Odontoprev SA
BOVESPA:ODPV3
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Odontoprev SA
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Good morning, ladies and gentlemen, and thank you for holding. Welcome to the Odontoprev conference call to discuss the earnings of the third quarter and 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 conference call is over. We would like to remind you that webcast participants may register questions in advance via our website 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 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. 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.
Hello. 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 third quarter and first 9 months of 2019. It's important to inform from the beginning of the webcast, this was not a typical quarter for the company profitability. Myself, Luis and -- here in this webcast, we will all be focused on delivering growth in margin and until then, we have many work ahead of us -- a lot of work ahead of us.
So now to begin the presentation on Slide #3. We can see data from ANS since 2012 with the continuous growth of dental plans, even during the difficult years of the recession with net additions of almost 1 million members in the first 8 months of 2019, exceeding 25 million beneficiaries at the end of August, the last data available by ANS. On the other hand, we also see a stagnation of the number of members in health care plans, currently lower than 7 years ago in number of beneficiaries with net loss in health care plans of 84,000 members in the period up to August 2019.
On Slide 4, we would like to highlight the 9.6% annual growth of net revenues, reiterating Odontoprev's strategic differentials, with noteworthy mention to 13% growth of the revenues from SMEs and 26% in individual plans.
On the next slide, #5, we show the evolution of our several business segments, particularly the noncorporate segment with an average annual growth rate of 17% in SME revenues and 26% in individual plan revenues in the past 5 years. The noncorporate segments, as we can see on Slide 6, present continuous and fast revenue increase with an annual growth rate of 22% since 2014, much higher than the competition in magnitude and speed of increase as well.
On Slide 7, we would like to highlight the unique Odontoprev positioning relating to the leadership in developing and expanding noncorporate segments, individual plans and SME as they present a higher ticket, less competition, fast growth compared to the market and annualized contribution margins that are special, additionally reiterating our strategy. The noncorporate product presents significant barriers to entry such as scale and distribution quality, customer credit risk for small customers or individuals and last, the adverse selection.
On Slide 8, we present the consolidated incremental revenue of BRL 39 million in the quarter. It's worth noting that noncorporate segments accounted for 83% of new revenues in the quarter with noteworthy mention to individual plans as they more than doubled their annualized incremental revenues since the end of last year.
On the next slide, #9, we can see that Odontoprev has added 91,000 new members in the quarter, the best seasonal performance since 2015, growing and leading in all segments and all regions in Brazil. Please note that the Bradesco channel has added 32,000 new SME and individual customers, approximately 2/3 of the additions in the noncorporate segment.
On the next slide, #10, we can see the 91,000 new members for the period, the best commercial performance in the past 5 quarters, confirming the positive seasonality historically in the second half of each year. On Slide 11, we show the organic quarterly evolution for the corporate segment, which is also the best performance in the past 5 quarters, with a net addition of 42,000 new members at a much higher rate than 1 year ago in 3Q '18 by winning new contracts and increasing the number of beneficiaries in corporate open enrollment contracts, strategic differentials for the company.
On the next slide, #12, we can see that the SME segment added 25,000 new members in 3Q '19, the best performance in the last 8 quarters. The Bradesco channel accounted for approximately 3/4 of the net addition in this segment. On Slide 13, we can see the individual plans that added 24,000 new members in 3Q '19, the 7th consecutive quarter of growth. The Bradesco channel has added 14,000 individuals in the quarter, more than half the growth of the segment in the period.
As we can see on Slide 14, individual plans count on the growing share of the bank channels with a higher average ticket, lower selling expenses and lower bad debt. On the next slide, 15, we can see the evolution of the consolidated annualized services cost evolution, achieving 44.1% in the quarter, similar to levels in 3Q '18. In the breakdown per segment, the individual segment stand side -- stand out. Giving -- given the growing dental care ratio, the company made adjustments, and the results of that to adjust this cost of services for individual plans are expected for the upcoming quarters.
Now moving on to cash generation. According to Slide 16, we can see that the sum of the effects of higher dental care ratio in individual plans, the increase in selling expenses, higher bad debt and the implementation of the long-term incentive program in 2019 resulted in a lower EBITDA margin in the quarter by 450 points. It's worth noting that the long-term incentive plan will have lower values in 2020 and 2021. On Slide 17, we show a summary of the lowest EBITDA and net margins. The increase of individual dental care ratio proportionately increased the IBNR, and we counted the -- accounted the Odonto System earn-out relating to the 2018 fiscal year, resulting in net income 18% lower year-over-year.
