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Good afternoon, ladies and gentlemen. Welcome to Alliar - Centro de Imagem Diagnósticos S.A. First Quarter of 2018 Earnings Conference Call. Present here are Mr. Fernando Terni, Chief Executive Officer; and Mr. Frederico de Aguiar Oldani, Chief Financial Officer and Investor Relations Officer.
The live webcast of this call is available at Alliar's Investor Relations website at ir.alliar.com and MZiQ platform, where the presentation is also available for download.
As a reminder, questions will be taken by telephone and by the platform. Also, this event is being recorded. [Operator Instructions].
Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Alliar management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future.
Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Alliar and could cause results to differ materially from those expressed in such forward-looking statements.
Now I'll turn the conference over to Mr. Fernando Terni. Mr. Terni, you may proceed.
Thank you. Good morning, to all, and thank you for participating in our conference call.
As you see in our presentation, overall, our results were very positive. As we commented during our last Alliar Day in October last year, the company in 2018 would start a new cycle, pretty well focused on the profitability of the flagship assets mainly through innovation and productivity gains.
As you will see next, in the first quarter results, we represent these changes are already starting to yield positive results. I also remember that during 2018 this quarter are one of the weakest in the year. In addition, this quarter in 2018 also has fewer days than the same quarter in 2017.
Having made those initial comments, I would invite everyone to go to Page 3, where we'll present our highlights for the first quarter of the year.
So let's start with net revenue, which grew by 6.3%, driven by the ramp-up of the new mega units and 2% of same-store sales. If we consider the same basis of comparable days of this quarter, as I have said before, we have fewer days, same-store gross above 5%.
Gross profit increased by 12.4% in the quarter to reach BRL 73 million with a gross margin of 27.7%, which represents a gain of 148 basis points. Our adjusted EBITDA reached BRL 59.4 million, a 19.6% growth with a margin of 22.6%, which represents an improvement of 251 basis points.
Our operating cash generation reached BRL 30 million, a growth of almost 40% in relation to the previous year with a 52% cash conversion, also above the level of 2017 and once again demonstrating the high cash generation capacity of our company.
Net Promoter Score was on 60.5% at the end of first quarter '18, but here it is important to mention that in this quarter we have all the units of our group already contemplating the new methodology we have started last year. We now believe we have the correct base to follow the improvements of this important indicator of our patient satisfaction.
So let's move on to the next page where I will highlight some of our recent expansion initiatives. At the end of the first quarter, we reached 118 units out of which 18 are mega units, 84 are those of standard types and 16 are smaller stores, the one dedicated for clinical analysis only.
In the same period, we have added only 2 new equipments in MRIs. This is the result of a fact we have from last year where we have replaced equipment locations as we were not producing a lot of exams. We have transferred those equipments to other locations. Therefore, we have only to add 2 new equipment despite the fact that we have opened new units.
The supply of clinical analysis in Alliar was stable when compared to the last quarter of '17. And we are now serving those services in 53 units out of the 118 we have in the company. I think now we have reached a stable level where we are offering these types of services everywhere where we have reasonable amount of ultrasounds. We don't expect increase in the number of new collection points in the company for 2018.
Turning on now to Page 5. Some details on the revenue. As I have already mentioned, we've seen a growth of 7% in gross revenue, reflecting consistent growth in MRI and also in the clinical analysis, despite the fact that in this quarter we have less working days in the calendar.
In the chart at the right side, we have opened the contribution of which vector especially the contribution of new units, which added some BRL 9 million to the results or 3.3%. This is the reflection of the opening up of the mega units, especially the ones in São Paulo region, they are developing very, very well.
The M&A contribution, net of the store closed, as I have commented before, we have closed some units last year. The added -- the net value was 1.5%, mainly due to Multiscan, which was started in Alliar in March last year. So we have 2 months contribution from Multiscan.
Turning onto Page 16 (sic) [ Page 6 ], I will turn to Fred, our CFO. But before turning the stage to him, I just want to briefly comment big picture. I mean, you clearly see here the improvements we have had in the company, reflections of our -- all the benefits of focusing on improving the productivity of our company we clearly see that despite the fact that this quarter we didn't see big loss in sales, the growth we were able to deliver on the net income recovery was very positive. This is a reflection of a lot of initiatives that Fred will comment and some of them I can also comment if you have some further details -- if you want some further details on the Q&A part.
