U.S. Markets closed

Edited Transcript of ODPV3.SA earnings conference call or presentation 27-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Odontoprev SA Earnings Call

Sao Paulo May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Odontoprev SA earnings conference call or presentation Thursday, April 27, 2017 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* José Roberto Borges Pacheco

Odontoprev S.A. - IR Officer

* Luis Andre Carpintero Blanco

Odontoprev S.A. - Administration and Finance Director

* Rodrigo Bacellar

Odontoprev S.A. - CEO

================================================================================

Conference Call Participants

================================================================================

* Leonardo Olmos

Santander, Equity Research - Research Analyst

* Marco Calvi

* Olivia B. Petronilho

JP Morgan Chase & Co, Research Division - Analyst

* Rodrigo Gastim

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, everyone, and thank you for waiting. Welcome to OdontoPrev's First Quarter of 2017 Results Conference Call. With us, we have Mr. Rodrigo Bacellar, CEO; Luis Blanco, CFO; and Mr. José Roberto Pacheco, Investor Relations Officer.

This event is being recorded. (Operator Instructions) This event is also being broadcast live via webcast and may be accessed through OdontoPrev's website at www.odontoprev.com.br/ir, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via the webcast may post their questions in advance on our website. They will be answered during the Q&A session.

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

Now I'll turn the conference over to Mr. José Roberto Pacheco, IR officer of OdontoPrev. Mr. Pacheco, you may begin your presentation.

--------------------------------------------------------------------------------

José Roberto Borges Pacheco, Odontoprev S.A. - IR Officer [2]

--------------------------------------------------------------------------------

Good morning, everyone. We would like to thank you all for participating in this conference call to discuss OdontoPrev's results in the first quarter of 2017.

This is the first disclosure related to 2017. And we are celebrating 30 years of the company's establishment, 19 years of market leadership and 11 years since the IPO. This quarterly call is also starting off with simultaneous translation, and I'd like to greet everyone that is listening to us in English.

Now let's get started. We will begin the presentation on Slide #3, which shows the medical plan sector with continuous loss of members since 2014, totaling a loss of 2.8 million lives. According to Brazilian Healthcare Agencies, the ANS' most recent data. On the other hand, the dental plan sector has been growing its member base year after year, with net additions of more than 2 million members since 2014. In particular, in the first quarter of 2017, the Dental sector, according to ANS' data, added 0.5 million members.

As we can see on the next slide, Slide #4, according to ANS, the membership growth of the dental plan sector in the first quarter of 2017 was concentrated among few companies. Two companies alone with a market share of 13% account for over 70% of the sector growth in the quarter. At the same time, the 3 companies with the highest net adds in the quarter account for 17% of market share and represent more than 80% of the sector growth.

On Slide #5, we demonstrate that revenues increased 6.6% year-over-year in 1Q '17, reaching BRL 350 million and increased 8.6% year-over-year on an LTM basis.

On the next slide, #6, we highlight the strong expansion of individual plans and SME. The individual plan revenues increased by 34%, while SME increased by 15.5% year-over-year in business segments where OdontoPrev counts on, exclusive distribution channels with a high growth potential.

On Slide #7, we analyze the incremental revenues per segment. Individual plans accounted for the majority of incremental revenues in Q1.

On the next slide, #8, we highlight OdontoPrev's unique strategic positioning, demonstrated by the leadership position and the development and expansion of individual plans and SME segments of a higher average ticket. Lower number of competitors accelerated growth compared to the market and higher contribution margins. In addition, emphasizing the strategy, the noncorporate products have significant barriers to entry, such as scale, distribution, bad debt for the individuals and SMEs, adverse selection and IT tools, which are the clear competitive advantages of OdontoPrev's business model.

On next slide, #9, we see an average ticket expansion in all 3 segments. In particular, the biggest increase of 16.1% was in the individual plans, with the highest ticket that has been expanding at double-digit rates since 2014, reaching approximately BRL 38.

On the next slide, #10, we see a net loss of 54,000 lives in the quarter of 2017.

Now analyzing the individual plan segment as we demonstrate on Slide #11. This portfolio had 11% net addition growth in the year reaching 652,000 members in Q1, driven by the higher participation of the bank channel. It is worth mentioning that the Bradesco channel grew 14% year-over-year with net additions of 36,000 lives in 12 months.

