Centro de Imagem Diagnosticos SA

BOVESPA:AALR3

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to Alliar - Centro de Imagem Diagnósticos Fourth Quarter of 2017 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 platform MZiQ 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.

[Fernando Terni, executive]

Thank you. Good morning, everyone, and thank you for joining our 2017 earnings release call. I'd like to start with a brief 2017 retrospective. This year, we have concluded an important cycle focused on the expansion of our geographic presence through M&A; the increase of our productivity capacity with existing brands, the streamlining of our operations, seeking operational improvements; and the most importantly, the quality of our medical services.

So let's start on Slide #4. In 2017, we had invested more than BRL 260 million in expansions. As you can see on these pictures, we have opened 5 new mega stores, 3 of them being in São Paulo as the result of unique marketing opportunity we have in the city. And it's also important to report that in 2017, we had anticipated the opening of those mega stores, which were originally planned for 2018 and '19. Just as a reminder, each mega store has a revenue potential of BRL 50 million per year.

Furthermore, it is also important to note that we have concluded investments in the RBD, our PPP, alongside with the Bahia state government, which will allow us to start 2018 with full monthly revenue until the end of the contract.

In '17, we also have made 3 acquisitions, one of them being Multiscan, leading -- the leading company in image diagnostics in the state of Espírito Santo, where we have already operated under the CDI brand. With that acquisition, we consolidated our presence in the region with almost 50% market share. The other 2 acquisitions, we purchased multi and [ CA ] labs, an important step to get accreditations, and also the rollout of our clinical analysis strategy.

If we move onto Slide #5, we can see the 3 strategic pillars of Alliar: Patient satisfaction, operational efficiency and medical quality. So let's start with operational efficiency. In 2017, we have directed a great amount of time and effort towards this pillar. We concluded integration of our RIS and ERP into a single cloud-based database, provides a better quality in the patient's journey as well as an effective billing and cancellation control.

We have also centralized our call center operations in the -- into a single site here in São Paulo in Barra Funda, which grants us future cost synergies and a greater scheduling efficiency. It's important to highlight that this movement put us in a privileged position in achieve efficiency improvement through automatization and also robotization of our operations.

Regarding patient satisfaction, we have promoted an important change into our data structure methodology, namely Net Promoter Score. Now we have a more robust information on our patient's journey that will allow us to evolve considerably in this matter.

Those that have had the opportunity to visit our headquarters in São Paulo could have a closer look on the level of tracking with a remote control of this patient journey, we assume that the system integration will have promoted.

To conclude this slide on the medical quality pillar, I'd like to highlight the results of -- that we got on the standardization of our medical protocols on different examples, especially on the MRIs. The result of those efforts and all the initiatives are reflected on the productivity increase we have in different assets.

As a highlight, the volume of MRIs per day per machine has increased 77% in 2017. Moving on, on our presentation we highlight on Slide #6, some of the relationship models we have developed in the commercial areas.

We now offer to some health care operators a negative vertical virtualization (sic) [ virtual verticalization ] model, which enables the utilization of our services network, but also to -- through mutual benefits. As an example, the model adopted prevents failure that grants us the higher utilization rate in our equipment. And at the same time, it allows the operator to grant better assistance within the legal deadlines, avoiding fines and also allowing cost reductions to our customers.

We're also involved in commercial partnership with other big national operators that seeks quality services with an attractive cost. So we can expect 2000 -- or in '18, some increase in our expense volumes from those new contracts.

Furthermore, as a result of innovations in Alliar remote operations, such as the Command Center, in 2017, we began to sell lab-to-lab services in imaging to external customers seeking cost optimizations. This new model opens the door for new business with greater additional revenue streams.

On Slide 7, we detail the main actions results in the medical front in 2017. One of the most important medical fronts for Alliar has been the reevaluation of reports by peers. One of the benefits of the large and diverse clinical staff we have, the possibility of channel validation of diagnostics by another physician alongside with a possibility to request a second print in case of high-complex exams.

Also through the increased volumes of reports from teleradiologist, it has become possible to include the offer of exams in different locations through the medical staff's diverse specializations. So the Command Center, now we operate with the 3 major suppliers. We have also expanded to CT scanning. We have now developed the standardization with standardized medical protocols, meaning that it does not matter in which unit the patient is -- the exam is being performed, we will deliver the highest standards in quality available in the company.

