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Good morning, ladies and gentlemen, and thank you for waiting. Welcome to OdontoPrev's conference call, where the results of the first quarter of 2018 will be presented. With us, we have Mr. Rodrigo Bacellar, Mr. Luis Blanco and Mr. José Roberto Pacheco. This event is being recorded. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through OdontoPrev's website at www.odontoprev.com.br/ir, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded.
We would like to remind you that webcast participants may submit via website in advance any question for OdontoPrev, which will be answered during the Q&A session.
Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of OdontoPrev's management and on information currently available to the company. They involve risks and uncertainties, because they relate to the future events and therefore depend on circumstances that may or may not occur.
Investors and analysts should understand that conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.
Now I'd like to turn the conference over to Mr. José Roberto Pacheco, IR Officer of OdontoPrev. Mr. Pacheco, you may begin your presentation.
Good morning, to everyone. Welcome and thank you very much for your interest and trust in OdontoPrev. I like to thank you for your participation during this conference call, so we can present the results of the first quarter of 2018. Now to begin the presentation. On Slide #3, we can see the increase of the average ticket in 5.6% originated in all 3 business segments. Particularly, the highest increase of 14.5% occurred in the SME segment.
On our next Slide #4, we can see a net addition of 29,000 members in the quarter, including the corporate segment. As demonstrated in Slide 5, the corporate segment presents the net addition of 9,000 members in the quarter, compared to a loss of 47,000 members year-over-year. In the past 12 months, there was an addition of 63,000 members compared to the loss of 263,000 members in the previous period.
As we can see on Slide #6, the company recorded an actual ISS rate of 3% in the month of January and February of 2018 reflecting the average rates in the municipalities where the company operates. And 2% in the month of March, resulting from the STF, the Supreme Court preliminary injunction to suspending effects of complementary law 157/16.
On our next Slide #7, we'd like to highlight the growth of 2.1% in the revenues of the corporate segment, the best performance in 7 quarters. On Slide 8, we'd like to highlight the unique positioning of the company, in relation to the leadership in developing and increasing the noncorporate individual plans in SME segment, which presents a higher ticket, less competition, high growth compared to the market and higher contribution margin.
Additionally, reinforcing this strategy, the noncorporate products present significant barriers to entry such as scale and quality of distribution. Credit risk of small sized customers or individuals, adverse selection and management technology, which are clear differentials in the Odontoprev's business model.
Now moving on to our next slide, we can see that the noncorporate segments are becoming more and more relevant, as you can see on Slide #9, in which 1Q '18 it now accounts for 37% of the consolidated revenues compared to just 25% in 2014.
On Slide 10, our next slide, we can see that the dental loss ratio accounts for 41.9% of net revenues in 1Q '18, 45% lower year-over-year. In the past 12 months, the amount was 45%, 400 percentage points lower than the previous period.
Now moving on to Slide #11, we can see the quarterly evolution of bad debt, which accounted for 3.6% of revenues in 1Q '18, lower than the 4.6% of 1Q '17.
On our next slide, Slide #12, the adjusted EBITDA achieved BRL 106 million in the quarter, 17.7% higher year-over-year, with a margin increase to 28.7%, 300 points over the 25.7% observed in 1Q '17. It's also worth noting as you will see in Slide 13, the growth of 130% of the adjusted EBITDA of Brasildental in 1Q '18, going from BRL 2.7 million to BRL 6.3 million in 1Q '18 with a margin increase of 24.5%.
On the next slide, Slide 14, we can see that net income was BRL 82 million in 1Q '18, 19% higher year-over-year, with an ROE -- annualized ROE of 31%. In the past 12 months, profit was BRL 258 million, 19% higher year-over-year.
On our next slide, 15, we closed 1Q '18 with a net cash of BRL 522 million, without any debt. Resulting from the solvency requirements to acquire odonto system in this quarter, there is no proposal to distribute this dividends an addition to the ones that have already been paid, the BRL 12 million in interest on capital relating to 1Q '18.
On our next slide, #16 we would like to highlight the record number of over 6,000 shareholders in our shareholder base making us very happy, over -- more than double than that seen in 3Q '16, and mainly individuals. The company's share base remains globalized with the highlight to 94% of the free float with foreign investors, as you can see on our last slide, #17.
Once again, I would like to thank you for your participation and for your interest and trust in Odontoprev. Now I'd like to move on to the Q&A session in our usual practice of 45 minutes for our conference call. Thank you very much, and good morning.
