Fleury SA

BOVESPA:FLRY3

Earnings Call Analysis

Grupo Fleury reports strong Q2 2024 growth

Grupo Fleury's earnings call revealed significant growth in Q2 2024, driven by a successful merger with Grupo Pardini. Revenue surged by 19.7% year-over-year to BRL 2.1 billion, and net income rose by 47.5% to BRL 173.6 million. The Fleury brand grew by 6.1%, with other brands in Sao Paulo and mobile services showing stronger increases of 27.4% and 19.7%, respectively. EBITDA improved by 21.7% to BRL 522 million, achieving a margin of 26.4%. Management expects synergies from the merger to yield BRL 200-220 million in incremental EBITDA by the third year, emphasizing the ongoing efficiency and expansion initiatives.

Strong Revenue Growth Driven by Strategic Merger

In the second quarter of 2024, Grupo Fleury reported gross accounting revenue of BRL 2.1 billion, marking a substantial growth of 19.7% compared to the same period last year. This growth can be attributed to the successful business combination with Grupo Pardini, which has expanded the company’s service offerings and market presence significantly. Fleury’s consumer segment also saw a 6.1% growth, while other brands in São Paulo witnessed a remarkable increase of 27.4%. Mobile services, which comprise 7.6% of total revenues, recorded an increase of 19.7%.

Impressive Earnings and EBITDA Margins

The company's Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) reached BRL 522 million, showing a 21.7% increase from the previous year, with a stable margin of 26.4%. This reflects effective cost management and operational efficiency following the merger. Net income for the quarter stood at BRL 173.6 million, representing a striking 47.5% increase year-over-year with a net margin of 8.8%. Excluding specific gains related to the integration, adjusted net income was BRL 194.7 million.

Strategic Synergies Boost Performance

The merger with Pardini has progressed well, with synergies generating expected incremental EBITDA between BRL 200 million to BRL 220 million, anticipated to be fully realized by the third year post-merger. As of this quarter, the company has achieved 60% of these synergies, primarily through cost reductions. Continued integration efforts emphasize improving logistical efficiencies and enhancing service offerings, which positions the company for future growth.

B2B Growth and Diversification Strategies

The B2B segment has become increasingly significant, contributing 24% to total revenues. Notably, B2B revenues surged by 48.2% in the second quarter compared to the previous year, amounting to BRL 501.6 million, reflecting strong demand for lab-to-lab services and partnerships with hospitals. Future growth in this segment is underpinned by ongoing efforts to expand service contracts and strengthen relationships with healthcare providers.

Investing in the Future: CapEx and Cash Generation

Grupo Fleury’s capital expenditure in Q2 was BRL 97.6 million, a decrease of 8.1% year-over-year, indicating a disciplined approach to capital allocation. This was primarily aimed at maintaining cash liquidity while supporting digital acceleration strategies and expansion efforts. Cash generation has also seen remarkable improvement, totaling BRL 588.2 million for the quarter, up 82.4% due to better working capital management.

Maintaining Financial Health Amid Market Challenges

The company sustains a healthy leverage ratio of 1.1, well below the 3x threshold set by financial covenants. This low leverage allows Grupo Fleury to pursue its strategic goals without excessive financial risk. The management acknowledges potential challenges related to market fluctuations and healthcare insurance dynamics, yet they express confidence in their robust brand positioning and customer relationships to navigate these obstacles.

Looking Ahead: Future Guidance and Expectations

While specific numerical guidance on revenue and margins wasn't provided, the executives expressed optimism about maintaining growth momentum, primarily driven by ongoing market share gains and effective cost management. They noted that growth in the B2C segment is returning to pre-pandemic levels and that the company is well-positioned to adapt to changes in customer demand and preferences.

Earnings Call Transcript 2024-Q2

[Operator]

[Interpreted] Morning I would like to welcome you to Fleury's Second Quarter 2024 Earnings Release Call. We have here with us today, Ms. Jeane Tsutsui, CEO of the company; Mr. Jose Filippo, Chief Financial Officer; and Mr. Renato Braun, IR Officer. I would like to let you know that this event is being recorded and that we also have simultaneous translation into English. First, the company will present its results, and then we are going to start for a Q&A session. The end of the session, Ms. Tsutsui will make final remarks. Of numbers shared today are compared to the same period in 2023, unless otherwise specified, and they have been rounded to the nearest thousand. Before moving on, I would like to clarify that this presentation may contain information about future events. Such information comprises not only historical facts, but would reflect the wishes and expectations of the company's management. The words believe, expect, plan, forecast, estimate, project, aim and like, are intended to identify statements that involve known and unknown risks, Known risks include uncertainties which are not limited to the impact of price and service competitiveness. Uncertainties also include market acceptance of service transactions of the company and its competitors' regulatory approval, currency fluctuation, changes in the mix of offered services and other risks described in the company's reports.



I would like now to hand it over to Ms. Jeane Tsutsui.

