Centro de Imagem Diagnosticos SA

BOVESPA:AALR3

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Alliar - Centro de Imagem Diagnósticos S.A. Fourth Quarter of 2018 Earnings Conference Call. Present here are Mr. Fernando Terni, Chief Executive Officer; and Mr. Frederico de Aguiar Oldani, Chief Financial Officer, 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, and good morning to all. Thank you for participating in our call for results of 2018. I would like to start this call with a brief retrospective on 2018, the year in which we began an important cycle of growth, focused on maturity of the investments that were made, a strong discipline in cost and expenses and on our different projects to increase efficiency and improve the patient journey in our total services. All these things, without giving up, of course, the quality of our medical service, which is in the DNA of our company.

With that being said, let's move on to Slide #4, where I have summarized what are the focus of our Alliar current growth cycle. On the left side, starting with the higher profitability. Here, as you will see, this is a [ profitability ] we are very pleased to see that we have achieved the goals for the year.

Our results are have started to reflect substantial increase in our profitability, even with a challenging year as it was 2018 for the industry, we were -- we were able to deliver significant margin growth and strong cash generation, unprecedented in the company's history. Following my speech, Fred will give details on our numbers.

The second aspect is the digital transformation of the company, based on technology and innovation. Here, for 2019, we hope to capture important gains by automatizing some critical process, as for instance, our center in the reproduction services.

Finally, product [ expense ]. Today's diagnostic market has required new models of relationships between services providers and payers. From now on, more and more new ideas will be needed in [ search of efficiency ] throughout the whole healthcare chain. With all that we have been permeated in our company, and particularly, through Alliar, very well positioned for this new moment, with solutions and proposals that shoot for this moment in the market. Where, whether through provisional gain, where we are leading in the region, or through our new company, IDR.

Moving on to Slide #5. I will describe the 3 pillars of Alliar operations within the new structure areas: patient satisfaction, operational efficiency and medical quality.

So let's begin with operational efficiency. For 2018, we have directed a great effort and time in this pillar. Beginning with the contact better, we started new projects to cater efficiency and automation when we launched SOFIA this year, our video attendant that uses artificial intelligence, and helps us automatize our workforce in this important part of our business, considering that it is the beginning of the patient journey within our company.

Move on to the patient satisfaction. Given our high level of remote monitoring and control of our every day’s patient journey, in our [ web ], we have improved our [ lobby ] services levels, reducing the time that a patient remains in our centers and consequently increases patient satisfaction.

To conclude this slide, in the pillar of medical quality, I want to highlight the results of standardization of medical protocols in [ treatment ] exams, especially on MRI. The effect of this effort and other initiatives will be reflected in increased productivity of different assets. Highlight, further increase of 5% in the productivity of MRI per day per equipment that we saw in 2018.

Following on the presentation, we bring to the Slide 6 some aspects of our highlighted -- some aspects that we have highlighted in the commercial area of our business. In the traditional brands, I highlight the new commercial models that we that we have implemented, such as: exclusivity agreements or contracts with some patients -- sorry, with some clients; outsourcing of own services; negotiations of prices we will exchange for volume; our PPPs, the contracts we have with the government of Bahia; and some other new models that we have implemented in 2018.

And as I mentioned, we also should highlight here the creation of our new company, called IDR, which aims to develop new business opportunities from all of the contracts that we have gathered [ inside our group the past ] few years, with solutions that will be developed according to the needs of each patient, or each client or partners. I'm very confident with these new relationships, which have already shown some results in the beginning of the year.

Moving on to Slide #7, and to finalize this introduction, we display here the main actions developed within the medical front in 2018. I started by the evolution that we have seen on our Command Center, with the beginning of the remote operation of the CT scans, in addition to the high number of standardized MRI protocols we have implemented throughout the company.

I would also like to highlight initiatives and key strengths: the relationship with requesting physicians, the referrals, both as a Medical Concierge, which we have extended now to all regions, in all brands, as well as the new reporting delivery format that we call the multimedia reports, or the interactive reports, which adds a lot more information in the -- on the diagnostics, adding a lot of values to the medical community.

With that being said, with this introduction, I hand it over to Fred, which is our CFO, and will present you the details, the results of our company in 2018. Frederico?

