Odontoprev SA

BOVESPA:ODPV3

Earnings Call Analysis

Strong Q3 Performance with Focused Strategy

The company maintains a strong focus on pioneering market segments while offering higher than industry returns, driven by a unique pricing strategy and exemplary cost structure. Growth is generated through value innovation and new products, leading to two-digit revenue growth despite some market contraction in 2020 due to the pandemic. A significant shift from corporate to SME and individual plans, now accounting for nearly half of the BRL 2.1 billion revenue, has resulted in an EBITDA margin of 30%. Net income soared by 20% in Q3 of 2023, excluding nonrecurring effects, further bolstered by a unique business model that allows robust cash generation, highlighted by BRL 942 million in net cash and zero debt. The company also completed 3 share buyback programs since 2021, canceling all acquired shares and reducing treasury stock to zero, illustrating a strong commitment to shareholder return.

A Story of Strategic Growth and Profitable Execution

Odontoprev has showcased a robust performance over the first 9 months of 2023. The company has diligently followed a strategy of value creation by introducing new products into the market that command a pricing premium well above industry standards. This approach, combined with an exemplary cost structure, has yielded higher returns compared to competitors.

Enhanced Market Presence and Diversification Leads to Increased Revenue

Over a decade, Odontoprev has shifted its portfolio dynamics from being 75% corporate-focused to embracing SMEs and individual segments, which now exhibit a faster growth rate. This strategic pivot resulted in the company's annualized revenue crossing BRL 2 billion, with nearly half coming from these newer segments. The diversification into SMEs and individual plans has paid off handsomely, with these segments growing at a 14% annual rate, significantly outpacing industry averages.

Superior Pricing and Profit Margins

The company's growth journey reflects in the premium pricing achieved across its product offerings. Individual plans command a 60% premium over SME plans, while SME plans themselves are priced over 50% higher than corporate offerings. This has translated into a substantial average ticket size, which stands at BRL 21.53, demonstrating Odontoprev's commanding market stance.

Impressive EBITDA Growth and Margin Expansion

Odontoprev reports a commendable 13% EBITDA growth YoY for the first 9 months of 2023 and has witnessed EBITDA margins swell from historical levels of 24%-25% to over 29%, peaking recently at 30%. This expansion is a testament to the company's new value generation cycle and the stability of their dental care ratio, now at 40%.

Stellar Net Income and Investment in Technology

A remarkable achievement this quarter is the breaching of BRL 0.5 billion in net income over the 12-month year-to-date, marking a 12% increase in this period. Furthermore, Odontoprev is heavily investing in its proprietary technology platform, with current investment rates rising from BRL 20 million to around BRL 80-90 million, particularly focusing on a new ERP platform to boost productivity and efficiency.

Strong Cash Position and Shareholder Returns

Odontoprev's commitment to shareholder returns is evident from its executed share buyback programs, where it reacquired and canceled 129 million shares since 2021. Coupled with a robust cash generation model, the company boasts a net cash and zero-debt position of BRL 942 million, underlining its financial health and the ability to reinvest in growth while distributing dividends.

Earnings Call Transcript 2023-Q3

[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 third 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 on the web and the link can be found at the company website ri.ondontoprev.com.br where you will also see the company presentation or on the company's YouTube channel.

This webcast has simultaneous translation. [Operator Instructions] Next, we'll start 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 the call relating to 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. Any forward-looking statements are not a guarantee of performance as they involve risks, uncertainties and assumptions as 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 affect Odontoprev's future results and therefore, could lead to results that materially differ from those expressed in such forward-looking statements.

Now I'd like to hand over to José Roberto Pacheco to begin his presentation. Pacheco, go ahead, please.

[Jose Robert Pacheco, executive]

Hello, good morning, everyone. Welcome to our conference call about the earnings for the first 9 months of '23 and 3Q '23.

So the company continues to execute a strategy of value generation, offering new products in the market and benefiting from unique pricing, much higher than the standards that we see in the industry with an exemplary cost structure. And at the end of the day, offering much higher returns compared to those seen in other players in this segment.

I'd like to start off the presentation with the official data from the ANS, the National Health Agency with a track record of over 10 years, not only in health care but also in dental plans. So on the right side of the slide, we have 12 million more members since 2014 in dental plans. And that dynamic of acceleration and still building this industry that's in the beginning, the dental industry, has enabled this industry to achieve 32 million members in September.