In 2017, we implemented the Medico Concierge in our main brands, aiming to strength the relationship we have with the physicians through a differentiated communication channel with Alliar, which allow different -- direct access to our main radiologists.

Finally, in an even a more innovative way, we are looking for new medical productivity tools in 2017, such as the recent [ Charlie ] report and also the resolutive diagnostic model, which is a cumulative step in the future diagnostics with great productivity and less work. Finally, in -- Slide #8 is a brief summary of our growth cycle completed by Alliar.

In 2014, we have largely CDB, our business branch. In 2015, we started private-public partnership with Bahia. In '16, we have completed the acquisition of Delfin, the lead partner in the Northeast region of Brazil. And now in '17, we have completed the cycle of expansion with the opening of 5 mega units. The acquisition of Multiscan and the acquisition of small labs for clinical analysis.

It is important to note that in this cycle with the addition of the expression film, we have maintained the talks on technology, medical quality and patient experience seeking to strength the foundation of Alliar's differentiated business model. We have achieved a significant advance in the integration and increased operational productivity through the physical centralization of our call center with the new Command Center now operating out of GE and Philips business centers.

With that, I invite Frederico Oldani, our CFO, and -- to discuss in more detail the quarter results and the year results. After his presentation, I'll be back for the Q&A. Thank you.

[Frederico de Aguiar Oldani, executive]

Good morning, everyone. I'll start my presentation on Slide #10, where I'm going to comment about fourth quarter and full year results.

First, I'd like to highlight the good performance of revenues, both in the quarter and in the year. In the quarter, our growth reached 13.7%; in the year, 16.9%. Because it's impacted by same-store sales of 6% in the quarter and 9% in the year, highlight the continued growth of existing units at the same time that the company adds new mega units, while achieving that impact.

On the EBIDTA side, our EBITDA reached BRL 51.5 million in the quarter, 7.2% higher than previous year and the quarter and BRL 222.8 million in the year, 9.6% growth compared to last year. It is important to highlight that adjusted EBITDA was relatively impacted by the fact that we had 6 mega units right since third quarter of '16 and those mega units have had some important negative impact on our short-term margins as when we open those mega stores. Typically, we always partly capitalize 70% to 75% of fixed cost all over the year, while the potential revenues typically take 3 to 5 years to reach its full potential.

On the net income, recurring net income reached BRL 4.7 million in the quarter, BRL 24.6 million in the year.

On the operating cash flow, it is important to highlight that the company continued to generate a lot of cash, BRL 55.3 million in the quarter, 107% of cash -- EBITDA cash conversion, while for the year, cash flow generation reached BRL 176.3 million, a growth of 17.1% compared to last year.

Growth in the current operating flow highlight the company business model, which has a lot of potential to generate operating cash flow even in a growth environment. We also like to highlight the end of the consolidation of all the call centers. Now all call centers are centralized in the new contact center in the city of São Paulo, which opens a lot of room to -- for us to explore benefits from automatization and robotization in the future, which a lot of benefits in both cost reduction and also in the addition of tying off the cost.

Also, we would like to highlight NPS, Net Promoter Score, which reached 68.9% at the end of the quarter. But it's important to mention that in the quarter, the company improved a lot in the end of the period of the methodology of capturing data, which now reflects much better the real satisfaction of the patients than the previous model. And plus we continue to post very strong numbers on NPS.

Finally, we would like to highlight the implementation of the new ERP that's now all on Alliar brands running under the same database in the cloud. This is very important, because it allows us to increase a lot our internal control process and also our order-to-cash process, with significant benefit that we expect to tap in the future in terms of reducing losses throughout this new process that is very relevant to the IT -- with the new consolidated IT platform.

Moving into the Slide #11. I'd like to comment about our growth throughout the year. In the year, we ended up adding 6 new stores, that is 6 stores with a combination of 6 new mega stores for clinical portfolio's operation and where we changed less productive MRI machines into more productive locations, locations where we see much broader cost opportunity to fully use all the MRI potential. So when we look at the MRI through the year, we already added 6 machines, but actually we ended up moving 12 machines. Why? Because we're -- we've got 6 backlogs relocated to a better location.

