Earnings Call: Q2 2021

Aug 12, 2021

Good afternoon. Welcome to Hapvida's Second Quarter 2021 Earnings Conference Call. Joining us today are Mr. George Pinera, CEO Mauricio Teixeira, Chief Financial and Investor Relations Director and Guillermo Najus, Investor Relations Director and Sustainability Director. We would like to inform you that this event is being recorded and all participants will be in a listen only mode during the company's presentation. After Hapita's remarks, there will be a Q and A session for investors and analysts only when further instructions will be given. Today's live webcast may be accessed through the Internet address atri.hepida.com.bren. Before proceeding, let me mention that forward looking statements that may be made during this conference are based on the beliefs and assumptions of Hepfida's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Hebrida and could cause results to differ materially from those expressed in such forward looking statements. For those of you who are connecting via webcast, you control the slide deck. Use the navigation keys in order to change slides. Now I'll turn the conference over to Mr. Georges, who will begin the presentation. Mr. Georges, you may begin your conference. Hello, everyone. Thank you so much once again for joining us in our conference call. It is with great satisfaction that we share with the market Hepida's results for the Q2 of 2021. I could not start this conference call without highlighting the efforts that were made during the Q2 by our team to find the COVID-nineteen pandemic. I am thrilled and I acknowledge all the love, dedication, care and all professionalism put into the planning and execution of the several initiatives to fight the pandemic. We're very grateful for being able to fulfill our mission of serving, caring for and protecting our members. To our team, my deep felt thanks. And to our clients, I reaffirm our untouchable and innegotiable commitment to serve you, giving true meaning to our existence as an institution. The Q2 was an atypical and challenging period marked by the continuity of the second wave of the COVID-nineteen pandemic in Brazil. However, once we were getting close to the end of the quarter, we saw the main COVID-nineteen pandemic indicators presenting strong reduction. Our COVID care numbers are going through a downward trend in all regions. The daily volume of admissions that once exceeded 200 in one single day dropped to about 20 recently. Yesterday, for example, August 11, we had only 12 admissions. In some cities, the volume of admissions is already stabilized at historical levels for some months now. The average length of stay also went back to levels that are close to pre pandemic periods with most recent values of around 3.8 days per admission. The number of beds dedicated to COVID-nineteen were reduced by about 90%, a bit over 100 beds today versus 1652 beds that we had during the peak. We now have around 600 health care professionals dedicated to fighting the pandemic, a reduction of over 80% when compared to the 3,600 we once had. All of that added to the vaccination pace in Brazil makes us believe that we will remain in this downward trend in the number of COVID-nineteen cases. In the months of May June of 2021, and we'll give you further details about that later on. We added 584,000 health care members and 184,000 dental members, increases of 16.7% and 5%, respectively. Good afternoon. Okay. Continuing now. This growth came especially in the beginning of the consolidation of ProMed of Belarizonte, an acquisition concluded in the Q2. We also added lives organically, 130,000 lives in healthcare and 182,000 lives in dental. More recently, we've seen an active commercial pipeline with the addition of 23,700 lives in healthcare and 23,300 lives in dental in the Q2 'twenty one. Our consolidated MCR in the 2nd quarter was of 66.6%, 5.5 percentage points increase compared to the Q1 of 2021 due to the service and hospitalizations related to COVID-nineteen. There was also an impact with a greater number of COVID admissions in the Center West and Southeast regions, where we're still going through growing levels of verticalization. In addition, there was also an impact of the MCR of recently acquired companies, Medical, Sao Jose and ProMed. These three companies have MCRs around 85% 95%. They are still operating at levels that are higher than Hepri does, but they are already going through a MCR correction process. It's worth mentioning that only with the entry of the acquired companies and their weights without the COVID effect and without the impact of the negative readjustments of individual contracts, the consolidated cash MCR would have been 67.5%, and we delivered 66.6%. We were able to serve an exceptional demand and at the same time, deliver efficiency gains that were more than enough to absorb the one off impacts in the quarter that we mentioned previously. Our verticalized and integrated business model enables us to go through impacts like that much more than the rest