Now let's take a moment to analyze the SME segment, starting with Slide #12. SMEs count on the Bradesco channel has the #1 growth driver, which represents 79% of this portfolio. In the first quarter, the SME portfolio reached 912,000 lives, 6% higher year-over-year.

On the next slide, #13, we demonstrate that noncorporate products together represent 25% of total members, 35% of revenues and 39% of the contribution margin in 1Q '17, in line with our strategic planning.

On the next slide, #14, we see that the Dental Care Ratio was 45% in this quarter, due to the lower utilization of the dental benefit, below the 45.2% of 1Q '16 and 49.7% in 4Q '16.

We also demonstrate the behavior of the DLRs per segment, as we can see on the next slide, #15, which is lower in all 3 segments, in which the utilization level was higher year-over-year, but lower quarter-over-quarter.

On Slide 16, we see that selling expenses improved in the SME and individual plan segments, mainly the 210 basis decrease in the SME segment.

As we can see on the next slide, Slide #17, G&A represented 13.9% of revenues in Q1, mainly from personnel expenses.

On the next slide, #18, we see the quarterly evolution of bad debt, which represented 4.6% of revenues in 1Q '17, lower than 5% in 4Q '16.

On Slide 19, we analyze cash generation measured by EBITDA. In 1Q '17, the adjusted EBITDA reached BRL 90 million with a 25.7% margin. And in the last 12 months, the adjusted EBITDA was BRL 302 million with a margin of 21.8%.

On the next slide, #20, we see that net income reached BRL 69 million in the quarter and BRL 216 million in the last 12 months with an ROE of 32%.

Now let's take a moment to analyze the cash flow generation of OdontoPrev, starting on the next slide. As you know, the company remains with 0 debt.

On Slide 21, we highlight the cash flow evolution in the year. As you can see, during this period, there has been a cash generation of BRL 97 million, equal to 28% of revenues. Company's net cash position reached BRL 523 million in March, without any leverage, as you can see on Slide #22.

Our Board of Directors approved payments of dividends yesterday in the amount of BRL 43 million, plus the BRL 13 million interest on capital already paid, equals an 80% payout of the quarter and reaching BRL 1.7 billion since the IPO for shareholder compensation.

Regarding the tax optionalities related to Bradesco Dental in the company on our next slide, #23, the cost of Bradesco Dental of BRL 45 million is now in the final stages. We expect to release the corresponding cash deposits in the short term to -- for the financial statements. As per the company's similar requests regarding -- to the services provided to pension beneficiaries after July 2010, the updated amount reached BRL 288 million as of last December and is awaiting on a legal decision.

On Slide 24, our last one, we demonstrate the company's shareholder structure, mainly in the hands of foreign investors with 95% of our free float.

We would like to thank you all once again for your time and interest in OdontoPrev. So now I'd like to move on to our Q&A session for investors and analysts, and the call will last up to 45 minutes. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Marco Calvi from Itaú BB.

--------------------------------------------------------------------------------

Marco Calvi, [2]

--------------------------------------------------------------------------------

There is 2 questions from my side. First of all, about DLR. You said that there was an improvement in relation to frequencies. So can we understand that, that is a trend, meaning you've already seen improvement in frequency given the macro scenario? So can we consider that the Dental Care Ratio in 2017 should drop sequentially in the future quarters? That's my first question. And the second one, can you comment on competition, especially in corporate? I think in this quarter you lost again an important number of members. So I'd like to know about the competitive environment in the large corporate segment.

--------------------------------------------------------------------------------

Rodrigo Bacellar, Odontoprev S.A. - CEO [3]

--------------------------------------------------------------------------------

This is Rodrigo Bacellar speaking. Thank you for your participation and your questions. In relation to the Dental Loss Ratio (sic) [Dental Care Ratio], as you mentioned, we are very happy -- actually, we're celebrating the result when we look at that compared to the first quarter last year. It was a small increase, but on the other hand, we can see a drop in the other quarters. That's important news. But we're considering the same tone as the other quarters. We're very careful and cautious because we know that there is -- that -- it's a reflection of the economy. And the economy isn't booming that much yet, right? Even if the GDP is going to grow and as we see in the news and from analysts, the job generation will be a bit smaller, even though -- or lower, not as much as we expect even though the GDP would grow. So we're very -- we're happy with the results, but we're very cautious in relation to the future quarters. In relation to the competition, there are 2 ways to see that. We have the active contracts where we have lives that are lost, et cetera, and we also have losing and gaining contracts that happen because of bids. So in that commercial dispute, there is nothing new. We are still gaining contracts. We lose some others. There's nothing new about that. So it's -- but what is still high in Brazil is unemployment. So when we measure that, recall that there is introduction or -- addition, I'm sorry, of lives and -- or leaving lives, and that has affected the company. And as you saw, the decrease that we found in our portfolio is still a result of unemployment.