[Jeane Tsutsui, executive]

[Interpreted] Good morning, everyone. Thank you very much for your participation in our conference call today to present the results of Grupo Fleury of the second quarter '24. In our call, we are going to start with an overview of Grupo Fleury and the business combination with Grupo Pardini.



Moving on to our revenue diversification and growth avenues and finally arriving at the financial highlights. In the second quarter of 2024, the combination of Grupo Fleury and Grupo Pardini completed its first year. We are very pleased with this move that has strengthened our position as a major reference in diagnostic medicine in Brazil with unique competitive advantages, operational efficiency and financial robustness. As you can see on slide 5, the company resulting from this merger has had an expansion of operations in all states, an important geographic and business complementarity. In B2C, we had 24% increase in potential beneficiaries reaching 25 million, and we increased our service units by 65% with 557 units in the main economic hubs. In addition, in B2B parties a national referencing lab-to-lab business. Today, we're presenting more than 2,000 cities, reaching all states of the country and serving more than 7,000 laboratories with highly specialized and efficient logistics.



Slide 6 demonstrates the time line from the announcement of the operation in June 22 through trust the authority as planning and approval when we presented the potential for synergies of BRL 200 million to BRL 220 million incremental EBITDA to be fully obtained in the third year. Since May '23, we have been going through a structured implementation process, successfully capturing synergies and integrating the coaters and businesses. Some milestones in the business combination expressed in the time line are the expansion of the portfolio in the service units such as offering toxicological tests and lab-to-lab, offering genomic tests to all partnering labs. The optimization of the lab-to-lab logistic network, the advances in Project X allowing the processing of tests with greater efficiency and speed.



The greater use of technical areas, the unification of R&D teams in addition to commercial expansions in B2C. It was possible through a series of structural activities that guided the integration process with the definition of governance and institution of the IMO design of the new organizational structure, monitoring of initiatives, KPI monitoring, strengthening of the organizational culture and measurement of results. Thus, we united 2 companies with converging cultures, resulting in a combined company with more than 20,000 employees and 4,000 doctors dedicated to offering quality services with efficiency and focus on the customer.



As we can see on slide 7, the business combination put Fleury at a new level of revenues and has led to business diversification. In 2017, Grupo Fleury's revenue were BRL 2.6 billion, concentrated in B2C, 84% of the total, and influent 49.6%. Since then, the company has expanded revenues by 3x BRL 8 billion in the 12 months ended in June 24, with more diversified profile of revenue sources and payers. This situation reflects our organic growth, acquisitions in B2C, which expanded our regional operations, the business combination with Pardini, which expanded B2B through blood to lab and the gaming representativeness of [indiscernible]. Thus, currently, B2C represents 67% of total revenues and the Fleury brand, 25.6%. We continue to strengthen differentiation in the premium segment and expand our positioning and presence in the intermediate and basic segments.



We offer a care of journey, which is much more complete and integrated shown on slide 5. With robust network in B2C and B2B diagnostic medicine, prevention, primary, secondary and tertiary care as well as initiatives such as health platforms and joint ventures. So we are present at all stages of people's health and well-being joining.



As we can see on slide 9, our focus on the care journey is demonstrated by our 4 avenues of growth. B2C diagnostic medicine with 31 regional brands and 529 service units accounted for 67% of revenues in the second quarter of '24, 80% of which was mobile service.



In B2B diagnostic medicine with 9 brands and presence throughout the Brazilian territory, the percentage of revenues was 24%, while [indiscernible] represented 8% with 5 specialties, 9 brands and 34 units. In Health platforms, the percentage of revenues was 1% with telemedicine, distributors and marketplace. We have also and we are also announcing today the closing process of the acquisition of Sao Lugene to Diagnostics.



As detailed on slide 10 with this acquisition, we entered the B2C market in Santa Catarina state, which was already in our B2B business portfolio with Pardini Technical Center. This is a very important move, which also shows our commitment to evaluate the market and consider opportunities, which are aligned with our discipline in capital allocation. Before presenting financial highlights of the second quarter 2014, I would like to clarify that we provide in addition to accounting results, values of the same paces for the Beria, which enables a better understanding of the evolution of results. Based on the table on slide 12, the second quarter '24 accounting results captures the results of Grupo Fleury and Pardini comparing with the Grupo Fleury quarterly results in '23. The pro forma result, an audit and for simple comparison, includes the 3 months of Fleury and Pardini as if both operations were combined in the same period of '23 and '24.



Now coming to slide 13, we have the accounting financial highlights of the second quarter '24. Gross accounting revenue was BRL 2.1 billion, growing 19.7% compared to the same period in '23. Growth of 6.1% for Fleury brand, 27.4% of other brands in Sao Paulo and 19.7% in mobile services, amounting to 7.6% of revenues. EBITDA was BRL 522 million with growth of 21.7% over the second quarter, '23, [ x ] one-time expenses of the business combination, reaching margin of 26.4%. Net income was BRL 173.6 million, representing growth of 47.5% compared to the second quarter '23 with net margin of 8.8%.



