Hapvida Participacoes e Investimentos SA

BOVESPA:HAPV3

Earnings Call Analysis

Strong Revenue and Earnings Growth with Verticalization Strategy

In Q2 2024, our net revenue increased by 4.5% year-over-year, driven by a 9% rise in healthcare plan tickets. Despite a seasonal influx, our margins improved significantly. Adjusted EBITDA soared nearly 60% from the prior year, while adjusted net income rose 121%. We raised BRL 1 billion via debentures, optimizing our capital structure. Our verticalization rate reached 82% in appointments, enhancing cost efficiency. Guidance for 2024 indicates continued strong cash flow and EBITDA growth, maintaining CapEx around BRL 700 million. We are expanding our own hospital network in key regions like São Paulo and Rio to secure future growth.

Revenue Growth and Verticalization Strategy

Our consolidated net revenue saw a modest growth of 4.5% in Q2 '24 compared to Q2 '23. Healthcare plan revenue increased by 5%, driven by a significant 9% rise in the average ticket price, despite a slight drop in member numbers. Our verticalization strategy, aimed at enhancing the efficiency and quality of care through in-house services, continued to show positive results. We have been more selective with medical hospital service sales to reduce credit risk and prioritize hospital capacity for our members.

AI and Technology Investments

Artificial intelligence (AI) tools have been rolled out, helping physicians make accurate diagnoses and improve patient care. For example, our AI tool, trained with extensive clinical data, assists doctors by recommending potential diagnoses using the ICD-10 system. Additionally, significant investments have been made in IT and technological infrastructure, including the build-to-suit financing model for new hospitals in Rio de Janeiro and Sao Paulo, promoting cost-effective verticalization.

Financial Performance and Cost Management

Adjusted EBITDA reached BRL 958 million this quarter, translating into a significant year-over-year increase of almost 60%. Our adjusted net income surged by 121% in Q2 '24 compared to the same period last year. Despite a higher utilization rate due to seasonality and disease outbreaks, we managed to improve our Medical Loss Ratio (MLR) by 3.4 percentage points, demonstrating effective cost management and pricing discipline.

Member Dynamics and Average Ticket

While we experienced a net loss of approximately 13,000 members, our gross sales remained robust, indicating a strong pipeline of high-quality contracts. For the first time in several quarters, new sales outpaced cancellations, a promising sign for future organic growth. The average ticket price saw a notable uptick of 9% from Q2 '23 to Q2 '24, driven by tariff discipline and price adjustments, signaling a healthy pricing strategy in place.

Cash Flow and Capital Expenditure

Free cash flow contributed BRL 307 million to our cash reserves, which increased by a net BRL 590 million this quarter. Capital expenditure (CapEx) reached BRL 185 million, with a focus on verticalization and IT advancements. Our total CapEx projection for 2024 is around BRL 700 million, facilitated by a strategic move to free up BRL 300 million through the BTS transaction with Visa.

Debt Management and Deleveraging

We proactively managed our debt, raising a net amount of BRL 1 billion via debentures this quarter, optimizing our cost of capital. Our gradual deleveraging continues, reducing our debt ratio to 1.03 times EBITDA, maintaining a strong cash position. This healthy financial state allows us to enhance our operations and pursue strategic investments confidently.

M&A and Market Expansion

Recent M&A activities consumed approximately BRL 400 million, reflecting our commitment to market expansion and portfolio growth. The integration of acquired units has been effective, with significant progress in merging hospital and diagnostic units. The state of Minas Gerais, among other regions, represents a key growth avenue, with extensive integration and network expansion plans underway.

Earnings Call Transcript 2024-Q2

[Operator]

Hello, everyone, and thank you for waiting. Welcome to Hapvida Second Quarter 2024 Earnings Conference Call. Joining us are Mr. Jorge Pinheiro, CEO; Luccas Augusto Adib, CFO; and Guilherme Nahuz, IRO, would like to inform you that we have simultaneous translation available on this platform. To access it, please click on the button interpretation and choose the English language. This event is being recorded and will be made available on the company's IR website with a complete earnings release materials. You can download the slide deck by clicking on the icon in the chat. And please refer to the disclaimers at the end of the presentation. During the company's presentation, all participants will be in a listen-only mode. After the company's remarks, there will be a Q&A session. [Operator Instructions]. Now I would like to turn the floor over to Jorge Pinheiro, CEO, who will start the presentation. You have the floor, sir.