--------------------------------------------------------------------------------

Unidentified Company Representative, [4]

--------------------------------------------------------------------------------

Marco, and just to add do what Rodrigo just mentioned. In fact, unemployment is the first variable. The competitive environment hasn't shown anything new in the last couple of years. There's some companies that represent the substantial part of lives addition in dental plan sectors in the past year. So there's nothing new in that sense. And the main highlight is the variable of unemployment, which is still very high. So the company continues to focus on value with this long-term strategy and offering differentiated services, particularly in the large corporate segment that you mentioned, okay? Thank you.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Our next question is from Leonardo Olmos from Santander Bank.

--------------------------------------------------------------------------------

Leonardo Olmos, Santander, Equity Research - Research Analyst [6]

--------------------------------------------------------------------------------

My question is about, especially in the individual plans and the churn that we noticed and especially in Brasildental for the past quarters and even this first quarter. I'd like to know if you can comment on any expectations of stabilization or reverting that trend?

--------------------------------------------------------------------------------

José Roberto Borges Pacheco, Odontoprev S.A. - IR Officer [7]

--------------------------------------------------------------------------------

Leo, this is Pacheco speaking. Actually, for Brasildental, the product is -- still doesn't have the commercial priority. The focus in the strategy is mainly focused on the corporate segment and SMEs. For the other distribution channels, be it OdontoPrev through the commercial partnership with department stores or the -- with Bradesco with the individual plans that are through -- distributed through very -- a lot of different channels in Bradesco, yes, there is an important churn. That's a risk factor, and it's something that the company has been observing. There is no -- nothing new in relation to the churn levels in the past years. It's still relevant. And that is mainly reflected upon the structure of the products and the pricing structure. It's important to mention from your question about exploring the dynamic of the ticket. The individual ticket was clearly -- clearly stood out this quarter. It was the acceleration, means in the past 2 years, the 2 digit. And that has been the tone for the last 2 years. So there is a transition effect. The retail portfolio for the company is becoming more and more balanced and actually offered in relation to the Bradesco portfolio growth. And for the Bradesco's portfolio in individual plans has a higher ticket and a lower sales expense. Therefore, the final result is higher. So I believe that, that dynamic is very interesting when we observe that, as we have been mentioning in the past years. And that particularly has reflected in this last quarter with an increase -- a very reasonable increase of the ticket. Would you like to comment, Rodrigo?

--------------------------------------------------------------------------------

Rodrigo Bacellar, Odontoprev S.A. - CEO [8]

--------------------------------------------------------------------------------

I think that it's another figure that makes us happy in relation to Brazil. And now let's wait for the performance in the next quarters.

--------------------------------------------------------------------------------

Leonardo Olmos, Santander, Equity Research - Research Analyst [9]

--------------------------------------------------------------------------------

Okay. So just to confirm, what you're seeing is most of the loss, or almost all of it, was in the retail portfolio, and a result of that is an increase in the individual ticket, because the Bradesco individual tickets and other channels are growing. Is that what you mean?

--------------------------------------------------------------------------------

Unidentified Company Representative, [10]

--------------------------------------------------------------------------------

Yes. That makes sense. So if you take a look at the Bradesco portfolio, it had a recent slowdown lately. But the dynamic in the past years has been a faster growth in the Bradesco portfolio than in the consolidated portfolio of the retail agreements, particularly department stores. So once again, that dynamic is positive and there's a highlight for the tickets and lower sales expense at the end of the day. All right?

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Our next question is from Rodrigo Gastim from BTG Pactual.

--------------------------------------------------------------------------------

Rodrigo Gastim, Banco BTG Pactual S.A., Research Division - Research Analyst [12]

--------------------------------------------------------------------------------

I'd like to insist on the Dental Care Ratio. When we look at that in terms of frequency and cost, that break down, I'd like to know the behavior of these 2 variables throughout the past quarters, especially in the first one. I believe it's because of costs. So I know it's under control, as you've always done for a long time. So I believe that my interpretation that worsening of the Dental Care Ratio is because of frequency. So I'd like to understand the behavior in terms of frequency, especially in individual plans for the people that are still in the portfolio, that have been there for a long period of time so that churn is lower. I'd like to understand that drop between frequency and cost in the Dental Care Ratio world.