[Operator Instructions] Our first question is from Thiago Macruz from ItaĂş BBA.
Actually of this is Mark (sic) [ Marco ] speaking. We have 3 questions on our side. First of all, in relation to SME products, we were very surprised with the significant improvement that you had in the loss ratio. So I'd like to understand how we can see that moving forward? And if you can comment on the reason why the loss ratio significantly improved year-over-year? Second question is about the bad debt. So there was also an important or significant improvement, so we'd like to know is that because Bradesco has been growing in the company sales, and the third thing is about your commercial expenses or sales expenses, we see an increase so can you talk about that, the main reason behind that increase?
Marco, Pacheco speaking. I'd like to start out with this the loss ratio and the SME ticket. As you well observed, the SME portfolio has a concentration in the bank channel, and now in February, we had some price adjustments and launched new products with more -- that were robust with a higher ticket, that's one of the reasons why the average ticket is different, that was the highlight for the quarter. And consequently, the loss ratio for that segment was lower compared to the last quarters. So that's the reason why -- that's what happens in the SME portfolio. It has the higher possibility of growth, it's very consolidated, it's well established in the bank channels both providing differentiated growth in a higher average ticket observed -- compared to the market. So it's a clear competitive advantage in the company, and it has been increased in a noteworthy mention in the past quarters. The second point that you mentioned, before I hand over to Luis about bad debt, but just to mention it, bad debt does have higher share that comes from the individual plans, and the higher the share of the bank channel in the individual, the bad debt would be increase, so it gains unpredictability and quality and also in the total portfolio of bad debt for the company. Let me hand over to Luis Andre so he can comment about that.
Marco, this is Luis Andre speaking. So giving you a little bit more of flavor about bad debt. Bad debt, as Pacheco mentioned, is mainly related to the individual segments. So if we start to open -- that go into the details of where it's coming from, there is a behavior from the customer that come from the bank channel and also the customer that come from retailer channel. So when we analyze each channel, we can see in each season, we can see that in both subsegments, you can see a reduction throughout the year. So we had a peak back in the 2016, and as from that time, it has been dropping in all these channels. We still do have problem in a specific channel in 4Q, where one of the partners was making changes, and that really -- that jeopardized that specific channel a little, but in general terms, in all the channels where we distributed our product, there's been a continuous trend of improvement. Now we only have to organize the last channel, which we haven't yet given outside reasons, but in general, it's positive in that index. One thing that is always worth noting that I always like to remind people during the calls is that the consolidated bad debt has a growth trend given the higher share of the individual segment in the overall revenues so we can never forget that, we can't forget that, we always have to bear that in mind. But when we consider just the individual segment, there is a trend to lower that.
Perfect. Now in relation to the last question about the sales expenses, could you address that as well?
Well Marco, about the sales expenses, particularly in the corporate segment, in fact, in this quarter it was higher. Usually it's just a bit higher than 5% and specifically, in this quarter it was higher than 7% so that's an outlier, it shouldn't be repeated if we consider the next projection models. So any company's expectation is going back to the expenses of previous years, which is a bit higher than 5% in these next quarters.
And the next question is from Joseph Giordano from JPMorgan.
I have a couple of question. The first one is about the competitive environment. So I'd like to know from you what you see, what you are seeing in terms of competition and how aggressive it's becoming especially in the corporate segment if we consider SME and the growth, maybe the competition isn't that bad in that segment. And now looking into loss ratio I'd like to understand the frequency component, so how have you seen the members' behavior, not only their behavior but also the dentists' behavior in these past quarters 2, 3 quarters if you have a more normalized curve. And the third thing is about solvency. Pacheco mentioned solvency in the presentation saw a lower dividend payment to generate more excess solvency to absorb -- to take that in, but is the regulator -- is the regulator watching that? Will they change that a little, I'd like to know how that conversation is going?
Joseph, this is Rodrigo speaking and I'm going to talk about the competitive environment. I don't think there is any changes in the past 2 years, I think that the scenario that we've been talking about in the calls, has been -- remained stable. And we can see that the recent IPO, that's good, the more transparency we have, more information we can get and the better the culture of the dental health environment, that's healthy for the entire industry. So we're receiving our competitors that are now listed with open arms and it would be great for the industry's development an overall. Without major highlights to the tougher competition or not, it is tough, which it has been in the past 2 years. And that's the first part of the answer. The second one is about what we expect, given the competitive environment and the Brazil environment, I think that what I'd like to mention is that now, we have a very constructive vision for Brazil this year, but less constructive than it was in the last quarter of last year. So I think that in our conversations with businesspeople, customers and partners, in a certain way we had a more optimistic environment in the last quarter last year than we see now. I'm not saying that there's going to change our construction view for 2018 for Brazil and in its economic recovery, but clearly, at a more conservative and careful level on our side. So that's a bit about the competitive and industry environment that we see coming forward. And now I'm going to hand over to Luis about your other question.
