Hapvida Participacoes e Investimentos SA

BOVESPA:HAPV3

Earnings Call Transcript 2022-Q2

[Operator]

Hapvida's Second Quarter 2022 Earnings Conference Call. Joining us today are Mr. Jorge Pinheiro, and Irlau Machado, Co-CEO; Mauricio Teixeira, VP of Finance; Marcelo Moreira, VP of Investor Relations; and Guilherme Nahuz, Investor Relations Director. Should you need simultaneous translation into English, be aware that this is available on our platform. To access it, please click on the interpretation button represented by the globe icon on the bottom of the 2 bar and choose your preferred language. For those of you listening to this conference in English, be aware that you have the option to mute original audio in Portuguese. To do so, click on mute original audio. We would like to inform you that this conference is being recorded and will be made available in the company's IR website where the complete earnings material are also available. You can download the presentation on the website as well. [Operator Instructions] After the company's remarks, there will be a question-and-answer session. [Operator Instructions]

Now I would like to turn the floor over to the co-CEO, Irlau Machado, who will begin the presentation. You have the floor, sir.

[Irlau Filho, executive]

Thank you. Good morning, everyone. Thank you so much for joining us to our earnings conference call. We're all gathered here together in our [indiscernible] headquarters, Jorge, Marcelo, Mauricio, Guilherme Nahuz, and we're all very happy to be disclosing our results with you today. In spite of this very challenging scenario, we're very excited about the performance of the Brazilian market and the industry as a whole that is now benefiting 50 million members, historical records. And in the last quarter, all of our indicators, both financial indicators and operational indicators, evolved positively in all of our business lines. There is an important trend here in our organic growth.

And now together with Marcelo, to whom I would like to turn the floor, we will focus on each one of those lines so that we can better understand our numbers this quarter. Marcelo, you have the floor.

[Marcelo Moreira, executive]

Thank you, Irlau. Thank you, Jorge, Mauricio. Good morning, everyone. Let's get started on Slide #2, where you can find a summary of our main financial indicators. This quarter, the highlight was our strong and robust organic growth with improvement of our cash MCR. Just to make it easier for you, the whole presentation here will show you data of 2021 and 2022. In 2021, we're going to have the data combined for Hapvida and GNDI. And the data for 2022 are covering 6 months. So they include the month of January to make it easier for us to compare this data. So sustainable growth, our net revenue achieved BRL 6.1 billion, up 8.7% this quarter.

This growth will go up to 11.3% when we look at the first half of the year. And the main lever here was the expansion in the number of members. We have had an expansion of 6.8% in our health care member base. And the member base of our dental plans has gone up 12%, achieving here almost 9 million members. So we are an absolute leader in this market. So as you can see, quite a solid and sustainable growth in this revenue front. Now, looking at our costs and expenses, our cash MCR or cash MLR had a reduction of 3.5 percentage points year-over-year, so a significant reduction. We are operating at 72.3% MLR right now, which is a benchmark for the industry, a very efficient MLR in terms of managing health care costs here for Brazil. In terms of SG&A, we had a 2 percentage point increase.

Now considering our base in 2021, which was extremely low at 15% in '21, and there are other factors that impacted this number that we'll talk about during this presentation, as a final result, our EBITDA reached BRL 582 million, a 34% growth. We're saying this is adjusted EBITDA but the only adjustment that is made is for non-cash expenses of the stock options. So this is quite a significant number that shows how robust our operations are even in challenging scenarios, such as the one we faced since the beginning of the year.

Now moving on to Slide #3, the main topics of our strategic agenda. Let's talk about the advances in our integration. What we can see here on a daily basis is the firm commitment of the whole organization to capture synergies and have the state-of-the-art management governance. Since February, we've had a new board with a 100% independent audit committee. In our assembly meeting in April, we elected a fiscal council, which is already working. We have implemented several management committees with company executives, members of the Board of Directors and external experts that are also helping us on specific topics. And more recently, about a month ago, we reported the merger of all of the direct reports to the co-CEOs, except for health operations and integration.

