Odontoprev SA
BOVESPA:ODPV3
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Odontoprev SA
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Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the Odontoprev conference call, with the results of the second quarter 2018 and second half and -- first half of 2018 will be presented. Today, we have with us Mr. Rodrigo Bacellar, Luis Blanco and 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.
Those following the presentation via the webcast may post their questions in advance on our website, and they 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 future events, and therefore, depend on the 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'll turn the conference over to Mr. José Roberto Pacheco, IR officer of Odontoprev, who'll begin his presentation. Mr. Pacheco, you may begin your presentation.
Good morning, everyone. Thank you for your interest and trust in Odontoprev. I would like to thank you for attending the company's conference call and to present the results of the second quarter and first half of 2018, inaugurating the cycle of promoting the health care industry in the Brazilian capital's market.
Now to begin the presentation. On Slide #3, we highlight the net addition of 116,000 members in the quarter, record figures since 4Q '12, which highlights the addition of 99,000 corporate members.
On Slide 4, we show the recovery of the corporate segment. As in the first half of 2018, we had the net addition of 107,000 members compared to the loss of 75,000 year-over-year. On Slide 5, we can see the 5.9% growth in net revenues, higher than the rate of the past 4 quarters as a result of the growing average ticket, higher number of beneficiaries and the sales mix.
Now moving on to Slide 6. We can see the segmentation of the annual incremental net revenue. We would like to highlight in this case the corporate segment, which has achieved BRL 10 million of additional annual revenue. This segment has shown a 4.4% growth in the quarterly revenues which we haven't seen for 3 years since -- for 3 years as we see in Slide 7.
On the next slide, Slide 8, we would like to highlight Odontoprev's unique positioning relating to the leadership and developing and increasing the noncorporate segments of individual plans and SME, which have a higher ticket, less competition, fast growth compared to the market and better contribution margin. Additionally strengthening the strategy, the noncorporate products present significant barriers to entry, such as scale and quality of distribution, the bad debt of small-sized customers or individuals, adverse selection and management technology, which are the clear differentials of Odontoprev's business model.
On Slide 9, we see the average ticket for the semester, which was BRL 20.37, 4.3% higher year-over-year, which is the result of a better mix in the period with an annual growth of 8.9% in SME and 7.2% in individual plan.
On the next slide, Slide 10, we can see that the Dental Care Ratio has decreased to 45.5% of the revenues in the second quarter, and to 43.7% in the first half of '18. In the last 12 months, the Dental Care Ratio was 44.7%, the best rate since 1Q '10.
On Slide 11, the adjusted EBITDA achieved BRL 94 million for the quarter, 9.7% higher year-over-year. At the end of the first half year, the adjusted EBITDA was BRL 201 million, 13.8% higher year-over-year with the margin increase to 26.9%.
On the next slide, Slide 12, we can see the evolution of the Brazil dental adjusted EBITDA and net income. In 2Q '18, the EBITDA achieved BRL 5.9 million, increasing 33.9% and net income of BRL 3.9 million, 216% higher year-over-year.
On Slide 13, we can see that the net income was BRL [60 million] in the quarter, 17% higher year-over-year. In the past 12 months, net income was BRL 266 million, with a net margin of 18%, one of the highest since the IPO in 2006.
According to Slide 14, we have closed 2Q '18 with net cash of BRL 549 million with no debt.
On Slide 15, we would once again like to highlight the record number of 7.4 million shareholders, which is almost double compared to June 2017. The company shareholder structure remains globalized, with noteworthy mention to 94% of the free float in the hands of foreign investors, as you can see on Slide 16.
On the last slide, #17, we can see the approval of the Odonto System acquisition without restrictions by the ANS, Brazilian Supplementary Healthcare Agency; BACEN, Brazilian Central Bank; and the Brazilian Antitrust Agency. The transaction shall be submitted to approval by the company's shareholders during the extraordinary general meeting, scheduled for next -- for August 6.
Our board -- after almost some quarters without a distribution and after our Board of Directors meeting yesterday, they approved the payment of dividends in the amount of BRL 28 million, plus the BRL 14.3 million interest on capital already paid, a total 70% of the payout for the quarter.
Before moving on to the Q&A session, I would like to invite you all to visit our annual sustainability report, which is digital, available online on our IR website. It was published last month, and describes the main social and environmental initiative carried out by the company, as well as the corporate governance practices. Once again, we would like to thank everyone for your interest and trust in Odontoprev.
Now I would like to move on to the Q&A session, and our call will last 45 minutes. Thank you very much.
[Operator Instructions] Our first question is from Mr. Joseph Giordano from JPMorgan.
