Good morning, everyone. Thank you for waiting. Welcome to the Conference Call to Release the Results of the Third Quarter of 2025 of Viveo. Those who need simultaneous interpretation, this tool is available on the platform. To access, just click on the Interpretation button through the globe icon at the bottom of your screen and choose your preferred language. For those listening to the video conference in English, there is an option to mute the original audio in Portuguese by clicking on Mute Original Audio. This conference call is being recorded and will be made available on the company's investor relations website at www.viveo.com.br/ri, where the complete material of our earnings release is available. You can also download the slide deck at the chat icon, even in English. During the company's presentation, all participants will be in listen-only mode. We are going to start a questions and answers session.
If you want to ask a question, please click on the icon Q&A at the bottom of your Zoom screen and write your name and company to join the line. Upon being announced, a request to open your microphone will appear on the screen, and then you must activate your microphone to ask questions. Information contained on this presentation and any statements made during this conference call related to the business perspectives, projections, operational, and financial goals of Viveo are beliefs and assumptions of the company's management and are based on information currently available. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties, and assumptions because they refer to future events and therefore depend on circumstances that may or may not occur.
Investors should understand that general economic conditions, market conditions, and other operating factors may affect the future performance of Viveo and may lead to results that will be materially different from those expressed in such forward-looking statements. Now, we have here with us Mr. Leonardo Byrro , CEO, Fredrico Oldani , Vice President for Finance and Administration, and other executive directors. Now, I would like to turn the conference over to Mr. Byrro , CEO. Please, Mr. Byrro , you may start.
Good morning, everyone, and thank you very much for being here for the announcement of the results of the third quarter of 2025. First of all, I would like to tell you the beginning of the year, what it was like. We closed 2024 and started 2025 with full focus on the operational turnaround that we defined in 2024. They were based on three pillars: working capital, recovering our cash generation, that was the top priority, quality versus quality. After many years of very fast growth, both organic and through acquisitions, we understand now the time is to focus on quality. Quality of our sales, internal processes, delivery, service level, and last, operational excellence. To do more with less, to be able to improve our processes and our systems so that we will recover the service level during 2025. Based on that priorities, we defined a few goals and improvements expected during the year. Number one, reduce the growth pace, adjusting our operation, focusing on efficiency and cash generation.
Number two, we needed to look at all the businesses we joined and started operating over the past few years to understand which ones have below expected ROIC and to focus on those with better margins and improve the margins of all our business lines. Number three, reduce expenses and costs in line with the efficiency project that we designed during 2024 in partnership with Galease. This was only going to be possible after all the mergers and integrations that took place after 2025. It was more than 18 new companies, nine distribution centers. A lot happened in 2024, and this would enable our cost reduction and efficiency process. Number two, rebalancing our working capital, focusing on improving the cash conversion cycle. Number one, reduction of absolute inventories of the company.
While accrued revenue dropped by 3%, absolute inventory reduced by more than BRL 200 million, or 13% if we look at a snapshot one year ago. All of that improving service level that is acknowledged by our customers on the front end. We recover excellence in service at the same time as reducing inventories significantly. At the same time, we wanted to extend our payment terms to suppliers. Now we have the funded inventories. We want to reduce accounts receivable. We renegotiated most of our contracts with our customers and partners along the second quarter, reestablishing terms and times that were much more sustainable and appropriate to reality than our business today. Lastly, the result of everything is a gradual improvement of our EBITDA margin that we saw happening along the first and second quarters, but now more markedly after Q3. Many actions are still going on.
The main strategic projects, we still have many captures that will come along future quarters. I would like to highlight some here. Number one, inventory management. We have come a long way. Today, we have inventory levels appropriate to our level of activity where it should be, but there is still room to improve even further our efficiency inventory management. Portfolio and pricing. We have improved the gross margin of all our businesses. In addition to improving margins through the mix, we also had individual improvements in each one of them, but we still have lots of room for more intelligent pricing to improve the group sales of so many products that we have. Contract renegotiation with customers, especially in accounts receivable, we have benefits to capture, especially in Q4 this year, and we are going to go into 2026 seeking renegotiating even better and more sustainable levels.
SG&A reduction. We still have other opportunities to further reduce our expenses along future quarters, not just to optimize freighting where we have invested a lot in technology along 2025 to improve visibility and management of freights, but also in sourcing a freighting partner that we did in the second half of the year. We still have many benefits to capture from that along 2026. Many of these projects are still going on and still producing gains, not just in the fourth quarter, but also in the beginning of 2026. As highlights of the quarter, and Fred is going to give you more details about this. Number one, the gross margin. We have reached 1.4 percentage points in expansion in the gross margin as compared to one year ago.