[Jorge Fontoura Pinheiro de Lima, executive]

Hello, everyone. Thank you so much for joining us for our Second Quarter 2024 Earnings Conference Call. We're gathered here in Sao Paulo, Lucas, Guilherme, myself and the IR team, pleased to share some details with you. Let's get started on Slide 2 of the presentation. Here, you can see an overview of -- with some of the financial highlights that will explore later in further detail. I'd like to comment on a few of them. As you all know, the second quarter is marked by a historical seasonality with higher frequencies and greater volume of care services provided. This quarter was no different. Our frequency of per capita use in appointments, tests, admissions and surgeries increased and even surpassed that of the previous year. But even with higher volumes, we managed to control our MLR. And this is the strength of our verticalized and more than that integrated model. Our commitment and discipline to each one of the verticalization strategy implemented over the last few years, combined with other initiatives such as the prevention programs, standardization of best practices and strong investments in technology have been showing results.

Speaking of verticalization, A few weeks ago, we announced a financing structure using the build-to-suit model for 2 new hospitals to be built in Rio de Janeiro and Sao Paulo. This structure frees up the company's capital to accelerate other investments we have in our verticalization plan, which includes, for example, the bring in imaging equipment as well as radiotherapy services and infusion centers in-house, providing more comfort, quality and warmth to our members. In our own network, we continue to expand the number of therapy rooms, clinics and diagnostic units. We are also going to expand and upgrade several hospital units throughout the state of Sao Paulo and Rio de Janeiro, in the North, Northeast and Central West regions of the country, thus increasing the capacity of hospital beds as more mature places like Manaus, Belem and Fortaleza continue to grow in number of members. And Manaus, for example, we have just signed a lease for one of the city's largest hospitals, Milton Lines, which will add around 250 beds to our own network in the city. In short, the verticalization strategy remains strong and should intensify in the coming years. Looking back, our own network has already become more representative in the composition of our total cost, not only because of the verticalization process I mentioned but also as a result of the process of oxygenating the member portfolio, which with new sales, is adding more and more clients to verticalized plans.

We also successfully concluded the cycle of portfolio review and readjustments that were needed for the economic balance of our contracts, which began in late last year and was completed in April this year. We continue strong in this new cycle with appropriate adjustments in the responsible and sustainable underwriting policy. This has helped us to make important progress quarter after quarter. Here at the center of the slide, you can see our cash MLR, which is our most important operating indicator, showing an important improvement of 3.4 percentage points against the second quarter of 2023. Since we've had some changes in the season of viral disease is in a major dengue-fever epidemic this year, concentrated in the second quarter. We have to look at the first half of the year as a whole. On the right-hand side, you can see that the improvement in the MLR in the first half of the year is even more marked with a 3.9 percentage point reduction. EBITDA of BRL 958 million in the quarter is not only almost 60% higher than in the same quarter last year, but it's also higher than that of the fourth quarter of 2023, which is typically the best quarter of the year. Finally, it's also important to mention here that our gradual and organic deleveraging process continues with our indicator reaching onetime net debt over EBITDA, a very healthy and comfortable level.

Moving on to Slide #3. Here, I'd like to share a bit more about the progress we have made in the integration process. To waves of integration were carried out in the second quarter, one in April and another one in June, covering around 66 care units, including hospitals, emergency rooms and diagnostic units. Therefore, we now have all of our hospitals, emergency rooms and diagnostic units integrated, and we're now in the final phase of the Sao Paulo integration with just 1 less phase left planned for October, which is the turnaround of the health care operators systems. The integration waves of the care units have been carried out efficiently and effectively with no impact on customer perception in terms of quality of care and consequently, having no impact on cancellations. On the contrary, quarter after quarter, we are seeing our cancellation rates decrease. The second quarter was actually the first quarter since the beginning of last year in which gross sales exceeded cancellations. We are optimistic with the growth that is ahead of us. With the end of this integration journey, we will have a 100% systemically integrated company with significant gains in control of the customer journey and full visibility of all of our care quality indicators, which are paramount to our management.

As an example, you can see here the evolution of one of these indicators, which is service in up to 15 minutes for urgent and emergency appointments at our beautiful life center hospital located in the city of Belo Horizonte state of minister rise. This percentage was at 32% before the integration. And you can see now that the figures are better now at 88%. In other words, all of our members who needed to get care at the life center during this period, 88% of them were seen by a doctor in up to 15 minutes from the moment they checked in. That's a very strong figure. And throughout our network, we can see a solid improvement in this indicator. Still talking about quality of care. Another important indicator that we have been publicizing is the percentage of natural births in our network. As a reminder, Metro Childbirth is recommended by the World Health Organization, the WHO because it has a number of advantages and benefits, both for babies and mothers. With 50 maternity hospitals in our own network and an average of 5,000 deliveries a month, we have performed around 30% of normal deliveries, a performance that is consistently higher than that of a naps average, which represents the largest and most renowned hospitals in the country.

