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Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the Odontoprev conference call to discuss the earnings of the second quarter and first half of 2022. I am Stella Hong, IR Supervisor. Today, we have with us Mr. Rodrigo Bacellar, CEO; and José Roberto Pacheco, CFO and IR Officer.
This video conference is being recorded and streamed on the web. The link is available at the company IR website at ri.odontoprev.com.br, where the respective presentation is also available; or on the company's YouTube channel. This video conference is simultaneous translation. To use, click on the interpretation button, the global icon at the bottom right of your screen, and choose the preferred language, Portuguese or English. You may also click on your original audio.
[Operator Instructions] 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 are materially differ from those expressed in such forward-looking statements.
Now I'll turn the conference over to José Roberto Pacheco to begin his presentation. Pacheco, you may begin.
Hello. Good morning, everyone. Welcome, and thank you very much to be a part of our conference call to talk about the results of the second quarter and first half of 2022. We are Odontoprev, and we're here to talk to you about our performance in such a challenging half -- first half of 2022, but many interesting aspects that we will address here today.
Now to begin the presentation, we have the more recent data from the ANS, where on the right of the slide, we see continuous growth in a younger segment in Brazil, which is dental plans.We will soon celebrate the 30 million members in the industry, which is a huge leap compared to the 7 million that we had back in 2006. So that's very important growth, and we're very confident about the future position of this market that doesn't stop growing. And 2022 is no exception to that. As you can see, since the end of 2020, approximately 3 million new members joined the dental plans in the country.
On the next slide, we would like to highlight the main players in the industry. So on the top, spearheading the health care plans, our direct controller, Bradesco SaĂşde, with approximately BRL 32 billion in revenues. They're much higher than the other players mentioned.
[ I'm sorry. He is mute. We cannot hear the original audio. ]
And here on the next slide, we can see the main players now specifically in the dental plans segment, where the company accounts for BRL 2 billion in revenue compared to lower levels in revenues of the other players.
Now on the next slide, we can see continuous growth of revenues after the harsh impacts that we had in the first half of 2020 that were brought on by the pandemic. And since then, the company has continuously, quarter after quarter, after 22 years in the market, achieving a volume in revenues which is approximately 12% higher compared to the second quarter of 2020.
On this slide, we show the annual variation of revenues, where the company, after the impacts that we mentioned resulting from the pandemic 2020, we've been recovering year after year. And this is an important aspect to explore here, that this revenue recovery was mainly a result of volume and not ticket. The prices have remained stable. And naturally, that will change. By using the dental plan benefits, again, we should have the tickets going back to normal from now on.
And here on the next slide, we can see the long-term strategy of the company. So here, we're comparing the year of 2014 with more recent data in the past 12 months ending in June this year. So you can see that the company has 2 major business segments.
The traditional one, corporate with a low barrier of entry, and the average ticket doesn't really go up and down year after year. So we have scale, low cost. So we are definitely the market leaders, having the lowest cost in the industry.
And on the other hand, we're innovative and pioneers in increasing company revenues, not only in corporate plans, but also here on the top right, the plans that are mainly for individuals and SMEs, where revenues have been growing 15% every year since 2014.
On the next slide, we can see the net additions. They were approximately 170,000 in the last quarter. It accrues over 400,000 new members in the past 12 months, approximately 900,000 new members since the beginning of the pandemic, the peak of the pandemic in the second half of 2020, with premium rates. So obviously, we are adding market share in revenues in the more recent periods.
On the next slide, we can see the net additions, not only for the quarter, also for 12 months and 24 months. So we'd like to highlight Bradesco Dental. That's the main incremental brand and accounts for a great part of the company's growth. It's worth noting in all market segments, from corporate to SMEs and even into individual plants. So the Bradesco Dental brand is a brand that gets closer to the Odontoprev, considering the share of the 8 billion in the company -- 8 million, excuse me.
So here, we're comparing the dental loss ratio, the dotted line that shows the average of the dental care ratio pre-pandemic average. So the company is at an advantage at lower cost, and that is mainly resulting from the mix effect. So the company has been able to bring in new customers to its business with a higher ticket and lower dental care ratio, as you can see on the next slide. That shows that, in each business segment, starting off with corporate, we can already see similar use to the levels closer to the pre-pandemic levels.
And on the other hand, you see SMEs and individual plans, where together, they account for approximately 40% of our revenues, as you can see here, bringing in lower dental care ratio, more competitive dental care ratio. And here on this screen, I would like to highlight the plans for SMEs, where the pre-pandemic historical rates were 41%. And now the company presents the dental care ratio lower than 30%. And we believe that the dental care ratio for SMEs is not very likely to go back to the levels that we saw in the pre-pandemic area.