Well, now talking about the frequency. The first point is worth remembering that we always have a weaker first quarter, if you consider that now in terms of use, because there is vacation periods, so traditionally the first quarter is a month with a lower loss ratio, which is connected to frequency, and that scales up to the second and third quarter coming back in the fourth quarter. After reminding that and after remembering that and analyzing the first quarter, let's think of the first quarter, how it started, so it started stronger in January. We had a certain change, or transfer so to speak from the fourth quarter, coming into the first quarter, and February is in line with our expectations and March per se was a month that was a bit lower than what we usually expect. So there is always a year-over-year comparison in the first quarter relating to frequency and a bit distorted according to when the carnival festivities, holidays, fall on which date. But in general, the frequency has that type of behavior on a monthly basis. Speaking of solvency, and also are like also like to remind everyone on the conference call that today that we have a traditional model where within adjusted profit and loss compared to the accounting profit and loss has to be higher than a percentage over revenues or a percentage of costs. And ANS also allows us to have our own model, based on regulation so they are within that but no operators in health plans or in the dental health or health plan has enlisted with their own model, and OdontoPrev did enlist its own model for a market operator with ANS and had been discussing this with them. And it's a very slow process given the fact that this initiative is a pioneer initiative in the industry. We required the supplement -- well they required the extra documents, and we are gathering that information to submit them in May. So what we felt out of the conversations that we had, is that they like the model they believe it's suitable, so we've just been adding other information based on their request.
The adoption of this model, and I think that's worth mentioning, how would this be if model being adopted moving forward, going forward? ANS would consider the solvency models considering risk, operating risk, underwriting risk, market risk, credit risk and a fifth risk is that I can't remember right now. So at first, they requested for us to base the model on the underwriting risk, which in our opinion, is the most relevant risk of all. So that's the model we presented, and we're talking to [ DiOp ], which is the board or the management of ANS, and they will approve the model and we are very confident that we will be able to evolve that and approve that model at some point we believe this year. But the actual adoption of the model, and how we're going to do that compared to what we already have, that still has to be regulated or -- not related, but made clear to ANS, given the fact that, that is unprecedented. Nobody has done this before, this is the first owned model that would be registered.
I'd like to -- I have another question based on that regulatory model, I would like to understand that could you give us a flavor of that about the -- your regulated capital, if you could talk about the equity? And how much of that would be translated into payout? Because that model would hinder the 100% of payout in the long term so I'd like to understand the cash distribution would be effective, would be 100% or even greater than that at was in the past because of the model?
Well, Joseph, what I can say is that in the current model what -- it's just about the model of how it's done, the percentage of revenue or the costs or the higher of the 2. But the scale of that model would have in current regulations, is that there is a step, so in this quarter there is 64% and would achieve 100% in 31 December 2022. So what makes the growth of the requirements based on the on the current rule is just not going our operations, but mainly the growth in adopting those steps that goes up to December 31, 2022, that's what makes the requirements grow -- for equity, grow. In relation to that, to the result of the own model, I can't say anything about that yet because we're still discussing that with ANS so I can't really talk about the amount, and of course, when we approve that we will inform the market about that model. But what I could say is that at least for our operations here, today what we have in terms of our equity to cover that solvency, the model that was required requires less capital, based on the model that was. Just the concept of solvency is the portion of capital that you have to have to cover the volatility of the provisions. So given the fact that the dental market is a more stable in relation to a more predictable use, we're using models considering the past -- or the next 5 years so the need to capture the industry is lower than what required. It's lower than health care, and I'd like to remind you that the capital requirements in effect are lower for dental than health care. But when the model is approved we'll definitely share that with you, but the trend is that we should have excess capital. And the way we'd go back to that excess capital to the market is something that we will discuss in the future. But it's probably not going to be immediately in specific the traditional ones 100% that we were distributing.
Our next question is from Ricardo Rezende from HSBC.
