Earnings Call: Q1 2021

May 20, 2021

Good morning, everyone. Welcome to the earnings call of the first quarter of 2021 of Rede D'Or São Luiz. We have here with us today, Paulo Junqueira Moll, Chief Executive Officer. Otávio de Garcia Lazcano, Vice President of Finance and RI, Investor Relations. Marisa Martins, Executive Vice President. Rodrigo Gavina, Operations Vice President, and Leandro Reis Tavares, Medical Vice President. This event is being recorded and will be available at the IR website of the company. After the initial presentation, we will start with the Q&A session. Before we proceed, we would like to clarify that any information that might be provided during the earnings call regarding the company perspectives of Rede D'Or São Luiz operating results, market share, competitive positions are stated in forward-looking statements that express the opinion of the company. Factors and values may impact these results and go beyond the ability and control of the company. General economic conditions and industry conditions and operational conditions might affect the performance of the company and might lead to results that differ from those expected forward statements. Now, I would like to give the floor to Paulo Junqueira Moll. He will start this teleconference. Well, good morning. Thank you for your presence. Thank you to our shareholders and our analysts. We've had great results that we will present to you. Let me start by the update of the COVID-19. I think that the company has shown a lot of operational resilience, showing the capacity to adapt and flexibility, either with a higher number of COVID-19 patients and with the reduction of the COVID-19 demand, the allocation of those beds for the non-COVID patients through segregated areas in our hospitals. We are keeping the good services for the other pathologies and keeping the care, even with a lot of automation, high occupancy rates for keeping the operation updated. We said that over 1 million patients that were symptomatic. Out of these, 300,000 were confirmed cases that generated over 40,000 patients that were admitted to the hospital. Our general lethality rate is around 1.7%. Only the best centers in the world have these index. We would like to highlight our mobilization in support to the public health care system, and we opened over 1,350 beds for philanthropic hospitals, public hospitals to service the public health care system. As you asked, we have BRL 260 million that we invested from Rede D'Or and BRL 100 million that partners have contributed to this cause. Finally, in the research line that is related to COVID, we understand that it is our duty, and we have one of the biggest databases and historical data series of servicing and taking care of the COVID-19 patients in the world. Even throughout the pandemic, we are evolving in the process of training. Our objective is to have, until the end of the year, all hospitals accredited. The still not accredited hospitals were the ones that were acquired recently, or they haven't been launched yet. We also have the accreditation by The Joint Commission, in Copa Star and Vila Nova Star. The hospital has only been launched for three years, and we've been accredited by Joint Commission. In expansion, we want to increase the access to our services. We are accessing two new markets. I would like to highlight our entry in the state of Paraíba with the acquisition of Hospital São Lucas in the state of Paraíba. It's a great platform, and it's a second hospital that is called Lim. It has its own diagnosis unit, and we have the platform to expand in the state of Paraíba and also Rio Grande do Norte. I would also like to highlight our entry into the Minas Gerais market with Biocor. It's a very traditional 350 beds in the city of Belo Horizonte. It really highlights our entry in this market. We will have enormous opportunity for growth through M&A and through brownfield in this very attractive market. I would like to highlight our discipline as well in our M&A and our acquisitions. We acquired these assets with very attractive values and an ROI that is very good, aligned with our historical numbers. In the two M&As that we commented, these were processes that were non-competitive. These were processes basically of the partners choosing Rede D'Or as the partner. In aggregated numbers, we have nine hospitals that have been acquired since October, bringing a total of 1,290 hospital beds, surpassing all expectations. Commercial partnerships. I'd like to highlight a partnership that is very relevant for our year. We signed an agreement with Amil, which is the third biggest healthcare operator in Brazil, and we have 20 hospitals here in three states, São Paulo, Rio de Janeiro, and the Federal District. These are 82% of the beneficiaries of Amil, and within these 20 hospitals, we have five hospitals that were never accredited at Amil, are the 3-star, the São Paulo, Rio de Janeiro, and Glória D'Or in Niterói D'Or. These are hospitals that have a great capacity, and this will bring a lot of growth to the hospitals. Let's talk about ESG. We talked about the sustainability and the social fight against COVID, and I would like to tell you that we're going to publish our sixth annual report on sustainability that will detail all the actions regarding ESG in 2020. I would like to highlight a recognition that we received