Fleury SA

BOVESPA:FLRY3

Earnings Call Analysis

Fleury Group Posts Strong Q3 Growth, Low Leverage

In Q3 2023, Fleury Group's gross book revenue leaped to BRL 2 billion, marking a stunning 62.9% surge from the previous year, with home services and New Links segments as significant growth contributors, up 24.7% and 92.1% respectively. Organic growth, excluding COVID test effects, posted a robust 65.1%. Gross profit swelled by 57.4% to BRL 527.6 million with a healthy 28.2% margin. Despite operating expenses spiking 86.9% primarily due to business combinations and acquisitions, net income soared by 81.4% to BRL 174.2 billion, indicating a lucrative margin of 9.3%. Investments dipped by 17.5% to BRL 87.3 million, reflecting cash prioritization, while operating cash generation flourished, rising by 37.7%. Leverage remained low at 1.2x, illustrating the company's strong financial footing and investment attractiveness.

Strategic Positioning and Successful Expansions

In the third quarter of 2023, Grupo Fleury showcased the efficacy of its strategic positioning by achieving significant strides in business expansion, especially in the New Links sector. The company capitalized on a growing Brazilian population over the age of 60—16% and rising—which heralds a greater demand for medical services and diagnostics, sectors where Grupo Fleury is well-prepared to thrive. This demographic shift, along with the company's ability to cater to varying market segments through recognized brands in premium, intermediate, and entry-level offerings, cemented its role as an integrated health service provider. The robust growth in New Links, primarily through acquisitions and an 18.3% organic growth, indicates a successful expansion in preventive and outpatient healthcare solutions, resonating with an aging populace's needs.

Record-Breaking Financial Performance

Grupo Fleury's financial success this quarter was landmark, with a record quarterly revenue of BRL 2 billion. This was accomplished through a 62.9% growth year-over-year—or 65.1% when excluding COVID-related revenues. Particularly noteworthy developments include a 29.9% revenue growth of Rio de Janeiro units, a 24.7% increase in home services, and a staggering 92.1% increase in New Links revenue, attributable to organic growth and strategic acquisitions. Besides revenue growth, the company achieved a 52.2% rise in EBITDA to BRL 506 million and an 81.4% increase in net income, translating to BRL 174.2 million. These figures underscore a period marked by the company's cost discipline and synergistic gains from the business combination with Grupo Pardini.

Investment in Growth and Digitalization

Grupo Fleury's investment strategy focused on carefully calibrated expansions and advancements in digitalization, a strategic move that shores up its intentions for growth and efficiency. They opened nine new units total—six devoted to diagnostic medicine and three for New Links. The reduction in CapEx by 7% compared to the previous year is attributed to a one-time investment last year, with the group reassured to maintain CapEx levels on par with the previous year despite the merger with Pardini. The company's commitment to organic growth and strategic investments in digital IT for integration and client services forms a cornerstone of its strategy to stay on the cutting edge of the healthcare industry.

Maintaining Synergies and Leveraging New Acquisitions

Grupo Fleury's strategic growth extends beyond organic investment to tactical acquisitions and partnerships. A case in point is the incorporation of New Links solutions into healthcare plans, a move that consolidates the company's position while providing robust value propositions to the market and ensuring customer satisfaction. The credibility and long-standing reputation of Grupo Fleury facilitate such expansions, as they are able to negotiate accreditations due to their compelling offerings.

Strengthening B2B and Lab-to-Lab Services Amidst Challenges

The B2B segment of Grupo Fleury faced challenges due to the departure of a major client. However, strategic reclassification and management decisions steered the segment back towards growth. The Lab-to-Lab services, in particular, showed strong performance with an astounding 200% increase in revenue. The B2B segment is now looking towards a gradual recovery as it expands its presence in more hospitals and continues to negotiate advantageous terms. The pro forma results exhibit a modest increase of 0.6% in the B2B segment, indicating a strategic push towards recapturing and expanding the company's market share.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, everyone. I'd like to welcome all of you for the Grupo Fleury's Third Quarter 2023 Earnings Conference Call. Joining us today are Ms. Jeane Tsutsui, CEO; Mr. Jose Filippo, CFO; and Mr. Renato Braun, IR Director.

I'd like to take this opportunity to inform you that this event is being recorded and that we are also providing simultaneous interpretation into English. First, we'll have the company's presentation, and then we'll start the Q&A session. At the end of this session, Ms. Tsutsui will give her closing remarks.

