Odontoprev SA ADR (OTCPK:ODPVY) Q2 2016 Earnings Conference Call July 28, 2016 10:00 AM ET
Rodrigo Bacellar - CEO
Luis Blanco - CFO
Roberto Borges Pacheco - IR Officer
Bruno Giardino - Santander
Joseph Giordano - JP Morgan
Rodrigo Gastim - BTG Pactual
Good morning, everyone, and thank you for waiting. Welcome to OdontoPrev's second quarter results conference call.
With us today, we have Mr. Rodrigo Bacellar, CEO; Luis Blanco, CFO, and Mr. Roberto Borges Pacheco, Investors Relations Officer. This event is being recorded, and all participants will be in a listen-only mode during the company's presentation. [Operator Instructions]
This event is also being broadcast live via a webcast, and may be accessed through OdontoPrev's website at www.odontoprev.com.br/ir, where the presentation is also available. Participants may view these slides in any order they wish. The replay will be available shortly after this event has concluded. Those following the presentation via 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-looking 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. Roberto Borges Pacheco, IR Officer of OdontoPrev. Mr. Pacheco, you may begin your presentation.
Roberto Borges Pacheco
Hi, good morning, everyone. We would like to thank you all for participating in this conference call to discuss OdontoPrev’s results in the second quarter and first half of 2016.
Let’s get started. We begin the presentation on slide number 3, where we demonstrate the year-over-year growth of revenues in the average ticket. In Q2, revenues came up 12.3%, best commercial performance since 2013. And the average ticket increased in all three segments, 11.2% higher than Q2, 2015.
On the next slide, slide number 4, we highlight the strong expansion of individual plans and SME revenues. The individual plans revenues came up by 53.4%, while SME increased 14.5% year-over-year. It is worth mentioning that the individual plans revenues already represented a second largest portion of our portfolio. Together, individual plans and SME came from 26% of revenues to 31% now.
Next slide, slide number 5, we see the individual plans average ticket expansion of 12.3% on a year-over-year comparison, reaching BRL34.02 per member per month in Q2. The main reason for that were price readjustment and price updates of retail products, a better performance of the Bradesco channel and the introduction of new and premium products of our higher average ticket. It is worth mentioning that price readjustment that just occurred in June in the individual plans of the bank channels from BRL37.60 to BRL41.40 per member per month.
As we summarize in our next slide, slide number 6, we highlight OdontoPrev’s unique strategic positioning, demonstrated by the leadership position in the corporate segment and the development and expansion of individual plans and SME segments of a higher average ticket, lower number of competitors and higher contribution margins. The known corporate products have significant barriers to entry such as distribution [Technical Difficulty] clear competitive advantage of the OdontoPrev business model.
On the next slide, slide number 7, we analyze the incremental revenue expansion per segment. The individual plans contributed with 21 million out of the 36 million incremental revenues in the quarter or approximately 60% of incremental revenues.
Analyzing the individual plans segment, we’ll demonstrate on the slide number 8 that this portfolio had a 37% net addition in the last 12 months, reaching a total of 632,000 members in Q2, driven by the higher participation of the bank channels, representing 44% of the individual plans portfolio versus 37% last year. The Bradesco channel grew 64% year-over-year from 157,000 to 258,000 lives in this quarter.
In the next slide, slide number 9, we highlight the increasing participation of Bradesco individual plans, reaching a total of 258,000 lives in Q2, with a better product portfolio in multiple Bradesco channels.
Now, let’s take a moment to analyze the SME segment, starting at slide number 10. SME’s count with the Bradesco channel as the number one growth driver that represents 83% of this portfolio. In the quarter, the SME portfolio reached 863,000 lives, 8% higher than Q2 ’15. Bradesco Dental came from 664,000 lives in Q2 to 718,000 lives in the quarter.
Now, let’s take a moment to analyze the Brazil Dental portfolio. On the slide number 11, they average 33,000 new lives over the last 12 months. The portfolio is still basically corporate with a great potential, given the Bank of Brazil’s size and quality distribution channels. In Q2, the portfolio reached 330,000 lives.
On the next slide, slide number 12, we see that the dental care ratio was 48.8% in the quarter due to the benefits of our higher utilization of our services. In the last 12 months, the dental care ratio reached 47.7% as compared to 46.4% in the same period of the previous year.
We also demonstrate the DLR per segment as we can see in the next slide, slide number 13. In Q2, the DLR is clearly incorporated in SME segment. On individual plans, the DLR had an important improvement, mainly due to the pricing power, high contribution of the new channel and the launching of new products of higher average tickets.
