Odontoprev SA
BOVESPA:ODPV3
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Good morning, ladies and gentlemen, and thank you for holding. Welcome to the Odontoprev conference call to discuss the earnings of the first quarter of 2021. We have with us today Mr. Rodrigo Bacellar, CEO; and Jose Roberto Pacheco, CFO and IR Officer of Odontoprev. We would like to inform you that this event is being recorded [Operator Instructions]. This event is also being streamed on the web via webcast and can be viewed at www.odontoprev.com.br/ri, where the respective presentation is also available. You can control the slide presentation. The replay of the event will be available right after the conference call is over.
Before proceeding, let me mention that statements made during the call relating to the Odontoprev business perspectives, projections, operating and financial goals are based on the beliefs and assumptions of company management and on information currently available to Odontoprev. Forward-looking statements are not a guarantee of performance as they involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that overall conditions, industry conditions and other operating factors could also affect Odontoprev's future results and therefore, could lead to results that materially differ from those expressed in such forward-looking statements.
Now I'll turn the conference over to Jose Roberto Pacheco to begin the presentation. Mr. Pacheco, you may begin.
Good morning, everyone. Welcome, and thank you very much for your interest and trust. We are Odontoprev. I would like to thank you for attending the company's conference call, which inaugurates the health industry result cycle for the year to present the performance of the first quarter.
Now to begin the presentation on Slide #3, we can see data from ANS since 2006 where dental plans and business industry that was still young, presented continuous growth, adding over 20 million members compared to the increase of only 10 million of the members in health plans, a more mature market segment.
And specifically, in 2021, we see the resumption of the additions in health and dental industries, following the declines caused by the pandemic and the consequent recession with a growth of 366,000 customers in the dental plans, exceeding 27 million members at the end of February.
According to our next slide, #4, we can see the revenues and average ticket of the main dental plans in Brazil. We highlight the Odontoprev portfolios in the corporate and noncorporate segments with an expressive leadership in both.
On the next slide, #5, according to ANS data, we can observe the company's leadership in all regions of Brazil, in a generally domestic operation, the credit network in more than 2,500 municipalities and having exclusive distribution channels.
On Slide #6, we show the net addition of 33,000 new members in the quarter with a highlight to the bank channels, in particular, in the noncorporate segment, SMEs and individual plans. It's worth noting that the first quarter is seasonally slower in additions for the year and shouldn't be compared to the other quarters.
On our next Slide #7, we see the quarterly evolution of revenue with a sequential growth of net revenue of 1% and 5% since 3Q '20, after the harsh impacts of the pandemic in 2Q '20, which lowered the noncorporate segments during the second half of the year.
On Slide #8, we demonstrate the execution of the long-term strategy. We can see that the corporate segment revenues of BRL 874 million in 2014 grew 16% in 6 years. On the other hand, the revenues of the noncorporate segment of BRL 284 million in 2014 presented a 17% growth per year in the same period, achieving BRL 741 million in the past 12 months, with margins greater than the industry.
On our next slide, #9, we observed that the DLR per segment with an improvement in sequential and annual DLR in all segments. The consolidated dental loss ratio was 37.9% in the quarter, more efficient than that seen in previous periods.
On the next slide, #10, we see that the bad debt was 1.9% in the quarter, lower than the historical levels, mainly resulting from the transition and growth of the noncorporate portfolio in bank channels.
Moving on to the next slide, #11, we see a drop in the cost of services gain in admin expenses, efficiency and lower sales expenses and lower bad debt. There was an increase of the EBITDA by 42% in the year in the annual variation with the margin increase from 25% to 35%.
On the next slide, #12, we see that in 1Q '21, the company generated BRL 124 million in cash, ending the period with net cash of BRL 859 million with no debt. During the meeting of the Board of Directors held yesterday, an interim dividend distribution was proposed in the amount of BRL 96 million, totaling 100% payout in the quarter via cash dividends.
Moving on to the end of this brief presentation, according to our next slide, #13, the continuous growth in the number of individual shareholders, which for us at Odontoprev is a great reason for pride and satisfaction as well as the growth of our globalized institutional investor base, as you can see on our last slide, #14, with an approximate free float of 88% with investors from over 30 countries.