[Frederico de Aguiar Oldani, executive]

Yes, good afternoon, everyone. I'm going to start my presentation on Slide #9, where I'm going to highlight the main results for the fourth quarter and the year.

First, net revenue grew 1.7% in the fourth quarter, with same-store sales reaching 1.4%.

For the full year, our total net revenues reached BRL 1,075.5 million, 3.3% growth in the year, with same-store sales of 2.1%. Here, just wanted to highlight that in the growth cycle, growth is only coming from organic sources and mainly same-store sales, as we have -- as we have discussed with you as part of our new strategy there, we are now focusing on maturing the existing investments, as we still have a lot of idle capacity, Q4, all right?

EBITDA margin in the quarter reached 25.1%, reached EBITDA of BRL 64.9 million, a 26% growth. For the full year, adjusted EBITDA totaled BRL 250.8 million, 12.6% increase, with an EBITDA margin of 23.3%, a 194 basis points increase compared to last year. Again, another important achievement, with a low top line growth, we were able to deliver a double-digit EBITDA growth and margin expansion, in line with the company's new strategy of focusing on extracting more from the existing assets.

As a consequence of this strategy, we also have a very important growth in net income. Net income reached BRL 16.4 million in the fourth quarter, compared to a net loss of BRL 13.3 million last year. For the full year, net income reached BRL 40.1 million, compared to a very small profit in the previous year, with a 502.7% growth, which is a very positive number, given that we are just in the first year of the new phase.

Operating cash flow reached BRL 73.2 million in the quarter and BRL 181.3 million in the year, operating cash flow, which is another very important figure posted. But free cash flow was probably the highlight of the year, where we reached BRL 104.4 million for 2018, something that never happened in the history of the company, because the company was always investing way ahead of its operating cash flow generation. But with this new cycle, cash flow generation was already very strong in the first year and will continue to be strong in the following years.

As a consequence, we also see return on invested capital improving again, right, reaching 12.7% in the year. It's an important sign, right, that the strategy is on the right track. But return on invested capital still way below marginal returns that we see in our business, and we expect even further improvement in the following years, right?

Also important to highlight that all the improvement that are on the operations came with an improvement in the patient experience, measured by the net promoter score, which reached 67% by the end of the year. And it's an important sign that all the efforts to increase reserves and control costs does not come at the cost of a worst patient experience. On the other hand, we're investing a lot in improving the patient experience. And with the new tools that help us to manage, realign real-time line management and execution across all the patient journeys, will help us improve NPS even further in the following years, while we still keep the focus on improving overall profitability of our business.

Moving on to Slide #10. As I have already mentioned, gross revenue growth comes from mostly same-store sales, given the new growth rate driven by organic growth. Here, it is important to highlight that we actually grow in all of our exams, MRI, all imaging exams and also clinical analysis. Volume growth was driven bigger than revenue growth, but given the market trend in the last year of the lives shift towards lower-coverage health plans that the consequence was that most of the volume growth was offset by a lower ticket, but a trend that we see reverting to normalizing in the year on. But it is important to mention that our volumes are still growing and important also to mention that our biggest brand, CDB, which operates in São Paulo region and where we focus our -- most of our transactions are, opened 4 new mega units in the '16 and in '17. Our -- but that's performed well in the company, right? The mega units are ramping as we planned, and we're very pleased with our market position and the results we delivered into the [indiscernible] and city of São Paulo.

And on to Slide #11, commenting on further financial results. Here, I was looking to highlight the change in the structure of the company's P&L, where from '14 to '17, the company faced very, very fast pro forma growth, but given the dynamics of our business, where typically investments take 3 to 5 years to mature, the top line growth wouldn't turn into margin expansion or net income growth. But in this new phase, we thought that once we were stocking back and focus on maturing our existing assets we would see a different trend, where we would see a lot of operating leverage in our business. And that's what we saw in 2018 results, right? With net revenue that grew 3.3%, with an over adjusted EBITDA growth of 12.6%, with margin expansion and net income growing over 500%, right? Of course, top line in 2018 was weaker than we recently anticipated. '18 was a very tough year. But even in a tough year, we were able to deliver important margin expansion and significant net income growth, in line with what we have promised in our new strategy. Should the market helps and we see a gain, a better economic trend, with formal employment going up and more likely assistance, we expect to deliver even better results than we did in '18.

