Hapvida Participacoes e Investimentos SA

BOVESPA:HAPV3

Earnings Call Transcript 2023-Q2

[Operator]

[Interpreted] Good morning and thank you for waiting. Welcome to the second quarter 2023 earnings conference call of Hapvida. Joining us today are Jorge Pinheiro, CEO; Mauricio Teixeira, VP of Finance; and Guilherme Nahuz, IRO. [Operator Instructions] This event is being recorded and will be made available on the company's IR website where the complete earnings release materials are already available. You can download the presentation by clicking on the chat icon. The disclaimers are shown at the end of the presentation. [Operator Instructions] Now I'd like to turn the floor over to the CEO, Jorge Pinheiro, who will start the presentation.

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] Hello. Good morning, everyone and thank you very much for joining us for our second quarter 2023 earnings conference call. Mauricio, Guilherme, [indiscernible] and I are all gathered here today with our IR team to share the second quarter results with all of you confident about the execution of the plan that was presented to the market at the beginning of the year and later detailed in our Hapvida Day. We have all been working tirelessly to deliver with great focus and discipline. I would like to thank everyone who has been aligned with our greater purpose which is to provide affordable and high quality health care to the greatest number of people possible.Getting started on Slide 2. We have another quarter in which we remained on our consistent trajectory of margin recovery. And we have been doing that even with the several [ marker ] and regulatory factors that have been impacting our industry in recent years, in addition to the pandemic itself. Later on when I give you a breakdown of the numbers, you'll see that our business model remains robust and resilient with Hapvida GNDI's characteristic discipline.Historically, our MLR increases by 2 to 3 percentage points from the first to the second quarter affected by the typical seasonality of these periods. In the second quarter, we maintained our ticket re-composition strategy which together with cost management, discipline in managing admin expenses, increased vertical integration and the launch of new products resulted in an MLR that is slightly below historical seasonality.As we mentioned in our earnings call last May, we received the funds from the sales and leaseback and from the follow on operations, which reinforced our cash position by approximately BRL 2.2 billion. It's worth mentioning that my family contributed with around BRL 1.6 billion of this amount, reinforcing our commitment, confidence and long term vision. As a result and benefited by the cash position our leverage went from 2.3x to 1.6x EBITDA. This issue remains a priority for the Board of Directors and our management. Even though it's one of the lowest leverage ratios in the healthcare industry, we'll continue to seek further reductions to deleverage the company.Moving on to Slide 3, I would like to share some updates with you. This is a rendering of accounts related to what we shared with you in June on our Hapvida Day. Our combined and consolidated readjustments in May -- in June achieved 13% for large companies and 16.2% for business plans. In other words, we're maintaining the pace of implementing the readjustments needed for the financial balance of our contracts.We strictly complied with the timeline set for systems deployment in the acquired companies, CCG in May, Clinipam in July and in Santa Marta and Duque de Caxias hospitals in Rio de Janeiro this August. Our next wave is already scheduled and it will take place on October the first at the NDI units in Minas Gerais. It's important to mention that we're also making progress on the integration of corporate systems such as the fully integrated HR systems platform and our telemedicine platform which is also integrated.We continue to execute with great discipline our vertical integration plans. The highlight of the quarter goes to therapy rooms. More than 45 Autism Spectrum Disorder therapy rooms have already been delivered and many others are on the way. The vertical integration in regional one exceeds 80%. In regional 2 we exceed 30% but with plans to reach a similar level to that of Regional 1 in HMO produce products by the end of the year.Still related to vertical integration, as you can see on Slide #4, we'll soon open 2 new hospitals; Hospital Rio Solimoes, which will be an exclusively pediatric hospital, adding a fourth hospital to the city of Manaus. This will be an innovation for the State of Amazonas as we'll have hospitals with a distinct characteristic and profile. The unit will have a total capacity of 41 beds, 31 of them in the general inpatient ward and 10 in the ICU.The other will be Hospital Sao Jose do Rio Preto, in the countryside of the state of San Paolo. This unit will have 73 beds, including 53 general inpatient ward beds, 10 adult ICU beds, 4 pediatric ICU beds and 6 neonatal ICU beds rapidly expanding our own structure in a region where we recently started operating after the acquisition of HB health. In June, we also showed you our plans to streamline our group's corporate structure. We have had several acquisitions since then, as you can see on the slide, including hospitals, holdings and we're also advancing with integration of ultrasound by Hapvida Assistencia Medica.We have been executing our plan while remaining focused on quality of care and affordability, maintaining our values such as punctuality, kindness, respect, sustainability and cost efficiency. Speaking of quality, the group has been invested heavily in maintaining and improving our care quality indicators. Even in units where we don't have our systems deployed yet, we managed to advance in production and standardization of these parameters. We have operational teams that are specialized in this type of monitoring and quality care committee headed by the Chairman of the Board. It's important to highlight that we have outperformed national or even international benchmark.Now I'd like to turn the floor over to Mauricio, our CFO, who will go into more details about our operational and financial data. Mauricio, you have the floor.