All the numbers that we are going to mention here today are compared to the same period of the previous year, except where specified and have been rounded up to the nearest thousand.

Before proceeding, I'd like to clarify that this presentation may contain forward-looking statements. Such statements are not only historical facts but reflect the wishes and expectations of the company's management. Words such as believes, expects, plans, anticipates, estimates, projects, targets and similar words are intended to identify forward-looking statements that necessarily involve known and unknown risks. Known risks include uncertainties which are not limited to the impact of prices and service competitiveness. Uncertainties also include market acceptance of services, service transactions of the company and its competitors, regulatory approval, currency fluctuations, changes in the mix of services offered and other risks described in the company's reports.

Now I'd like to turn it over to Ms. Jeane Tsutsui. Please go ahead, ma'am.

[Jeane Tsutsui, executive]

Good morning, everyone. I'd like to thank you for participating in this conference call to present the Grupo Fleury's Third Quarter 2023 Results.

In today's agenda, we will first give you an overview of the Grupo Fleury's strategy, followed by an outline of the performance of New Links. After that, we will move on to the financial highlights.

As you have seen in our press releases, slide 5 illustrates the strategic positioning we have established. Our core of diagnostic medicine continues to show consistent results. We have recognized brands in different regions operating in the premium, intermediate and entry-level segments with more than 500 units in 13 states across the country. Through our Lab-to-Lab business, we provide diagnostic support services to 7,000 laboratories in more than 2,000 cities.

Besides diagnostic medicine, which supports medical decision-making, now phases of care from prevention to treatment, we work directly in primary care with immunization, services, health checks, clinical consultations in person or via telemedicine, as well as in secondary care with medical specialties and tertiary care with low complexity surgeries. Grupo Fleury's strategic positioning in offering solutions for the health care system becomes crucial, especially given the country's aging population.

According to data from the 2022 census recently released by the IBGE, today, 10.9% of the Brazilian population is 65 years old or older, and 15.6% is 60 years old or older, and these numbers are likely to increase rapidly in the future. It's only natural that this change in profile will also lead to an increase in the number of chronic diseases and increase in the search for diagnostic medicine and outpatient services. We are fully prepared to work with HMOs to meet these developments.

On Slide 6, we see our 4 growth avenues. The first is B2C diagnostic medicine, where we continue to expand our market share through physical units and home diagnostic services. The diagnostic performance at the B2C business showed the strengths of our core business and the robustness of the brands that unite tradition, quality and innovation, evidenced by the high level of customer satisfaction and strong relationships with the medical community.

The second growth avenue is B2B diagnostic medicine, which includes the like-to-like business and hospitals and which gained greater relevance with the business combination with Grupo Pardini.

The third avenue consists of New Links, which we will discuss next. And we have health care platforms with the aim of integrating businesses and increasing patient engagement. Our competitive advantages include medical excellence, science, technology and innovation, national scale and operating efficiency, which are key for productivity and market gains. And our ESG practices, especially the social impact of the Grupo Fleury's positioning to increase access to health care for more and more Brazilians.

Now moving on to Slide 8. I'd like to talk to you about the New Links growth avenue which has been a strategic pillar in shaping the company's health ecosystem, with integrated solutions that expand access to preventive and outpatient health care. Our participation in this health care ecosystem already includes areas of high-growth potential in specialties that tend to be in greater demand among adults and senior citizens. Our work in secondary care covers the areas of drug infusions, orthopedics, ophthalmology and fertility.

In tertiary care, we offer ambulatory surgical center solutions such as Fleury Hospital, Hospital Dia, Saha Hospital and Clinica de Olhos Moacir Cunha. We have offers designed to respond to the needs of an aging population and aiming at the sustainability of the health care sector with rational use of resources for the best clinical outcome for each individual.

Going over some numbers of Q3 2023, the gross revenue of New Links reached BRL 170 million, 92.1% increase compared to the same period of last year, explained by the expected effect of the acquisitions of Saha and Retina Clinic, and organic growth of 18.3%, mainly to the good execution of CIP. New Links revenue accounted for 8.5% of our gross revenue this quarter.

Before presenting the financial highlights of Q3 2023 I'd like to clarify that we provide, in addition to the accounting results, figures on the same basis for the period of this year and the same period last year, which enables a better understanding of the evolution of the results.