When we look only at the cities where we have already implemented prenatal care programs called Serving and Deserving, this rate gets close to 40%. Another important front on which we have made rapid progress is in the use of AI, artificial intelligence in many care fronts. For example, we're now rolling out an innovative tool developed in-house by training an AI with a vast set of clinical data. The tool is able to capture clinical terms and conditions in text written during care and recommend possible diagnosis to the doctor using ICD-10, the international Code of diseases. AI has contributed to the quality and efficiency of care by supporting doctors in identifying correct diagnosis, minimizing possible errors and helping to ensure the right treatment is provided. Finally, I would like to mention advances in our research, development and education area. The shortage of medical professionals in various regions of the country and the need to introduce final year students in institutional medical activity model prompt the creation of a structured educational development program. Our internship medical residency programs, either on our own or in partnership with educational institutions organized and managed by Hapvida, Natrami, Intermedica and many hospital units in our own network throughout Brazil guarantees future medical professionals access to high-quality practical training and reinforces our commitment to excellence in medical training. Before turning the floor over to Luccas, who will go into further details about our results, I want to conclude by reinforcing that we remain focused and very disciplined, facing challenges and taking advantage of opportunities, working hard to continue these strategies we kicked off last year. We continue to invest in strengthening our operations and seeking a healthy balance in our margins. We appreciate the contribution of our employees, doctors, dentists, brokers, suppliers and the trust of the Board of Directors, shareholders and above all, the trust of our clients. Luccas you have the floor now. Thank you.

[Luccas Adib, executive]

Thank you, Jorge. Hi, everyone, and thank you for joining us. It's a great pleasure to be with you once again for another Hapvida's earnings conference call. Let's get started on Slide 4 about net revenue. With the chart at the top left, you can see that consolidated net revenue grew by 4.5% in Q2 '24 against Q2 '23. And by just over 4% in the first half of 2024 compared to the same period of 2023. Moving on to the chart at the top right, our health care plan revenue is up 5% against the second quarter of '23 and up 5.4% compared to the first half of ‘23, driven by a 9% increase in the average ticket that more than offset a slight drop in the number of members. In dental, at the bottom of the slide, you can see that we have had a revenue growth of 4.4% and 4.2% in the period on the same basis of comparison, boosted by the increase in average ticket. In the line of revenue from sales of medical services and other activities, we saw a reduction of 27% in the second quarter of 24% and 34% in the first half of the year. The main factor that boosted the reduction in this line as a whole came from the sales of San Francisco Resgate and Meda, bringing our revenue from other activities to 0. Specifically in the sales of medical hospital services, we have been more selective with the aim of reducing exposure to credit risk and prioritizing our hospital capacity to serve our members in increasingly verticalized products that is those that prioritize our own network of care, like we mentioned in previous calls. It's important to note that this line grew by almost 14% compared to the first quarter of '24, reflecting the typical seasonal effects of higher utilization.

Moving on to Slide 5. Let's see more details about changes in members and average ticket. We lost around 13,000 lives net, a similar level to the previous quarter. This reflects a gradual slowdown in the levels of cancellations from previous quarters. Our gross sales remains very strong, performing above 490,000 new lives in the quarter. These are high-quality contracts with more verticalized products and a healthy pricing in line with our portfolio sustainability paradigm. On the other hand, cancellations of 460,000 lives in the quarter are still dynamic. The result of not only the readjustments that were necessary for the economic balance of the contracts but also of the processes of optimization, verticalization and regulation of the accredited service network. As Jorge mentioned, it's worth noting that this quarter, for the first time, per sales exceeded cancellations, showing that we are on the right track to resume our organic growth. We are more optimistic about growth looking forward, but without is costing us any flexibility in our pricing discipline and portfolio profitability.

At the bottom of the slide, we can see the improvement of average ticket, up 9% between the second quarter of 23 and 24. In the first column, net price, we had an increase of almost 9.1%, which reflects our tariff discipline. And price adjustment efforts already net of the effect of increased verticalization and co-participation in existing contracts. Compared to the first quarter of '24, the ticket grew by 2.5% due to the concentration of anniversaries of contracts with HMOs as well as a better performance of mass market products, which have a higher average ticket than corporate products. In the second column, we have minus 0.5%, which we call mix or miscellaneous, which represents the net difference in the average tickets of incoming contracts, gross sales and outgoing contract cancellations. This change is the result of our commercial focus and greater demand for more verticalized, lower ticket products, while cancellations are concentrated in contracts with higher tickets, but with greater exposure to the accredited network, as we mentioned in previous earnings conference calls.

