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Edited Transcript of HAPV3.SA earnings conference call or presentation 14-Nov-19 1:00pm GMT

Q3 2019 Hapvida Participacoes e Investimentos SA Earnings Call

Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Hapvida Participacoes e Investimentos SA earnings conference call or presentation Thursday, November 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruno Cals de Oliveira

Hapvida Participações e Investimentos S.A. - CFO

* Guilherme Nahuz

Hapvida Participações e Investimentos S.A. - IR Director

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Conference Call Participants

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* Vinicius Figueiredo

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

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Presentation

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Operator [1]

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Good morning. Welcome, everyone, to Hapvida Third Quarter 2019 Results Conference Call. Today with us, we have Bruno Cals, CFO; and Mr. Guilherme Nahuz, Investors Relations Director.

We would like to inform you that this event is being recorded. (Operator Instructions) After the remarks, there will be a question-and-answer session for investors and analysts only (Operator Instructions) Today's live webcast may be accessed through the Internet address at www.hapvida.com.br/ir.

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

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

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Bruno Cals de Oliveira, Hapvida Participações e Investimentos S.A. - CFO [2]

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Good morning, everyone, and thank you for being here today. We're very happy to present to the market and to our shareholders our earning release of the third quarter of 2019. This has been another very intense period for us. Last month, we dedicated to expanding our operations and planning the integration of our recent acquisitions, especially the San Francisco Group, based in Ribeirão Preto city in the state of São Paulo. We have finished the processes with the regulating organs, and the close was done on November 1. We're very happy with the conclusion of this acquisition and very happy about our future opportunities. To all of the employees of the San Francisco Group, who are taking part in this conference, I'd like to welcome you.

We also finished the acquisition of Padre Cícero in the region of Cariri in the South of Ceará, and this has been our 28th hospital. In the third quarter, we also added 2 diagnostic units and 1 optic clinic, with new infrastructure and easier access to service, reinforcing our commitment to the quality of the services provided to our members. We have one of the lowest complaint rate, with only 3.23 complaint rate against 4.28 on average, considering the 78 large-sized health care operators in the country.

So let's go to Slide 3 of our presentation. I'd like to emphasize that our company has capped net revenue growth of 13.1% in the quarter. This growth was supported by the number of dental members that increased, outperforming the rest of the industry, and we have about 4.8% growth in the number of health care members and 4.9% increase in the number of dental members. Our member loss ratio dropped compared to the previous quarter, and we also had improvements in our EBITDA with a 23.7% growth, in a total of 268 -- sorry, BRL 235 million in the quarter. Our margin this quarter was 17.9%, our EBITDA margin.

Now let's talk about the macroeconomic scenario. In the North, Northeast and South, the regions where we were more exposed in the third quarter, we have slow pace of recovery. But with the acquisition of the San Francisco Group, our exposure will have a different dynamic because we're now more present in the countryside of the state of São Paulo. After the acquisition of RN Metropolitan and the America Group that are still waiting for the national health care agency approval, we're going to have nationwide operator, and that's why the dynamics is going to change. The macro scenario in the country showing signs of recovery because of the better economic perspectives with GDP growth prospects for 2019 and 2030 (sic) [2020]. In September 2019, our country had, once again, a positive balance in the number of jobs created. These numbers then give us positive prospects, the positive perspective for the health care industry as well.

Now I'd like to give the floor to Guilherme Nahuz, who's going to give you further details about the financial results.

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Guilherme Nahuz, Hapvida Participações e Investimentos S.A. - IR Director [3]

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Thank you, Bruno. Good morning, everyone. I'll try and be brief in my comments so that we can go straight to our Q&A session. In Slide 4 of our presentation, we have further details about what Bruno said in the beginning of the call. This slide shows you the constant investment of our company in our own service network. We closed the quarter with 28 hospitals. The 28th hospital was the Padre Cícero General Hospital, as mentioned before, and so we have a total of 1,842 hospital beds available to our members. We also have 19 walk-in emergency units, 83 clinics and 90 diagnostic units. So you can see the growth.