at the beginning of this year as The Sustainable Company of 2020, the award of Sustainable Attitude by the Industry, Commerce, and Services Chamber in Brazil. It's a recognition that shows that we're on the right path. Let's talk about the digital platform and the importance that we are doing all the investment. Investments in technology and innovation. I would like to highlight that we already have robust results. We've had a relevance that is ever higher in Rede D'Or. Most of the appointments are done through the digital channel, and this has a growth from the first quarter 2020 to the first quarter 2021. We had 169 appointments done through the platform. We almost have doubled compared to last year, 132%. We are providing more. It's better for our patients. Just to give you a data on our website for appointments, it had 2 million accesses. In the first quarter of 2020 and 2021, we got to 6 million appointments, 6 million accesses to our website. I would like to highlight MSCI. We are one of the 54 dozen companies that are in the emerging market, the index, and we are just at the inception of our path here, and we are very happy with the support that we are receiving from the market and with the recognition of our investments. Last but not least, but before I give the floor to Otávio to continue with our presentation, I would like to once again thank all the collaborators, all of our employees that have worked brilliantly in this fight against the pandemic. To me, it's a privilege to be part of this excellent team. The floor is now with Otávio. Thank you. Thank you, Paulo. Once again, good morning, everyone. Thank you for taking part in our earnings call for the first quarter. I'm at page four, operational indicators. Results for the first quarter. The first quarter are, once again, we have new historical records. The consolidated results show once more the strong recovery of the operational results and financial results of Rede D'Or. I highlight that the results do not reflect the M&A either. The investment recently announced as the accumulative adjustment to next ticket streams, the negotiations where the paying parties take part through the fiscal year. Now, I highlight that in the second quarter and until today, Rede D'Or is as a favorable business environment characterized by the coexistence of COVID-19 patients and a growing number of surgeries and high occupancy rate. Until the current date, the results of the second quarter are higher than the expectations. Let's start with the graph on the left. The company reported 553,000 patients a day in the first quarter of 2021, 21.9% higher than what was reported for the first quarter of 2020, and 10% higher than the fourth quarter of 2020. We go to the center of the page. The company registered a hospital bed occupancy rate of 1.9% higher than the one reported for the fourth quarter of 2020, 9.8% higher than what was reported for the first quarter of 2020, and in the same way, 2.6 percentage points higher than what was reported for the first quarter in 2021. The company is presenting occupancy rate that is growing in the last three quarters. The graph on the right, the company reported 52,000 procedures of oncology. Basically infusions, on the ambulatory setting, and it's 12% higher than what was reported to the first quarter of 10% higher than the first quarter of 2020 and 4% higher than the fourth quarter of 2020. Another record. Let's talk about the next page. Now then, page five. Still with operational indicators. Actually, five and six, we have messages that are basically the same. Operational indicators, they highlight the leverage and operational adaptation of Rede D'Or, combined with our corporate competency to actively administer patients and optimize the allocation of resources that are very limited by definition. The graph on your left, we can see the evolution of total surgeries and hospital beds average occupancy rates, the historical data, and the occupancy rate as well, you can see. The surgery, you can see in 2021 is very similar to the third quarter, fourth quarter 2020, quarters where the company also reported good positive historical results. Just so you don't have any doubts, on the right, we have the same information in the same-day total surgeries and occupancy rate. In the next page, we can see the graph of the evolution of COVID-19 patients and total surgeries. Coincidentally, we can see the resources and high occupancy rates. We have a portfolio that has good operational growth. You can see the graph on the right, the patient daily evolution from March, April, and May. We have the daily average of patients. Even though we had a 26% reduction of COVID patients today in the same period, we have an excess management, and we have the capacity of the company to immediately allocate the best resources and maximize the results for our shareholders. Let's go to page seven. Evolution of hospital beds. Since September of 2020, even though we're facing all the challenges of COVID, we had the addition of 1,200 beds. Four acquisitions, as we know, we have the additional Cárdio Pulmonar acquisition, and we also have the participation of Biocor in Minas Gerais and also in Pará and Paraíba. In the same way, since September of 2020, Rede D'Or has implemented in an organic way 1,082 beds. Of those, most of them were in the first quarter. The