[Mauricio Teixeira, executive]

[Interpreted] Thank you, Jorge. Good morning, everyone. Let me start by talking about revenue on Slide 5. There has been a 12.4% growth in revenue year-over-year and 1.7% quarter-on-quarter. This growth is concentrated in healthcare plans with an evolution of 14.8% in revenue year-over-year due to our readjustment strategy that was needed to recompose our business margins. For dental plans, our revenue has been stable. Any hospital services that includes other revenues such as [indiscernible] the drop can be explained by the deconsolidation of our unit at Sao Francisco Resgate which was sold this quarter and the closing happened in August.Now moving on to Slide 6, you can see details about our health plans. This quarter, we had a loss of 116,000 lives. This is due to the optimization of our portfolio that focuses on maintaining profitable contracts and on continuing with a negative turnover, which is the net reduction of employees and segments where we have a lot of exposure. When it comes to ticket, we had an increase of 12.2% as a consequence of an average readjustment of 13.5%, reaffirming our strategy to recompose our margins.Now let's talk about MLR on Slide #7. In Q2 '23, we had a cash MLR of 73.9%, up 1.6 percentage points quarter-on-quarter. As Jorge mentioned, this growth is below what we expected considering the historical seasonality in the regions where we operate. The increase in the vertical integration added to the price readjustment helped us to partially offset the seasonal effect.Moving on to Slide #8, we can see admin expenses. In Q2, there was a nominal drop in the group's admin expenses. We had a one-off benefit of the sales and leaseback operation with a benefit of BRL 22 million. In this presentation, we have a backup -- a breakdown that shows all the effects on our balance sheet. If you have any additional questions, you can come and talk to our IR team.We also had 2 negative effects of termination clauses that were due to our synergy plans. In the contingency lines, there was an enhancement because of the review of provisions in acquired companies where we don't have the possibility of compensation with their sellers. Now if you look at revenues over expenses, there is a dilution that is a consequence to a 2-digit readjustment above inflation levels and the discipline in getting the most of the synergies, reaching a level of 9.1% of our revenue.Moving on to Slide #9, you can see our selling expenses. We had a dilution in almost all selling expenses line. We recovered credit in the sales of hospital services through third parties. This has been a strong initiative also in the discipline of collection in sales of hospital services, and we also had a stabilization of the default rates of individual plans. In commissions, we see a reduction related to the first quarter, especially due to a unification of our commercial policies, which is a synergy and best practices between Regionals 1 and 2.On Page 10, you can see our adjusted EBITDA. EBITDA achieved BRL 66 million in Q2. And even with the favorable seasonality, we were able to recover margins in SG&A, which had stability and that also proves how scalable our unified platform is. We had a margin of 9 percentage points, a small drop compared to last quarter, but a smaller drop than the increase in MLR.On Slide 11, we can see our cash flow. This is the second quarter in a row in which we had improvement in our cash flow. Recovery of EBITDA and CapEx discipline enabled us to improve our leverage. And we had 2 inorganic effects with a follow-on of BRL 1 billion, and the sales of hospitals corresponding to BRL 1.2 billion. So we were able to decrease our debt over EBITDA level to 1.6x, a much more comfortable position than we had in the beginning of the year.Now to wrap up my part on Slide 12, you can see the evolution of regulatory capital with the increase in the solvency going to BRL 942 million, technical provisions that require guarantees are stable, which considerably increased our regulated cash that is now at BRL 4.4 billion. I would like to thank you all for your confidence.And now, I'd like to turn the floor over to Jorge again.

