Odontoprev SA

BOVESPA:ODPV3

Earnings Call Transcript 2023-Q2

[Stella Hong, executive]

Good morning, ladies and gentlemen, and thank you for holding. Welcome to the Odontoprev conference call to discuss the earnings of the second quarter 2023. I'm Stella Hong, IR manager. And today, we have with us Mr. Rodrigo Bacellar, our CEO; and José Roberto Pacheco, CFO; and IR Officer of Odontoprev.

This webcast is being recorded and streamed online. The link is available at the company IR website at ri.odontoprev.com.br. With respect to presentation is also available on the company's YouTube channel.

This video conference has simultaneous translation. [Operator Instructions] Next, with the Q&A session. [Operator Instructions]

It's important to note that submitting questions is only allowed for participants on the webcast platform. The aforementioned instructions are also available in the chat as well as the presentation of this webcast.

Before proceeding, let us mention that any statements made during this call relating to the Odontoprev business perspectives, projections, operating and financial goals are based on the beliefs and assumptions of company management and as well as 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 José Roberto Pacheco to begin his presentation. Pacheco, you may begin.

[Jose Robert Pacheco, executive]

Hello. Good morning, everyone. Welcome to our conference call to present the results of the second quarter as well as the first half of 2023. We continue to add value, contributing even more with a new product mix, expanding the frontiers of development and sales of the dental plans market, therefore, capturing margins that are higher than the competition and delivering unique results to our shareholders in over 30 countries.

So now I'll begin the presentation. As always, we show the ANS information, and the comparison in the past 10 years on the left side that medical plans are the same level of members shown in 2014. And having a lot of difficulty, and I will mention that during our presentation, given their cost structure and giving the structural inflation seen here in Brazil and outside Brazil. And on the other hand, Odontoprev has the privilege, as you can see on the right side of the slide relating to dental plans, where the plans grow from 24 million members since 2016. Over 10 million new members in the past decade.

In 2023, it's no different. More than 1 billion members have joined dental plans for the -- in this first half of the year compared to a little over 350,000 in medical plans.

On our next slide, we can see the evolution of the line of the company, the revenues and annual variation since 2020, the first year of the pandemic, where we granted discounts, especially for corporate customers, so the revenues were one-off lower than the previous year. And then we went over to a growth of 4%, 2021, 7% 2022. And now more than 10% in this -- for six months of '23.

On our next slide, we can see the competitive market and the differentials of our company. You can see that at Odontoprev, we've exceeded BRL 2 billion in net revenue, annual, with the corporate BRL 1 billion at the annual rate closely followed by the segment of SME and individual plans at approximately BRL 900 million.

The companies have lower revenue levels, and they are still trying to reach their first BRL 1 billion in sales in dental plans.

On our next slide, we have the net adds, so the new customers. As always, in the first quarter, historically, we have lower sales activities, lower commercial activities, lower growth in the industry. And that happens at Odontoprev as well. You can see that after that, we go into over 100 -- more than 150,000 new members in this quarter with highlight to the last couple of months, May and June.

On our next slide, this is exclusively dedicated to Bradesco Dental brand. There's -- here, we have three years of the evolution of the Bradesco Dental brand by winning over new customers in all segments of our portfolios. In the past 12 months, over 300,000 new customers that came through their organization through the Bradesco Dental brand. So in the past three years, approximately 1 million new members connecting with Odontoprev through the Bradesco Dental brand in all business segments from the major corporates and also SMEs 350,000 new members and individual plans with approximately 100,000 new members that are part of our portfolio in the past the 3 years.

On the next slide, we have the company's strategy. Here, we can see the past 10 years, where basically, the company is a pioneer in diversifying its growth, increasing its base of distribution in addition to the traditional products for the corporate market, where we have a current average ticket of BRL 17. And as we've mentioned, over BRL 1 billion in annual revenues.

For a new segment, a recent segment that has been growing 14% per year in the past 10 years with an average ticket that's pretty much double the corporate market. And in that case, I'm talking about the SME and individual plans. That currently accounts for BRL 900 million in revenues in LTM.