of the market. We continue excelling in claims management. Digital transformation, automation and artificial intelligence are already part of the everyday life at Hapita. Our operational technical center located in Recife in the state of Pernambuco enabled us to continue increasing the number of tests conducted in our own network in the Q2. Another novelty in the quarter was the launch of our ECG report center that is now using artificial intelligence. With machine learning, we can now deliver 95% of test reports in up to 15 minutes. From March July this year, we have already interpreted and delivered over 53 1,000 tests with this new system. The use of artificial intelligence enabled us to implement this process in a safe and agile manner, indicating to experts the tests that may have some type of abnormality. Our selling and administrative expenses level reduced by 0.5 percentage point when we exclude our long term incentive plan or ILP. Our SG and A level remains very well controlled with a stable index. So our ex ILP EBITDA has reached BRL312 1,000,000. Now on Slide number 4, we closed the quarter with 4 65 care units between hospitals, emergency walk in units, clinics and diagnostic units, 27 more than the Q1 of 2021. We opened Hospital de Maceo replacing another hospital in the same city, 2 walk in emergency units, 6 clinical medical clinics and 3 diagnostic units, in line with the modernization and consolidation process in new and large units for higher complexity procedures that centralizes and expands the existing services. In the inorganic front, we concluded the acquisition of ProMed, which became part of Hepvida in May, consolidating the results in June 1, 2021, adding 2 hospitals, 5 clinics and 1 diagnostic unit to our structure. In addition, we now have 9 hospitals in different phases, some of them still under planning and other at advanced stages of construction. We are also expanding our hospital unit in Natal, where we are doubling our capacity. Thus, we closed the quarter with 3,570 beds, 507 more than the same period the previous year. The main additions of beds happened in the following way: 103 at Hospital Singha Junqueira, 23 at Hospital Mario Palmeiro, 112 at Medical, 99 in Grupo San Jose and 116 at ProMED. We continue engaged to find the ideal size of our own network, which will enable us to achieve gains in verticalizing medical expenses. Now on Slide 5, you can see the market share of the Healthcare and Dental segments in the Q2 of 2021 compared to the same period of 2020. In Healthcare, we had a 1 percentage point increase in all regions where we operate. In Dental, we grew 0.3 percentage points, fruit of our growth strategy. Another major step was given, as you can see on Slide 6. We are advancing at yet another stage of our business merger between Hepida and Grupo Notre Dame Intramedica, GNDI. In June, we received the official approval to take over GNDI's operator by the national regulator or ANS. The next step is to receive CADE's approval. Our process was submitted to them in June. On Slide 7, you can see that we continue committed to our sustainability agenda. We published in May our 2nd annual sustainability report. We are advancing in our strategic planning for the area. In the environmental sphere, we celebrated for the first time the environment week in which we implemented actions to foster the discussion of the topic at the company. We have also announced 4 new hospitals in the network of green and healthy hospitals. We also have a major work front with a project called Evolve with several social responsibility actions with our employees. We have also reserved the month of June to celebrate diversity and create a safe environment free of prejudices through programs that foster the practice of diversity in all its breadth and polarity. So we published a diversity and inclusion guide at Hapvida. The launch of the document was also accompanied by corporate talks and a remote learning course with 10 videos. We understand that we are in the beginning of this journey, and we are confident that the ESG agenda advance is key for the sustainability of our business. We have also been taking all the opportunities created right now in the market for the buyback of shares in order to generate value to our shareholders because we believe that the current price of our shares does not reflect the foundation and the opportunities of hapvida's business. The dedication of our over 37,000 employees and 30,000 medical professionals and dental professionals reinforces our belief in our business model. Now I would like to turn the floor over to Mauricio Teixeira, our Financial VP and Investor Relations Director, who's going to give us further details about the numbers of the quarter. Thank you very much. Thank you, George. Good afternoon, everyone. Let's move on to Slide 8. Our net revenue in the Q2 of 'twenty one grew by 15.7% when compared to the Q2 of 2020, boosted mainly by the organic increase of 130,000 lives in our healthcare member base, 39,000 in individual plans