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] Thank you, Mauricio. I just want to reinforce that we are writing a 2023 in a balanced and diligent way, disciplined in executing our plan to recompose average tickets, opening new units and working to recover our margins. I would like to thank you all for your contribution, all of our employees, the management, the admin employees, back-office employees and also all of our doctors, dentists, brokers and suppliers. Thank you for your confidence and the strategic word of our Board of Directors has been keen.We want to thank also our shareholders and of course, our clients, that's the reason why we're here. So now I would like to open for questions. Thank you very much.

[Operator]

[Interpreted] [Operator Instructions] Getting started with our first question by Vinicius Figueiredo, sell-side analysts at Itau BBA.

[Vinicius Figueiredo, analyst]

[Interpreted] I'd like to start by exploring your operations in the North and Northeast. You mentioned that the more mature operations on the Hapvida side was already running at similar margins to what you had before the pandemic. Has this been maintained in Q2? And also considering that you already have a more normal MLR in that region, are you planning to have a lower readjustment in order to be more competitive and gain market share in the region because that's an important point in our organic growth premise?Now another point that the buy side has been talking about was related to the selling expenses. We saw an improvement in PDP this quarter and also improvement in the coverage level. I just want to understand how this line is expected to behave from now on. Do you see anything relevant affecting these results in Q2? And finally, a third question about the nursing salary floor. Do you have any updates about your negotiation with the unions?

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] Vinicius, I'll start by answering the first and third questions and then Mauricio will answer the second. About the North and Northeast regions, they are now what we referred to Regional 1. These 2 regions have mature operations, and we also have the Center West, which is a more recent region. Minas Gerais which was incorporated to Regional 1, and we have relatively recent acquisitions made by Hapvida and NDI and the State of Minas Gerais.I mentioned earlier that we are deploying systems in half of our operations in Minas Gerais by the end of October. The other half already had the systems deployed earlier. And we also have the countryside of the state of Sao Paulo as part of Regional 1. All the rest of our operations compose what we call Regional 2. The Regional 1 is a region in which we have a very high vertical integration level. Talking about verticalization, exceeding 80% for low complexity outpatient procedures and over 90% reaching 94% in hospital services in the more mature regions. So, we see a better MLR here within the expected levels.And in Regional 1, as a result, we have a lower need to apply readjustments. I'm talking about 2 to 3 points of readjustments below our average readjustment. Looking at all of the channels we sell individual, small and medium businesses, affinity, medium and large companies. We, today, have levels that are slightly above 15% of readjustment. Regional 2 has rate of readjustment that are a bit higher than that, Regional 1 has readjustment a bit below that. That enables us to expand our operations Regional 1 and continue gaining market share in those regions.So with regards to the nursing salary floor, once again, I'd like to emphasize how important this category is for us. [ Dona Anna ], my mother is a nurse by background. Her legacy can still be felt in our operations and in the nursing area of the company. But answering your question, we're still waiting for the final decision. We know that there are still appeals in the superior court awaiting decision, and we are expecting the final say in order to make any type of provisioning if need be. In addition to that, we continue with union agreements happening in many regions in the country.And now I'd like to ask Mauricio to answer your second question.

[Mauricio Teixeira, executive]

[Interpreted] To talk about PDD, Provision for Doubtful Debt, I would break down PDD into 3 elements. Individual book which was an offender since Q4 and is now showing signs of improvement. We've been making a great effort in the financial area to collect this and the focus on the policies of suspending services and working on digital channels in order to accelerate the collection services and talk to customers because when the revenue -- when the income is restricted, we need to work fast so that our bills can be paid first.Now for group plans, we don't have any problems with large customers. This has been quite stable, indeed. For large accounts this is quite stable. We're being paid on time, so we don't need any specific provision for credit risk. So we don't see any need for additional provisions for large accounts. And then something that is more one-off, which is related to the sales of services. Together with the sales of services, we have a VP that covers the sales of hospital services to other plants, and we've been very strict in suspending service, rescheduling and talking to these companies in order to make sure we are paid so that we can continue providing services. And we were paid for many these bills that were accumulating.And here, of course, we have denials and delinquency that get mixed up and it's quite complicated to separate them. So we are working hard in order to get paid for what is actually delinquency rather than denial. So an individual, we see a consistent improvement once again, and we're working in order to keep this improvement going. Large accounts, we have no major problems related to that. And for the sales of hospital services, we were able to recover overdue payments and we are now going to work on continuing with a normal pace of payments.

[Vinicius Figueiredo, analyst]

[Interpreted] Congratulations on your results.

[Operator]

[Interpreted] Our next question is by Mauricio Cepeda, sell-side analyst at Credit Suisse.