So you can see the long list here involving human resources, IT, administrative, commercial, financial, legal lab, including dental. You all know that both companies were already operating at a national level, so all of these areas have been unified now. The goal is to streamline administration activities and to have more agility in the decision-making process, making it easier for us to capture all synergies. So let's look at the synergies here. In February '22, we presented a target for monthly and recurring synergy capture. So our target was BRL 46 million in synergies in the month of February '23. So these were recurring synergies.

And this number was going up year after year until it can reach BRL 115 million by February 2025. Now the good news here is the target of February '23 has already been identified and it's already scheduled. We already have action plans in place or initiatives in place that make us realize that we will be able to achieve this target by February '23. We are on this progressive ramp-up to reach those 43. And in the second quarter of '22, we have already captured and we can already see this reflected on the results, BRL 29 million throughout these 3 months. And we would like to emphasize that the national solution has been implemented with 64,000 lives already signed, of which 40,000 are active. The individual product in these regions of NotreDame Intermédica has already been expanded to 70 new municipalities. So we currently have 23,000 active lives on June 30.

We have already implemented a new table for purchasing of materials and drugs. And at every purchase we make, we already collect synergies of materials, drugs, special materials and inputs, so many important fronts, supplies as well, when we look at the service perspective, all different types of services.

And finally, it's worth mentioning here the cross accreditation. What do I mean by cross accreditation? I mean verticalization through network sharing. That was one of the initiatives that when we announced our synergies in the beginning of this journey, that was one of the things that made us notice that we could have many additional gains. And as we took a deep dive in each one of the geographies throughout the country, we saw these possible gains and we have already implemented this. So there are many initiatives. And as per your requests, we did an exercise to break down the synergy of BRL 46 million EBITDA in February '23 into its 3 main components.

So as it is today, in February, BRL 14 million will come from revenue synergies and another BRL 32 million will come from synergies of costs and expenses, and this accounts for a gain of 1.2 percentage points in MLR especially because of the gains in purchases of materials, supplies, drugs, already talking a bit about protocols and the cross accreditation that I just mentioned and 0.4 percentage points will come from G&A gains. So this is broken down for February '23. Of course, as time goes by, we will see a higher weight of the commercial part coming in but for now, we can already see this gaining traction very quickly.

So MLR and G&A synergies mostly here at first. Now on Slide 4, we will tell you a bit about our ESG agenda. Our focus is to have sustainability as a pillar of our development. You all know that a lot has been done at our organization on each one of the fronts, the environmental front, the social front, the governance front. What you can see on the slide is a selection of initiatives that happen almost every day in all of our operations and reaching all of our 70,000 employees. A lot of awareness raising is being done. But what I want to highlight here is this table that mentions our goal of becoming carbon neutral by 2023. You all know that since 2021, NotreDame Intermédica has been carbon neutral already.

And now it's been 6 months since our merger, and we are now making a public commitment to make the entire Hapvida and NotreDame Intermédica Group carbon neutral in 100% of our operations by 2023. This is a very bold goal but it is a goal that makes us all very, very proud because we know that we are contributing not only to a more sustainable planet but also to the spread of values that are in tune with the demands of society for the whole productive sector and the industry, the health care industry could not be any different from that. So this is really important to us and we're very proud of this pioneering movement. Okay. Now let's talk about our results on Slide #5, starting with our net revenue. We have had solid organic growth, especially boosted by our health care plans. We grew both in our Hapvida operations and our NotreDame Intermédica operations, we grew in all of our business lines.

As you can see there, hospital services has had growth, dental plans have had growth but mostly, the main lever here was our health care plan operation, our main operations that grew almost 10%. This 10% growth is a growth that, as I said, was boosted by an increase in the average number of members at our company since the average ticket is still influenced by the scenario we faced in the last 18 months, a scenario of a relative stability.

So let us state it in more detail. In the next slide, for now, I would like to focus on dental plans, where we saw a growth of almost 12% of our member base, with almost 750,000 members that were added to our dental platform. Our average ticket had a reduction of 8.6%. And this is something that you all know in the last 18 months, I think that M&As that we did, in fact, have opened an incredible opportunity for our company to promote cross-selling. And we tried to do that, obviously, at the cost of this lower average ticket, but to sell to our members, health plans and dental plans bring benefits not only regarding margin because they do contribute to a greater margin but also to have the fidelity of our customers. So we are very happy with the things we have [indiscernible] in this dental plan. And now about the top plans on Slide 6. Talking about our growth, in fact, the increase of our member base was the real reason for our growth in the last 12 months.