company reported the operational beds at the end of the first quarter of 2021, 8,191 beds, 10.8% of what was reported for the fourth quarter of 2020. As you can see on the numbers, we're 18.5% higher than the third quarter of 2020. Once again, the company has reported great results. Let's see page eight, revenue. Once again, with the information on your left. We can see the total gross revenue of BRL 5.3 billion. This value is 13.2% higher than the fourth quarter of 2020, 42% higher than the one reported for the first quarter of 2020. You don't have any doubts in cross sales. Gross revenue grew 30.2% compared to the first quarter of 2020. Hospitals and other services, they reported 92.3% of the gross revenue, a growth of 13.2% over the fourth quarter of 2020, or 43.7% over the first quarter of 2020. You can see on the right, the company reported the gross revenue in oncology infusion, BRL 406 million, a value that is 26.4% higher than the one reported for the first quarter of 2020. Page nine, costs and expenses. We can see the information on the left, the cost of services. We can see BRL 3.5 billion, a value that is 32.4% higher than the one reported for the first quarter of 2020. Here we have the justification acquisitions, the integration of Glória D'Or hospital, the central Rio de Janeiro, and also the personal hiring as the operation grows. Non-recurring expenses. Expenses related to the pandemic and the expansion of the oncology business. Going on the right, the company reported that the general and administrative expenses, we have BRL 217 million, a value that is 45% higher than the one reported for the first quarter of 2020. The same way, justifications. The subcontracting of third parties related to COVID, the building of new stock options so we can have the same plans that were preexisting to the IPO for the executives and collaborators, the IT services, and the monetary contingencies for the labor issues within the company. Excluding the non-recurring effect of stock options, the increase would be 23% year-over-year. The sub-line of personnel in terms of administrative expenses was 8.8%. Going to page 10, getting to EBITDA, net income and cash generation. Once again, on the left. The company reported an EBITDA of BRL 1.134 billion, an increase of 86% when comparing to the first quarter of 2020, a record in the company. The third sequential record for the company. The margin of EBITDA increased 5.5 percentage points to 25%. In the center of the graph, the adjusted EBITDA and the margin BRL 1.330 billion, a growth of 95.3% when comparing to what was informed in the first quarter of 2020. The adjusted EBITDA margin grew 7.6% once again, a historical record for the company. On the right, we have the net income, BRL 402 million, a growth of 254% compared to the first quarter of 2020. A new record for the company. Still on the right on the bottom, the company informs the adjusted operational cash generation, BRL 777.6 million in the first quarter of 2021. Next page. We can see indebtedness of the company. We reported the gross debt of BRL 21 million. The gross debt average cost to the i plus 1.3 percentage points. The gross debt average term 5.1 years. We have the foreign currency exchange debt, 40%. We also have reported the equivalent of cash, of BRL 30 million. Net debt is BRL 7.2 million and a ratio of net debt to EBITDA 2.4 times. At the center of the page, we have the gross debt profile per investor and on the right, the amortization schedule of the debt of the company. Last but not least, we have in the last page of the presentation the Rede D'Or three performance. We can see the performance related to our shares since the IPO when comparing to the IBOVESPA index and on the right some additional information about the shareholder composition. You can see the end of the presentation, and we are open for Q&A. Thank you. Thank you. We will start with the Q&A. To ask a question, please type star now. Please wait for the question. Mr. Joseph from J.P. Morgan would like to ask a question. Mr. Joseph. Hello, good morning. Thank you, Paulo. Otávio, thank you for accepting my question. Congratulations on the presentation. Two points that I'd like to mention. First, a very relevant evolution in the average ticket of the company. I wanted to understand how much did you reach of the complexity level before the pandemic. I want to understand how the regular demand has behaved in this first quarter. Second point, if you can comment a little bit on how we are seeing the evolution all throughout the second quarter. The first is very strong. Of course, the pandemic still affecting more to April. I wanted to get a few more comments on how the second item has behaved from the standpoint of growth and in this regular demand of high complexity of treatment. I'm going to answer the first. I'm going to talk about the ticket. What we observe in tickets is that the COVID-19 patients, we end up having a ticket that is similar to what we have with the other pathologies. A profitability that is less. Our expectation with the reduction of the COVID-19 patients cases that we have observed since the beginning of April until today has been compensated through the other pathologies and surgery schedules, and it's a positive signal to our results. Otávio, would you like to add anything? Paulo, I will reaffirm here what I've told you