As we can see on the table on Slide 10, Q3 2023 accounting results captures the results of Grupo Fleury and Pardini and compares it to the result of the Grupo Fleury in Q3 2022. The unaudited pro forma results for simple comparison includes 3 months for the quarter and 9 months for the year-to-date of Fleury and Instituto Hermes Pardini as if both operations were combined in the same period of 2022 and 2023.

On Slide 11, we see the financial accounting highlights for the third quarter of 2023, which show that the business combination has taken the company to a new level. We achieved a record quarterly revenue of BRL 2 billion with growth of 62.9% or 65.1% ex COVID, compared to the same period last year. The quarter was once again marked by the recognition of the Fleury brand, which grew by 10.4%.

We'd like to highlight the performance of our units in Rio de Janeiro, which grew by 29.9%, and performance of home services, which grew by 24.7% compared to the same quarter last year and accounts for 6.9% of the group's total revenue. Another highlight was the revenue of New Links that increased 92.1% compared to Q3 2022 explained that the organic growth of 18.3% and the expected impact of acquiring Saha and Retina Clinic. We'd like also to highlight the organic expansion that has taken place since the beginning of this year with 9 new PSC, 6 which are focused on diagnostic medicine and 3 for New Links.

In Q3 2023, EBITDA totaled BRL 506 million, a 52.2% increase compared to Q3 2022 with a robust margin of 27.1%. This is a consequence of discipline in controlling costs and expenses, and the new mix of business coming from the combination of Grupo Fleury and Pardini. Finally, net income totaled BRL 174.2 million an increase of 81.4% compared to Q3 '22, with a margin of 9.3%.

Considering the pro forma results on Slide 12, quarterly revenue was BRL 2 billion, 11.6% higher than in the third quarter of 2022, with 8% organic growth and 13.6% if we consider ex COVID growth. The Fleury brand grew by 10.4% pro forma in addition to a significant 9.4% growth in Rio de Janeiro. Home services grew by 14.5%, representing 6.9% of revenue, and New Links grew by 92.1% with organic growth of 18.3%.

EBITDA totaled BRL 506 million this quarter with a 27.1% margin. These figures demonstrate the consistency of our results and give us a peace of mind to continue with our strategy of organic and inorganic growth and to leverage this business combination with Pardini, to improve the services offer to patients, doctor, partner laboratories and HMOs.

Now I'd like to turn it over to Jose Filippo, CFO and IRO, who will give us more details about our financial performance.

[Jose de Almeida Filippo, executive]

Thank you, Jeane. Now I am going to continue by adding more color about the financial results of the third quarter of 2023 and also the data to date.

On Slide 13, we can see that gross book revenue reached BRL 2 billion, third quarter of 2023, an increase of 62.9% compared to the same period last year. Excluding the effect of COVID test, this growth was 65.1%. The home service segment continued to grow and recorded an increase of 24.7% and representing 6.9% of growth revenue in this quarter. New Links grew by 92.1% with organic growth of 18.3%.

Now moving on to Slide 14. Considering the pro forma gross revenue, it reached BRL 2 billion in the third quarter, up 11.6%, vis-a-vis the same period last year with 8% organic growth. Excluding the effects of COVID tests, the increase was 13.6% with organic growth of 10%.

On a pro forma basis, home service saw growth of 14.5%, accounting for 6.9% of revenue. New Links grew 92.1% with organic growth of 18.3%. In the first 9 months of this year, gross revenue reached BRL 5.9 billion, up 11.2% in the previous year.

Next slide, Slide 15. Once again, we see that the contribution of COVID test to gross revenue dropped. In the third quarter of 2023, the share of these tests in our revenue was 0.2% compared to 1.5% in the third quarter of 2022, reaching the lowest level since the beginning of the pandemic. In the pro forma analysis, the share of COVID revenue fell significantly, from 2% in the third quarter of 2022 to 0.2% in the third quarter of 2023.

On next slide, Slide 16. We show that gross revenue from PSCs reached BRL 1.4 billion in the third quarter of 2023, representing an increase of 38.4% compared to third quarter of 2022, with a 10% growth in the brand Fleury that's the highlight. Rio de Janeiro and São Paulo also saw significant growth of 29.9% and 49.8%, respectively, in addition to the 27.4% growth in other regions.

Slide 17, considering the pro forma gross revenue from patient service centers grew by 9.2% in third quarter 2023, totaling BRL 1.4 billion, reflecting the 10.4% growth of the Fleury brand, mainly due to the market share gains, growth in the number of lives covered and expansion of home service.