[Mauricio Cepeda, analyst]

[Interpreted] My first question is about regional differences. I understand that some parts of Brazil have not yet reach the ideal vertical integration, and you were planning to have a BRL 400 million CapEx in vertical integration effort throughout the year. Are you planning to review these numbers now in order to accelerate vertical integration and decrease MLR? And on the other hand, in regions where you already have enough capacity, what is the growth of the member base like in those regions which could make the most of your vertical integration?Now my second question is related to your third-party network portfolios. How is this portfolio evolving? Are you reducing this? And what is your relationship with your third-party network during this transition? Is it something good for members?

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] Now, about your first question, regional differences in CapEx for the year. We have projected something around 400 -- up to BRL 450 million in CapEx in 2023. We are already working on our budget for 2024, and we think that this number might be expanded aiming to implement our own network and have it more qualified and closer to our customers. And we've been able to do that. We have been able to increase vertical integration in all regions where we operate, Regional 1, Regional 2, opening new units, expanding existing units, buying new equipment for ORs, for diagnostic clinics, oncology. So we've been enhancing our own network, and that's a national historical movement that we have been making investing in our own units in our own network.We firmly believe in this, and we think this may be our main competitive differentials, offering services from the sales of product to all outpatient procedures, all the way to high complexity procedures, and we are very much focused on that in all regions of the country. We have investment all around the country to make this happen. And in 2024, we're working on our budget, and we're planning to intensify this even more.About PPO products, we have made a strategic decision a few months ago to maintain this product available, especially in the main Brazilian cities, Sao Paulo, Rio de Janeiro, Belo Horizonte and a few other cities with a lower video presence, but our goal is to keep the percentage of our portfolio the same. And we want to keep this percentage because we believe there is significant synergy between our HMO products that currently account for 95% of our customer base, and we don't want to expand the PPO percentage more. We want to keep it at the same level, but we don't want to decrease this portfolio either. We don't want to shrink this portfolio either.Now about our relationship with the third-party network in PPO products, I'd say it's really good. In this type of product, we don't have major ambitions to reach the same vertical integration level that we have elsewhere. We have vertical integration of 10%, 11% in those PPOs and we see a natural movement of our members going to our own network, but this is completely spontaneous. Our users go and resort to our own network because of the quality of care that is provided.

[Operator]

[Interpreted] Our next question is by Artur Alves sell-side analyst at Morgan Stanley.

[Artur do Amaral Alves, analyst]

[Interpreted] I'd like to understand the reduction of your contracts that were invested in your member base? Is this going to continue in the coming quarters? And how much has this impacted MLR since the increase was lower than the historical increase we see in Q2 as compared to Q1?

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] We have been making adjustments and analysis in our customer base so that we can maintain balance and sustainability. And we have been assessing this, especially in Regional 2, namely in more recent operations. And in situations where we don't have our own network and where we are not planning to invest in the medium term, in these situations, we've been reassessing especially corporate contracts at large scale. In these situations, in which the only solution would be to increase prices in contracts that are efficient, we have been making the decision to discontinue the contracts in some regions where this is happening. And on the anniversary of every contract, we will go back and reassess that contract.The more vertical products are highly competitive in the market because of the quality of the services provided and also affordability competitive prices that we offer, but in situations in which we rely on a third-party network and where we don't have that PPO characteristic, as I mentioned earlier because, yes, there are regions in which we're not planning to invest but where we have a higher exposure level. And in those regions, we'll continue to review these portfolios. And we might discontinue those that we find are not sustainable.With regards to the positive impact on our MLR, this is not the only measure. Actually, we have taken a set of measures that gained trend recently. The readjustments that we made with great discipline also had a positive impact on MLR, but other measures such as increasing the vertical integration of HMO products, the process of integrating acquired companies, which is running at full speed, and we expect this to be done by May and June last -- next year.All of the assets that are part of the NDI Hapvida group and also supply and other set of measures that enable us to offset the seasonal curve that would lead us to 2 to 3 percentage points higher MLR this quarter, but that was kept at 1.6% only. So we continue working hard to continue implementing all of these measures even if part of them don't bring short-term results, such as the integration process that exerts pressure in cost, implemented systems as well, also the vertical integration process, the third pressure because you have duplicate costs for 2 to 3 months, but even though we continue working with discipline so that we can implement all of the measures that we believe will be sustainable in the long run.I'm sorry for the long answer, but it's a whole set of measures that are implemented together and that enable us to reduce MLR and offset seasonal factors as well. You were talking about the specific impact of nonprofit customers, but the impact is small because these customers, they leave throughout the quarter. And since these customers depend on the accredited network, I mean, they leave but their bills will still come during 180 days. So this is actually going to impact MLR later rather than on the quarter they left the portfolio.