And now what we can see is that we have an acceleration of the organic growth. So looking at the table on the left side, we are really happy to see 139,000 new members regarding organic addition in this quarter only, which is a target that represents a very important number for us and was really pursued by all fronts. And we had already been telling you that we could see an improvement in this competitive dynamics, and this is the result, 139,000 lives included in this quarter. But I would like to emphasize that this growth is a really nice target for the quarter but it's also consistent. Why? Because in several fronts, what we see is this growth that is happening in our more mature markets. And we are also seeing an increase in the P&A in particular in the South and Southeast region of the country which is very robust.

It has a lot of attraction. And we are also seeing that what we decided to do, which is this additional solution, has already brought results in such a short period of time. With this buying from our customers, they are buying this product and also the expansion of the individual plans within the GNDI network. So this plurality and this growth is something that gives us a lot of confidence in the months and quarters to come. About the average ticket on Slide 7, the good news regarding average ticket is that we are starting a new readjustment cycle as of May 2022. When we analyze the average ticket in an organization like ours, we have a lot of activities and M&A, it's very important to break down the average ticket. And when we do this, what can we see? We can see that in practice, we had a 2.2% growth over the last 12 months.

We know that this 2.2 is not enough for the cost phenomenon that we are observing but it's acceptable. This is something that, when we look back, it's different from what we see when we look forward. But we should also emphasize the impact of individuals or individual impact is 1.5% less and M&As normally life bring lower average ticket. In this case, we are analyzing this period with 668,000 lives with average ticket of BRL 166 . We can see that we have some outpatient products, [indiscernible] premium that have helped to compress our average ticket.

On this table, average ticket scenario has pervaded all the health industry and what's already happening for more than 18 months. So the good news is that this cycle has been completed and we are now entering a new era. And you can see that we are trying to include readjustment as of May 22 from 60.2% to 18.5% for premium products, 15.5% in [indiscernible] products and 16% for [indiscernible]. And then these readjustments are being included in our revenues and also in our results in the next 12 months, and they account for 55% of our revenue. So we have already a readjustment for more than half of our revenue. And we still have to include corporate products.

As you know, this is a case-to-case basis and [indiscernible] based on the real and effective MRL table. And we are promoting these readjustments in a more robust manner based on this changing scenario. So as we change cycle, we can see that this has been observed in all fronts. As to readjustments, this will be very important to improve our MLR. But to a company like ours, they are not a single tool that we have. Different from other players, Hapvida, NotreDame Intermédica, so we do not depend only on readjustment to correct for MLR. I think we have a weaponry of tools actually. So let's check our earnings in the second quarter.

In the second quarter, we had an MRL of 72.2%. Compared to the same period in the previous year, it's a gain of 3.5%. And compared to what we had in the last quarter, it's an increase of 0.6 percentage points and comparing to the fourth quarter, it's 2.6% of gain. So it doesn't matter how we want to look at it, our MLR has improved in the second quarter. And I would like to include another data. We know that, seasonally, the second quarter historically is higher than the first one but check the table and see how interesting it is to see that in BRL, in nominal values, our total MLR dropped from BRL 4.6 billion to 4,500. So this is not only a percent reduction. We are talking about a lower MRL or a reduction in MRL. And I think this breaking down of our cash MRL so that 72.3 million is something that we still see as an outlier.

The covered cost itself has had an impact in the quarter in person points, the negative readjustment of individual plans has also impacted by 1 percent point. And also, we had 0.9% of this higher MRL of companies that were acquired and that require greater verticalization over time. In the second quarter, the impact of the capturing of synergies is still low or small but over the course of the next quarters, we believe this will be progressively more relevant. So the covered costs and negative adjustments are improvements that over the course of the next quarter that shall be captured, but the major opportunity that we can see is and the MRLs of the companies that were acquired using our strategies.

