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Edited Transcript of ODPV3.SA earnings conference call or presentation 6-Mar-20 1:00pm GMT

Q4 2019 Odontoprev SA Earnings Call

Sao Paulo Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Odontoprev SA earnings conference call or presentation Friday, March 6, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* José Roberto Borges Pacheco

Odontoprev S.A. - IR Officer and Interim Financial & Administration Director

* Luis Andre Carpintero Blanco; Administrative and Finance Director

* Rodrigo Bacellar

Odontoprev S.A. - CEO

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Conference Call Participants

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* Emerson Vieira

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

* Joseph Giordano

JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst

* Leandro Bastos

Citigroup Inc, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for holding. Welcome to the Odontoprev conference call to discuss the earnings of the fourth quarter 2019. Today, we have with us Mr. Rodrigo Bacellar, Luis Blanco and José Roberto Pacheco.

We would like to inform you that this event is being recorded. (Operator Instructions) This event is also being streamed on the web via webcast and can be viewed at www.odontoprev.com.br/ri, where the respective presentation is also available. You can control the slide presentation. The replay of the event will be available right after the conference call is over. We would like to remind all webcast participants that you may register any questions in advance via website to Odontoprev, which will be answered during the Q&A session.

Before proceeding, let me mention that statements made during the call relating to the Odontoprev business perspective, projections, operating and financial goals are based on the beliefs and assumptions of company management and on information currently available to the company. Forward-looking statements are not a guarantee of performance as they involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that overall conditions, industry conditions and other operating factors could also affect Odontoprev's future results and, therefore, could lead to results that materially differ from those expressed in such forward-looking statements.

Now I'll turn over the conference to Mr. José Roberto Pacheco, IR Officer of Odontoprev, who will begin the presentation. You may begin.

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José Roberto Borges Pacheco, Odontoprev S.A. - IR Officer and Interim Financial & Administration Director [2]

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Good morning, everyone. Welcome, and thank you very much for your interest and trust. We are Odontoprev. I would like to thank you for attending the company conference call to present the results of the fourth quarter and 2019. This quarter was a quarter of recovery and achievement with a record addition of members after 7 years increase of sequential margin, lower dental loss ratio in all segments, lower bad debt and lower selling expenses. We will also address the new solvency rules according to our regulator, ANS, published this week, which will enable us to increase the dividend flow and payout as from 2020.

Now to begin the presentation on Slide #3, we can see data from ANS since 2012 with the continuous growth of dental plans, even during the difficult years of the recession with net additions of almost 2 million members in 2019 achieving 26 million beneficiaries. The year of 2020, according to preliminary data from ANS, in January started at a high, showing a net addition of 76,000 new members for the dental sector.

On next Slide, #4, we show the evolution of our annual net revenues with a 13% growth higher than 2018, particularly in noncorporate segment with an average annual growth rate basically organic since 2014, up 16% in SME revenues and 26% in individual plans revenues. These levels are much higher than the industry and our main peers.

On Slide 5, and in the next slides, we'll present the figures of the execution of our long-term strategy. We can see that the revenues of the corporate segment were BRL 874 million in 2014, meaning 75% of total revenues, with the ticket of BRL 15.

As we can see on Slide 6, corporate revenue increased 17% in 5 years, with a modest variation of number of members in the period as a result of the unemployment effect.

On the other hand, as we can see on Slide 7, revenues of the noncorporate segment, individual plans and SMEs, which was BRL 284 million in 2014 at the time accounting for 25% of total revenues, presented a 165% growth in the past years, achieving BRL 753 million in 2019, meaning 58% of total revenues. The average ticket of BRL 22 in 2014 increased 50% up to BRL 33 in 2019, as you can see in Slide 8.

I would like to highlight the unique Odontoprev positioning relating to the leadership in developing and expanding the noncorporate segment as we present a higher ticket, less competition, fast growth compared to the market and special annualized contribution margin.

Additionally, reiterating our strategy, the noncorporate products present significant barriers to entry, such as scale and distribution quality, the small or individual customer credit risk and lastly adverse selection.

On Slide 9, we present the consolidated incremental revenue for 2019, 36% higher than 2018. It is worth noting that noncorporate segment accounted for 75% of the new revenues in the year, with noteworthy mention to individual plans as they ended 2019 with a record in incremental revenue of BRL 109 million.

On next slide, Slide 10, we see that Odontoprev added 121,000 new members in the quarter, the best-selling performance since 2012, confirming the positive seasonality.

And as we can see on Slide 11, 212,000 new members in this semester, a record in 7 years, with growth and leadership in all segments and in all regions in Brazil.

On Slide 12, we can see the consolidated cost of services of 44.6% in the quarter, 290 bps lower than the 47.5% in 3Q '19 and the drop in all segments, with the noteworthy mention of an improvement of 670 bps of an expressive improvement in the individual plans. In the per segment breakdown, we can see the effectiveness of the adjustments made by the company, whose results to stabilize the cost of services of individual plans are still expected throughout the next quarter.