Turning to Slide #12, I'll comment on the gross profit and EBITDA margin. Here, it's important to highlight, right, the increase in the gross profit margin for the year, right? Also, it's important to mention the very good cost and expenses management in the company, which was key to help us deliver margin expansion in a low top line growth environment. Really, I want to highlight the benefits of the strategic sourcing front, especially in the support lab and in general suppliers, where we captured important benefit in the year and we also have some further benefit on these lines expected for 2019.

Moving on to Slide 13, comment on debt and our financial results. 2018 showed the first full year where the company actually started to show some deleveraging, right? For net debt to EBITDA, that started the year around 2.7x, we ended the year with 2.3x, an increase in reduction driven not only by the EBITDA growth, but also by the reduction in total investment as a consequence of better cash -- or better free cash flow generation that was used to repay investments. As a consequence of this, of this reduction in investment, also, the lower interest rate in Brazil, and also the initiatives to reduce that cost implemented, mostly at the end of 2017 and beginning of 2018, financial results -- financial expenses reduced by 14.1%, as shown -- showing that in the new phase, the burden of the financial cost will impact less our P&L than it did in the past.

Moving on to Slide 14, comment on effective tax rate and net income. Effective tax rate was the more heroic important achievement for the year, right? It was a bit concern about our ability to reduce effective tax rate to normalize the leverage. We had expected to lower our tax rate to slightly below 30% for the year. It is better. We reached 26.4% for the full year. It's important to mention that we haven't finished the merge of the legal entities yet. So we're not benefiting from the IFC benefit in effective tax rate yet, but we do expect to benefit from 2020 on, which shows that clearly that we have further room to reduce our effective tax rate when it's -- when we finish the merge of the legal entities. The combination of the operating results with low financial burden and improving effective tax rate was the main component of this increase on the net income, right, which came from BRL 6.7 million in '07, reaching BRL 40 million at the end of '18. Still, it's very low net income compared to the potential that we see for the company, right? And we do expect to see even further increase in the next years as our strategy matures.

Moving on to Slide 15, investments, show a very important reduction in the year, right, of 71% compared to last year. 2017 was the last year of the investment -- of the very active investment cycle, with a combination of organic, M&A. But as we promised for the year, now we will focus on organic growth, and in fact, we see a huge reduction on investment, which turned into a very positive cash flow scenario that is still [ happening ].

Slide 16 shows our operating cash flow and free cash flow results for the year. Operating cash flow was very good in the year, but as it has been in the previous year as well. Cash conversion did not change significantly from '07 to '08 (sic) [ '17 to '18 ]. Operating cash flow reaching BRL 181 million. But the main difference compared to 2017 was that investment was way ahead of cash flow -- operating cash flow generation, leading to a negative free cash flow of BRL 28.1 million. With the reduction in investments in '18, the cash flow turned into BRL 104.4 million [indiscernible], over BRL 120 million of improvement year-on-year, which is something that never happened in the history of the company, but shows very clearly the quality of our business and the ability for us to turn our results into cash flow. And this is surely the big highlight for the year, right?

With that, I have made the most important comments about our fourth quarter and full year results. I would like to open for Q&A session.

[Operator]

[Operator Instructions] I would like to turn the floor to Fernando Terni for any closing remarks.

[Fernando Terni, executive]

Okay, if there is no question, I would like to thank you very much, everybody, that attended our call. And I'd like to conclude by saying that we are very pleased to see that the strategy we have adopted and took at end of [ the top ] of '17 and beginning in '18 pays off during the year. We were able to deliver good margin improvement and have invested cash -- free cash flow generation despite a very difficult market that we saw in 2018, in '17 -- in '18, sorry. We are also confident with that strategy to keep it for '19 and '20. And I would like to say that the company is prepared for 2019. If the market continues the same as it was in '18, we will still see some margin improvement and in case that we see a good improvement in the market situation, and if there are more lives insured, we are going to see a very good results for Alliar in 2019.

Without being said -- that being said, thank you very much for your attention. We look forward to see you in our next call. Thank you, bye-bye.

[Operator]

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