--------------------------------------------------------------------------------

Rodrigo Bacellar, Odontoprev S.A. - CEO [13]

--------------------------------------------------------------------------------

I'm going to take the second part of your question, which is about the increase. We prefer to look at the glass half full. So in relation to that increase in the first quarter that you mentioned, that 22% to 24%, if we look one quarter ahead, you can see, we -- from a drop -- from 25% to 24%, and then 27% to 24%, and then the fourth quarter 26% to 24%. So what you're seeing is an evolution of the Dental Care Ratio in individual plans. Now I'm going to pass on to Pacheco to comment on your first question.

--------------------------------------------------------------------------------

José Roberto Borges Pacheco, Odontoprev S.A. - IR Officer [14]

--------------------------------------------------------------------------------

Rodrigo, in terms of the Dental Care Ratio, it has been dropping or decreasing in a consolidated manner. There was that high number up to 2% in the third quarter and 400 points base in the second of 2015. It reduces to less than 200 basis compared to four quarter '16 -- compared to 4Q '16. And now it's negative comparing the first -- quarter over quarter. That's very good news, without a doubt. And that's mainly related to frequency and not currency. So we have a relationship with the network with over 28,000 in the network also based on the long term and much desired contracts. And there is a reasonable amount of professionals that want to join the dental network -- the dentist network. So what we're dealing with the transition from 2016 to 2017 is the frequency effect, which clearly stood out last year, particularly in the second quarter and already starting in the second half of the first quarter last year. And now it's showing the first signs of stabilization. As Rodrigo mentioned, it's still early to say. We have low visibility in the next quarters, in a way that we will follow the next company disclosures and monitor that, exchange ideas with the market about the reality that we will have for 2017. So what to the time being? The movement is closer to history than what we've observed in the figures in 2016. So 2017 is already similar to the historical standard. So that's what we've seen so far, all right?

--------------------------------------------------------------------------------

Rodrigo Gastim, Banco BTG Pactual S.A., Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

Excellent. Very clear. So just a little bit about the end of your answer. So heating up the frequency increases that? And then you're starting to see that in all segments, or most importantly, in corporate, which was probably the one most impacted because of the crisis and employment. So it just corporate, or do you see that in all 3 segments, marginal improvement in frequency?

--------------------------------------------------------------------------------

Unidentified Company Representative, [16]

--------------------------------------------------------------------------------

In relation to 2016, without a doubt, it was corporate where the frequency was higher. It's still hard to talk about the trends for 2017. But what we see is the behavior that's closer to the historical behavior in the 3 segments. So we see a frequency that's much closely to what we've seen in the past, regardless of the customer's business segment.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Our next question is from Olivia Petronilho from JPMorgan

--------------------------------------------------------------------------------

Olivia B. Petronilho, JP Morgan Chase & Co, Research Division - Analyst [18]

--------------------------------------------------------------------------------

I have 2 questions, mainly focused on corporate and in addition. The first one is about the price increase that we may see upcoming now we see lower inflation. So I'd like to know if you are planning on continuing with that? Or if you want to absorb that price impact to the margin or not? My other question is about cross-selling. How much do you see cross-selling in terms of dental plans and health plans in your platform?

--------------------------------------------------------------------------------

Unidentified Company Representative, [19]

--------------------------------------------------------------------------------

Thank you, Olivia. In fact, in the first quarter, we already had a price increase to the SME portfolio of approximately 10% in order to align the product to the market average. What we can -- we've seen from the other competitors that also operate in the SME segment, we've seen that as well. So in the beginning of the year now, aligning the noncorporate products in the company of what's been happening in the market, we have an increase -- 2-digit increase in the individual plans to be implemented in 2Q '17. So that is resulting from the company's opinion that we are -- we do have the right pricing for our products and having a distribution opportunity to distribute our products in channels and thinking on our growth for the future for the upcoming years. So that's what we had to say about price increases, ticket increases in the noncorporate segment for 2017.

