1Q18 Conference Call Transcript April 26, 2018

Transcription

1 1Q18 Conference Call Transcript April 26, 2018 Good morning ladies and gentleman and thank you for waiting. Welcome to OdontoPrev s first quarter of 2018 results conference call. Today we have with us, Mr. Rodrigo Bacellar, CEO, Luis Blanco, CFO and Mr. José Roberto Pacheco, Investor Relations Officer. This event is being recorded and all participants will be in a listen-only mode during the Company s presentation. After OdontoPrev s remarks, there will be a Q&A session. At that time further instructions will be given. Should any participant need assistance during this call, please press *0 to reach the operator. This event is also being broadcast live via webcast and may be accessed through OdontoPrev s website at 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. Jose Roberto Pacheco, IR Officer of OdontoPrev who will begin the presentation. Mr. Pacheco, you may begin. José Roberto Pacheco Good morning everyone. Welcome and thank you very much for your interest and trust in OdontoPrev. I would like to thank you for your participation in this conference call to present the first quarter of 2018 results. Now to begin the presentation on slide number 3, we can see the increase on average ticket, in 5.6%, of which originated in all three business segments. Particularly, the highest increase, the 14.5% occurred in the SME segment. 1 de 12

2 On our next slide, number 4, we can see net additions of 29 thousand lives in the quarter, including the corporate segment, as demonstrated on slide 5. The Corporate segment presented net additions of 9 thousand members in the quarter, compared to loss of 47 thousand members YoY. In the past twelve months there was an addition of 63 thousand members, compared to the loss of 263 thousand members in the previous period. As we can see on the slide number 6, the Company recorded an actual ISS rate of 3%, in the months of January and February of 2018, reflecting the average rate of the municipalities where the Company operates and 2% in March resulting on the STF Supreme Court liminal to suspend the effect of the complementary law 157/16. On the next slide, number 7, we would like to highlight the growth of 2.1% in the revenues of the corporate segment, the best performance since 7 quarters. On slide 8, we would like to highlight OdontoPrev s unique positioning, in relation to the leadership position and the development and expansion of Individual Plans and SME segments, which present higher average ticket, lower number of competitors, accelerated growth compared to the market and higher contribution margins. In addition, emphasizing the strategy, the non-corporate products present significant barriers to entry, such as scale, quality of distribution, bad debt, adverse selection and IT tools, clear competitive advantages of the OdontoPrev business model. Now moving on to our next slide, we can see that the non-corporate segments are becoming more and more relevant, as you can see on the next slide number 9, in which in 1Q18 they account for 37% of the consolidated revenues compared to 25% in On slide 10, our next slide, we can see that the dental care ratio accounted for 41.9% of net revenues in 1Q18, compared to the 45.0% YoY. In the last twelve months, the DCR was 45.0%, 400 bps lower than the previous period. Now moving on to slide number 11, we can see the quarterly evolution of bad debt, which represented 3.6% of the revenues in 1Q18, lower than the 4.6% in 1Q17. On our next slide, number 12, the Adjusted EBITDA reached R$ 106 million, in the quarter 17.7% higher than the R$ 90 million YoY, with margin expansion to 28.7%, 300 bps higher than 25.7% observed in 1Q17. It is also worth noting, as we can see on our next slide, number 13, the growth of 130% of the Adjusted EBITDA of Brasildental in 1Q18, growing from R$2.7 million in 1Q17, to R$6.2 million in 1Q18, with margin increase of to 24.5%. On the next slide, slide number 14, we can see the net income was R$82 million in 1Q18, 19% higher YoY, with an annualized ROE of 31%. In the last twelve months, net income was R$ 256 million, 19% higher YoY. 2 de 12

3 On the next slide, slide 15, net cash, at the end of the quarter, were R$522 million in March, without any debt. Regarding the solvency requirements in order to acquire Odonto System, in this quarter there was no proposal to distribute dividends, in addition to R$12 million in IOC already paid, relating to 1Q18. On our next slide, slide 16, we would like to highlight the record number of investors, of 6,500 shareholders in our base, making us very happy, more than the double of the number seen in 2016, and mainly individuals. The Company s shareholder structure, with a highlight to foreign global shareholders, with approximately 95% of our free float, as you can see on our last slide, number 17. We would like to thank you, once again, for your time, interest and trust on OdontoPrev. Now we would like to move on to the Q&A session for investors and analysts with our practice of conference calls which will last 45 minutes. Thank you very much and good morning. Operator: Ladies and gentlemen we will now begin the Q&A session. To ask a question please press star one and to take your question off the list press star two. Our first question is from Thiago Macruz from Itaú BBA. Mr. Marco Calvi: good morning everyone actually this is Marco speaking. We have three questions on our side, first of all in relation to SME products. We were very surprised with the significant improvement that you had in the loss ratio. So I would like to understand how we can see that moving forward and if you can comment on the reason why the loss ratio significantly improved YoY. The second question is about the bad debt. So there was also an important, significant improvement. So we would like to know if that is because Bradesco has been growing in the company's sales. And the third thing is about your commercial expenses or sales expenses. We see an increase; so can you talk about that and the main reasons behind that increase? Thank you. Mr. Pacheco: good morning Marco, Pacheco speaking, thank you for your question. I would like to start off with the loss ratio and the SME ticket. As you well observed, the SME portfolio has a concentration in the bank channel and now in February we had 3 de 12