[Operator]

[Interpreted] Our next question is by Gustavo Miele, sell-side analyst at Goldman Sachs.

[Gustavo Miele, analyst]

[Interpreted] I actually have 3 questions. First, can you share with us your observations related to frequency in the month of June and July? When we compare this to other third quarters, we're a bit shortsighted because of the change in the complexity level that we see happening throughout the whole industry. So can you talk about size and frequency in your own network with us?Now a more technical question about the financial results. We noticed that the cash compensation line is going up together with the CDI percentage this quarter. What leads to this performance? What are the main drivers? I believe there is an effect of the average cash and now with the sales and leaseback and the follow-on operations, this is probably helping the financial results, but is there a change in profitability in any of the other assets that you have in-house?Now a third question, which is a bit more straightforward. Going back to the selling discussion. You mentioned that part of the improvement came from unifying your internal policies. Has this covered the whole quarter or only part of the last 3 months so that we can calibrate this assumption for the rest of the year?

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] I will answer the first question, and then Mauricio will address the other 2. About frequency, since we operate in all 5 Brazilian regions, we have a privileged view on how seasonality works, medical seasonality more specifically. So we see that Regional 1 and namely the north starts to face viral dismal diseases in the beginning of the year in January. And then that goes to the Northeast, usually in the months of February, March and April, and then this goes further south with the colder temperatures in the Southeast in the month of June and August.And this wave of seasonal diseases usually closed by the end of Q3. In July, more specifically, we see greater pressure for appointments and tests in the states that are part of Regional 2, but we see a decrease of other indicators such as patient day. So I think that these factors combined will lead to a third quarter that will show seasonal behaviors as expected in Q3, usually very similar to Q2. But we're going to work hard and show you all the actions we take in order to continue on this curve of margin enhancement.That's the commitment we made for the first cycle, and we gave you lots of detail about this. This is a cycle that is closed in June 2024 with all of the readjustments made, all of the assets integrated so that we can move on with continued planning, considering all the sites seasonal effect to the end of this journey that will be completed by June 2024. Now Mauricio, you have the floor.

[Mauricio Teixeira, executive]

[Interpreted] So about cash compensation, what happened in Q2 was a recovery of the secondary market of corporate debt. So our cash, either free cash or other cash is applied through restricted funds in which assets manage the cash and buy that with policies that we determined focus on AAA bonds and corporate credit bonds. And we saw in Q2, many companies having credit issues. I know some famous cases, I don't want to mention any names, but the credit market was impacted, and we see the bonds opening up and that penalized our quotas in Q1.And even for AAA corporate debt, they were negotiated at a different level. So the margin in the market was way below the curve for many bonds, not only ours but others that we buy in our funds. And in Q2, what we saw was the recovery of the secondary market in Brazil with a higher flow and fixed income, corporate and institutional bonds, and that helped our quotas recover. So it was a technical issue of market margins. And when we look at the average cash of the quarter it's what we expected due to the follow-on in the sales and leaseback.About commissions and commercial policies, the commission and the claw back of the [indiscernible] in cases of customers that we pay commission in sales and when they leave, we make an adjustment for future commissions. This is actually a market practice, and that's very strong in Regional 2, not that much in Regional 1. So we unify these practices. Not only this, but other conditioning practices, and that is something that started in the beginning of the year, and now we start to see the effect of those initiatives.

[Operator]

[Interpreted] Our next question is by Joseph Giordano, sell-side analyst at JPMorgan.

[Joseph Giordano, analyst]

[Interpreted] I'd like to talk about loss ratio. Your MLR was a bit better than we expected in spite of the negative effects of the season. You talked about the pressure of therapies. And when you talked about vertical integration, you mentioned that you have new therapy rooms being opened. But in Q1, we had 1 to 1.2 points of effect on MLR in Q1. And how do you see the evolution of this pressure that started mid last year?Now my second question is about expenses. We see a sequential improvement in G&A. The company is highly committed here to accelerating the integration processes. So thinking about G&A levels, I would like to ask you whether we can think about something flat or even a downward curve year-over-year. The first guidance that you gave, I'm not sure we should be still considering this but when we look at the synergy numbers in the expense and cost basis, were they conservative back then?

