Odontoprev SA

BOVESPA:ODPV3

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to OdontoPrev's Fourth Quarter and 2017 Results Conference Call. With us we have Mr. Rodrigo Bacellar, Mr. Luis Blanco and Mr. José Roberto Pacheco. This event is being recorded. [Operator Instructions]

This event is also being broadcast live via webcast and may be accessed through OdontoPrev's website at www.odontoprev.com.br/ir, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded.

Those following the presentation via the web may post their questions in advance on our website, which will be answered during the Q&A session.

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

Now I'd like to turn the conference over to Mr. José Roberto Pacheco, IR Officer of OdontoPrev, who will begin this presentation. Mr. Pacheco, you may begin.

[Jose Robert Pacheco, executive]

Good morning, everyone. Welcome, and thank you very much for your interest and trust in OdontoPrev. I would like to thank you for participating in this conference call to present the fourth quarter results and the results for 2017.

Now to begin with the presentation. On Slide 3, you can see the data of the ANS, the Brazilian Healthcare Agency since 2013, with the continuous growth of dental plans even through years of recession versus the members in health care plans, which was lower 5 years ago, in number of members.

On Slide 4, we can see that OdontoPrev net revenues increased by 5.6% in the quarter, achieving BRL 372 million. We'd like to highlight the growth of the SME plans' revenues, which increased by 17.6%, and corporate with annual positive increment, according to our next Slide #5, the -- positive variation.

On Slide 6, we'd like to highlight the unique positioning of OdontoPrev in relation to its leadership in developing and expanding the noncorporate segments, individual plans and SME, which presents a higher ticket, less competition, fast growth compared to the market and higher contribution margins. In addition, to reiterate the company's strategy, the noncorporate product presents significant barriers to enter, such as scale, quality of distribution, credit risk of the small size or individual customers, adverse selection and management technology, which are the clear differentials of the OdontoPrev's business model.

On our next Slide #7, we can see an increase of the average ticket in all the 3 business segments, particularly, a 2-digit growth, the largest, in individual plans.

On the next slide, Slide #8, we can see the net addition of 83,000 members in the second half of the year, the best performance since the second half of 2014.

In addition, we would also like to highlight the Brasildental performance for the year according to Slide 9, with net additions in all the quarters of the year totaling 97,000 members in 2017.

On our next Slide #10, we can see that the EBITDA of Brasildental achieved BRL 5.4 million with a margin of 23.3%, much higher than the 14.3% of 4Q '16.

Our next comments and slides will mention metrics where we'll exclude the INSS Bradesco Dental and OdontoPrev effects, which took place in 2017, particularly the company accounted in 4Q '17 tax credits related to INSS payments made during the 5 years prior to 2010 in the total amount of BRL 87.2 million, resulting in a lower cost of services of BRL 42 million, a positive impact of BRL 39 million o the EBITDA and an addition of BRL 52 million to net profit in the fourth quarter.

In the next slide, we can see, in Slide 11, by excluding the INSS effects, the dental loss ratio was 44.1% compared to 49.7% year-over-year. The amount in the year was 45.7% showing the normalization on this indicator.

As you can see in the next slide, Slide #12, the administrative expenses represented 15% of the revenues in the year, mainly made up of personnel expenditures.

On the next slide, Slide #13, we can see the quarterly evolution of bad debt, which represented 4.2% of the revenues in 4Q '17, under the 5% of 4Q '16 showing gains in the process and enriched product portfolio and the perception of value by customers.

On Slide #14, we analyze the evolution of cash generation measured by the EBITDA criteria. In 4Q '17, we see an adjusted EBITDA of BRL 94 million, excluding the INSS effect. 31% higher than the BRL 72 million year-over-year with a margin increase of 20.4% to 25.3% in 4Q '17. In the year, the EBITDA achieved BRL 352 million with a margin of 24.5%.

On the next slide, Slide #15, we see that by excluding the INSS effects, the net income achieved BRL 245 million in 2017, 13% higher than the BRL 216 million recorded in 2016 and BRL 64 million in 4Q '17, according to Slide #16.

Now we will analyze the company's cash flow. It's just worth mentioning that the company does not have any indebtedness.

On the next slide, Slide 17, we would like to highlight the evolution of cash flow in 2017. We can see that during this period, there was a cash generation of BRL 359 million, equal to 25% of net revenues. Net cash at the end of the year was over BRL 500 million, meaning BRL 508 million in December without debt, as we mentioned, and you can see that clearly on Slide #18.

