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Edited Transcript of HAPV3.SA earnings conference call or presentation 26-Mar-20 1:00pm GMT

Q4 2019 Hapvida Participacoes e Investimentos SA Earnings Call

Apr 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Hapvida Participacoes e Investimentos SA earnings conference call or presentation Thursday, March 26, 2020 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 & Investors Relation Director

* Guilherme Nahuz

Hapvida Participações e Investimentos S.A. - IR Director

* Jorge Fontoura Pinheiro Koren de Lima

Hapvida Participações e Investimentos S.A. - CEO & Director

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Conference Call Participants

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* Caio S. Moscardini

Morgan Stanley, Research Division - Research Associate

* Gustavo Henrique;Bradesco;Analyst

* Mauricio Cepeda

Crédit Suisse AG, Research Division - Research Analyst

* Samuel Campos Alves

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

* Thiago Capucci Macruz

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's Fourth Quarter 2019 Results Conference Call. Today with us, we have Jorge Pinheiro, CEO; Bruno Cals, CFO; and Guilherme Nahuz, Investors Relations Director. We would like to inform you that this event is being recorded. (Operator Instructions) Today's live webcast may be accessed through the Internet address at www.hapvida.com.br/ir.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Hapvida's 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 can 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. Jorge, who will begin the presentation. Mr. Jorge, you may begin your conference.

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Jorge Fontoura Pinheiro Koren de Lima, Hapvida Participações e Investimentos S.A. - CEO & Director [2]

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Thank you. Good morning, everyone. Thank you so much for taking part in this conference. I have the great satisfaction to tell the market about Hapvida's earnings for the fourth quarter of 2019 and the year of 2019. We are reporting excellent numbers for the quarter and for the year, and we're very proud of them. We have achieved spectacular operating and financial results, and we have reached an unprecedented level for the company in several spheres. However, this is a very sensitive moment because of the coronavirus pandemic in Brazil and in the world. Therefore, before talking to you about our results, I'd like to give you a few pieces of information about how we are preparing to go through this moment.

I have tested positive for the new coronavirus, and therefore, I have been isolated since last Monday, but I have only mild symptoms and have been able to work well at home. And I'd like to tell you that the coronavirus family has been known since the 1960s. This new mutation is highly communicable and contagious, although it apparently has a low mortality rate among the younger population and a bit higher mortality rate among the elder population. The current pandemic, like any viral disease, is an epidemiological event that has a beginning, a middle and an end. People who are contaminated by the virus develop immunity against it. So this is a self-limited event that will go away. Also, as you know, our operations at Hapvida are impacted every year by the viral season, like influenza, dengue, Zika, chikungunya fever, and this is a season that starts in late January, early February and ends in the second quarter. This happens every year. And because of that, our operation has been trained to deal with this increase in the number of patients we have to provide urgent care and also hospitalization at our hospitals. This is part of our business as usual at Hapvida.

Also, our members are concentrated in the north, northeast, countryside of the Southeast and Midwest, which are areas that haven't been as hardly hit by the new coronavirus so far. And we are the most verticalized company in Brazil, and that's why our claims have the lowest possible cost. This is a great competitive edge.

Our infrastructure has over 2,600 beds, including 555 ICU beds right now. And we are very flexible. And we have been expanding the number of hospitalization and ICU beds by new machines and pieces of equipment as well. We believe that this pandemic, however, will not be that intense where we operate, but our infrastructure is prepared for the most challenging of the scenarios. We have created a multidisciplinary commission including physicians, nurses, medical and hospital managers of our company in order to monitor the pandemic. We've been gathering every day and studying the best possible practices to treat and control the disease, using the best experience in the world and in Brazil for that. And we have been talking to the health organs in the country and making sure that we follow all of their recommendations. We are the largest health care operator in Brazil, and so we are also working on communication. We are working to educate the population, in general, our customers, our employees, everyone with videos, photos and recommendations from physicians, which are being communicated in newspapers, TV, radio, website, social network. And we also have a web chat with nurses and physicians so that our customers can clarify their questions. The Ministry of Health, the National Agency for Private Health Care plans and the Federal Medicine Council have given the health care operators all the possible recommendations to cancel elective procedures.

