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Good morning, ladies and gentlemen. Welcome to the OdontoPrev conference call to discuss the earnings of the third quarter and first 9 months of 2018. 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 the website any questions to OdontoPrev, which will be answered during the Q&A session. Before we continue, we would like to mention that any statements made during the call relating to the OdontoPrev business perspective, 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. The 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 Mr. José Roberto Pacheco, IR Officer of OdontoPrev, who will begin the presentation. Mr. Pacheco, you may begin your presentation.
Hello, good morning, everyone. Welcome, and thank you very much for your interest and trust in OdontoPrev. I would like to thank you for attending the conference -- company conference call to present the results of the third quarter and first 9 months of 2018. Inaugurating these cycle to promote the healthcare industry in the Brazilian capital's market.
Now moving on to the presentation, on Slide 3, we would like to highlight the growth of 14.8% of net revenues in the quarter. Our best performance since 2Q -- since 2012, reiterating OdontoPrev's strategic differentials by accelerating the revenues for SMEs and individual plans.
On Slide 4, we show the evolution of the noncorporate segments with an increase of 75% in SME and 120% in individual plans when compared to 2014, meaning the annual growth rates are much higher than the industry.
On the next slide, Slide 5, we would like to highlight the unique OdontoPrev positioning relating to the leadership in developing and expanding noncorporate segments of individual plans and SME as they present a higher ticket, less competition, expediting growth compared to the market and differentiated contribution margins.
Additionally, reiterating our strategy, the noncorporate products present significant barriers to entry, such as scale and distribution quality. Customer credit risk for the smaller individual customers and [risk] selection and management technology, which are clear differentials in the OdontoPrev business model.
Now moving on to Slide 6. We present the historical record of BRL 24 million in incremental revenues in the individual plans in the quarter. Noteworthy to mention, the corporate segment as well with the best performance since 2014 with over BRL 70 million in incremental revenues in 3Q '18.
It's worth noting, as you would see on the next slide, Slide 7, that the corporate segment presented a growth of 7.2% in the quarterly revenue, which we hadn't seen since 2015, particularly 1Q '15.
Now moving onto Slide 8. We would like to highlight the 13% growth of the average ticket of noncorporate, achieving BRL 33, compared to BRL 29 one year ago. On Slide 9, we can see the profile evolution of individual plans, which in 2018 now this year are now balanced out between retail and bank channels, meaning we have a higher power for pricing and lower commercialization expenses and bad -- and more appealing bad debt, increasing the profitability of the consolidated portfolio.
Now moving on to Slide 10 and the members analysis. On Slide 10, you can see data from the ANS since 2012 with the continuous growth of dental plans, even during the years of the recession compared to the stagnation of the number of members in health insurance plans, which is currently lower than the health insurance market plans 6 years ago in terms of beneficiaries.
On the next slide, Slide 11, we present the net additions in 3Q '18 originated in all segments with a total increment of 711,000 members where 77,000 are organic and 634,000 are from Odonto System.
On Slide 12, we highlight the organic net additions of 256,000 members in the past 12 months, the best performance since 3Q '15.
Now moving onto Slide 13, we present the recovery of the corporate segment, wherein 3Q '18, we had a net addition of 313,000 members, where 25,000 are organic and 288,000 from Odonto System.
On the next slide, Slide 14, we would like to highlight the lowest dental loss ratio -- annual dental loss ratio since 2010 of 44.3% of revenues as a result of the growing share of higher value-added products in the revenue composition with competitive costs.
Moving on to cash generation. According to Slide 15, we see an adjusted EBITDA of BRL 302 million, 17.3% higher in the first 9 months of 2017 with the margin increase to 26.1%. Particularly in the quarter, we achieved BRL 102 million with an EBITDA margin increase to 24.6% and growth of 25% year-over-year.
As we can see on Slide 16, we have ended the quarter with a cash flow of BRL 430 million after the financial liquidation of Odonto System, which took place in August.