Once again, we would like to thank you all for your interest and trust in Odontoprev. Now I would like to move on to our Q&A session in our common practice of a 45-minute earnings conference call. Thank you all.
[Operator Instructions] Our first question is from Mr. Gustavo Miele from ItaĂş BBA.
I have 2 very quick questions on my side. The first one, Pacheco. I'd like to understand if you can give us some more information on the net adds performance consolidated month-by-month for the first quarter? So we see ANS data, and we have the impression that January and February were months that were very strong for the company. But when we look at that number of 33,000 members, we have a feeling that in March, the performance may be a little weaker. Does that make sense? Could you comment on that on your performance in April, so we can try to understand the trend for the second quarter, that would help as well? That's my first question.
My second question is about the trend of the selling -- especially individual plans. We see that it's been very positive in that sense. So could you comment on what has helped to dilute the expenses line as well? Those are my 2 questions.
Gustavo, this is Rodrigo speaking. Thank you for your question. About the monthly breakdown, in fact, January and February were strong. And then what we're experiencing right now is the COVID effect similar to last year, but a little bit lighter. So this year, the lockdown started in February, different, which was -- last year was in March. So you had shopping centers closing and the other mobility restrictions again. So that's why March -- so that -- so did February a little bit, especially in retail partners and individual channels. And that's where March -- why March was worse. So mainly concentrated in the retail channels. In the 3 months, we have positive performance in the other segments.
I'd like to add Gustavo. This is Pacheco speaking. In relation to the ANS, it's not perfect. So the different registries, there's statistical adjustments that take place sometimes in the ANS. So we always recommend caution in analyzing those figures because they do not reflect the actual company base. To add, relating to your second question about sales expenses. That's an interesting item of the likely margin increase in the future because great part of the sales expenses is originated in individual plans, and we've seen a constant migration of individual plans moving from retail to the bank channels and the bank channels have lower sales levels. In addition, the company has been renegotiating and changing the commission levels with some partners in the retail segment. So since mid-last year, that's -- at the end of the day, that's enabling us to have sales expenses in individual plans, which is lower than what we've seen in the past years.
Our next question is from Mauricio Cepeda from Crédit Suisse.
I have 2 questions as well. My first one is about DLR. It's very low. So I'd like to know -- I'd like to hear some further explanation about what's behind that phenomenon? Is it in fact because people are using it less? I know that there maybe factors that have led to that? And consequently understand if use is lower, would that result in a lack of interest for dental plans or even would it be possible to lower the ticket and try to be more aggressive in growth? That's the DLR question. And my second question a follow-up on these sales channels and the evolution to look into other sales channels in addition to bank channels and retail stores?
This is Rodrigo speaking. About DLR, as we mentioned in the first question from Gustavo, we see a similar effect to the first wave, but it's dampened a little. So not only in the drop in members, but also on the positive side, which is the DLR. So what we're seeing is that the dentists were already vaccinated. So they're doing their work, calling their patients, "Come on over, I've already had my vaccine" and the population, in general, is already getting a vaccine, approximately 30 million people that were vaccinated in Brazil. So the DLR now is, in fact, related to the lockdown in February and March. That, without a doubt, has touched on that. And also, now we've controlled things.
So there's the effect of the nontechnical and technical provisions. So that is in line with what we're commenting here that the DLR, I think, it's a very specific one-off effect. There's a 15% of DLR that doesn't happen because of the lockdown. Only 15% would happen again because when you separate that, according to urgencies and emergencies and tightening braces, you do that in 1 month, but you're not going to do it 3 or 4x to offset, right, either you have a problem or you don't. So in case of orthodontic maintenance, that's done once a month.
So there's that advantage of not having a repressed demand that will be back in subsequent months. So that equals approximately 15%, when we analyze the things that may come back. So DLR will go back to normal, but in a controlled manner as it is in dental operations. So according to our controls and the excellence in clinical and operational audit with -- as well as the tools that are developed with dentists for intelligence in the company to assess treatment and so on.
