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Edited Transcript of FLRY3.SA earnings conference call or presentation 26-Jul-19 2:00pm GMT

Q2 2019 Fleury SA Earnings Call

Sao Paulo Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Fleury SA earnings conference call or presentation Friday, July 26, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Alberto Iwata Marinelli

Fleury S.A. - CEO & Member of Board of Executive Directors

* Fernando Augusto Rodrigues Leão

Fleury S.A. - Chief Financial, IR and Legal Officer & Member of Board of Executive Directors

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Conference Call Participants

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* Frederico P. Mendes

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Marco Calvi

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Mariana Hernandes

Crédit Suisse AG, Research Division - Research Analyst

* Olivia B. Petronilho

JP Morgan Chase & Co, Research Division - Analyst

* Samuel Campos Alves

Banco BTG Pactual S.A., Research Division - Research Analyst

* Tobias Stingelin

Citigroup Inc, Research Division - Director

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Presentation

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Operator [1]

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Good morning, and thank you for standing by. Welcome to the conference call of Grupo Fleury to release the results of the second quarter of 2019.

Today, with us, we have Mr. Carlos Marinelli, CEO; and Mr. Fernando Leão, CFO and IRO and also Legal Officer. We're informed that this conference call is being recorded. (Operators Instructions) This conference call is also being simultaneously translated on the Internet and may be accessed at the address www.fleury.com.br/ir, where its respective presentation will be also available. Slide selection will be controlled by you. A replay of this conference call will be available right after it ends. (Operators Instructions)

Before continuing, we would like to say that forward-looking statements made during this conference call relative to Grupo Fleury's business prospects, operational and financial projections and goals are beliefs and assumptions of the company's management. And they are based on information currently available to Grupo Fleury.

Forward-looking statements are not guarantee of performance because they involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that general economic conditions, industry conditions and other operational factors may affect the future performance of Grupo Fleury and may lead to results that will be materially different from those expressed in such forward-looking statements.

Now I would like to give the floor to Mr. Carlos Marinelli, who's going to start the presentation. Please, Mr. Marinelli, you may start.

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Carlos Alberto Iwata Marinelli, Fleury S.A. - CEO & Member of Board of Executive Directors [2]

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Good morning. Thank you very much for attending our conference call to release the results of the second quarter of 2019. Initially, I would like to highlight that even though we have a challenging market and an economy that does not yet show any clear indication of recovery, we have been keeping a consistent pace of growth based on a portfolio of brands that continues to attract new customers and keep a level high of satisfaction with our medical customers, patients and health carriers.

Focusing on our long-term strategy and sustainability of returns to our shareholders, we have advanced in the evolution of Fleury brand with a business platform with initiatives going beyond diagnostic medicine and then are connected to who we are, a company of medical knowledge.

Innovation has always been part of Grupo Fleury, has been gaining shape, not just in the evolution of personalized and precision medicine platform, but it is also present in the improvement of our service processes, in better management of our assets and focusing to improve the experience of our customers.

Now moving to presentation on Slide 3, we highlight the main financial indicators of the second quarter. I would like to highlight that for comparison purposes, the numbers that will be presented below are being reported without IFRS 16 effect.

Gross revenue had a growth of 8.2%, totaling BRL 788 million. We highlight that this growth, among other highlights, was impacted by the recovery of Fleury brand, which grew 6.2% in this quarter.

Cancellations represented 1.3% in the period and have remained stable in relation to the same period in the year before.

The recurring EBITDA reached BRL 1.91 million (sic) [BRL 191 million] with a growth of 6.6%. A recurring EBITDA margin reached 26.2%. And net income reached BRL 90 million, presenting a growth of 4.2%.

ROIC, without goodwill, reached 35.8% with impact of nonrecurring effects and the acquisition of Lafe Serviços Médicos. In the second quarter of 2019, we had nonrecurring effects amounting to BRL 18.1 million related to provision for accounts receivable write-off, expenses with M&A and the redesign of the organizational structure. More detail about this will be provided by Mr. Fernando Leão.