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] So specifically about MLR and therapies, you're right. That was the type of procedure that due to the regulatory changes impacted us and the whole industry strongly and [ weakly ] last year. And when it comes to that, the company has been taking action also quickly, but of course, we have an implementation deadline. The first thing we did was to create a specialized area to develop efficient protocols and guidelines and to implement our own network throughout the country.As I mentioned earlier, we have already opened several units in all regions of the country. And by the end of the year, our pipeline aims to get to high levels of vertical integration in all of our HMO products everywhere we operate. So we want to provide functional care with optimized protocols and guidelines, but being cost efficient and reducing the impact that, yes, has become a relevant cost and is already impacting our company, but we are confident that we'll be able to curb this impact in the coming quarters by the end of the year when we are going to have all the units already operational in the HMO products.When it comes to MLR, we are working and preserving the conditions we have without any major changes. So we're working so that this first cycle with all of the changes that will be made by June next year put us closer to our historical MLR levels. So we want to be closer to those levels, but it's worth mentioning that we have many acquisitions, and each one of those acquired companies have their own history of asset corrections through different ways, optimization of outpatient services, hospital services, but we're very confident in the execution of our plan. We feel confident that we are on the right track, but we will have to wait for the implementation timeline of each one of them with gradual reduction of the MLR. That's our plan.Now Mauricio is going to talk about G&A.

[Mauricio Teixeira, executive]

[Interpreted] About G&A, Joseph, we have many initiatives mapped. We have a G&A committee that gets together every Friday morning to map the opportunities and then follow up on their execution. There's a lot to be done. We're working to readjust the ticket and keep G&A stable or at inflation levels at most, but we are committed to decreasing the nominal base of G&A. And there are several opportunities related to IT technology.So rather than performing management -- maintenance of 2 different systems, we're going to have one single core system, Hapvida's system being deployed in Minas and Sao Paulo so that you can stop paying for software license or server cost to the system. So there's a lot of synergy in technology and licenses of major software, trips, third-party services, consultancies, we are mapping all of this to see what we can eliminate in terms of G&A costs in the acquired companies.So after being incorporated, some of these services make no sense. So we're going to work in order to reduce our nominal G&A base in order to offset the inflation rate that incur in those contracts and also the collective bargaining agreement of our payroll. So there is a lot to be done. I don't want to give you any guidance, but we're working hard to reduce this percentage even further.

[Operator]

[Interpreted] Our next question is by Samuel Alves, sell-side analyst at BTG Pactual.

[Samuel Alves, analyst]

[Interpreted] I have 2 questions here on my side. The first question is about the competitive landscape. Can you tell us about this? Do you still have a favorable ticket pass-through environment? Especially in Sao Paulo, we heard some companies are now more aggressive when it comes to margins. So can you talk about the competitive landscape in Sao Paulo? And our second question that is also related to that, should we expect sequential ticket increase quarter-on-quarter if we consider the carry-on effect of the readjustment or is there any other effect we should be concerned about?

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] About the competitive landscape, I would say that the most important point where we focus is on building a care structure that provides quality services and that enable us to be competitive when needed. We might see one or another situation in which operators produce prices that are not sustainable. We saw that throughout decades operating in this industry. So our main concern, which is something that is crucial is to make sure that we provide high-quality care, but something that is in a way that is affordable for customers and sustainable for us.So sometimes with the operators without a cost structure, if you look at the public data that is made available, we can see that they have a short-term portfolio composition strategy, but without any type of medium-term and long-term sustainability. And that's not what we want. What we want is to build a network that will enable us to be a competitor of trust. And we've been able to expand our customer base with this philosophy. We can deliver services from end to end. Now I'd like to ask Mauricio to answer your question about the ticket re-composition strategy.

[Mauricio Teixeira, executive]

[Interpreted] Our pass-through -- price pass-through discipline remains the same. We follow up on this every week and we see the same levels of price readjustment. So the average ticket is also related to mix because as we mentioned earlier, we had a price increase of 13.5%, but the mix led to an average ticket growth of 12%. And we expect this to continue since we're losing lives in products with open network. So these are products with a higher ticket, and we are recomposing in locations where we have available beds and a stable verticalized model or in places where we are undergoing this verticalization process with lower tickets, and that's key for our business model.This can lead to ticket reduction, but the magnitude of what we're doing is much greater. That was 30%, and that will continue to be around 13% to 15%. So there is lowering of the average ticket on the mix, but in total, that's going to lead to a re-composition of tickets.