Last weekend, we told our customers that we were canceling all elective services, including elective appointments, elective tasks and elective procedures, except some special cases like oncology, OB/GYN and others. We've been doing that in order to increase our capacity to provide emergency services and hospitalizations that are needed due to COVID-19. And this is enforced up until April 5 and can be extended if needed. The Federal Medicine Council has also made it flexible for us to use telemedicine. We can now provide tele-guidance, tele-monitoring and tele-appointments. We have a great infrastructure to provide telemedicine services with many physicians providing over 10,000 appointments a month. We know that the use of imaging like x-ray can help us to identify the disease. So through our health tech that is focused on artificial medicine called Maida.health, we've been developing an artificial intelligence platform that uses and analyzes imaging, like x-ray imaging of patients that have been diagnosed with COVID-19. The idea is to increase our capacity and speed up the diagnostic process.

We are also taking a close look at our financial and operating indicators like loss ratio, depo rates and contract canceling. We closed the fourth quarter with about BRL 3 billion in our balance sheet from -- in cash flow and liquidity, and this is very profitable. So now we're going to invest in infrastructure to prepare for COVID-19 and in verticalizing claims. We are temporarily suspending all other investments. In M&A, we are suspending all of the projects that were under analysis for at least 60 days.

About our employees. We are studying all of the measures included in provisory measures #927 of March 22, 2020, about labor measures to take on this public calamity. So our risk -- our employees, who are part of the risk group, are working at home. And our employees that work in health care units and had vacations scheduled for April, May and June, have had their vacations canceled, and they will be rescheduled later. We know that this is a great crisis, but we don't know what the impact of the slowdown will be on the economic activity of the country. However, we should remind you that in previous crisis, many customers have come to us. We were one of the only companies that grew number of members during the last crisis. So we think we're in a good position to seize this opportunity.

And finally, I'd like to tell you that we're using our experience of over 40 years in medical hospital management to minimize possible impacts on our operations and to keep on taking care of our customers and employees as usual with our usual warm service, which is so characteristic of Hapvida.

Having said that, I'd like to tell you that we're very happy with the 2019 results. Our members -- our health care and dental members have grown even in this adverse scenario. We have grown 49%, our health care members, and 68% are dental members. And we closed the year with an extra 6 million customers. We've made significant and relevant acquisitions in operators, hospitals and portfolios. We are now the only health care system that is present in the 5 regions of Brazil. And starting in the fourth quarter of 2019, with the acquisitions of São Francisco Group and América Group and RN in Rio de Janeiro, our expansion -- our exposure became national. We are now present nationwide. And when we implement our business model in these new regions, we are going to connect millions of customers that will have access to an intelligent health care plan like Hapvida.

We closed the year with 39 hospitals due to our acquisitions and our organic growth. Our constant investment in our own network and the verticalization of claims will enable us to continue offering a high-quality product at an affordable price to everyone. We made 2 major operations in the capital market. We have issued debt with a debenture of BRL 2 billion and a public stock issue of BRL 2.6 billion, which will enable us to continue expanding and strengthening our own network infrastructure.

When it comes to health care quality, last year, we have adopted a revolutionary tool called 5 Star Service. This is a satisfaction survey that all our clients receive after being seen at one of our centers. Throughout the second semester of 2019, we gathered over 2.6 million assessments by customers. Our overall average was of 4.46, which is an excellent result. This is a valuable tool for the whole company. With that, we're going to be able to see opportunities for improvement and see where we're doing well.

In 2019, many programs have been developed at Hapvida to offer high-quality services. For example, VidaHap is our umbrella of programs that focus on quality of life, preventive medicine and health care promotion. This is a program that has been expanded and is present in Fortaleza, Recife and Salvador. We have a program that focuses on decreasing the complications related to diabetes and has a total of 5,300 participant members, and we have had excellent results so far.

And we have also launched Qualitotal, which is a quality certification program that is now implemented in 14 of our hospitals. We're also strengthening the standardization of our procedures in our -- with implementation of 75 medical protocols in our ER units.