We have 2-digit growth on the next slide for the company. This dates back to 2020, the year of the pandemic, and with lower costs, we had special discounts, especially in the corporate segment, which made the revenues smaller in 2020 compared to 2019. And you can see continuous growth not only because of adding new members, but also a faster growth in the segments of products for SMEs and individual plans, both have tickets that are much higher than the traditional tickets that we see in the corporate segment.

On the next slide, we can see the beauty of this strategy. Approximately 10 years ago, the company had a portfolio that was 75% in the corporate segment and approximately 25% in other segments, meaning individual and SMEs. There has been faster growth every single year in the SME and individual segment, noncorporate, a pioneer initiative at Odontoprev that leads to a very unique opportunity in looking forward.

On the next slide, we have concrete data based on this strategy. So on the top right part of the slide, you can see the plans for SMEs and individuals that had a 14% growth per year, much higher than the industry and the traditional portfolio in the company. Corporate continues to grow with lower barrier to entry lower competition and that is equal to BRL 1.2 billion revenues in our portfolio. So the company currently has over BRL 2 billion in revenues annualized, of which almost half are coming from new plans, meaning plans for SMEs and individual plans.

On the next slide, we see the average ticket dynamics. So a premium of approximately 60% in individual plans compared to SMEs and also the premium of over 50% in the average ticket for SMEs compared to corporate plans. So that's a very important differential that the company has.

In the third quarter, the company had an average ticket of BRL 21.53 as an average ticket, which is much higher. Again, showing a premium compared to the levels that we see in the industry.

On this slide, we can see the recent evolution over the past 3 years of the Bradesco Dental brand. This brand is becoming very relevant in our portfolio. So approximately half of the company, customers already have this brand. They've added approximately 1 million new members in the past 3 years and over 600,000 new members in the past 2 years. And still in 2023, it's the brand with the fastest growth in the overall Odontoprev portfolio.

On this slide, you can see the strategic positioning of the company. It's very simple to see how big the company revenues are compared to the peers. We can see revenues, as we mentioned, BRL 2.1 billion, divide into BRL 1.1 billion in the corporate segment at Odontoprev and approximately BRL 900 million in SME and individual plans.

Other market participants do not have -- have not achieved BRL 1 billion in revenues and in many cases, a ticket that's much lower than what we have had in the past decade.

Now moving on to cost of services. That's a clear benchmark compared to the industry. Here, we can see back to 2016 when the cost of service, actually -- the dental loss ratio was close to 50%, and it was gradually going down to levels close to historical levels of 45%. And since 2020, the company has been presenting a new level, which is very stable and predictable of approximately 40%. And that is a result of many different strategies in basically new products. They have had faster growth, have had lower dental care ratio, and that's the main reason for the margin increase that we will see in the upcoming slide.

As we've mentioned, in this image on this slide, we have the dental care ratio per business segment and per category. So on the top, our traditional DLR for the corporate segment is pretty much always been close to the levels of 50% approximately. And in the center -- in the middle of this slide, we have SMEs and individual plans. So you can see that both of them are at levels lower than 30%, and that's exactly the company's strategy.

So having 2 simultaneous processes, the traditional, the corporate that still accounts for a higher number in the company portfolio, which is close to 50% and the company being a pioneer in the market in bringing in new segments and increasing these segments. Once again, SMEs and individuals, both with the right pricing, with a way to service with the accredited network all over the country and also working with leading brands such as Bradesco Dental. Both of them have presented a very appealing dental care ratio and has behaved under the levels of 30% in more recent periods.

This is the beauty of strategy translating into figures. We talk about gross profit, and that reflects the revenues minus cost of services, With the growing share of SMEs and individual plans in the past 10 years, the gross profit of the company grew on average 16% per year. Today, more than half of our gross profit, approximately BRL 1.1 billion, BRL 1.2 billion annually, is already represented by the plans for SMEs and individuals.

So SG&A. In 2023, we've seen relevant advances in SG&A, enabling them to account for approximately 24% of revenues instead of the level of 25% revenues that was seen in the first 9 months of last year.

So here, bad debt. This is different than the standard. So this is an evolution quarter after quarter in 2023. So as we expected and informed, we're back to the level of 2.4% of bad debt, and that's similar in the third quarter of what we see in the first quarter.