We also take the opportunity to say that yesterday, we announced the payout of dividends through interest on its own capital amounting to BRL 63 million or BRL 0.20 per share.

Now we are moving to Slide #4, where we show the operational highlights of the quarter. At the end of the second quarter of 2019, NPS of our brands reached 76.4%, keeping the high level of differentiation of our services and remaining stable in relation to the same period in 2018.

In May, we completed the acquisition of the operation of Lafe Serviços Médicos, which has 21 units focusing on clinical analysis in Rio de Janeiro, thereby strengthening our presence in the second largest market for diagnostic medicine in Brazil. This acquisition complements even further our operations with the brands Labs a+ and Felippe Mattoso in regions where we're not present before or in regions where we have room to continue expanding our operations. The integration started in June and in the first phase, we expect to internalize all process of clinical analysis, bringing it into our technical area of the region to double the current portfolio of tests from 800 to 1,600, to expand the credentialing of units with health carriers and to strengthen the relationship with the local medical community. In addition to these initiatives, we are already integrating the system to benefit the operation with all technical processes, service processes and management processes, for which we are renowned.

In personalized and precision medicine, we have had a significant advance in our test portfolio. We have launched 2 new genomic tests in partnership with startups, Mir Thype and the Pharmacogenomic Panel. Mir Thype assesses the need of surgery in cases of thyroid nodules and may avoid up to 84% unnecessary procedures. The Pharmacogenomic Panel helps to choose the best treatment for different clinical conditions, supporting physicians in choosing the best medication for each patient. We are at the forefront of personalized and precision medicine, continuously developing our portfolio of products, with a significant growth in our volumes in complete symphony with this pursuit of sustainability in our industry, working effectively for the best utilization of resources and higher treatment resolution rates for the medical conditions of the patients that come to us.

It's -- on the strategic front of health care businesses, we have opened this quarter Fleury's Day Clinic in Orthopedics. Connected to our diagnostic excellence in orthopedics, we started offering surgical procedures that may be performed as -- in an outpatient environment, which today accounts for 70% of our orthopedic procedures conducted in the Brazilian population. The value proposition of this new business line provides significant efficiency gains for physicians, carriers and patients counting on the structure that has been sized for this level of complexity. It makes it possible for patients to be discharged on the same day of the procedure with a premium experience with a cost that is below the market. The structure has 2 operating rooms with brilliant post-operating areas. The initial offer already counts with 21 different procedures, and we are already considering expanding our portfolio.

I would also like to mention the awards we received in the second quarter. Weinmann received Top of Mind award in terms of clinical analysis laboratory in Porto Alegre, once again, emphasizing the high reputation of our brands in the southern Brazil. The Fleury brand was recognized for the 18th time in a row for its excellence in customer services as the best in diagnostic medicine. We have also been recognized in a new edition of the ranking BrandZ Brasil, which listed Fleury as the 44th most valuable brand in Brazil.

Now I would like to give the floor to Fernando to continue presenting the results for you, and I'll be available for Q&A.

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Fernando Augusto Rodrigues Leão, Fleury S.A. - Chief Financial, IR and Legal Officer & Member of Board of Executive Directors [3]

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Thank you, Carlos. Good morning, everyone.

We continue with our presentation on Slide #5, where you can see the details of gross revenue per business line. We have had an organic growth of gross revenue in a quarter of 8.2%, totaling BRL 787.6 million, the highlight for the Fleury brand in hospitals, which presented an acceleration in relation to the growth of the last quarter. Service units presented an increase of 7.8%; 6.2% for the Fleury brand; 12.5% for regional brands, excluding Rio de Janeiro; and 6.3% in the Rio de Janeiro brands. Operations in hospitals B2B grew 8.8%.

On the right, you can see the same analysis for the first 6 months of the year. As you can see, the organic growth of gross revenue was 6.6%, of which 6.3% was increase in service units and 7.3% in hospital operations.

On Slide #6, you can see the details of our portfolio. You can see that most of the incremental revenue volume is a result of the evolution of Fleury brand, which accounted for BRL 20.7 million and regional places, excluding Rio de Janeiro, had an evolution of BRL 19.5 million.