The fourth improvement in a sequence, improving pricing, improving profitability of each one of our businesses and still grow in those ones with better margin. This leads to continuing improvement of our gross margin. Combined with expenses that grew below inflation this year, for the fourth quarter in a row, we see the EBITDA margin going from 5.2% in Q3 2024 to 6.1% in Q3 2025. Cash cycle, once again, with two days shorter than it was in the second quarter of 2025, and cash generation was BRL 167 million in the third quarter of 2025. If we take all advances of receivables and everything else, we had almost 29% increase in cash generation in Q3 versus the same quarter last year. Our net debt, which peaked in March this year at 4.5x .
As a reminder, we asked for a covenant waiver up to 5x, but we never got there. We have reversed the curve. We are at 4.17x, and we are sure that this curve is in a downward trend. Last, DIFAL, which is an important piece of news this quarter, and we have always had great trust in the recommendations of our lawyers, and we always understood that this was not a due charge, but at the end of 2024, despite that understanding, we were conservative and we provisioned more than BRL 350 million in Q4 last year for that. Now with definitive decision in line with what we always believed, we are reversing almost BRL 315 million this quarter.
This not only gives us the assurance that this is not something that will come back in the future, but also we know that what we were doing is what we believed in. The team can give you more details about the main differences, how we allocated DIFAL. I would like to give the floor to Fred to go into the details of the financial result, and I will be back for the Q&A.
Good morning, everyone. I'm going to start on slide number 9, talking about the revenues of our main businesses. Starting in hospitals and clinics, there was a reduction of 8.6% with BRL 2 billion of revenue. We talked a lot about this, that this movement would happen especially after the third quarter, considering that during the second quarter, we implemented the renegotiation of new contracts, and then we decided to give up contracts that in our understanding did not have good terms in terms of times, profitability, or ROIC. They are not providing the returns that we thought were the best for us to continue with them. This was very much expected, anticipated, and you can see that the effect, despite the drop in revenue, the gross profit was higher with an increase in the gross margin, as you are going to see. Now, in laboratories and vaccines, we are robust. We have been growing over the last few quarters, and here the growth has been driven especially by many launches that we are having on this segment.
Also, most of this is focused on adults, which is not so common. Vaccines are usually very much focused on children, but we have launches for the adult population, and this explains the robust growth that we are having on this channel this year. Now, continuing, you can see retail. In retail, we resumed a more robust growth along the third quarter. Here there are many categories where we are seeing significant growth. This segment has gross margins that are much higher than what we see in other business lines. We are confident that we are on a significant path for growth in this business line. Lastly, the service business line, we saw some resumption below potential in our opinion, but I think we see indications that we have been able to stop the drop in revenue that we have been seeing along several quarters.
Service is an important channel. It's smaller, but it is a channel that is part of our strategy, and we really bet on the future of this segment. Now, continuing our gross profit, as I said before, we grew 6.5% despite the shrinking in revenue. Here we can clearly see our trajectory of growth in gross margin. Here in this chart, you can see ex CMED. We have been growing consistently from the beginning of this year. We were flat in the second half of last year. As I said, with all the actions, we have been growing consistently quarter after quarter in gross margin. It's also important to mention here that we are not increasing gross profit because of mix.
What we see here is the growth in gross margin that we have grown in practically all segments in addition to the mix, helping because of the growth in retail. In a year, you see a growth of about 0.8 percentage points, a growth that is quite significant and in line with the company's strategy, a strategy that we have been adopting since late last year. As to expenses, here on expenses, considering the effects that we have the default, the lines are kind of messy, but part of default goes to different lines, especially legal fees going to SG&A. The lines in the quarter are kind of polluted, but when we look at the expenses, ex non-recurring effects and depreciation, you can see a growth that is significantly below inflation. We grew 1.8% in the quarter, and in year to date, we grew 2.3%.
Expenses are very much under control. As Leo said, we are still seeing opportunities to capture additional savings in expenses, especially in some specific lines such as freight. We still have in logistics, we are still reviewing our distribution structure, and we believe we still have space to be able to capture more efficiencies in our expense lines. In EBITDA, in a sequence, we have been improving EBITDA margins. We went from 5.2% of margin in the third quarter last year, and we are getting slightly above to that with a growth quarter after quarter. Also a significant growth in nominal EBITDA, BRL 153 million in the third quarter last year to BRL 173 million third quarter this year. It is slightly below the second quarter, but this quarter there is no CMED. This is a very good result.
It's very good, and it is in line with what we had been saying in terms of gradual recovery of results along the year. It's three consecutive quarters of better performance, and this is very much in line with everything that we discussed along the year. At the end of last year, when we implemented the plan to recover the company's results, BRL 510 million of adjusted EBITDA in the first nine months of this year, a growth of 4.6% and the margin expanding from to 6.1%. Financial results, it was affected positively by two effects, partly by the default and partly correction, and the correction affects the net investment income. There are other factors that helped improve the investment income.