4 some price adjustments and launched new products that are more robust, with a higher ticket. That is one of the reasons why the average ticket is different and there was the highlight for the quarter and consequently the loss ratio for that segment was lower compared to the last quarters. So that is the reason why That is what happens in the SME portfolio and has the higher possibility of growth. It is very consolidated, well-established in the bank channels both providing differentiated growth and a higher average ticket compared to the market. So it is a clear competitive advantage in the company and it has been increased noteworthy mention in the past quarters. The second point that you mentioned before I hand over to Luis about bad debt; but just to mention the debt does have a higher share that comes from the individual plans, and the higher the share of the bank channel in the individuals, the bad debt would decrease. So it gains in predictability and quality and also in the consolidated bad debt for the company. Let me hand over to Luis Andre so he can comment about that, thank you. Mr. Luis Andre Blanco: good morning Marco this is Luis Andre speaking. So giving a little bit more flavor about, on bad debt. Bad debt as Pacheco mentioned is mainly related to the individuals segment. So if we start to open, going into details on where it is coming from, there is a behavior from the customers that come from the bank channel and also the customers that come from the retail channel. So when we analyze each channel, we can see that in the both sub segments a reduction throughout the year. So we had a peak back in 2016 and as from that time it has been dropping in all these channels. We still do have a problem in a specific channel in 4Q where one of the partners was making changes and that jeopardized that specific channel a little; but in general terms, in all the channels where we distribute our product, there has been a continuous trend of improvement. Now we only have to organize the last channel which we have not yet given on outside reasons; but in general it is positive in that index. One thing that is always worth noting that I would like to remind people during the calls is that the consolidated bad debt has a growth trend given the higher share of the individuals segment in the overall revenues. So we can never forget that, we have always to bear that in mind. But when we consider just the individuals segment, there is a trend to lower that. Mr. Marco Calvi: perfect. Now in relation to the last question about sales expenses could you address that as well? 4 de 12

5 Mr. Pacheco: Marco about the sales expenses, particularly in the corporate segment in fact in this quarter it was higher. Usually it is just a little bit higher than 5%, and specifically in this quarter it was higher than 7% - so that is an outlier and it should not be repeated if we consider the next projection models. And the company's expectation is going back to the expenses of the previous years, which is a bit higher than 5% in these next quarters. Mr. Marco Calvi: perfect Pacheco thank you. Operator: our next question from Joseph Giordano from J.P. Morgan. Mr. Joseph Giordano: good morning everyone, good morning Rodrigo, Luis, Pacheco. I have a couple of questions. The first one is regarding the competitive environment. I would like to know from you what are you see, what you are seeing in terms of competition and how aggressive it is becoming especially in the corporate segment. We can see the SME ticket and members growth, maybe the competition is not that bad in that segment. And now looking into loss ratio I would like to understand the frequency component. So how have you seen the members behavior? Not only their behavior but also the dentists' behavior in these past quarters, two or three quarters, if you have a more normalized curve. And the third thing is about solvency. Pacheco mentioned solvency in the presentation and so the lower dividend payment to generate more access solvency to absorb Odonto System; but I understand that that is a conversation with the regulator in order to change the rules. I would like to know how that conversation is going. Mr. Rodrigo Bacellar: good morning Joseph this is Rodrigo speaking, I am going to talk about the competitive environment. I do not think there is any changes in the past two years. I think that the scenario that we have been talking about in the calls has remained stable and we can see that the recent IPO is good. The more transparency we have, more information that we get and the better the culture of the dental health environment, that is healthy for the entire industry. So we are receiving our competitors that are now listed with open arms and it will be great for the industry s development overall, without major highlights to the tougher competition or not. It is tough and has been in the past two years and that is the first part of the answer. The second one is about what we expect. Given the competitive environment and the Brazil environment I think that what I would like to mention is that now we have a very 5 de 12