On the clinical analysis, we added 16 new rooms in the year. It's important that with you ramping up those rooms, you can see that the productivity of those rooms is still way below our average, but that is very in line to our business plan. And it's important to highlight as well that most of the costs associated with running those clinical analysis rooms are variable. And the company has very little in opening those rooms. So the counter-impact of this additional cross-sell will be very important as we mature those rooms.

Moving into Slide 12. We're going to comment on revenues. Revenues in the quarter grew 12% and 17% in the year. It's important to highlight that all kind of exams grew in the double digits, both in the quarter and in the year. MRI, which is our most important exam grew 11.7% in the quarter and 15.8% (sic) [ 16.8% ] in the year, mostly driven by increased productivity, which is very important at the same time that we keep adding new machines without losing productivity on existing ones.

Clinical analysis also grew significantly in the quarter and in the year. In the quarter, it reached 18.1%, in the year, 30.9%, showing that the company's strategy of offering clinical analysis as a cross-sell unit is going extremely well as planned.

Moving onto Slide 13. We will comment on costs and expenses. As we have mentioned, the impact of the new mega stores and also the investment and the PPP has had an impact, especially on the costs side, where for the year, we ended up having the cost ex construction and depreciation and amortization growing higher than revenues, leading to a small contraction in the gross margin for the year that through the end of investment cycle, we can already see that during the fourth quarter, we had costs grow below revenues, which is something that we expect that continues to happen throughout '18 and '19 structurally as these investments cycles are over.

On expenses side, it's important to mention that in the quarter, there was a lot of one-off effects, one-off. Both in '16 and '17, there was some kind of one-offs, but just one specifically that, I think, comment already stated, which is the write-off of receivables.

Throughout the quarter, the company went through a very improved -- improvement in its internal controls and reconciled some of balance sheet asset accounts. Let's put a big focus on the receivables and throughout the new IT platform and the new process on order-to-cash controls. We've emphasized that was around BRL 50 million of receivables that the current management understands that are not billable effectively.

So we understand that there was a need to impair those assets, and we recorded a loss of around BRL 50 million in the quarter. We also had some positive impact of around BRL 4 million in the quarter, which was somewhat offset relative to those losses. But it's important to mention that those loss does not necessarily reflect any relevant impact on the future revenue yields. We understand that our current level of provisioning for losses are pretty much in line to the scenario we're seeing today. We look to provision 1.2% of revenue for those losses. We revised that level to 1.8% filing in the fourth quarter '17. And we think that this level -- this new level is very adequate to reflect this regional losses scenario.

And also, the new order-to-cash process that was implemented throughout the quarter also guarantees that we are in much better controls in process now and guarantees that in the future, we won't suffer those kind of problems again.

Moving into Slide 14, comment on the adjusted EBITDA, adjusted EBITDA, which is BRL 51.5 million in the quarter, BRL 222.8 million in the year, which is, in the year, 21.4% adjusted EBITDA margin. Now this is still way below what the company understands is its potential recurring EBIDTA. It's still impacted by the fact that we added a lot of capacity over the last year. And typically, the maturity of those investments will happen in 3 to 5 years. So we're very confident that the current EBITDA margin does not reflect all the assets that the company is currently holding in its balance sheet.

Moving onto the Slide 15, comment on financial results and taxes. Financial results was around 19% higher than previous year. This was mostly explained by higher tax compared to last year and also some differences in the basis of comparison for -- from 4Q '16 to 4Q '17, where, in the 4Q '16, there was some interest that was capitalized, while there was no interest capitalized in 4Q '17. This was a, so called, old effect. We would expect that the new -- the lower levels of Selic rate should have a most positive impact on the fourth quarter '17, but it didn't happen because of variation in the basis of comparison.

For the year, our financial expenses reached BRL 71.5 million. While the total financial expenses was higher, there was a negative impact of BRL 6.7 million in the quarter, mostly impacted by the fact that throughout the quarter, the company issued new debentures, and those debentures were used to prepay everything back. Those existing debt had market value different than the account value, and also there was some prepayment fees associated, generated a negative one-off impact of BRL 10.5 million in the quarter that was somewhat compensated by BRL 3.8 million (sic) [ BRL 3.7 million ] of gains in correction of some tax depositors.