[Operator]

[Interpreted] Our next question is by Ricardo Boiati, sell-side analyst at Banco Safra.

[Ricardo Boiati, analyst]

[Interpreted] I have a follow-up question to -- related to ticket. Rafael mentioned that the negotiation for large accounts would be more challenging, and we see a slowdown in ticket readjustment from May to June. These were the numbers reported for large contracts and corporate contract as a whole. So I would like to understand if this ticket movement is more stabilized or is there greater slowdown ahead of us in the level of contract readjustment? The readjustment above 13% is still very, very good, I know, but is there any slowdown in the readjustment expected to come? Or is this going to be kept at the same level from now on?And finally, about non-profitable contracts. I would like to know if you have a more consolidated view on your customer base. How much clean up this non-profitable contract base still needs just so we understand this dynamic in order to have a healthier portfolio with contracts that do not need any significant readjustments because after you clean up your base, the adjusted [indiscernible], if you look at the portfolio that you want to keep in-house, it wasn't as bad as the loss of lives you have this quarter. I just want to have a more normalized view of your healthy member base.

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] So first about the persistence of the readjustment level. Indeed, we have shown that this was at around 15%, and that was going to apply on 50% of the May contract. But as Rafael said, and you mentioned this, the easier negotiation are solved first and those that take longer are to be solved or the more complex ones, large contracts with major retailers that receive a lower readjustment than average because of their bargaining power and also the scale that this contract brings us diluting costs and diluting our G&A basis. So these are contracts with a contributory gross margin.So the main contracts were completely readjusted, including those contracts that have a readjustment level, a bit below average. And the June contracts are now happening as well. I think this has not lost momentum. Just the larger contracts have pulled this number down a bit. But if we look at the June and July readjustment as we do weekly, we see the same pace happening, and we have not changed our strategic decision on readjustments. We keep on applying readjustments to correct contracts that are in deficit.Now about unprofitable contracts still, I don't have a number to give you about how many contracts are subject to the risk of us not reaching a consensus when it comes to the readjustment. This is something we do on the contract anniversary. And this is a cycle of contract optimization that will only end in May next year, so after a whole year of readjustments. What matters the most is that the revenue mass is going up. So the power of readjustments at the 2-digit level that is already happening and will continue to happen until the end of the cycle is more than enough to offset the loss of non-profitable lives. At the end of the day, what we have is a positive factor that will impact MLR positively.

[Ricardo Boiati, analyst]

[Interpreted] Congratulations on the improvements you achieved this quarter.

[Operator]

[Interpreted] Our next question is by Leandro Bastos, sell-side analyst at Citibank.

[Leandro Bastos, analyst]

[Interpreted] I have 2 questions. My first question, talking about what Mauricio mentioned. The second half of the year, do you think this is going to be a lower semester with a PMD growth or do you think there will be an acceleration when it comes to merits? And about systems integration. You talked about your SSG. What was the process like? And what can you expect in terms of portfolio and working capital?

[Jorge Fontoura Pinheiro de Lima, executive]

[Interpreted] As we told you on our Hapvida Day and Mauricio restated today, we have a year to go to reassess all of the contracts. And every week, we have a meeting to assess the contracts on their anniversary, and this is expected to continue until next year. And we want to get there with a healthy and sustainable portfolio within the premises of what we believe is sustainable and guaranteeing high-quality services delivered, but also in conditions for us to continue expanding, growing and investing. So yes, we'll continue with the same readjustment discipline and reassessing the portfolio in the coming quarters, 3 quarters.About the integration process, of course, we need to deploy systems and processes. And this is usually something very complex, but we're used to this. We have dedicated teams. It's a very complex process. But in some situations, we send 300, 400 employees or even more sometimes to the unit so that they can perform systems training for weeks. So this integration process takes from 60 to 90 days until it can be stabilized. But things are advancing well. Of course, it is challenging, but in our accelerated schedule, we've been working well. There are points to correct. We always discuss them and assessed with our specific committees, but we are on the right track.

[Operator]

[Interpreted] This concludes the question-and-answer session. We are now closing the second quarter 2023 earnings conference call. The IR team will remain at your disposal should you have any other questions. Thank you.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]