Now moving on to our last slide, Slide #19. We can see the company's shareholder structure, with the highlight to foreign shareholders, global shareholders, with approximately 95% of the free float.

We would like to thank you once again for your interest and trust in OdontoPrev.

Now we'd like to move on to the Q&A session for investors and analysts on our practice of conference calls, which will last 45 minutes. Thank you very much.

[Operator]

[Operator Instructions] Our first question is from Thiago Macruz from Itau Corretora de Valores.

[Marco Calvi, analyst]

Actually, this is Marco speaking. I have two questions. First of all, I'd like to know about the competitive environment and corporate environment. We see a positive trend following the same as the third quarter. So I'd like to know what the competitive environment is like? Could you give us some more flavor on the net addition if it came through getting more contracts? Or any potential net growth in the current agreements -- current contracts you have? That's my first one. The second one is about the dental loss ratio. We saw a general drop especially from large corporate. So I'd like to know about the individual segment dental loss ratio. How can we think about that for 2018? So that's what I have.

[Rodrigo Bacellar, executive]

Good morning, Marco. This is Rodrigo speaking. Thank you for your questions. I'm going to address the first one about the competitive segment, and then Pacheco will talk about their DLR. First of all, about the competitive sector what we -- scenario, what we've seen is in line with what we've been talking about in the 4 or 5 -- last 4 or 5 calls. Meaning the company is performing well in gaining more corporate contracts. However, the economic crisis was giving negative effects on moving the active ones. In the first quarter, we had the first one with a positive movement in these contracts. That means that a company that has 100 members with us at the end of the quarter, a little bit over 100 members, and that shows that, that in that vision that we've been mentioning for a while that we were carefully optimistic about the path of the economy and some clear improvements that weren't reflecting in job generation or a lot of informal job generation, for instance. And in the last quarter, we've achieved the companies where we are present, the over 6 million members. So we noticed that in the quarter that we have a reversal of that, a turnover in that with a positive contribution in terms of members. And when you add that into the new contracts, which, in fact, is a reflective of the last 4 quarters, was able to give us a positive leap as you mentioned yourself. So we believe that from now on, our vision is to be very cautious, however, with a more constructive view than we already have -- had. And when we're out making the calls, we see a lot more optimism as a company than we clearly expect for this year. It will be a tough year as we have elections coming up to the middle of the year that should happen. And then it could intensify and bring in some new volatility to the industry and the decision to invest by business people. However, we do have a constructive view for the year about contracts and growing them, growing the contracts company is contracting and lowering unemployment. Now, I'll hand over to Pacheco to talk about DLR.

[Jose Robert Pacheco, executive]

Thank you, Marco, for your question. About the DLR, it has 2 components. So first of all, we have the INSS effects that we started to have in 3Q '17. This is effect is here to stay. So it's in perpetuity. The company has 300 points in that and that impacts all the business segments positively and a sign of margin expand -- expansion as from the third quarter 2017. Specifically in the individual plans, first of all, we've also seen an important expansion in the ticket or increase in the ticket explained by more prime products and with more coverage and that are more expensive. So the DLR, the cost of services in individual plans was higher -- much higher especially in the fourth quarter compared to the track record. It doesn't that it doesn't have the highest contribution margin, that remains, but it is an important aspect that we have to call your attention too. I'd also say that we have 200 exceptional cases in terms of DLR in the disclaimer line, because that impacts the results -- beginning results in 2018. I'm talking about a strike of the National Post Office system, which delayed some of the documents for some of the procedures that arrived to us now in 2018, but they're relating to 2017. That amount isn't much. We're talking about [ BRL 4 billion ] in the quarter, but it's an important disclaimer. So we can understand the DLR better for the fourth quarter of 2017.

[Operator]

Our next question is from Olivia Petronilho from JPMorgan.

[Olivia Petronilho, analyst]

I have two questions. The first one with the current profile of corporate, I'd like to understand is that coming from existing contracts or if there's more employment now, if it's new contracts? Second, I'd like to understand the performance, the Bradesco specific in their case. So I think there has been a higher churn, maybe there was a specific event with Bradesco?