In 2019, we've also implemented many projects that reinforce the focus of our company on innovation and digital transformation. For example, the use of facial recognition to complement biometrics. This is a new -- and we also have a new technology to monitor vital signs of fetuses. We have medical auditing that uses artificial intelligence and machine learning through Maida, our health tech. We have implemented SAP and an ERP in all of Hapvida's units. This is all to prepare Hapvida for the future.

Our claim management initiatives have also started to achieve excellent results. Our ex-SUS claims loss ratio has been well controlled, which proves that our business model is quite robust. The rate was 58.7% in the fourth quarter and 59.1% for 2019 as a whole. And our net profit was BRL 866.6 million for the year.

So we're very optimistic about our integrations. We can see that our plan has been followed strictly without major surprises up until now. We're very confident, and we think that we can reduce the total time of integration for the São Francisco and América groups because we can deliver on the promised synergies.

Now I'd like to give the floor to Bruno Cals, our Financial Director; and Guilherme Nahuz, our Investor Relations Director, who will give you further information about the fourth quarter numbers, and then we can move on to our Q&A session. Thank you very much.

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

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Good morning, everyone. Let's please move on to Slide #3. Here, you can see the main highlights of the fourth quarter of 2019 and 2019 as a whole. These are consolidated numbers. We have Hapvida numbers and the 2019 acquisitions, São Francisco and América Groups included here.

In the fourth quarter of 2019, our net revenue had a 47.4% growth compared to the fourth quarter of 2018 and 23.1% for the whole year compared to 2018. Our ex-SUS MLR means that we have had a great control with a reduction of 1.6 percentage points.

We also had great EBITDA growth, and we closed the year with BRL 344.3 million in the fourth quarter of 2019. We've had a growth of 49.1% in the fourth quarter and 23.2% for 2019 as a whole. We're very happy with the quarterly and the yearly results. We've had a strong EBITDA growth, even considering this very high level of SUS reimbursements and some M&A operations as well.

Now in Slide 4, you can see our current investments in our own network. We closed the year as the only Brazilian health care operator with its own hospital network in all 5 regions of the country. After the acquisition of São Francisco Group and América Group and our organic growth, we have added 13 hospitals, 23 walk-in emergency units and 110 clinics as well as 95 diagnostic units. We closed 2019 with 39 hospitals with 2,635 beds, including 555 ICU beds. We have 42 walk-in emergency units, 185 clinics and 179 diagnostic units. This provides our customers with new infrastructure and quick access to service. This reinforces our commitment to the quality of the service we provide to our customers.

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

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Guilherme Nahuz, Hapvida Participações e Investimentos S.A. - IR Director [4]

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Thank you, Bruno. Good morning, everyone. I'll try and be brief in my comments so that we can open for questions.

In Slide 5, you can see the number of members in our company. You can see the history of our company since 2016, and you can see that we've had a strong growth in recent years. From 2018 to 2019, we had a 49% growth, which is quite significant when we include São Francisco and América in the group. Our organic growth was of 3.7%, basically focused on our operations in Joinville and Santa Catarina that started in early May and are doing really well. We've also made investments in Bahia, Pernambuco and Manaus. An organic growth of 3.7% is quite robust when we compare to the rest of the market players, which did not grow last year and in some cases, even decreased. So we are very happy with this growth. We also had quarterly growth in both portfolios, the individual health care plans and the group health care plans, both of them grew.

And in Slide 6, we can see our dental portfolio, which was quite similar to the health care portfolio. Our organic growth was very strong, 1,100,000 lives to 2,800,000 lives from 2016 to 2019 with a very strong organic growth. When we include the numbers of the São Francisco and América Group, we reached almost 70% growth in 1 year. So we see there is a great opportunity for growth in the region of Goiânia, Aparecida de Goiânia, Anápolis and neighboring municipalities that contributed to 3,000 lives to our dental portfolio. And we think that we can continue growing at the same rate that we have been growing up until now. The organic growth of our company was basically concentrated in the state of Ceará and Bahia, Pernambuco and the Federal District, where we were able to sign some very significant contracts.

In Slide 7, on the left-hand side, you can see the average consolidated ticket. Here, we are adding up Hapvida São Francisco and América, BRL 191.25 by the end of the fourth quarter, a 10.5% growth compared to 2018. And that's basically due to price increases in our current contracts in order to achieve an economic balance in our contracts.