Selling expenses, as we can see on Slide 13, have improved quarter-over-quarter, with highlight to the expected drop of 340 bps in SMEs.

On the next slide, #14, we see that bad debt was just 3.9% in the quarter as a result of a lower share in individual plans from department stores and a higher share in the bank channel.

Moving on to cash generation. According to our next Slide #15, we can see that the adjusted EBITDA was BRL 104 million in the quarter, 15% higher quarter-over-quarter, with the margin increase from 20% to 23%, but still low, of course, compared to the excellent margins that we saw a year ago.

On Slide 16, we can see the evolution of shareholder compensation in cash dividends. During the meeting of the Board of Directors held yesterday, an additional dividend distribution was proposed in the amount of BRL 36 million, totaling a 70% payout in 2019. The new ANS solvency rules approved this week will allow us to, as of 2020, based on our understanding, to increase company payout to more than the 85% that we had previously estimated. Odontoprev, as you know, ended the year with a net cash of BRL 560 million debt-free.

The company's investor base, as shown in Slide 17, remains globalized with an approximate free float of 90% with foreign investors from over 30 countries. We are proud to highlight the continuous growth of the number of individual shareholders, which more than tripled in 2019 and continues increasing in 2020, as shown on Slide 18.

On our last slide, #19, we have the pleasure of informing that in January, Odontoprev became one of the 4 Brazilian companies part of the Bloomberg Equality Index 2020, a global index of listed companies that are committed to supporting gender equality by developing policies, agency and transparency.

Once again, I would like to thank you all for your interest and trust in Odontoprev. And now I would like to move on to our Q&A session in our common practice of a 45-minute earnings conference call.

Thank you, all.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Mr. Thiago Macruz from Itaú BBA.

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Emerson Vieira, Itaú Corretora de Valores S.A., Research Division - Analyst [2]

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This is Emerson speaking. I have 2 questions. The first one is that in the corporate segment, we saw a better trend in the ticket even year-over-year. How do you see the new products for the segment? And in terms of the average ticket and pricing, are you able to include the inflation or are you adjusting the contract base less? That's for the corporate side. I'd also like to understand [Technical Difficulty] segment, if you can break down, what has been the contribution of new contracts and how much is the contribution of growing the old contracts, just so I can understand if we will see a derivative of a macro recovery or do you still -- or if we're seeing jobs increasing the net adds? And we saw an improvement in the dental loss ratio compared to the third quarter and the net adds is more controlled. So could you share with us the initiatives that you have implemented throughout the fourth quarter that led to those results? And where do you believe that you're at in the normalization of the individual product curve?

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Unidentified Company Representative, [3]

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Thank you, Emerson, for your questions. About the macro scenario and the impact to net additions, the good news is that the company has been very positive and has been winning new contracts, but we don't see the rhythm of new jobs affecting our corporate. So as it's an industrial one, the (inaudible) data shows that still low-income jobs. We've been able to grow through 2 factors. First of all, in one of -- in the open enrollment, and that's very strong for the company because every day, every week, the company can bring new employees in the contracts that were already signed. That's an important portfolio. It's pretty much half of it, of 5.1 million lives or members that we have in that segment. So once again, for 2020, as in 2019, we have very constructive enrollment and very positive enrollment.

The company has been taking part in bids and there's competition, we've been winning selected processes for important accounts that are switching from other operators or other service providers. Therefore, the growth of members in the corporate segment that took place in the second half of 2019, we can see that in a constructive manner the growth of lives. In corporate segment in 2020 as from the beginning of the year, okay, it's not a milestone yet -- I'm sorry, it's not a recovery of the macro scenario in terms of jobs contributing in the industrial sector, but for the company we already see this as a very positive manner. And it encourages us of having a different volume in 2020 compared to the past years.

Your second question, Emerson, about adjusting the ticket. It's worth noting and remembering the internal dynamic of Odontoprev in terms of inflation. Our cost of services had a modest effect under the inflation rates in the past decade. So we don't see that that would be any different in 2020. And with the expectation of potential frequency, especially in the second half of the year, being lower than that observed in the past years, it is possible to imagine that the loss ratio, mainly in the corporate segment, will be well behaved and even dropping in 2020, therefore increasing the margin in that segment, as we can see, pretty much already in closing -- almost closing the first quarter of 2020.

And the second part of your question addresses the individual segment, just to remind you, the individual segment had a negative highlight in the past quarter. It was the highest dental loss ratio in the company history. At the time, we said that the company's vision, and we maintain that same vision, is that we'll have some quarters working on correction moving into mid-2020. So we haven't changed our perspective or vision. The results have already shown. We see an important drop already of approximately 700 bps in the dental care ratio from the third to the fourth quarter 2019. So we do expect that we will have the lowest dental care ratio in the company portfolio. And as we move from a portfolio of retail products to the bank channel products, we should have a significant margin increase, given the pricing power and lower cost of acquisition as well as very low bad debt in the bank channel compared to the retail channel, department storage channel. So that's something that we wanted to mention.