And I think that on Slide 9, we have complementary data. It's almost a self-explanatory slide. On the left side, we can see the result of upfit operations verticalization and on the right, NotreDame Intermédica. On the top of this page, what can we see? You can see clearly that Hapvida operated in high standards, the best in the industry regarding verticalization, reaching 9% to 6% of verticalization of hospital admissions and consultation. And in the NDI operations, we can see this progressive increase of verticalizations. As we have been working in the last few years, it's interesting to see that on the lower part of this table, both companies have put a lot of M&A efforts to expand their operations beyond their frontiers and entering new territories.

The results show that we have a dilution of our verticalization. And this is the work that is being done by all the operation in each geography trying to analyze what needs to be verticalized, a hospital, diagnostic units, oncology, low cost, high cost, this is the permanent work that is being done by our operational team. And I believe that from this view, I would like to show you and talk about our prepared care network because in the current scenario of health in Brazil, this verticalization strategy that we have adopted with medical quality, modern infrastructure is fundamental for us to be able to face this challenge of delivering good quality health at affordable prices.

This is our new hospital in Brazil and has been operated in April 22. We had [indiscernible] open in Sao Paulo, [indiscernible] Hospital and [indiscernible] several regions with an infrastructure, that's really something that should be envied. With [indiscernible] units well planned regarding flow and agility and productivity with efficient investment. And also, I think we should emphasize these 2 units on the top of the page to give you an overview of the different time points of the company that has been national presence. The Brazilians Hospital is the first one in the region of Brazil, Abeta was growing in Brazil. We also had [indiscernible] in Brazil, the GNDI and now we have not only a tool for verticalization of the high complexity of our businesses but also [indiscernible] something that can help us to grow in this region.

Comparatively, compared to others, what happens when we have an area with density of members such as the city of San Paulo and the eastern side of the city. In this case, I believe you all know San Paulo and this was our objective to eliminate this outpatient services of 46 new services that have been inaugurated. So we are taking this away from other to create a higher complexity structure to gain scale and benefits. So I believe that in summary, this improvement of costs with quality in a company such as ours is a continuous thing. It happens in new markets where we have entered and it's also something that can happen in this more mature regions where they are operating.

Well, moving on to Slide #11 now, our admin expenses and selling expenses, SG&A. Starting with administrative expenses, they reached 9.6% in the second quarter, which is slightly higher than in the last 2 quarters where we achieved 9.3% and 9.2%. When we break down to see the main factors that led to this improvement of 0.2% and 0.3%, what we can see is that this is very much related to our efforts, almost investments that we have been making, not only in integrating both companies but also in IT. We are going now into a critical phase to complete several extremely important projects and this is the third-party service line that is growing the most.

Now comparing to the second quarter of '21, it would be a bit unfair because it was an outlier, especially because in that quarter, we had a reversion of contingencies when the normal thing is to have a certain level of contingency expenses. Now in terms of administrative expenses, my main message is, we are aware of this. We're paying attention to this with figures as fixed costs that must be diluted. So in a daily basis year, we noticed that there are many opportunities. So this is a commitment to discipline that we make here again with all of you. Now in terms of commercial expenses, you can see that the last 3 quarters have been stable at around 7.5%.

I only have 2 brief comments about this. The first is that we have promoted a reallocation throughout the whole historical period that you can see here of 2 lines, which are marketing and advertising and PDD. So they leave from G&A and they go to commercial expenses but this movement happened in all lines. And in this comparison, this has not been affected by that, so just a clarification. Now another important comment is, looking at the commercial expenses is, that we continue to see a stable delinquency level. We have not seen any pressure here for delinquency. That's another indicator that we monitor and we have not seen any increases in that level.

The last comment about the slide, I just want to emphasize that in administrative expenses, we're sharing cash administrative expenses. And the only adjustment we make here are for stock options, that is the accounting expenses of the stock options, which was BRL 144 million this quarter. In the third quarter of '22, we expect to have a similar level of BRL 130 million to BRL 140 million but starting in the fourth quarter, we have a drop to around BRL 60 million to BRL 70 million, a significant drop. That is part of our amortization schedule, stock option. This is related to the vesting period. So in the last quarter of the year, we expect to see a significant decrease in that line. How about our EBITDA?