Actually I have 2 questions the first one is more specific looking at the CapEx for this quarter. There were something in the IT line, I'd like to understand if that was a specific project, something more on the digital side that requires more investments, and how are you can see that in the future? And as my second question is relating to the individual plans there. They have higher levels year-over-year, it's kind of stable quarter-over-quarter, so I'd like to know how much of that is influenced by the change that you had in the sales channel in the last 2 quarters with retail losing members, and how are we going to see that in the future especially in the individual segment?
Ricardo. So in relation to CapEx, the company is, in fact, expanding its initiative in the digital world, and technology is what accounts for most of our CapEx in the past years, and 2018 is going to -- will be no different. We've been practicing investment level of BRL 15 million, this year we should have higher investment levels of approximately BRL 25 million, which is not very representative in relation to the annual cash generation, but it does reinforce the company's commitment to state of our technology and the digital world is an essential aspect of our business strategy. So that's the CapEx levels that we've been having, 1Q '18 is already in line with that. I'm going to start answering you about the individual plans and revenues and loss ratio that you mentioned. In fact, the company has been observing a change in the mix within the individual segment, and that's very important, because first of all, the average ticket of the bank channel is higher than the retail channel, and the sale expenses for the retail channel is much higher than the bank channel. Three, the bad debt level, we already talked about that, that is lower in the bank channel compared to the retail channel. Since most of the portfolio is still under retail in members -- number of members, the quality of the P&L of the company, individual channels has improved substantially, and that's what we expect from the coming years. In the bank channels, they should become the greatest part of the revenues of the individual plans in the next years so that's what we're experiencing right now a period of transition. I'm going to hand over to Luis Andres so he can comment as well.
When you have a change of that mix of the subsegments of the individual plans the contribution margin will definitely increase with the share of the bank channels. And with a higher participation of the individual segment in the consolidated that increases the contribution margin of our consolidated, so we cannot lose those 2 mix effects. One is the mix of a bank and non-bank and the individual plans and the other one is the mix between noncorporate and corporate in the total. So it's becoming more and more representative, that mix effect is showing more and more in our consolidated financial statements.
Okay. Great. I'd like to follow-up on that on the individual term so as you mentioned in the presentation, there's still a specific program with one of the channels in the retail. You're losing members, but it was already much lower than the fourth quarter. Do you think that's going to become stable in the second and third quarter or should we only see that becoming stable at the end of the year in that channel?
Ricardo, this is Rodrigo speaking. Well just, first we're working with the scenario that throughout the second and third quarter that should become stable again.
Our next question is from Adeodato Volpi Netto, Eleven Financial.
I would like to have an idea about the loss ratio. When you look at the corporate segment, we went in 2016, it was 56% at the peak of the crisis. And we talked a lot about that lay -- important layoff cycle and an acute crisis moment, where people were looking for treatment, because they have coverage because they were worried about being laid off. Considering that, do you think it's reasonable to think that we will -- that the levels would settle at lower levels and loss ratio especially in the corporate plans world?
Yes, that is the case. In fact, we've seen in prior years during the years of recession, we saw higher loss ratio, which was mainly driven by a frequency that was outsized historical levels. Once the level of trust increases, when the company and the market has an expectation of a positive GDP and employment. It's very natural to see in the 3 business segments, particularly in the corporate segment that we will see a frequency of use, closer to the historical patterns, which leads us to an upside and a differential in terms of the loss ratio compared to the recession years, particularly up to mid last year, mid 2017. So that is a new cycle that's beginning. Obviously, it's very positive for the company's margin, and we can capture that benefit, which is driven by the noncorporate segment where in that case you have a possibility of differentiated or additional pricing compared to the exclusive channels of the company, and the company can be a pioneer in the servicing a new type of customer, the noncorporate customer.
Great. One more question just real quick, if I may? About the distribution of products in Bradesco, do you see any movements in terms of incentive program, in the end the integration of the product in the [ goal ] plans -- retail [ goal ] plans of the branches and if that could lead to any effect in resuming things in 2018?
That is a constant path. The company's been, in recent years, introducing products in the SME segments and also in the individual plan segment. That's very new, it's about -- it accounts for 35% of our revenues. 10 years ago, it was pretty much the thing, now it accounts for over 1/3. So it's been growing even in the recession of the past years. So we're absolutely focused on that -- in the quality of that opportunity for differentiation and innovation. So the company has a strategic positioning that's very clear and differentiated. These 2 noncorporate channels are a high-priority. So year after year, we want to bring in new products to encourage people to learn about this new product in the market, and count on channels that are absolutely aligned with the company in developing their own brand like Bradesco and [ DB ] as you mentioned that have a higher potential for members than the corporate, and I think that's going to become more and more clear for Odontoprev in the future.
