Centro de Imagem Diagnosticos SA

BOVESPA:AALR3

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Alliar - Centro de Imagem Diagnósticos S.A. Second 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, 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 the 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.

[Fernando Terni, executive]

Thank you. Good afternoon to all, and thank you for participating in our earnings presentations call. As you'll see during our presentation in general, our results were positive in the second quarter of this year, although we have faced some nonrecurring events such as our -- the national trucks drivers strike and the soccer World Cup somehow affecting the volume growth of our company.

Also, it's worth repeating that we have been -- what we have been highlighting since our Alliar Day last year, with this new growth cycle of the company, we are focused on increasing the profitability of the company through the maturations of investments already done and through productivity gains from technology and innovation.

In this new growth cycle, although growing less in the top line, we will see that the company post robust EBITDA growth and especially net income growth.

In this new cycle, it also changed the profile of cash generation and indebtedness of Alliar. In the second quarter, as we will see, we started position -- posting positive free cash flow, a milestone in our company history. And we have also started the success of deleveraging the debt as our CFO will detail you later on.

Having making those initial comments, I invite everybody to move to Page 3, where we will present the highlights of the second quarter of 2018. We started with a new net revenue, which grew by 5.7% in the quarter, with same-store sales of 5% growth. Year-to-date, revenue reached BRL 537.5 million, a growth of 6%, with the same-store sales growth of 3.5%.

Our adjusted EBITDA reached BRL 59.4 million, a 21.6% growth, with a margin of 22.1%, an expansion of 64 basis points.

The net income of Alliar shareholders was BRL 5.3 million, an increase of 33.2%. Year-to-date, profit reached BRL 12.4 million, an increase of 27%.

Our operating cash flow generation totaling 5-3, BRL 53.2 million, an increase of 5.6% in relation to previous year, with a 89% cash conversion, an expansion of 433 basis point. That is, once again demonstrating the high operating cash generation capacity of our company.

The NPS, Net Promoter Score, registered a 65.4% at the end of the second quarter 2018, an important evolution of almost 500 basis points in relation to the first quarter of this year, when we had 60.5% in NPS. This evolution mainly reflects the stabilization of the centralized contact center here in São Paulo as well as the continuing improvement in managing the patient flow inside our stores.

Moving onto next page, I'll highlight the most relevant expansion initiatives. The chart in this page demonstrates our strategy of focusing on the maturation of our current asset, and also increasing in the profitability. At the end of the second quarter, we had 116 units, which is a reduction of 4 collection points and 2 standard stores. The last one was the last 2 with low performance. In the same period, we have added 3 new MRIs in the operations, especially, I think it is important to mention a second machine we have installed in the Morumbi mega store and also a second machine in our Móoca mega store, both a mega units -- new mega units here in the city of São Paulo.

We have also continued to expand our clinical analysis offering, with the realization of 9 new rooms in the company when compared to previous period.

And that also reflects the start of a clinical analysis in our Multiscan company in the State of Victoria -- in the state of [indiscernible]center. We have now closed the month of June by offering clinical analysis in about 50% of our units.

Moving on to Page 5. I will further detail the evolution of our revenue. Considering the challenge we had in this quarter as we had previously mentioned, we consider the company was able to deliver good performance in this period.

Let's start by looking at the right chart. We have noticed the gross revenue of 6%, especially spread out in all different exams, MRI and other imagings as well as in clinical analysis.

Looking at now at the left-hand chart, where we opened different vectors of growth vectors in this period, highlighting the same-store growth of 5%. Here it's important to notice that some of the new mega units were all opened in the first month of [ 2007 ], therefore, I'll add reflecting those same-store sales that we are presenting here.

On the other hand, the contribution of the most recently inaugurated mega units, which had about BRL 4.4 million, which is another 1.6% growth, reflecting the good ramp-up we are experiencing in those new stores.

Lastly, the M&A contribution that will be scaled was reflected by a reducing of 0.5% in Multiscan, when comparing to the last year quarterly results.

I'll now leave the floor to Frederico, our CFO, which will give us more details on the numbers.

[Frederico de Aguiar Oldani, executive]

Good afternoon, everyone. I'll start my presentation on the Page 6. I'm going to comment about the financial performance of the quarter and the year, right? Since we having to manage our new strategy by the end of last year, where the company was starting to focus on maturing its investment and focus on increasing profitability and cash flow generation. I would like to highlight what has happened in the first quarter -- in the first half of the year. For a 6% revenue growth, we had an adjusted EBITDA growth of 9.2%, while net income grew 27%, showing operating leverage, something that we do expect to maintain this kind of performance over the next quarters.

Moving to Page 7. I'll comment on the adjusted EBITDA and margins for the quarter. The second quarter was a quarter with some one-off events that prevented our EBITDA from posting margin expansion compared to the same quarter last year. Even so, our adjusted EBITDA reached BRL 59.4 million, a 0.5% growth. But if you consider that in the second quarter '17, there was a one-off gains related to reversion of provision for contingencies of BRL 4 million, the company would have posted a margin expansion in the quarter.

Also, there was a negative impact on the top line that preventing us from delivering more -- creating leverage that Terni already mentioned in the top line. And this impact those one-off events won't affect us again for the remaining of the year.

Moving to the Slide #8, comment on the financial results. Our financial results decreased by 50%. So our net financial loss of BRL 22 million was BRL 18.7 million for the current quarter, reflecting the lower cost of debt since we have implemented in the end of last year some liability management initiatives, combined with lower interest rate as well.