Now going on to the next slide. Here, we have a summary that needs us to record historical records of EBITDA margin. And not only because of a mix of a more competitive dental care ratio in the pre-pandemic period, but also given the dilution of SG&A.
So it's also worth noting, the bad debt levels is much lower than what we've seen in the past. And that is a result of the increasing bankability, but not only in SME plans, but also individual plans. So the [ bank-onization ] of the -- those noncorporate segment products is very competitive and difficult to be replicated, leading the company to higher returns that are much higher than the industry average.
So as a result of everything that I've mentioned so far, new product mix, dental care ratio is well behaved, the possibility of diluting SG&A and the possibility of having a competitive expenses framework, is the company as been presenting since 2019 robust cash generation. The average rate of growth was 15%. And from 2019 up to the past 12 months ended in June, of 32% in LTM.
Now on the last line of the financial statement. So -- or income statement, we see that the company is debt-free and cash position, over BRL 800 million. So financial income has been benefiting from actual interest rates in Brazil. And we've recording quarter after quarter, higher financial income.
In this specific case, this last year, we've extended our investment profile so we can take advantage of the real interest rates in Brazil. And we've addressed and determined for the upcoming years, significant amount of actual interest rates to our portfolio, which is 100% dedicated to government bonds, long-term government bonds.
And as a result of what we've been mentioning, the net income [ increased ] at a higher speed than cash generation, achieving an ROE in last 12 months of 40%. As we mentioned before, the cash -- the company's net cash position is BRL 830 million in June.
And this is the last part of the presentation. This is the profile of minority shareholders. A free float of 46% with global investors in over 30 countries. And the Brazilian share is 14%.
Here are some highlights in ESG. It's highly important for the Odontoprev business model. So starting off with the classification or ranking in the corporate ESG performance line by ISS from the U.S. And we also published another annual edition of the Sustainability Report.
And on the bottom, in a pioneer initiative of the company in international, multinational institution called Sea Shepherd. The company has been sponsoring a pioneer project in Brazil along the coast of Brazil mapping the methodology developed with the Oceanographic Institute of the University of SĂŁo Paulo about all the waste found.
Here on our last slide, we have an agenda of Investor Relations events, not only in Brazil but also in Latin America, Europe and the U.S.
So those were our initial comments. And now we're open to answer your questions. That starts now. Thank you very much, everyone.
[Operator Instructions] First question is from [ Felipe Alonso ] Amos from Itau.
So in this quarter, we saw dental ratios getting close to pre-pandemic era, not only in corporate but also individuals. But it's taking longer for SME. Could you give us some flavor about why SME takes longer to get back to normal? And when that happens, what should we expect? Should we expect normalization of consolidated DLR?
And another question is, how should we consider the impacts of the normalization of DLR to the ticket? Should we consider that a higher ticket moving forward because of that?
Rodrigo speaking. Thank you for your question. Well, about the DLR, as Pacheco mentioned, and you saw that in the 3 charts, we have a scenario that's back to normal. And since the beginning in the corporate segment, and individuals that as well, we like that. We want our members to use the product so they can see value in it.
And in SME, I believe that a part of that new level that you're seeing is the result of one of our strategies to segment SMEs. So we have different ranges or brackets. So it goes -- according to the ANS, it goes from 3 members to 199 members. And currently, we have 3 specific groups in that range of 3 to 199 members. So that goes into coverage, pricing; in addition to an effort to sale, as you mentioned, in selling Bradesco. So we're connected to health care. And that explains a part of that SME showing that.
So it would be weird to imagine that corporate went back to normal in its loss ratio, individual as well, and for some mysterious reason, SME didn't. So it's very much related to the strategy that we have in segmentation that goes through coverage and connection in selling with the health plan.
And now I'll hand over to Pacheco. But I believe that we have to look at that as a sales effort. In general, we see the market back to normal in the use and in the clinics. And in our day to day, when you go out, when you're out and about, you see people. It seems like a more stable scenario, post-pandemic scenario. Pacheco?
Thank you, Rodrigo. Thank you, [ Philippe ], for your question. I believe that a correct understanding of the DLR is fundamental, so we can understand how that's connected to the average ticket. And specifically in the corporate segment, it accounts for 60% of our revenues and the highest DLR that we've been seeing after the first quarter of 2020. And now it's back to the pre historical levels -- or pre-pandemic historical levels.
We bring on a more balanced conversation in corporate customers to recover the use -- them using the benefit. And that translates into a ticket. That it's -- in the first quarters post-pandemic, that was negative in corporate, now it can become positive. And that's for 2022, 2023 moving forward, and it's essential to recover revenues.