and 91,000 in group plans and the organic increase of 182,000 lives in our dental member base with 38,000 in individual plans and 144,000 in group plans. BRL 5,200,000 in the quarter. The consolidated acquisitions in the Q2 of 'twenty one that did not exist in the Q2 of 2020 also contributed to this growth, BRL 48,800,000 in medical, BRL 43,300,000 of the Sao Jose Group and BRL 43,300,000 BRLs at ProMED. And we also have 12,000 lives coming from SANAD and 13,000 lives coming from PlanREC. Our Dental segment had a decrease of 3.1% in the average ticket value because of the participation of urgency care plans. But even with a smaller ticket, our revenue grew 11.2% because of the increase in the number of members. On Slide 9, you can see how the COVID-nineteen landscape has been evolving at the company since the beginning of the pandemic. In the Q1 of 2020, we had the peak of the 2nd wave with 217 admissions in one single day. In the Q2 of 2021, our care units were impacted by almost the same volume of service and admissions related to COVID-nineteen compared to the Q1 of 2021. The difference is that this happened in a scenario with a downward curve. Just like in the Q1, the Q2 led to a higher demand of elective procedures because of the flexibilization of mobility restrictions and the non suspension of elective procedures. So there was a drop of 65% compared to the average of the Q2. In August, the rhythm indicates a drop of over 50% compared to July. We project less than 500 admissions for the whole month. This trend, together with the advances in the vaccination phase, will give us an expectation of normalizing our operations. On Slide 10, you can see the MCR for the quarter and for the first half of the year. Cash MCR in the Q2 of 'twenty one was at 66.6 percent. And in the first half of 'twenty one, it was 63.9 percent, increases of 14.1 percentage points and 9.8 percentage points, respectively. And this is mainly due to the COVID scenario that was explained previously with an impact of BRL153.5 million in the Q2 of 'twenty one alone against an impact of BRL47.6 million in the Q2 of 2020. And there's also higher level of MCR in the acquired companies, Medical, Saint Jose and ProMed, which was not which were not present in the comparative period. We had cash MCR and the IBNR constitution because now we have the return of elective procedures in our accredited network and the normalization of the ESA's reimbursement provision with the new ABS that are now being sent by ANS after being interrupted because of the pandemic. There was also an increase of BRL4 1,000,000 in depreciation and amortization in the first half of the year because of the increase in care units coming from both organic and inorganic growth. The reduction of BRL5.4 million in the Q2 'twenty one is due to a reflex of the amortization and our PPA, which is actually reflecting lower amortization in the period. On Slide 11, you can see the breakdown of the SUS reimbursement provision. In the Q2 of 'twenty one, we received a new ABI lot, 86. And because of the acceleration of the number of invoices sent in previous quarter, the historical percentage sent by ANS suffered changes, but the provision of ABI has been kept stable. Okay. Connections have been reestablished. On Slide 12, we continue to present the percentage of representativeness of the SUS reimbursement provision value that has been been dropping compared to the total claim of the company. We calculate using the ABI amount divided by the quarter to which the ABI refers. There has been a sequential drop in that level And we have received the ABIs for procedures that happened in the Q2 of 2020. And the nominal value is similar to our historical levels. But since the claims of the Q2 of 'twenty was much lower because the elective procedures had been suspended, which is the number that goes in the denominator, there has been a dramatic increase in this index. But this should go back to normality in the next quarters. On Slide 13, you can see an additional slide showing what our cash MCR would have been in the Q2 of 2021 if we disconsidered the additional expenses with COVID, which were BRL153.5 million and the higher level of MCR in the acquired companies, Medical and Sao Jose and Promed. Our index would have been 59.7%, which is well in line with our historical MCR for 2nd quarters. On Slide 14, you can see our operating expenses. The selling expenses rate was of 8.1% in the Q2 of 2021 and 7.1% in the first half of 'twenty one, a reduction of 0.6 percentage point and 0.9 percentage point compared to the same core periods of 2020. This reduction can be explained mainly by a lower rate of selling expenses in the acquired companies, reduction of deferred expenses of net commissions due to the cancellations of plants and reduction in the level of delinquency in individual plants, both in the Q2 of 'twenty one and in the first half of 'twenty one. Compared to the Q1 of 'twenty one, there has been a 1.9% digit point increase and the level of administrative expenses was