Odonto System, as you can see on the next slide, Slide 17, adds a new business model at a multiple of 9x of the EBITDA for 2017. OdontoPrev added 634,000 members to our base, revenues of BRL 17.3 million in the months of August and September. Average ticket of BRL 14.7 and dental loss ratio of 33.5%, even lower than the OdontoPrev levels. The EBITDA for the August, September bimester was BRL 4 million with an EBITDA margin of 23.4% higher than that in 2017.
On Slide 18, we would once again like to highlight the growth in number of shareholders totaling almost 8,500, almost twofold compared to September 2017. The company's investor base, as you can see on our last Slide 19, remains globalized with the highlight to the 94% of free flow with foreign control.
Before moving on to the Q&A session, I would like to invite all of you to take part in the OdontoPrev Day, which will take place on December 4 at company headquarters. Stay tuned for further information. Once again, I would like to thank you all for your interest and trust in OdontoPrev. And now, I 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 Mr. Thiago Macruz from ItaĂş BBA.
I have 2 questions. The first one in relation to Odonto System. You mentioned a while ago that the individual plan business model is different than what you have for OdontoPrev in the southeast. So I'd like to know how that's working. So exchanging information, the mindset of Odonto System, what they do in other regions to the southeast? So what you've been doing so that make us understand better that part of the business -- different business model? How it will add to yours? And if there's a discrepancy in the dental loss ratio between OdontoPrev and Odonto System per segment for corporate, individual plans and SMEs? So if you can give us some flavor on that to quantify that, that would be great.
Thiago, this is Rodrigo speaking. Thank you for your question. Actually, we signed and liquidated the operation on August 7. So it's been a little bit over 2 months of integration. So it's still very recent. What we found so far are things that really excite us. And we're very satisfied to see the quality of the Odonto System operation, but it's still too early for us to talk about how we're going to roll out that into other regions. So we're, in fact, proving this business model that they have, having an average ticket at BRL 14.7, BRL 15 and we're still having a lot of meetings, talking about things and understanding the department. So it's still early for us to go into depth about how we're going to roll this out. In relation to the schedule, we're really going into that, which is the shareholder structure integration. And the rolling out to other regions is part of our operating schedule. So we're having weekly multidisciplinary team meetings, a lot of travel and exchanging information and knowledge. But still, it's just pretty much 2 months since we executed the agreement. So it's still early for us to anticipate or talk about the future of migrating that business model into other areas of Brazil.
Okay, perfect. And how about the dental loss ratio between the different segments and Odonto System and OdontoPrev? Can you give us some flavor on that?
Thiago, this is Pacheco speaking. For the second quarter -- second half, sorry, of 2018, it's going to be time for understanding the Odonto System model in depth. We hope to bring in more flavor in 2019 about this new model. So without a doubt, it's a different type of acquisition compared to the many others that were done by OdontoPrev. So it's a different business model with a very appealing loss ratio. It's a regional company and a model that's well -- could be well applied to many states. And given the domestic feature of OdontoPrev, that's a very relevant potential for us. So it's going to be a topic of constant communication between us and the market. So we're very satisfied with the deal being concluded in the quarter. And then we're going to give you, into the future, more flavor about how we're going to develop this new model, this new platform, which without a doubt, brings in a lot of optimism for future quarters.
Next question is from Joseph Giordano from JPMorgan.
The first of my questions has to do with the trend in volume. We see an improvement, maybe what we were expecting, but we can still see positive aspects in 2 consecutive quarters. So I'd like to know how you're doing in the market? If the net member -- net addition of members is coming in from new contracts? Meaning, you're capturing new customers or if it's about the turnover in the contracts? So you see more volume because of the contracts? My second question is about the migration of the noncorporate and individual. So the bank channel is getting -- was getting more space, that was expected and now it's half and half. So I'd like to know the difference in the duration of that product. So if you're retaining them more time on the base or not?