And [ Philippe ], you also mentioned something interesting that is SME. That's a very specific market segment, as Rodrigo mentioned. It even has the potential of becoming bigger, and it employs more people than the other big corporate accounts.
The challenge, though, is distribution. And we have the privilege of having the Bradesco Dental brand with -- as our main brand, dominant brand, in distributing to SMEs and it gives us pricing power. And that translates not only into 2-digit robust growth in the first line -- in the top line in SMEs, but also with superior profitability compared to our portfolio. So once again, we're very optimistic about SME and the Bradesco Dental brand, a decisive factor in that.
And all things considered, the consolidated DLR of the company is on the right path to be more competitive than the pre-pandemic scenario, the 45%, 46%. And will potentially take a while for us to see that. We see DLR lower than the pre-pandemic period.
And we have to consider there's a new product mix in the SME plans and individual plans and banked individual plans for growing expressively, and that's essential for the expectations to return and generate cash for the company.
Our next question is from Pedro Lima, BTG Pactual.
On our side, we have 2 questions. The first one is a follow-up from [ Philippe's ] question about a lower DLR, especially in SME and individuals. I'd like to know what it actually influences that. Is that consumer profile? Is that the ticket and -- such as consumers using the network less?
And the second question is about CapEx. We saw higher CapEx levels in this quarter. And there's a line of others that brings that up related to revenues. So I would like to know if you can give us more flavor in that.
Great point. Allow me to start with the second one, CapEx. So it's basically technology. And you've seen that, since 2020, Odontoprev doubled its investment. And once again, mainly focused on technology. There are many reasons for that. The growth of digitization of processes, the number of robots in the company is much higher than previous years. Today, we have less employees compared to previous years. So technology is absolutely critical for the business. It's part of the Odontoprev DNA. So you should expect levels of approximately BRL 70 million, BRL 80 million a year. That's the amount of CapEx that we've been seeing.
About your first question about DLR and specifically for the SME plans. In fact, once again, that is a segment that highly interests us, it brings in the pricing power of the distribution channel. So Bradesco Dental brand accounts for over 80% of the amount and the flow of new customers into that profile.
And it has different behavior, in fact. It has an important relationship with the Bradesco organization, not only in the service overall, but -- or in dental, but many times connected to health plans and the bank relationship -- the relationship that the bank has with small entrepreneurs.
So we're very happy with the results we've had so far. And this addressable market has a very important strategic importance for the company.
Our next question is from Leandro Bastos from Citi.
I'd like to address inflation. So first of all in DLR, today, when you consider your cost per procedure, we know that inflation is everywhere and in medical products as well. So today, how much does the procedure cost increase compared to pre-pandemic levels? If it's already capturing higher inflation or if there's still something that will happen in that sense.
Because if the DLR comes back, I don't know if the impact of inflation of the cost, would that be a challenge moving forward? I'd like to hear something about that.
And your G&A, you have some agendas on productivity and you've been dropping as a percentage of revenues. But what do you see inflationary impact with the levers to offset those effects? That's it.
Thank you, Leandro. I'm going to start off with G&A. So there are a number of projects. And Pacheco mentioned the robots. So just to give you another number when you talked about structure. As soon as we've incorporated Odonto System with all their employees, we had almost 2,300 employees, 2,250, and now we have 1,750.
So considering all the synergy systems and having a well-done integration, and we have a good track record in acquisitions, around 11, 12 in its history. So using these new teams and taking advantage of what each of them have to offer. So we went to -- down to 1,750 in personnel.
Then you go into the efficiency topic that Pacheco already mentioned. About sales commission, you mentioned dropped a little. That has to do with the mix mainly, and I'll comment on that later. But what we are seeing is that retail isn't fully recovered in dental plan sales compared to pre-pandemic levels. So it's the only quarter that we dropped in members was in the second in 2020 because the stores were closed. But in relation to the sales percentage over revenues, it's mainly related to product mix and actually special terms or conditions.
And inflation, what you're seeing today is already a reality, and DLR is already considering our ability to price, about the negotiation with our dentist network. So as those levels have been normalized since the beginning of the year, that's already at the level in that wrestling, I'd say, that we have between the person who is hiring, the person who's being hired, that's already organized.
Pacheco, would you like to add?
Leandro mentioned something fundamental, which is understanding cost versus price that we've been seeing in recent years. The fact is that we had deflation, we had lower costs, and that translated into lower tickets.