More recently, we've seen a certain migration of lives from insurers with higher tickets coming to our product grade in the middle of the period. With PPO and HMO components, all of the movements mentioned above are part of the company's strategy and the plan to recover our historical margins, which has been carried out with rigor and discipline. On Slide 6, we can see our cash MLR of 70.5% in the quarter, a significant improvement of 3.4 percentage points against the second quarter of 2023. As compared to the previous quarter, this indicator is up by 2.5 points, reflecting the seasonal growth that was expected in higher utilization that is inherent to our segment. This includes emergency appointments, tests and admissions related to the virus diseases that are typical of this period in addition to the fact that we had fewer holidays in this quarter. This year, exceptionally, we saw significant increase in dengue-fever cases in some regions. Looking at the first half of 2024, we saw an improvement of 3.9 percentage points compared to the first half of '23, positively overcoming the implicit seasonalities of these periods, in line with our goal of always trying to overcome the seasonality in this journey of gradual and responsible margin recovery. This also reflects the various strategies we have implemented included successful price adjustment cycles and increased sales of more verticalized products.

The company has worked hard to increase verticalization standardized protocols, optimize the provider network and implement cost control and management measures. These effects are clear in our verticalization rates. As you can see in the chart on the right, the second quarter of '24 for plants that prioritize their own network, which we call HMO. -- Verticalization was almost 82% in appointments and 79% in admissions. The 79% of admissions in total, for example, is the average of 83% in Regional One and 75% in Regional 2. We still have an opportunity to increase these indicators, and we understand that greater verticalization and consequently, less exposure to the accredited network is a factor that ends up reflecting in fair prices for everyone. On Slide 7, cash admin expenses, which disregards the effects of long-term incentive plans, depreciation, amortization and nonrecurring items, we can see that the percentage of expenses in relation to revenue has remained stable in recent quarters and slightly better than the second quarter of '23. The second quarter saw an increase of just over BRL 14 million, which was mainly due to the increase of BRL 37 million in contingencies for acquired companies and incremental contingencies for outcomes that were unfavorable to the company as well as BRL 8.7 million in location and operation, which are expenses with concessionaries, travel and accommodation and the readjustment of technology infrastructure in the context of system implementation and turnarounds.

On the positive side, there were 2 effects that are worth mentioning: BRL 33 million in third-party services, including BRL 9 million in capitalization of investments in technology and BRL 6.5 million in reclassification of expenses to costs, both referring to previous periods. The first quarter of ‘24 was negatively impacted by BRL 14 million in IT expenses related to the implementation of system integration process, affecting comparability. We also had BRL 14.5 million in other incomes in which the company was able to renegotiate in STADA in advance the retained installments of 2 acquisitions. In those negotiations, we always evaluate the potential contingencies versus the balance payable in a conservative manner. And having said that, Blasco continue to reinforce this, we should see an rapid behavior in the coming quarters for G&A, which is normal and expected since the expenses related to integration with turnarounds and system implementations that involve support staff, travel accommodation, temporary coexistence of legacy systems with new systems can cause this line to behave more upwards or downwards. We are confident that there is room for improvement through initiatives that we will undertake as these integrations stabilize. These are initiatives that cut across G&A lines, and we expect to reap the rewards of this from 2025 onwards.

Moving on to selling expenses on Slide 8. We see stability in the year-over-year comparison for the quarter and for the first half of the year. Looking at the first quarter of '24, we see a reduction of just over BRL 55 million in the second quarter, mainly due to the positive impact of BRL 66 million on the provision for bad debt line. On this amount, BRL 15 million relates to extraordinary receipts for SME and individual clients, the result of a major new campaign, which we are undertaking, which reduced the company's delinquency levels and consequently, provisions in the quarter. In addition, BRL 20 million came from bank reconciliations of receivables from previous periods. In the first quarter of 24, BRL 32 million were also provisioned on a one-off basis, an amount that was not repeated in the second quarter, which affects the comparability with the second quarter. These amounts were partially offset by an increase of BRL 11 million in the advertising and publicity line due to the institutional campaigns carried out between March and May focused on strategic locations for growth and retention. On the next slide, our adjusted EBITDA was BRL 958 million this quarter, almost BRL 2 billion in the first half of the year. Significant increases of almost 60% compared to both the first 3 and 6 months of the year. of 2023. Margins are also close to the historical pro forma levels of the combined company, and our adjusted net income rose 121% in the second quarter of ‘24 against the second quarter of ‘23 and more than 29% in the first 6 months of ‘24 compared to the first 6 months of '23 because of the factors I already mentioned.

