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Good morning, ladies and gentlemen. Thank you for waiting. Welcome to the OdontoPrev conference call to discuss the earnings of the second quarter of 2019. Today, we have with us Mr. Rodrigo Bacellar, Luis Blanco and José Roberto Pacheco. 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 end of the call. We would like to remind you that webcast participants may register in advance via website any questions to OdontoPrev, which will be answered during the Q&A session.
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 the company. 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'd like to turn over to Mr. José Roberto Pacheco, IR Officer of OdontoPrev, who will begin the presentation. Mr. Pacheco, you may begin your presentation.
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 conference call to present the results of the second quarter and the first half of 2019.
Now to begin the presentation on Slide #3. We can see data from the ANS since 2012. With the continuous growth of dental plans, even during the years with the recession, with net additions in 2019 exceeding 24 million beneficiaries at the end of May, which is the last information available -- latest available. On the other hand, the stagnation of the number of members in health care plans is currently lower than 7 years ago and number of beneficiaries with the net loss in the first 6 months of 2019.
On Slide 4, we would like to highlight the 19.2% growth of net revenues in the quarter, our best performance in 9 years, of which 12.4% is purely organic growth, reiterating OdontoPrev's strategic differential with noteworthy mention to the acceleration of the revenues from SME plans and individual plans.
On next slide, #5, we show the evolution of the several business segments, particularly the noncorporate segment, with an average annual growth rate of 17% in SME revenues and 27% in individual plan revenues since 2014.
This segment, as we can see on Slide 6, presents continuous and fast revenue increase with an annual growth rate much above the industry. Given the launch of new products with higher added value, the noncorporate segment currently has an average ticket of BRL 36, 62% higher than 2014, as we can see on the next slide, Slide #7. On this slide, we'd like to highlight the unique OdontoPrev positioning relating to the leadership in developing and increasing noncorporate segments, individual plans and SME as they present a higher ticket, less competition, fast growth compared to the market and special contribution margin.
Additionally, reiterating our strategy, the noncorporate products present significant barriers to entry such as scale, distribution quality, customer credit risk for smaller individual customers, [ and risk ] selection and management technology, which are the clear differentials of the OdontoPrev business model.
On our next slide, Slide #8, we present the consolidated incremental revenue of BRL 70 million in the quarter, the best performance in the decade, where this SME segment presents a historical record of BRL 15 million in incremental revenues. We'd also like to highlight the corporate segment with over BRL 40 million of incremental revenue in the first half of the year compared to just 2 years ago with a negative incremental revenue of about -- of BRL 11 million, as was the case of the first half of 2017.
On our next slide, Slide #9, we have 7.9% growth in corporate revenues and the eighth consecutive growth -- or quarter of the highest corporate revenue, especially in the open enrollment modality.
The next slide, Slide #10, we see the 6-month evolution of net additions, particularly, as you know, deferred tax is seasonally lower in growth compared to the second half of the year. Since 2014, there was an average decrease of 20,000 members in the first half compared to an addition of over 100,000 members in the second half.
On Slide 11, we would like to highlight the best annual dental loss ratio, 43.6%, lower than the previous year given the growing share of noncorporate products in revenue composition at competitive prices, thus increasing the net present value, as in the case with individual bank plans with a higher ticket, better duration and lower bad debt.
On Slide 12, we can see that gross income achieved BRL 235 million in the quarter, 21% higher year-over-year. And the net income increased 23%, exceeding BRL 0.5 billion.
Now moving on to cash generation. According to Slide 13, we can see that even with the decrease in the dental loss ratio and higher efficiency in administrative expenses, we had an increase in commercialization expenses given the growth of the individual plan portfolio with department stores, which has a higher acquisition cost, and other operating expenses such as the implementation of the long-term incentive program now in 2019, resulting in a 22.7% EBITDA margin in the quarter.
Moving on to Slide 14. We see an adjusted EBITDA of BRL 438 million in the past 12 months with a margin of 25.2%. In this semester, we achieved an adjusted EBITDA of BRL 223 million with an annual growth of 11%.
On Slide 15, we can see that net income achieved BRL 52 million in the quarter. In the first half of the year, net income increased 12% with a net margin of 18%.
On our next slide, #16, we can see the evolution of market compensation and cash dividend according to the cash criteria. During the meeting of the Board of Directors held yesterday, an additional dividend distribution was approved in the amount of BRL 28 million, which when added to the BRL 16 million in cash dividends already paid up totaled 70% payout in the quarter.
On Slide 17, we can see that OdontoPrev ended the quarter with BRL 475 million in cash flow, debt-free.
On Slide 18, we are very proud to highlight the growth of the number of individual shareholders, surpassing 14,000. The company has grown pretty much every -- the number has grown pretty much every single day.