throughout the presentation. The business environment is very favorable, very similar to what we verified in the first quarter. We are having a high number of COVID-19 patients, and the company has corporate competency to fulfill that space, to leverage operationally all of our units almost immediately. The results until today are even higher than the expectations of the company for the second quarter. It's positive. Thank you. Thank you, Otávio. Mr. Samuel from BTG Pactual, the floor is yours. Hello, Paulo. Otávio. Congratulations on your results. Two questions. First, the opening on slide six, a really healthy issue, but could you talk about the representativeness of the COVID-19 admittance to the hospital? That's my first question. Secondly, on a follow-up, on a comment of Paulo on the average ticket, we know that the ticket is growing, and percentage-wise, of course, Paulo mentioned the similarity in the COVID-19 treatment and general admissions. I just wanted to see if there is an effect on the ticket, because maybe since March of last year, we had a drop in the admittance. The question is, from January to February, the ticket of the company grew with the same magnitude as you mentioned? That's the question. Thank you for the questions. Regarding the representativeness of COVID-19 patients admitted to the hospital in the first quarter, we'd rather not provide that information. I think that the relevant information for the shareholders, for analysts, is that the company keeps high occupancy rates and the volume of patients per day is very stable, regardless of the natural oscillations and movements of the number of patients that are COVID-19, and we can see very clearly in the presentation, in the slides. About the evolution of the ticket. Yes, we've had an evolution of the ticket of 16.6% when we compare to the first quarter of 2020, and 5% when comparing to the fourth quarter of 2020. It's very important to highlight that this is a very broad range, a broad mix. When we compare the first quarter to this year or last year, there was even more evolution in the portfolio. Now, the adjustment practiced by this company, it always follows the base inflation plus a premium, very small, maybe 1%, that's not stable throughout time, and the company goes through it. We have corporate competency to attract more high-complexity cases, which leverages the revenues as time goes by. This is something that has been discussed all throughout the process, this is a conscious decision of the board of directors that allows to target a higher market share. Therefore, we are helping the market to have more sustainability, financial sustainability on the medium to long term, so that the market grows. Thank you. Congratulations on the results once again. Mr. Gustavo from Bradesco BBI, the floor is yours. Thank you. I have two questions on our side. First is regarding the operational beds. What can we observe? What can we have a better visibility, and what would be a ratio that would be sustainable operationally for the second quarter, third quarter? Because what we are thinking, there is the impact of COVID-19, is that maybe increase the number of operational beds, an increase in percentage. What can we imagine for the third quarter? Is that sustainable? That's the question. Second question, oncology. The structure of oncology in Rio de Janeiro is very strong, and in São Paulo, it's doing a catch-up. How is that situation since the pandemic gives a little bit of a dilution to those numbers? How can we move forward? Do we have proportions similar to Rio de Janeiro and São Paulo? How is the situation unfolding? Gustavo, I'm going to answer on the oncology question, then I will let Otavio talk about the operational beds. You're right. We had oncology in Rio de Janeiro that was very strong. We grew our oncology. Our oncology is growing in São Paulo, basically organic. Well, it's organic growth. We attracted a few big names. Dr. Paulo Rossi joined the group in 2017. From that moment on, we are attracting physicians and assembling our services in several hospitals within the city of São Paulo itself. This growth, very organic growth, has been very strong, to the point that we are reaching, if I'm not wrong, in March, the number for the first quarter, volumes are similar in São Paulo in chemotherapy than with the numbers that we see in Rio de Janeiro. Of course, São Paulo, the size of the market is completely different, and we have more opportunity than what we expect in Rio. Here in Rio de Janeiro, we are still growing. We are growing, nonetheless, with good rates. Given the fact that we have the opportunity in São Paulo, and we started to from a very low invoicing in 2017, we had a rhythm of growth that is higher, and we have a gigantic opportunity to keep the size of the growth because of the size of the São Paulo market. Gustavo. I'm going to repeat myself once again. One of the more beautiful characteristics of this company is its capacity to optimize the resource allocation almost immediately. At the end of last quarter, we had 8,181 beds that were operational. We have today approximately 8,230 operational beds. In the presentation, there is the information that since the end of March until today, the number of COVID-19 patients dropped 26% year-on-year. This is sufficient evidence for my statements here. It doesn't seem that