On the right-hand side, you can see the average ticket per company. These numbers are being shown for the first time. You can see that the tickets are quite similar, especially São Francisco and Hapvida. And América's ticket is a bit lower, BRL 164. And Hapvida is growing a bit over our consolidated numbers at 10.8%.

You can see the evolution of the monthly consolidated ticket for dental. Hapvida had a 3% growth, as you can see. And individual plans have grown more in this period of time, and we're very optimistic about this type of contract. We don't have the numbers of the average ticket of the América Group that started March 2020. We have started selling our dental products in the América region with the Hapvida brand.

Now in the next slide, you can see our net revenues. We have grown by 15% excluding acquisitions, so a quite robust growth compared to the fourth quarter of 2018 and 47.4% growth, including our acquisitions. As Bruno said, we are considering 2 months of revenues of São Francisco, only November and December, and 1 month of revenue of the América's group, and we've had this 47% growth. In December 2019 compared to December 2018, our revenue grew by almost 70%.

Here on the right-hand side, you can see our yearly growth of 14.5%, ex-acquisitions. That's because we increased the number of members, and we adjusted our prices. Now if we add the acquisitions, that growth was of 23.1%, considering only 2 months of the São Francisco Group and 1 month of the América's group.

In Slide 10, once again, you can see that the numbers are impressive. We are very happy about the numbers we're showing you today. The beauty of this vertical and integrated model can be seen here and proven by the numbers we're showing you today. Ex-SUS numbers were spectacular. As you can see, 58.4% in 2019. These are the best numbers in the history of our company.

We had a positive impact of all of our claim management projects, also our claim verticalization projects that have had great results. We have verticalized tasks, appointments, hospitalizations, and you can see that the numbers reflect the positioning of the company. These are permanent and long-lasting gains. These are not specific cases. This is something permanent.

Now you can see our MLR and medical costs. We have also reduced our total claims, an increase -- an improvement of 0.7 percentage points compared to the fourth quarter of 2018, even though the SUS reimbursement provision had to be very high. So achieving such reduction with this volume of reimbursement makes us very proud of our results.

In Slide 11, an interesting view we're offering to the market, which is the view of the companies that we acquired. We're talking about medical loss ratio and medical costs of the São Francisco and the América Group only. So these are the numbers for 2 months in the São Francisco Group and 1 month for the América Group.

Comparative numbers cannot be shown to you because the years of the -- I mean the numbers of the previous years do not use the same standard, but we have worked really fast in November and December to implement our integration plans, and we have been able to reduce the MLR in those 2 groups. And we can say that we have already achieved improvements compared to the same quarter of 2018. So total MLR was 69.5%, and the preacquisition numbers were around 71% to 72%.

Now in Slide 12, you can see the 2 previous slides put together. Total MLR of São Francisco, América and Hapvida, 58.7% for the fourth quarter of 2019. Compared to the fourth quarter of 2018, this is an improvement of 1.6 percentage points, which is an impressive improvement. And even when we include São Francisco and América, which have a higher MLR compared to Hapvida in a stand-alone, the numbers are still very good, which makes us feel very comfortable with our operations, and we believe that our numbers tend to improve in the future.

2019 compared to 2018, for the whole year, we also had a decrease of 0.5 percentage points. And considering SUS reimbursement provision, that is a 0.9 percentage point increase in the MLR. So once again, fourth quarter of '19 to fourth quarter 2018, an increase of 0.4 percentage points. And 2019 to 2018, 1 percentage point increase. We're very glad with these numbers that includes the loss ratio of São Francisco and América, and they operate with an MLR that is almost 10 percentage points above Hapvida's. And we also had this major impact of SUS reimbursement, which we are going to talk about in Slide #13.

