Fleury SA

BOVESPA:FLRY3

Earnings Call Transcript 2018-Q2

[Carlos Iwata, executive]

[Foreign Language] I highlight our main indicators for this year. Net revenue presented a growth of 12.7%, totaling BRL 673.4 million in the quarter. For the first time, we consolidated in our results the acquisition of Institute of Radiology of Natal, market leader in the region, in addition to Serdil in Porto Alegre, which had already been consolidated in Q1 this year. Denials reached 1.4%, in line with the number presented before. EBITDA expanded 18.1%, reaching a margin of 26.6%, which represents an expansion of 122 bps. Our net income has reached BRL 86.6 million. The variation as compared to Q2 '17 has suffered the effective rate in that quarter. In comparable basis, the growth would have been 14.9%. Operating cash flow is BRL 111.9 million (sic) [ BRL 211.9 million ], an increase of 31.3%. ROIC without goodwill has had an expansion of 213 bps, a growth of 41.9%.

Lastly, I would like to highlight that the Board of Directors of our company has approved the payout of BRL 57.6 million regarding the results of the first quarter of 2018 through interest on equities.

On Slide 3 and 4, or rather 4 and 5, we are showing the new units that we have opened as part of our expansion plan. Between April and June, we opened 7 new units, 6 of the a+ brand in São Paulo and 1 in Pernambuco. I would like to highlight the strong expansion of the a+ brand in São Paulo. In addition to the large unit in Guarulhos with the full mix the we had already announced, had the opening of 5 such sites in important regions of the city of São Paulo Avenida Brasil, Alphaville, Ipiranga, Rio Negro and Vila Andrade in Morumbi. These new units are strategically located in regions that have an important share of our target audience for the spring and which did not have our services offered close by. In that manner we have reached a total of 41 new units opened ever since we started our expansion plan until July this year, thereby totaling 13,500 square meters of service areas that's ready to provide services to our customers with comfort and convenience. It's important to highlight that the strengthening of our capillarity includes new openings this year, especially for a+ brand in São Paulo and the brands Felippe Mattoso and Labs a+ both in Rio de Janeiro.

Now moving to Slide 6, and you can see the operational highlights of the quarter. Once again, the extension of our NPS, an indicator of the quality of provision of services. We have reached 76.5% in the quarter, a high of 186 basis points. In May, we have expanded our portfolio of hospitals with the beginning of operation of clinical analysis in traditional hospital Vera Cruz are referenced in the city of Campinas in the state of São Paulo. With about 800,000 tests a year, this is in line with our diversification strategy for the portfolio of our customer hospitals and our entrance in new regions. At the same time, we are advancing strongly in our digital transformation with the aim of improving the customer journey in utilization of our services and also to expedite even further our internal processes of management and efficiency.

The many different initiatives in development and implementation are highlighted. After launching the pilot phase of a+ Queiroz Filho units, the Digital Reception project is also available in a+ Morumbi, both units in São Paulo. Over the next few months, this new model will be implemented in other a+ units in São Paulo and Fleury. And afterwards, it will be expanded to other brands of the group in Brazil.

It's also important to highlight a launch through the Genomic platform, the Oncofoco, the first genomic test developed with the use of artificial intelligence in Brazil in partnership with IBM Watson Health. This test is capable of assessing the abnormalities in genes associated with different types of tumors, being directed for oncology patients who have complex conditions, and it's objective is to indicate an alternative treatment. This is another innovation conducted by our research and development team among many others that are under way.

As already mentioned, in June, we have signed a partnership with Grupo Sabin for a technical-scientific cooperation. It will be international. We will -- are jointly investing in Qure, venture capital startup in health care in Israel. This initiative is an evidence of our strategic vision in the face of the changes in the innovation ecosystem.

In addition to the close approximation that we have always got with universities to produce knowledge and develop new medical solutions, we have increasingly more incorporated partnership models with technology company start-ups and other companies that share with us the strategic vision of this industry.

I also highlight that as a reflects of our ongoing commitment to technical excellence, we have renewed and updated according to new rules our certification to ISO 9001 and 4001 (sic) [ ISO 14001 ], including, for the first time, the brand Felippe Mattoso and our technical area in Rio de Janeiro.

