Odontoprev SA

BOVESPA:ODPV3

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for holding. Welcome to the Odontoprev conference call to discuss the earnings of the fourth quarter of 2020. Today, we have with us Misters Rodrigo Bacellar, CEO; and Jose Roberto Pacheco, IR Officer and Financial and Administrative Officer.

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/ir, 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.

Before proceeding, let me mention that statements made during the call relating to the Odontoprev business perspectives, projections, operating and financial goals are based on the beliefs and assumptions of company management and on information currently available to Odontoprev. Forward-looking statements are not a guarantee of performance as they involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that overall conditions, industry conditions and other operating factors could also affect Odontoprev's future results and therefore could lead to results that materially differ from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mr. José Roberto Pacheco, who will begin the presentation. Mr. Pacheco, you may begin.

[Jose Robert Pacheco, executive]

Good afternoon, 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 fourth quarter 2020 and 2020.

Now to begin the presentation on Slide #3. We can see data from ANS since 2006 where dental plans in industry that was still young, presented continuous growth, adding almost 20 million members compared to the increase of only 10 million members in health plans. In 2020, as a result of the pandemic, the dental industry grew more than 1 million customers, surpassing 27 million members compared to the addition of only 0.5 million members in health plans.

On our next slide, #4. Now more specifically, after the beginning of the pandemic in 2020, we can see growth picking up in additions in the health care industry, following the declines caused by the pandemic in the second quarter last year. When compared to June, the health plans grew by 900,000 members, while dental plans in the same period added approximately almost double with 1.7 million new members.

On our next slide, #5, we can see the revenues in average ticket of the main players in dental plans in Brazil. We highlight the Odontoprev portfolios in the corporate and noncorporate segments with an expressive positioning in both markets.

On our next slide, #6, according to ANS data, we can observe the company's leadership in all regions in Brazil. Given the national operation, the accredited network in more than 2,500 municipalities and exclusive distribution channels for all market niches.

On our next slide, #7, we can see the net organic addition of 200,000 new members in the fourth quarter, the best performance since 2011.

And on the next slide, #8, we've demonstrated the addition of 321,000 new members in the semester, the best performance in 9 years.

On our next slide, #9, we see the annual expansion of net revenue per business segment since 2014. The highlight is the growing share of noncorporate plans with an average rate of annual organic growth of 14% in SME revenues and 20% in individual plan revenues. These levels are much higher than the industry and our main peers and reinforces the beauty of the strategy with the profitability that is much higher compared to market levels.

On our next slide, #10, we demonstrate the execution of the long-term strategy. Here we have the revenues of the corporate segment of BRL 874 million in 2014 with an average ticket of BRL 15 gross, 16% in 6 years. On the other hand, the revenues of the noncorporate segment, individual plans and SME, which was BRL 284 million in 2014, presented a 17% growth per year in the same period, achieving BRL 739 million last year in 2020.

We would like to highlight the unique Odontoprev positioning relating to the leadership in developing and expanding noncorporate segments as they present a higher ticket, less competition, fast growth compared to the market and unique annualized contribution margins. On our next slide, #11, we can see the gradual resumption of frequency in consultation scheduling and use shown by the dental loss ratio of 43.3% in the quarter, lower than the 44.6% in 4Q '19 and 40.6% in 2020. The lowest ever recorded by the company.

As we can observe on Slide 12, the individual plan segment had a DRLR (sic) [ DLR ] of 45.1% in the quarter, counting on lower nontechnical provisions of BRL 4 million in the quarter related to free choice of dentists plan in the bank channel. Excluding these provisions, the dental loss ratio would have been 42.5% in the quarter, 210 points lower than 4Q '19.

On the next slide, #13, we have gains in efficiency with administrative expenses lower by BRL 22 million in 2020. Among the positive highlights, we had lower post expenses and also rental costs across Brazil in addition to lower costs -- specific costs in advertising.

Moving on to our next slide, #14. We can see that the 4Q '20 administrative expenses was BRL 65.9 million, BRL 10 million lower than 4Q '19.

On the next slide, #15, we see that bad debt was 2.8% in 2020, lower than the 2019 levels due to the continuous transition of the individual plans portfolio to bank channels and new processes and control systems with the retail channels.

Moving on to our next slide, #16, we see a drop in the cost of services gains in admin expenses, efficiency, lower sales expenses and lower bad debt represented an increase of the EBITDA by 30% in the year with a margin increase from 23% to 31% in 2020.

On the next slide, #17, we show an improvement of BRL 23 million in EBITDA in 4Q '20, achieving BRL 128 million.

On the next slide, #18. We -- in 2020, we can see that the company generated approximately BRL 0.5 billion of cash, BRL 499 million in cash, ending the period with a net cash of BRL 753 million with no debt. During the meeting of the Board of Directors held yesterday, an additional dividend distribution was proposed in the amount of BRL 101 million to be approved by the general shareholders assembly next month on April 5.