Now moving on to Slide #12. The improvement in MLR was what boosted our EBITDA growth, which was 34% better than last quarter, achieving 9.6%. I will not mention the levers because we covered that already but I want to highlight our adjusted net income. As you can see, we are reporting a net loss of BRL 312 million. I know how important net income is and I know that many of you monitor this number but net income is always seen as a proxy of cash flow. And in this case, particularly, we have 2 factors that have been negatively affecting our net income, which is the SOP amortization and the intangible amortization of all of the M&As that have been done that have an important weight, but that have no cash impact.

So we're looking at the adjusted net income, which this quarter was BRL 241 million. Now when you have net income tax, the result is appreciation and then we get to that EBITDA level. And as we're talking about cash, we had a strong EBITDA conversion into cash and we have had that even in challenging periods. And you can see that the cash flow of our operations this quarter achieved BRL 569 million. We invested BRL 168 million to open these beautiful units, so we had a cash flow of BRL 401 million. Now the last 2 comments that should be made. First is about the lengthening of our debt profile. Mauricio, Rodrigo and the whole team have completed this quarter, in the month of May, the issuance of a new debenture worth BRL 2 billion.

This issuance of debentures was really important to us, not only to lengthen our debt profile because some of the debts would mature in '22, '23 and '24, and they will now mature in '28 and '29, but mostly to reduce the cost of debt. In this case, specifically, this debenture was captured at CDI of 2.6% and more to say, we paid for debt that had a 2.5 CDI. So the global cost of debt went from 1.79 to 1.69 and the average duration of our debt went to 4 years. So that was a major effort that is being added to other efforts that have been made, such as the issuance of Cree, lengthening our debt to 2031. And now we are on this trajectory to recover our profitability levels.

This is another hard work that has been done by the team to perform a thorough assessment of our goodwill balance. And we divided this into 2 groups. The M&As before February 22, we have almost BRL 40 million that are being used and will continue to be used as we incorporate all of the M&As that we made. So this is a healthy balance that is being used and that we plan to use until 2024, 2025. And after that, we'll have a new coverage, the shield of almost BRL 30 billion that comes from the merger of Hapvida and NotreDame Intermedica, and the schedule will cover the years up until 2031. So we were telling you that we saw an efficient fiscal structure to the next 6 to 7 years but now we think that this is going to be covering the next 9 years as well. So now I close my part of the operations and I turn the floor over to my colleague.

[Irlau Filho, executive]

That was great, Marcelo, congratulations on your presentation. It was very clear. You shared so much data that most of the investors wanted to see. So the team got organized to meet their needs in the best way we could. So, Irlau and I would like to thank you all for joining us in today's call. And just a quick reminder to all of you. I just want to emphasize what has already been said. We are reporting results for the second quarter, which was hardly hit by the COVID-19 pandemic, as you all know. So we'd like to thank the over 70,000 employees who worked diligently to serve all of our patients on time with a warm service and the high-quality service that we provide.

So thank you all very much. And this quarter was still hardly hit by the negative readjustment. The month of April, for example, had a higher impact on all of our customer base, that had a negative readjustment of 8%. This quarter, we also had inflation pressures but in spite of this very challenging context, the company has shown, because of the strength of its model and the discipline of its team, the company has presented satisfactory and positive numbers. With organic growth in a country that is resuming growth, Hapvida and GNDI are leaders in this movement, gaining market share more than any other competitor, which proves how attractive our products are. Now the second point, of course, is the control of our MLR levels considering all of our conditions, verticalization, integration, tooling knowledge, technology know-how, the company is a highlight in MLR control.

And finally, this is a quarter that has started to capture synergies and we have been sharing important numbers of synergies coming from the commercial area, synergies coming from SG&A costs and so on and so forth. So we're very happy about the results. Of course, we have not yet reached historical MLR levels because of this whole environment that is surrounding us but we're very confident that we are on the best track to make a difference and deliver high-quality health care at an affordable price. So we're now opening for questions, and we are available to all of you for any other clarification you might need. Thank you very much.

[Operator]

[Operator Instructions] Let's start with our first question by Vinicius Figueiredo, sell-side analyst from Itaú Corretora.