In July, for the ninth year in a row, we have published our Annual Sustainability Report, which can be accessed in our Investor Relations website. This is an important report of the performance and the main actions, whose objective is to continuously enforce the concept of sustainability of our business model.

Lastly, I would like to highlight the award that the company won along the second quarter. We were recognized for our actions in digital transformation innovation by the award Valor Innovation Brazil, winning a highlight position in its category of Medical Services. For the 17th time in 19 editions, our company was elected Excellence in customer service awards in a sector of diagnostics medicine from the magazine Consumidor Moderno and the Weinmann brand was the most recalled brand in terms of Clinical Analyzes Lab.

As I said before, we had many operational challenges that were caused by the truck drivers' strike and by the FIFA World Cup. However, the company was able to demonstrate its competitive power in mitigating adverse events -- effects of these events. And once again, we have solid results of growth and business evolution. A special mention for the advancements that we have been building for our main financial quality indicators in our entire portfolio of brands always based on pillars of positioning: technical, medical, service and management excellence.

Now I turn the conference over to Viviane for her to start talking about the results. At the end, I will be available to answer your questions. Viviane, the floor is yours, please.

[Viviane de Castro, executive]

Thank you, Carlos. We continue on Slide 7, where in you can see the results of our business lines.

We have had a growth of 12.6% in a total gross revenue, adding BRL 728.1 million. The growth in total gross revenue is a reflect of the solidity of our robust brand portfolio. If we discount the units coming from acquisitions and our Natal radiology unit that was consolidated in Q1 and Q2 '14, respectively, the gross revenue in the quarter represented an organic growth of 9.8%, with the highlight for the regional brands, excluding Rio de Janeiro, were 20% and Rio de Janeiro brands with 16.4%.

This result took place in spite of the effects of the truck drivers' strike and the World Cup, which impacted demand in all our segments of operation. In addition to smaller demand for tests on the date the strike at the end of May, and even though we kept all our units in normal operation during that period, we saw a prolonged impact in June due to the reduction of test orders, resulting for fewer medical appointments during this period. At the end of the quarter, we noted a similar effect during the World Cup, which led to the delay of medical appointments and demand for tests. The brands, with the dominance of imaging tests, which require previous scheduling had a smaller impact. Additionally, we'll highlight that our annual price adjustment were significantly below as compared to the same period in the previous year, a reflect of a lower inflation as measured by ITC. Within this context, our service units grown 13.3% in the quarter with the following breakdown: 4.1% were brand Fleury; 36.2% were regional brands, excluding Rio de Janeiro; 16.4% were Rio de Janeiro brands. If we discount the units coming from acquisitions, Serdil and IRN, the gross revenue of units in the quarter has an organic growth of 9.9%. Our operations in hospital have presented a growth of 9.9%.

As we can see on the chart, on the right-hand side, in the quarter, the total gross revenue grew 11.3% totaling BRL 1.4 billion. Likewise, discounting the units coming from our acquisitions, Serdil and IRN, gross revenue in the quarter represented an organic growth of 9.5%, with the highlight for the regional brands, excluding Rio de Janeiro, with 18.8% growth and the brands in Rio de Janeiro with 12.5%. The full breakdown of the gross revenue can be seen in the chart.

On Slide #8, you can see more details about the growth of the brands in our portfolio. The chart shows that most of the growth is a result of the advance of regional brands, excluding Rio de Janeiro, which accounted for BRL 41.4 million of the increase, followed by BRL 17.4 million of brands in Rio de Janeiro, and Fleury brand contributed with BRL 13.3 million.

In the table below the graph, you can see the growth as expressed in gross revenue same-store sales for each segment. Starting with regional brands, excluding Rio de Janeiro, you can see a growth of 36.2% of the gross revenue with same-store sales of 10%. In these operations, we highlight the brand a+ in São Paulo, which presented a strong organic growth of 30%, which also counts on the effects of the new units that we opened. Additionally, we observed an increase in gross revenue in the region of Rio Grande do Sul with 19%, a result of the acquisition of the brand Serdil consolidated since Q1 '18, and the region of Northeast with 72.3% because of the acquisition of IRN consolidated in the Q2 '18. In Rio de Janeiro brands, we note a strong increase of 16.4% in gross revenue with 14.6% of same-store sales.