Fleury brand presented for the second quarter in a row an improvement in its growth, an increase of 6.2%. A significant part of this growth is a result of same-store sales with an increase of 5.4%. We understand that the growth we present in this quarter is a consequence of the stabilization of number of members in the premium market after a period of drop because of the economic crisis and also because of the comparison basis with Q2 '18 that suffered an impact of the demand reduction caused by the truck drivers' strike and the soccer World Cup.

The regional brands, excluding Rio de Janeiro, represented an organic growth of 12.5%, following the trend of the last quarter. A+ São Paulo brand keeps a strong pace of growth, reaching 23.1% this quarter. Because of the fewer units that we opened in the past 12 months, most of the growth presented in regional brands, excluding Rio de Janeiro, is a result of same-store sales, which grew 7.9%. In Rio de Janeiro, we presented a growth of 6.3% in the quarter with same-store sales evolving 1.5%.

We continue seeing a strong demand for our services in the region. However, this quarter suffered a negative and one-off impact because 2 carriers canceled services in the region. We have already observed the mitigation of this effect in Q3, with an increase of share of other carriers in the region with new health plans covering our services.

On Slide #7, you can see the execution of our expansion plan with the opening of 53 units, representing a new area of 19,400 square meters. The opening corresponds to 73% of the minimal interval of expansion guidance, which estimated the opening of 73 to 90 units by 2021. You can see the aging of the areas that we have opened so far, in which 82% are less than 24 months old and 47% had been operating for less than 12 months.

On Slide 8, you can see cancellations and net revenue. On the left, you can see that the cancellations presented a high level of efficiency, reaching 1.3% in the quarter, stable as compared to the same quarter in the year before. In the semester, it also remained stable, reaching 1.4%. At the right, you can see a growth of 8.2% in the net revenue in the quarter, totaling BRL 728.7 million. Year-to-date, net revenue totaled BRL 1.4 billion, a growth of 7.7%.

On the next slide, we're going to see the main financial indicators. And I would like to highlight once again that on January 1, 2019, we started adopting IFRS 16 leasing. With the objective of making numbers more comparable, we are going to present the indicators without the effect of IFRS 16. All details about the impact of IFRS 16 are -- can be found in our financial statements and in our earnings release.

On Slide #9, I would like to comment about the nonrecurring effects that impacted our operational expenses this quarter. There have been 3 different effects totaling BRL 18.1 million, which due to their significance, we are going to highlight in our performance.

Number one was a provision for the write-off of other accounts receivable amounting to BRL 8.2 million, regarding the sale of 5 units in Rio de Janeiro due to a decision of CADE in 2015 after the company acquired the Labs Cardiolab and today, Labs a+. The second effect is related to higher concentration of expenses with advisory services and consulting for the acquisition of new companies, totaling BRL 5.1 million.

I highlight the completion of the acquisition of Lafe Serviços is one of the main impacts. Lastly, the first -- the third effect is a result of the redesign of our organizational structure amounting to BRL 4.8 million. As in 2016, this project aims to simplify and make the current organizational structure of the company faster. And the effect in this quarter refer to provisions for expenses for the payment of damages. Along the second half of 2019 and during 2020, we hope to present better efficiency in our expenses as a result of these initiatives.

Now going to Slide #10. On the left, you can see our cost structure. In the quarter, we had an increase of 12.3%, which represented an increase of 261 basis points as compared to net revenue. In the semester, we have had an increase of 11.2%, a growth of 221 basis points as compared to the net revenues.

In this quarter, we highlight an increase in the line of direct materials, personnel and medical services. In terms of personnel, we had an increase of 10.5% impacted by an increase in headcount, an expansion of our operations, such as provisions for the annual collective bargaining, which started in May. Indirect materials, the growth was 20.9% with a highlight for the increase in the volume of specialized tests as well as genomic tests. The effect of the mix of tests combined to the mix of brands has led to an increase in the share as compared to the net revenue.

On the right of the slide, you can see our recurring operational expenses. This quarter, we had a reduction of 7.1%, with a highlight for the line of general and administrative expenses, where we had significant efficiency gains in medical care for employees and technical services. The evolution of recurring operational expenses in the semester also went down by 3.1%.