Our next slide, slide number 14, we see that in Q2, selling expenses improved in the individual plans segment due to the growing participation of the bank channels with the lower distribution fees.
As we can see in the next slide, slide number 15, G&A represented 14.3% of revenues in the semester, same level of the previous two years, mainly due to personnel expenses. It is worth mentioning that a number of OdontoPrev employees remained virtually flat, since 2011, showing continuous gains of productivity.
Slide number 16 demonstrates the evolution of cash generation as measured by EBITDA. In the last 12 months, the adjusted EBITDA reached 316 million, with a 24.1% margin. In the quarter, adjusted EBITDA was 76 million with a margin of 22.4%.
Our next slide, slide number 17, we see there, net income reached 44 million in the quarter and 113 million in the first half of the year. In the last 12 months, the net income reached 216 million with a ROE of 34%.
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 a zero balance.
On the next slide, slide number 18, we highlight the cash flow evolution in the first half of the year. As we can see, we highlight the cash flow evolution in the first half of the year. As we can see, during this period, there has been cash generation of 149 million, equivalent to 22% of revenues.
The company’s net cash position reached 365 million without any leverage, as we can see in slide number 19. Our board of directors approved yesterday quarterly dividends in the amount of 24 million, moving up the total shareholder remuneration over the last 12 months to 194 million.
It is also important to highlight the recent tax litigations related to the company. At the next slide, slide number 20, the total cash savings related to INSS reached 237 million. In Bradesco Dental, INSS request of 43 million was approved this quarter by the Supreme Court. The company has requested the correspondent cash deposit to be released. OdontoPrev will account the reversal of the related provisions after the legal authorization to release those cash depositors. We also have a similar request, regarding the services provided to beneficiaries after July 2010, which has not been analyzed yet by the Supreme Court.
Our next slide, slide 21, our last one, will demonstrate the company’s shareholder structure, especially in the hands of foreign investors, which holds the biggest portion of our free float.
Well, we thank you all for the time and interest on OdontoPrev at a time that we celebrate 10 years of our IPO at the Novo Mercado. Thank you again and let’s start now our 45-minutes Q&A session. Thank you.
[Operator Instructions] Our first question comes from Bruno Giardino, Santander.
I have a question, actually two questions in the membership. The first one in regards to the individual portfolio. In this quarter, we noticed that the shift in terms of net addition with the retail channel gaining relevance over the banking channel, and as the banking channel decelerating a little bit in terms of number of new clients. Is there any particular new dynamic in this segment or a new trend that we should observe in the following quarters? That’s my first question.
Hi, Bruno. This is Rodrigo speaking. Thank you for your question. I'm going to take advantage of it to enlarge a little bit the answer. Basically, what we see is that our company has been committed to implement a strategy that is based on two pillars. The first one is the corporate segment, which we have been doing for the past 29 years. And in that case, what we are facing right now is [Technical Difficulty] and the whole country and the whole operators with a lot of difficulties.
So what we are facing here is two dynamics. One, in terms of loss and gains of lives, which is exactly the same that we are used to over the past 29 years. So we gain lives, we lose lives, and this is absolutely under control. And the second part is the loss ratio, the product corporate segment has been presenting some higher rates then we were used to in the previous years.
The second pillar of the strategy in regards to our entrance to the individuals and the SMEs plans. And with that, we are quite pleased to note that we are increasing individuals by 53.4% in terms of sales and 14.5% for the SMEs. So basically what we are facing is that companies that are used to operate in the corporate segment, and will continue to do so and as soon as Brazil, the economy picks up again, there are some analysts and economists right now that are [Technical Difficulty] that maybe the bottom has been reached already and we would be in the inflection point, starting to see and to observe a peak in the economic cycle.
OdontoPrev is ready to take advantage if this peak really comes through. Maybe, it's going to happen in three months, six months, we don't know. But basically, consensus has been formed that the bottom has been reached. And for the second pillar, which is individuals and SME's, we are facing quite pleasant results with incredible growths and we are happy to continue and we will much potentialize this opportunity. And this opportunity was even spread to us, because we actually have extra exclusivity agreements with Bradesco HSBC and Banco do Brasil, which represents 48% of the bank branches in Brazil and 52% of the customers. They are bank-arrived customers in Brazil. So this is a tremendous power, tremendous really leverage, and we must continue to potentialize this market.