We could also see in this quarter a trend of a slowdown in the growth as compared to previous quarters as a result of different factors, which include an increase in services provided in clinical analysis, the expansion and optimization of offers with expanded scheduling for imaging tests, [ credentialing ] of new carriers that started in Q4 '17, expansion of mobile services routes, medical relationship and more services provided to the carriers that are partners of our company.

For the brand Fleury, there was an increase of 4.1% in gross revenue, same-store sales of minus 2%. The brand Fleury was the one that suffered the highest impact of the effects of the truck drivers' strike both on the days when we had shortage of fuel and also right afterwards.

In addition to the World Cup, Fleury brand has a higher proportion of clinical analysis tests that were the most deeply affected test in this period because they do not require previous scheduling, in contrast with imaging tests. And because of -- they do not need rescheduling, they had a smaller impact. It's also important to mention that there was a smaller impact in the price readjustment levels because of excessive falls in inflation.

The total growth of gross revenue has a contributed of new units that are still maturing. As a reminder, approximately 73% of the square meters of services that opened is less than 12 years old. These new units are performing as planned, advancing in their revenue potential and providing better care in regions and neighborhoods where our service offer needed to be operated.

Same-store sales of Fleury brand suffered the impact of new units. This effect is related to customer distribution, both old and new, between existing units and new units within a same area or geographical cluster. Additionally, in this quarter we had several substitutions of equipment by other state-of-the-art equipment, especially in the unit Paraíso in São Paulo, the largest unit of our brand.

Now on Slide #9, we demonstrate the execution of our expansion plan, which ended a total of 38 new units by June 2018. This represents 12,700 square meters or about 11% incremental area. On the chart, we highlighted 73% of the total new area opened is less than 12 months old.

And then on Slide 10, you can see our denials and net revenue. On the chart to the left, you can see that our denial indicator reached 1.4% in the quarter, stable as compared to 2Q '17. Discounting the specific effect of negotiations of paying sources in this quarter, the indicator would have been 1.6%. This result is a reflect of the continuing improvement of our processes and systems related to accounts receivable and its cycle. In the first 6 months, this indicator 1.4%, a reduction of 44 bps as compared to the forecast of 2017. And net revenue reached 12.7% in the quarter, totaling BRL 673.4 million. In the quarter, the growth was 11.9%, reaching BRL 1.3 billion.

On the next slide, on the left-hand side chart, you can see our costs. In the quarter, we have had an increase of 12%, which represented a dilution of 42 bps as compared to net revenue, especially impacted by personnel and medical services, where we gained efficiency by reducing costs of health plans of our employees, with management and more efficient utilizing of this resource; and also of salaries that had an adjustment of about 1.7% as a result of collective bargaining processes that started in May 2018.

In the first 6 months, there was a growth of 13.1% in total cost with an increase of 68 basis points. On the right-hand side, there was an increase of 14.3% in our expenses, which represents the growth of 16 basis points in -- as compared to the net revenue especially due to increase in operational expenses related to the increase of different provisions. In the first 6 months, our expenses have grown 14.3%, an increase of 23 basis points in relation with the net revenue. We keep our strict discipline in managing costs and expenses involving our controls and a tireless pursuit for efficiency since -- even considering that we are executing our expansion plan. This can be seen on Slide 12 where you can see the EBITDA margin has a reached 26.6%, an expansion of 122 basis points even with the opening of new units and the specific effects of the strike and the World Cup, demonstrating the strength of our brand portfolio and our continuing efforts to gain operational efficiency.

EBITDA has reached BRL 178.8 million in the quarter, an 18.1% as compared to the previous year. In the first 6 months, EBITDA has reached BRL 364.8 million, a growth of 12.4% with a margin of 27.5%.