Joseph, thank you for your question. Relating to volume, I think that one -- as Pacheco mentioned in the opening remarks, that's one of the beauties of OdontoPrev's strategy. We have a diversified portfolio in the segments. So we operate in Corporate, we operate in SME and individual plans. And we also have diversified channels. So we have operations with brokers, they're great partners of ours, the bank channels. We have partnerships with retailers. So I think that's the beauty of our model, as Pacheco was saying in the opening remarks, is that we can have a ready-to-use platform that can benefit from movements. So it could be movements that adjust and align all these channels and segments at the same moment. It could be a platform that when one channel or one segment isn't doing well, the others are. So I think that what we envisioned based on what's been happening in the past quarters in growing the members is that we're leaving that awful moment behind of strong economic retraction and trying to envision better events. So an indicator that we always like to mention, which is contract movement during months in a row, we were seeing companies terminating more employees than contracting employees or hiring employees, and now in the past 5 months, we've seen a trend where that is turning back around. So there is an improvement and 177,000 positions in September, another 50,000, 60,000 job positions opening up in August. So when you see the segments diversification, where we operate and reaching out to them through the right channels with the technology behind that enabling you to bring in efficiency and sale simplification and adequate or suitable products for all these different segments. When we have all that and we have recovering signs in the economy, we can see that not only these different segments through different channels that they're positively responding to all that. So sometimes we have ones that do good offset the ones that are doing bad. When we saw the members addition, we had a net addition in all segments, when we showed that slide. So obviously, there's the election scenario and all the reforms that have to be implemented that Brazil needs. So we're still being cautious. But the vision is better than 3 months ago and 6 months ago, but we still have a lot of uncertainties. Whichever candidate wins we need to know what they're going to do with their projects, but we do have a better scenario than we did 6 months ago. So in relation to volume, I'd say that what it's all about, our capability of having a platform technology, the right products and the sales channels to benefit from the country's growth in all segments. In relation to noncorporate, I'm going to hand over to Pacheco.
Thank you. Thank you, Joseph, for your question. OdontoPrev is a pioneer in opening the doors of the noncorporate market. So having the distribution channels that are fully committed and which -- with an unmeasurable side. So in fact, the members have been a characteristic of the expansion or increase of this channel. And we took advantage of having the noncorporate -- or we have the opportunity of having noncorporate becoming more and more relevant. In 2014, we had 1/4 of the revenues. And now in 3Q 2018, achieved pretty much 40% of our revenues. So that's very significant. The size of this portfolio loan is much higher than some of our competitors. And more interesting, even in the individual plans specifically is that the company has been successful now in 2018 and for the first time is showing the bank channel as the members leader in individual plans as well. So that gives us a higher average ticket. It gives us a lower commercialization expenses that makes the bad debt decrease and the profitability of the portfolio increase. It's not just for individual plans, but also for the company overall. So that's exactly the value renovation cycle that we want to make clarify. It's the core of the company's business strategy in the past years. And now it's getting even more clear with these figures and increases on a quarterly basis. Today, our average ticket in individual plans is approximately BRL 40. It's still lower than the price list, especially in the bank platform. That's why we've still seen a relevant upside in the individual plan tickets. Similar dynamics for SMEs where once again we're a pioneer in launching new products that have a higher coverage and therefore a higher average ticket. So that's the cycle we wanted to share with you and the strong feature about 3Q '18.
Our next question is from Rodrigo Gastim from BTG Pactual.
I'd like to talk about the individual plan average ticket. I think that's one of the pleasant surprises in the results. So it's a good level of net add to new products at higher prices. It pretty hard to explain all the improvement that you got from average ticket. I'd like to understand why the average ticket is better. So 2 things. Where that improvement is coming from? And the second point, how sustainable or how much room do you still have to improve your average ticket in individual plans? And then if you could split that answer into the department stores segment or retailers and bank channels, I think that would be better for us to understand how that mix effect is playing in favor or against the average ticket.