The company's investor base, as shown on Slide 19, remains globalized with an approximate free float of 90% with foreign investors from over 30 countries.
On our last slide, #20, we have the pleasure of informing that the company was confirmed as part of the British FTSE4Good Indexes, which measures the performance of companies relating to their social and environmental practices as well as corporate governance internationally.
So once again, I would like to thank you all for your interest and trust in OdontoPrev. Now we would like to move on to the Q&A session in our common practice of a 45-minute conference call. Thank you very much.
[Operator Instructions]
Our first question is from Mariana Hernandes from Crédit Suisse.
Actually, I have 2. The first one is about Odonto System. We saw a relevant drop, corporate turnover and a relevant drop in SME plans. So what is your vision on that? Is that because of the integration? Are you losing some contracts? What's the logic behind that drop? And the second question is about individual plans and commercialization expenses. I'd like to understand how you connect that. Because in this quarter, we saw more sales to retailers, but commercialization expenses dropped. So I'd like to understand the profitability of the individual plans in this third quarter and the first quarter -- second quarter, sorry.
So thank you for your question. I'm going to answer the Odonto System part, and then Luis Blanco will talk about the retailers. About Odonto System, there's nothing that's concerning that -- has nothing to do with integration. That was just a specific case, one specific customer that had a relevant scale so [ he ] continue -- it was just a very specific episode that's not concerning and not really related to the integration, as you mentioned. Now over to Luis about the individual plans.
Hi, Mariana, good morning. About the individual plans about the use, the use has been growing in the higher-value plans that were implemented as from last year. So we can sell plans with higher coverage and more procedures and, therefore, a higher amount. In addition to that, we also have a practice to encourage use, especially in the plans that have the moderator factor so that close to when it's time for them when they're able to use it, that they're -- we contact the customers so that they can already use it. Because we believe that an individual client that uses the product, he can see -- perceive the value of our service. And therefore, the duration of this customer with us lasts longer.
In commercialization, we had a higher commercialization. So even though the retails were part of that -- retailers who were part of that in that quarter we were able to reduce the total of the commercialization not only in the bank channel but also in -- with retailers. Those are the 2 factors.
Our next question is from Marco Calvi from ItaĂş.
I have 2 questions from our side. The first one is about the corporate segment. So looking at OdontoPrev figures, excluding Odonto System, we see a drop of -- in the number of members. So just to -- I don't know if it has to do with unemployment. So I'd like to understand if that negative figure is associated to a more difficult macro and not a market loss. So maybe you can talk about the dynamic of the loss ratio in that market. So how did Odonto System incorporation influence them? Relating to the dental loss ratio because it was flat. And on the individual side, just a follow-up relating to the first question. So there was a department [ short ] gaining share on top of the bank channel, but I'd like to know, moving forward do you still see the bank channel as the main source of growth in terms of individual plan channel? Those are my questions.
Good morning, Marco. This is Rodrigo speaking. In relation to the corporate market, it's made up -- comprised of 2 factors, gaining and losing contracts. And you also have the movement inside the contract, so turnover. So some employees quit or are fired, and that's what's included. So as we mentioned in the call, there's a huge dynamic of unemployment in Brazil. A lot of people are being terminated, and that was affecting the corporate contracts in relation to turnover and movement.
The dynamics were different in this quarter. We had an end of quarter that was better, much better than the beginning and the middle of the quarter. So what we could say is that there was an improvement in perception, as we used to say in the past about dental loss ratio and throughout the quarter in relation to that movement as well. So I don't know if that's to -- if it's here to stay, but we've seen an improvement in the economy in the middle of the quarter forward in activities in losing and gaining contracts in general. So as Pacheco mentioned, and you -- as you mentioned, relating to this presentation, we do have a seasonality.
About individual, you asked a question. Could you repeat that?
[indiscernible].
Just to understand the channel strategy. I remember. I remember. Okay. I remember now. Okay. We believe without a doubt that, that is the star of our strategy in noncorporate segment. So there's a huge area to explore, low share, and that's what we truly believe in.
You mentioned DLR as well. So Luis Blanco is going to answer that.
About DLR overall, if we disregard the dilutive effect of DLR that comes from Odonto System because it's an operation that presents a composition of lower DLR than OdontoPrev's consolidated number. So we have an increase in DLR in that period in the second quarter 2019 year-over-year.
So I believe your question is about the corporate segment, right? And that really happens. There's a slight increase in DLR overall of 0.7%. That also happens in corporate and as a consequence too. I'd like to remind you about the second quarter last year where we had the World Cup effect, which also reduces the use during that period. So yes, we did have a higher frequency not only in corporate but also in SME in this quarter compared to the previous one last year. And -- but it's mainly relating to that specific effect that we had in 2Q '18 in the World Cup, especially in June.