On Slide 18, we can see the evolution of shareholder compensation in cash dividends. During the meeting of the Board of Directors held yesterday, an additional dividend distribution was approved in the amount of BRL 23 million, which when added to the BRL 15 million in cash dividends already paid up, totaled 70% of a payout in the quarter and will accumulate BRL 251 million in shareholder compensation in 2019.
On Slide 19, we can see that Odontoprev ended the quarter with BRL 517 million in cash flow, debt-free. On Slide 20, we are proud to highlight the continuous growth of number of individual shareholders, which more than doubled in 2019. The company's investor base, as shown on Slide 21, remains globalized with an approximate free float of 90% with foreign investors from over 30 countries.
In our last slide, #22, we have the pleasure of informing that Odontoprev was awarded most voted dental care provider among HR professionals at the ash -- annual edition of HR Top of Mind. We are also granted with a quality certificate of Great Place to Work and participated in the 2019 edition of Forbes Magazine's the best CEOs in Brazil.
Once again, we would like to thank you all for your interest and trust in OdontoPrev. Now I will move over 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 Itaú BBA.
Actually, this is Emerson speaking. I have 2. First of all, in terms of volume, we saw a reversal of the trend in corporate where you have more -- higher net addition of members. Could you explain the dynamics behind that throughout the quarter and if that was more explained because of new contracts or a less turn -- smaller turnover at the base? We also saw that SME in the bank channel was stronger. Could you give us some more flavor about a more positive performance in that channel? The second question is about individual plans. We saw a deterioration of the dental care ratio that wasn't really expected. So was that very specific? Or when did you actually realize that it would be -- that the dental care ratio would be worse? Or will that remain, or will we see that again? Is it -- will it be continuous?
Emerson, this is Rodrigo speaking. I'm going to talk about volumes first. So about our performance, there's the measures, and the major comment is this came in, in many different ways, more members, new contracts. And this is not only valid for corporate, but also for SME in both brands, not only Odontoprev but also Bradesco. So the quarter had a commercial recovery, and in the presentation Pacheco showed the seasonality in -- what's been happening in the past 5, 6 years. So what we're seeing is a response in the selling side, so not only in corporate but also in SME and all the brands. What I'd like to highlight though is if we consider the center of gravity of production, it's closer to September. So there was a main concentration or higher increase of that throughout September. Now I'm going to hand over to Pacheco to address the second question about the dental care ratio.
Emerson, thank you for your question. About the dental care ratio, particularly in individual plans, it's very important to understand the specific characteristics of that segment. It's different than the SME and corporate. First of all, there are 3 risk metrics that are unique to this segment: first of all, adverse selection; number two, the churn, so the cancellations; and three, bad debt, which pretty much doesn't exist in the other segments. So to handle that, the company has been evolving in the past years with 2 clear strategies: first of all and the oldest one, a partnership, the segment with a partnership with retail chains that is equal to half our members in individual plans. And the more recent that we developed is exploring the bank channels, the bank channels, such as Bradesco and Banco do Brazil banks.
The channels are very different, and they have different metrics amongst each other. So the ticket in the bank channel is higher, the selling expenses lower. The bad debt in banks is lower, and we also historically observed a retention that has been growing in the bank channel in a more clear manner than in the partnerships with department stores.
So at the end of the day, it's a strategy of net present value that the company has been implementing year after year. What happened now and particularly in 2019 in the revenues that show up in 3Q '19 is a consequence of a specific product niche for open enrollment and of providers of the network that will be addressed and will continuously be addressed by the company in the upcoming quarters. Control -- the tools to control that are many. The company has a lot of work and instrumentation to address an atypical result that we're just seeing. First of all, price and the product selling that the company has is very robust, so it can manage many different individual plans. So two, coverage, the plans that we've been registering and the ones that we can register with the regulator. So three, the waiting period is very important in some cases so we mitigate the risk of adverse selection. So four, duration of contracts. There are monthly plans and we also have annual plans. They have different characteristics amongst each other.
And five, distribution channels. And then the company has a number of ways to distribute, so the banks and the department stores. And six, the open enrollment compared to registered networks. So all of that, that entire matrix is exhaustively modeled by the company. So we expect that in the upcoming quarters and throughout 2020, we will bring back the dental care ratio to the standards that the company expects. The dental care ratio levels that the company has seen in the individual plans in the past years were actually low, resulting from a mix that is mainly concentrated on department stores and has been increasing year after year, quarter after year -- quarter after quarter, sorry, and -- but it's past the ideal levels. So we want to bring back dental care ratio for individual plans to where it should be. That's what we're going to work on and talk to you about that in the upcoming quarters.