The average ticket of individual plans went from BRL 36 one year ago to actually close to BRL 41 in 3Q '18. We're comparing this same level of customers and portfolio. The answer is no. The portfolio is changing for the better. We've been launching new products in the bank channels and the ticket adjustment in some contracts in the retail portfolio. So -- which includes department stores. So there are number of agreements that have different prices in the department stores. And we expect continuous adjustment making this portfolio which still has a lower ticket to the bank channel plans. So here there are 2 things going on. The launch of new products in the bank channel -- bank portfolio, which has a list price that's substantially higher than the BRL 40, which is the accounting average for the individual plans in 3Q. And the second one is a price update and adjustment for the retail plans. That pretty much a year ago were at BRL 35. Some are still at that level. So when you see the portfolio having more banks, having a price adjustment in the retail contracts, and also, with success in Bradesco -- mainly Bradesco launching high-end products, AAA products with a higher value-added that means that you have a higher ticket in individual plans, making the revenues increase more than 30% year-over-year. So that's the dynamic about the value. It's a transition process. So both portfolios are changing, changing for the better in relation to member addition, but also for the tickets. That's our vision for the upcoming quarters, Rodrigo.
Perfect, Pacheco. So about the retail channel, we even talked about this -- about some contracts that weren't receiving price adjustments and it was much lower than what could have been done, and now it seems like you're capturing that benefit in the third quarter. So let me see if I understood. Throughout the next quarters, there's still room to capture adjustments in the retail channel. The mix effect makes a lot of sense, as you explained, the AAA products through Bradesco and through the retail channel. So is there still room to renegotiate some contracts? I don't know if frozen is a good word for it, but maybe they were being adjusted at a lower rate than you wished for. Do you still have something to capture from that?
Yes, exactly, that -- you understood correctly. That's the dynamic. The company has been successful in this dialogue with the many different partners in the retail industry. It's also important to talk about the churns. So the cancellation of the older products and plans and when they're replaced by newer plans that clearly brings in a higher ticket. So those 2 aspects are -- it's exactly what you understood. It's exactly what you said. So it's a dynamic of the average ticket of individual plans in the quarters.
Excellent. If you allow me, just a second question. Now talking about M&A. I'd like to understand what the company's focus is in that area this time? Okay, obviously, now you're integrating Odonto System. I know that's one of your main priorities, obviously. But I'd like to understand how it's going to be moving forward? So will you continue to analyze other players in regions where you're not present or as present? And then maybe have problems with the Brazilian Antitrust Agency, CADE? So -- or are you just focusing on the integration now and slow down M&A from now on? I'd like to understand that strategy for M&A, moving forward.
Rodrigo, your answer -- the answer is the standard answer. Every time there's a good opportunity, we will be looking into opportunities. But in fact, our focus now is to integrate Odonto System, but we wouldn't ignore a great opportunity if it comes to us.
Just to understand a little better, let me change my question, rephrase. So are there interesting opportunities, good opportunities of companies that would have a similar profile to the company that would eventually make sense to be acquired? So you -- are you saying that the pipeline exists?
Actually, Rodrigo, the OdontoPrev mandate since the IPO is to maximize value organically or inorganically. So what the company did and will continue to do is to look into good acquisitions. So certainly, we haven't made all the acquisitions in the sector in the last decade. So it's about value. So you may have situations of volume being offered. So we're focused on the bottom line, not necessarily the top line.
Our next question is from Marco Baldini from UBS. Our next question is from Javier Martinez from Morgan Stanley.
I'd like to double check 2 things. Your figures for the dental loss ratio are spectacular and there's the incorporation of Odonto System. So if we disconsider Odonto System, an ISS I ask what would be our dental loss ratio? That's first question. And the second one is I believe that you are speeding up. Do you think things are getting better because of the Bolsonaro candidate is ahead in the elections?
Javier, based on what you say, if Bolsonaro wins or Haddad wins, we are constructed here in relation to Brazil. There is a consolidated view among us and other people that we talk to -- and economists, there is an understanding that, for instance, the social welfare problems have to be faced. That's critical in Brazil. So there are some things on the agenda that regardless who wins the election have to be addressed and are very important for the country. So we believe in a constructive view for the country. We're very optimistic, carefully optimistic, but seeing a better country for 2019, and especially for 2020 than the country that we've been living in 2016 and 2017. So that's an important scenario that's already reflecting upon us, especially in a way that we control our contracts and how many people are being hired -- more people are being hired than terminated. So there's our daily controls, our sales visits, our sales calls and the talks that we have with businesspeople and economists that there's a lot of anxiety of kicking off projects and attacking and addressing things that are very important to unlock the economy. So we have a constructive view regardless of the candidate that wins. In relation to the dental loss ratio ex-Odonto System, I'm going to hand over to Pacheco.