Here, you can see how SUS reimbursement works. So if you have a member using the Unified Healthcare System, which is the public health care system in Brazil, then the National Agency informs the operators. The operators receive the package, and they have 60 days to conduct an analysis and reply to the National Agency or ANS. ANS will then analyze this reply and accept or reject the defenses by the operators. So if the defense is rejected, then the ANS generates what they call GRU, or G-R-U. Operators have to put together provision for this reimbursement. And then the operators will look at the volume of requests they receive, and they use a percentage that is also given to them by the National Agency that is individualized for each operator. And ANS will take a look at this provision and make any adjustments that are necessary. And then you might have to increase the provision, especially when it comes to interest rates, monetary restatement and fines.

In the fourth quarter, we changed our accounting procedures, and we're going to include interest, monetary restatement and fines in our financial results. Up until the third quarter of 2019, the numbers of interest monetary statements and fines were not significant. But once it started to become significant, we decided to include it in our financial results. In the fourth quarter, we had BRL 117.4 million of SUS reimbursement. Part of this, BRL 48.4 million were included in the financial results.

So we've seen that the number of ABIs being presented to the operators is increasing really fast. And the fourth step, which is the feedback given by ANS to the operators, have also taken on speed. And the number of invoices has also increased. So since this is now happening at a faster rate, we've had very high volume in the fourth quarter of 2019 and in 2019 as a whole. But we need to mention that the average SUS reimbursement per member is virtually stable. There hasn't been an increase in the average ticket by member. And the average SUS reimbursement per member is equal or actually lower than other health care operators in the market. In December 31, the stock was of 15 months, and we are going to create an IBNR for SUS as defined by ANS starting in 2020.

So we're almost done. In Slide 14, you can see selling and administrative expenses. On the left-hand side, you can see our selling expenses. We've had a 0.5 percentage point increase, basically because the fourth quarter had been benefited by an increase in the deadline of preferred acquisition costs. So that had a positive impact, and we reassessed this in the end of the fourth quarter, and we saw that there was no significant change. It was only 1 or 2 months difference compared to the previous year.

Now when it comes to administrative expenses, on the right-hand side, the percentages have evolved. We had amortization of BRL 75 million of our acquired companies and an M&A expense of BRL 39 million. That's a one-off event. But our rate is about 10.5% if we exclude the acquisitions.

Now in Slide 15, you can see our EBITDA numbers. We've had a 20% level -- in 2019, 22%, and basically that's due to the fact that I mentioned in previous slides. These are numbers ex-acquisitions. Once we include the acquisitions, there is a small drop, both in the quarterly results and in the yearly results.

Now Slide 16, net income has dropped 8% in the fourth quarter of 2019 compared to the third quarter -- to the fourth quarter of 2018. But we are very happy about our yearly results with a strong growth, even with the significant increase in financial expenses, and SUS reimbursement provision, as I mentioned previously.

And finally, the last slide, you can see our free cash flow that is stable compared to 2018, BRL 440 million of cash flow generation, even with the impact of the SUS reimbursement provision. So we're very happy about these numbers. And of course, we had the positive impact of the (foreign language) depreciation I mentioned.

On the right-hand side, you can see our CapEx, a 15% CapEx increase compared to 2018, BRL 236 million ex acquisition. So not considering São Francisco and América. And this is a result of the investments we've been doing in our

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So now I'd like to open for questions, and thank you very much for your attention.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is by Samuel Alves, Banco BTG Pactual.

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Samuel Campos Alves, Banco BTG Pactual S.A., Research Division - Research Analyst [2]

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I have 2 questions. The first about synergies in the São Francisco and América Group. In your release, you say that the synergies will be achieved faster than expected. And Jorge also said that because of the coronavirus, you are not going to make any investments in organic growth right now. So do you think that the synergies will actually be achieved before expected, even with the new coronavirus? Also, have you seen a significant increase in the number of patients searching services in the State of Ceará because of the new coronavirus?

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Jorge Fontoura Pinheiro Koren de Lima, Hapvida Participações e Investimentos S.A. - CEO & Director [3]

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Samuel, thank you for your questions. About the synergies, as I said previously, we have decided not to take on any new M&A projects right now. However, the investments that were planned in order to enhance the verticalization in the units we are already operating will be kept. And we're going to give priority to them. And yes, we intend to achieve the synergies, even though we're going to face the needs of the new coronavirus in the next months, but we intend to achieve the synergies planned. We are planning to have a complete integration for -- of the São Francisco Group in 4 years and in 3 years for the América's group. We're very confident that our systems will bring many synergies in terms of process protocols and readjustments of the operating model. So I'm confident to say that this will all be implemented before the deadline that we have given you.