On the next slide, #13, you can see the net income, which reached BRL 86.6 million in this quarter, a reduction of 1.4%. Net margin was 11.9% as compared to 11.7% in the second quarter of 2017.

So that you understand better the comparison between the net income between periods, we highlight in gray in the chart the effects of linearization of effective rates with the forecast of the tax benefit of interest on equity. On the result of 2Q '17, this effect reflect the accumulation of 2 quarters, which led the effective rate to 16%. Thereby, considering interest on equity, the net income would have presented a growth of 14.9%. In the first 6 months, the net income totaled BRL 181.3 million (sic) [ BRL 183.1 million ], an increase of 8.1%.

On Slide 14, to the left-hand side, you can see our operating cash flow that had -- that was BRL 211.9 million in the quarter, 31.3% increase as compared to the previous year. The conversion of operating cash and EBITDA has reached 118.5% in face of 106.6% in Q2 '17. In 6 months, the operating cash flow has reached BRL 315.8 million, an increase of 27.7% as compared to the previous year. Cash conversion was 86.6% in face of 76.2% in the second quarter of 2017.

On the right-hand side, you can see the CapEx for the quarter, which totaled BRL 51.1 million, a reduction of 24.7% as compared to Q2 '17. Of this amount, 51.9% are concentrated in expansion and improvement of service units. These investments in expansion will become -- will be intensified in future quarters with the opening of new units, especially a+ in São Paulo and the brand in Rio de Janeiro. In the quarter, CapEx has reached BRL 83.7 million a reduction of 32.6% as compared to Q2 '17.

On Slide 15, we highlight our ROIC without goodwill reached 41.9% in the quarter with strong evolution of 213 basis points as compared to Q2 '17. The growth of ROIC is an evidence that investments that we are making in spite of the initial stage of maturation of our new units are on the right track.

On the same slide, on the right-hand side, you can see the evolution of NPS that reached 76.5% in the quarter, an improvement of 186 basis points. NPS is a metric used to measure the accommodation of our services by our customers. This evolution demonstrates that continuing evolution of ROIC is a sustainable and is related to that basic principles of medical, technical and service excellence, which differentiate our services and are notably recognized by our customers.

On the next slide, #16, we highlight on the chart the average daily trading volume of our shares indeed did reach BRL 50.4 million, an amount that is 76% greater than in the same period of 2017.

On Slide 17, we highlight that our Board of Directors has approved yesterday that it should -- the payout of interest on equity at the amount of BRL 57.6 million corresponding to BRL 0.1826 per share. This will be based the shareholding structure of July 31, and shareholders will be paid on August 15.

On Slide 18, you can see our agenda with already confirmed events with the market.

Now we are open for questions and answers with Carlos, myself and Fernando Leão, our CFO, who's available for -- to answer your questions. Thank you all very much.

[Operator]

[Operator Instructions] Mr. Rodrigo Gastim from BTG Pactual is going to ask a question.

[Rodrigo Gastim, analyst]

I have 2 questions. The first regards the truck drivers' strike. For the brand Fleury, I would imagine that it suffered the most with the strike because of your mix of services. What is the trend? So how was the brand growing until mid-May? This would be very important. The second question regards clusters. There was a slight slowdown with same-store sales for the Fleury brand. And I would like to hear more about clusters both in Morumbi and Anália Franco. Is -- do you think these clusters are likely to reduce in growth?

[Carlos Iwata, executive]

This is Carlos answering your question. As to the truck drivers' strike, it had an impact. It impacted the whole economy. And since last week, we had seen many indicators of the quarter. There was a variation and a worsening of the monthly GDP. And you can see economic activity. It was starting to grow, but then it showed a downtrend in May. And definitely, this was something that had an impact. When we compare the different services, we need to think as follows. Our audience and Fleury strategic positioning is different. Fleury audience has more flexibility in terms of going to have its tests. For a+, they schedule the test. They have a period they are scheduled to go do the test, and they had even been authorized by their health plan. So there is a pending authorization that needs to be used. So it's more difficult for them to miss the opportunity of going and having their tests. For Fleury, it's slightly different, a different positioning. And they feel more free to do their tests whenever they have the opportunity. For Fleury, so we have a quite relevant share of clinical analysis tests, but they are the one that suffered the most because you might not do it today and do it tomorrow because you'll be free, specifically in the city of São Paulo, and we are likely to forget these things very fast. The truck drivers affected supply, gasoline and everything. And -- but -- so you saw that being with transportation of children to schools. Many schools canceled their classes. So we need to remember, and we are likely to forget this, well, the city really is tough and, well, very chaotic.