[Rodrigo Bacellar, executive]

Thank you Olivia for your question. For corporate, what we can see is a bit of the 2 effects. So the company is getting more corporate contracts. We've had a very good performance. We monitor our portfolio in 2 different ways. The contracts that we win over from the competition or lose to the competition. And the second one, which is the movements in existing contracts, as you mentioned. So the company has had good performance in getting more contracts from the market. And also assisted by the improvement in the economic scenario in the country. So moving the contracts, we're contracting more than decreasing that. So hiring more than terminating contract. So now it was positive in November and December. So the figures you see is the total -- the sum of 2 effects. But the company's footprint is pretty much the same, and we've been reaping good fruits.

[Jose Robert Pacheco, executive]

Good morning, Olivia. This is Pacheco speaking. About the individual plans with Bradesco. 2017 was a successful year to launch new products, products with the higher ticket and higher coverage. So these increased the revenues. So the individual tickets had an important leap in all quarters of the year, particularly in the fourth quarter. So in relation to the churn, there is a higher churn in this portfolio compared to others. So that affected the net adds and the revenues offsetting that, a 2-digit revenue for the year. So that was the strategy for 2017. And now we may have a balance between volume and price from now on as from 2018, taking advantage of opportunities in the market, more income available in the consumer market, the trend of job and not growing unemployment, which was a characteristic of the past years. So that explains the top line strategy for individual -- Bradesco individual plans that was mainly focused on revenues and the churn in that portfolio made the volume remain stable.

[Olivia Petronilho, analyst]

Great. I have a follow-up to that. In relation to DLR, we see a huge improvement. Are there any calendar effect from that? Or we can see that as a structural improvement through the quarter?

[Jose Robert Pacheco, executive]

Olivia, as you can see on Slide 11, if you see -- take a look at the dotted line, you see that there is a behavior. But when you look at the fourth quarter, it's still lower than the other 4 quarters than previous years. And most importantly, it's the 12 months trend, which is the dotted red line. So after 3Q '16, which is the highest peak of DLR even people that were unemployed, they were employed, they were acting as if unemployed. They were so worried that they would be terminated that they were using all their benefits, I mean, like their medical checks up -- checkups and so on, and we observed that. So now we're coming back to normal standards. And as the economy shows that it's getting back to normal and people are more comfortable with their income and their job, we can see a more well-behaved curve compared to DLR history. Just to add, Olivia, to what Rodrigo mentioned, that's exactly it. So the midterm trend is a different DLR compared to what we've seen in the past year. Not only the cycle -- the economic cycle brings in a more reasonable behavior and not so high as we've seen in the past, and now I'm talking about the corporate segment. But even the mix effect given the growth of the portfolio for the SMEs and the individual plans portfolio, OdontoPrev should have a much lower DLR compared to the market because of the exclusivity of these channels, pricing and consumer behavior in specifically in the noncorporate segment. So we see a moment of transition. And the company is very well positioned and maybe with a unique positioning in the market to improve our DLR in the upcoming years based on the economic cycle.

[Operator]

Our next question is from Rodrigo Gastim from BTG Pactual.

[Rodrigo Gastim, analyst]

I'd like to talk more about the news that was in Folia article -- Folia newspaper about marketplace. How is that product working? Tell me about the structure of that product? How you plan on making it profitable? If you can give us some more flavor about the company's strategy in relation to that. How much that could represent in revenues or margin in a qualitative manner, obviously. But to understand better what your strategy is in relation to that product.

[Jose Robert Pacheco, executive]

Thank you, Rodrigo, for your question. I think you got it right in the end, it's the qualitative aspect. So where is this coming from? We had a problem of loyalty with our dentists. So the program started about 3 years ago when we made available for the dentists exchanging these points we would give them 150 items for their practice, just prosthetics, amalgama and so on. And we want our dentists in our network to have first line area -- material. We were giving them these products in exchange for points and delivering them for free as well in their practice. That generated 200, 500, 700, and now 3 years later after starting this operation, we have approximately 1,500, 1,700 items. So now the dentist, 6 months back, started to ask us if they could buy, not just exchange the points that they have accumulated in the loyalty program, but also if they can buy products from us, because we have the bargaining power and an interesting price for them. So they gave us that idea, and we started to just sell up. So now in launch -- in March, we'll launch that which not only the dentists from our network, but also the other 260,000 dentists in Brazil can buy products in this portal that will be launched. So 2,000 -- we'll have 2,000 items. Well, 3 years ago, it had only 150. That will be in an open platform for our dentists and other dentists that are not in -- a part of our network as well. So the dentists that are part of our loyalty program, they can exchange their points, and if they wish, they can buy more products on the website. So the marketplace idea is that there may be a natural evolution as we're selling these products, maybe in the near future given that we have an spectacular brand and well recognized in this sector for our ongoing education programs. Our quality programs are well recognized in the markets. So maybe we can be a major marketplace, a major hub, not just for the products that we currently sell, but also for other product lines. So about the qualitative. This is a baby that we are caring very much for. We're much more concerned on putting some powder on this baby, so they can feel better, be very comfortable, so that this -- being very careful with this, so that this can work throughout the year in a very good manner and efficient manner with the dentists. So we do have plans in the future as this evolves to grow our portfolio and services more and more. Whatever we can add value to our dental community, we will do that as we've done that in the past.