of 9.9%, both in the Q2 of 2021 year to date. So this is stable when we deduct the long term incentive plan effect. We had some variations that offset each other. So this indicator has remained stable. On Slide 15, you can see our ex ILP EBITDA of BRL312 1,000,000 in the Q2 of 'twenty one and BRL778.8 million in the first half of 'twenty one. The EBITDA margin of the Q2 'twenty one was 13% 16.5% in the first half of 'twenty one. This reduction can be explained by the 2nd wave of the pandemic since our SG and A as a percentage of the revenue was practically stable. Excluding care costs coming from the COVID-nineteen effect, we would have had BRL153.5 million for the Q2 and BRL247,100,000 for the first half of 'twenty one. Net income totaled BRL269,800,000 in the Q2 of 'twenty one, a reduction of 29.5% compared to the Q2 of 'twenty and BRL 569.4 million in the first half of 'twenty one, a reduction of 11.8% compared to the same period the previous year, impacted by the reduction of the EBITDA because of the pandemic, as we already explained, and an improve in our net financial expenses and effective rate. Slide 16. The ex acquisition free cash flow was negative of BRL202.4 million, impacted at BRL420 million by the working capital variation of ProMat that had in its opening balance sheet BRL669 1,000,000 of net liabilities and that after we took over was reduced to BRL 248 1,000,000 through the payment to many suppliers. It's worth mentioning that this will be offset by the price adjustments for this transaction. The cash flow was positively affected by the lower balance in our income tax and social contribution explained by deductible expenses that did not occur in the comparative period. There was also an impact of the EBITDA reduction that was BRL 316,100,000 lower. And our cash consumption for the quarter of 2020 due to the increase in CapEx investments and the expansion of our own network. We're now available for the questions and answer session. We'll now start the questions and answer session for investors and analysts only. There is a question from Vinicius Ribeiro from UBS. Good afternoon, everyone. Thank you for taking my question. I have actually two questions about the same topic. I apologize if you have talked about this during your presentation because we had some connection issues. So first, I'd like to know about organic additions in new locations, especially in the countryside of the state of Sao Paulo. How is your vertical structure in those locations? I know you are planning to launch new products in these locations that needed higher level of verticalization. Considering the investments that were made during COVID, when do you expect to accelerate this in the new locations? Now my second question is about negotiation with clients. Last year, we had an indication that the competition was a bit more aggressive, and I wanted to have your take on that. And in addition to this macro situation, is there any catalyst on your side to accelerate organic growth? [SPEAKER CANDIDO BOTELHO BRACHER:] Hello, Vinicius. Thank you for your questions. About the infrastructure, you know that our team is very disciplined when it comes to all of the initiatives that will increase the level of verticalization and integration of operations. Even in the regions where we already have a high level of verticalization, like in the North and Northeast of Brazil, we're expanding the hospital of Natal. That's actually a duplication that is now ready. We have a pediatric hospital to be opened. And in the coming weeks, we will have a new pediatric hospital in Recife. We opened a hospital in Maceo that is twice as large as the previous one we had. So we always want to offer the best to our customers and this is very well aligned with our foundations. Now about the recently acquired companies, we have several initiatives. For the Center West, we will deliver in the coming days the 1st walk in emergency unit in the region and we are also building a hospital in the region that might be ready by the end of the year or beginning of next year. In the countryside of the state of Minas Gerais, we just acquired a property and we are now going through the regulatory process to build a hospital in the city of Uberlandia. In the city of Uberaba, we had already leased part of the largest hospital in that region, Hospital Mario Palmerio. And we're also investing in imaging clinics, emergency units and so on. These investments have already been made and are already operating. Still in the center west region, we are building a hospital in Campo Grande. We just opened a low complexity hospital in Rondonopolis and there are another 3 walk in emergency units for the region involving Mato Grosso and Mato Grosso do Sul. We also acquired property in Brasilia and will soon start construction of that unit there. Now for the Southeast, starting with Belarozonte. The whole verticalization plan of these 2 acquired companies, Promad and more recently, Premid, We are expanding the number of beds in existing hospitals. We are also