On Slide 10, you can see that in the second quarter of '24, our cash increased by a net BRL 590 million, of which BRL 307 million came from free cash flow, $1 billion from the raising of the seventh issue of debentures and BRL 1 billion from the raising -- and in free cash flow, we started from BRL 958 million of adjusted EBITDA and BRL 122 million from rents and consumptions in working capital. This consumption of working capital is seasonal and varies from quarter-to-quarter. The main points that affected working capital this quarter were the disimbursement of BRL 50 million in IPF and INSS related to the payment of the 2023 variable compensation that occurred in the first quarter of '24 and the increase in revenues from customers receivables of just over BRL 50 million in our medical hospital services sales business and the remainder in judicial deposits that -- where the company has proactively increased this practice to minimize the potential impact of fines and interest during the course of the proceedings. If we adjust the operating generation, but just one of the elements mentioned above the IRPF and ISS, our generation would be above 60%, in line with the company's historical conversion parameters. RCS for the quarter was BRL 47 million, although current tax was 800 or was BRL 84.5 million. There is a shift between calculation and actual disimbursement. CapEx was BRL 185 million with the resumption of a stronger pace in verticalization and significant developments in IT. Our historical pro forma CapEx before the pandemic was around 2.5% to 3% of gross revenue. Considering our recent recently announced BTS transaction with Visa, we have freed up BRL 300 million in CapEx for 2024, which opens up interesting options to accelerate other projects that we're in the allocation pipeline, all within a prioritization regime that takes into account the sufficiency of care in some locations in addition to verticalization with a view to more accurate cost and quality control in others, our CapEx projections for 2024 in the sense should remain at around BRL 700 million.

On Slide 11, M&A activities consumed around BRL 400 million with payments of retained installments detailed here for each one of the assets. There was also BRL 90 million corresponding to the initial installment of the agreement with the seller of Natrium Intermedica, an arbitration dispute that we inherited after the business combination. So we still have monthly installments up until December 25, totaling BRL 356 million. In the financial activities section, we generated almost BRL 680 million. We raised a net amount of BRL 1 billion in the context of the company's seventh issue of debentures held in May 24, optimizing our cost of capital. There was also BRL 200 million in income from financial investments reflecting responsible and optimized management of our cash above the CDI rate for the period. And last but not least, BRL 518 million in interest and principal on the maturities for the period. This is what we want to continue doing for our financial management conversion and robust cash generation. There are important to increase our level of verticalization and qualification of our own network in a strategic location, supporting our commercial strategy and maintaining our gradual pace of deleveraging quarter-after-quarter, reprofiling our debt as necessary to maintain strong cash levels. This quarter, we reached 1.03x EBITDA in the calculation of our contractual financial covenant. As Jorge mentioned at the beginning, we've reached this EBITDA, and we'll continue to reduce it.

Moving on to the last slide before we open up for questions, we have the regulatory requirements. As a reminder, there are only -- these are only applied to individual operators. So on the left, you can see that free cash increased by BRL 660 million, of which BLR 59 million was from the increase in the cash position and the inclusion of almost BRL 150 million in real estate as collateral allowed by ANS regulation free up more tied cash. On the negative side, there is an increase of BRL 75 million in required technical provisions. And the breakdown of this increase is the reduction in adjustments to the balance of the reimbursement to SUS in accordance with ANS regulation and the increase in medical bills received at the end of the quarter, affecting PSL. In regulatory capital on the right-hand side, we saw substantial increase. There was a BRL 1 billion net increase in capital at the operators and further BRL 675 million from surplus in operating results. It's worth mentioning here the reverse incorporation of BC BF, one of the company's subsidiaries, which after all its effects had a net increase of BRL 142 million. With this merger, we eliminate some inefficiencies, and we keep start the path of the many mergers we'll carry over the next few years, especially in the MDI vertical. -- anticipating a potential question, this incorporation of BC BF affects the CBR, which is risk-based capital because this methodology does not only take into account underwriting risk, which obviously did not apply to BC BF because it's an intermediate holding company, but also involves additional risks such as credit, cash, among others, in the system of actuarial calculation of risk-based capital. Thank you once again. I hope this presentation has been useful for you to understand our financial numbers, and we are all here available for you. Should you have any questions, Jorge, Guilherme and myself can answer any questions you might have. Thank you very much.

[Operator]

We'll now start the question-and-answer session for investors and analysts. [Operator Instructions]. Our first question is by Vinicius Figueiredo sell-side analysts from Itaú. Vinicius, go ahead, please ask your question.

[Vinicius Figueiredo, analyst]

like to start by pleasing your earnings release. It's now very clear and self-explanatory. -- and this has helped us in our analysis. So congratulations to the whole team. Now I'd like to explore 2 topics. First, I would like to understand a bit of your MLR performance in Q2. You came from a quarter in which you had many rollouts of systems in hospitals, as you said, with probably more adherence to protocols and greater cost efficiency. Now in the second quarter, have you seen any gains related to that? Or do you expect the effects to be seen only in the second half of the year? Can you tell us about how this has helped in your MLR numbers throughout the quarter like month after month and now a more specific question. When we look at the cash generation of the company, something I would like to explore is the line of deposits and judicial blocks. There has been an increase in this line, especially when we look at civil lawsuits. Is that an externality, -- have you seen more lawsuit? Or is this because of a more conservative posture at the company in this specific quarter? Do you expect this to happen again in the second half of 2024 -- thank you.