With that, I turn over to Fred.
Hi, everyone. On the financial performance, we want to highlight the impact already in the first quarter of '18 of our new strategy.
If you recall, in the last Alliar Day, we stated that from 2018 to 2020, the company would focus on maturing the investments made and increasing profitability of existing assets. And we continually see that once we stop investing, our P&L now has a different dynamic than in the past. If in the past, we were growing very fast the first line and not having the same kind of growth in the bottom line, the consequence of this new phase is that we are seeing exactly the opposite, right.
Now on, we expect to post lower growth in the top line compared to what we have delivered in the past, but we do expect that this growth in the top line translate into a much higher growth throughout the P&L and that's what you can clearly see already in the first quarter, right or a 6.3% net revenue growth YTD, 12.4% growth in gross revenue, turning to a 19.6% growth in adjusted EBITDA and around 23% in the bottom line.
So operating leverage is something that we do expect to see now on and it is very important now that investors can clearly see the dynamics of our P&L in a normalized growth environment.
Moving to Page 7. I'll comment on our gross profit and margin improvement throughout the first quarter. We had an improvement in gross margin of 150 basis points roughly. Here we want to highlight the benefits of the strategic sourcing from steps we have implemented throughout the quarter, especially on the support lab. We have renegotiated our agreement with our existing service provider on support lab, yielded a benefit of 20% reduction in the cost per exam for the current year and another 7% reduction in the cost of each exam for 2019. So these -- it's a very positive impact expected for this year and the next year, and it's something that we understand that it's a new level of costs for the companies, not a one-off gain, but it's a new level of cost for those kinds of exams.
We also want to mention that there are further fronts to be captured on the strategic sourcing. We are also renegotiating contracts on the other main providers that we do have and we expect to capture further benefit throughout the year. Of course, those additional benefits won't be as relevant as the one we have just mentioned with the support lab.
What is also important to mention was that the expansion in gross margin are not higher because we had an increase in the cost of medical services in this quarter. The reasons behind that are associated with one, the mix of exams. We are growing faster in clinical analysis and ultrasound exams and those exams did carry lower gross margins than CT scan and MRI exams, although those exams delivers more gross profit than margins, they do deliver very good returns because on clinical analysis, we have very little investment associated. In the ultrasound, the cost of equipment is way cheaper than an MRI or a CT scan.
Also important to mention that there was an impact as well, negative impact on the gross margins on the PPP, once we have all the 11 hospitals in full operation, right. We are running exams in the normalized level and that imply an increased cost of medical services, ahead of the increase we did have in revenues and this was expected. It's not something that wasn't expected. But we're very positive with this gross margin expansion in the first quarter and we understand that the gains that we did post will also appear in the next quarters.
Going into the Slide #8, comment on adjusted EBITDA and EBITDA margin. Here, we want to highlight that the expansion in the EBITDA margin was 250 basis points, 100 basis points more than we did have expansion in gross margins. Here we want to mention the positive impacts of our efforts on the fourth quarter to adjust our headquarters and shared service structures. We ran again our CDB process and adjusted the structure and captured some benefits. With that you can see that the wage lines had a reduction quarter-over-quarter even though we have inflation these 2 years, we have hired more people for supporting the new mega units that we have added, but with the CDB efforts, we could keep our wages lower than the same quarter last year and this is a very positive impact.
Going into Slide #9, comment on the financial results and debt position. Financial result was way ahead of the expenses we did have in the first quarter of '17. The main reason is associated to one, the higher net debt, average net debt in the first quarter '18 compared to the same quarter of '17, right.
During the first quarter of '17, the company had way much more cash than we did in the first quarter this year. The reason was that the company was still holding some of the resources gathered in the IPO, but it was impressive throughout the first quarter last year. So financial income was way lower than the previous year and also that is higher than the same quarter last year. So it was this combination plus the positive affects gain we did posted in the first quarter '17 that did not occur in the current quarter. That explained why our financial expenses grew 71% in the quarter.
But it is important to highlight that compared to the last quarter of '17, our financial expenses are way much lower and the same -- the levels we are seeing in the first quarter '18 are the levels that we do expect to sustain over the next quarters.