Moving into the debt section. It's important to highlight that this quarter the company have posted a first reduction in its net debt position, a slight reduction where we started the year with BRL 611 million of net debt. By the end of second quarter, net debt was BRL 607.6 million. A small reduction, but for the first time, company's cash flow generation was enough to cope for all the financial cost and even to start the process of deleveraging the company.

In the end of the quarter, leverage reached 2.61x EBITDA, coming from 2.74x by the end of the year and end of first quarter. It's important to highlight that this is a trend that we expect to achieve in the next quarter. The company understand that the right debt leverage ratio for the company should be between 1.5x to 2x EBITDA, a level that we expect to convert until the end of next year. But we do expect to see a continuously reduction in the leverage in the coming forward -- in the coming quarters, both because our operating results will improve, but also because we expect to reduce net debt as well.

Moving into the Slide #9 commenting about the tax rate and net income. In the 6 months of this year, we have reached 31.8% of effective tax rate, a significant reduction from the 46% posted in the first 6 months of '17. It is very important to highlight that the reduction of the effective tax rate to the current levels is -- reflects the effort of the management to reduce the impact of its current structure in the effective tax rate. But yet, it doesn't incorporate the incorporation that are to be done in the next quarters and in the next year especially.

It's important to mention that, once those incorporations are effectively done, we expect a more significant reduction in the effect -- in the effective tax rate, but those effects are not expected to impact results at least until 2020. But with the measures already taken, we understand that the current effective tax rate can be sustained towards the next quarters even without the incorporations.

Going to the net income. Net income for the quarter was positive reaching BRL 5.3 million, a 33% growth. In the 6-month period, we reached BRL 12.4 million, 27% growth, highlighting the objectives that the company had mentioned that we would focus a lot on improving profitability and generating operating leverage. While we expect to grow less in the first line, we would expect to grow way further in the bottom line. And that's the kind of results that we have already showed in the 6 months of this year. And we expect to continue to post those kind of results for the following quarters.

Moving to the Slide #10 commenting on investments. Investments were significantly reduced this year, 74% reduction compared to the 6 months of '17. It's important to mention that the reduction in investment is the main driver of improving free cash flow generation for the company. Have in mind that the lower level of investment is a consequence of the accelerated period of investment from 2014 to 2017, where the company focused on growing in all fronts, M&A, organic fronts, PPP and built a platform that now we are ready to grow just maturing the investment we made in that period.

Moving into the Slide #11. Comment on cash flow. Here it's very important to show why both operating cash flow and the free cash flow. Operating cash flow and cash conversion is something that the company has -- posting very consistent results over its history. Cash conversion has been very high for a very long time. In the 6 months of '18, our cash flow -- operating cash flow generation reached BRL 84.3 million, 71% cash conversion, a 60% increase in operating cash flow compared to the previous period, and a 400 basis points increase in cash conversion.

But what is important to mention and it's different than previous periods, is the improvement in free cash flow generation. While operating cash flow has been very strong since the company inception, free cash flow has been always negative because the company was already investing ahead of its operating cash flow. But in its new cycle, free cash flow has turned it positive in the second quarter of '18. We have reached BRL 29.2 million in free cash flow compared to a negative BRL 19 million of free cash flow in the same quarter last year. In the 6 months period, we have reached BRL 27.8 million of positive free cash flow compared to a negative BRL 150.2 million of negative free cash flow in the 6 months of '17. These highlights the importance of reducing investments in this new cycle, where cash flow will be significantly improved through maturing the investments already made in the previous cycles. Again, it is important to highlight that, we can continue to grow top line even though this growth will be lower than in the previous cycles, but the platform it's already there. It's a matter of putting it to work.

According to Slide 12, our closing remarks. It's important to mention that the company will continue to focus on improving profitability. This improvement will come from some fronts, first one is the ramp-up of the new mega units. You remember that the company has opened 6 mega units from the fourth quarter of '16 to the third quarter of '17. This was a huge investment. And out of those 6 mega units, 4 are in the city of São Paulo, are new mega units. The other 2 mega units are conversion from regular unit into new mega units, which post a different kind of maturation profile. But the 4 mega units opened in São Paulo are ramping up accordingly. Our operation in the city of São Paulo is the fastest-growing operation of the company. And we have a very strong competitive position with CDB brand in the city and the mega units are helping us to gain market share and increase our penetration with CDB brand in the city of São Paulo.

Also, we're increasing -- we continued to focus on increasing productivity of existing equipment. Our most relevant productivity indicator is the number of MRI exams per machine per day. And we continue to expand this indicator in the second quarter, reached 24.5 exams, 2.3% increase compared to the previous quarter, even with the addition of 3 new MRI machines.

And the consequence of the ramp-up of the new mega units, with increased productivity in the existing exams, will be key to deliver the margin expansion and the growth in net income and also in cash flow generation. It's also important to highlight the importance of technology and innovation in our business. Technology has produced and will continue to produce dramatically changes in the way our business is run. Alliar is ahead of this and is leading treatment in the use of innovation and technology as a key driver to improve 3 fronts.

First, efficiency on the operation. Second, the quality of our exams. And third, the patient experience. We will continue to focus on investments in the use of technology and innovation to improve these 3 fronts. And it's very important to highlight all the efforts that we are making on these fronts.

That's what we wanted to comment about the second quarter results. And we open floor to Q&A session. Thank you.

[Operator]

[Operator Instructions] This concludes the question-and-answer section. At this time, I would like to turn the floor back to Mr. Fernando Terni for any closing remarks.

[Fernando Terni, executive]

So as we don't have any questions, we like to thank you, everybody, for participating in this call. And looking forward to talk to you again in 3 months' time. Thank you very much.

[Operator]

Thank you. This does conclude today's presentation. You may disconnect your line at this time, and have a nice day.