Moving on to the pro forma results, which are available on slide 14, we highlight in another quarter, our consistency in delivering results. Gross revenue reached BRL 2.1 million, representing growth of 8.1% over the second quarter '23. Fleury brand grew 6.1%, while the other brands in Sao Paulo grew 19.9%. In Minas Gerais, there was growth of 11% and mobile service had increase of 16.3%, representing 7.6% of revenues. EBITDA reached BRL 522 million, growth of 12.5%, with margin of 26.4%, an increase of 115 basis points over the second quarter '23.



I would like now to hand it over to Jose Filippo, our CFO and Investor Relations Officer, who will tell you more about our financial performance.

[Jose de Almeida Filippo, executive]

[Interpreted] We are now going to provide detailed information about all the financial information. Slide 15, gross accounting revenue reached BRL 2.1 billion in the second quarter '24, growing 19.7% over the second quarter, '23, as a reflection of the business combination with Pardini, the good performance of B2C and growth of B2B. Considering the first 6 months of the year, gross accounting revenue reached BRL 4.2 billion, growth of 34.6% compared to the same period in 2023.



Moving on to slide 16, we can see pro forma gross revenue, reaching BRL 2.1 billion in the period, an increase of 8.1% in a situation of good performance of B2C and mobile services in addition to growth of B2B. In the first half of the year, growth was 7.5%, with pro forma gross revenue reaching BRL 4.2 billion.



Slide 17 shows the accounting results of our service units. Gross revenue reached BRL 1.4 billion in the second quarter of '24, growing 14.6% over the second quarter '23. It was driven by the Pardini combination. Fleury brand grew 6.1%, while the other brands in Sao Paulo grew 27.4%. Rio de Janeiro reached 12.3% increase. Minas Gerais grew 58%, and the other regional brands had 6% growth.



In the half year comparison, the growth of service units was 21.5% compared to the first 6 months of 2023, with 4.2% increase in Fleury brand, 35.5% in the other brands in Sao Paulo and growth of 14.2% in Rio de Janeiro. In Minas Gerais, the growth was 187.4% reflecting the combination with Pardini, while the regional offices reached a 13.9% increase in gross revenue.



In the next slide, slide 18, we can see pro forma results of our service units, and we can observe the growth was 7.7% compared to the same period in '23. Considering the compensation of the Easter week in March, the [ gain ] in Sao Paulo, [indiscernible] in Minas Gerais and some impacts on the regional offices of Rio Grande de Sol, due to the situation of the natural disaster.



In the quarter, the Fleury brand had 6% growth with the brands in Sao Paulo, reaching 17.9%. In Rio, the growth was 6.9%, while Minas Gerais, there was 11% growth. The other regional offices retracted 4% due to reclassification of regional offices to B2B. Without this effect, the reduction would be 0.6%.



Comparing 6 months over the previous year, there was growth of 6.1%. Our brand grew 4.2%. Other brands in Sao Paulo progressed 14.4%. In [ mill ], there was 3.1% growth in the period. In Minas Gerais, the progression was 11%. And in the other regions, we recorded a retraction of 4.5%. Excluding the reclassification, the retraction would have been 0.8%.



Now moving on to slide 19, observing the B2B accounting results, growth in the second quarter of 2024 was 48.2%, reaching BRL 501.6 million. In the half year comparison, the evolution was 115.3% with BRL 991.1 million.



The next slide, slide 20. Comparing pro forma, B2B growth in the second quarter, 24 was 13.2%, reaching BRL 501.6 million. Comparing the 6-month period, there was 12.5% growth amounting to EUR 991.1 million. This result reflects our gain in customer share of wallet in lab-to-lab and the maturation of customers in hospitals.



Moving on to slide 21, in the second quarter '24, gross revenue from [indiscernible] totaled BRL 181 million compared to BRL 180.7 million in the same period, '23, representing growth of 0.2%, impacting our comparison base because of free doses of the medication [indiscernible] in the second quarter '23.



In [indiscernible], the growth was 49.9% with BRL 19.7 million as a result of the business combination. As a whole, in the second quarter '24, gross revenue from New Links and Platforms reached BRL 200.7 million with growth of 3.6%. In the first half of the year, the increase was 14.3%, reaching BRL 389.4 million in gross revenue.



On slide 22, we show pro forma and consolidated growth of 3.2% in the quarter, reaching BRL 20.7 million and 13.7% in the half year with BRL 389.4 million. The growth of [indiscernible] New Links was 0.2%, reaching the impact of strong application of [indiscernible] in the second half of the year. And the [ Platform ], the advance was 43.4%, reaching BRL 19.7 million.



Slide 23, we can see accounting gross profit reaching 24.7% in the period of increase, reaching BRL 567.3 million and a margin of 28.7%. Half year, our gross profit accounting reached BRL 1.1 billion, with growth of 39.5% over the same period last year.



Slide 24. Pro forma result, gross profit reached BRL 5.67.3 million, with growth of 13.3% and margin of 28.7%, reflecting our discipline in cost. In the half year, the growth was 12.4%, reaching BRL 1.1 billion.