In total, we have 210 units. We had an increase in the number of beds, basically because of the new operations of the Santa Catarina Hospital in the city of Joinville in April this year and 17 beds from the General Hospital Padre Cícero. We've also had growth because of an increased capacity and increased number of beds in our existing hospitals. So compared to second quarter of 2019, we had a net reduction of 31 beds because we closed the period in the season of viruses. We had lower demand for ICU beds in some units as well. And some hospitalization beds were transformed into pediatric beds in one of our units.

Our own network is measured with a tool that was developed by Hapvida. This tool takes into account several variables, such as expected growth, average productivity and usage profile of each region. We also have our own infrastructure in 12 states, with our physical presence in those 12 states. But now, with the San Francisco Group and with the America and RN acquisitions, we're going to have our own service network operating in 18 states in the country.

In Slide #5, you can see the evolution of the member base. On the left-hand side, you can see the growth of our health members, and on the right-hand side, dental members. So you see that the growth was 4.8% in the number of health members and 4.9% in the number of dental members. The supplementary health care industry is still going through low movement when it comes to the increase in number of members.

Compared to the third quarter 2018, the whole industry had a drop in the number of members, while Hapvida had an increase in the number of members. So you can see that we're still outperforming the market. So you see that we increased 4.9% in the number of beneficiaries, which is great. Bahia and Pernambuco presented organic growth. State of Amazonas also had growth. And Santa Catarina, which was not one where we had members in the third quarter of 2018. Inorganic growth was present in Piauí and Ceará because of the acquisitions at the end of last year.

Compared to the second quarter of 2019, our health care member portfolio had a small drop of around 20,000 lives. We still have a high cancellation rate. There hasn't been any increase or decrease in this number, but it's still high. And we've been impacted by a stricter hiring policy in certain regions. Our goal is to decrease the churn rate and increase contract retention rate. And this has been showing positive results.

In Slide #6, you can see the evolution of our average monthly ticket, health care on the left-hand side and dental on the right-hand side. We've had great growth in the average health care ticket, an increase of 9.3%, 3.2% in the individual health care plan and in the collective health care plan a bit more, achieving this average of 9.3%. And in dental tickets, we've had a growth, an average growth of 1.7%.

In Slide 7, you can see our net revenue growth. So the growth trend has been capped with a growth of 13.1% in the quarter and 14.4% year-to-date. That's due to the increased number of members and also the increase in the average ticket amount, which has been influenced by price increases that were implemented in the portfolio. That was something needed to balance -- to achieve this economic balance in our contracts.

In Slide #8, we can see our medical loss ratio and medical costs. This quarter, we can see the ex-SUS loss ratio. This is the rate that can better represent the performance of Hapvida's operations, and the rate was 61.4%, an improvement of 0.8%. That is a relevant improvement for us because it's happening during a time in which we started operating new health care units, including in Joinville, as I said, so that means almost BRL 9 million more in medical loss ratios there compared to the last quarter. Of course, we also had some positives in administrative expenses. And we also hired new employees in the third quarter of '19 compared to the third quarter of '18. So BRL 7.5 million impact. The vertical model's beauty is that the investment in expanding our own network is quickly converted into cost control to the company. So even though we had all of these impacts, we were able to reduce the medical loss ratio. The volume of hospitalization in our own hospitals went from 92.4% in the third quarter of 2018 to 95.2% in the third quarter of 2019. So a 3 percentage point gain in the volume of hospitalizations in our own network.

So the total medical loss ratio is the last line of the table here that includes SUS reimbursements and provisions for IBNR of 73.3% -- 63.3%, so 0.7 percentage points increase compared to last year, but we have significant increase in SUS reimbursement provisions as well. In the quarter, we had BRL 24.6 million against BRL 6 million in the third quarter of last year. So a difference of almost BRL 20 million comparing the third quarter of 2018 to the third quarter of 2019.