On Slide #11, on the left, you can see that the recurring EBITDA reached BRL 190.6 million in the quarter, a growth of 6.6%. The recurring EBITDA margin reached 26.2%, a retraction of 39 basis points as compared to the second quarter of 2018. And we also remind you that we had impacts that put pressure on margins, especially related to the maturing of our new units and the change in our mix of brands in the results. On the right, you can see our 6-month EBITDA, which reached BRL 387.3 million with a margin of 27.1%.

On Slide 12, you can see the recurring net income, which reached -- we had a growth of 4.2% as compared to the same period in 2018. Net margin was 12.4% as compared to 12.9% in the second quarter of 2018. On the right, you can see the recurring net income in this semester, which was BRL 187.2 million with a net margin of 13.1%.

On Slide #13, on the left, you can see our operational cash flow with BRL 127 million in the quarter, a reduction of 40%. The conversion of operational cash and EBITDA reached 73.6% versus 118.5% in the second quarter of 2018. In the semester, our operational cash flow totaled BRL 196.9 million with the conversion of operational cash and EBITDA of 53.3%. In this quarter, we had a high absorption of cash and accounts receivable resulting from longer average collection times, which reached 70 days as compared to 67 days in 2018.

This longer collection time is nonrecurring and is related to adverse events with change in the billing process of one of our main payers. We do not expect this impact in average collection time in Q3 '19. We also highlight the cash effect of income tax, which explained by the comparison basis of the year before where we had a higher utilization of goodwill generated by former acquisitions, which reduced the cash effects of tax.

On the right, you can see the CapEx in the quarter, which totaled BRL 41.7 million, a reduction of 21.3%, in the second quarter of 2018. In terms of expansion and improvement of units and technical facilities, investments totaled BRL 9.6 million and were specially directed to the implementation of Fleury Day Clinic and the expansion of the MRI services in 2 units of our brand a+ São Paulo. In others, our investments totaled BRL 32.1 million. The focus was on technology and digital projects. The CapEx of the semester was BRL 89.7 million, a 4.9% increase as compared to the same period in the year before.

On Slide #14, on the left, ROIC without goodwill reached 39.8%. The consequences of the acquisition of the brand LAFE will only be consolidated in our financials as of the next quarter, and we are going to present an ROIC without goodwill of about 41% on the right. NPS has its high level, reaching 76.4%.

On Slide #15, you can see the average daily volume of trading of our shares is reaching BRL 43.1 million in the quarter.

On Slide 16, the Board of Directors approved on July 25, a distribution of interest on its own capital amounting to BRL 63.3 million, corresponding to BRL 0.20 per share. This is going to be paid based on the shareholding structure on July 30, and shareholders will be receiving this amount on October 4.

On Slide #17, you can see the events that have already been confirmed in the future few months.

Now we are open for questions and answers. Thank you all very much.

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Questions and Answers

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Operator [1]

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[Operators Instructions) Ms. Olivia Petronilho from JPMorgan would like to ask a question.

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Olivia B. Petronilho, JP Morgan Chase & Co, Research Division - Analyst [2]

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I have 2 questions. We have seen a shift in trends, especially for the Fleury brand. So what do you see in July for Fleury and other brands? What is -- how has this trend been evolving? And the second question regards new units. Could you give us an update on that, of the new units that you have all been -- how many of them have already been credentialed by health carriers? What do you think is still missing in this process?

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Carlos Alberto Iwata Marinelli, Fleury S.A. - CEO & Member of Board of Executive Directors [3]

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Olivia, this is Carlos Marinelli. Thank you for your question. So the growth of Fleury brand, as we said, has been a significant growth in the second quarter. This does not impact the growth of our regional brands. We still have a significant growth in regional brands. In São Paulo, specifically with a+, we are very confident on its performance because we have a significant growth, more than 20%, both in the quarter and the first 6 months of 2019.