Thank you, Pacheco. Let me add to what he mentioned, that's a very important aspect of commercial activities when we consider noncorporate and corporate, which is adding to the network throughout time. So -- yes that's what I meant. In addition, to the goals and objectives, there's the thing about being part of training being part of meetings, being available for visits and so on so that's a part of our day-to-day with the bank channels.
Our next question is from Leandro Bastos from Crédit Suisse.
This is Tobias. Just to clarify in your costs composition, you said BRL 7 million of other operating -- or revenues what is that exactly, that's a strong growth year-over-year. What is that?
[Technical Difficulty]
Ladies and gentlemen, please hold.
Tobias, this is Pacheco, no highlights in relation to other revenues. Actually we have software sale, we have services rendered. We still don't have an expressive line yet, because -- and here I'm talking about Dental Partner, which we also mentioned in previous quarters, and that's going to be a revenue line, which is a clear priority for the company in the next quarters, but we, particularly in relation to those BRL 7 million we don't have anything we can highlight about that right now. But that's costs right, it's not revenue specifically. Its cost component, BRL 7.7 million compared to BRL 2 million last year. So 2 of your revenues compared to half -- 2% of your revenue compared to half last year. Just so I understand if we're talking about the same thing, you're talking about within costs, you can get back to me later.
Yes, we'll get back to you later then.
And about the ISS tax, you provisioned the 2 month. The 2-month provision, are you thinking of reversing that or not?
No, we're not thinking of doing that. We're not reversing that. He asking about the ISS? The 2-month provision?
Actually, the process what's going on right now, is that there is a preliminary injunction, and the entire ISS profit went back to the service renderer not taker. So Pacheco mentioned in the beginning about the rates that they would go back to 2%, and that's how we'll remain. So far that's a strategy.
Okay. Let me answer this and go back to the first point about the other revenues sorry, I was looking for that in the statements. So a part of that calculation, every time that we closed the month, when we have monthly closings we -- given our deadline for closing, we have a provision of what we received in the past 3 days, but based on the closing date, the cutoff date we make a provision for those amounts. That's why it goes into operating expenses. That's a normal variation. So if that means in the last 3 days of the month of March, we had a higher provision than the last 3 days of the month of December, that's what it means that's just it. These -- they are what came in the past 3 days, and given the closing date, the cutoff date for monthly closings it goes into a specific line. And that's provisioned. So the name of that summarized account is operating expenses and revenues. That's what it means. That means they're all the events that came into the company in the past 3 days.
So it shouldn't grow, like, or increase. It increased because of the cutoff date, right? Is that what you mean?
Yes, yes, that doesn't change year over year, it really depends on the cutoff date, and the flow that we get all the events that took -- that occurred. So we get the information but because of the cutoff closing dates, we provision them in a specific line, and there is a trend that, that should become 0 at the end of the year. So it's an event that still hasn't been recognized as an event because it was a temporary account. That's the main point that goes into the other costs part.
Speaking of the ISS, for January and February, we operate in practice in 5,300 municipalities so we have customers, be it individuals or corporates that are present in 5,300 municipalities, it's impossible to map out all those regulations, all those different systems to collect taxes. So in January and February, we mapped 70% of those municipalities approximately in, which the most relevant one in which you operate, so we mapped out the regulations for each one of those most relevant municipalities, and for those that we were able to collect the ISS, we did collect the ISS in those cases. And to the ones that we didn't, I provisioned the ISS. The 30% remaining cases, which weren't mapped, I provisioned them for the average rate of [ 17% ] so there is -- I -- provision of ISS with those rates that vary from 2% to 5% depending on each municipality, which are provisioned in the balance sheet, and I look at them every month, provision in my liability for payments when possible. As for March, we collect here for company headquarters which is Barueri, so we're going to pay the rate of 2%.
Our Q&A session is now closed. I'd like to hand over to Mr. Roberto Pacheco for his final remarks. You may begin.
I'd like to thank everyone for your participation in this conference call. The company remains optimistic in relation to the new cycle and that the competitive advantages and technology, distribution and pricing will become even more to clear. Thank you very much until our next event.
The OdontoPrev conference call is now over. Thank you for your participation, and have a good day. And thank you for using Chorus Call.