So here, we can see an outlier of what happened in the corporate segment in the second quarter of this year. And we've overcome that with the growing bankarization of the portfolio. We will bring in more comfortable levels and exemplary levels of bad debt.

As a result, of the dilution of SG&A, in a very predictable pattern of dental care ratio by increasing the revenues by 2 digits, the company is delivering 13% growth in the EBITDA, not only in the variation quarter-over-quarter, but also in the variation of the -- of 9 months -- first 9 months comparing '22 and '23. In the past 12 months, last 12 months, the EBITDA margin shows 30%.

So this slide clearly shows the company's strategy. We're very proud to show our numbers since our IPO in 2006, not only in dental care ratio and cost of services, but also the company's EBITDA margin.

We believe that we're in a new cycle of generating value, where the dental care ratio of 40% translates into a very much higher EBITDA margin compared to the historical patterns. So we went from 24%, 25% EBITDA margin to showing results that are greater than 28%, 29%, and more recently even achieving 30%.

Company net income. For the first time, we've exceeded BRL 0.5 billion in the 12 month year-to-date. So a variation of 12% in these months. And here, the variation of 28%, which includes some nonrecurring effects. If we exclude those effects, the growth of the company's net income in 3Q '23 would have been 20%, which is a very high number as well.

The company's business model, privileges, technology. So the Odontoprev technology platform is proprietary, and we show our priority here in investing in technology at the company that went from BRL 20 million to BRL 30 million and now going into BRL 80 million, BRL 90 million. That's the current rate.

The main company investment in the past years has been in a new ERP platform, the general system for the company. We're in the final process to implement that new general system and that has been representing important gains, and will represent even more important gains in productivity and efficiency.

So with the detailed cash flow in the first 9 months of 2023, we ended last year at BRL 800 million. And now we have a net cash 0 debt of BRL 942 million. Here, we can see dividend payments that happened in the third quarter and also the investments in technology that we just mentioned. So robust cash generation, as you can see, and the cash conversion of the result is one of the very unique characteristics of the Odontoprev business model.

A few words about the buyback programs. The company has executed 3 since 2021. In total, we bought back 129 million shares at an average cost of BRL 11.62. All of these shares were canceled, so now the company does not have any shares in the treasury. Since the shares and moving towards the end, not only in the quarterly comparison, but also 9 months of very positive information when compared to year-over-year.

So this is our shareholder base. And here, you can see that on the right of this part of this slide, most is from the U.S. -- or North America, U.S. and Canada, but also Europe and other countries. The company has a shareholder base in over 30 countries.

We're very proud to mention this announcement of a couple of days ago. This is the tenth consecutive year that the company is the Top of Mind dental plan in Brazil. So out of the 26 annual additions, the company was remembered in approximately 21, and that shows our commitment and the focus of our work of approximately 2,000 employees focused on excellence and delivering differentiated services all over Brazil.

Those were the initial comments. Thank you very much for participating. So now we're open for Q&A. Thank you.

[Stella Hong, executive]

We'll now begin the Q&A session. [Operator Instructions] So first question is from Leandro Bastos from Citi.

[Leandro Bastos, analyst]

I have 2 questions on my side and both about the individual plans. About the DLR that's running at lower levels even when you adjust the positions. When can this start affecting the value proposition for beneficiaries? And when we look at individual plans, when you think of the mix, like you have retail and the bank channel, can you share how you're running the DLR for these different plans, because bank probably brings it down an individual, what can we consider for these 2 channels?

[Jose Robert Pacheco, executive]

Thank you, Leandro, for your question. Not only individual plans, but also plans for SMEs are modeled to bring in more return, higher returns. So it's higher risk, risk of default or canceling adverse selection. So these products have to be well worked on and well priced.

As you well mentioned, within the individual plans, we've had the dynamic in the past years of replacing channels. There's been a faster distribution in the recent years in bank channels and less in retail channels, particularly department stores.

And why is that important? Because the pricing power and consequently, DLR that we've been observing in the bank channels is more appealing. The DLR is lower when compared to the sales in department stores.

So yes, there has been lower DLR in individual plans in the past years and even than the plans for SMEs. So that brings on many positive impacts like we've observed. Not only the ticket of individual plans has gone up 13% in the annual valuation, but as you mentioned, Leandro, the strength, the pricing power of the bank channels is a very positive differentiation factor in that.