[Rodrigo Gastim, analyst]

So you feel much more comfortable?

[Carlos Iwata, executive]

No. This also applies to your physician. Sometimes you delay that. So in the end, this affects very much. So we were evolving the programs. And the strike, you should remember the following. It's not about the timing of the strike. And flowing just as they are more flexible. Sometimes it's easier for them to go for an appointment. And when we look at them, so it -- sort of a -- and then right afterwards, there was the World Cup, and there was a period which definitely was unfavorable for us. As to the clusters that you asked, according to what we have, the growth between 3% more or less that we already had, this is going on. We are keeping that. Fortunately, soon, we are going to be able to include that in our total growth and in our total numbers of same-store sales because it will be for more than 12 months. And the plan is evolving as we had planned. I hope I have answered your questions.

[Operator]

Mr. Thiago Macruz from Itaú BBA would like to ask a question.

[Marco Calvi, analyst]

This is Marco asking the question. I have 2 questions to ask. The first one regards Rio de Janeiro operation. We saw a significant increase in growth year-on-year and in the quarter. Is this more related to the acceleration of offers in the units, something that had already been happening? Or are you seeing a gain of market share in the region? And the second question regards the increase in payment terms, which, in the end, benefited the working capital. So is this a trend or is it a one-off event that you saw an opportunity during the quarter?

[Carlos Iwata, executive]

Thank you for your question. So in Rio de Janeiro, there are many factors influencing Rio de Janeiro. Rio de Janeiro is an operation that, as you said, that suffered a loss because of exogenous factors, the overall economy and other factors. Specifically for the state of Rio de Janeiro, it has been going through very difficult times. So we cannot say that they are [indiscernible] -- well, things are slightly better. And we did very intense work in Rio de Janeiro, especially towards [indiscernible], the most critical moment, to assure that we could continue identifying opportunities for growth. One of the items, as you mentioned, in that we worked very well, especially in terms of offers. But we kept growing, especially, for example, in terms of Felippe Mattoso and also our a+ brands. For a+ brands, we still have many opportunities in terms of offers of services. And as you know, they depend on physicians. So there is an issue of structure, of availability. And Rio de Janeiro is a difficult and dispersed market. We have quite a referral operation. And we cannot deny that if we want to have good schedules, sometimes it's difficult. Sometimes doctors don't want to travel so far. They don't want to get at certain times because that means that they would need to drive through some regions that they don't not want to at certain times. So the logistics aspects of our offers is very difficult. So we worked day-on-day, period-periods and physician by physician and different connections with different physicians in terms of their occupying. So we tried to improve the coverage of our schedules in the diagnostic centers. So sometimes, the AC and the CD, there's a culture issue, and we are changing the cultural effect of having AC together with CD. So in terms of payments, there has been an evolution in that we managed to have an increase. That was helpful. And we have that, in some cases, in specific negotiations. We don't see that as a line that reflects a trend. But for these negotiations, even for us to work with current prices, our inventory has also grown a little bit. There's an effect. And this is an opportunity for a purchase or acquisitions at times, which was translated in gains. And Leão is here with us. Would you like to add anything else?

[Fernando Leão, executive]

I think that in reality, the supply team is estimating some specific opportunities in terms of renegotiation of prices with suppliers. And as Carlos mentioned, there was also an increase in inventories. Considering the working capital, there was also a negative effect in inventory. The net effect is a positive effect in the working capital with a gain within this environment where we are discussing supply. Have we answered your questions?

[Marco Calvi, analyst]

Oh, very clear.

[Operator]

Mr. Joseph Giordano from JPMorgan would like to ask a question.