with the information that we have today that the first semester was monotonous in regards to COVID. We still verify high occupancy rate of COVID-19 patients and that a capacity utilization and optimization of resources is key to our company. Thank you. Congratulations on the results. Mr. Mauricio from Credit Suisse, the floor is yours. Pablo Otavio here at Cepeda. Congratulations on your results. Two questions. Now that you have some respite, well, you have the expansion as well of the other operations and not so much the heavy burden of COVID-19. How are you dealing with that expansion? The second question is the stock options. You have done some corrections for the stock options and the results. The question, do you want to change the dimension of these stock options? Do you have a differentiated stock options in the future? Thank you. That's the first part. Well, I apologize the connection was poor, and I realize that your question is about the indebtedness of the company. If you can repeat it, Mauricio, please, we couldn't get it. Cepeda. The respite of the ratio of indebtedness, will you finance the expansion of the debt? Well, we do the management of liability effectively. In the post-announcement of our earnings call, we issue a pre-15 years, BRL 1.5 billion. Of course, there is the expansion of the organic expansion of the company and the issuance of debt to 15 years of CRI. We can see the lines of credit that have eventually a higher cost and a deadline that is shorter. The company has a very robust plan of investment. It's detailed in the section 10.4 of the reference form, 32 projects of growth, organic growth, that will add to 5,200 beds to the portfolio until the end of the fiscal year 2025. All of this projected growth by the company and in the context of our business plan, will be done with the capital structure that is optimized, understood as optimal by the board of directors of the company. Have I answered your question? Yes. In regards to the stock options, did you get that question? Yeah. The company doesn't have any intention of changing our plan of stock options. I understand that the way that we report gives enough transparency for the analysts and investors to understand the impact in our financial reports and the cash flow of the company. It would be the way the stock options is not reported separately because we don't want to change its dimension. It has a recurrence in those levels that we are used to seeing. Yes, I would like to highlight that we didn't have anything relevant new in regards to stock options after the IPO of the company. What we have new options that are transferred to the beneficiaries of the plan, of course, this is correctly stated in our financial reports. Thank you. Eventually, new stock options will be given by the company in the future, what is stated in the financial reports, it is related to the plans of stock options, granting of stock options in the past. Otávio, if there is any variation that you're observing, it's due to the valuation of the shares itself. Rodrigo Guerra, our controller, can answer your questions more specifically, it's based on that group of shares that you have planned to grant. Thank you. Mr. Leandro from Citibank, the floor is yours. Quick question on my part, cost. I wanted to know your opinion, especially. We've had a lot of shortness of materials in the supply chain, really. Outside the supply chain itself, year-over-year, it's not reasonable. COVID really impacts a lot. Can you see the scenario of cost for the year materials? We, in fact, the items related to COVID-19, these items had variations in cost. Some of these items, we depend on imports to guarantee the supply. Our team in logistics has done brilliant work assuring the safety of our operations and the good supply of all the materials necessary to provide care for our patients. Some of these materials had variations that are expressed there. In the consolidated, this is diluted. When I see the COVID-19 patients and I compare to the other patients, given the lateral cost associated to these procedures, I have an expense of materials over revenue that is higher. This is diluted when you see the numbers of the company as a whole. As we have a reduction in the invoicing, in the COVID-19 patients, as it has been compensated and it's growing in the service to the other patients. We have a gain in profitability because it's an efficiency of costs of expenses of materials that is higher than the patients non-COVID. Thank you, Paulo. Remember, should you want to ask any questions, please type asterisk nine. If I have answered your question and you'd like to remove your question, type asterisk nine once again. Without any further questions, we close the Q&A session and let you give the floor to Mr. Paulo Moc for his final statements. Once again, thank you to all the shareholders and analysts that took part in our earnings call. I would like to close by saying that we are very confident in regards to the scenario ahead in the future. I would like to compliment our executives, our employees that have shown the capacity to adapt and a very quick response in a scenario of a lot of volatility. We are very happy with the scenario ahead. Thank you. Have a wonderful day. During this call, all the Rede D'Or São Luiz disclosures. Thank you for your participation. Have a wonderful day.