Roberto Borges Pacheco
Well, regarding the retailers, perhaps, we could say that they’re back to the game. We haven’t been making adjustments in the pricing, starting in 14. So not without a reason, the average ticket of individual plans came up and we will keep on moving up. We just mentioned our individual average ticket coming from at the bank channel from 37 to 41 as of June 2016 and in the same trend, we will be observed related to retailers. So again, retailers are back to the game and you can expect net additions coming from both sides of not only the bank channels, but also several retail partners that we have today. Pricing power is here to stay and they bring a tremendous P&L actually at the end of the day. This is important to us and [Technical Difficulty]
Thank you for the answer. Just curious to see retailers doing so well in such a troublesome moment for Brazil. Second question comes to the corporate segment. Was there any particular losses of relevant contracts in the quarter, or were the losses that we saw was just related to the unemployment rate in Brazil?
Bruno, basically unemployment. The unemployment brings in, in fact, impact from all of the country, all of the sectors. So, this has been the headwind, the macro headwind of 2015, 2016 and hopefully at the end of this year, early next year, it’s going to improve. We do observe the second derivative improving, so the outlook should be realistically positive, hopefully for the first half of ’17. In the meantime, we have been mitigating the pressures coming from the unemployment, doing a hell of a job in terms of the average ticket readjustment, price discipline, margin and profitability, we are again better driven and you can expect no change whatsoever in this transitioned banking policy in the second-half of this year. So, this is our outlook for the corporate sector.
Our next question comes from Joseph Giordano, JP Morgan.
So my question is mostly related to the ramp-up of the JV. Initially there was like very formal guidance of about 1 million members, like the first one or two years, and it seems that we are a little bit distant from that expectation. So I just wanted to understand, how is the process evolving in that specific commercial platform? And if there is any type of, let's say, sharing of best practice between the BB and Bradesco platforms to try to unlock or accelerate the value generation from the JV. Thank you.
Joseph, this is Rodrigo speaking. We are having [indiscernible] if you look at the operation now, the past 12 months the Company has been profitable, so it's pre-showing results this year; that's opposed to the previous 12 months. And when we look to the next 12 months, we are even more optimistic than the current 12 months. So we are in a positive trend with the operation. And as you’re output, we are really having a lot of talks; we are participating in workshops, et cetera, in order to share best practices and things like that.
Just like going back a little bit if I may ask a another question to the cost side of the damage, just wanted to understand a little bit like if the improvement seen in the last ratio for individual plan, it’s mostly related to the recent price hike or if we still have like some adverse effect on a lot of people in their grace periods given that this base has been like really refreshed over the past quarters? Thank you.
Roberto Borges Pacheco
Hi Joseph, actually as per the cost of services, it’s pretty much the same regardless of the segment as we demonstrate in our earnings release, it's about BRL8 per member/per month given the much - very much better pricing power at the individual channel that's why the loss ratio has been actually improving and today running at mid 20s. So, what you can expect is a lot of action in order to reprice individuals as we have done the adjustment now in June. SMEs, we have the greatest price in Q1 and you will see the results in the second half and early next year, again coming from BRL18 per member/per month to any real per member/per month. And finally in the corporate business there has been a frequency issue, so it’s all about frequency, it’s all about some type of moral hazard and we don't believe this is here to stay, this is a temporary, it’s 2016 due to the recession type of thing, and should improve related to - as a result of the price readjusted not only in the corporate business but also in the SMEs and individuals. So we are confident that this is a transitional loss ratio that should be back to normally historical levels as the economy improves and the price readjustments of not only SMEs and individuals yet in place. So, we're facing a transition at the end of the day, improving the top line of the company, in a transition of the bottom line and of course both should convert in 2017 in a very important way. Also it’s important to highlight what we have mentioned before, the tax opportunities I had and basically we have two not only the one related to Bradesco, as high as 43 million that should be back any time soon. And the second and extremely important one related to Odontoprev of more than 230 million that is going to bring margin expansion of over 300 basis. So, and this is extremely important for the model of everyone else. So, that it, the value driven strategy is here to stay and I think Rodrigo wants to add some comments.
I would just say Joseph that in regard to this higher frequency that Pacheco was mentioning, there is a qualitative aspect of that is that people are trying the service and this is good, this is good because we know when they try this increased retention, this increases mouth-to-mouth communication and this helps to boost the market. So, there is something good about this dental loss ratio increase, is that people are trying and they’re going be happy with the service and this will help the market as a whole.
Roberto Borges Pacheco
It moves retention up, right, it allows people the possibility to understand how it works and that’s crucial for the positive future of individuals and mid-sized companies.
Just one extra question if I may, and this is related to some topics that we discussed in previous conference calls, and basically this relates to the service margin requirements. I remember that there were some like ongoing conversations inside the regulator regarding potential differentiation between dental and healthcare plan operators, given the different profiles of the business just like requiring different service margin requirements. I just wanted to understand, is it still going on, is those conversations are evolving? And that's it thank you.