On the debt position, our net debt has reached BRL 636.3 million in the quarter. This is net-debt-to-EBITDA of 2.74. It's important to mention that first quarter is the worst quarter in terms of cash flow generation and this small increase compared to the end of the year was expected, all right. But we do expect to see the leverage reduced throughout the next quarter and significant reduction in the second half of the year.
Going to the Page 10, comment on the tax rate and net income. Tax rate had a significant improvement in the first quarter, reached 37.1%, a reduction of 505 basis points compared to the same quarter last year. This is a consequence of all the efforts the company put into normalizing its FX tax rate and the level expected for the year between 30% to 34% is sustained. The 37.1% that we delivered in the quarter was expected, especially because first quarter is the only weakest quarter in terms of earnings for the company.
In the net income, the combination of the operating improvements on the EBITDA line, combined with the reduction in the tax rate made the net income grow 23%, reaching BRL 7.1 million in the quarter, despite of the weakening in the financial results for the quarter. This is a very positive figure because I think it is probably the first time that the company has been able to deliver operating leverage in all the lines and this is -- we are very pleased to present this kind of results in the first quarter that we have changed our focus and we are delivering what we have promised in the last Alliar day and the focus of '18 and '20, this new cycle, we do expect to see a way much better performance on the bottom line, even though we are not going to grow top line as fast as we could do in the past, but we do expect to have a very, very positive net income results in this new phase.
That's all for the results. Now, we're going to comment on the next slide, on investments. Investments in the first quarter went down around 80% year-on-year. This is a very positive impact on the company cash flow. Remember that first quarter, '18, we're still higher than what we're going to see in the next 3 quarters of '18, right.
In the quarter, we had acquired a stake of 30% in the PPP. We used to have around 50%. Now we raised our stake to 80%. This was a very good opportunity and very accretive for the company already in '18. We were able to acquire this 30% stake at book value what we think was a very, very good opportunity. And this is the only inorganic investment plan for '18. So we do not expect to have any other further investment in inorganic front for the year.
Also on the CapEx side, CapEx in the first quarter was one of the highest expected for the year and we do expect to see a lower-level of CapEx in the next quarters as well.
Turning to Slide 12, comment on cash flow. Operating cash flow reached BRL 31.1 million in the quarter, an increase of 40% compared to the first quarter '17. Operating cash flow is something that the company has already posted very positive figures. Cash conversion for the quarter reached 52%. It's important to highlight that first quarter is also the worst quarter in terms of cash flow generation for the year due to seasonality reasons, but what we like to mention is that with the combination of the positive operating cash flow with the reduction in the level of investment, the company will start to post positive figures in free cash flow as well and that's something that you can expect to see further improvement in the next quarter and positive free cash flow generation will be a very positive impact not only in '18 but also in this new cycle from '18 up to 2020. We do expect to improve cash flow generation -- free cash flow generation, significantly in this period.
That's what we had to comment related to the results and the balance sheet for the quarter and now, we are open to answering any questions that may arise. Thank you.
[Operator Instructions] This concludes the question-and-answer section. At this time, I would like to turn the floor over to Mr. Fernando Terni for any closing remarks.
So thank you, everybody, for your attention. As we had been saying a lot, the last couple of months, we are now putting a lot of focus on the operation -- the operating leverage of our company. And what you could see in this first quarter results was the result of this effect. Despite the fact that this quarter, you see seasonality is not the best month of the year, so we didn't grow that much as everybody else in the market, but the result in the bottom line was very positive. The company has delivered very strong results. And if we're looking forward, we are still believing that we are in the right path. The ramping up of the new mega stores here in São Paulo are developing very well. We already installed second machines in 2 of the mega units, something that was expected only after 1 or 2 years of operations in both mode of the mega store as well as in Móoca here in São Paulo. The development has been such that we installed the second machine. We are now under operation. So we are very happy with the outcome of those mega units.
Also, we are very happy to see that we are delivering almost 24 MRIs per day per machine. Just to give you a flavor what does that this number mean, when I started the company in 2012, 24 MRIs per day meaning that the machine was operating at its maximum capacity now we have in the company some machines are delivering more than 40, 44 exams per day per machine, that is extremely positive. That just gives you a flavor of how much we can extract from those MRIs on the months to come.
So with that being said, I thank you very much for your attention, looking forward to talk to you again in the next call. Thank you.
Thank you. This does conclude today's presentation. You may disconnect your line at this time, and have a nice day.