[Jorge Fontoura Pinheiro de Lima, executive]

Thank you for your questions. I will start by talking about MLR and then I'll turn the floor over to Luccas. So speaking specifically about the benefits of the system deployment in our own network. We have done this deployment in full here in Sao Paulo. But before that, it's important to mention that the MLR that we have achieved for the first half of the year, which is 69%. If we deduct 1 percentage point, which was the effect we had because of the inclusion of new therapies in ANS' list, especially autism therapies. I mean we would be at the pre-epidemic levels. In spite of that, there is a lot yet to be done in terms of verticalization, a lot to be implemented in prevention projects, which are running at full steam with new projects and the use of artificial intelligence to define best practices and centralization of units. So there is a lot to be done in MLR, and we have a very robust plan in that area. So yes, we have already seen some significant gains as we deploy these systems in our own network, but the full effect will only be seen when we implement these systems in HMOs because there is full integration between what is done in HMOs and the operator in our own network. So yes, we have already captured a few gains, but it's only after implementing the systems in October that we'll see the full effect with that full integration with the operator. An example of that is prevention programs. Once we do that, we can capture gains in the operators because the outpatient systems are in operators. So we can close the loop, the care loop of all of our programs. So yes, there is a lot to be done and a lot of opportunities of gains from more verticalized and integrated systems. Now Luccas will answer the other question.

[Luccas Adib, executive]

Vinicius, thank you for your question and for giving us the opportunity to give further details about this topic, we've been trying to break down our cash numbers so that things become very clear to you. Specifically about this column, we have 2 main factors there. The first is related to recess. This was a change in the legal strategy of the company in order to stop multi interest and discuss in court, certain topics. So part of this comes from there. And the other part, which is more representative in the whole is related to civil lawsuit, judicial deposits civil lawsuits. So here, you can see lawsuits in which the company thinks they have a right, and we make the deposit proactively, and we also have judicial blocks coming from these soups. Yes, there is increased judicialization in this industry. People go to court to have access to health, and this can lead to the judicial block of certain amounts. And sometimes, they are converted into judicial deposits, and then we will discuss those demands in court. So these are the 2 main factors, the first broken down into 2 fronts representing almost the whole amount of judicial deposits that affected our working capital for the quarter.

[Vinicius Figueiredo, analyst]

That was very clear. Thank you for your answer, George, and Lucas. Just one clarification here. I understand the nature of this increase in judicial blocks and cases that are taken to court, but about the recurrence of this from now on. Is this a new level that you expect from now on?

[Jorge Fontoura Pinheiro de Lima, executive]

Well, it's hard to say Vinicius. We don't expect to see this recurring in the future. This has escalated from the first quarter to the second quarter, and we don't expect this to happen again. But it's hard to say this for sure. We'll have to see the coming months. Of course, we have many internal conversations, and we review our methodologies, but I can't say how this line will behave in the coming quarters, unfortunately.

[Operator]

Our next question is Gustavo Miele, sell-side analyst at Goldman Sachs Miele, please unmute and ask your question.

[Gustavo Miele, analyst]

Good morning, Jorge, Luccas, Guilherme and other attendees. I also have 2 questions. The first one is related to Slide #3 about a location that I believe is very important in your growth plan, Minas Gerias. You said that the integration process has been completed there and that you are now operating with a better structured network and a more controlled complain level. Now can you give us an update about your guidance to grow in this state in the next 2 years. Life center verticals, ravines -- do you think that the current occupancy level of those assets is enough to support growth of lives in that location? And what about the competitive environment in that location. You have a significant competitor there with over 50% market share and the rest of the market share is quite spread. So do you aim to attack that spread market share? Or are you aiming at this competitor that has a more relevant share. Can you tell us about your growth plans in the State of Ministers, please? That's my first question. The second question is more about the results. About the ticket, 9.1% year-over-year, 9.1% difference. So what is the trend of slowed down in Regional One. You have more mature contracts in terms of margins in the North and Northeast. So I just want to understand how much the contracts you have in those regions have already been readjusted and are now at a more compliant level or not? I just want to understand how much this 9% ticket can be seen as a good reference for the rest of the year -- thank you very much

[Jorge Fontoura Pinheiro de Lima, executive]