Hi Joseph, it’s Luis speaking, as you mentioned we have two major fronts regarding the service margins in Odontoprev, we have what we call the sector front that is regarding where we represent the sector in these discussions with the regulator. This front did not move ahead yet, but what the regulator says that it’s going to move forward in this year, but until now it didn't happen to now. The second front that we have that we are working that, developing with actuarial team, our own service margin methodology so we are working on that right now, we are in the middle of this new methodology, we are working with external actuarial on this and we hope to present to the regulator, these on servicing margin methodology until the end of this year, so we have this two fronts that are happening at the same time.
Thank you use, I just like to clarify it for now, we should remain for unexpected payout ratio about 80% for the company?
Yes, we can expect that because according to our best estimations this 20% of non-distributing profit it’s enough to satisfy the increase of the servicing margin requirements in this calculation that this on the Streets right now. So, we can expect that.
Our next question comes from Rodrigo Gastim, BTG Pactual.
My question now is about average tickets. First, in the SME segment, I'd just like to better understand why average ticket growth remained below inflation this quarter, and what are your estimates for price growth, specifically in this segment going forward? Then in the individual segment, if you believe it is possible to continue with the higher price hikes, especially in the Bradesco channel given the current macro outlook? That's it thanks.
Roberto Borges Pacheco
Hi, Rodrigo, thanks for the question, let me start with individuals, for five quarters in a row, it has been growing double-digit, I mean the average ticket. And we are not done, as we mentioned before, the average ticket for individuals at the bank channels has been readjusted for 41 per member/per month at a time that in our books we are still accounted for 34. So there is plenty of room to improve, to increase, to update the individual plan average ticket coming from not only the bank channel but also the retail channel. Also as we have highlighted in some previous quarters, we have introduced annual plans that we account of a per member basis outdoor we get the premiums up front. So from a cash flow perspective this is fantastic, this is very good. So we're not done with the individuals, please expect some more action, some positive readjustments in the individual channel. As per SMEs your previous question, we have updated prices from 18 to 20 per member/per month in Q1 and you will see the effects now in the second half of this year and early next year. So in this, sector, Bradesco dictates more than 80% of the members, so again price driven strategy pricing power is here to stay, we will not hesitate to update prices short-term and mid-term.
[Operator Instructions] Our next question comes from [indiscernible].
My question is on your current market share, could you kindly give us current market share of the second quarter of this year. And could you also please explain us to why the market share has been gradually declining in 2010 [ph] and also a brief comment on the current competitive landscape on the corporate business and individual business in Brazil? Thank you.
Roberto Borges Pacheco
Hi John thanks for the question, as of 2015, the latest figures available from the healthcare product in Brazil, we had 29% of the members in the dental sector at a time and we also had 43% of the revenues, right. So, [indiscernible] related to the high quality service that we provide. In terms of the competitive landscape nothing has changed, basically we lead the market since the 90s and we face non-dedicated competitors normally related to either healthcare or insurance or is financial institutions, we are dental only that's why actually we have been able to expand the business to actually [indiscernible] type of strategy of pursuing the Brazilian middle class represented by SMEs and individuals, where the penetration is virtually single digit. So, there is great potential ahead and we believe we have the right distribution channels to address both opportunities. Number one, retail banks that happen to be our shareholders, so they’re behind, they’re committed, the type of return on equity that we have been adding to both of them is a way much better than their own, we have been delivering over 30% ROE for our shareholders. So that's why we have been optimists for the future outlook of the sector and our market share, not only in terms of members but also in terms of revenues and even more important in terms of value creation. Today, we could emphasize that with less than one third of the members of the sector, we definitely have been able to generate more than two thirds of the value creation of the sector, I believe Rodrigo is going to make a comment.
I see that you addressed it all Pacheco, thank you.
Roberto Borges Pacheco
Thank you. I don't know John if you have another question, so if I can be able to answer your question.
[Operator Instructions] This concludes today's question-and-answer session; I’d like to invite Mr. Pacheco to present with his closing statement. Please go ahead sir.
Roberto Borges Pacheco
We would like to thank you all for joining us today and invite you for our Odontoprev Day on August the 17th in São Paulo. Pretty soon we'll be able to visit most financial centers not only in North America but also in Europe, our upcoming IR events will be released soon. Thank you all, see you there.
This conclude the Odontoprev conference call for today, thank you very much for your participation have a good day and thank you for using Chorus Call.
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