[Unknown Executive]

Just to add, we're talking about dental pack, which is another OdontoPrev initiative, this company is a company that currently makes the purchases for the company. It's a cost item and all midterm strategies for that is trending that into from a cost center to a profit center by creating more loyalty in the dental net -- in the dentist networks. And just so to give you a flavor of the timetables for 2018, opening the platform in e-commerce for other dentists in Brazil, in a country that has largest number of dental professionals in the world. So this strategy is yet another strategy that we have, and we have the pleasure of sharing the first impressions with all of you today.

[Operator]

Next question is from Leandro Bastos from Crédit Suisse.

[Leandro Bastos, analyst]

Actually, I have two questions. The first one is what you already mentioned about the net adds performance of Bradesco Dental, which is a bit weaker this quarter. I'd like to know the average duration of your members in the base today? So that's my first question. And the first -- the second question is relating to the changes in INSS tax collection. So now there's a base municipality. So I'd like to know the impact of that to the company's operations. So you can comment on the first few months in 2018. It's in line with what you expected, and how we can accept these effects throughout the year? Those are my questions.

[Jose Robert Pacheco, executive]

Thank you, Leandro. About the net adds and the Bradesco Dental products, in fact, we have not only in the Bradesco portfolio, but also in the individual plans, the churn, it's intrinsic to individual plans, so given -- especially given how young these products or plans are in Brazil. So it's definitely under 1 year. The company has been launching new products year-after-year. Today, we have annual plans or plans that have a longer duration that's much higher compared to the ones with individual sales. This is the constant challenge. It's not going to change in the upcoming years. It will take a while for us to achieve a duration that's closer to the corporate portfolio. It is a natural risk, not only -- not just the lower duration of the individual plans, but also nonpayment. So there -- that's why it has a risk -- extended risk and translates into a ticket, which is over -- it's pretty much double compared to corporate. So about the INSS, I'm going to hand over to Luis Andre for those comments. Thank you.

[Luis André Blanco, executive]

Hi, Leandro. This is Luis Andre speaking. Just to recap about the INSS so everybody is on the same page. This regulation was changed now in 2018. Up to 2017, the collection of health care operators and dental operators and other industries was made in the municipality of the service providers. So for OdontoPrev, the head -- its headquarter in the city of Barueri. So we were collecting ISS for Barueri based on the revenues coming from our customer base. Barueri has or used to have a 2% nominal rate, which enabled a reduction to the basic calculation and there was a transfer making our rates to go down to 1% for the effective rates of the ISS. As from 2018 and based on the federal law that was approved, now the collection is made in the municipality of the uptaker, so that means where our customers live. Since we have over 5,000 municipalities in the country, be it individuals or corporate, now instead of considering the regulations for the city, we have to consider the regulations for over 5,000 municipalities in Brazil, and each one of these municipalities has their own regulations and own rates which could vary from 2% to 5%. So that's a problem, not just for the dental operators, but also health care and other sectors that will be affected. That affects credit cards, leasing and many other industries. So this is being challenged not only about the constitutional factor relating to this, but also some initiative to somehow try to centralize the collection. But today, currently, based on what we are following in relation to this topic and based -- as from January, our best estimates are that this rate, which up to 2017 was effectively 1%, would be a 2% rate, meaning 200 bps above the ISS. And it's worth noting that the company will be impacted by the rate increase, not to mention the gigantic impact to the country. But on the other hand, the company has the benefit of 300 bps for the positive effect of the INSS that we gained last year. So we will be impacted, as from 2018, by a higher rate of ISS, which are best estimates given the average of the municipalities would be an increase of 200 bps. But it's worth mentioning that we have a positive effect from last year's INSS effect.