-- Hi Gustavo, thank you for your questions. About Minas Gerias, -- this is a very strategic location for us. We entered the state in a broad and complex way. We have made acquisitions of the Promed Group that included 3 operators and one affiliate and then NDI made another acquisition there of an operator that had its own network. We had made other acquisitions in Divinopolis, Hapvida had made another acquisition of RAN in the state and then we had another acquisition by NDI in the city of Patos and so on and so forth. So up until recently, we had a number of operators with their own networks that were broad, but still very fragmented. So our strategy was to organize this portfolio. With suspended sales and revisited portfolios in many of the cities where we did not have our own network, some of those operations were selling previously in many cities that were not in our scope, our focus, and we installed ERs in Santa Virginia case. We complemented acquisitions with Otaviano, a reference unit in the city of Belorizonte, where we did not have a maternity hospital yet. And then at the end of the year, we finished the complete integration. Now Belorizonte is one single body managed by one single system. And with a new portfolio that focuses mainly on sales for the Greater Belorizonte area, where we have our own network with great growth capability, but not only in the greater metropolitan area, but also in other regions where we have our own network like Divinopolis, Poso decades, Tiago Mineiro, Affiero, Virginia, -- so our portfolio is much more focused, where we have our own network, but in corporate plans, we can sell for the whole state of Minas Gerias because we do have accredited network all over the state. So that's a very promising state for us. We have gone through this very complex and difficult phase of integrating with products that were already in the market. And now we see great opportunities for growth in the whole state of Minas Gerias, particularly in locations where we have our own network. With regards to average ticket, we have just implemented a cycle of readjustments completed in April. -- in our existing portfolio at the level of around 13%. This was done quite successfully. And way beyond this measure taken, we had many other activities such as the possibilities of implementing core participation or offering more verticalized products coming from products with broader networks to our own network. So in many situations, we swapped readjustments for network review and that benefited our own network. And this whole plan was implemented successfully. We're now starting a new readjustment cycle, which should be 2 points below last year's, but still above 2 digits -- and this cycle started now in May 2024 with a greater need for regional 2 and a lower need for Regional 1. But the consolidated numbers are expected to be above 2 digits with an inflation rate below 4%, these readjustments going to be needed and enough for us to continue diluting costs and expenses throughout this new journey that started now in May, and there is no concentration of anniversaries that will hit Regional 1 more than original 2 because that was your question, right? But I talked about readjustments in a broader way. And as you saw, we are less exposed to the accredited network. So with a lower inflation rate and the readjustments we'll be able to continue diluting costs and expenses. That is very, very clear.

[Operator]

Our next question is by Mauricio Cepeda sell-side analyst at Morgan Stanley we'll open your mic so that you can ask your question. Mauricio, go ahead.

[Mauricio Cepeda, analyst]

Dr. Jorge Luccas, Nahuz thank you for this opportunity. I have 2 questions. The first is about growth avenues. It's clear that you have rebalanced your tickets. You are now at a good position. The claims per member are better controlled now. So my question is, what can be done now to increase the number of members? I see that small and medium businesses plans in your portfolio have not been growing as much as the rest of the market. Do you see this as a possibility for you? And in the Greater Belorizonte area and in regions where you have enough verticalization, wouldn't that be a good case for growth now that you have a better MLR ratio? And my second question is about the build-to-suit. Can this be a new avenue to accelerate verticalization throughout the country even more? Thank you very much

[Jorge Fontoura Pinheiro de Lima, executive]

Cepeda, -- thank you for your questions. Yes, we have completed this phase as we have made clear to all of our investors and to the market as a whole of reviewing portfolios, and that review was completed last April. From April onwards, our commercial area has been very responsible, but also very excited because the corporate channels are doing really well. Month after month, we have seen a very good performance in our corporate channels. On the retail channel, we have not achieved our goal yet. Retail is at around 89% to 90% of our target, but it's growing, and we expect this to gain momentum. So July was better than June, which was better than May, which was better than April. And that's for retail. So it's an upward trend, and we're hopeful if the retail channel has a similar performance to the corporate channel, considering that the cancellations are going down, we have reached historical levels of cancellations at the company now. And with a good control. If the upward trend in the retail channel continues, we see a great chance of having a stronger growth.

Still talking about retail. We have just launched a new portfolio products focused on the retail channel. So individual and small businesses, these are more district product or neighborhood products. So we offer hospitals in the region, and they are based on family physicians. And since the price of these new products is more attractive, and we have a low level of complaint with great acceptance. We believe that this can boost the retail channel, helping us to achieve our targets, and this could create a virtuous cycle of growth, but we'll see how this unfolds in the coming months. Now Luccas is going to talk about the build-to-suit, but I can already tell you that the company is getting ready. After we were able to have better discipline at the company and have robust cash generation quarter after quarter. And having consistent deleveraging quarter after quarter because of that cash generation, we have started to dedicate more resources to expand our own network.