In Minas Gerais, we recorded growth of 15.2% as a result of the expected effect of the acquisition of Methodos on October 2022. The other brand in São Paulo recorded growth of 12.1%, mainly due to the good execution of a mais São Paulo brand and growth in home service, while Rio de Janeiro saw growth of 9.4%, indicating gaining market share mainly to the expansion of supply and services. The performance of the regional brands was impacted by the strong basis for comparison by COVID exams versus third quarter 2022. It's worth noting that there was a reclassification of revenue from regional to B2B. Excluding this effect, growth would have been 5.5%.

Now moving on to Slide 18, accounting results of New Links and health care platform. We can see that gross revenue from New Links totaled BRL 170 million in Q3 '23, representing growth of 92.1% compared to the same -- compared to the previous year, rather. Organic growth was 18.3%. In health care platform, revenue reached BRL 13 million in the third quarter of 2023.

Next slide, Slide 19. We show that the pro forma revenue from New Links similar to the accounting results -- had results similar to the accounting results. This quarter, revenue growth from New Links and platform was 77.9%, of which 18.3% was organic. In this first 9 months, growth was 88.6%, totaling BRL 525.5 million.

Now moving on to Slide 20. We can see that in Q3 2023, gross profit reached BRL 527.6 million, an increase of 57.4% year-over-year with a margin of 28.2%. In the year, gross profit reached BRL 1.34 billion, an increase of 39.5%.

Next slide, Slide 21. In the pro forma analysis, gross profit totaled BRL 527.6 million in this quarter, an increase of 12.3% compared to Q3 2022, and gross margin of 28.2%. In the year, the pro forma gross profit reached BRL 1.54 billion, an increase of 10% compared to the previous year.

Slide 22 shows that operating expenses in Q3 2023 increased by 86.9% compared to the same quarter in 2022, reaching BRL 209.6 million, equivalent to 11.2% of net revenue. This variation is mainly due to the expected effect of the business combination with Instituto Hermes Pardini and acquisitions.

Slide 23 shows pro forma operating expenses, and compared to the net revenue of 2023, increased by 33 basis points compared to the same quarter of the previous year, equivalent to 11.2%, totaling BRL 209.6 million. This variation is mainly because of the higher depreciation and amortization, mainly related to the expected effect of closing acquisitions offset by a reduction in G&A expenses.

Next slide, Slide 24. We see that in the third quarter of 2023 accounting EBITDA reached BRL 506 million, an increase of 52.2% in relation to Q3 2022 and a margin of 27.1%.

Next slide, 25. We see that the pro forma EBITDA was BRL 506 million in the third quarter with a margin of 27.1%, an increase of 16% compared to the same period in the previous year. In the year, pro forma EBITDA reached BRL 1.43 billion, up 9.7% from the previous year and with a margin of 26.1%.

Moving on to Slide 26, net income. We see that in the Q3 2023, net income reached BRL 174.2 billion, an increase of 81.4% compared to the same period last year with a margin of 9.3%. In the year, accumulated net income reached BRL 386 million.

On Slide 27, we present investments in the quarter, which totaled BRL 87.3 million, down 17.5% against Q3 2022. In the year, investments represented BRL 264.3 million, down 7.3% on the previous year, reflecting the prioritization of the company's cash. In the 9 months, most of this investment was directed towards IT and digital actions.

Moving on to Slide 18 (sic) [ 28 ]. In this quarter, operating cash generation reached BRL 480.7 million, an increase of 37.7% compared to the same period in 2022. The conversion rate came to 95% of EBITDA. In the year, operating cash generation already exceeded BRL 1 billion.

On Slide 29, we see that leverage was 1.2x at the end of the quarter, slightly down on the previous quarter and below the same indicator at the end of the third quarter of 2022. This level of leverage allows the company to face the current environment of higher interest rates with more resilience. Our leverage has remained below the 3x limit established by debt instruments.

Slide 30, we can see the amortization schedule for Grupo Fleury's divestures, financing and acquisitions shows our robust cash position in relation to our obligations. We have a healthy debt profile and an average term of 3.1 years, with no concentration in maturities.

Before we start the Q&A session, I'd like to hand it over to Jeane for her closing remarks. Thank you very much.

[Jeane Tsutsui, executive]

Thank you, Filippo. The Q3 2023 results show that we continue to advance along our path of strengths and consistency in delivering results, reflecting financial discipline and the rigorous execution of our strategy of growth and structuring outpatient solutions contributing to the sustainability of the health care system. These figures reflect the assertiveness of the strategy we outlined 2 years ago. Our ambition is to increasingly strengthen our position as one of the leaders in health care in Brazil, adding value to the system through prevention and integrated care in people's health journey.