Slide 25. In operating expenses, the accounting result increased by 24% in the second quarter of '24 with BRL 237.9 million, amounting to 12% of net revenue. In the period, there was an increase of 42.5% with BRL 475.9 million year half.



Slide 26, we show pro forma operating expenses, which represented BRL 237.9 million in the second quarter with growth of 9.8% period-over-period. Comparing the half year, operating expenses reached BRL 475.9 million with 10.1% increase.



Now slide 27, the second quarter of '24, EBITDA reached [ BRL 522 ] million, increase of 21.7% over the second quarter '23, excluding the one-time business combination expenses. With margin of 26.4% half year, the growth was 34.1%, reaching BRL 1 billion, while the results in the first 6 months of '23 was BRL 774.9 million.



In the next slide, slide 28, pro forma EBITDA grew 12.5% in the second quarter, '24 reaching BRL 522 million and margin of 26.4%, reflecting the increase in operating profit. In the half year, the growth was 11.8% of EBITDA, reaching BRL 1 billion.



Slide 29, we can see net accounting income, which reached BRL 173.6 million in the second quarter '24, increase of 47.5% compared to the same period last year and net margin of 8.8%. Excluding the [ captive ] gain of the Institute of [indiscernible] Pardini, net income was BRL 194.7 million with margin of 9.3%.

Comparing half year, the growth was 61.5%, reaching BRL 341.5 million compared to BRL 21.5 million in the first half of 2023.



Next slide, slide 30. CapEx for the second quarter of '24 was BRL 97.6 million, down 8.1% over the same period last year, showing the discipline of our capital allocation, prioritizing cash. In the half year, the drop was 6.8%, with investments of BRL 164.9 million.



Slide 31, we can show you cash generation, which reached BRL 588.2 million in the second quarter, growing 82.4% as a result of the increase in EBITDA and improvement in working capital of the company. Comparing half year, the increase was 51.1%, with BRL 808 million and cash conversion of 77.8% of EBITDA.



Slide 32, compared leverage dedicated in the end of the quarter was 1.1x with decrease that especially a consequence of higher cash generation and increase in EBITDA. We emphasize that our leverage has been maintained below 3x, which is set by our debt instruments. This level of leverage puts us in a differentiated position to follow the execution of the strategy designed by Grupo Fleury.



Slide 33, we can see our amortization schedule of debentures, financing and acquisitions of Grupo Fleury showing our robust cash position in relation to our obligations. We have that with healthy profile, average maturity of 3.6 years with no concentrations of due dates.



Before we're starting our Q&A session, I would like now to hand it back to Ms. Tsutsui to finish the presentation.

[Jeane Tsutsui, executive]

[Interpreted ] At this moment of celebrating 1 year of business combination between Grupo Fleury and Pardini, we would like to thank all our employees and physicians who have dedicated intensely in our integration process, [ for me only one essence ]. We are a stronger company with broad recognition for medical excellence, robust positioning in science, technology and innovation, national presence and operational efficiency as well as known for our commitment to ESG practices.



In fact, we were recognized by Magazine [indiscernible] as the best of ESG highlight of the year in health. Finally, we would like to give our special thanks to all of those who participated actively in the efforts in Rio Grande do Sul in all the flooding events that we have experienced in May and June. Since the beginning, we have been monitoring the situation and offering continued support in different initiatives. Through our regional brands, we offered essential health services to the population, and we continue to support the process of rebuilding the stage. We are confident that with strong culture, focus on customers, clarity of strategy and execution with discipline, we are going to be firming our ambition to be one of the leading companies in health in Brazil through increasingly complete, integrated and sustainable solutions and good experiences in people's health and journey. Thank you all very much.



And now we are available for the Q&A session. Thank you.

[Operator]

[Interpreted] Thank you. We are now going to start our Q&A session. [Operator's instructions] The first question is by Rafael with XP.

[Rafael Junqueira de Barros, analyst]

[Interpreted] I have 2 questions. First, concerning the level of refusals, which is still very low. But still, there is a similar level to the previous quarter and previous half year. So what would we expect of this line for upcoming years in the quarters? First question. And secondly, could you please shed some more light on the impact of regrants on your regional businesses. We would appreciate if you could tell us a bit more about that specific line, excluding the effect of the impact and what we can expect from the denials.