Going to the income taxes. Income taxes was significantly impacted by BRL 28 million of nonrecurring events in the quarter. There were 2 different impacts. One of them is associated with write-down of deferred tax liabilities. This is something associated with the fact that acquisitions made before '14, right, were not incorporated until the end of '17. Now we do not see this kind of issued taxes anymore. Because as of '17, the tax and accounting basis must be equal. Right? So there was a need to account for these write-downs of liabilities, which ends up being a gain in the tax in the quarter.

Also we had BRL 16.7 million of deferred tax assets recorded in the quarter based on tax losses of tax periods, which hadn't been recognized in the past. Right? And given the new study that the company made, that allow us to increase the ceiling of the total deferred tax assets, while previously it was around BRL 92 million. Now we raised to somewhat around BRL 123 million, which allow us to recognize these deferred tax assets. And those BRL 16.7 million, the company actually expects to reduce tax payments in the future. They are different than the write-down of deferred tax liability, which was only an accounting effect.

Turning to Slide 16. Net income reached BRL 4.7 million in the quarter, BRL 24.6 million in the year. Net income was lower than the previous year, but it is important to mention that this was somewhat expected, as the company accelerated significantly its investments with the consequent debt levels, which remained at very high throughout the year and very, very high interest rate as well. And as the company is going into the new phase, new investment phase, where we expect to invest very much less than we did in the past and also matured investments made in the previous cycle, we understand that we have very positive prospects for net income growth in the near future.

Going into Slide 17. Cash flow was a very positive highlight, both for the quarter and in the year. In the year, BRL 176 million of recurring operating cash flow, right, which is very powerful, 79% of cash conversion, showing the strength of the company with this model. And combined with the reduction in investments and for -- in the next cycles from '18 to 2020.

Now the company will actually extract its operating cash flow from now on, actually, turning it into positive free cash flow as well. That, as a consequence of all investments made in the year, ended up reaching BRL 706 million of total debt and BRL 611 million of net debt, right. The net debt represents around 2.7x the EBITDA, which is consistent to the company covenants, but clearly ahead of what the company understands, which will be our normalized leverage level. So it's important to mention that in '18, the company expects to use most of its cash for its previous motivation to reach EBITDA.

Finally, going into investments. Investments in the year, which account for organic investments and acquisitions and investments on the PPP, ended up reaching over BRL 250 million, 41% higher than the previous year, less than BRL 189 million. That is important to mention that in the fourth quarter, we're clearly adapting the end of the investment cycle there, where our total investments was almost 60% lower than 4Q '16, where we are still looking -- having that new organic capacity.

So moving on, we expect CapEx to be significantly lower, as the company is not planning any relevant acquisition for the year, ensuring that with the reduction in investment, free cash flow, we expect it to be very positive for the year. And this is something that is very different than what we have seen throughout the last cycle there. We add up our operating cash flow generation, but we created an asset base that now will guarantee that in the next cycle, we'll have a very, very good platform for topline growth, margin expansion and value creation.

Now let me turn back to Carol to start our Q&A session. Thank you.

[Operator]

[Operator Instructions] Mr. Thiago Macruz from the Itaú BBA would like to make a question.

[Vinicius Figueiredo, analyst]

Actually, it's Vinicius here. The first one is regarding the competitive scenario. We follow a lot of players expanding their operations in the city of São Paulo in the last year. And we would like to know how do you see the current competitive environment in the city? And my second question is, we saw the write-down of almost BRL 50 million. You already commented about that. Could you guys explain a little bit more about the nature of this impairment? And can we see a future impairment going forward?

[Fernando Terni, executive]

Thank you, Macruz, and in turn, thank you, Vinicius. Let me start addressing the first part of your question as to the market as what we have seen so far in the first quarter of this year, especially in São Paulo, which was your question, which certainly has been one of our strongest growth in the first quarter. We are very confident on the investments we have done last year. I think we have knocked off the new mega sales in São Paulo. We have been very, very positive, surprisingly positive. We have installed the second MRI in Morumbi about 3 weeks ago. Last week, we have completed the installation of the second MRI in Móoca. And we are very satisfied with the development in the new region -- in the [indiscernible] region here in São Paulo. So with that, I think São Paulo, which is your -- to take up your question, has been very positive to us. It has been the best growth we have seen in the company. Externally, to give the answer, in Bahia, we have been quite unstable, more a flat market. The same also in Espírito Santo. And another positive surprise was win of the rights as mentioned [indiscernible] granted. Our relationship with the local players hasn't been seeing that. So it has been very positive. So all in all, what we have seen so far in 2007 -- in '18 is the market is not growing as much as it was growing in the first quarter of 2017. But in the regions where we have made most of our investments, the growth has been very positive. So we are very confident on 2018 so far. So with that, I pass to Frederico for the second part of your question.