6 constructive vision for Brazil this year; less constructive than it was in the last quarter of last year. So I think that in our conversations with business people, customers and partners, in a certain way we had a more optimistic environment in the last quarter last year then we see now. I am not saying that that is going to change our construction view for 2018 for Brazil and its economic recovery; but clearly in a more conservative and careful level on our side. So that is a bit about the competitive and industry environment that we see coming forward. Now I am going to hand over to Luis about your other question. Mr. Blanco: well now talking about the frequency. The first point is worth remembering that we always have a weaker 1Q if you consider seasonality in terms of use. Because that is vacation period and so traditionally 1Q is a quarter with a lower loss ratio, which is connected to frequency and scales up to the 2Q and 3Q coming back in 4Q. After remind you that, after remembering that and analyzing 1Q, let us think of 1Q how it started. So it started stronger in January, we had a certain change or transfers so to speak from 4Q coming into 1Q and February is in line with our expectations and March per se was a month that was a little bit lower than we usually expect. So there is always a YoY comparison in 1Q relating to frequency and a bit distorted according to when the carnival festivities, holidays so on, which date; but in general the frequency has that type of behavior on a monthly basis. Speaking of the solvency and also I would like to remind everyone on the conference call that today the ANS has a traditional model where there is an adjusted equity, calculated on the basis of the accounting equity and it has to be higher than the percentage over revenues or a percentage of costs. And ANS also allows us to have our own model based on regulation. So what they are within that but no operators in the health plans or in the dental plans has enlisted with their own model - and Odontoprev did list its own model for a market operator with ANS and has been discussing this with them and it is a very slow process given the fact that this initiative is a pioneer initiative in the industry. They required the extra documents and we are gathering that information to submit them in May; and so what we felt at the conversations that we had is that they liked the model, they believe it is suitable and so we are just adding other information based on their request. The adoption of this model, and I think that it is worth mentioning, how would this model be adopted moving forward, going forward? ANS would consider the solvency models 6 de 12

7 considering risk; operating risks; underwriting risks; market risks; credit risk and a fifth risk that I cannot remember right now. So at first, they requested us to base the model on the underwriting risk, which in our opinion is the most relevant risk of all. So that is the model that we presented and we are talking to Diope, which is the board or the management of ANS and they would approve the model. We are very confident we will be able to evolve that and approve that model at some point we believe this year. But the actual adoption of the model and how we are going to do that compared to what we already have that still has to be regulated Not regulated but made clear to ANS given the fact that that is unprecedented, nobody has done this before and this is the first own model that would be registered. Mr. Giordano: I would like to take another question based on that regulatory model. I would like to understand that. Could you give us a flavor of that about your regulating capital? If you could talk about the equity and how much of that would be translated into payout, because that model would hinder the 100% payout in the long-term and so I would like to understand if the cash distribution would be effective, would be 100% or even greater than that it was in the past because of the model. Mr. Blanco: well Joseph what I can say is that in the current model it is just about the model and how it is done, the percentage of revenue or the cost, so the higher of the two. But the scaling that the model has in current regulations is that there is a step. This quarter it is 64% and would achieve 100% in 31 December So what makes the growth of the requirement based on the current rule is not just the growing of our operation; but mainly due to the growth in adopting those up to December 31, That is what makes the requirement grow for equity growth. In relation to that, to the result of the old model, I cannot say anything about that yet because we are still discussing that with ANS and we cannot really talk about the amounts; and of course when we approve that we will inform the market above that model. But what I could say is that at least for our operation here today what we have in terms of equity to cover that solvency, the model that was required, requires less capital based on the model. Just the concept of solvency is the portion of capital that you have to have to cover the volatility of the provisions. So given the fact that the dental market is more stable in relation to a more predictable use - we are using models considering the past, the last five years - so the need of capital in the industry is lower than what is required, it is lower than healthcare; and I would like to remind you that today, the capital requirements in fact are equal for dental and healthcare. 7 de 12