We ended this quarter with the certainty that we are on the right track, presenting consistent results with growth in all business lines. We are a robust and resilient group, with a solid financial position and low leverage, and we are prepared to continue executing our strategy.

I'd like to express my deepest gratitude to all the professionals at Grupo Fleury, who contribute to bringing more access and quality of life to people. Thank you very much. Now we'd be happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from Joseph Giordano with JPMorgan.

[Joseph Giordano, analyst]

Actually, three questions. First one is about growth in imaging. So when we go over New Links, we see consistent and strong growth. My question is, what's your take on the development of profitability considering new lines of business?

Second, can you give us an update because it's been 6 months already after the merger with Pardini. So can you give us an update about the level of synergy that you have achieved against the guidance?

And finally, considering the macro scenario of the market, we see many players facing financial challenges. So do you see any opportunities regarding M&A and cash generation? Because you do have a very healthy balance.

[Jose de Almeida Filippo, executive]

Thank you, Joseph, and good morning. So let me start by talking about profitability. As you know, we have been very concerned with cost discipline, and we have been implementing many initiatives regardless of the integration with Hermes Pardini, which we also mentioned.

What we see is that we see an increased growth of New Links, although this is still diluted amongst the other businesses, but we see that the structural margin of New Links is below the company's historical margin, which was for diagnostic medicine. We have a margin of reference for sure, but we see that, that number is increasing, and we expect this activity to present increased productivity does increase the margins.

But obviously, during the growth phase, and we started New Links with inorganic growth with acquisitions. And now we have opened some new units. And once you open units, and we have recently also showed that with, for example, an ophthalmology unit we see that there is a learning curve at these units. So obviously, this combined margin will need to grow and also its productivity.

So over time, we expect to see these margins increasing also with productive productivity gains but we need to consider that we work with the mix. And so the different activities we carry out. So it's part of our business plan and we have been following the business plan we have designed.

[Jeane Tsutsui, executive]

Joseph, I'd like to strengthen the importance of New Links considering our partnership strategy with HMOs offering outpatient services. We know that it will contribute for the system sustainability. These solutions make sense to patients, physicians and the entire health care system. And as Filippo mentioned, we are working so that we can improve the margins of New Links over time. But we are very happy with the results we have achieved so far and also regarding synergy with our diagnostic medicine operations.

As for your second question, as you mentioned, we are already in the process of integrating services Fleury and Pardini. We are a single group, and this process includes 3 key pillars. The first pillar you mentioned is a capture of synergy. So we announced the possibility to also increase EBITDA by BRL 200 million, BRL 220 million, but achieving 95% of that at the end of 3 years. Some other initiatives have been approved by our management team. We are working with governance, with an IMO, and we are on the right track. That means that we have already carried out some actions that demonstrated some level of synergy, but we are sure that synergy will be enhanced as demonstrated in the curve we announced and we are confident that synergies will take place timely.

Second point is cultural synergy. We are talking about 2 organizations with converging cultures although they are different because they were originally 2 separate organizations. But this cultural convergency allows us to carry out a very good integration process. People are aligned, they all work together, all the entire organizational structure has already been determined. And today, we have teams of this combined company working so that we can build a stronger and stronger company.

The third pillar is that there is also system integration and also capture of opportunities. For example, in order to expand our portfolio for the different brands and different lines of business. So everything is taking place.

As for your third question about the macro scenario, we have already mentioned, and I believe we have been very disciplined. Regarding capital structure, you saw our leverage is low, and we are examining prospects. We do have an M&A pipeline analyzing financial culture and other aspects, and we are very stringent regarding financial parameters for acquisitions. We will do that if the criteria is met. We do have capital structure for that. but it does need to make sense for our strategy. But I believe that with this high capital cost it's not always easy to close the deals.

But at the end of the day, we have a healthy combination, organic growth. And just to remind you, this year only, we have opened new PSCs, 6 for diagnostic medicine and 3 for New Links. Thank you very much for your questions, Joseph.

[Operator]

Next question, Felipe Amancio with Itaú BBA.

[Felipe Amancio, analyst]

Actually, I have 2 questions. First, about [indiscernible]. We saw in the results, there was an increase in year-over-year, but it's further when you compared to the second quarter. I'd like to ask you to give more color about that. And also, when you talk about synergies with Pardini, please?