Now something that did not impact the total medical loss ratio was an improvement in the processing of the medical expenses of our accredited network due to improvements in our operating systems with the implementation of the SAP. This implementation happened in the second quarter in our own network and in the third quarter in our accredited network. As a result, we were able to acknowledge BRL 30 million in additional loss ratio, but this effect was offset by the reduction of the IBNR that had a net reduction of almost BRL 30 million. So we think that the medical loss ratio should not be taken into account on its own. We should also take into account IBNR when we look at those numbers.

On the next slide, you can see our selling and administrative expenses. On the left-hand side, you can see the selling expenses chart. We've had a rate of 9.7% in this quarter with the impact of the approval deadline. So we had a positive impact of BRL 1.5 million in the quarter, and year-to-date, we've also had a decrease in the selling expenses, also because of the commission's approval deadline changes. We've had a positive impact of BRL 15 million last year that did not come about this year.

On the chart on the right-hand side, you can see the administrative expenses. The total administrative expenses as a company divided by net operating expenses. So year-to-date, our rate was up 10.7%, with a reduction of 1.3 percentage points. Compared to the third quarter of 2018, that adds a significant improvement for us. We've had impacts of collective salary entries, accounting for about BRL 5 million, and year-to-date improvements were also impacted by that, by the same factors. The numbers are all mentioned in the earnings release that you can see later.

Now in Slide #10, you can see our EBITDA numbers and our EBITDA margin numbers. We're very happy with BRL 235 million in EBITDA in the third quarter of 2019, a 1.6 percentage points gain compared to the third quarter of 2018. So a significant increase. And year-to-date, it is $780 million of EBITDA, 14.5% increase compared to the same period of 2018.

In slide 11, you can see our net income and net margin. The results are very satisfactory. We're happy about those results of almost BRL 216 million in net income in the period, BRL 652 million year-to-date, with a 13.5% increase in our net income and 16.7% increase in our net margin. Our net margins are quite robust. We've had gains even with relevant negative impact, such as the SUS reimbursement. We have already commented we've had a net income increase that is very favorable in spite of that. We've had some positive impact as well on our net income, both in the third quarter of 2019 and in the third quarter of 2018, as you can see.

In Slide 12, our last slide, you can see our free cash flow generation and CapEx. Free cash flow can be seen on the left-hand side and CapEx on the right-hand side of the slide. We've had BRL 62.4 million of CapEx in the third quarter of 2019 due to the investments in our own service network as was said in Slide 4 of this presentation. In the third quarter 2019, we generated BRL 32 million of free cash flow. There is a small reduction compared to the third quarter of 2018, and this is basically due to this larger CapEx. We've also had a few acquisitions in this period with the Padre Cícero General Hospital and Infoway acquisition, and a negative variation of working capital. And this impact can account receivable on September 30. But anyway, we are very happy about our third quarter results, and thus, I conclude my comments.

We're now available for the questions of our shareholders. Thank you.

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Questions and Answers

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Operator [1]

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We shall now begin our Q&A session for investors and analysts only. (Operator Instructions) First question by Vinicius Figueiredo from Itaú.

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Vinicius Figueiredo, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2]

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I'm going to talk about the net increases. We saw a drop in collective and individual plan. For individual plans, you have a stricter policy for the sales of products, which had an impact. What about the collective plan? What impacted the numbers: Cancellation of contracts or sales or some specific performance of one or another region? Now about medical loss ratio, we saw positive IBNR numbers, which was impacted by the implementation of SAP and enhancement of your processes. Will we continue to see gains of this type in the future? Will this implementation have impact on the loss ratio this quarter and in the quarters to come? Also, do you see any movement by the regulator to affect SUS reimbursements?