About the new coronavirus. In the regions where we operate, with a few exceptions like the State of Ceará, where there is a large number of cases, we have been going through daily reports to see the number of patients diagnosed. In Ceará, we have published a report yesterday, and we had 6 cases confirmed, if I'm not mistaken. I can look up these numbers for you to confirm. So the emergency patients, while this has not increased, we are working really hard to raise awareness of the patients. We have 24-hour-a-day service with physicians and nurses to provide the whole population with information, and we have a web chat to answer questions. And the goal is to prevent people from going to our units if they don't have to. So yesterday, we had like 1,000 people getting in touch with us to answer their questions regarding coronavirus. So we prevent people from going to our units if they don't have to.

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Operator [4]

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Next question by Thiago Macruz, Itaú BBA.

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Thiago Capucci Macruz, Itaú Corretora de Valores S.A., Research Division - Research Analyst [5]

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The MLR improvement was a great highlight of the quarter. Now do you see room for even greater improvement or you think that the main projects that have led to such improvement have already been implemented? Now you had expenses of BRL 40 million related to M&A. Did that happen in the fourth quarter? When did that happen exactly? So these are my 2 questions.

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Jorge Fontoura Pinheiro Koren de Lima, Hapvida Participações e Investimentos S.A. - CEO & Director [6]

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Thiago, so about your first question -- I'm going to answer the first question, and Bruno and Guilherme will answer the second. As you know, we aim to provide the population with high-quality health care services. Our EBITDA was around 20% in 2019, which is completely different from what the other players in the market got. We're confident that we can reduce the MLR of the acquired companies and increase the quality of the services provided by them. So what I mean is that this 20% margin seems to be sustained over time. And we think that in the future, we may have exceptional gains and that can impact our prices. In Brazil, 24% of the population only has health care plans. So we want to achieve the other 76% of the population. So additional gains in margins will be transferred to our customers with fair prices and a more aggressive pricing strategy in order to continue expanding and expanding the access to health care to the Brazilian population.

Now Bruno and Guilherme will talk about the one-off M&A expenses.

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Guilherme Nahuz, Hapvida Participações e Investimentos S.A. - IR Director [7]

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Just to add to this first question, I was looking at the numbers and the report that we published yesterday, said that we had 1 case confirmed in the State of Amazonas, 4 cases in the State of Bahia, 7 cases in the State of Ceará and 3 cases in the countryside of the State of São Paulo. So 15 cases of coronavirus confirmed in the whole of our network.

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Bruno Cals de Oliveira, Hapvida Participações e Investimentos S.A. - CFO & Investors Relation Director [8]

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So the BRL 39 million M&A expenses was in the fourth quarter only. We paid these expenses when we concluded the acquisitions throughout the fourth quarter. We have a team working in the operations internally, but especially the São Francisco acquisition, this is what led to the expenses in the fourth quarter.

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Operator [9]

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Next question by Mauricio Cepeda from Crédit Suisse.

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Mauricio Cepeda, Crédit Suisse AG, Research Division - Research Analyst [10]

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Thank you for your introduction about COVID-19. You said that you were considering this impact in the long term, and I have a question. We know that many people will lose their jobs because of this economic downturn. So my question is, you said that you were suspending your M&A projects. And are there any other measures that you're considering, especially if we consider that many people lose their jobs, then you might lose scale? That's my question.

Now thinking about a long-term horizon, you're now considering SUS reimbursement provisions. Do you have any long-term estimates about what you need to consider when it comes to member reimbursements?

And my third question is in regards of shorter-term horizon. You said that you are postponing elective procedures, and hospitalizations represent significant costs for operators. So how much do you estimate in terms of elective claims that can be postponed in order to free up ICU capacity for coronavirus cases?