In this segment alone, the noncorporate segment already exceeds the annual revenues of any competitor of the company in the dental plan market.

On the next slide, based on the same 10-year outlook, we can see the beauty of strategy because the new products have a pricing power. In their essence, they have a more appealing DLR. Therefore, the gross profit that the company has been able to originate with these customers has grown 16% per year in the past 10 years. You can see that most of the consolidated gross profit of Odontoprev is coming from SMEs and individual plans. And that strategy has been bringing on excellent fruits for us.

On our next slide, we can see the dental care ratio. So here, this -- we have pre-2019 and the period post-2020. So you can see that the company, since its IPO in 2016, it historically presented a DLR close to 45%. In the past 3.5 years, almost a straight line at a new more competitive level of 40% per year, and that's mainly a result of the new products that have presented lower and more appealing DLR and therefore, better than the traditional corporate market. We'll see that on the next slide.

Here, we're comparing the historical average in the three business segments, starting off on the left with the corporate market where we traditionally have DLR greater than 50%. The level since 2014, 2015 was 52%, and now it's becoming more stable in the past, in the LTM at 50% with no major changes. We do not expect any relevant change to that in corporate DLR.

But in the middle, when we see the DLR of SMEs, it's more competitive than the historical average, under 30% compared to the traditional one that, which was 41%.

And finally, in individual plans, where historically, the dental care ratio is lower, and in one-off cases, we had reversals, for instance, in the first half, BRL 3 million. So we'll have some residual of BRL 3 million of provisions to be reversed, and that has led to lower levels of the dental care ratio, as you can see, 24 here that ends in the last 12 months, ending in June.

On this slide, we have bad debt. So bad debt in the company portfolio pretty much does not exist. In corporate customers, it's very low in small customers, and it's more expressive and relevant in the individual plans, specifically in the nonbanked channels, meaning retail channels and particularly the department stores.

I'd like to say and highlight that we had a different quarter, so to speak, an outlier that was fully resolved in the first month of the third quarter, where we've seen bad debt greater than the normal of 2.7% revenues. So ending at 2.5% of the revenues. So the company is comfortable in saying that we have a more competitive bad debt pattern that, and that's also lower than previous years. That was 4% or 5% of revenues regarding the provision for bad debt.

So this quarter, in the corporate segment, we have some one-off movements and better outliers and have been resolved in the following months, and we expect to go back to the pattern of 2.5% during the next quarters.

Here we have the evolution since our IPO in 2006. So 17 years of performance of not only the EBITDA margin, but also the dental care ratio. So here, we can clearly see new levels, specifically after 2020, given the mix effect by including new channels of distribution with more value-added products, higher average ticket compared to the industry, which is leading to returns and margins that are very hard to be replicated. So in essence, we've observed very predictable dental loss ratio of approximately 40%, pretty much without many ups and downs since in 2019, and that's been very important for increasing the margin from 24% to 25% to now having 30% per year, which would probably be one of the most competitive margins in this type of activity in the health care industry overall and even considering other countries.

This is the evolution of the company [ EBITDA ]. So just to highlight, the CAGR of 17% since the IPO, particularly since the year of 2019, it's been two digits, 12% per year, and that shows how beautiful our strategy is in value innovation.

On our next slide, the same idea, showing an even higher growth and this time, in net income. So with a CAGR of 22%. And more recently, since 2019, it has been 16% increase. Once again, very hard to be replicated by our peers in this segment.

Now moving on towards the end of our presentation. Here, we have cash flow. We ended last year at approximately BRL 800 million net cash. And you know that the company is not -- does not have any debt. And CapEx of this -- the company in the first half of the year was BRL 49 million. We have an annualized rhythm of BRL 80 million, BRL 85 million per year. We do not expect to increase the level of investments in 2024. Actually, we expect to maintain that amount in investment, and most of it is dedicated to technology differentials. That's the -- where we focus the most. We're at the peak of those investments, and they will start to mature next year.

And to add here, the company ends the first half of the year with net cash close to BRL 1 billion. And you can see that BRL 989 million the position at the end of June.