As to the other question, we are still seeing quite an interesting growth in July, and we have been talking with the market sources. In terms of -- with carriers especially saying that the first quarter this year, they felt there was a slowdown. And this is still going on, was like it was carried over to the second quarter. But we think of the sustainability of the industry in terms of frequency prices and everything else. So we started the second half of the year of 2019 with a quite good outlook. In the macroeconomic scenario, there's still a lot to improve. The numbers recently disclosed in terms of job generation was good. And we need to wait what will happen now in the second half of 2019 and next year. I hope there is a turnover in terms of trend. I think that the country has started to grow again and the economy to warm up and pick up.

As to new units, we're still talking with all carriers in terms of credentialing. The process is not simple, not easy and -- so in terms of negotiations. It's also very cumbersome in terms of paper work. It takes time. But they're still working strongly to try to have 100% credentialing. The important thing is that credentialing has been increasing as time goes by, and we see the percentage of credentialing ranges around 60% and 70% on average for new units. Fleury, 100% already credentials, especially. So we are very optimistic.

And also, if I may, when I talk about Fleury, there is Fleury platform, all the new services that we have been working on, the Day Clinic, infusion units and other services we've been working on that are very strong commercially in the market, and this has helped us to strengthen our base in terms of growth in the future.

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Operator [4]

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Mr. Marco Calvi from Itaú BBA would like to ask a question.

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Marco Calvi, Itaú Corretora de Valores S.A., Research Division - Research Analyst [5]

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I have 2 questions. Number one, if you could explain the evolution of the gross margin, if we exclude noncash line, you said that there is a pressure on gross margin year-on-year, it's 3 if you look at cost line. So could you talk a little bit more about that, especially with the brand Fleury, that grew at levels that were very similar to other brands and other businesses of the company? Where do you see the pressure? And is the pressure going to continue, especially in the line of materials. This is question number one. Second, if you could talk a little bit more about the redesign of your organizational structure. What types of benefits are we going to see in the next quarter in terms of expenses and the G&A?

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Carlos Alberto Iwata Marinelli, Fleury S.A. - CEO & Member of Board of Executive Directors [6]

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Our goal is -- this is Carlos Marinelli answering your question. As to gross margin, as you said, you can see an evolution of costs, especially in medical services and personnel, direct material, it's kind of more or less evenly spread in terms of growth. Now what we need to understand on this line that makes us -- in hearing management's confidence about these numbers is that we slice that very well. We break it down very well. We know very well what's going on. And we know that this is a specific event in time. There is a pressure, especially coming from innovation.

So if you take tests that we send overseas, genomics and genetics, you explain most of the cost evolution of our tests. And why have costs evolved because we increased considerably the volume of these 3 items in contrast with automated tests that we have here. So if we are in a premium positioning as we are bringing new technologies, bringing volume of these new technologies as we go to the market and expand the technologies and also the -- as customers and physicians comply and volumes increase gradually and they help us in the long term to reduce the costs, which momentarily in the beginning once you start offering the dilution of fixed cost of machinery of kits is limited. And even with the test that we send abroad, we have a strategy. Once we get a test that we need to send abroad, we want to rapidly in-source the technology through technology absorption or developing the technology in-house, if it's very successful.

For example, unit cost of test, 25% of the variation of unit cost is only related genetics, genomics and tests sent abroad. So even though there is the issue of materials, we need to slice that and to understand very well all the variations. Another thing in that in terms of automated line, we organize these automated tests in a way that, at a certain time, some customers, especially hospitals, we start doing this inside the hospital. So there's a reduction of automated tests here in Jabaquara, but the same test can be done inside the hospitals with a higher resolution rate, with better cost structure. And it creates this effect once we break down all the costs.

So what I mean here in terms of this is that this is part of our strategy that given time, that we affect the gross margin because we are incorporating new technologies. This is our strategic positioning, this is positive in the long run in terms of gross margin and this assures the execution of our strategic positioning of differentiation, both for the brand Fleury and a+. Obviously, this starts with Fleury. But as it extends, we bring this venture to a+ with the expectation of higher volumes and having higher volumes of patients too as to the organizational redesign.