[Joseph Giordano, analyst]

Carlos, Viviane and Fernando, I have a few questions, especially regarding the expansion of a+ outside Rio de Janeiro. I would like to understand what you think in terms of your expansion strategy from now on. Are you going to look more at clusters so -- to have a [ better ] expansion? Or is your focus geographical expansion? So are you going to open more units in the Northeast? What's your challenge in that region, both in terms of competition and also in terms of new carriers that might be a niche for some players in this industry? And when we look for the M&A of the company looking into the future, what is your competitiveness for assets? And is there relevant prospective acquisitions in the market?

[Carlos Iwata, executive]

All right. Carlos -- this is Carlos. I am going to answer your first 2 questions and then talk about M&A and market competitiveness. Expansion of a+. So our strategy, obviously, is to expand our businesses wherever there is a competitive -- a favorable, competitive environment with good prices for us to practice considering that when you have a quality standard that we need to meet and also wherever there is competitiveness in terms of paying sources of -- when one has extreme conditions in terms of paying sources, it's so difficult for us to go in. Even if we buy an operation, that -- an existing operation, sometimes there are pre-existing conditions that make it more difficult. And today, we are in other geographies. Today, there are some geographies that may be in a [ test ]. We did not have operational strategy to be competitive. Today, we have already managed in looking in some regions and become competitive in those regions. So it's not impossible for us to expand the number of regions that we provide services to go into the markets where we are not present today. However, this is going to be inorganic. This is going to be done through acquisitions, which is how we go to the regions where we are not providing services. In the region that we are already, we are taking all opportunities. For example, you can see what we did in Paraná. So there was a significant acquisition last year there, some units that are providing better services to customers. We did not manage the credentialing of all carriers for all units. But even so, we have been growing, which demonstrates in terms of organic expansion that this is the right strategy because there are customers which are not being served as they should.

So talking more of the expansion of a+, this has been our strategy. As to the Northeast, of course we are talking about a region that today, as a vertical player that has been growing significantly and at the end of the day, we are very interesting solutions in terms of demonstrating quality, differentiated services, a relationship with a medical community is something that agrees with what health carriers want, health carriers need. And it also agrees with strategic positioning of health service carriers that have different market positioning to vertical structures. In the Northeast, we have been expanding with a more modest expansion than here. And the South and Southeast are the regions where we started our expansion plan. But this has not been a problem. We are levered to help in the positioning in terms of offering differentiated products, in contrast with vertical health care, yes.

[Fernando Leão, executive]

And then we'll talk about M&A. And Joe, this is Fernando. I'll be talking about M&A. Well, in terms of acquisitions, yes, we have been talking with relevant players in the market, always observing that there are players that really fit our company in terms of quality and brand with an image that is very much committed to service quality in terms of the services that are delivered to customers. And there now are relevant prospects and not so much in terms of size but in terms of being strategic players on a given region or in a given segment. So these are our preferential options. So you talk about prices. So there is more pressure on our numbers and prices. In our discussions, they are demanding that. And what we have been -- done is to equate very well demand with effective diligence that is more careful. And we've been discussing with salespeople so that whatever we announce in the future, so that they add value to the company.

Okay, have I answered?

[Joseph Giordano, analyst]

Yes.

[Operator]

Mr. [ Joel Marcos ] from Santander would like to ask question.

[Unknown Analyst]

I have 2 questions. The first regards the expansion. In 1.5 years, you opened 41 new units and the guidance is 73 until 2021. So what we understand -- are you going to advance that guidance? Or are you going to review up your guidance? And the other question, about a+. It grew 30%, and, of course, there's an expansion in units here. Can you see any cannibalization with the brands that will be considered close by?

[Carlos Iwata, executive]

[ Joel ], this is Carlos. Thank you for your questions. Yes, in fact, there has been an -- there's been expansion. That was very significant. If you look only at 2017, on average there's 1 new unit every 11 days. The company who was not used to doing that will learn how to do that. And now it's delivering units faster and faster and better units operationally speaking, cheaper both in terms of rent and physical structure, well negotiated, meeting the needs of customers in terms of continuous well-being. And that is better and better. And we are very proud of that. We don't see the prospect of changing our guidance or reviewing it up. So we are opening our new units according to the opportunities that come up and as we believe is appropriate.