And my second question is about cash generation. We know we saw there was a decrease in CapEx, so what actually promoted that reduction? And the company does have a very strong cash generation. So what else contributed for that? And is that something recurrent?

[Jeane Tsutsui, executive]

Thank you, Felipe, for your questions. So let me start. When you talk about [indiscernible], as you commented on, there was also a development in the mix of business, as you have been following, and you talked about the increase in New Links. New Links has drug infusions. So we are talking about cost in which drugs have a high cost, and that's why some costs seem to be higher in that but it's now a structural change. This is what we have been observing. It's part of our portfolio, and we are happy with that.

When we go over, once again, cost of materials, we also examine working capital, which is very important to us, and this is our constant focus. Our management team focuses on that so that working capital does not have a high impact on cash consumption. And when you talk about cash generation and CapEx, cash generation certainly is a highlight. We have more than BRL 1 million in 9 months. And that reflects the discipline and also our very strong management, and CapEx is one of the items over here. So as for CapEx, we are not going to do anything that can produce any damage, but we have been judiciously examining on how to use or how CapEx should take place. And when we go over this first 9 months, you see that half of that is related to digital IT, which is important for synergy, for integration, also for our clients, this is related to that.

And the other part is for retrofitting and maintenance of equipment and also the organic growth of the company. And this number, you see a drop by 7%, but it's -- I'd like to remind you that last year, we invested on [ colleges ], and we don't have that this year. So I think it's important to consider that. And it's not a guidance, but we expect to close this year at the same level of last year. After all, we have this combination with Pardini, but we believe that we are going to achieve same level achieved last year. With cash, we are very happy with performance and focus on management. This is what promotes our business profitability.

[Operator]

Our next question is from Gustavo Miele with Goldman Sachs.

[Gustavo Miele, analyst]

Jeane, Filippo and Renato, thank you very much for the presentation. I have some questions. First, more related to the competitive environment in the premium segment. We saw the double-digit numbers growth. And once again, you also mentioned that you gained market share. But how do you see competition in the premium segment and also this increased share, where is it coming from? From bigger players or smaller players spread out different regions? This is my first question.

And my second question more related to domestic services. We also saw a very interesting result. But can you please tell us about what is your take perhaps an increase in this type of service for other brands? I believe that you're doing good over the last quarters, but I'd like to know what is going on in the premium segments and also your expectation regarding future quarters, please?

[Jeane Tsutsui, executive]

Thank you, Miele, for your questions. As for the premium segment, we follow the number of lives, 50.7 millions covered by private health care plan, and we know that we see an increase, a stronger increase at entry level. But here in São Paulo, the Fleury brand is very strong, recognized and there are many initiatives not only regarding retrofitting and service expansion, but also strengthening relationship with physicians, with HMOs, and over time, we see resilience and even increased the share in the premium segment. Obviously, it's not only a matter of increasing number of lives, but also it's related to our portfolio, increase and offer of the services out of pocket, that also helps our share of increasing share of wallet in the premium segment.

As for domestic services in the premium segment, it keeps on growing. We offer routes that goes -- that go beyond the cities where we do have a brick-and-mortar units. So we go to the coast and other cities, and that also allowed us to increase our market share in the premium segment. Obviously, over time, this strategy of keeping a very high NPS, very satisfied customers and also offering more complex services.

So we have integrated medical centers in which some more complex cases can be addressed. And we also -- we are also offering new tests, for example, the new test for detecting Alzheimer by collecting a blood sample, PrecivityAD2, and we are pioneers in doing that for this premium, which is a premium brand, and we expect to keep the strength of this brand.

As for domestic services, Miele, you are right. Traditionally, that had a very strong presence in São Paulo. With the pandemic, we expanded this service to all the other regions, but the penetration is still very heterogeneous. What I mean is that we have that mapped in some cities where we are present. The penetration has increased, but there are opportunities of expanding routes in some other places. And there is also cultural aspects that vary from city to city, but we see opportunities.

Obviously, bigger opportunities have already been captured, considering also changes in our customers' changing behavior. But there is also the learning curve, the routing also logistics. So we expect to keep on expanding the offer of domestic services. Not every single region will reach the level of penetration we have here in São Paulo, but I am sure there is still places where we can gain, and we are also increasing the portfolio of services provided by domestic services. So I believe that we will see a growth for this segment. But once again, major opportunities have already been captured. Thank you very much for your questions, Miele.