So as we said, you can see the effect that is nonrecurring. This is a significant effect mainly in practice. This is an initiative, something that we need to do all the time. And then we reorganized. And we want to redo our organizational design. So there is a gain of new expertise, the construction of Fleury platform. And just -- practically speaking, there is a reduction in terms of the executive officers. There are certain executive officers that no longer exist. And so we have eliminated some positions of executive officers. So we want to have an organizational structure that responds to market needs and will help us to leverage growth, and that is ready for the future design of high competitiveness.

So I hope I have answered your questions. If there's anything that is not absolutely clear, please I'm available to answer it.

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Marco Calvi, Itaú Corretora de Valores S.A., Research Division - Research Analyst [7]

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Oh, you have answered all my questions. Very clear.

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Operator [8]

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Mr. Fred Mendes from Bradesco would like to ask a question.

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Frederico P. Mendes, Banco Bradesco BBI S.A., Research Division - Research Analyst [9]

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So there has been a significant growth in the Fleury brand. Of course, if we look test by test, there has been a drop. But could you understand more of the -- those dynamics, the increase in this line and also how more complex the test with a higher ticket? How do they impact this line? And secondly, if you could tell us more about Rio de Janeiro of how -- of course, the macro scenario has been an impact there too, but could you tell us more about that too?

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Carlos Alberto Iwata Marinelli, Fleury S.A. - CEO & Member of Board of Executive Directors [10]

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Thank you. Thank you for your question. I'm going to start with Rio de Janeiro. Of course, Rio de Janeiro is a market with its own dynamics. It has ups and downs. But in the second quarter, we had a time that was more difficult, especially if we compare to last year. But there are some specific times in terms of payment base, volumes that were not exactly as we imagined, but this is intense work in terms of positioning, and especially what we have in terms of commercial work, in terms of payer sources for us to organize our payers. So we had a problem with 2 payers, specific payers in the first half of 2019. But we are rebuilding the spaces with other payers so that the growth may go back to the levels we used to have in Rio de Janeiro.

As to Fleury, so this is the usual situation. And this growth in revenue is also part of what we call the Fleury platform with other services. But this is a matter of a specific fluctuation, which we need to look at when we look at the revenue per test. And there are many other factors. And especially for specific commercial negotiations that produce this effect. The most important is that we keep our growth strategy for the Fleury brand, and we have a portfolio for the brand. The portfolio we have wouldn't allow us to migrate to a portfolio that would be a lot different and is not related to differentiated services. So this is very momentarily. And it's okay and it's normal as well.

I hope I have answered your question.

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Frederico P. Mendes, Banco Bradesco BBI S.A., Research Division - Research Analyst [11]

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All very clear.

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Operator [12]

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[Operators Instructions) Mr. Samuel Alves from BTG Pactual would like to ask a question.

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Samuel Campos Alves, Banco BTG Pactual S.A., Research Division - Research Analyst [13]

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I have 2 questions to ask. The first one regards expansion plans. I have noticed that you have slightly slowed down in the past few quarters in terms of opening of new units. So how do you see your expansion plan, your strategy and the opening of new units will be concentrated for next year, even 2021? And the second point -- and I understand it might be slightly a bit too strategic, but whatever you could say, even if a little about the rollout strategy, economic revenue in terms of infusion of medications in Fleury and a+ and your other brands.

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Carlos Alberto Iwata Marinelli, Fleury S.A. - CEO & Member of Board of Executive Directors [14]

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Samuel, thank you for your questions. So let's start with Fleury platform, as you said. What I can say about this segment, of course, we have an ambitious plan for that. It's not limited to the pilot [discipline] for us to grow. But more than anything, it is a plan for us to build a service platform in the market. We have the issue of its growth in terms of beneficiaries, user longevity, everything that we have in the market and meet demands increasing healthier people. And once people are healthier, there is more health promotion, and they are more away from hospitals. They don't go to hospitals if they are not really sick. They only go to hospitals if they have something very acute or crazy.