[Frederico de Aguiar Oldani, executive]

All right, Vinicius, regarding the write-downs. The write-downs are a consequence of the company values. All the receivables in its balance sheet throughout the fourth quarter and in order to understand given all the eligible quarter, that was actually billable, right. Why? Because the profits of -- the other 2 cash profits works somewhat like this. You do an exam. Then, you have some time where you need to collect a lot of documentation from that specific exam and send to the HMOs to then for that exam to become a receivable, right? The analysis is that we did work on all the exams that was recorded at the present that wasn't effectively billed. And we needed to understand, given all the document -- all the available documentation in all the contractual terms that define for how long that exam is actually billable. And you need to run these analyses for every one, right, in every different HMO because every brand has different context with different HMOs and HMOs tend to have not necessarily the same billable billing procedures. What we end up realizing was that there was around BRL 50 million of receivables that the company could not bill -- could not collect because of mainly 2 reasons. One was that we really have enough support documentation to actually make the bill, make the collection. And the second reason was that, in some cases even though we did have the necessary documentation, the collection period had expired. So that means that even though we have all the right documentation, but there is some HMOs that requires that we collect them in around 9 days, for some there is a 6-month period. So whatever -- after those periods, we cannot collect any more. So when we run these kind of analysis, we realize that there was around BRL 50 million that couldn't be actually received. So we understand that. We need to repair those assets. So the most important thing associated with this process, right, it's one thing -- well, actually [indiscernible] first, right? We understand that those write-downs does not necessarily mean that going forward, the company has much higher expected losses in the future, right? Given our current analysis, by adding 0.5 percentage points in our provisioning, right, moving from 1.3% to 1.3% -- 1.8% in a constructive way, we are covering for the existing losses on the current run rate. This is very important because the impact moving forward, we expect just to be 0.5 percentage points of revenues. That's important. First thing. Second thing is that, if you look at the cash flow generation, right, you see that even though we made the write-down, right, cash flow generation was very, very positive both for the quarter and the year showing that those impairments did not actually attract the company's ability to generate cash flow, right? So these are 2 very important things, right? That's why we understand that those write-downs are a nonrecurring event with a very small impact on the future cash flow generation prospect. It is also important to mention that we are very confident that with our new internal control process, combined with our new IT platform, we are now -- at least at the end of the year, we have all the company brands under the same database in the cloud, which allows to centrally manage and control all the order to cash process, right? And since the end of last year, we haven't created a new structure, and we aimed a holding reporting to you, which is the level with shared area, which is possible to control all the process. And since we have this new link and centralized IT product with all information, we have all the necessary means to be very much more proactive in the collection, right process and also in controlling all the relevant KPIs for making sure that we convert most of our production exams into cash flow generation. So we're very confident that we have the write-downs. And then we have cleared up everything that needed to be cleared, and we have a much more robust process in place with a very small impact on future cash flow generation prospect.

[Operator]

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

[Fernando Terni, executive]

Thank you everybody for being present in our call. As a closing remark, I think our idea is to stress the fact that we have now concluded this part of the growth in 2017, and we are pretty much ready for the new start in 2018, where we will be focusing on increasing the usage of our assets. We have -- as we described, we made a lot of efforts on streamlining the operations and then putting efforts on the medical protocols, and we are quite confident on the [our financials]. The company is well prepared for the innovation that needs to come into this new cycle, previous cycle and also on the cost expenses and the reductions, but also with technical part and the medical part. We have done a lot of investments also on increasing the productivity of the doctors, and we are quite confident in this new cycle.

As also Fred said, with this new ERP combined with the new kit, all of this in the cloud, we are very confident on the new controls we have put in place. So as Fred just described it, we don't expect any new batch crisis as we have see this next quarter. With that being said, I hope you will be reverting in the next conference call, and I thank you very much for your presence.

[Operator]

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