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Bruno Cals de Oliveira, Hapvida Participações e Investimentos S.A. - CFO [3]

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Vinicius, this is Bruno speaking. So about the individual plan, indeed, in some of the regions, we improved our sales processes, which had an impact in the cancellations rate. But from now on, we believe, our churn of the portfolio will be lower. And as a consequence, we're going to have more efficiency in our sales processes. But generally speaking, we've been feeling great stability compared to what we saw in the past and the economy of the North and the Northeast region. We see many jobs being created and the economy is working better, especially in the Southeast region of the country in the state of São Paulo. And this actually gives us hope for good numbers in the future with the acquisition of the San Francisco Group. And starting in November, our results will also take into account the growth of the San Francisco Group. This growth is actually quite robust. San Francisco is growing 7% a year this year compared to last year. If we take into account all of the acquisitions, this growth will actually increase to around 10% or 11%. So we have great expectations about the investments we've been making in the regions and the launch of new products so that we can continue with our very good growth performance also in the Southeast region of the country and in the Midwest region in the near future as well. So this is very much related to the economic environment, which is still unfavorable in the North and Northeast regions compared to the Southeast region of the country.

Now about IBNR. This is an impact that we see only on this quarter. From now on, we're going to have regular IBN variations, and this was only a specific enhancement that we saw due to the implementation of the SAP system. So from now on, we expect these numbers to go back to normal to the traditional variation of the loss ratio and also traditional IBNR variation.

So now about SUS. That's something we don't have much control over. That will depend on the accounts processes -- processing by ANS. In some quarters, we get BRL 2 million, others, BRL 5 million, or BRL 13 million or BRL 24 million. So indeed, there is a lot of variation, and we have no predictability from -- about what is about to come.

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Operator [4]

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Next question by [Bruno Giordano] from Bank of America.

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Unidentified Analyst, [5]

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I have a question about the medical loss ratio. If we were to exclude the expansion of Hapvida, what would be the medical loss ratio in this quarter? And if we look at the isolated medical loss ratios for collective plans and individual plans, what has been the evolution in the last 12 months?

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Unidentified Company Representative, [6]

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So about the medical loss ratio, in our earnings release, we disclosed all of the impact, and you'll be able to compare this to the third quarter of 2018. So as I said, you have to take into account SUS reimbursement, which is above the normal level, and the IBN variation. Also, we had expenses of personnel of around BRL 7 million, which actually was moved from expenses to costs. So the loss ratio would be closer to 60% with attractive gains compared to the third quarter of 2018.

Now about the individual plans and collective plan behavior, we've had no significant variations. Compared to last year, this is pretty much in line with the total medical loss ratio. So there is no individual factor in the individual segment or corporate segment. They've been evolving pretty much hand-in-hand with what we saw in previous quarters.

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Unidentified Analyst, [7]

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Okay. Now about the first point, the numbers that you released are the enhancements and some expansion operations, right? But last year, you already had costs related to these expansions. So I wanted to understand your running rate of the medical loss ratio, not taking into account these expansions, but we can discuss this off-line later, if you prefer?

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Unidentified Company Representative, [8]

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Sure. But please do the math considering SUS and the personnel expenses reclassification, and then if you need, we can give you further details so that you understand the influence of the new units, especially the Joinville unit.

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Operator [9]

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(Operator Instructions) This concludes the question-and-answer section. At this time, I would like to turn the floor back to Mr. Bruno for any closing remarks.

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Bruno Cals de Oliveira, Hapvida Participações e Investimentos S.A. - CFO [10]

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Thank you, everyone, for participating in this conference call. We're sure we're prepared to make the most of the opportunities that are arising with the conclusion of our acquisitions, and we know that we have built a solid, robust business that can advance quicker and quicker. For those of you who live in Brazil, enjoy the holidays tomorrow, and we'll talk to you soon. Thank you very much.

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Operator [11]

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

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