[Operator]

Our next question, Gustavo Tiseo with Bank of America.

[Gustavo Tiseo, analyst]

I just have one question. I'd like to know more about low-ticket brands. Are they still being started and/or are these brands that can already provide you increased revenue? Or what do you expect to see? And as for Pardini, is there any synergy also so that you can increase these lower tickets? This is my question.

[Jeane Tsutsui, executive]

Thank you, Gustavo, for your question. You are right on the following. Now by having the combination with Pardini, it's true. We do have many brands in some regions. And depending on the city, our brands already serve different segments from the entry level to premium segments. We don't have that clear segmentation in some places as we have in São Paulo and Rio de Janeiro.

We'll examine Sao Paulo, for example. Right now, our footprint, the combination with Pardini added 30 more units to the state of São Paulo. So I'm talking about cities such as Santos and [indiscernible]. But for the city of São Paulo and also in Rio de Janeiro, we also added the brand, Center of Medicina. And also in Rio de Janeiro, we had already positioned some other brands in order to serve these segments.

So today, we have the opportunity to also check our footprint, distribution of brands and take these offers to HMOs, including services to all segments. This offer support HMOs and will also allow us -- allow them also to serve their customers. I'd say that right now, we are carefully examining the distribution of our units. For example, in São Paulo, units that were added by Pardini as well as our component units, in order to benefit more and to also offer a better portfolio to HMOs. Thank you very much, Gustavo.

[Operator]

Next question, Rafael Barros with XP.

[Rafael Junqueira de Barros, analyst]

I have two questions actually combined. You saw that there was an increase in all PSC brands. And I'd like to understand if this growth was because of increased share? Or is it because you see a market resuming growth? And as for increased share, where is it coming from, from bigger players or for more regional smaller players?

[Jeane Tsutsui, executive]

Thank you, Rafael. It's true, we showed you consistent growth amongst our different PSC brands. For example, Minas Gerais. We had a stronger influence of COVID test in the second quarter so -- in the third quarter of 2022 rather. But now this has dropped, but we still see some growth. And we also mentioned Rio de Janeiro, where we don't see a significant growth in the number of customers, but we still have that pro forma result of 9.4% because of new contracts, so more lives to be served by our brands. So we had this market -- the share increase because of smaller players. So we are resilient even when you don't see a number, an increase in the number of members of HMOs.

We are now increasing our portfolio and strengthening our relationship with the medical community we see an increase in the number of chronic diseases, but now there is also a balance when you think about post-COVID. So it's very important to say that the results of the third quarter that was benefited because of business day. If you go over the calendar, we have a seasonality of our PSC operations. So the more business days we have, the higher is our revenue that also reduces our fixed costs, and that leads to a healthier margin. That's exactly what happened this quarter. So we did see benefit because of the more business that we had. Thank you, Rafael.

[Operator]

Next question, Leandro Bastos with Citibank.

[Leandro Bastos, analyst]

I have two questions. First, about their commercial strategy now with Pardini. And also your conversation with payers, how have you been handling that? So negotiations and also renegotiating prices. We know that, that also takes place at the end of the year. And so how is your business strategy, commercial strategy now that it's a bigger company?

My second question is about the premium segment. And I'd like to understand if you see any downgrade trend, I mean, to see a drop in the number of individuals with access to the premium segment?

[Jeane Tsutsui, executive]

Leandro, thank you very much for your questions. With regard to commercial strategy, yes, we do have an executive management team focusing on this area, and Alessandro is leading this commercial strategy, and all of our negotiations have been unified. Obviously, when we talk about commercial strategy, there are negotiations with bigger national HMOs and also regional negotiations for the different brands.

As for our conversations with payers, that has involved a great deal of negotiations. Everyone is very sensitive to the high MLR rates of HMOs, also with the demand by the aging population that we always mentioned, and we present ourselves as a company with a very clear strategy, targeting prevention, also outpatient services that do help to decrease MLR and improve the quality of life of people in general.

All these negotiations, as I mentioned, are very tough negotiations. But over time, we were able to understand the point of paying and to present proposals that we reach a balance in this sector. Price negotiation is not an easy task. You know that we can never transfer the entire inflation rate, but we have been increasing our internal productivity in order to keep healthy margins. And it's also important that we understand that, that market is under pressure, particularly talking to our vendors as well. So it's the entire health care chain that needs to contribute in order to keep the system sustainable.