So the whole platform that we are building in Fleury is a platform to retain these customers, to keep them healthier and healthier, to meet their needs. And so that we have a continuum of care that is not limited only to diagnosis. We want to connect to other needs, you understand, other needs that patients have that they don't have a preferred place to go and so that they have a high resolution rate and high differentiation if they come to us. As to the Day Clinic, for example, we do not want to be a general hospital. We want to have a specific unit. And even improved occupancy rates of general hospitals, directing more complex surgeries for them because they're prepared to do that, and they are better prepared to do that.

As to the economic aspects, as I said, we have an ambitious plan. It starts with diagnostic medicine. And it is a plan that is -- that has capacity of closing the model of the provision of different services that are required by carriers without us needing to invest in assets. It's a plan that is related to our competence and their operations, very much related to patients and physicians. And obviously, it is a plan that aims to improve the profitability of the company as a whole and also of shareholders because we use certain assets in a different way, providing more revenue with the same asset so there is a reduction in fixed costs.

As to our expansion plan, you are right, comparatively to other years, there has been a slight slowdown in our expansion. It is not because it is impossible, but it's because of the economic scenario, the overall economic scenario needs to mature other investments. We need to focus on investments on efficiency, which is what we've been doing considering the current assets that we have. But we are totally prepared to resume the organic expansion growth once there is a clear indication. There is very strong signs of the recovery of economic growth. And although we don't have expansion plan in an organic way, there are 31 new units in Rio de Janeiro. And so a significant organic growth and there is also the credentialing of our units.

So this is sufficient that we have for our expansion plans. I hope I have answered your questions.

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Samuel Campos Alves, Banco BTG Pactual S.A., Research Division - Research Analyst [15]

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Yes, you have answered my question.

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Operator [16]

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Ms. Maria Hernandes from Crédit Suisse would like to ask a question.

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Mariana Hernandes, Crédit Suisse AG, Research Division - Research Analyst [17]

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I would like to ask about SG&A. What is going down and what is recurring? So what is driving the reduction in SG&A? Is it health plans for your staff or anything else? And the second point is related to negotiations with health carriers. Do you see -- do you show tickets with the carriers? The stabilization of the market, is it slightly simpler? Or is there a reduction of cost?

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Fernando Augusto Rodrigues Leão, Fleury S.A. - Chief Financial, IR and Legal Officer & Member of Board of Executive Directors [18]

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This is Fernando. About G&A, well, actually, we're still seeing efficiency gains. So we continue to work to improve internal efficiencies, to improve productivity. We have also had significant changes as we have highlighted in health benefits to our employees. They are the 2 main drivers helping us with that.

As to nonrecurring, we highlight the charge for the period because of the significance and also the coincidence that we have had all these effects in this quarter. For example, we highlight in terms of acquisitions, we had 4 acquisitions. And in previous quarters, we didn't have any expenses because of their material effect. So we decided to highlight this this quarter, also to show how we've been able to capture the efficiency in the line of expenses.

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Carlos Alberto Iwata Marinelli, Fleury S.A. - CEO & Member of Board of Executive Directors [19]

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This is Carlos Marinelli. I'll answer to you about the carriers. Of course, in 2019, it is a year that has been more difficult. It started more difficult because of the overall economic scenario. And we had the expectation and that the macroeconomic scenario would be better. And we did not see this happening in the beginning of this year. It's not any more difficult or less difficult. They've always been hard. And the new economic scenario, whenever there's even good news, even the news that we heard from [CashEdge], it takes a while for things to be reflected in our realized numbers.

And we are still very close to carriers. We have a good partnership with them. And the market will only grow as providers and carriers together have a vision focusing on the customers and the solutions that physicians that are on the other end want to provide good health care for their patients. We continue with that focus, and we have found very good solutions.

So once again, to highlight of Fleury platform, the many new businesses already credentialed by the carriers, they want the credential. We've been talking to them. We want to know their needs. And this is connected to our current assets. And this is -- this has been the [keystone] and will remain the keystone with the health carrier.

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Operator [20]

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[Operators Instructions) Mr. Tobias Stingelin from Citibank would like to ask a question.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [21]

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You've been talking a lot about the platform. SantéCorp, have they produced anything more tangible, anything that may grow in terms of the health plan, specifically? Of the technology what you have learned, what you have studied, what you can buy and sell, it might be something small. But could you tell us more about how this fits into the overall scenario and how this is evolving?