[Jeane Tsutsui, executive]

[Interpreted] First of all, concerning denial of Rafael, we have here a situation. I'm going to take a step back to talk about the health care system. There has been a lower level of loss ratio during the pandemic. then higher loss ratio after the pandemic. And that based on the data of the health of the private health care agency, we can see better operating results of insurance companies and better controlled loss ratio. In general, in diagnostic medicine, the process is a better structure, so to speak. We always ask for preauthorization for MRIs, CT scan and over time, we've also improved our processes to maintain better control of the whole cycle of receiving. Therefore, it's impact in the level of denials, which is very much under control. It's difficult to predict the future, and we don't give you any guidance. But I can tell you that we are paying close attention to having very good relationship with health insurance companies contributing to the health industry with sustainability measures and having an internal process that is very straight. We hope that this moment of greater challenge that we've all experienced during the pandemic will take us to a more sustainable and better situation. It's a system where people value really health and where we also have to deal with the challenge of population aging. But Grupo Fleury has a position of constant discipline and offering solutions of outpatient and prevention solutions that contribute a lot Concerning your second question about the impact of Rio Grande 2 floods, Unfortunately, it was a massive disaster in May and June in the state. We have operations in Rio Grande do Sul with our brands, Weinmann Serdil in Portalegre. And there was an impact on revenues. We have resumed quite quickly our services. There was some impact on some specific patient service centers, but have also provided essential services to the population of the region. And in general, the impact had been documented in our accounting of the months, and now we expect to have the rebuilding.



Without the impact, we would have had a new expansion of regional brands. But unfortunately, this is a situation, an uncontrolled situation. And I would like to emphasize all the actions that we had put in place during the situation of crisis, providing good support to the safety of our own staff and also providing a solidarity really supporting the population, health structure to the whole society, especially our own staff. And now we are contributing for the rebuilding of the state. It was a one-off impact with doubted we would have had some minor growth in the regional offices, but we expect the impact to be over by now. Thank you, Rafael.

[Operator]

[Interpreted] The next question comes from Artur Alves Morgan Stanley.

[Artur do Amaral Alves, analyst]

[Interpreted] Let me understand how you deal with gains of market share, especially where you do not have a Fleury brand. Is it a result of having partners? Are there more beneficiaries? Or do you have more health care insurance companies in the specific regions? If that's the third option, what has attracted them? Price, the strength of brands? What's the most relevant action in your opinion?

[Jeane Tsutsui, executive]

[Interpreted] You've seen that throughout time, we've been showing resilience of file brand, our premium brand, there was growth of 6.1% in the quarter. In the first quarter, there was the calendar effect as we explained with the Easter just evading March. So the second quarter had an increased number of working days. Concerning brand Fleury, and I would like to emphasize the growth of other brands in Sao Paulo, pro forma growth of 17.9% and growth in Minas Gerais of 11% growth in RIO of 6.9%. In other words, in general, we can see an increasing market share. Of course, we are paying close attention and working very closely to manage our commercial contracts. All the time, we try to interact and discuss with health care insurance companies to bring more lives to be served by all our different brands, focusing on quality of care. And in general, what we see is growth based on volume more than price in all the different brands, but we are also bringing new lives and gaining market share. Speaking of all services in our units, it's important to emphasize that appropriate use of resources is a key focus that we have. We focus on medical education, development algorithms, adjusting the utilization of the diagnostic medicine. But bear in mind that with increase of chronic disease and population aging, diagnostic medicine can really support medical decision-making. I believe that all our teams, and I would like to thank everyone that works in our units. We've been increasing the offer of services to increase revenue by square meter in our existing units. This is something that involves all areas. It takes us to expanding the schedule for ultrasound, for example, something continuously done, always focusing on what we can capture as additional demands in our patient service centers. It has been translated into growth and market share gains. Brand Fleury, as we always emphasize, is a very mature brand with high market share in a segment that grows the least.



So the growth we are showing means we have gained market share, and the same applies to other brands. But it's interesting to point out that throughout time, we've experienced different levels of growth by the different brands. We always share with you that Grupo Fleury, especially after the combination with Pardini and something that we had been working on before, which is to diversify businesses and revenue sources. As we showed you today, we have a better portfolio with Fleury brand representing 25% of the total revenue of the group. Other regional brands have their share, significant increase of the percentage of what is B2B, which has presented consistent growth, but above all, thanks to our discipline of costs, expenses and capture of synergies despite a change of mix, we've been maintaining our good level of profitability, including in the quarter, showing the expansion of 115 basis points of EBITDA margin. It's a combination, a very healthy combination of having a company of portfolio with national expansion, different businesses, and the business combination has brought strength and the diversification of paying sources but always focusing on results.

[Operator]

[Interpreted] The next question is by Estela Strano with JPMorgan.

[Estela Strano, analyst]

[Interpreted] Do you anticipate weakening of competitors in some specific regions. With difficulties of contract renegotiation. I'd like to hear you speaking about the HMOs, different health care insurance companies and your contracts with them. And do you think there is a favorable environment for M&A in 2024?

[Jeane Tsutsui, executive]

[Interpreted] I'm going to start and hand it over to Filippo. We have to bear in mind Estela, since the very beginning of this cycle, pandemic, post pandemic, a more challenging situation for health care and all different trends we've described before. And our position concerning paying sources and negotiations with HMOs take into consideration a very clear position of acting as partners, understanding a challenging moment, understanding a moment of high loss ratio, but bringing sections to the table because we focus on prevention because throughout time, and chronic disease monitoring really leads to better control of loss ratio or from a time perspective, operationally, we've got adapted to meet the needs of HMOs in that moment where the system is under more pressure. Of course, it also takes into consideration the competitive environment, of course.