And as you mentioned, we won't have the problem of the price, but -- of losing value. People will come back. They will appreciate and like it in relation to the sales channels, and that's, as always. All the channels that you know, e-commerce, we have brokers, we have partnerships with brokerages, We have own sales force, bank channels. We have white label operations with health care operators. And that continues in cruise speed. And also relating to Gustavo's question about net adds, that's bringing on excellent results. Pacheco showed that in the initial presentation in that chart, in the ads. So if we unplug that quarter of the pandemic, second quarter of the last year, and the last 20 quarters are very encouraging and exciting. So these sales expense -- sales, operations at full speed in developing products so that we can be able to serve our partners and members. I'm going to hand over to Pacheco now.
I'd just like to add the aspect of seasonality. I think we're forgetting that in the reports, that's not being commented. We had also proven business model in seasonality has 2 main aspects. First of all, on the sales side. Traditionally, the first quarter in the decade. So if you look back 20 years, it's the one that -- quarter that has lowest growth. It's where we have slower sales activities. And in 2021, that was no different.
The second aspect is about use. That's related to the DLR. So in the first quarter of the years, typically, it's a quarter where we have summer. So it's less use of the benefit. Therefore, historically, DLR is lower than in the next quarter. So not only in growth in net adds, but also in DLR, the fair comparison would be the annual comparison. So as Rodrigo mentioned, we're practically in a period of low use, not only because of the specific quarter of the year, but also given the moment of social distancing. And I believe that the beauty of the dental model is the safety and the predictability of the educated and gradual recovery of frequency throughout the year, which is much different and the opposite than what we see in health care plans according to ANS data, which is showing the health care plans use as well.
Our next question is from Eugenia Cavalheiro from JPMorgan.
The first question that I have is about ticket trend. So we see the drop in the ticket. And I'd like to hear what we should expect for the next quarters? And if you can give us perspectives relating to new members and older members? Second question is about inorganic growth. Can you give us some more about the strategy, M&A now after the acquisition that you had in December of Mogidonto and Boutique Dental.
Eugenia, that's a good point. The ticket answer has different colors depending on the segment. So in the corporate segment, we see the support and sales activities based on contracts that have a long-term duration. So providing services focused on pluri-annual contracts. So there's a less use of the benefit given social distancing. Therefore, there should be less frequency, and the trend of not adjusting the prices and maintaining the tickets, even in some cases, lower tickets that will be built up across the years. So that's the reality of the corporate plans of big employers. And we have to address that in the noncore right now.
Considering the SME plans, we've seen a favorable price elasticity. In 2020, revenues and tickets grew in SME segment, supported by the launch of new products, and that continues in 2021. So we see an interesting market opportunity in bank channel distribution in the segment of SMEs. In relation to the individual plans, in that case, we basically have 2 groups of plans, so in banks and in retailers.
Starting off with the plans in the retailers. We've seen an opportunity to positively adjust prices -- update prices and tickets in some agreements and distribution for private label. In the bank channels, the distribution of lower ticket and higher retention -- because in some products, we have a much higher ticket, and it's expressively higher than some niche products that were distributed in the bank channels. So we have a number of answers here. And at the end of the day, the portfolio and the customer base for the company is comprehensive enough to have the behavior of variation.
So at the end of the day, Eugenia, you see a modest variation of the average ticket and certainly much more modest than what we've seen in costs and expenses resulting in margin increase. That strategy doesn't change, in my opinion, for 2021. The company has had value -- pricing based on value and focused in the long term, which has always been our policy and characteristics.
The second part of your question is about growth. Odontoprev is a company that prioritizes organic growth. However, we've been mapping and planned the performance of all the market players in profound detail. So if there are any opportunities to have inorganic growth with quality, we will definitely look into that. There's no reason not to do that. So we still are analyzing and looking into detailed performance in all regions in Brazil, in all market segments. And if the case, if any opportunity comes up in inorganic growth, be it through partnerships or acquisitions or even by developing new technologies, we will look into that carefully.
Our next question is from Leandro Bastos from Citi.