On Slide #20, we can see the cash flow since the IPO and the discipline in capital allocation, with the priority of compensation to shareholders mainly via dividends.

Moving on to the end of this brief presentation. On our next slide, #20, we can see the continuous growth in the number of individual shareholders. Our globalized investor base. And as you can see on our next slide, #21, with an approximate free float of 87% and with investors from over 30 countries.

On our last slide, #22, we have the pleasure of informing that in January, Odontoprev became for the second consecutive time, 1 of the 9 Brazilian companies part of the Bloomberg Equality Index 2021. And for the fourth consecutive time, part of the FTSE4Good Index, global -- both are global indexes of listed companies committed to supporting sustainable practices and ESG standards.

Once again, we would like to thank you all for your interest and trust in Odontoprev. Now I would like to move on to our Q&A session in our common practice of a 45-minute earnings conference call. Thank you, everyone.

[Operator]

[Operator Instructions] Our first question is from Mr. Yan Cesquim from BTG Pactual.

[Yan Cesquim, analyst]

I have 2 questions, 2 quick questions about the competition. Based on the organic growth, I'd like to understand if you see a continuation of the strong growth in addition of members that we've seen in that quarter, and that was impressive. I'd also like to know about the competitive scenario in relation to pricing. So we saw some pressure still of -- on prices, mainly based on the moment that we're going through right now. But I'd like to understand what is your vision in terms of pricing and competition in the short term. That's it.

[Rodrigo Bacellar, executive]

This is Rodrigo speaking. Thank you for your question. This is what we observed in terms of competition. Obviously, there's a huge interest in the health care industry. There are a number of different players fighting to achieve their share. And it's an area where you see high share. When you look at 24% in health; and dental, 13%, both of them have a huge potential for growth still. So what we see is that when we look at our model, we believe that once again, and it has proven itself throughout the pandemic, that it's a very robust model. Meaning if economy is growing and if you have a strong retail operation, so we sell a lot of individual plans, if you have companies that are hiring and growing their business. So then you're going to have a corporate segment increase, which are the biggest ones and there's SMEs.

On the other hand, if you have a scenario of restraint, which was -- happened last year, you're going to see you losing members. But on the other hand, you have some savings in terms of cost of services. So I believe that the robustness of services and the business model that we have and that we've seen in the last quarter, last year and throughout the year, in the past, especially in the past third quarter, with a recovery, remember that the fourth quarter where people were in the green phases and almost going back to normal, the ability to respond is very fast. So in the corporate segment, for instance, we saw a comeback of that positive movement where people were becoming employed again in retail with operations with the individuals and our partnership with our retailers. So we saw a comeback -- quick comeback in that as well. So basically, the airplane is there, on track. Everything is working. The flight plan is perfect. So in one scenario or the other, our ability to respond is quick as the airplane would quickly take off. So that's what we -- how we see that scenario. We have strong competition. It didn't start today. It's been there for 10 years already, and we believe that, that's very healthy for the market.

There's the aspect of the ticket. That's also in line with DLR. So was there pressure on the ticket? Yes, but DLR was also lower. So the ticket suffers a direct influence, be it from the competitive environment or be it from the cost of services. So in general, nothing really changes about what we've been seeing in the market in the past 6 years. So nothing's really changing. It's the same competitive dynamics and behavior, and we were able to have an excellent quarter, as you commented. So the airplane is ready, one scenario or the other, we're ready to fly. Pacheco, would you like to add?

[Jose Robert Pacheco, executive]

I have a comment, Yan, and thank you for your question. In fact, in relation to ticket, I think the highlight last year was the SME portfolio. So the SME portfolio, different than the others, it presented a growth in revenues and a growth in ticket. So it's strongly in the bank channel and the pricing power of the bank brands was very clear. The launch of new products with a higher list of coverage and more service and the standard in service was also a reason for that portfolio to stand out. So differently than the cycle, it actually grew last year.

As Rodrigo mentioned, we're very constructive for 2021 in terms of maintaining the possibility of the company playing in all market niches, counting on a differentiated pricing power through leading brands in some regions in Brazil, where we operate. So it wasn't a surprise that the average ticket increased in 4Q year -- or quarter-over-quarter with a standard of delivery and performance that's very unique compared to the market. Just to summarize that additional aspect.

[Yan Cesquim, analyst]

Perfect, everyone. Congratulations on those achievements, Pacheco.

[Operator]

Our next question is from Mrs. Eugenia Cavalheiro from JPMorgan.

[Eugenia Cavalheiro, analyst]

I'd like to know about trends that you see in loss ratio already in the beginning of the year, January, February, if you can talk about loss ratio. And about the sales channel. You already mentioned about that in Yan's answer, but can you give us some more information in the bank channel, especially for individual plans, that would be great.