building new hospitals and leasing hospital units and building an outpatient network. We have already devised the plan. This is a very robust plan that is now being executed. Our expansion area is working very hard on this. Now for the countryside of the state of Sao Paulo, we're still working on the inorganic and organic fronts. In some regions, not only in the countryside of Sao Paulo, we have M and A projects that will help us increase the verticalization level in the hospital segment for Sao Paulo and the countryside of the state of Sao Paulo. We're also building 3 hospitals there. In total, we have 9 hospitals under construction, not to mention those that will be added inorganically. So there are several fronts, and this is what's going to support us because we don't focus only on verticalization, but also on complete integration of all of the services that give us a great competitive edge, sustainability and that will help us grow in the future. Now about the competition. For now, there is nothing very surprising to us. For the Q2, as we said, the company is resuming organic growth. The Q3 is even more exciting. I'm really excited about retail that has been exceeding our sales target in June August has started well as well. So we think our product is very well fit. And we're very confident that we are on the right track. We are expanding our markets here in general, and we have the possibilities to grow and expand market share at the same time. In the regions where we operate, I don't see the competition offering any new competitive edge or anything that can threaten our consolidation. Our next question is from Mauricio Sepeda from Credit Suisse. Hello, George. Thank you so much for your time and for taking my question. Talking about the commercial area, I have a few questions about things that have been happening in the field. Do you see any signs of economic recovery for your corporate clients? Do you think that they will increase the number of lives? Also, do you see willingness from other companies to change their health care plans? Do you think that you have the possibility of attracting new customers because of that? Now I would like to hear a bit more about the cancellations that you mentioned. What has been motivating those companies to cancel their contracts? Thank you very much. Thank you for your questions, Mauricio. About the inclusion of lives in existing contracts, we see that this movement is already happening, but we're not back to pre COVID levels yet. I think that the companies are resuming activities on the one hand, but I think that the main factor here is that the companies are now reestablishing their expansion plans, but not all of them are enforced yet. But we have positive signs and we believe that soon we'll go back to the level of hiring and the number of headcount that companies had before the pandemic. So this is a very healthy growth for us when we talk about companies that are already our clients. When they rehire their employees and go back to the headcount to pre COVID levels, that's going to have a great effect for us. So yes, we see some growth there, but we're not yet back to pre COVID levels in existing contracts. Now about the dynamics and the possibility of offering new corporate products, In times of COVID, it's harder to do that. Many companies started working remotely, and it's harder to get in touch with them. Thankfully, we were going through the pandemic very well. Once this is over, we think that we're going to have a great semester of growth. And based on the expectations of our commercial area, we believe we'll go back to normal levels of growth. And finally, about the cancellations, it's natural to have a bit more cancellation in periods of economic instability, but we're overcoming that. The second quarter already had net growth and the third quarter will have an even more robust number. I think that when it comes to economic landscape, the worst is behind us. So I don't see a negative outlook for that. On the contrary, our product, especially during these challenging times that we're going through, is the product that Brazilians want the most. It's a dream of all Brazilians to have a health care plan, and we're ready to make the most of the economic recovery and of that desire of the population to have high quality health care available to them. That was very clear. Thank you very much. Our next question is from Freddie Mendes from Bank of America. Good afternoon, everyone. Thank you for your call. I have two questions. The first one is about an important topic. In the macro scenario, we are talking about almost 400,000 lives added. So I don't know if organically you had some specific contract that added to that. I would say that you are now way above historical levels. Can you confirm that? Now about MCR, if you exclude the COVID effect, you would be within your historical MCR range as well without a large impact of elective procedures, which would we would expect to have a higher impact. But the point is, I believe that from now