In June, we published the annual ESG report based on the GRI guidelines. So I would like to invite you to view our report. It's -- you can see that on our Investor Relations website with a lot of information in a classic information quantitative information. But overall, the qualitative information about our business model and the stakeholders for the company.

On the last slide, we have our shareholder framework. It's very global, approximately 30 countries with investors and shareholders.

Here, I'd like to highlight North America with over half of the free float shares.

I'd like to thank everyone for your participation and yet again, another conference call. So we have the information for 2Q '23 and the first 6 months of '23. So now we're open for a Q&A session. Thank you.

[Stella Hong, executive]

[Operator Instructions] First question is from Estela Strano from JPMorgan.

[Estela Strano, analyst]

In this quarter, we saw an increase in expenses, especially when we look at G&A. Is that a one-off expense or something typical seasonal for this quarter? Or is it more structural? And the second question is if you can give us an update for the sales incentives in the bancassurance channel.

[Jose Robert Pacheco, executive]

Estela, I'll comment on the first part of your question about G&A. And then a little bit about bancassurance and then I'll hand over to Rodrigo about the strategy, especially in the Bradesco Dental brand.

Nothing structural in G&A, quite on the contrary. We've been investing in technology, decreasing the number of employees at the company and having lower cost in location with long-term rentals here with our headquarters in Alphaville, robotizing processes. We continue to do that where we've had a higher number of robots and [ EPIs ] . So we've been diluting G&A for many years. And particularly in this quarter, there are some one-off initiatives that brought this level to a level that's higher than the average that we've seen in previous periods. So we expect dilution time after time, quarter after quarter. So I am also going to mention the selling expense that's been benefited by the bancarization of the portfolio and more competitive costs, especially in the individual plans. So the company continues in the effort to dilute SG&A.

You also mentioned bancassurance. In fact, we had some specific slides for that. So 1 million new members in the last 3 years in all the three business segments. So it's a privilege for the company to have this channel and this type of exclusive access, market leadership and customer base that's very clear with the Bradesco organization in the distribution channels with the insurance -- channel insurance platform and even the actual bank distributing that. Rodrigo, would you like to add?

[Rodrigo Bacellar, executive]

Well, you were very thorough. So where we have the slide with Bradesco Dental, adding more than 300,000 and then 361 members in the past 6 months and then 290. So in Bradesco Dental alone, 330,000 members per year on average, whereas Banco do Brazil. So we're determining new strategies, new products to see how we can fit into the different segments. So in fact, the bancassurance channel has been very important to us, not just that, Estela, you mentioned that channel, but Odontoprev has also been performing well in SME. In the corporate segment, our Odontoprev brand is very strong and giving us a great year of 2023. Just wanted to mention that. Thank you for your question.

[Stella Hong, executive]

Our next question is from Arthur Alves.

[Unknown Analyst]

Two questions on our side. First of all, the DLR of individual plans, and we saw that in that quarter. So how can we expect the other reversals you saw them, some this quarter? Are they at the limit? Should we expect a little more, wait a little more? And a follow-up about the Bradesco channel in the individual segment. It seems like there's a slowdown in the first quarter, and we saw negative results in net adds in the second quarter. So I'd like to see the sales in that customer base and how you see that evolving?

[Jose Robert Pacheco, executive]

Thank you for the question. So about DLR in individual plans. In fact, it has been -- it's behaving under that historical level of 30%. And when we do the math, we've seen DLR at the levels of 25%, and that's a good benchmark that we have moving forward.

The reversals are about the open enrollment plans that were created in the past that had adverse selection, the corrections were made. So the provisions are being reversed on a quarterly basis. We still have a residual balance, approximately BRL 3 million to BRL 4 million in the third quarter. We don't see a material figure of reversing the individual plans after that. So that's about the DLR of individual plans. Rodrigo?