We know of a number of movements happening in health concerning our competitors, and we are prepared and the whole organization is fully focused on providing good care to our customers, running commercial contracting, negotiations, bringing new agreements and offering new products to HMOs, capturing the largest and the more market we can. The diversification and the strength that we have has placed us at a level of being acknowledged for our quality with all our brands. Now we are going into Santa Catarina state. With a very well-positioned asset in terms of quality and diversification of paying sources. And this is something that really helps. And I can tell you that we are highly focused with all our teams in all the different business units, lab to lab, B2B, new alone lanes with a very clear path towards providing good services to our clients and capturing all possible demands. Filippo please.

[Jose de Almeida Filippo, executive]

[Interpreted] Concerning M&A, as we've just told you, we've closed the operation of Sao Lucas, which was an operation that we had announced some months before, and it was quite important because it was the first event after a while, right? But it doesn't mean that M&A hadn't been active or prospecting. We've been managing our prostate. We have our pipeline of M&A, fully active. We are working on it. But the profile that the market offers seems to be the same. Looking for quality assets, as we want to have still have higher price resilience, something that hasn't adjusted to a new cost of capital as a result of market assumptions. Therefore, we haven't really progressed as fast as expected. It doesn't mean we are not going to keep on doing business. We are still prospecting. We expect to move ahead, but we are always going to maintain the discipline in our negotiations, maintaining our figures.



When we prospect M&A, we take into consideration 3 aspects: strategic aspects. So [indiscernible] is very important geographically speaking, in a state where we were not present with clinical analysis. Secondly, we take into consideration financial aspects, return on investments, et cetera, and cultural aspects. Our practice is always to have integration once we have a new asset coming into the group. So the cultural fit can be an advantage or a hint rage. So we really have to take that into consideration. That's all to tell you we've been considering possibilities and a market that's still very similar in terms of price levels to meet our minimal financial standards to really close any M&A. This is how we see things.

[Operator]

[Interpreted] The next question comes from Felipe Amancio.

[Felipe Amancio, analyst]

[Interpreted] I would like to hear more about the brand [indiscernible]. You've emphasized that to some extent, but I would like to know whether it makes sense to maintain this constant growth as we've seen in the quarter. Do we expect the brand to keep on growing like that. And I'd also like to know whether the partnerships you've made with some specific HMOs in Sao Paulo are contributing to your results.

[Jeane Tsutsui, executive]

[Interpreted] brand [indiscernible] in Sao Paulo is a brand where we still see opportunities to increase market share through all time. It is a brand that has performed quite well, as we told the brands in Sao Paulo grew again, 17.9% pro forma. When we consider the potential of the brand, which has the endorsement of Grupo Fleury in recognition by physicians. And what we've been doing with our team, our business team and medical team of brand [indiscernible] is to expand some services with our portfolio of tests, increasing the schedule available for different tests, better use of square meter, and it has generated gaining market share.



Please bear in mind that a [indiscernible] is somewhat new. It derived from other acquisitions. And it's a brand that has got stronger and captured all the demand of a high deleted segment, and it's known for its quality. We are focused. It makes sense to have continuity of growth of brand a [indiscernible].



And concerning partnership with HMOs, we've been making these partnerships. And we also have a potential of expanding the brand Pardini in Sao Paulo, which is another segment in which we can benefit from the capillarity we have combining in Sao Paulo brands, Fleury, a [indiscernible] and Pardini. We used to have come but now, it's Pardini Express. So we would have great capillarity providing to HMOs services and units in different levels of health care services. This is a strength. Some companies have different health care plans to meet the needs of all the different social strategy.



So I would say that this is the strength we have, not only capillarity in terms of job geographic coverage, but also segmentation. Another relevant point is our mobile services, something that has been growing, including in brand [indiscernible], in Pardini brand, we still can see a potential to expand the route and it takes us to the expectations of combining businesses and with that have better and better synergies.



We have to bear in mind that similarly to Sao Paulo, in Rio, we also have this combination with the business combination, we have a business center medical center in Rio. And now we have greater capillarity, more services being offered, and we are prepared to capture as much demand as possible and provide that to journals.

[Operator]

[Interpreted] The next question, Yan Cesquim, BTG.

[Yan Cesquim, analyst]

[Interpreted] We've seen in the first half consistent half year consistent gains in March compared to the same period last year as a result of synergies with Pardini. I would like to know whether there is still space for gaining margin in the second half of the year. This is my first question. Second question about B2B. We can see that B2B has been growing faster. And I would like to know whether you anticipate continuous growth and try to understand what are the growth leverages that you anticipate for the B2B strategy? Thank you.

[Jose de Almeida Filippo, executive]

[Interpreted] I'm going to go first, and Jeane can jump in and complement. Concerning margins, we are very satisfied because in our results, we can see the what has been generated by that margins, more combinations and the result of synergy, of course. In this quarter, we are celebrating one year of our business combination with Pardini, and this is a result of our work. The integration has generated gains in synergies. As you pointed out, whenever the year goes around, you increase your comparison basis, and you would be able to compare against the previous year.