Just a follow-up on DLR. Focusing on individual plans, I'd like to understand if you can comment the levels of DLR that we can expect as a result of no longer having the effect of nontechnical provisions and the change in the mix from retail to bank? That's what I have.
Leandro, this is Rodrigo speaking. The best way to consider DLR is looking at history. And always looking at the whole year because Pacheco already mentioned seasonality, which is very important. So the first quarter is lower. The third quarter is higher. And that across -- or since 2006, when we look at the company since the IPO, that's how it behaves. So if we consider that history, that can give us a good idea of what we can expect looking forward. So there are periods of high unemployment, lower economic activity, so you can expect certain behavior.
Such as when you have a high long unemployment rate, people are using it more because they're going to lose their jobs, so they want to use that benefit. And here in Brazil, when a company is terminated, usually, they have benefits for 3 more months after termination. And people, sometimes when they're employed, they act as unemployed because they're afraid of becoming unemployed. And that happened in 2016, 2017. So you can have a peak in 1 quarter or the other given the certain situation. But when you look back to 2006, you can see that the ups and downs are very predictable based on that range that you'll see.
Leandro, Pacheco speaking, just to give you some more flavor. The individual DLR should be the lowest in the portfolio because you have a product of higher risk, risk of adverse selection, bad debt and the churn. So there's a higher ticket there. So to answer your question, that makes DLR lower. At the end of the day, what we want to share today with you is that DLR in individual plans in 2020 was atypical, and it remained much higher than the historical levels. The reason was the maturity of the free choice plans in the bank channel that had that cycle, which is pretty much reaching the end of inadequate use. So consequently, we see the DLR of the individual plans coming back to historical levels, which is more appealing and lower than what we had in 2020. So one of the reasons for the consolidated DLR for the company being lower in the first quarter, without a doubt, was the contribution of individual plans that are gradually coming back to historical levels and lower DLR compared to SME and individual plans.
Historical levels of the individual would be for 2018, right, before the impacts of that portfolio. Is that what you mean?
Yes. Before 2019, I think it's -- well, that's a level that's closer to what we are expecting for the upcoming years.
Our next question is from Vinicius Ribeiro from UBS.
I only have one. So in the past quarters, we've seen maintenance of G&A lower than historical levels. I know it has to do with pandemic, but also digitalization that you've mentioned in the past. So I'd like to understand if the gains in efficiency -- potential gains in efficiency, if we can consider that will be longer-lasting and consider that these gains will remain? Or is -- are there any structural investments that you will make?
Or investments that you will have in other lines -- or in other businesses to leverage some type of growth? Go into other businesses that are related to dental, as we've seen in other companies? And you know who I'm talking about. In a way, they're trying to invest those gains and efficiency in new opportunities for growth. So I'd like to understand on your side, if strategically that makes sense? Or if we can imagine that the levels of return will be higher and be more normalized?
This is Rodrigo speaking. That's a great point because we've been focusing on that ride we got on the DLR because of the lockdown. But there's a lot of work being done by all our management divisions, production, digitalization, productivity, innovation. So a lot of work to learn about how we can streamline and bring in efficiency to our operations. So we have committees to prioritize technology projects. We created the squads here. We had 3 in the past. Now we have 18 segmented per area and legal demands, and all of these squads to service brokers and companies and our sales processes, the beneficiaries overall.
So when we talk about SG&A, we have a number of things that we can use that we've been working on in the past 3 years and more intensely in the past 2 years. And with the pandemic, we've been prioritizing these tasks so that they are here to stay. So you're correct, into -- to consider that assumption because of a great part of the savings that we have, will continue.
I'll give you an example. We have an operation that we do for companies where the companies can buy the product in a mode where they can buy it for all employees or negotiate it a better price for employees, and employees can decide if they want to join or not. And then some of them leave, go to other companies and the ones that don't join, you have to go back to those companies every now and again to explain the products, talk about the benefits to try to add more members. We call that agency process. And depending on that, we can have that.