[Rodrigo Bacellar, executive]

Arturo, Bradesco channel is still strong like we showed on the slide. I'd like to call your attention to the beauty of our model. We have many distribution channels and many different brands. We have e-commerce. We have a white label partnership with health care operators and retailers. And actually, retailers have been performing better this year than before. We have the bank channel with Bradesco and Banco do Brazil. We have our own sales force, partnership of over 30 years with market brokers. And we have products for individuals, SMEs and corporates. So that engine that gives us setup to benefit from all of that, and you can have a channel, a segment, a sales force that's performing a little under or not than it was but the important thing is that, in general, we're always ready to explore all those channel segments and products. So we're carefully optimistic about this. And when we have some tailwind to help us even better, you'll see all these channels and segments performing even better. That's the beauty of our model as we have all these multiple channels, products and segments to help us out.

[Unknown Analyst]

Congratulations on your results.

[Stella Hong, executive]

Next question is from Renan Prata from Citi.

[Renan Prata, analyst]

I have two quick questions. One is still individual plans. I'm not sure, it's not very clear to me. So today, the DLR we see that recurring 25%, 26%. Is that the new level? I understand that you do have a mix in individual plans and bancorization and ticket and lower DLR, but I'd like to know the balance in that line.

And the second is a follow-up about bad debt. So is it going back to historical levels now? Or is that debt going to go back to the historical levels in 2023? Those are my questions.

[Jose Robert Pacheco, executive]

Renan, thank you for your comments. Starting off with bad debt, 7% higher as a one-off compared to 2.4%, 2.5% that we were seeing in previous quarters. So what we mentioned is that corporate brought up our basis points. It's a one-off though. So we do expect that to settle to the levels that we mentioned before, 2.4%, definitely under 2.5%, so those levels are extremely efficient and showing the beauty of the bank distribution that has a competitive edge in credit rating in, for higher risk customers, making bancassurance an element of our strategy that's very special, compared to what the competition can do.

The other part about your question is about DLR and individual plans. So yes, it remains. It's being adjusted at 25%, 26%, and that's what we should expect, in having bancarization of individual plans. Not to mention that most of the members in individual plans have not yet been originated in bank channels but instead in other channels, and that still represents the greater part of the 1 million customers in individual plans, so in time. And considering that equation in the power of placement that the banks have. concerning individual plans. It's reasonable to expect that as a result of the pricing and the quality of customers, specifically in the bank channels, we should have DLR ratio -- DLR under the traditional 30% that we had where individual plans in most part, were originated in nonbank channels. So that's the beauty of strategy that's been revealing itself in more competitive DLR rates compared to the industry. That's what we've been observing and following closely.

[Stella Hong, executive]

The next question is from Pedro Caravina from Credit Suisse.

[Pedro Caravina, analyst]

I have two, So about demand, different than other quarters, there was the higher demand from other channels. considering the sales that were not bradesco dental especially in corporate for other brands. So I'd like to understand which brands performed better? Where the demand came from and what we should expect for the second quarter -- excuse me, second half? And even though that growth is very much welcome, it brings in a negative mix for the P&L. I'd like to understand the slowdown in the Bradesco channel, even though there's relevant growth. Could that be connected to the slowdown in the Bradesco health care channel? We see Bradesco transferring on price increases in the industry and prioritizing that, even though they're losing members could that impact Odontoprev and they're doing that much higher than the competition.

[Rodrigo Bacellar, executive]

Thank you for your questions. Pedro. I think it's great to talk about the commercial strategy. So the first point that I'd like to mention is that we do not have a strategy in privileging one channel over the other. As I mentioned before, we have over 800 products that are registered with the ANS. We operate in individuals, SMEs and corporate channels. We operate with the Bradesco Dental, BB Dental, Mogidonto, Odontoprev, Previa, Odonto System brands. And as a distribution channel for these over 800 products in these channels and I mentioned, we have our own sales force, we have e-commerce, we have brokers, bancassurance so -- and white label. It's not like we're saying, "Oh, let's expedite this channel over the other." But obviously, we do have campaigns when we see there's an opportunity of meeting a specific market need, we can have a campaign, but we do have framework set up be it with people or technology to also always increase the potential of all products, channels and segments.