8 When the model is approved we will definitely share that with you; but the trend is that we should have excess capital and the way we would go back to that excess capital to the market is something that we will discuss in the future - but it is probably not going to be immediately, but going back to the specific traditional one, 100% that we were distributing. Mr. Giordano: perfect thank you very much Luis and Rodrigo. Operator: our next question is from Ricardo Rezende from HSBC. Mr. Ricardo Rezende: good morning everyone. Actually I have two questions, the first one is more specific. Looking at the Capex for this quarter, there was something on IT line. I would like to understand if that was a specific project, something more on the digital side that requires more investments and how we are going to see that in the future. and my second question is related to the individual plans. They have higher levels YoY, it is a kind of stable QoQ. So I would like to know how much of that is influenced by the change that you had in the sales channel in the last two quarters with retail losing members and how we are going to see that in the future especially in the individuals segment, thank you. Mr. Pacheco: hi Ricardo and good afternoon to you in London. So in relation to Capex the company is in fact expanding its initiatives in the digital world and technology is what accounts for most of our Capex in the past years and in 2018 it will be no different. We have been practicing investments levels of 15 million BRL. This year we should have higher investment levels of approximately 25 million BRL, which is not very representative in relation to the annual cash generation; but it does reinforce the company's commitment to state of art technology, and the digital world is an essential aspect of our business strategy. So that is the Capex levels that we have been having and 1Q 18 is already in line with that. I am going to start answering about the individual plans and revenues and loss ratio that you mentioned. In fact the company has been observing a change in the mix within the individuals segment and that is very important, because first of all the average ticket of the bank channel is higher than the retail channel; and the sales expenses for the retail channel is much higher than the bank channel; three, the bad debt level - and we already talked about that - that is lower in the bank channel compared to the retail channel. Since most of the portfolio is still under retail in members, number of members, the quality of the P&L of the individual segment has improved substantially and that is what we expect for the coming years. 8 de 12

9 In the bank channels, they should become the greatest part of the revenues of the individual plans in the next years. So that is what we are experiencing right now, a period of transition. I am going to hand over to Lewis Andre so he can comment as well. Mr. Blanco: when you have a change of that mix of the sub segments of the individual plans, the contribution margin will definitely increase with a higher share of the bank channels; and with a higher participation of individuals segment in the consolidated that increases the contribution margin consolidated. So we cannot lose those to mix effects: one is the mix of bank and non-bank in the individual plans; and the other one is the mix between not corporate and corporate in the total. So it is becoming more and more representative and that mix effect is showing more and more in our consolidated financial statements. Mr. Rezende: okay great thank you. I would like to follow-up on that in the individual channel. So as you mentioned in the presentation there is still a specific problem with one of the channels in retail. You are losing members, but it was already much lower than 4Q; do you think that is going to become stable in the 2Q and 3Q or should we only see that becoming stable at the end of the year in that channel? Mr. Bacellar: hi Ricardo this is Rodrigo speaking. First we are working with a scenario that throughout the 2Q and 3Q that should become stable again. Mr. Rezende: okay great thank you guys. Operator: our next question is from Adeodato Volpi Neto, Eleven Financial. Mr. Adeodato Volpi Neto: good morning. I would like to have an idea about the loss ratio. When we look at the corporate segment in 2016 it was 56% at the peak of the crisis and we talked a lot about that, the important layoff cycle and acute crisis moment where people were looking for treatment because they had coverage and they were worried about being laid off. Considering that, do you think it is reasonable to see that the levels will settle at lower levels in the loss ratio, especially in the corporate plans segment? Mr. Pacheco: good morning thank you for your question. Yes, that is the case in fact. We have seen in prior years during the years of recession a higher loss ratio, which was mainly driven by a frequency that was outside the historical levels. When the level of trust increases and when the company and the market have an expectation of a positive GDP and enployment, it is very natural to see in the three business segments, particularly in the corporate segment, a frequency of use closer to the historical patterns, which leads us to an upside and a differential in terms of the loss ratio compared to the recession years, particularly up to mid-last year, mid de 12

10 So that is a new cycle that is beginning. Obviously it is very positive for the company's margin and we can capture that benefit, which is driven by the non-corporate segments, where in that case you have the possibility of differentiated or additional pricing compared to the exclusive channels of the company, and the company can be a pioneer in servicing a new type of customers in noncorporate customers. Thank you for your question. Mr. Volpi Neto: great and one more question just real quick if I may about the distribution of products in Bradesco do you see any movements in terms of incentive programs at the end in integration of the products in the goal plans, retail goal plans of the branches and if that could lead to an effect in resuming things in 2018? Mr. Pacheco: that is a constant path. The company has been in recent years introducing products in the SME segment and also in the individual plans segment. That is very new; it accounts for 35% of our revenues and 10 years ago it was pretty much nothing and now it accounts for over one third. So it has been growing even in the recession of the past years. So we are absolutely focused on that, in the quality of that opportunity for differentiation and innovation. So the company has a strategic positioning that is very clear and differentiated. These two noncorporate segments are high priority. So year after year we want to bring in new products to encourage people to learn about this new product in the market and count on channels that are absolutely aligned with the company in developing their own brands, like Bradesco and BB as you mentioned and that have higher potential for members than the corporate. And I think that is going to become more and more clear for OdontoPrev in the future. Mr. Volpi Neto: thank you Pacheco. Mr. Bacellar: let me add to what you mentioned. That is a very important aspect of the commercial activities when we consider noncorporate and corporate, which is adding to the network throughout time. So that is what I meant. In addition to the goals and objectives, there is a thing about being part of training, being part of meetings, being available for visits and so one. So that is a part of our day-to-day with the bank channels. Mr. Volpi Neto: okay thank you. Operator: our next question is from Leandro Bastos from Credit Suisse. Mr. Tobias Stingelin: hi this is Tobias, good morning Pacheco. Just to clarify: in your cost composition you said 7 million of other operating our revenues; what is that exactly? That is as strong growth YoY. What is that? Operator: ladies and gentlemen please hold. 10 de 12