First of all, I'd like to understand the very good dynamics that we saw on corporate with the substantial addition of members. We haven't seen that for a while. So I'd like to understand how you had -- how you approached these new contracts, especially in relation to price because even though there is a favorable mix, the ticket -- average ticket was very close to inflation. So I'd like to know if you're being more aggressive in commercial terms. And then moving into my second question, which is regarding the INSS, we still have a positive load on net of 200 basis points in relation to the dental claims ratio, which we hadn't seen in the other quarters. So I'd like to understand -- so first of all, if we had any price matters. So maybe lower transfers and lower average ticket in the new contracts compared to the old ones? And also frequency, because I know there were some events that should have helped, such as the World Cup, for instance, and the truck drivers’ strike, because I know that, that would lead -- that leads to a lower loss ratio, right, compared to other years. So I'd like to understand that, your commercial approach and the average ticket.
Joseph, thank you for questions. This is Rodrigo speaking. In relation to commercial aspects, actually, what we did was restructured the commercial department a year ago. The commercial projects have a long maturation, so when we talk about the company contracts in effect and so on. So now we're reaping the fruits of the project that started off in the beginning of last year by hiring new people, the commercial management, and after that, the planning with these new people. So now we're reaping the results of all those -- of all that planning. And second, in relation to the loss ratio, you mentioned the basis points. We can't forget the ISS effect. So if you had the 270 points of the INSS, where we were paying 2% of ISS, and then with the services, then we had an actual rate of 1%, but now it's no longer that. Now we have 2% without being able to offsetting the cost of service. And in relation to frequency, Luis Andre will answer that question.
Joseph, so you mentioned the effects on the second quarter in relation to frequency. I think it's important to mention and remind you how we record the events and how we provision that. We record the event when it actually arrives at the company. So all the events that are out and still haven't arrived, they are accounted for through the IBNR. So they're the incurred, but not reported events. What happens is that our IBNR is approximately BRL 80 million. And if you divide that by the average cost that we have in the network, that represents 40 to 45 days, so an average time where the treatment begins and then ends, and then comes to us, so we could recognize the expense. So we have to analyze how these events took place. That they took place, but they weren't informed yet. So in our best estimates and actuarial mass reflects on the IBNR. That's why it reduces the variation in the second quarter year-over-year. In relation to frequency, that's another aspect that we always like to highlight. So it's important to remind everyone that in the individual segment, we have encouraged the segment to use. So the segment -- the customers have to understand the value, and they understand the value of services when they use it. And that's why we price this segment in such manner, so it can support that type of use. Therefore, we have this relationship system where we contact the customer at some point in their lives, not only when they're on-boarded, but also a little bit before their grace period ends, we call the individual and we clarify any doubts about using the product, the -- we recommend dentists if the case and to simulate that use. And why do we do that? Because in our -- according to our internal studies, when we have a control group, and we act proactively on this control group, we have noticed that the average period is higher when we actively work with them proactively than the other group. So even with that type of use, it gives us a present value, a higher value of keeping these individual users when we consider the present value. And so we're specifically talking about the individual segment, that's why we encourage them so that we can keep them longer, and therefore, we have more value in the individual segment if they stay longer with us.
Joseph, this is Pacheco. I'd just like to add a comment in relation to the commercial comments that Rodrigo started to mention. So we do have a more constructive dynamics in the corporate segment. So the corporate commercial actions have been successful in implementing new contracts. And they have also -- therefore, they are overcoming the loss of older contracts. So that's very important for Odontoprev, for us to share that with you. So even though there's still an unemployment that's higher to the new contract. So we've been really setting us -- setting ourselves apart. The number of new beneficiaries and corporate segment really stood out, especially in this first half, right, and especially in the second half-- second quarter, sorry. And now what we've been doing to expand is having the agency factor in the corporate plans, where you have the 3 [indiscernible] contracts. And now through new contracts expanding the team and having a team that's focused on this specific activity, we've been having a lot of success in bringing new beneficiaries. So that's a huge priority for the company from now on, and we believe that it's very well positioned in the corporate segment as from the second half of 2018 and on.
Our next question is from Mr. Thiago Cruz from Itau BBA.
I have 2 questions. The first one is relating to the individual segment piggybacking on the other question. So can we assume that the dental loss ratios are going to be similar to that number from now on even though there's a lower churn, so that combination that we have to have -- bear in mind, looking forward to the next year? So that's my first question. My second question, in relation to SME, the -- you've been having -- capturing for 3 years in all quarters, and now we have a sequential loss. I'd like to know what's behind that if it's something that's temporary that will be recovered in the next quarter. I'd like to understand how we should consider the growth of that business in the next period.