on, we would go back to historical levels without any strong impact of the elective procedures. [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Well, Fred, thank you for your questions. When it comes to organic growth, in the last 12 months, provoked by us, we canceled 4 significant contracts. And I think we mentioned that in our last conference call. But these are contracts of acquired companies that had a sprayed presence in regions where it would not be appropriate for us to invest in verticalization. Our verticalized model would not make sense for that. These were all corporate customers with very high MCR rates, about 90% to 120%, all of these contracts. And they accounted for 80,000 lives, but we were the ones that wanted to cancel those contracts. Maybe some of them might make sense in the future if we implement a verticalization strategy there or a co responsibility, co participation model. But the way that it was, it didn't make sense for us to keep the contracts in which we would have no remedy, but to transfer the prices to our customers. So we thought it would not make sense to keep these contracts. And during challenging times of the pandemic, our company had relevant growth. In the end of last year, from the 3rd to the 4th quarter, we had had a robust growth already after the first wave of the pandemic was left behind. And now the 2nd wave is ending, and we expect to see the same growth phenomenon in the second half of the year. About MCR, that's a great question. I know that we had connection issues, so I would like to explain that to you once again. What I was saying is that if we made a simple merger of that has around 60% MCR with all of the acquisitions that we made in recent months, San Francisco, PROMEDE, LIMERA, America, RN, Sao Jose and others, the MCR of Hebrida at 60% and all of the acquired companies that varied from 70% to almost 100%, the combined MCR would be 67.5% in a scenario without COVID-nineteen and without negative readjustment for individual health care plans. But our operational discipline to capture synergies and correct assets that were acquired only a short while ago, we were able to achieve 66 0.6 of cash MCR, which is lower than the simple combination of hapida's MCR and the acquired company's MCR ex COVID. It's as if we were able to offset all COVID-nineteen related service with a balance of 1 percentage point. So I reinforce, this is a spectacular result. And we kept MCR at around 60%. So it's important to mention that we see the whole market struggling. It's been challenging for everyone, but our business model enabled us to keep the MCR at around 60% and to offset that major volume of admissions and COVID-nineteen related care provided. We absorbed all that with efficiency gains, capturing synergies as well in the acquired companies. And they are now relevant considering our member base and our portfolio. Now looking ahead at the Q3, as we tried to show you in the number of care provided, admissions, number of employees dedicated to one thing or another. We'd say that the Q2 was very much affected by COVID-nineteen and the Q3 is now going through a strong recovery with a dramatic reduction of COVID-nineteen related service. June July was less impacted than June August, much less than July. So there is a downward trend. And we believe that in September, we will have almost no COVID-nineteen effect, considering the reduced number of hospitalizations and the demobilization that we've done. In terms of elective procedures, we haven't stopped. But of course, some procedures were not conducted in the Q2, but they will be done in the Q3. And I think that the backlog will be over in the Q4. But we don't think that there will be a major impact. And that's because we have a very resilient business model. A surgical procedure at our network cost infinitely less than the rest of the network because around 70% of the cost has been prepaid in terms of salaries, property leases and so on. So we can buffer those costs. And considering the COVID-nineteen landscape, our business model has proved to be very resilient, even in spite of all the challenges that we went through in the Q2. Thank you so much, George. That was very clear. Now there's one thing I did not understand. If we look at gross sales only, almost 400,000 in the second quarter. Now if we look at 2019, I see that the numbers were close to that, right? Or was that lower? [SPEAKER CANDIDO BOTELHO BRACHER:] Well, Fred, I don't have the 2019 numbers here. But what I can say is that sales targets for corporate plans and individual plans are much higher than for 2019. And in the Q3, we see great indicators of economic recovery. And the targets are now higher than those that we had for 2020 and for 2019. But if you want further details about that, we can forward them to you later. Okay, George. Thank you so much. That was very clear. Our next question is from Leandro Bastos from Citibank. Thank you. Good afternoon, everyone. I would like to talk about M and A a bit more. The first question about