[Vinicius Figueiredo, analyst]

Now the MLR behavior, as you well said, was positively surprising, especially after we saw the results of other listed companies in the industry. So I'd like to understand whether you think that this verticalized model with this more coordinated care, you already anticipated this resumption of the procedure volume that has been affecting the industry so much or can you channel the spike in frequency better to distribute it throughout the coming quarters? Now another point here. I would like to understand whether the increase in more verticalized health care plans in the [indiscernible] operations because you said that in the Hapvida vertical, the share of these plants has been increasing and also the gain of copayment products, are they significant enough to help you reduce the MLR this coming quarter?

[Marcelo Moreira, executive]

Vinicius, thank you very much for your questions. Yes, I believe our company [indiscernible] behaved within the major guidelines for verticalization and have integrated its units for the company to be protected from volume oscillations. And this is what we saw over the course of the second quarter, while we had a lot of request for emergency services in the whole country almost simultaneously and almost everyone has done this, people who were affected with covered symptoms and other viral diseases for the most case, have sell-services or services.

And even our models of digital platforms that had an important impact in this period and different integrations that brought us more effectiveness from outpatient services to hospitals in a continuous process of verticalization. As Marcelo has alluded to, we still are inaugurating new units over the last few months in Sao Paulo, [indiscernible] Manaus, some other regions and cities, and our plan of utilization is ongoing. It's a continuous process. And this protects our company due to the use of technology and other tools for prevention. And this allow us to be protected. So we are offering a volume that's more or higher than the EU, that's what we saw in the second quarter. So we are confident in our trajectory.

And it's important to remember that the second and third quarter have these factories are having a higher volume. And we also expect that over the next few months, fourth quarter or first quarter of the next year, we will be able to recompose our average ticket combined with the return of our current volumes, we observed volumes that are close to historical levels, and this brings us a lot of confidence that we are on the right track to achieve our MLR levels. And retaliation as I said in Belron, we had synergies in CapEx, and has -- shows inaugurated a huge head in the team of emergency services that will service both verticals in one single regional coming with a lot of synergy. So we will benefit from this. And also our ongoing dynamic work and we have inflation, it’s easier to implement co-pay, which is very effective, and is something that pleases our contractors and satisfy their needs and regulate in a more intelligent manner our MLR.

[Operator]

The next question is from Fred Mendes, the sell-side analyst on BofA Securities.

[Frederico Mendes, analyst]

I have 2 questions. I think the first one, it seems to me that in this quarter, in particular, we had some big contracts that were completed. And just for me to understand the dynamics, the McDonald's contract, is this already included in the national plan? This is the first point. And was there already any kind of prior negotiations in this respect or was it something that was started when you launched the national plan in a short term for you to close or complete such a contract?

And the second question, as Marcelo has alluded to in his second slide in his presentation, with detailing explanations about synergy, I would like to know if that 46 million, was that based on the case rate that you had initially or you have been reviewing the initial presentation, we had an upside of things that were presented? So it's for me to understand how the synergies connects to the first slide on synergy.

[Irlau Filho, executive]

First of all, regarding contracts [indiscernible] the interesting point is the quality of the growth, the organic growth that we are achieving, which is something that we see in our unit as a whole in P&A, individual, in affinity and corporate plans. In online, we can see a similar growth and this is something that encourages us very much. In the case of McDonald's though, in reality, we were able to make this possible. I won't give many details about negotiation with customers but of course, since we have a national product, this is what has motivated this process as a whole of the acquisition of this customer and our growth of MRS growth was covered in all lines.

And we are very happy with good perspectives in this sense. In the specific case of synergies, I think Marcelo will be able to answer your question better than me. This number [indiscernible] that we have an opportunity. We are still at the beginning of our process. We're talking about 120 days working together with a spectacular team and Marcelo is a member of this team. And these teams are building a scenario of synergy opportunities. Marcelo, would you like to comment on it?

[Marcelo Moreira, executive]

Yes, perfectly. I think that to have achieved this target of 46 million in the month of February, it was something that we have celebrated really. That was a reason for celebration in our organization and our team. Myself and Irlau are the leaders of this team on the Hapvida side but we have already mentioned that we won't stop there. So Fred, for now, as we have told you, we have a roadmap, which is very clear and it shows that we will deliver these 46 in February '23. We haven't adjusted this figure because I think that the organization as a whole is pushing in new fronts. We won't stop there but for now, we are happy with 46 million.