[Rodrigo Bacellar, executive]

Eugenia, thank you for your question. About loss ratio. Well, for loss ratio, we have a curve that shows the quarterly behavior that Pacheco just showed us, and we have that track record available for everyone on our website. And I believe that the big point here for loss ratio is that it has a huge parity in relation to the level of lockdown and social distancing and restrictions that we have in economic activities. So here, you can observe that it was growing last year in the fourth quarter. And then we had end-of-year celebrations and in Carnival and now a complicated state of the pandemic with more general restrictions all over Brazil. So that makes loss ratio drop.

On the other hand, we have more people that are becoming vaccinated, such as health care professionals and even the population. So you'll see in the first 4 or 5 months of the year, we would probably still have a more controlled loss ratio because of the second or third wave, we don't even know which wave we're in right now anymore. And then an increase again after operations go back to normal. And vaccination as well, we should get back to normal. And that's good because we want that our members to use their dental plans and feel that there's value in that. They're actually using something that offers them a lot of quality. So that's the first part.

The second one about the sales channel is that we see more integration, ours in Odontoprev, especially with Bradesco health and the Bradesco Bank. So that's a very important factor, not only in building the results of the fourth quarter, but also from now on moving forward, we believe that, that integration is much stronger in terms of meetings and joint strategies and customer acquisition, joint strategies with health that brings on a dynamic, right? That conversation already existed, but now, I'd say it's more structured and more adjusted. It's a process. Those are my comments.

[Jose Robert Pacheco, executive]

Just about the first part, Eugenia about loss ratio. Everyone saw that the lowest level of loss ratio that the company recorded last year, and I believe that there's a consensus that in these first months of 2021, we've been observing a different pandemic scenario than what we expected a couple of months ago.

So I think that the takeaway here is clear in the fact that the company differently than what we observed in health plans, the company has a predictability of its cost that's very high, which gives us a good ability to project cost of services gradually coming back to normal throughout 2021. Obviously, the company's business model was highly protected in a scenario like this of less historical use of the plans and services, but as Rodrigo well mentioned, all our efforts and our national presence is to encourage as soon as possible with the necessary care for our members to start using services again and the dental benefit. That's it. Thank you, Eugenia.

[Operator]

Our next question is from Mr. Leandro Bastos from Citi.

[Leandro Bastos, analyst]

Actually, I have 2 questions. The first one is about nontechnical provisions in individual plans. I'd like to understand how the situation is today. If there's any residual aspects and update on that? That's the first question. And the second question is in capital allocation. So your balance is still strong. And there's the aspect about solvency. So in addition to the dividends dynamic, what else can you expect? I don't know, M&A, that type of thing? That's the second question.

[Rodrigo Bacellar, executive]

I'm going to address the first part. This is Rodrigo speaking about the technical provisions. As what -- according to what Pacheco showed us, it went from 24 to 15 to 4 and 4. So that subject is completely mastered, I'd say. We expect normal behavior now, I believe that the -- building the provisions is behind us, the news is behind us, and now that's controlled, a minimum residual portfolio. We removed many of the products from the market that led to those nontechnical provisions. You can see 20-some 15, 4, 4 and then has converted into normal operations. So we're very comfortable in relation to that solution of those provisions and especially that product.

[Jose Robert Pacheco, executive]

Yes. What Rodrigo mentioned is very important. It's up to us -- convey to you this tranquility, which this theme that was generated in the past is now understood and organized. So the provisions are very conservative, the ones that still exist. We are -- have addressed that well. No point to call any attention.

To the second part of your question, Leandro, is about capital allocation. So we're doing supplementary dividends now, if approved in next month's shareholders meeting. We're a traditional payer of IOC every quarter. And when we adopted the RN 451 from the ANS mid last year enabled us to increase the payout, which is practically the maximum payout for each year. And there's nothing different to expect here. There is a possibility as of 2023 of the company having a different type of regulatory framework. So the industry would have a different type of regulatory framework as of 2023 with the arrival of the risk capital evaluation model. So then in that case, there might be some additional release. It's still early to quantify that.

But I believe that the company is going through a moment of a very robust capital structure, which is ready to analyze opportunities, be it in the organic field of growth, where the company has constantly analyzed projects as well as any potential share buyback. That's also something that's part of the company's scope of analysis. We're traditional dividend payers. That's our #1 priority. And it's been as such since our IPO in 2006, but the discipline in that structure in that allocation is one of the characteristics of our management model. Thank you, Leandro.

[Operator]

[Operator Instructions] As there are no further questions, I'd like to hand over to Mr. José Roberto Pacheco for his final remarks.

[Jose Robert Pacheco, executive]

I would like to thank everyone for their participation in this earnings call that ends the 2020 cycle. And the next month, in April, we will not only have our shareholders meeting, but also the disclosure of our results of the first quarter. Thank you, everyone. Have a great week.

[Operator]

The Odontoprev conference call is now adjourned. Thank you for your participation, and have a good afternoon, and thank you for using Chorus Call.

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