the recently acquired assets. Promad is the most relevant one. Can you share your first impressions there and your attempt to capture synergies with them? That was one of my first question. Now the second question, do you see new opportunities to acquire assets? We know that we have the COVID-nineteen challenges, but do you see any M and A opportunities in the industry? Thank you. Thank you, Leandro. These are great questions. About Belo Horizonte, I am very impressed with many actions. After PROMAD, we also received CADES approval for PN. So in Belo Horizonte, we already have a relevant portfolio. And that is really important for us because we'll be able to fully implement our business model there. And as I was saying, our philosophy guides us to implement a large health care network present in the most important regions of the Greater Metropolitan Area around Belo Horizonte, where we need low and medium complexity units, where we need emergency units, imaging clinics, diagnostic units. We're also expanding our hospital network. The plans have already been devised. They are ready and we are planning to implement our systems and integrate the whole network. You know that our systems have great intelligence, standardization of operations, medical protocols, prevention programs. So after all of that is implemented, we are going to have a huge competitive edge, not only to win markets to gain new market shares, but also to create new market segments. And we will be able to reach locations that are out of the private health care market. We were very well received by our customers and by the medical class. We've had over 96%. I'm not sure this number is correct, but I think it's been over 96% of the contacts with physicians from the Belo Horizonte area have been made, which reinforces a solid partnership with the medical class in Belo Horizonte to make this product a financial reality and also a reality in terms of high quality health care population of Belo Horizonte. We're very happy. We've been doing a lot, but the market is huge and there are many opportunities to be explored. Now about your second question. Yes, I see that the scenarios that we're going to face in the coming months will create organic and inorganic growth opportunities. And that's because many companies in the country depend on individual health care plans, and the negative readjustments will impact their operations strongly. So two things may happen. On the one hand, this type of company might have to transfer this readjustment through other sales channels and this could bring us organic growth opportunities, but this could also create some fragility to those operations, which could be reverted into opportunities for acquiring those companies. Our portfolio of acquisitions as our acquisition pipeline is going strong. A few weeks ago, we announced the possibility of acquiring one of the major operators in Sao Jose de Rio Preto. We also acquired a hospital in the countryside of the state of Bahia. So this year, we're going to see a lot of activity in the M and A area. Our team has been working really hard, and we know that this can be boosted by the regulatory scenario as well. Thank you, George. That was very clear. Next question is from Gustavo Miele from Itau BBA. Good morning, everyone. Thank you for this conference call. I have two brief questions. First, I'd like to talk about NCR from the COVID-nineteen perspective. It's clear to us that there is a positive message when it comes to the drop in COVID-nineteen admissions in the beginning of the Q3, as you already mentioned. But can you tell us about the unique cost of COVID-nineteen admissions in the beginning of the Q3 of 2021 compared to the Q3 of 2020. Is there any relevant changes here in terms of medication costs, medical costs, so that we understand what the costs are? Maybe will the lower admission rate be translated into lower costs or not? Now another question is, I would like to understand how the selling expenses fits into this context of healthier or sounder growth sales. We've seen that selling expenses usually go through variation in recent quarters. It's now going through a positive trend. But if we look at the organic portfolio of the company today, do you think that you have you are at risk of having more volatile selling expenses because of this higher gross sales? So these are my two questions. Thank you very much. Thank you, Gustavo. Okay. I'll try to give you a bit more detail about COVID-nineteen costs. What items have impacted COVID costs for us? Well, first of all, the second variant causes more severe cases than the first variant we had. This led to longer lengths of stay than in the first wave of the pandemic. And that affected not only the elderly and patients of risk groups as happened in the 1st wave, but also younger patients during the 2nd wave. So we had a higher volume of COVID-nineteen related admissions, as our charts show, and also longer length of stay. But the excellent news that we're sharing with you is that in August, we'll