Next question is from Tobias Stingelin from Citibank.
Pacheco and Rodrigo, is there any news about regulatory capital? Can we consider anything in the upcoming months? Could you give us some flavor on that?
In relation to the regulatory aspects in the beginning of the year, the [ RN443 ] about company governance was published. And in March, there was a public consultation that supports the new rules about solvency rules for the market overall. And that was part of the agenda in the ANS board meeting last week. So the -- there was one regulation presented, and this one was -- is being discussed internally about the general rules.
In our specific case, just to remind you that before all these changes that ANS established this year, we had already presented our own model in June last year. The own model that's something that we were working on and presenting it in many different phases, together with the ANS team, the op team that's part of the -- well, it's one of their groups that handles this topic. So currently, they are working on that. They -- we've been talking to them since then, and we believe that we are the only -- well, we're the first and only operator that has presented their own model to the ANS. And we do understand that the regulator needs time to understand the methodology and to approve it.
So that's the case in which we're in. So the review of the rules are still in public consultation. It hasn't been approved by the Board. In our specific case, OdontoPrev presented that a year ago -- submitted that a year ago. So they have our submission, and we're always open to continue talking to them as we have been. But we also understand that it's even a learning process for them.
Great. And I have another question. So you've talked a lot about maximizing present value for customers especially in individual plans to encourage them to use it in frequency. So how has the DLR ratio evolved for individual plans? How does that show that this strategy that you're using is actually working?
Hi, Tobias. The mix in individual plans has -- have improved year after year with the participation of the bank channels. So they offer a higher ticket. They have lower commercialization expenses. They have lower bad debt. So as Rodrigo mentioned in the previous question, the long-term view and the beauty of this strategy remains very clear. So there's -- and we have a natural calling of working as a leader and a star player in growing individual plans through bank channels as they are bigger in the Brazilian market.
I believe that the metric is the contribution margin and increase in relation to EBITDA margin. I have no doubt that the individual plans in that bank channel segment is the segment that gives us the highest return. So it's an absolute strategic priority for the company and much different than the industry overall health insurance where they have no possibility of cross-selling the individual plans as they haven't even been sold.
Pacheco, there's some data and internal controls that we have for each of these channels. And what we do, we -- so we have what was sold during those months, and we follow that in relation to how long they stay and compare their stay and separating those -- that specific group and the ones that we can contact and encourage the ones -- or the ones that we can talk to, to encourage them to use that. So we work with that specific metric that we call it harvest internally per channel and type of commercialization. So if it's a monthly plan or annual plan -- commercialization plan, that's something that we monitor internally. I know it's very specific, but I can guarantee you and show you that we monitor that performance and the duration that these customers stay in the channel.
That specific metric that we don't have access to, do you compare that harvest looking at in the past year, 12 months, has it -- is it improving? Is it better?
Yes, especially in the bank channel.
Our next question is from Samuel Alves, BTG Pactual.
Rodrigo, Luis, Pacheco, my question is a follow-up on the corporate question. You mentioned a better environment in the past month, especially relating to macro. So could you give us an update in the online and the corporate segment relating to the competitive scenario? So if you felt that there was a worsening of that in the past times or not? Or is the competition at the same level that we had been seeing? And another point, if you allow me, I'd like to hear about the average ticket. Pacheco mentioned in the presentation we saw growth in value -- higher value-added plans and a growth in the average ticket as it increased in the second quarter. Could you tell us about if you believe that there's more room for growth in general terms of the average ticket, not just based on the mix effect but also like specifically looking at the individual portfolio? That would be very interesting.
Thank you, Samuel. About the competitive scenario, still the same. There are no changes. It's a very competitive dynamic. In fact, in the past 3, 8 years the dental market attracted the attention of a lot of operators. And we're still competing, as we always have. And we believe that's very good. The more visibility the dental system -- or the industry has, the better we can develop. And we can have more resilience with access to quality dental care. So we want to involve the market. And it hasn't changed. It's still the same as the past 8 or 9 years. Pacheco will talk about the ticket.
Samuel, about the corporate ticket, actually, in the past decade the company had the privilege of following its internal inflation. So there's the dynamic where in health -- medical health insurance plans you have inflation from multiples above the price inflation. That's different in dental. And especially in the OdontoPrev model, we have a very well-defined cost structure that's very much under control. So in the past decade, per year we've seen that sufficient numbers to maintain the margin balanced in levels that are very hard to be replicated by the industry where they don't prioritize dental and prioritize medical health insurance.