Maybe I didn't explain this correctly. To me the positive result -- there was negative highlights in the past quarters, and now we have an improvement. That improvement is, obviously, coming from a positive aspect. Let's suppose that there's an economic recovery regardless of who wins the election, but there's no reason for the dilution of things to happen that's my question. Is that okay?
Well, the important thing that you mentioned is not only we have new products or repriced products, but we also have a portfolio that changes with a lower ticket, which eventually leave the portfolio are replaced by products and members with a higher ticket. So that's expected, as Pacheco mentioned, that the actual replacement of the portfolio older lines at lower prices coming in with new members at a higher price. So your idea is correct. It should happen.
Javier, this is Pacheco speaking. To add to revenues -- the revenue growth dynamics, one highlight of the past quarters and actually since mid-last year was the corporate segment. For 5 consecutive quarters, we presented net additions in the corporate segment with a growing average ticket. Two reasons have justified that growth. First of all the open enrollments dynamic where we have the growing gain of new employees in corporate contracts that were already signed. So that's exclusive for the company with a healthy average ticket in contracts that were already signed in previous years. So the second one, and that's something new as well and it's -- became more clear after mid-last year, is -- or are the bank channels that are also bringing the commercial possibility of new contracts in the corporate segment. So that's also a differential, which is more evident and more clear since mid-2017. Regarding your other item about the dental loss ratio ex-Odonto System, yes, it was lower in the corporate segment and also in SMEs. It was pretty much at the same level in the individual segment. And that's very healthy because in essence when we measure dental loss ratio, it's pretty much the same since the average ticket has increased, especially in the noncorporate segments, but consequences that the dental loss ratio is lower. Therefore, the company is well positioned, and now in the past 12 months, we have the lowest dental loss ratio since the strategic association with Bradesco in 2010, which eventually translate into an EBITDA margin close to the historical high, almost 26%. So I think, the beauty of the strategy is very clear. And once again we're very happy with the company's recent results.
Our next question is from Joao Matos from Santander.
I'm sorry to be insistent in the net additions. The -- in individual where 36,000, 88% came from department stores in 3Q, did you change the policy in that sales channel? Or is that something specific?
Sure. Once again, all these plates that we're balancing out in our hands in terms of channels and sales in the segment and products, a number of times you have a product launch, you have a focus of a certain network on a certain product or a promotional campaign in one of these many plates that we're balancing out. And that just reiterates the diversification strategy in segments and in channels is one of the company's strengths. And when we look forward and see an economic recovery, it is more likely for all of these channels to be in tune and all these segments to be in tune, walking on a positive path. So what happened this quarter could continue to grow in next quarter, but even more in a different channel. So in fact, there is an important gain where some companies that postpone commercial actions or they focus on the specific matter, product or action in them. But clearly, in this quarter, we did see a recovery in that. This may continue at the same rate or be less relevant if the others move forward as well. So that's the beauty of strategies having a very diversified portfolio and segments and products and the channels to have access to all these segments.
Just to add, Joao, to Rodrigo's comments, actually, the commercial agreement portfolio in retail for the company and in new partnerships has been growing. Particularly they weren't the ones in -- that brought in the net additions in the last quarters. So we are still optimistic about 2019 and the results of the existing partnerships that we've had to -- for years that bring in new members and an adjustment of the average ticket closer to the bank channels and the expectation that these channels will bring in net additions at the new recent updated ticket, which is closer to the current portfolio. So once again, the individual revenue is the second highest in our portfolio, that growth over 30% in 3Q really made us happy. And we remain optimistic about that for 2019 forward.
[Operator Instructions] Since there are no further questions, the Q&A session is now over. I'd like to hand over, again, to OdontoPrev.
I'd like to thank everyone for their participation in this 3Q conference, and I hope to see you soon in our next market event. Thank you. Good morning, everyone.
The OdontoPrev conference call is now over. Thank you for your participation. Good morning and thank for using Chorus Call.