As we just mentioned, the DLR of corporate has been going up, so the frequency is going up. And it's normal for that to come back. And that said, then we think about tickets. So the higher DLR of corporate in that transition of '22, '23, that's basic. So DLR in corporate is going -- already went back to historical records.
What's the next step? To see the balance of the contract. And we have one that's great for most of them in the short term. So it's natural to have the ticket going back to the normal levels. And that, for the next quarters, is once again a very important factor to determine revenues.
So once again, if the revenue variation was shy in the past years based on volume, it will no longer be, given the fact that we'll have the expectation of additional volumes, but also there's the pricing power, the traditional pricing power in the corporate segment, and it's natural that, that should come back with the frequency coming back to normal in using the benefits.
Let me go back to SG&A, Pacheco. You mentioned the robot and mentioned the structure. I think we could talk about the digitization process, where we have the virtual ID for the plan, issuing the payment orders or second payment orders, moving from the older building going into a new building still in the same city. So there are many things that we've been doing and we continue to do. And many of that's a result of technology, enabling us to get to those lower levels, right? It's not just one single thing. Many things are playing into that.
Next question is from Gustavo Miele from Goldman Sachs.
I have 2 quick questions on our side. So first of all, I'd like to go back to the SME discussion at a different angle, talking about net adds and not DLR.
So the performance stood out, and I'd like to understand if the source of that growth is because of the growth of the market, new customers? Or do you see any dynamics in market share gain that's relevant in that specific category?
Could you talk about the competition? Do you see that cross-selling in SME in the health -- with the health care-specific players, is that decreasing? so could you talk about the origin of that faster growth in the SME category? That would be great. That's the first question.
And the second point, exploring the Bradesco channel, and other points that stood out positively. Is that an increase of Bradesco's share in the company? So I'd like to understand the economics of that. How does the contribution margin compared to the rest of the portfolio?
You already mentioned DLR, but now I'd like to understand in SG&A. Do you see a way to dilute selling through that channel? Is it already at an efficient level? Those are the 2 questions on our side.
Gustavo, thank you very much for your question. I'm going to start off with the competitive environment, then I'll hand over to Pacheco. So about SMEs, you touched on a fundamental point. Just to give you the data. So the record in sales in SME sales was in 2014, and then we exceeded that record by 20% last year. And this year, we'll have interesting performance in SME as well.
So we have an interesting growth in SME and with the optimism that Pacheco mentioned 2 questions ago. And that -- what is that a result of? If we look at the customer base in SME that Bradesco has, this is huge. You can see information disclosed by them or even [ sell ].
So Bradesco has an important relationship because they give credit or they have payroll, they have the cards and private label. So we have an increasingly more integrated relationship with Bradesco. We have some meetings with the credit committee and also the sales organization at the insurance company, their insurance division and all the different verticals and insurance that they have together with the bank operation.
So I'd say today, the game is more harmonious and unified with more intelligence data on the table to make decisions and regional superintendents that's doing better than the other and so on. So it's a way for us to get to that final consumer or customer of Bradesco with all that information. And the results that we see from the past 2 years is that support from the Board members that we have here with us, and at a second level in operations and sales, stronger integration as well.
So we had record growth in historical SME. And now this year, we're going to have a very interesting first half. I think I answered your question about net adds and Bradesco's position in that.
And in the competitive environment, we heard many times, oh no, corporate, it's hard to compete with insurers that have health plans. But I'd like to give you some data here. And we always like to say that we're used to that competition. It's not -- from now, it got tighter with all the IPOs and all of that capital that came in. But we already had that competitive environment forever. The players names changed, but the environment has existed for a while.
And what we see is that the real data in the past 20 quarters in the corporate segment, we were positive in 18 of the last 20 quarters. So once again, that's not new for us in the competitive environment. It's a challenge. And it leads us to consider innovative solutions, new product design and all the different things that we've been doing. But the concrete data is that 18 quarters of growth.
And obviously, there's tighter competition, and you've seen a corporate ticket in the past with a lot of pressure. But now what do we see moving forward? We believe that we'll see how the dynamic is moving, moving forward. So we've had the competition that were merged or acquired, and that's a lot of work. They're large, important, relevant operations even for Brazil and the market for everyone. And it's a dynamic and challenge and cultural aspects.
And a lot of the growth that was taking place, right? We never stopped growing, except for the second quarter '20. And individuals, we are stronger. And what was happening was the dilution because they were buying many health care operators and being very aggressive in that.
And now I believe that they have a huge task ahead of them. First, decrease because there is acquisitions of 18 or 16 companies. And now to integrate that brings in the dynamic. And we believe that there will be a market where we can't forget that there will be growth from acquisitions and strong growth. And it's a game we know how to play. We've been in the market for 35 years doing that. And we see that with good eyes.