11 Mr. Pacheco: Tobias this is Pacheco. No highlights in relation to other revenues. Actually we have software sales, we have services rendered; we still do not have an expressive line yet because - and here I am talking about Dental Partner, which we also mentioned in previous quarters and that is going to be a revenue line which is a clear priority for the company in the next quarters - but we particularly in relation to those 7 million we don t anything that we can highlight about that right now. Mr. Tobias Stingelin: but that is costs, it is not revenue specifically; it is a cost component 7.7 million compared to 2 last year, so 2 of your revenue compared to % of your revenue compared to half last year. Just so I understand if we are talking about the same thing; you are talking about costs Within costs. You can get back to me later. Mr. Pacheco: we will get back to you later then okay. Mr. Tobias Stingelin: and about ISS tax, you provisioned two months, two months provision; are you thinking of reversing that are not? Mr. Bacellar: no, we are not thinking of doing that, we are not reversing that. Actually what is going on right now is there is a preliminary injunction and the entire ISS process went back to the service renderer and not taker. So Pacheco mentioned in the beginning about the rates that they would go back to 2% and that is how it will remain you know? So far that is the strategy. Mr. Blanco: okay let me answer this and go back to the first point about the other revenues. Sorry I was looking for that in the statement. So a part of that calculation, every time that we close the month, when we have a monthly closing, given our deadline for closing we have a provision of what we received in the past three days; but based on the closing date, the cutoff date, we make a provision for those amounts and that is why it goes into operating expenses. That is a normal variation and that means in the last three days of the month of March we have a higher provision than in the last three days of the month of December and that is what it means, that is just it. They are what came in in the past three days and giving the closing date, the cutoff date for monthly closing it goes into a specific line and that is provisioned. So the name of that the account group is operating expenses and revenues and that is what it means. That means they are events that came into the company in the past three days. Mr. Tobias Stingelin: so it should not grow like Or increase. It increased because of the cutoff date right? Is that what you mean? 11 de 12

12 Mr. Blanco: yes yes. It does not change YoY. It really depends on the cutoff date and the flow that we get of the events that occurred. So we get the information but because of the cutoff closing dates we provision them in a specific line and there is a trend that that should become zero at the end of the year. So that is an event that still has not been recognized as an event because it was a temporary account. That is the main point that goes into the 'other costs' part. Speaking of the ISS for January and February we operate in 5300 municipalities. So we have customers, be it individuals or corporate, that are present in 5300 municipalities. It is impossible to map out all those regulations, all those different systems to collect taxes. So in January and February we mapped 70% of those municipalities approximately, in which the most relevant ones in which we operate, so we mapped out the regulations for each one of those most relevant municipalities and for those that we were able to collect theiss we did collect ISS in those cases; and to the ones that we did not I provisioned the ISS. The 30% remaining cases which were not mapped I provisioned them for the average rate of the 70%. So there was a provision of ISS with those rates that vary from 2% to 5% depending on each municipality, which are provisioned in the balance sheet and I look at them every month provisioned in my liabilities for payment when possible. As for March we collected here for company headquarters which is Barueri, so we are going to pay the rate of 2%. Mr. Tobias Stingelin: okay great thank you Rodrigo, Luis and Pacheco. Operator: Our Q&A session is now closed. I would like to hand over to Mr. Roberto Pacheco for his final remarks. Mr. Pacheco: I would like to thank everyone for your participation in this conference call. The company remains optimistic in relation to the new cycle and that the competitive advantages in technology, distribution and pricing will become even more clear. Thank you very much and until our next event. Operator: The OdontoPrev conference call is now over. Thank you for your participation, have a good day and thank you for using Chorus Call. 12 de 12