usability -- deductibility? Do you think there will be an increase in that with the combination of business? What do you expect from now on?

[Irlau Filho, executive]

Thank you for your question, Beatrice. About the deferred expenses, what happened was that in Sao Francisco, we had a few contracts. And the cost of acquisitions were still being paid for. Now in terms of churn, when we wrote off those customers, the value to be recognized was written off from the results because it made no sense to have that recognized in our results, the commercial expenses of customers that were no longer generating revenue. So we did this one-off writing off.

About tax benefits, we've been working a lot with Marcelo and other legal consultants to see how we can optimize tax considering the added value that was created. And as a reminder, both companies have made acquisitions and they have premiums to be ceased, like Sao Francisco was BRL 1.5 billion in terms of tax benefit, and that's going to last for a few quarters. So we don't have to launch this new value that was created for GNDI. We also have recent acquisitions, and we're planning how we're going to use that value to see how we can make the most of it. So we don't need to be in a hurry when it comes to tax benefits, but to have the lowest possible tax level. And as time goes by, we're planning how we're going to use those benefits that are being generated right now. For cash effects, both companies already have levels of tax that are very low and with a good accumulation of value to be used. So we're now going to plan for the years coming ahead with new incorporations, so that we can keep this very low level of taxes, effective taxes.

[Operator]

This concludes our questions-and-answer session. Now I would like to turn the floor over to the company for the final remarks.

[Irlau Filho, executive]

Go ahead, Jorge.

[Jorge Fontoura Pinheiro de Lima, executive]

Once again, I'd like to thank you all for joining us today. I would like to thank Irlau and the GNDI team for the welcome. I'm very happy we're now working together. And I want to thank all of our employees for the huge effort they have made together with us in 2021, and we'll continue to work hard together in 2022 to fulfill our mission, which is to provide high-quality health care in an affordable way to the Brazilian population.

I would like to thank our investors for being with us, supporting us in our growth. Thank you so much.

[Guilherme Nahuz, executive]

Thank you, Jorge. Thank you, Marcelo, Mauricio, Glauco, Nahuz, everyone, investors and analysts and see you next time.

[Operator]

This concludes Hapvida's Fourth Quarter 2021 Earnings Conference Call. The Investor Relations department is available to answer any other questions you might have. Thank you very much for joining us, and have a great afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]