[Operator]

Our next question from Mauricio Cepeda, sell-side analysts of Credit Suisse.

[Mauricio Cepeda, analyst]

I have some questions about the competitive environment. I believe that this environment is a little ruffled and we are facing difficulties regarding regulatory demands. And I would like to know if you are perceiving the return of some customers and the magnitude of this return in the future, if you can feel a more rational environment to renegotiate all the contracts? And what will be the opportunities that are being opened in this competitive environment in a sense as we may have a more rational environment? And I had a similar question in the prior quarter about the cleanup of our businesses in our contracts. We had some cleanup with a relatively high turnover. And do you see a risk of more cleanup and do you see some sort of solution of commercial transition given you by operators that many times don't have the same profile of members and contracts? And do you think about coming up with a solution, a transition at least in this transitional phase in those regions where we have been working?

[Irlau Filho, executive]

First of all, as to cleanup, we talk about this when it's more intense DGD acquisitions that we carry out. But this is something that is buying in the company because our purpose is to keep a balance in our contract. And this is something that we need to do to generate what our shareholders desire. So many times, we offer different products and we had companies that we have acquired, which we have driven towards a virtualized product so that we can deal with these customers and include the adjustments, but this is something that is ongoing. Right now, we have done a very good work with companies that were recently acquired, so we are not seeing anything much more robust in the next few months. As to the rationality of the market, you're right.

The balance sheet that have been recently published could show you that some data that have been disclosed by several of our competitors. And we can see that this companies are not having a good performance, and they will need management and better performance, and this opens a lot of competitive opportunities for us. What we can see a lot of our competitors are aware of the difficulties and we have a rationality in the market. In some cases, [indiscernible] are selling products to recompose their revenues in the short term, maybe products with some level of loss that can offer revenue but not necessarily have higher costs. So we have a greater opportunity for competitiveness.

[Operator]

The next question is from Yan Cesquim, sell-side analyst of BTG Pactual.

[Yan Cesquim, analyst]

I have 2 questions also. One, about the growth of individual sales. You can see that these sales are progressing, reaching almost half of the net acquisitions of the quarter. And this is on the Hapvida side, while Intermedica grows more slowly, which is natural. I would like to know if you can talk about the drivers of this growth and if you expect this rhythm to persist?

And the second question is a more technical one about balance. We have seen that the net activity has increased by BRL 6.2 billion from BRL 6.2 billion to BRL 6.7 billion, so BRL 5 billion increase, but you have [indiscernible] flow of BRL 400 million. So we have this difference due to acquisitions. And I would like to understand how this variation of this that is related to the data of operational cash flow generation? Is there an effect that can explain this or adjustments of acquisitions, a monetary updating of the debt that can explain this effect? These are my questions.

[Irlau Filho, executive]

First, the individual, where the individual, what we see is the following. Maybe this is a bit mysterious for you but GNDI was already selling individual plans in the past through companies that were acquired throughout time. Now, with the merger technology with Hapvida, we launched this in another 72 municipalities, which was key for us to acquire more knowledge and know-how in selling these individual products in those locations. And we expect to see this dynamic continue. We are one of the few companies in the country that is still selling individual plans. Some of the companies that are still selling individual plans are facing difficulties and they might have more difficulty because of pricing to offer efficient competition. Now, in the case of the balance sheet, I would like to turn the floor over to Mauricio but maybe the focus should be different here. Mauricio, you have the floor.

[Mauricio Cepeda, analyst]

Well, the growth in net debt has the natural effect of hiking interest rates here in Brazil and a residual part of the M&A, the merger of Hapvida and Intermedica that had some foreign investors that had installments to be paid in the second quarter. And the relevant CapEx that was strong in the second quarter with the units opened and with the tax income being paid, you're removing the goodwill benefits.

[Operator]

This concludes the question-and-answer session. So we're now closing Hapvida's Second Quarter 2022 Earnings Conference Call. The questions that have not been answered during the call will be answered shortly through the IR Investor Relations website. Thank you very much, and have a great day.