So in other meetings that we have had, unlike last year, we favor the brand Fleury. And now we are focusing on a+, which has proven to be strategically correct or good strategy. And so the growth of a+ in São Paulo has been really significant. In terms of what you said in terms of cannibalization, I don't think there is cannibalization of Fleury to a+. What happens, and everyone knows this happens, is that we have been having a few years of recession and slowdown with very small growth in some units, and everyone is suffering pressure. And this sometimes leads us to have some sporadic specific movements. I don't see this as a major trend. I see this as adjustment that the market makes since that it does, oftentimes, an adjustment in terms of us having negotiations with Fleury. Fleury is a brand that is interesting, that is designed with the pressure for certain portfolios and then we change customers. So definitely, Fleury is not a brand that only loses customers, we're also gain -- win new customers because there are specific negotiations with certain companies and health plans that bring in new customers. We work with these components to make Fleury be very strong and relevant in the market considering the strategic positioning; also because requesting physicians considering their applications.

[Operator]

Now Mr. Luciano Campos from Bradesco BBI would like to ask a question.

[Luciano Campos, analyst]

The first question, going back to the brand Fleury, the consolidated. So we've seen an increase in footage that was 8% comparing this year to last year with an inflation of 3% or 4% in the first quarter this year. The feeling I have is that 6% in the first half and -- it seems a low number. I would like to hear your opinion. I think your growth was low. Was there any effect? Sometimes you use the opening of a new unit to renovate older units. How do you think you could explain the total growth of the brand Fleury, which is kind of low? And you may agree with it or not. That is my first question. And the second is a follow-up on the previous question. Considering that you are well advanced in delivering the guidance of organic expansion, but apparently, did you find the right way to do this? And I don't know if you already have enough time to focus your attention on other things. And what would these other things be? So what would you tell investors to pay attention apart from organic growth that you have already announced?

[Carlos Iwata, executive]

Thank you for your question. It's good to talk to you again. As to Fleury, well, we can make many calculations so you can put the numbers and think where our growth is small because the area increased 8%. I think that there is a still significant growth. Inflation is very low, and we have a very premium positioning in this market, which, if you talk to all carriers, this is a premium market where there is higher income. Of course, there is a pressure of reducing costs to rationalize costs in many things that might lead to easier solution of taking a good, quality-based player, and differentiating and putting another one is an easier solution. I believe that with the expansion of the REIT in the right way and if we had not done this 8% expansion, we might not be seeing the total growth. And that is the most important for same-store sales because if it's such a small basis, it's not really relevant, and then we would not be seeing this growth. And it's been growing at the rates I have mentioned with an economy that is not shrinking but it's not really evolving. So this is a winning solution in terms of growth. But not just that. If we think the relative importance that it has been dropping in the total scope of the company -- so we were a portfolio company. And it relates to your second question. It shows how the portfolio is working to benefit the whole organization also in terms of us gaining margin. It does not depend just -- not just on Fleury. Fleury is an important brand. We are differentiated, of course. The flagship, for example. But in terms of cost management, people management, and as we have just said, average payment times, average receivables time, many things have made this to work in our way that the whole company had a benefit, especially regional businesses. And they gained scale with benefits for Fleury, too, where we have more diluted costs in managing a+ and Fleury. If I could summarize the answer to you, the 2 things that you have mentioned in terms of expansion, if there is the right expansion that has provided benefits for the company both in terms of gaining market share, benefits customer services, both economically speaking and also in the other brands, I don't think we've done everything that we could. But we have a very good model and we're improving it more and more, which is contributing to improve the company's numbers. And we are talking about 4 quarters that every quarter for every line we've been improving. I don't know whether I have answered your questions.

[Luciano Campos, analyst]

Just one follow-up. And a second question, what else -- in addition to the expansion plan that you are executing, what else should I pay attention to? Some are saying that the market -- or analysts haven't been observing appropriately. What's missing in terms of other projects in addition to expansion?