This is something that we will have to manage as the year goes by. And then in terms of comparison over the previous year, there wouldn't be that much expansion. Even though we are always adding more items to gain more and more margin.



Another important factor, which is a disadvantage is the mix. As business grow, for example, lab-to-lab, B2B, the area of new links, it brings into the mix a less advantageous margin. It impacts EBITDA and gross profit. But in terms of margin, they also tend to be negative, but they are offset by the combination of programs we offer. We don't have any specific guidance. But speaking about the future, we want to keep on diluting costs with growth, thanks to our programs of cost efficiency that we have in place and gains in synergy I don't think we can expand margin as we used to in terms of speed. But we are gaining in efficiency. So with a perspective of maintaining our relevance of the results of margin when we look ahead.

[Jeane Tsutsui, executive]

[Interpreted] Thank you, Yan, for the question. Thank you for the answer, Filippo. B2B, and it's the second avenue of growth. In other words, we consider the patients of scenario centers, but also B2B and platforms. B2B has gained a representative of 24% of our total revenues in the quarter, it maintained significant growth, 13.2%. In '24, it has amounted to 12.5% growth total. B2B is a combination of our Lab-to-Lab businesses and diagnostic medicine within hospitals, which is something that varies in terms of new contracts coming in or contracts living, but something that has also presented good performance. Now analyzing lab to lab, which is something in which Pardini is quite strong. Pardini has always been a referencing Lab-to-Lab. It's a team that knows quite well the business and has very good relationship with the labs. They know about logistics and they have provided with for us gains really in efficiency.



Please bear in mind that in the first half of the year, within the B2B growth, there was a very important contribution of toxicological tests. There were regulatory changes with more toxicology has been required. And this was one of the highlights, which resulted from a synergy effect. Pardini has always been a reference in toxicological test. We implemented that so that can be collected in all Fleury brand units. And we started offering a portfolio of Fleury to all [indiscernible] of left to lab Pardini. So these are examples of strength and advantages of combination of our business. In the first half of the year, there was a benefit of toxicological tasks. This is something that will be maintained with the regulation, but without a peak. And we are going to keep on looking for the opportunities of Lab-to-Lab to better use our technical areas. We have 24 technical areas in our group, Fleury and some other areas coming from Pardini. And this is a different model, right. You don't have to invest in patient service centers, but you need logistic efficiency and a need to integrate systems. It's a very interesting model, something that brings the possibility of diversifying services, and we are very satisfied with everything that we've had.

[Operator]

[Interpreted] The next question comes from Emerson Vieira, Goldman Sachs.

[Emerson Vieira, analyst]

[Interpreted] Good morning, Jeane, Filippo Renato, everyone. Thank you very much for the opportunity to ask a question. Capital allocation, my first point, one more quarter where you had improvement in your net debt, giving you a very comfortable position of balance. There was a slight increase of CapEx and BRL 184 million for dividends, that's a high payout ratio. So what's an optimal mix of capital allocation, considering all these initiatives and dividend sharing. Secondly, let me ask about synergy. According to the schedule 60% of the synergies with Pardini would have been reached by now. So how well have you done it? What is your current status? Do you think when are you expected to reach really the full integration with Pardini? And finally, if I may, I would like to ask about a ticket in our patient service center. The decrease that we've noticed of 0.2% growth year-over-year, concerning 1.7% in the previous quarter. This decrease is resulting from the fact that you have a normalized ticket because in the previous quarter, you pointed out there was a positive impact of topological tests, imaging tests and others.

[Jose de Almeida Filippo, executive]

[Interpreted] I'll go with the capital structure. This is a very interesting point. As we've said before, we are very concerned about being disciplined and consistent in our management. The distribution in our opinion is quite clear in terms of CapEx and I would like to say that our CapEx in the first quarter and the half year was below the level of last year, but it's a result of the prioritization that we've made so that we can have cash liquidity. The second half in tend to speed up what's expected, but we really have to analyze CapEx at something in terms of percentage of revenue similar to what we've observed before. We don't expect any changes there. The CapEx has been divided half of it to IT, digital initiatives, especially digital acceleration and the other half maintenance expansion and rebuilding of our units. In this quarter, IT and digital was less than half, which is a dynamic really of what we observed, and we've been trying to talk about digital acceleration. This is something important but it is below other items, just for circumstantial reasons, this is no trend. We want to keep on focusing on digital acceleration as a very important component to us.



Secondly, M&A, as we've pointed out, we want to keep on advancing as we have the right assets, we have results and appropriate parameters fully met. We'll keep on expanding. Inorganic growth is another component of our capital allocation, which we consider to be important. It's been more prevalent in diagnostic medicine, but we've been considering the different assets that are part of our portfolio. Thirdly, it's associated with what we've just announced with an equity share. It will be included in our plan and dividend sharing, then we are going to decide about payout, with another situation that we are going to see as we go. But as our financial condition can do it, we are also going to consider the payout as a potential of really sharing all based on interest on equity. The level of leverage, it's 1.1, but in the end of the quarter can go up, nothing very relevant, but it tends to be high in the second half of the year, but we are always going to focus on having the lower level of leverage. We understand that this is still something appropriate to be done. There is a high cost of capital in terms of interest rate, of course, and considering the macroeconomic conditions that will probably remain in place for a while, we understand it's more appropriate and careful as a management to have lower leverage. Looking ahead, this is how we manage our capital.