As for credit in new units, there is a mix. First, we have some units that have been strategically opened in areas in which we saw a demand, so the task is easier. And depending on the situation, for example, for New Links, as I mentioned, we take, for example, a drug infusion solution to HMOs and we are able to negotiate this accreditation because we do have a very robust value proposition. And I believe that this is key for our strategy.

We need to think about the whole, we need to think about how we can take this kind of value proposition to the market and the market does perceive that. All players see that. And by doing that, we can keep our strategy as Grupo Fleury position itself as a group of health care solutions.

As for the premium segment, we don't see anything related to downgrading. Obviously, there are brands that have been positioned for the different segments and they do meet the needs of different HMOs. And I think that over time, the premium market, although there are some questions. It is a resilient market. People do value the type of integrated services that we provide. We do not carry out only test. We provide diagnostic solution. We discuss cases with physicians, we solve patients, problems, more complex cases, they can be tackled avoiding repetition of tests. So patients are served in order to have their problems solved. So be it using one of the different actions the market sees our value. Thank you.

[Operator]

Next question, Pedro Pimenta with EQI.

[Unknown Analyst]

Can you hear me?

[Unknown Executive]

Yes.

[Unknown Analyst]

Jeane, Filippo, Renato, congratulations for the results. Two very quick points. For B2B, in the release, you mentioned the reclassification of revenue from regional to B2B. So can you please add more color about what that reclassification means?

And the second point, what about the recomposition of the base in which you had patients at hospitals and that terminate there and then that left. So there was a drop in revenue because of that, but now we see the growth, even excluding the impact of reclassification. It was 0.6%. So is that a recomposition of your base? Or is it more improvement of the mix or prices?

[Jeane Tsutsui, executive]

Thank you, Pedro, for your question. And you are absolutely right. In B2B we did have the impact of one major client that left and that led to the reduction of our revenue in hospitals. But when we talk about B2B, we have Lab-to-Lab and hospitals. This specific reclassification took place because at one region we had a combination of revenue because there was a single management that included PSC and hospitals in that region. What we did now was a reclassification. So the revenue from hospitals that was part of regional PSC is now under B2B revenue, which is how we manage that for hospitals. And even just considering that effect, what we see is that there was a recovery. So there was a mild growth. So we stopped seeing that drop in B2B.

But I like to just mention -- also the combination of Lab-to-Lab. And Lab-to-Lab is very important for that. So the book results, you can see the very good result because we added revenue coming from Lab-to-Lab. So an accounting 200% increase because of Lab-to-Lab. And in the pro forma, we have this mild growth of 0.6% because of the combination of Lab-to-Lab. But Lab-to-Lab is presenting a very healthy growth.

And as for hospitals, we examined some prospects, and we are now present in some other hospitals. And we will keep on doing that, also negotiating, and we expect that over time we see a recovery. But I'd say this will take place more slowly. But thank you very much for your question, Pedro.

[Operator]

Next question, Guilherme [indiscernible] with Santander.

[Unknown Analyst]

Can you please elaborate working capital? We saw a drop, but that was offset by payment days. You talked a little bit about negotiations with HMOs regarding payment terms. But what have you been doing regarding negotiations with providers, with vendors in order to mitigate the issues?

[Jeane Tsutsui, executive]

Guilherme. Well, the change in the number of receivable days and working capital. This is something that was done, but there is no change in the profile or on the format. As you can see that the number of vendor days are also increased. It does not reflect any type of change or any change in our commercial relationships. That's only for accounting purposes.

Obviously, we take everything into consideration. We talked about our relationship with payers, we talked about negotiations, about health solutions that we are offering, we talk about the system sustainability. So all this is addressed during a negotiation. So the receivable days, payment days is not something that should be examined isolated. This is just for accounting purposes, and that happens every quarter. There was no change in the profile to be associated with that, okay?

[Operator]

Ladies and gentlemen, with that, we end our Q&A session. So I'd like to turn it over to Ms. Jeane Tsutsui, for her final remarks. Please go ahead, ma'am.

[Jeane Tsutsui, executive]

Well, I'd like to thank you all for joining us in this call to discuss Grupo Fleury's Q3 2023 earnings release. We are very confident that we have a very clear strategy, and we are executing this strategy with discipline. We look forward to seeing you all at our next earnings call.

[Operator]

With that, we close this conference call of Grupo Fleury. Thank you very much, and have a great day. Bye-bye.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]