Centro de Imagem Diagnosticos SA

BOVESPA:AALR3

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Alliar - Centro de Imagem Diagnósticos S.A. Third 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 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 will turn the conference over to Mr. Fernando Terni. Mr. Terni, you may proceed.

[Fernando Terni, executive]

Thank you. Good morning to all, and thank you for participating in our results for the third quarter of 2018. As you will see during our presentation, in general, our results was positive in this quarter. We remain confident with the different efficient initiatives we have been working on. Those projects have led us to important expansions in our EBITDA and our net margins, as you will see during our presentation. Specifically regarding top line, which was practically stable in this period, in October, we already saw some improvement. It's very likely, therefore, that we'll see top line growth during the fourth quarter of this year. This will be important to us to continue leverage the company on the operational level.

By design in this new cycle, despite of a modest revenue growth, we will see the company present a robust growth in EBITDA and in profit. We remain focused on the purpose of increasing the profitability of the company through the maturation of investments already made and the productivity gains with technology and innovation. In this cycle, we are also working to reduce Alliar's financial leverage to a more comfortable level. And on further reduction in investment, this has been an important driver for the company's free cash flow generation.

I have made those initial comments. I invite everybody to go to Page 3, where we will present the highlights for this quarter. We start with the net revenue, which presented a slight reduction of 0.3% in the quarter, with same-store sales increase of 0.1%. Year-to-date revenue reached BRL 816.8 million, an increase of 3.8%, with same-store sales of 2.4% growth.

EBITDA margin expansion reached 169 basis points to a margin of 24%, with adjusted EBITDA of BRL 67 million, an increase of 7.3% in the quarter and 8.5% year-to-date.

Net income for the shareholders of Alliar reached BRL 11.2 million, an increase of 10.1% year-to-date. Net income for the shareholders reached BRL 23.6 million, an increase of 18.4%.

Our operating cash flow generation was BRL 11.7 million in the quarter and minus BRL 6 million in the year. Free cash flow in the year totally approximately BRL 21 million.

The net promoter score, which indicates the patient satisfaction with our services, appointed 68.6% at the end of the third quarter, an important evolution of almost 320 basis points in relation to the previous quarter. That is a reflection of our continuous improvement in our patient flow in our units.

In the next page, I'd like to highlight evolution of our operating assets. We can see in this image our strategy of focus on maturing the current assets, reason of Alliar increasing the profitability of our operations. At the end of the third quarter, we operated 114 units, which is a reduction of 5 collection points for clinical analysis and 3 small image centers, typically low-performing stores that was closed in this quarter. On the other hand, we continue with 18 mega units in operation and it's important to remember that part of them are still in [indiscernible].

Regarding MRIs machines, we ended the quarter with 124 machines, 1 machine more than in the previous period. We also continued with our clinical analysis expansions with -- but also important to mark that we reduced 2 collection points in the last 12 months. With that, we closed the month of September operating clinical analysis in 52 out of the 114 stores.

Turning now to Page 5, I will further detail the evolution of our revenue in this quarter. Initially, let's look into the chart at left, where we opened the contribution per growth sector. Same-store sales contributed BRL 0.4 million in revenue, which is practically stable and if we see the same-store -- the existing store, the growth was BRL 0.2 million. As we had mentioned, we closed some low-performance stores in this comparative period. This has led us to a revenue pretty much in line with the quarter -- the same quarter of 2017. This fact is also impacted by the fact that we had some less working days in this period and also we had the World Cup in July. The positive aspect that we already saw a reversal of this scenario in October, and we are expecting growth again in top line during the fourth quarter of '18.

When we look to growth revenue per region, we saw in São Paulo good growth with new mega stores still ramping up pretty much in line with our plan. The challenge of here was in Salvador in Bahia, where Delfin brand is facing challenging situations in the market there, mostly not because of the competition but mainly because of the plants, plants that we don't have contracts with, they are gaining market share in the region and also the region there is going through some difficulties in the macroeconomic scenario.

Looking now to the right chart, we can see that despite the negative factors, we still grew in MRI. That's very important because it's where we have the highest margins, and also growing in the clinical analysis. By design, we shut down some small units and the impact was this reduction in all the services other than in MRI. I still feel this picture as a very positive trend when we see mid terms and long terms.

With that being said, I will hand over to Fred, that is going to go through some more details, and I will be back here for the Q&A. Thank you.

[Frederico de Aguiar Oldani, executive]

Hi, everyone. I'm going to comment on the -- on Alliar's financial performance starting on Slide #6. Here it is important to highlight again that in the third quarter, the company continued to delivering positive operating leverage throughout the P&L, and for a flat revenue performance, we were able to grow adjusted EBITDA by 7.3% while growing net income by 10.1%. Looking at the numbers for the year, we also see very important operating leverage with net revenue growing 3.8%, while adjusted EBITDA grew 8.5% and bottom line 18.4%. This is very in line with the new company strategy, where we're focusing on maturing our existing assets and focus on improving productivity throughout our activities.

Going into the Slide #7, going into more -- further details into the P&L. Gross profit and gross margin, we saw a slight reduction in gross margin in the quarter, 36 basis points reduction was mainly explained by increase in depreciation and amortization, which does not affect EBITDA. Disregarding that, gross margin expansion was 132 basis points positive, all right? Here we want to highlight the positive impact of the strategic sourcing initiative mainly in support lab for the quarter, which is yielding very important results. It's also important to mention that on the strategic sourcing front, we have already negotiated other important categories, which will yield positive results in the fourth quarter and throughout next year as well.