What we can see, not just in Bradesco Dental, could be any of the channels, in retailers, it would be the same like when it's Mother's Day, for instance, or winter -- new winter collection, things like that. We always have the infrastructure set up for anything that can come up in each segment. And that goes with certain moments. So if there are moments that we campaign here, these channels also have time to privilege A or B. So we believe that, that's the beauty of our business model is being present in all of these channels and segments and offering dental plans that are excellent already chosen as top of mind in HR as the best provider of dental services. Dental plan services in Brazil. So we're mentioning that infrastructure that's ready to serve you with their ability of focusing more or less on that product at a given time.

So I don't want you to think that we're privileging one over the other. We have systems, processes and people to service that business development.

I think I just answered both of your questions. One was more specific for Bradesco but it's not just Bradesco. There's a partnership with Unimed in Belo Horizonte. And we have retailers so we're ready to service everyone. Thank you for your question.

[Stella Hong, executive]

The next question is from Emerson Vieira from Goldman Sachs.

[Emerson Vieira, analyst]

My first one is about SME product. So it's a follow-up on one of the other analyst questions about the slowdown. Does that mean that there's a more challenging competitive environment or even an opportunity or less growth than you envisioned in 2022. I remember that during last year, Bradesco was approximately 50,000 more members per quarter. So that slowed down, is it structural? Do you expect that you would sell less in this channel in the upcoming quarters? That's the first question.

And also, based on SME, we saw a cost dynamic [ per life ] . That's a bit stronger than in the other products. So year-over-year, the cost per light per member on and SMEs grew 12%, that was higher than individual and the corporate. So when we look at the quarterly comparison, we saw a growth that was a bit higher than what they suggest. So in 2019, we saw quarter-over-quarter growth of 39% in SME and now we saw something like 20%.

So I'd like to understand that dynamic of cost per member in SME. Is it a result of the mix? Or is there a component of new cohorts, maybe contributing towards higher frequency in use. Could you explain that further in SMEs? That would be interesting.

[Rodrigo Bacellar, executive]

Thank you, Emerson I'll address the first one. You mentioned slowdown in SME. In SME, we are starting to operate that segment in Brazil, so that's 80% of the GDP of all countries in this country, and that's what actually moves the industry in every country. We still have a low market share SME, something like 10%, 13%, of share in SME compared to 90% in the corporate segment. So the bigger companies already offer dental plans for many, many years. So in SME, we're still in the beginning. We have a lot to do. So Bradesco went on that slowdown. But on the other hand, SME -- Odontoprev SME grew a lot in the first quarter and second quarter. So definitely, it's a segment that we started to happen now, and we still have a lot to do, and we'll develop a lot. So we're very optimistic about SME.

[Jose Robert Pacheco, executive]

Emerson, about DLR and SMEs, It's structurally and intentionally more appealing than corporate. It's a risk compared to corporate. So we modeled price and we've been capturing value faster in SME than in corporate. And even with year-over-year increase, it's still extremely appealing. Nothing new there and even it was sold in previous periods. So SME DLR even where the bank channel is bigger and representing more people, there's a level under 30% highlight to the portfolio. So that's what we expect. That's what's being delivered.

The increase in costs was similar to the increase in revenue, 0 impact. So within expected, absolutely normal. And more importantly, the DLR metrics are absolutely within expected SMEs. And once again, in essence, increasing the company's return.

So as Rodrigo mentioned, it's a business segment that has higher potential incorporate, not explored enough yet. So we have the huge competitive edge of having a channel and a brand that has access to SMEs all over Brazil. So we're very positive about that business segment. And we don't see anything new in the cost structure or the DLR structure.

[Stella Hong, executive]

Next question is from Caio Moscardini from Santander.

[Caio Moscardini, analyst]

I'd like to know the DLR dynamics for July, beginning of August, if you can give us an idea, that would help especially year-over-year. And if I may, I'd like to explore the admin expenses and specifically understanding third-party services at 40% year-over-year, and rental that went up 33% year-over-year. What actually happened here? Is it one-off for the quarter? Are those the levels that will continue moving forward? And other question, if I may, if you can quantify the one-off impact of bad debt in the corporate segment.