And like with digital, you don't have to take a plane, a car and drive far. But -- because with the pandemic showing us that we can also have virtual meetings, we've been able to do that. Like 1.5, 2 months ago, we were able to have 550 employees at -- from a company in the same event at the same time to explain to them. So we're saving time. We have the ability of holding more events such as those with more companies. So the travel side and everything that Pacheco mentioned about having the physical or the actual hard copy instead of a digital one, right. So that has the expenses with the plastic and mail. And then we have to think of rents. So we have a huge horizon of activities that are being done and the apps for brokers, apps for members where you take away paper in a very emphatic manner.
That innovation footprint isn't new in the company. That's part of our DNA. So everything that I'm talking about, simplifying things and getting rid of paper, we were already doing that 4 or 5 years ago. We already had -- almost 90% of images coming in digital instead of paper. So 95%, 98% of the images already digital for our analysis.
So what we did was being able to roll out that innovation footprint and savings and making life easier. And that also touches on the sustainability thing, the environment and all of that. So we're also able to offer that to HR in companies, dentists, members, users. So we clearly incorporated a great part of these savings, and that will be a part of it from now on. Pacheco, would you like to add?
I believe that what Vinicius is talking about Rodrigo is great. The strategic focus of the company is becoming increasingly more clear through the increase in gains in SG&A that are being provided by technology. So the digital process will not end. We got off on the right foot with that, and we have permanent gains in company margin originated by these huge strategic efforts of prioritizing digital. It's here to stay, and it's been giving us return levels that are much higher than what we were using in the past decade.
Well, it's very motivating, we talked about more tangible things like travel, rent, mail, but we can also use AI in audit. The company just won the award of the best IT executive award from IT Media last week from the productivity solution. So when we implement another module of AI for low complexity files in operational audit, we can save 100,000 hours for analysis per year, where you can use those hours in the high complexity procedures or even translate that into savings and efficiencies in personnel expenses in the company. So we have that strong footprint.
And you can say that in Pacheco's area and other areas in finance, the use of robots, the RPAs that we have, that are more intense. So all work that has high-frequency and low complexity, we have extensive mapping in the company to identify those opportunities and introduce the famous robots that replace more mechanical labor.
That was a great question, Vinicius. And it's not just taking advantage of DLR. There's also a lot of work that the company management has been doing in SG&A. Bad debt, the control that we currently have on bad debt, especially in retail operations, which is not easy. It's a very complex operation spread out -- throughout Brazil with a lot of partners. So it's just many fronts that we operate in, in that sense.
Our next question is from Caio Moscardini from Morgan Stanley.
I'd like to follow up on the individual plan use in relation to the additional provisions that are built, given the free choice plan. I'd like to understand if that's already in the past? And if [ not ], we won't have that additional problem? Or if there's still a risk of seeing more provisions in the upcoming quarters?
And the second question, cash is still very robust. So I'd like to understand your strategy. If you plan on maintaining the 100% payout for a longer period of time? Or if there's a possibility of changing that in relation to dividends?
This is Rodrigo. I'll answer the first about individual plans, and I'll hand over to Pacheco. The free choice is controlled. It's in normal levels of loss ratio. We had operations in the product and in other calls, as we mentioned. We continued with some products that were problem. We launched it and more adjusted to reality with different market segmentation and different conditions to purchase the product in a number of dependents, a number of things and measures that we took to control that. So we had that first season of products that's already controlled that led to normal levels now. And the second one, new products that are behaving according to expected in terms of DLR.
I'll answer your question about cash. This is Pacheco. The position at the end of the quarter was very robust. Cash generation has been a differential of the Odontoprev's business model. And our practice is to maintain 100% of payout every quarter divided in cash dividends with immediate payments, very quick payments. And the news that we've been sharing with you is an open buyback program that -- to add on to the company's dividend policy. So we'll have 2 models, the business model and the capital structure. So we -- our intention remains to count on these 2 tools throughout the next quarters.
[Operator Instructions] We have no further questions. The Q&A session is now over. I'd like to hand over to Mr. Jose Roberto Pacheco for his final remarks.
I would like to thank everyone for their presence. We remain very optimistic with opportunities looking forward. Have a great day. See you at our next event.
The Odontoprev earnings call is now over. Thank you for your participation. Have a good day. Thank you.