Thiago, this is Rodrigo. I'm going to answer your second question first, and then I'll hand it over to Pacheco to talk about SMEs and individual. In SME, we're considering constructive scenario in the half year. We believe it's very specific in the second quarter. That doesn't really change our perspective for the behavior of it in the rest of the year. So just considering the regular patterns that we've seen before. Thiago, in relation to the individual plans, actually, there's something very interesting that's going on, and we have to understand that in the new use sales mix and the new use mix impacts, the ticket -- average ticket, bad debt and the loss ratio. So the portfolio that had 2 quarters in the past was mainly retail now is being changed. We're being successful in building a new portfolio with a higher ticket and lower bad debt and better duration. So I'm talking about the banking individual portfolio, which is for the first time, we are disclosing mainly the banking portfolio, which is at least BRL 10 higher than the retail portfolio on average ticket, and it also has a more clear use and encouraged, as Luis Andre mentioned. So the loss ratio is possibly higher. On the other hand, the duration is practically double than what we've seen in the past. So this portfolio is extremely positive for the company, and once again, it's a huge strategic priority for the company. It's developed through Bradesco and Banco do Brazil that are represent -- or account for over 50%. And that's the first time that we're informing that about the beneficiaries portfolio. It's very welcomed. It's the strategic focus of the company. It's a target of constant innovation developing new products and new channels. Therefore, we'll be monitoring that from now on. Very clear, Pacheco. So on our side, what we have to think is that even though the dental loss base of 29 to 30, the return that you get from this portfolio is higher than before, and we should see that in the future, right, in -- a bit in ticket, a bit in growth because the churn increased. That's the mindset, right? Exactly. Exactly. That's the strategic direction. Yes, you're correct.
Our next question is from Mr. Rodrigo Gaston from BTG Pactual.
I have 2 questions on my side. The first one is that I'd like to talk about the net ads, the corporate net ads. You already mentioned a bit, I think -- a bit of that in the past answers, but I'd like to know the dynamics of growth for corporate. So contracting employees, again, from the existing contracts or did you get new contracts? I'd like to understand the mix of the corporate adds. And the second question is average ticket. So we saw a slowdown in average ticket in 3 segments: corporate, SME and individual. I think it's natural given the more competitive scenario of dental, as we've seen in the past period. But I'd like to understand that that's the natural dynamics of the market that we should expect from now on. As you mentioned, more aggressiveness in commercial, especially in one region or another, more pressure on the ticket. So a higher slowdown of the average ticket because of the competition, so I'd also like you to talk about the competition for the next periods.
Rodrigo, this is Rodrigo speaking. Thank you for your question. I'm going to address the first one about corporate, and then I'll hand it over to Pacheco to talk about the average ticket. What we've been seeing is that, unfortunately, the existing contracts are terminating more employees than hiring more. So as you know, what's going on in Brazil, the unemployment rates, you see this dynamic of employees being terminated more than being hired. So we did some planning work, starting off with contracting or hiring a corporate sales management division here a year ago. And they were addressing 2 things in planning, getting new contracts compared to the competition. So for 2 years, we still have a good balance in that. And above all, we had another strategy, which is a strategy that offsets the employee termination than hire, which is the interesting aspect that Pacheco mentioned. So you can have a corporate contract as a mandatory contract. That means that the company pays 100% for their beneficiaries or you can have a contract where through adherence, where the company uses their bargaining power to get a better price for their employees that would buy in an individual manner. So the employee can decide to have the dental plan or not. And what we see in the industry, which is worsened by the economic scenario in the past 3 years, on average, we get 30% of adherents and at the end of the year because of the natural churn -- and because of the economic scenario. These employees left the company. So now there's planning of having talks at the companies and doing their full analysis of these employees, so we can add new beneficiaries, new employees to the contract. So that's one of the plans, different than what we did in the past, with more predictability and doing this in advance, not to mention, the logistics, which involves people, mobility, travel and so on. So with that, we've been able to offset or partly offset this adverse scenario that we see in the economy. So we expect that in the second half of the year, we still don't have that much economic activity. It's hard to get the business people to kick off their projects, especially with the election scenario that's undefined. So I believe that what we can expect for the second half is what we've seen so far. Still, unemployment rates that are concerning, but we have scheduled till the end of the year with these companies to talk to them to try to recover these numbers. Now I'm going to hand it over to Pacheco.