demobilize all COVID-nineteen dedicated premises we have. During the peak of the pandemic, we had medical material inflation over 30%. And in the last month, that number was below 8%. And it was focused on some specific items. So we see that this important cost indicator has already been is already changing. Now about medical fees. There is a shortage of physicians, and we have to pay up to 80% more to some specific experts. That was also a temporary inflation that has zeroed down. The month of August has just a little bit of that cost remaining, but we don't expect any more of that for September. The number of COVID-nineteen tests has decreased. The number of professionals needed, nurses, physical therapists, this has all been reduced by over 80%. But I would like to emphasize that our team was very agile opening units and making beds available so that we would not have any shortage of beds or services to any of our members, not even in terms of materials, PPE, drugs and beds. We were very agile to open and make the best conditions available to all of our members. And we were also very quick in making demobilizations. As the numbers decrease, we demobilize those assets so that we can return to normal operations. I would like to congratulate our team. We acted according to our needs and the operations are now going back to historical care levels. Now I would like to turn the floor to Mauricio so that he can answer your second question. Thank you for your questions. So talking about commissions, I don't see any type of volatility in commission expenses. First of all, because they are deferred by the duration of the contract. We had a benefit in the Q1 to increase the average duration of the deferral of commissions of contracts, which is a good sign. This creates customer loyalty and the customers remain with us for longer. And the acquired companies have an average cost of sales that is lower than ours. So yes, there are gains of scale in selling expenses. So I don't see any volatility. We can actually gain efficiency in the part of commissions. Now we saw a decrease of the delinquency rates in the Q2 of 2021 and the Q1 as well, but we should look into this in the long term after the end of the pandemic. But private health care is now at the top of the priority of both individuals and companies. So when they have to choose what to pay, the health care plan will be one of their priorities. So I think the delinquency levels will continue to drop. Now then for bad debt, I don't see any type of changes from now on. Next question by Gustavo Tazeo from Bradesco. Good afternoon, George, Mauricio and Auz. Thank you for taking my question. I only have one question about the merger with GNDI. We know that there is a relatively long period until we get Cadiz approval, like 7 to 9 months? Have you been working with a consultancy company? Can you capture any type of synergy in these 7 to 9 months that we have ahead of us? Just want some update about the merger with GNDI. Thank you for your question, Gustavo. Well, yes, we've been advancing in everything that we can do for now, respecting all regulatory requirements. Yes, we've hired a consultancy firm. We have put teams together. These teams have been meeting very frequently. We have listed all the main gain fronts that will have larger impacts in the short and medium terms. All of this is going to become initiatives and the teams are working to devise and define everything that will be done after the merger takes place. Up until we get the approval, none of the initiatives will be implemented. We'll only plan the activities and other critical information, unfortunately, cannot be shared with you. We are keeping a high level of compliance in this area. But whenever our teams work, we get more excited because we see many opportunities. All of the fronts that have been identified are very solid and there will be clear gains. So on our side, we've been working the best way we can. And I'm very excited about all of the fronts, the gains and the synergies that will happen in the future, either in the commercial area, G and A, MCR. There are many fronts for us to work on to bring gains to our members and to both companies. Great. Thank you so much, George. If there are no further questions, I'd like to turn the floor over to Mr. Georges for his closing remarks. We would like to thank you all once again for joining us today. We'd like to thank our members. They are the reason we exist, and we are still committed to offering them high quality health care and efficiency. I would also like thank all of our employees for fighting so hard and to congratulate them on the results that we have achieved in fighting the pandemic. I would like to thank also the Board of Directors and all of our partners and our shareholders who believe in this beautiful mission of taking care of people. Thank you very much and see you next time. This concludes HEPLIDA's earnings conference call. We thank you all for joining and have a nice afternoon. You may disconnect your lines now.