[Leandro Bastos, analyst]

Okay. It's very clear. Just a follow-up question. So it's 100 bps. Have you accrued this amount? What are you doing?

[Luis André Blanco, executive]

That's a good question. We can collect it for all the municipalities that we operate in. So we are effectively accruing that. So for the municipalities that we're unable to collect it, we're considering a rate of 3%, so giving us an impact of 2%. So that's a provision, and we're waiting for that to unfold, not only about the many sectors and industries that are challenging that this is -- does not comply with the constitution, and health care and dental operators and other initiatives that are being encouraged by these class entities that would be one-single system developed by Serpro, so it would be collected in a centralized manner for all municipalities. So there is a law that's being analyzed by the senate, where you would be mandatorily have to adhere to the system to collect through Serpro, and definitely that would help a lot and make it -- the operational side easier to collect these taxes. Since that's not fully approved yet, we are provisioning these. We started that in January. For the ones that we didn't collect yet, we're provisioning 200 bps.

[Operator]

Our next question is from Ricardo Rezende from HSBC.

[Ricardo Nasser de Rezende Filho, analyst]

I had two quick questions. First of all, about the corporate segment, about reporting a growth of members and lower trends, but the average ticket only grew 2.5%. So I'd like to understand the dynamic of that growth. And my second question is about individual plans. So the performance about the retail department stores that had a huge drop in the quarter. So I'd like to know what happened there, please?

[Jose Robert Pacheco, executive]

Ricardo, thanks for your question. Starting off with corporate. In fact, the ticket growth was small and the revenues grow though, that's the good news. So we were losing revenues for 4 consecutive quarters, and then it recovers, it becomes positive in the third and also in the fourth. So there is a constructive scenario here for 2018, having growing revenues in the corporate segment resulting from volume and resulting from the ticket. But definitely for ticket it's a very modest variation definitely under inflation given the competitive scenario that we have in the corporate segments. So that's the corporate side. Your second question about the individual plans, particularly retail. So currently retail still represents over half of the individual plans in the overall company portfolio, and that has been changing. That change is very healthy. It's strategic. As the company grows its portfolio and the bank channels, it gains in sales and it has a customer that's more focused on using the product. So without a doubt, the profitability of individual plans has grown in the past years in a significant manner. However, it's also worth noting something that took place in the fourth quarter, which is also an important disclaimer, is the individual plan portfolio of 2 retail partners had a base adjustment of 25,000 members. And that was a determining factor for that portfolio to have a negative factor. So there was a drop in the fourth quarter. So that was a system adjustment, a base adjustment. And we expect that with the midterm vision by maintaining the privilege of having the bank channels as the star players in that, it still hasn't happened, but it's also -- sorry, always -- already happening in revenue, so it's over 50% higher than the average of the retail channel. So the company is going through changes and for individual plans that as you well observed in the fourth quarter. We have that specific situation with one of the retailers, which resulted in a lower number of members, which is 25,000 in the fourth quarter 2017. Rodrigo, would you like to add to that?

[Rodrigo Bacellar, executive]

I'd just like to comment that, that was external to OdontoPrev. That has nothing to do with our systems. That was an adjustment, an external adjustment.

[Ricardo Nasser de Rezende Filho, analyst]

Great. I have another question. At the end of last year in the fourth quarter, you announced the online plans, but it was still early to have any indication about performance. Do you have more flavor on that now about how these plans are performing?

[Jose Robert Pacheco, executive]

Yes, we do. As a general rule, it's not material yet in number of members, but it tripled what it was doing in the digital channel. And another important thing, speaking of the digital channel, is in the launch and closing program. So the first one was e-commerce which you mentioned. And the second one is the sales platform that also enable people that used to call our call center about -- for product information and then were redirected to our portal, now the digital platform -- sales platform can also let them buy on the spot. So by adding these 2 effects, we have 3 to 4 more times more sales. But it's still not a significant volume. It is growing, though.

[Operator]

The Q&A session is now; closed. I'd like to hand over to Mr. José Roberto Pacheco for his final remarks. You may begin.

[Jose Robert Pacheco, executive]

I'd like to thank everyone for their participation. The company is kicking off 2018 with more constructive view. We're very positive, in fact, about the company's strategic planning and the opportunities for differentiation that we find ahead of us. See you soon for our first Q '18 results.

[Operator]

The OdontoPrev conference call is now closed. Thank you for your presence. Good morning, and thank for using Chorus Call.