So there's positive aspects about corporate but just enough to cover the inflation dynamic. Therefore, we have stable and healthy margins in corporate. That's our vision.
Our next question is from Joseph Giordano from JPMorgan.
Rodrigo, Pacheco, Luis, I have 2 questions. Going back to corporate, I'd like to understand how you see the trend of bundling with health and more aggressive cross-sell from other operators, be them verticalized or not. And the second point is that we see some transaction happening in dental. How do you see that -- there was Odonto System last year. So -- but that's a long case of M&A, so I'd like to know if you're active in the M&A market as well.
Good morning Joseph, thank you for your question. About cross-selling, recently -- the bundling that you mentioned, recently I'd say that it is back in style again. But actually, that's been happening for many years. We don't see anything really new. We also have our bundling. So even in line with Samuel's response, it's still the same. In fact, you use bundling for contracts that we also have, so we see that with good eyes. That's why we see the healthcare market lower than 2012. And dental is growing. That's great. The more we talk about the dental care system that's even better. And we believe that there's a huge potential to grow the 12% -- 12-some percent of share. And we can grow. We could reach 30%, 40%. So the more help we have, the better. There's room for everyone. There's segments for everyone.
So again, there was more recent visibility because of IPOs, but that's always been a reality for those who are in the market. It's been happening for a long time.
Relating to M&A, you mentioned yourself that based on the scale it had it was the biggest operator in the market. It's hard to believe that there would be scale available like that, but we're always looking at opportunities. We're open. The company already has made 12 acquisitions that's part of its story. And in these many years of [ lag ], there were acquisitions before the IPO. So as you mentioned, the scale will be different now.
So the work that you have to put in to buy a big operator is the same as a small one. In the case of -- like Odonto System, regional cases and all over the country, so it's the things that we always have to face too, anyway.
We still have a small operation growing in revenues in Mexico. So is internationalization more relevant when we look at the next 5 years?
Yes. That's part of the revenues. And you can see that it doubled quarter-over-quarter in Mexico. So we already had an opportunity to talk a number of times. In Mexico, we're have a vision that it's the Brazil of 20 years ago in dental care. What's going to happen from now on? I don't know, but we're working together with other operators, developing the market, taking the culture of dental care. And we're excited because the operation is doubling every year. It's been growing. We've been supporting. Next year, I'll be in Mexico. So we're happy. We can see that the company is growing, developing. More brokers are talking about that. People are talking about that. So in terms of money, financially speaking, it's not material in fact. But we see a business that's growing, that's great, that's gaining more bodies. So we're very happy about that evolution.
We have Mariana Ferraz from Eleven Financial.
I'd just like to understand the increase in commercialization in corporate or if it's just specific now. And in the bank channels, we see a drop in Banco do Brasil Bank not only in corporate but also in SME in the first quarter. So could you talk about that for the second quarter or second half? Do you expect any increases in campaigns?
Hi Mariana, this is Luis Andre speaking. About commercialization expenses for the corporate segment, the major point is the one-off that we had last year. So the second quarter last year was low, and now we have these levels that we've achieved in 2Q '19. So this is a normal level. So the point is was 2Q '18, where you had that effect in commercialization expenses in the corporate segment.
Just to remind you, in relation to Banco do Brazil, we received 40,000 members last year and more members in previous years. And this year, we haven't had the growth year yet, as you've noticed. I think that's a result of the new government, strategic direction, the team, government teams. So I think there has been natural movement of organizing themselves and understand what the new spirit is behind the new government administration. So we're monitoring that, supporting them and hope that they get back to balance so they can continue to grow and take dental care to more and more people.
Our next question is from Tobias Stingelin from Citibank.
Just a follow-up. About Odonto System, the fact that it offers a different product than you, have you learned from Odonto System? Are you considering using the lessons learned to expand your product offer to other places as well?
Tobias, we have learned a lot, and we do consider using our learnings somehow, some pilot projects in some regions. They're -- we're increasing -- extending the model to be adapted into some regions and even our own model. So we're evolving and advancing that knowledge to see how we can take most advantage out of it.
You're not testing anything yet in practice? Are you just understanding the product?
No. No. No, we are testing. Yes, we are testing.
Their products, it's average, right?
We understand it perfectly, right? But based on the product, we're testing things such as with their brand, in other places. We're considering if we should -- could do something similar to that with our own network. So we're evolving in all those lessons that we've learned.
[Operator Instructions]
The Q&A session is now over. I'd like to hand over for the final remarks.
I'd like to thank everyone for participating in our conference call. Good morning, and talk to you at our next event. Thank you.
The OdontoPrev conference call is now over. Thank you for your participation, and have an excellent day. Thank you.