So in the past 20, 18 quarters that have been positive for us, I believe that speaks for itself.
Pacheco?
Yes, Gustavo was mentioning an important aspect about lower acquisition costs when we talk -- work with Bradesco Dental and the Bradesco channel, and that's a fact. And particularly in the individual plans segment, as we have the higher commissions, it's important to note that the company is changing its sales profile.
15 years ago, it was practically exclusive for retailers, and now it's balanced out pretty much 50-50 in retail channels and bank channels. So the conclusion is direct. The higher banking lowers the levels of commissions by 1/3 in sales of individual plans, and that's where we have most of the acquisition cost.
So higher [ bank-onization ] that already exists in SME plans, but doesn't exist in the individual plants, but it's halfway there, that really lowers the levels from 30% to 40% down to 10%, 15%, which would be more normal that we see, not only in the great broker segment but also the banks, the partners of the company and shareholders of the company.
Gustavo, I'd like to add something else. When I talk about the structure, of SG&A, just to give you a metric, we had 3.5 members per employee. Now we have 4.8. So that's growth of 40%. And that shows that, in our internal exercise of looking for that efficiency all the time. So that's also important data to show that there was an effort, and yes, DLR did drop during the pandemic. Now it's coming back. But we're always working on looking for more efficiency.
Next question is from Gustavo Tiseo from Bank of America.
We also have 2 questions on our side. First of all, you've mentioned this a lot already, but we'd like to understand the timing on price increases in corporate. When you talk to them, to have that logic, that they're going to look back to the last 12 months and then a drop in the short term, but with a higher calculation for next year, or given that DLR is already back to 50%, does it make sense to continue to look at a ticket that's going to increase?
And the second one is about Odonto System. Based on the individual plans, you've been developing a great strategy. So I'd like to understand if that is a movement to decrease churn. So someone that was going -- that was in a higher ticket going down to a lower ticket because you rolled it out to other Odonto System regions? Or given the difference in target audience, that doesn't happen in there with the other individual plans?
Okay, Gustavo, thank you for your question. The first one, I'll start of Odonto System. You have -- the rollout is still -- we're still working on that, nothing new there. We're still enrolling dentists. And it's like you mentioned, it's a different product. It has excellent quality, but it's the first product to access different than the Odontoprev brand, which is more premium. And for that, we have to continue to build a different network, right?
And after that, like the chicken and the egg. So you have to have a customer that's going to use it, but they'll use it if they have the network. And that's in parallel to that, and it's being done all over Brazil slowly.
And by winning new customers, that will enable us not only to have these entry products and then we can upgrade afterwards, like you mentioned, to robust products with methodology of scheduling and control that we have at Odonto -- that we have that's different in Odonto System.
What was your first question?
Price increases.
As Pacheco mentioned. In the pandemic, DLR was very low in the beginning. And I'm talking about medical plans mainly even, because everything was closed down, right? And then in dental. So medical plans would come back. Even if things weren't going to be done, people would do them later, so that's very important. 15% of what we pay of DLR can be postponed.
But an urgency or emergency, if you had an accident and you broke you tooth, it has to be treated immediately. Orthodontics, you get maintenance once a month. If they stopped for 4 months, they're not going to do that 4 times in 1 single month, right? They're not going to -- that won't be recovered.
So we don't have like a time -- it's not a time bomb. So it stopped because of the pandemic, and I need a prosthetic, I'm going to get that in 4 months from now. That would happen in Medical, right? But for us, that doesn't happen. And so when we had very low DLR in dental, obviously, the companies took advantage of that in negotiating the tickets, right? They took advantage of that because their revenues were affected given the economy in general.
And as -- and us and the health plans we're benefiting from lower DLR. But now that's over with. And as you can see in the frequency and the frequency in health care, it is back to normal. So moving forward, using the pandemic to negotiate differentiated rates is over because now things are back to normal.
Pacheco?
Yes, that's the idea. Gustavo brought in an interesting point about the ticket. If it was negative in 2020, in beginning of 2021, now in the past 2 quarters, you've seen positive ticket. And that's the trend. It reflects the use in 12 months and it reflects a higher DLR in corporate. So the equation is direct. So higher in DLR. Well, actually, what we're going to see in corporate is we're going to see a ticket that doesn't go down.
[Operator Instructions] We have no further questions. The Q&A session is now over. I'd like to hand over to Pacheco for his final comments.
I would like to thank everyone for participating in one of our other events with the first call in the health care segment. Have a great day.
Thank you. Good morning to you all.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]