Our next question is from Joseph Giordano from JPMorgan.
Based on the improvement of the selling dynamics and more net additions, I'd like to know what your average ticket is for new sales when compared to your stock. And also the conversation for renewals, especially in an environment where selling is lower and we saw the dental care programs that were lower than inflation traditionally.
Joe, this is Pacheco speaking. About the renewals -- contract renewals, there's specific dynamics according to each segment. In corporate, we already expected higher volume, higher amount of net additions in the second half of the year. Usually, the second half has most of the additions year after year, and it will be no different in 2019. The growth that we just saw is a result of new contracts and higher share of the open enrollment. So we see 2019 ending -- the next quarter ending well, given that seasonal behavior and also the recognition of the company's brands, especially Odontoprev in the last quarter of the year.
Historically, the company has exceptional control of the cost of services in the corporate segment. Therefore, we only have long-term contracts, and we have a lot of visibility of the cost of services in that segment. That gives us the guarantee and predictability of cash flow in the corporate segment. In noncorporate segments, the company has been launching new products and the ticket -- average ticket has been growing in SME and individual plans, enabling us to generate incremental revenues without anything similar in the market. So we remain constructive in the sense that we have pricing power throughout 2020 that's enough to cover our corporate segment -- corporate costs and to add value in SME segment. And through a continuous new portfolio of individual plans to be built, the company expects additional pricing power in 2020 in individual plans.
Our next question is from Samuel Alves from BTG Pactual.
I have 2 specific questions. The first one is the Odonto System earn-out that was included in the third quarter. I'd like to understand if the performance of the asset is better than expected, that's why you incurred -- it was incurred -- this earn-out was incurred. And another question just to clarify the growth of number of members in the third quarter. You mentioned, especially in corporate, a growth in new contracts. And also in the same context, I'd like to understand if churn performance improved or if it was just a matter of a better number of gross adds in the quarter. That's it.
Samuel, this is Luis speaking. About Odonto System earn-out, just to explain again our acquisition deal. We paid an EBITDA multiple over the year of 2017. We concluded the acquisition in August 2018, and when the acquisition was concluded, in addition to the 2017 EBITDA multiple, we agreed with the seller an earn-out based on 2018 and 2019. When we do a business combination of that transaction in the third quarter of 2018, you consider the amount paid in 2017 and also the expectations that we have in relation to future results of Odonto System. So that was accounted for in the business combination in 2018. So now in 2019, after 1 year, we ascertain the numbers, and we realized in 2018 was greater than expected, what we had accounted for. Therefore in that settlement, we recognized the difference between realized and the plan as a result. So with -- so in 2018, we did have performance above expected when we did the business combination of the transaction. We paid 9x the EBITDA for the transaction, and the earn-out was based on the last EBITDA.
Samuel, about corporate churn, first of all, the performance is not only about the sale of new contracts, but also the returns to existing contracts. So here we see an improvement relating to contract transactions. So every month, we receive a file from the company to include a certain number of employees and exclude others because they were terminated or they quit. And then we see more stabilization, which is signaling a better scenario in the employment area for corporate.
Our next question is from Leandro Bastos from Citi.
Just a follow-up question about the dental care ratio in individual plans. I think it's very clear, your strategy to take that level back to what you believe would be reasonable and all the tools that you have mapped. So my question is about -- what's the time horizon that you think would be reasonable to expect an improvement in the dental care ratio? And if you allow me another question. Dental care ratio in corporate growing year-over-year. So what -- how do you think you would adjust that as well?
Leandro, about dental care ratio in corporate, this year, we saw no hazard by using -- given the high levels of unemployment. So that happened in the first quarters of the year. And now we've seen more encouraging signs recently. So we're very cautious for 2020. There may be an upside risk in dental care ratio in corporate. Then let's hope we can have good news. We'll closely monitor that.
The second part of the dental care ratio in individual plans, I'd say we have to be careful in having to say the right quarter where we will get that back to the levels we expect. We mention quarters in the release and all our communication has been using time -- the quarter in plural because we don't have that in 2019 and in 2020, throughout the quarters of 2020 -- we're obviously talking to everyone and offering transparency in our results. So there are many adjustments, the channels have already started, and we expect to have in the upcoming quarters the expected results given these specific movements.
[Operator Instructions] The Q&A session is now over. I'd like to hand over for our final remarks.
I'd like to thank everybody's participation in another quarterly release. We'll see you soon during the market events. Thank you all. Good morning.
The Odontoprev call is now over. Thank you for everybody's participation, and have a good day.