So we now have projects in Recife. We're going to open a major hospital in the beginning of next year there. We have just announced the lease of a large hospital in Manaus and the build-to-suit model will help us expand our own network in Sao Paulo and Rio de Janeiro with 2 hospitals. There will be another hospital opened by January here in Sao Paulo, and we have projects to open hospitals in the Center West region and extend our own units. In the ABC region of the state of Sao Paulo, we also have the opening of ER units in Sao Paulo. So a very robust plan to expand our own network. This will make us more competitive because having our own units, we can be more aggressive commercially speaking, and bring better margins. So Luccas will now comment a little bit more on the BTS.

[Luccas Adib, executive]

-- You fully understand what our purpose is. Here, we like to win all gains and do many things at the same time. So with this BTS strategy, we have many strengths. The first is to accelerate our verticalization capacity, creating an avenue here. And this BTS is not supposed to be one-off. We want this to be medium to long term so that we can have this verticalization capacity whenever we need. And at the same time, we have space to continue with our deleveraging process. So we deleveraged the company. We accelerate our CapEx projects. And the third point that is also very important here that takes into account our optimization structure within the group is that our holding as revenue per equivalent and our operating units, which will recognize the right of use in those BTSs is where we have the operating centers. So there is intrinsic utilization in this operation, considering this difference between the reference revenue per equivalent and operating revenue. So that's another strength in this BTS structure. But the idea is that this becomes a journey and not a one-off project. We want to be able to have some BTSs in order to advance in our strategy of advancing our own network to support our commercial strategy.

[Operator]

Our next question is by Samuel Alves sell-side analyst at BTG Pactual will open your mic so that you can ask your questions. Samuel, go ahead.

[Samuel Alves, analyst]

Good morning, Jorge, Luccas, Guilherme and everyone I have 2 questions here on my side. I just want to make sure I understand it right. The first quarter, you had IBNR reversion and a provision for net debt as well, which boosted your results. Do you see these reversions as a result of the integration and system deployment that you have made, increasing verticalization, improving collection mechanisms and so on and so forth. -- to understand if these lines will be repairing or not? Now my second question is you have been talking a lot about your growth potential. So can you give us a geographical heat map? And what locations do you have the best opportunities, Rio de Janeiro, Sao Paulo or Minas Gerias. Can you rank your main growth targets, please?

[Jorge Fontoura Pinheiro de Lima, executive]

Samuel. Thank you for your question. I'll start with your last question. In places like Fortaleza, where the company has over 50% market share and is still growing. And with investments reserve, of course, the greatest volume of investments that the company will do not only through our own proceeds, but also through operations such as the BTS one that we have announced will happen in Sao Paulo and Rio in the Southeast region in general. This is where we believe we can have the greatest growth. Even though we'll continue to make investments in expanding our network, I haven't mentioned, but in Belo, for example, we're going to open a hospital that was closed. It's going to be reopened. We have contracts signed with a major industry there starting in January next year. So even in locations where we have a large volume of lives, we believe that we can continue to expand and we're going to make investments across the country. But summarizing in the Southeast, Sao Paulo, Rio and Minas are the regions where we can see the greatest growth opportunities, and that's where we're going to expand our network the most.

[Luccas Adib, executive]

Luccas? Samuel, thank you for your question. So talking about recurrence. Well, it's a bit hard to talk about recurrence in these 2 lines, IBNR and PDD. IBNR as we continue our verticalization strategy and optimization -- we have new lives coming in, more exposed to our own network and with the optimization of our own costs, these are all factors that impact IBNR -- so if we try to deduct IBNR to see what the EBITDA would be. I don't think this makes sense because I think this is a fruit of activities that we have been implementing here and not an exogenous situation that has favored a certain line of our balance sheet. This is all fruit of this great work that has been done. And as part of this journey, we can see, of course, reversions as part of this technical and actuarial provision. -- Of almost BRL 1 billion. So yes, we can see some volatility when it comes to IBNR reversion. And when it comes to PDD, provision for doubtful debt, I read all of the reports that you published overnight. Congratulations. It's amazing to see how fast you process all of this. But I see -- I saw some calculations being made saying, "Oh, let's remove this PDD because it can be one-off. Indeed, this quarter, PDD was favored by a possibly one-off situation, but this is also fruit of actions we have taken internally to improve our receivables. We have an internal campaign being led by our treasurer, financial person, Rodrigo, to improve our delinquency levels. So although this looks like a one-off thing, we are working really hard on this, and we're not going to stop now. We'll continue working really hard on this in order to improve our delinquency profile at the company. So this is how I see when it comes to the reversion of IBNR and PDD this quarter.

[Operator]

This concludes our Q&A session. Thank you very much for joining us for the Second Quarter 2024 Earnings Conference call. The IR team remains at your disposal should you have any questions -- thank you all for joining, and have an excellent day.