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Carlos Alberto Iwata Marinelli, Fleury S.A. - CEO & Member of Board of Executive Directors [22]

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This is Carlos Marinelli. Thank you for your questions. The theme of SantéCorp is very relevant, especially within the Fleury platform. SantéCorp offers many services, as a second opinion, follow up and then medical cost in companies, this is important. So there are many different types of things that we have under the management of SantéCorp. We have been working SantéCorp in a way that is independent from Fleury. It still has a profile as a startup developing competencies. They are maturing products, developing new things. And Fleury that has the infrastructure, the assets, connection with customers, reputation and many other elements.

What we have been working a lot in connecting these 2 worlds so that together, they may be an effective response for health carriers and payers. And this is still very marginal in the results of Fleury, but it is very clear to us in terms of the strategies that we have chosen. This is a lever for the future in terms of creating a service platform where we're plug in certain solutions and in this manner, we can leverage all the services that we have within the company's DNA, the differentiation and a close contact with patients and customers and physicians.

So creating the environment of high efficiency, high resolution rates and in understanding that their journey in the use of services does not end once they come and have a test done with us. This is a diagnosis. It appears in many different ways as part of utilization. And the diagnosis is a critical element as part of service utilization.

For example, we talk about predictive models, working with a certain patient on a given case, when there's a higher cost or a higher likelihood of gains, if they are appropriately managed. It's important to highlight that any predictive model -- health predictive model, if we take it in a day, using patient history or the information of their office visits, if you add the element of the diagnostic result of the test, you -- there is a significant and exponential improvement in the predictive capacity to see what will happen to them.

So we're capturing the conditions of the patient in a very early time so that the total health cost will be lower than they would have if we didn't have those pieces of information. So we want to embrace patients to manage costs and to provide a solution for employers in terms of the resources that they use -- in the use of health resources, which have been the second highest cost of company, and it has been so for a while.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [23]

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Your long-term plan, do you think that products today, your new products in your platform, how relevant are they going to be in 5 or 10 years? Do you have a long-term plan? Thinking -- could you disclose those numbers for us?

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Carlos Alberto Iwata Marinelli, Fleury S.A. - CEO & Member of Board of Executive Directors [24]

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So how do we see these businesses as relevant in the future? Yes, we do see them as relevant, but we also need to consider that we have a basis of diagnostic medicine that is very, very broad. We are talking about a company whose revenues is close to BRL 3 billion just in diagnostic medicine. So anything that it relates to that has a long way to go.

However, we are choosing very well which are the services that we are going to add to the platform. So it's not just our wish but a response to market demand. So the Day Clinic is that, the infusion center was that. And we are meeting very good reception.

We don't think the future is going to be similar to the past. So the different services -- so we understand that services will be increasingly more connected. There will be a care continuum and customers will prefer to choose a single service provider that has this connection that can -- like a one-stop shop with very good reputation that their physicians trust in and that they might comply with this platform or system and might consume everything they need in terms of health care within that platform in a very effective way, much more economically feasible than today, but still fragmented, everything is disconnected. And this will make it possible for us to generate efficiencies, to improve the use of our assets and also to respond to market needs at the same time.

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Operator [25]

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[Operators Instructions) We'll now end our questions-and-answers session. I would like to give the floor back to Mr. Carlos Marinelli, who's going to make his closing remarks.

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Carlos Alberto Iwata Marinelli, Fleury S.A. - CEO & Member of Board of Executive Directors [26]

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I would like to finalize our conference call, reaffirming our positioning of consolidation in a diagnostic industry, growth of our brands and continue to capture market share. At the same time, we continue transforming Fleury brand into a health business platform and continue evolving consistently in personalized and precision medicine, which has presented a huge potential and contributes to a health care model with better treatment and prevention. All of that is very motivating and is part of our mission to provide increasingly more complete and integrated solutions for health care management and the well-being of people with excellence, humanity and sustainability.

Thank you very much, and have a good day.

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