Going to Slide #8 now on adjusted EBITDA and EBITDA margin. It's important to highlight the 169 basis points improvement in the EBITDA margin for the quarter, which reached 24%. It's important to highlight the very tight expense control in any form and where our top line stayed flat, which yields very positive results given the current market and macro conditions, and also an important expansion we're seeing in the full year with the accumulated EBITDA -- adjusted EBITDA margin reaching 22.8%, 99 basis points of expansion. It's important to mention that those margins are not yet in the -- in what we consider the sustainable levels, given that we still have some important units under maturation and we haven't extracted all the productivity gains that we think we can from technology and innovation.

Going into the Slide #9, I'll comment on the below EBITDA lines. Financial results was a positive highlight in the quarter as well, with financial expenses going down by 9.6% despite the BRL 1.9 million positive FX gain in third quarter last year, right? So it was an important reduction as a consequence of lower interest rates on the market and also a lower cost of debt given there are ability management implemented on the fourth quarter last year.

Net debt on the end of the quarter reached BRL 624.8 million, a net debt-to-EBITDA ratio of 2.63, flat compared to the second quarter of this year and in comfortable levels, even though still higher than what we consider our normalized levels, which we think were moving towards below 2x throughout next year.

Going into the Slide #10. Here, we have a very positive figure from a lower effective tax rate, which reached 28.4% in the quarter, an important reduction compared to third quarter last year. And for the full year, the effective tax rate has reached 30.3%, significantly lower than previous year. Here, it's important to mention the relevant contribution from the lower tax rate and the lower financial results for this year P&L growth. Also important to mention that effective tax rate, even though now are in normalized levels, we still see a very big room for further improvement after 2020 given the plans that we are to implement next year on simplifying our company -- our corporate structure, right? And this should yield very, very important results after we have implemented the simplification once we are able to distribute dividends through ROC, right?

Having said that, net income reached BRL 11.2 million in the quarter, 10.1% increase, while for the 9 months of the year, P&L reached BRL 23.6 million, 18.4% growth. Those figures are in line with the company strategy of focusing on improving profitability, productivity and maturing the existing assets, but still in a minor scale given the lack of top line growth on this quarter.

Moving into Slide #11, comment on investments. Through both charts, we can see that investments were reduced dramatically, both in the quarter with 47% reduction and in the year with 70% reduction. It's important to mention that this reduction on investment, it's a consequence of this new phase where we think that there's no need to further invest in new capacity, but it's important to mention that the company is still investing significantly on technology and innovation to where we think we can still capture significant forms of growth, but we think that with the existing asset base, we can extract way much more value from those assets. It's important to mention that this reduction in investment has freed up significantly free cash flow for the company. And going into Slide 12, we can see the importance of this change on investments through the company cash flow generation, right?

While operating cash flow has always been very positive for the company, free cash flow has been negative over the last few years, because company was investing way ahead of its free cash flow during -- of its operating cash flow given the market opportunity that we took advantage over the last year. But in this new phase, we have freed up significantly cash from the operation. As you can see in the right-hand chart, our free cash flow for the 9 months of last year has reached negative BRL 137 million, while for the 9 months of this year, it reached around BRL 21 million of positive free cash flow generation, a very big improvement, and we think that this improvement will be even more pronounced in the coming quarters.

Moving to Slide 13, on towards the closing remarks. Alliar is still very focused on improving profitability of its operation and the uses of assets. Investments made on the mega stores are ramping up accordingly. The mega units we have invested within mostly in CDB brand in São Paulo, where we're still facing very important growth [indiscernible] brand, and our position in this market, it's very strong and it continues to gain share on this region. Also important to highlight the continued improvement in productivity of the equipments, where we have reached 25.2 MRI exams per machine per day. It's important, lab reports still way below where we think we can get. We think that there is room for extracting way much more productivity from existing equipment, and this is one of the important reasons why we don't think we will need to invest that much in the future to continue to grow, right? It's also important to highlight that even in a tough market environment, we have been able to deliver strong margin expansion and positive cash flow generation and important bottom line growth, given all the investments we have made in productivity and technology, and there is still much more to capture in the coming future given the comps that we have already implemented. It's important to mention that we will have our Investor Day next week, where we are going to discuss several of those initiatives that will be very important drivers of value for the company in the coming years.

With that, I'm finished with presentation of the third quarter results and I open for Q&A section. Thank you very much.

[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 thank you, everybody, for being present in our call or for your time. As Fred just mentioned, we are going to have the Alliar's Day next week, where we will be able to go into details on what we are planning for next year. There will be a lot of informations on what we have been doing this year as to innovation, as to improvements in our protocols, improvements in the algorithms in the call center. There is a lot of details that we are not able to go through this -- during this call here, but if you have, by chance, the possibility of being in the call, you will see all that we are doing in the company. We are very confident that we are on the right track, especially around innovation. We have created the second engine in the company that will allow us to go back to growth in the top line. I think we have reached the spot there on the costs, but we do have to improve the top line, and we'll be covering those aspects during our Alliar Day. With that being said, thank you very much again for your presence here and looking forward to meet you again. Thank you. Bye-bye.

[Operator]

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