[Jose Robert Pacheco, executive]

Thank you, Caio, for your questions. Let's start off with a second. So bad debt without the corporate impact, it would have been at 2.3%, 2.4%, which is normal. That's why we mentioned it was one-off 2.7%. The 0.3% came from corporate, and that has already been resolved, as we mentioned. when we close the quarter.

Second point is admin expenses. We're in a cycle of investments that are dedicated to technology, which includes vendors and partnerships, with excellent agencies or consulting firms that are part of our project. So it's not structural. It's one-off, and that justified the higher admin expenses in the second quarter.

Lastly, about DLR, we're very constructive about DLR for the year. It's not the first time that I'm going to mention. I'll mention again that this possibility of having DLR lower and better than the previous year is very high. So we're not changing our vision on that. The company has been a winner in bringing in channels that have lower DLR for its portfolio, and that's been the tone for the first month where DLR was lower. So we're still in the beginning of the third quarter. No new facts, quite on the contrary. So we're very confident about the pattern of the cost compared to services and specifically the cost of services.

And there are many reasons for the company has been able to develop. Many different networks of service providers, simultaneously and servicing different markets and different customer profiles all over Brazil and the control standards and audit through technological processes has shown to be a differential. We've been focusing more on digital processes, and we acquired a [ dental pack ] that helps us in electronic processes. So we're at a level of quality and digital audit. That's very hard to be replicated by the market, and that's enabled us to have that type of level of DLRs. So for 3.5 years since the end of 2019, it's been very predictable and approximately 40%. And that's the reason why we have this current exercise.

So nothing new there, and I believe that a product mix of lower DLR, therefore, higher returns and different returns, segmentation of the network of providers and the standards of digital control all moving towards a positive way gives us good fundamentals with the basis for efficient DLR, much different than our peers can offer.

[Caio Moscardini, analyst]

So still following up on third-party services. Was there a one-off project that you had or will have in the third quarter? Or Will that drag on for some other quarters at higher levels?

[Jose Robert Pacheco, executive]

The biggest company project is a 2-year project, which is implementing a new ERP. It started in 2021, and it doesn't end in the short term. So we have some partners in projects that will continue until the beginning of next year.

[Stella Hong, executive]

Next question is Rafael Une from Safra.

[Rafael Une, analyst]

Can you hear me?

[Stella Hong, executive]

Yes.

[Rafael Une, analyst]

So first of all, congratulations on your results. We have two questions on our side. You mentioned the actuarial methodology in the IBNR, could you mention the impact moving forward?

And the second question, there's a part of cash that has been allocated as bank to maturity, it's significant compared to the previous quarters. So I'd like to understand that a little better. Is that related to dividend payout and return for shareholders? What's the expectation with that?

[Jose Robert Pacheco, executive]

Rafael, about IBNR, we have a new model, proprietary model, actuarial model developed by the internal team at the company. And in the second half, it enabled the IBNR for the company, bringing to a similar level that we see in the market. So now that gain was specific in the second quarter and won't be repeated in the upcoming quarters.

About the financial investments, we basically have two blocks of investments, short term and long term. All long-term investments are dedicated to government bonds, that are marked to the curve. So they will be taken to maturity. We have investments in '24 up to 2030. So those investments will guarantee an actual interest rate that's significant, much higher than IPCA, which is the indicate the reference -- indicated in most contracts of more than 4% on average with a duration of approximately 3, 3.5 years. So that's our characteristic.

The other part of the portfolio is dedicated to the short term. And that one is connected to the Brazilian interest rate the Selic and focus on short term investments. So we have a negative need for working capital. We have prepaid contracts and postpaid costs, so the company doesn't need working capital. So the main purpose of the short-term cash is, as you mentioned, paying dividends. That's why we still have very short-term amount available so we can deliberate whenever we need. Thank you Rafael.

[Stella Hong, executive]

We have no further questions. So any session is now over. I'd like to hand over to Pacheco for his final remarks.

[Jose Robert Pacheco, executive]

I would like to thank everyone for attending yet another conference call for the company, and this is for the second quarter and for 6 months of 2023. We hope to see you soon. Have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]