[Carlos Iwata, executive]

I think that what lies behind the expansion is the company's portfolio. When I talk about portfolio, there is a growth of brands in the total mix, and this is a company that -- those who have been watching us for a long time, last year we suffered with issues like the acquisition in Rio de Janeiro that was very difficult to manage. And there were many unanswered questions about capacity in terms of generating value that was not a super premium. And this is what we are seeing. We've been improving our engine, working on the business intelligence, offers, demand, medical relationship and innovation. For example, today, in terms of genomics, in terms of revenues, we are most likely the largest national player in genomics. Genomics is something that has been growing exponentially in the company. There's a potential, for example, of being even bigger than some of our smaller regions. This is a market that, I would say to you, that has a differentiated in submission chain of the segment because we have the relationship and we're investing in high-cost relationships, and this is very important for them. So there are many different components. And the physical expansion in traditional businesses, for example, innovation in terms of genomics and looking at market segments where we are not present in terms of geography. And even other market segments where we could add value is something that we will be doing all the time. This is a company that has innovation in its DNA. We practice innovation. And most importantly, we constantly bring innovation to the market, and this generates value for shareholders, patients and our requesting physicians and, as a consequence, to shareholders, too. So these are the components that we're missing in this equation. And we're walking a path that seems to be a path that has been providing good results.

[Operator]

We have a question in English. Mr. Daniel Utsch would like to ask a question.

[Daniel Utsch, analyst]

I just wanted to get more color on the cost improvement, especially in the personnel -- on the personnel improvement. I have 3 questions on that front. First, I would like to get more color on the execution of the health care benefits of employees. From the outside, it looks like their reduction would be -- I don't -- I mean, it looks like there have been some reduction in the health care benefits for the employees. But I don't think that's the case, right? And second, the 1.7% salary adjustment you mentioned, is it real or no?

[Carlos Iwata, executive]

A question of -- regarding the health care benefits and the execution of it. You're totally right, we are improving our cost on the health care benefits. We have been implementing a series of actions inside the company that have reduced these costs. So the total loss ratio in terms of our health care plan is up from 140% few years ago to less than 75% right now. So we have been implementing a lot of -- executing a lot of things that are improving. The actions on prevention on health care are sort of helping our employees to better use the resources on health care. And this is helping that it's very important when you have more than 9,000 employees. And if you have -- and if you consider not just the employees but also the [indiscernible] employees, this number comes to 17,000 people. So this is very important. And this is something that our people area or the human resources area have implemented a lot of actions in different areas of the company, in different places of the country. So we are improving this a lot, and this is coming to reality in terms of the reduction of costs in the numbers that you have seen.

The second question regarding the salaries, the compensation of the employees. This is something that we have been improving the utilization of the resources. As you know, Brazil has some loans, so we have to give annual increases negotiated with the unions. This [indiscernible] passed this year. It happened in most of the areas of the country in May. Of course, because inflation was so low comparing to the years before, it's -- inflation passed through on the salaries was low, too.

But the most important part is regarding the utilization of the human resources. So we have implemented lots of projects regarding, for example, Lean Six Sigma, how we improve the processes and the execution of those processes in the patient service centers, how we utilize resources inside the corporate areas. And we are improving much of the usage but also the results of these resources regarding the efficiency of the company. So this is something that is not a matter of nominal or real impact on the salaries, of the compensation but the usage of the resources, better processes and the implementation of, let's say, an approach of workforce management across the whole company.

I guess these are the 2 questions that you made. I don't know if I missed something here.

[Operator]

[Operator Instructions] And since there are no further questions, we now end our Q&A session. I would like to give the conference back over to the company for their closing remarks.

[Carlos Iwata, executive]

I would like to close by reaffirming the company's commitment to sustainable growth. So growth, innovation and digital transformation. And so as you could see, our foundations of excellence and execution capacity has been advancing with full steam. We are confident in the current prospects and also future prospects for the company. And once again, we thank you all very much for attending our conference call, and we hope to meet you along the events that we are going to take part in the second half of the year. Have a good day.

[Operator]

The conference call of Grupo Fleury has now ended. We thank you very much for your participation, and wish you all a good day.