About the average ticket, we've seen growth of 2.5% in the first half of -- in corporate and over threefold in noncorporate. That's a strategic differential that's important to understand. So where the pricing strength is coming from. It's coming from the fact that we've launched new projects. And that the bank channel is the strong point in the individual plans, and that's hard to replicate. You've also seen companies, public companies that are -- that have a negative average ticket. Now going back to the dental loss ratio, it has behaved well. And the company, as we mentioned before, encourages the use of the individual plans with the purpose of having relevant retention and duration. And that also focuses on our business model, where we want to develop individual plans even more and the plans for SMEs because, today, consolidated already accounts for 33% to 37% of the company's total revenues. So that dynamic is very clear. Last year, we had approximately 1/4 of our revenues dedicated to individual plans and SME. Today, it already accounts for approximately 36%, 37% of the company, with a reasonable loss ratio, and with more and more quality of the average ticket, therefore, return for shareholders. So that is the mandate that we have in the company. That's the innovation cycle that you will continue to see in future quarters.
Excellent. They're very clear. Can I follow-up on that? My last question -- last answer. If you consider this last quarter comparing to 2017, 2016. If you can define the competitive scenario, would you say that is worse, better, the same? Can you give us some flavor about how that is in practice? We see the figures that -- from ANS, but we don't work on this on a daily basis. So it's a bit complicated for us here that are not part of the market to have a more precise understanding on the competition. So if you could look back and tell me about the competition, is it better? Is it worse? Just so we can have some flavor on that, please.
Well, we can answer based on our strategy. But in the past 12 years, meaning, since we went public, there's always a cycle where some companies or 1 company spearheads the aggressiveness in the market with a very clear strategic objective. So I believe that it's important for the market to understand that in dental plans, there's a clear player that's 100% focused on the activity, bringing in the best dental plans to the corporate segment -- SMEs and individual plans, and we have the privilege of competing with companies. Many are global and leader in their segments that -- where dental represents 1% or 2% of their revenues. That makes a huge difference in their capability to price and the geographic presence and the number of participants in their dental network and management. That's what we've been showing year-after-year, and in this innovation cycle once again. So it's just in the beginning.
Excellent. Just a quick question because Rodrigo mentioned about the ISS. So let me see if I understood that about -- so just I can understand how that ended. So today, you are collecting 2%, and you're not offsetting the dental loss ratio. Is that the change? So is that what we should expect for the next quarters?
Correct, Rodrigo. Exactly. This is Luis Andre speaking. Just to go back to the ISS, so the supplementary law that was enacted in January where we had to collect ISS or that would change to the location where the beneficiary lived. And that was a change in January and February. But then there was a court order by one that was filed by one of the industry associations to suspend this law. Therefore, we're back to collecting the ISS according to the city where we -- where our headquarters are located, which is Barueri, but without reducing the base or calculations. So on the practical effect is that, last year, we had an average rate of 1% of ISS and now our average rate is 2%.
Our next question is from Mr. [indiscernible] from Santander.
First of all, I'd like to understand if there's a relation between the slowdown of the SME ticket that was almost [20 to 7] and the job and number of additions in Bradesco in that same line? Second question is about solvency, so if there are any updates about having your own brand with ANS.
I'm going to start off with SME. We have the annual cycle of launching new SME products in this first quarter that led to higher revenues. In the second quarter we had specific movements that shouldn't take place again throughout the year. Therefore, we have the same construction vision, and SME is the segment that's been most predictable in the past 3 or 4 years. So no reason to be different now in 2018, with an average ticket that's higher to corporate and a loss ratio that's lower to corporate. It's a segment where the bank channel is the biggest aspect that accounts for the biggest share of the portfolio. So today, we have the privilege of having almost 1 billion beneficiaries in the SME segment. Relating to the solvency margin, Luis Andre will talk about that.
I'd like to remind you about our solvency process. Throughout 2017, the company has had many interactions with the management responsible for this topic at ANS. So no dental sector, health care sector approved by ANS. Throughout 2017, we have been testing our understanding about having our own model, and working with these evolutions through 2017 with the ANS. In the current situation, we have submitted all the documents, which is required by the standard. We were the first operator in health care to have done that with -- or to ANS. And our contact with the department, the IoT. The technicians really like the model, and now, it's up to their analysis. Since we've been showing all the development of the work during all the meetings we've had with ANS during 2017, it wasn't just the handing and/or submitting something that they were unaware of. When we filed the final documents, they already had a lot of information about our model. So now, let's say, it's up to them and we're waiting for their assessment. But we're very optimistic in order to have our own model this year approved by ANS being the first operator, not only in dental, but also in health care to have their own model approved by the agency.
[Operator Instructions] The Q&A session is now over. I'd like to hand over to Mr. Pacheco for his final remarks. You may begin, Mr. Pacheco.
I'd like to thank everyone for attending the conference call for the first quarter -- first half of 2018 and to our next event. Thank you very much. Good morning.
Your Odontoprev conference call is now adjourned. Thank you for your participation, and good morning.