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Jorge Fontoura Pinheiro Koren de Lima, Hapvida Participações e Investimentos S.A. - CEO & Director [11]

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Mauricio, so you have 3 questions about the economic scenario, about elective procedures and SUS reimbursement. So about the elective procedures. As we said, about 65% of our hospitalizations are due to elective procedures. So we estimate that a significant part of it can be postponed. Maybe 70% of all of the elective procedures could be postponed, but this is not yet confirmed because we have cases like oncology, obstetrics and others that cannot be postponed, right? But the fact is that in addition to the productive capacity that we have at our hospitals, our average occupancy rate is of around 60%. And we have free capacity in our current operating units. Considering our current beds, only about 60% of them are being used. And this number is going to be reduced because we are postponing elective procedures. And so these extra beds can be used to take care of coronavirus cases. And we also have emergency units with great number of staff, nurses, technicians, and we also have outpatient department staff that can be added to our hospital services without any extra costs, because these are already our employees. So what I'm saying is that we do have this capacity in-house, especially due to our verticalized business model that gives us flexibility to rearrange our staff as we need. So we have the beds available, we're going to reduce the number of elective procedures, and we have staff hired. And our human resources team is already looking up how the staff can be rearranged.

Now we still don't know what the impact will be on the economy. There will be an impact. We just don't know exactly the magnitude of this impact. However, we believe that the whole of the population would like to have health care plans in such a situation. So we believe that this is an attractive product that we have to offer right now. And of course, there will be an economic downturn by small businesses, but I think that we have a very attractive product at this point in time.

As Guilherme said, we went through a moment of crisis a few years ago in our companies to grow. Our cost matrix is the most efficient among all health care operators in Brazil. So we think there is a great opportunity for growth there. So this is a challenging moment, but we need to seize the opportunities, and we think that we have the perfect model for this because we provide our clients with high-quality health care services at affordable prices.

Now I'd like to give the floor to Guilherme to talk about SUS reimbursement.

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Guilherme Nahuz, Hapvida Participações e Investimentos S.A. - IR Director [12]

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Well, Mauricio, about the SUS reimbursement. The market as a whole saw this increase in the pace of SUS reimbursements. And we are creating this SUS, IBNR, which will help mitigate the uncertainty of the amounts for this provision. Historically speaking, the amount per life of SUS reimbursement is a bit below BRL 2. So less than BRL 2 per member. These are the historical numbers of SUS reimbursement.

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Mauricio Cepeda, Crédit Suisse AG, Research Division - Research Analyst [13]

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Okay. So you said BRL 2 per member. Is that per month?

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Guilherme Nahuz, Hapvida Participações e Investimentos S.A. - IR Director [14]

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Yes, that's per month. BRL 2 per member or per life per month.

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Mauricio Cepeda, Crédit Suisse AG, Research Division - Research Analyst [15]

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Okay. Thank you very much for that clarification. Now as far as I understand, 60% of your -- 65% of your hospitalizations are for elective procedures, and you have this workforce that you will rearrange. Is there an economic advantage of suspending expensive elective procedures like an orthopedic surgery, which has much higher costs than a respiratory viral disease?

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Jorge Fontoura Pinheiro Koren de Lima, Hapvida Participações e Investimentos S.A. - CEO & Director [16]

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Well, our team is creating different scenarios -- analyzing different possible scenarios. It will all depend on the number of patients affected by the new coronavirus in the regions where we operate. So several scenarios are possible. We have designed more pessimistic scenarios, more optimistic scenarios, but these are only estimates. We don't know exactly what the intensity will be and what the time line will be. So we'll need a bit more time to be more confident about these 2 variables, like intensity and time line. Until then, what I can say is that we are resilient because of our business model. Our cost matrix has been preparing our units, beds, and the human resources we need to face this pandemic.

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Mauricio Cepeda, Crédit Suisse AG, Research Division - Research Analyst [17]

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Okay. And I hope you get well soon.

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Jorge Fontoura Pinheiro Koren de Lima, Hapvida Participações e Investimentos S.A. - CEO & Director [18]

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No, I'm feeling great, and I'm working even more than if I were at the company. I am isolated here at my house and working morning, afternoon and evening.

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Operator [19]

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Next question by Gustavo Henrique from Bradesco.