So the product has a lot of return in the bank channels and consequently lower DLR and lower return when sold in department stores, even because of the cost of acquisition. And that, in fact, we've been observing lower DLR in individual plans in recent years.

And that comes a lot from that mix effect where we have new channels 10 years ago, the -- pretty much the entire portfolio was coming from department stores and now approximately half of it is coming from bank channels. That's very positive. And that's what we've been seeing in that lower DLR in the bank channels.

I'm going to hand over to Rodrigo, so he can comment.

[Rodrigo Bacellar, executive]

Good morning, Leandro, thank you for your question, and that's very important because the way you asked it you're mentioning the perception of value, right? So to what extent may low DLR show that they're not using the product because of value.

And it's important to understand that DLR is part of 3 variables, 3 factors, which is frequency. And yes, frequency has to do with what you mentioned. So if we have very low frequency, it means that people aren't using it, and then that could lead to a perception of lower value, but it's not just frequency, it's that. And every time, Leandro, goes to the dentist, it's about the number of procedures that the dentist is going to perform and then the cost of what they're doing. So frequency is fine.

Our customers are using it, and they see the value in the plan. And that frequency is something that we don't have a direct action on. We even encouraged our beneficiaries, our members to use the plan. So where we can act is in the other factors, which is the number of procedures per beneficiary and the cost of that.

So in that case, by investing in the technology that Pacheco mentioned and our ongoing education programs for dentists and using AI to fight fraud, waste and abuse, that's what we can control. So lower DLR or very well-controlled DLR at those levels, doesn't mean that the members aren't using. That's just one of the factors.

So thank you for that question because it gives us an opportunity to clarify that. And it's important to see that those are 3 factors that will actually show their perception of value and what happens with customers and dentists. Thank you for your question.

[Stella Hong, executive]

Next question is from Estela Strano from JPMorgan.

[Estela Strano, analyst]

Actually, it's about the growing number of members. So when we see the industry dynamics, we can see that we have a fast growth in consecutive quarters. And when we look at Odontoprev, you are going through the same trend. So I'd like to explore that. How do you see that growth in the industry? Is that structural, a structural trend or more of a specific scenario? And then looking at Odontoprev, we see that the individual in this third quarter lost some members. So I'd like to explore that. So how you see that in the company and the reason?

[Jose Robert Pacheco, executive]

Estela. A great point that you brought up about growth. In our vision, it's structural. So as we've shown, based on the ANS data, starting off with the health plans, today, the industry is pretty much the same as 10 years ago, no growth. On the other hand, we see that dental is still low. It's still in the beginning. Only 15% of the Brazilian population has it. So that's the reason why dental is growing every year regardless of the GDP, it does grow regardless of generating new jobs.

There are many structural reasons, low share, lower ticket and the great appeal that dental has in Brazil. So we truly believe that the industry still has a lot to grow. That's a very clear characteristic. Since the IPO with 7 million members, today it's 32 million members in the industry and growing at 2 million members per year.

So one of the opportunities and challenges that the company has is to taking dental benefits to other markets, not just the classic one, which is large-sized companies. And that's what's been showing in that growth of members in SMEs.

And then, Estela, you mentioned something interesting about the individual plans. So individual plans aren't even sold in the health care industry. On the other hand, once again, we've been very focused in bringing in new offering, new individual plans to the market. Our portfolio currently has 1 billion beneficiaries in individual plans. That's not easy. That's a very difficult achievement through distribution channels, through right pricing, designing, an accredited network that's specific for that market niche.

So the company continues on a strategy to diversify its sources and that effect we already answered in the previous question, where we show the increasing bancarization in that portfolio. But it's a continuous achievement. It's still a product that's not well known in Brazil, so the company strategy has helped us to reap the fruits, and we can see that not only in revenues, but also in generating value.

So once again, it's a huge challenge to bring in individual plans, but it's still one of our big strategies and focus. We do expect to generate value in a significant way in individual plans in the upcoming periods.

[Stella Hong, executive]

[Operator Instructions] Since we have no further questions, the Q&A session is now over.

Pacheco, you may proceed with your final remarks.

[Jose Robert Pacheco, executive]

I would like to thank everyone for participating and clarify how we're excited about our strategy and value innovation new products in pioneer segments in the market with returns much higher than the industry. Thank you, everyone. See you soon.

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