--------------------------------------------------------------------------------

Olivia B. Petronilho, JP Morgan Chase & Co, Research Division - Analyst [20]

--------------------------------------------------------------------------------

Perfect. And how about cross-selling with the health plans? Also, talk about corporate and cross-selling with health?

--------------------------------------------------------------------------------

Unidentified Company Representative, [21]

--------------------------------------------------------------------------------

In corporate, the dynamics are different. So the price increases on a case-by-case basis, agreement-by-agreement basis based on the commercial reality in costs and the Dental Care Ratio for each specific client, not to mention, the relationship, how long we've had a relationship with those contracts. The older contracts have a higher level of retention. So that's historical in our commercial portfolio. That's what we have to comment about that in relation to corporate contracts. So you see an evolution of a 1-digit evolution of the ticket. That's been the practice in the past years, nothing new here. That's the company's expectations for this current year for 2017. In terms of cross-selling with health, as you mentioned, it's also a potential activity. It is carried out inside the Bradesco universe and particularly Bradesco Saúde. So that's also an avenue for growth. And it's the same practice, same strategy. The difference is that it's spearheaded by the channel that has the main contract with the client, which is Bradesco Saúde.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question is from Rodrigo Gastim from BTG Pactual.

--------------------------------------------------------------------------------

Rodrigo Gastim, Banco BTG Pactual S.A., Research Division - Research Analyst [23]

--------------------------------------------------------------------------------

I'd like to talk about bad debt, real quick. I'd like to hear from you the -- about the evolution of that line in the past quarters. You can clearly see that there is a natural worsening, of course, because of the mix. But I'd like to understand, because there is a reasonable rate of bad debt. And this first quarter is very similar to the second half last year, where individual has more share and representativity. So considering a bad debt of close to 4.5%, 5% of consolidated revenues in a mix of individual -- in a more sustainable standard in the future, do you think that's reasonable? Or do you still think there is some marginal pressure that's upcoming because of the individual segment? I'd like to hear from that.

--------------------------------------------------------------------------------

Luis Andre Carpintero Blanco, Odontoprev S.A. - Administration and Finance Director [24]

--------------------------------------------------------------------------------

It's Luis Blanco speaking. I'd just like to comment about bad debt. First of all, I'd like to talk about how we see that first segment. And then I'd like to talk about how we see that in consolidated terms with the effect of the mix between the segment has a relevant effect on it. So this is how we see it per segment. In the individual segment, what happened last year resulting from the economic scenario we've seen, not only in the bank channel but also in individual, so bank channel and nonbank channel in retail, we see default escalating throughout 2016. And that was very clear when you look at the levels and -- of collection. It was around these different channels in 2016. They worsened. And therefore, worsened the company's allowance. So in the third quarter, we took some initiative, which I mentioned in the fourth quarter. We introduced the credit card payment medium for some channels which did not have that option for payment to some channels where the non-in-person sale. So what I mean is we changed the way to activate that channel. Regulations enabled us to carry out activation, not only when you sign contract or when you pay. And since it's a non-credential channel, we activate that after the first payment. We also reinforced collection in the renewal of the annual plans, not on the first due date, but in the renovation. So all of these initiatives plus an improvement of the economic scenario that was already felt now, especially in 2017, is bringing down default in the individual segment. So throughout 2016 in this segment -- comparing to the curve of 2016, it has inverted. Of course, it's going up faster than going down, but it's coming. That's in individual segment. But it's important to say not just bad debt but because -- and also -- also in the other indicators, it's important to talk about the mix effect. The individual plans revenues has been growing 30% to 40% year-over-year for a while now. And now the revenues for individual plans, if we just consider the quarter, it already represents 20% of our NOR. So the higher the share of the individual segment in total company revenues and NORs is going to increase bad debt because bad debt in the individual segment is much higher than in the other segments. So to summarize, in the individual segment, as from 2016, we see a trend towards a decrease. And every month, you can see that it's getting better. But in consolidated terms, we have to have that vision of the mix effect, okay?

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

(Operator Instructions) The Q&A session is now closed. I'd like to pass to -- pass over to Mr. José Roberto Pacheco for his final remarks.

--------------------------------------------------------------------------------

José Roberto Borges Pacheco, Odontoprev S.A. - IR Officer [26]

--------------------------------------------------------------------------------

Well I'd like to thank everyone for participating, and I hope to talk to you at our next market event. I'll see you there.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

The OdontoPrev conference call is now closed. Thank you for your participation, and have a good day.