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Gustavo Henrique;Bradesco;Analyst, [20]

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Congratulations on your results. I have a question about SUS, the Brazilian public healthcare system reimbursement. You said BRL 48 billion (sic) [BRL 48 million] in interests. So that was accrued numbers, right, BRL 48 million? So what can you expect? Although you have 15-month stock, what can you expect in terms of interests? You think that it's going to be the same in the next quarter, the same level?

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Bruno Cals de Oliveira, Hapvida Participações e Investimentos S.A. - CFO & Investors Relation Director [21]

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Gustavo, this is Bruno here. It's hard to define the amounts. This BRL 48 million comes from the increased rate, the increased pace of collection. The predictability of the pace is what's going to define how much this is going to be. We simply cannot predict it. Also, we can't predict exactly when each procedure will be collected from us by the public health care system. If it takes a long time for them to charge us, then the interest rates will be higher.

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Operator [22]

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Now [Leandro Priva of Condor].

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Unidentified Analyst, [23]

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So do you work with the possibility of regulatory risks considering this uncertain scenario?

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Jorge Fontoura Pinheiro Koren de Lima, Hapvida Participações e Investimentos S.A. - CEO & Director [24]

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[Leandro], thank you for your question. Well, actually, I think it's the other way around. The regulation is going to be affected by the situation, and they will create flexible possibilities for the operators to face the situation. So when it comes to canceling contracts, I think that we need more flexible deadlines. We still need to check if the regulation will make sense in that new situation, but on the other hand, I think that regulatory capital deadlines and costs will be flexibilized. For now, what we know is that we have had the deadlines postponed so that the operators can prepare for the pandemic. So I think this is actually time -- a time in which the regulators will be more flexible than stricter.

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Operator [25]

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(Operator Instructions) Now we have Caio Moscardini from Morgan Stanley.

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Caio S. Moscardini, Morgan Stanley, Research Division - Research Associate [26]

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Can you please tell us what the breakdown is of the members of the corporate health care plans among large, medium and small enterprises?

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Jorge Fontoura Pinheiro Koren de Lima, Hapvida Participações e Investimentos S.A. - CEO & Director [27]

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Caio, we have a strong footprint in individual health care plans. About 25% of our portfolio is made up of individual plans in the north and northeast and 18% in the southeast. Now when it comes to the corporate portfolio, we have many big customers, but unfortunately, I don't have a breakdown in the number of small, medium and large enterprises. I will ask Guilherme to get that number for you. And I think Guilherme can give you a few more details about this right now.

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Guilherme Nahuz, Hapvida Participações e Investimentos S.A. - IR Director [28]

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Thank you, Caio, for your question. Our health care portfolio, considering the São Francisco and the América's group. When it comes to group plans, only 8% are small and medium enterprises. So enterprises with 1 to 29 lives. So 8% of our member base was made up of small and medium enterprises, and we have 27% of individual health care plans. So the rest is of business plans. But I don't have the exact breakdown to give you about small, medium and large enterprises. Medium-sized enterprises would be up to 300 lives. We don't know exactly how many we have. But as soon as we get these numbers, we're going to forward them to you.

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Operator [29]

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Thank you. If there are no further questions, I'd like to give the floor to Mr. Jorge for any closing remarks.

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Jorge Fontoura Pinheiro Koren de Lima, Hapvida Participações e Investimentos S.A. - CEO & Director [30]

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That was great. Congratulations, Bruno and Guilherme, for your explanations. I think it's very clear. I'd like to thank all of our investors and partners in this journey. We're very happy to share our 2019 results with you. We expect to keep on achieving great results, and we're working really hard for that. And I'd like to thank our employees as well for our 2019 results that were above our expectations.

And now a special thanks to our employees who are working really hard to prepare to provide high-quality services in such difficult times throughout the world in fighting this pandemic. I've been seeing great dedication and passion from our employees. I'm really proud to be a part of this team. We are sure that we're going to be able to overcome this challenge and will come out even stronger. This is a moment for us to reconsider what we do and to look for alternatives. And we think that we're going to come out of this as an even stronger company. Also special thanks to our clients, who give us the privilege of taking care of them. We're working to provide them with the best possible care.

Thank you very much, and I hope that we can keep on working well and that you can all keep healthy.

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Operator [31]

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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.]