[Jeane Tsutsui, executive]

[Interpreted] Now speaking of synergy, and thank you for your question. I'm going to emphasize once again that capturing synergy is a result of good integration. The cultural part is really important, processes and the governance, right, that we've put in place with IMO, all the different forums, weekly monitoring of all our 8 executives leading our 60 initiatives and just following criteria discipline. Since the beginning, when we announced the perspective of having EUR 200 million of incremental EBITDA up to the third year, we've made a curve of 60% in the first year, 85 in the second year, 95% in the third year. 90% of the synergies were in reduction of costs and expenses. And we are very confident. My answer is yes. We've maintained our time line. This is reflected in our results.



As Filippo pointed out, there is a changing mix of brands and services. And even so we have a margin expansion, thanks to the synergies. We are following the curve and highly confident that throughout time, we are going to capture the results. We've had a very detailed planning. And when we announced the curve, we had had a number of initiatives some that have got in the period of maturation. And nothing has happened as we had planned, and all executives had the clarity that if we don't capture the synergy there, we should look for it somewhere else, so always maintain the curve now concerning the average ticket of patient service center, you pointed out something interesting. In the first half, we have pro forma growth of 1% gross revenue per test. In the second quarter, it was 0.2%. But there was a change in mix, right? And it fluctuates a lot. And this is why we always show you test per encounter and gross revenue per test. When we have more lab analysis, we end up having an increasing number of tests performed and therefore, the revenue per test is somewhat lower. In our patient service center in the quarter in pro forma, there was a 7.1% growth. But you can see that mobile services, which is predominantly clinical lab analysis, it has grown pro forma 16.3% and mobile services is mainly clinical lab analysis. So this is just to let you know that, in general, in our planning and considering all opportunities, we've captured really a good demand, and we want to keep on expanding in the clinical in the coal it impacts really the gain in gross margin because of the changing mix.

[Operator]

[Interpreted] The next question is by Renan Brata, Citibank

[Unknown Analyst]

[Interpreted] I think most have covered the main questions. Just to let you know whether you are seeing any difficulties of negotiations, especially with brand Fleury and the downgrading of plants for the past 2 or 3 years, price increases have been massive. Have you been observing any downgrading and something that might impact the expansion of brand Fleury. That's it. Thank you

[Jeane Tsutsui, executive]

[Interpreted] Concerning brand Fleury, when we observe what has happened in this quarter, 6.1% growth, please note, it's not increasing number of beneficiaries in the premium segment. Brand Fleury throughout time, it's a 98-year-old brand. It's very resilient. But the number of beneficiaries is limited. Of course, when there is an expansion of macroeconomics, there is also an increasing number of beneficiaries. But our brand Fleury has a very clear position. It delivers value. It's recognized by the medical community by customers, high NPS. And as such, growth is comparable with the growth that we used to have before the pandemic.



The growth of the brand this year has resumed the level that we used to have before pandemic with the brand Fleury. Concerning the downgrading of healthcare plans in the intermediate level or even in basic or entry-level lens, this is where we have more beneficiaries and where you can expect a greater growth according to the data of AMS. It's important to know that we have very well positioned brands to capture this demand. We've talked about brand A, mice, Sao Paulo and how it has been growing with the endorsement of brand Fleury as well as Pardini and other regional brands. We are strategically prepared as a group in terms of position of our brands to keep on serving all our clients. Grupo Fleury is much stronger with this position today. Throughout time, it was a strategic decision to bring onboard brands from different segments, and we are still very confident. Brand Fleury will always have that differentiated bracket, always be recognized. It's a very strong brand, and we are very confident of the perpetuity of brand Fleury of how resilient the brand is in the premium segment. Thank you, everyone.

[Operator]

[Interpreted] Thank you. With that, we close the Q&A session. I would like now to hand it over to Ms. Jeane Tsutsui for her closing remarks.

[Jeane Tsutsui, executive]

[Interpreted] I would like to emphasize my gratitude for all of those that have worked for the successful integration of Fleury and Pardini our first year of business combination. It demanded hard-working and dedication. And I would like to personally thank all of you. We are very confident about the future of our group and our ambitions of becoming one of the health leaders in the country with strong brands, recognized businesses, operational efficiency and robust capital structure. Thank you all very much for your participation in one of our conference calls, and I hope to see you next time. Have a great weekend. Hope we succeed in the Olympic Games in carries, and thank you.

[Operator]

[Interpreted] Thank you. We close now the conference call. Thank you all very much for your participation. You may disconnect now. Thank you.