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Operator [4]

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Our next question is from Leandro Bastos from Citi.

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Leandro Bastos, Citigroup Inc, Research Division - Research Analyst [5]

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My question is about your comment about the new solvency rules that you mentioned in your presentation, Pacheco. Can you explain what exactly changed? And what's the new flexibility for the company? You mentioned that the payout should go from 70% in 2019 to greater than 85% in 2020. So could you comment on that, if you can share any other metrics with us on that?

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Luis Andre Carpintero Blanco; Administrative and Finance Director, [6]

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Leandro, this is Luis Andre speaking. A little bit increase. We already expected for 2020 an increase in our payout to approximately 85%. Yesterday, it was disclosed that ANS approved a public consultation, which was done in the beginning of last year for a new approach relating to solvency. So it's no longer based on the dental care ratio or the loss ratio, and instead it would be based on risk. So that normative resolution was approved yesterday.

In practice, we have new calculation for each kind of existing risk. They already regulate the underwriting risk and give us a term -- a deadline to 2022 for the credit risk, operating risk and market risk. In practice, that would affect the industry in reducing the demand of capital that's required for the operators overall. So in the current rule, you have sort of -- it would scale up. So it would be 100% in 2022 and by adopting this new model, it freezes that in 75% -- or 65% and until the -- all the other risks are completely adopted throughout that period until 2022. So that increase that we have in these different brackets, it's frozen at 75% when we adhere to that risk-based capital.

With them, we will not have an additional increment to capital, to our own regulatory capital. And based on our preliminary studies, don't forget that this was approved yesterday, we can increase the 75% that was initially planned for 2020. And just to add to what Luis (sic) [Pacheco] said, the company would move to a level of 100% discounting the level of 5%, that would take us to 90% to 95% in 2020. So that's a reasonable range for a quarterly payout.

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Leandro Bastos, Citigroup Inc, Research Division - Research Analyst [7]

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Great. Just a follow-up on that, just to understand -- let me see if I understood. So it's now 75% and by 2022 you're going to have a variation depending on the other risks. Is that correct for credit, as Luis mentioned? And just one other question on my side. The new rule was approved per industry, so health care and dental, or is there a difference according to the different type of operators?

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José Roberto Borges Pacheco, Odontoprev S.A. - IR Officer and Interim Financial & Administration Director [8]

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Yes, it's 75% considering the ceiling. And according to the regulator would be enough to embed the underwriting risk, where the model was already included, and the operating and credit risk and market risk, which will be regulated by 2022. So in my opinion, I believe that the -- well, obviously, in the regulator's opinion, in 2022, based on the new rules for all the risks, it would decrease from the 75% that's currently expected. And it's for the entire health care market, both for dental and health.

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Operator [9]

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Our next question is from Mr. Giordano from JPMorgan.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [10]

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I have some doubt -- a doubt about marketing expenses from the company. They've been increasing. Are you endeavoring more efforts to activate the sales channel and -- on marketing? The second question is about the performance of BB Dental. So what the activation is? I know that you're very close to Bradesco, but the performance is very diverse considering the 2 platforms.

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Rodrigo Bacellar, Odontoprev S.A. - CEO [11]

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Rodrigo speaking. I'd like to answer about marketing. Actually, we have an annual budget of marketing, but the campaigns that we're going to work on doesn't always go into the quarter -- the previous quarter where it should. So last year, the campaign, it went in -- last year went into the third and not the fourth quarter. So it's not that there was an increase where we were trying to increment or something like that. It was just an increment or chatter from -- increment from the third to the fourth quarter than what we were planning. And if you analyze that, year-over-year, you can see that's very much in line.

In relation to Banco do Brasil, I think that the challenge -- all banking channels have a challenge because they have their products that have to be distributed and sold to meet their customers' needs. So there are some semesters, quarters that do better or worse. We have some of our corporate contracts that were worked -- being worked on for a longer period of time, they have a longer-term maturation to mature, and there's noncorporate. So it's not -- we can't really say what it's going to be on a monthly basis, but there's a way where we're selling throughout the year. And at one point, one may be faster, then another point the other one may be faster. So this is Rodrigo.

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Luis Andre Carpintero Blanco; Administrative and Finance Director, [12]

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Just to add. I've been here since the beginning of Brasildental -- or BB Dental, sorry, the margin itself, since the third quarter of 2019, BB Dental was able to pass Odontoprev in terms of the dividend margin. There's 15 employees. I'm also responsible for finance of the company. So it's very scalable and ready to capture the opportunities that Rodrigo mentioned in the 3 segments.

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Operator [13]

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(Operator Instructions) The Q&A session is now over. I'd like to hand over to our speakers for their final remarks.

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José Roberto Borges Pacheco, Odontoprev S.A. - IR Officer and Interim Financial & Administration Director [14]

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We would like to thank everyone for participating in our earnings call for 2019. We remain very optimistic with the company's differential for the 2020. Talk to you next quarter.

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Operator [15]

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The Odontoprev conference call is now over. Thank you for your presence, and thank you for using Chorus Call.

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