When we look at the last line, the adjusted net income, even if I clear out non-recurring one-off effects of default, the adjusted result is BRL 42 million this quarter, significant improvement compared to the third quarter last year. In the year to date, numbers are also better than we had last year, despite interest rates that are considerably higher, which somehow harm the bottom line of the company. Now going into cash generation indicators and working capital, we generated about BRL 167 million of free cash this quarter, even discounting and adjusting in advanced receivables. It was the same as we had the previous quarter. There's no difference in cash generation, cash generation X receivables, advanced receivables. This is better than the third quarter last year, almost 30% improvement.
Also in year to date numbers, BRL 211 million cash generation versus BRL 169 million last year, 25% increase in cash generation. We continue with expected cash generation that is very solid for the fourth quarter this year. Cash generation, in our opinion, is sufficient to cover all the service of the debt despite the highest interest rate levels that we have had in the last decade at least. Numbers today are solid. Our cash generation has gotten better and will continue to get better. We still have benefits to capture in working capital management, which will help even further the results of the fourth quarter. As to cash cycle, we have had an improvement of about two days in our cash cycle X accounts receivable anticipation and one day in the same period last year.
When we look at our working capital over net revenue, we're also getting better. We were at 18% last year, and now we are almost 1 percentage point better. We are at about 17%, low 17% in terms of working capital over net revenue. This is a significant improvement in relation to previous quarters. Now our debt. The net debt ended at BRL 2.8 billion. This is important. We reduced almost BRL 50 million of the company's debt. Here there are some positive effects in terms of the repurchase of the debentures. What we are seeing is that the company's net debt is already in a downfall trajectory. Of course, it's still small, but combining the reduction of the debt with better operational results, we have a leverage that is 4.17x, well below what we have, well below our covenant for the fourth quarter.
We are on the right track to go back to a leverage of 3.5x in the middle of 2026, which is what we have negotiated with the ventures last year. As to the results, these are the main highlights. Now we can move to our questions and answers session.
We are now going to start our questions and answers session. As a reminder, if you want to ask a question, please click on the Q&A icon at the bottom of your Zoom screen and type your question or click on the raise hand button. Once your name is announced, you are going to see a pop-up to open your microphone. You need to click it, open your microphone, and ask your question. We kindly request that you ask all your questions at once. Please wait while we collect questions. Our first question comes from Philippe Biamansu from Itaú BBA. Philippe, your microphone is open.
Hello, good morning everyone. I have two questions. Number one is about cash generation. I remember there was a discussion related to seasonality in the first quarter would take up lots of cash, and this got better and better until you got to the fourth quarter. Even though the seasonality was kind of lost in recent quarters, once you normalize results, does it make sense for us to think that the seasonal dynamics will come back? This is question number one. The second question is about profitability. The company has demonstrated an improvement in gross margin along the quarters, but how do you see possible gains in efficiency and also considering the company's mix? What is the structural margin mix that you think is the healthiest for the business? Thank you very much.
Philippe, how are you? Thank you for the presence. Thank you for your questions. I'm going to start answering. As to cash generation, yes, the business seasonality still exists even though it was not so present. We have a seasonality in the first quarter when we build inventory with CMED turning from March to April. In the first quarter, it takes up inventory, strong sales in March, and then accounts receivable is 60 days. There is a strong cash generation in the second quarter. Along the second quarter, these effects are no longer present and there is a growing cash generation along the year. There's still there and as Fred said, we can see in the fourth quarter a continuation of the company's cash generation. As to profitability, yes, we do see room for the gross margin to get better and better along the future quarters.
Also, maturing some initiatives that we haven't yet captured fully and also better mix. For example, our retail business, so the wipes factory, our main category, we turn around in the middle of June. We're still ramping up for this operation and we're going to capture margin improvements that are more pricing initiatives, revision of product portfolio for us to prioritize lines and categories with higher margins. Yes, we can expect improvements in the gross margin in future quarters and in 2026.
Great, thank you so much.
Our next question comes from Gustavo Miele from Goldman Sachs. Mr. Miele, please, you may ask your question.
Hello, Leo, Fred, thank you very much for the presentation. I have two questions to ask. Question number one is about the business units of hospitals and clinics. I think that this reduction in growth year on year, as you said, is apparently the result of much more of streamlining, so to speak, of contracts that you have on this business line. My question is, what about the KPIs in the contracts that you decided to keep? Could you tell us about price renegotiations and maybe increasing the scope of the products that you are distributing to your partner hospitals? I think it would be interesting so that we have an idea of how this vertical is evolving on a comparable basis versus the quarter in the third quarter of 2024. The second question more related to leverage and cash position. When we look at the debt amortization contract of the company, not just financial debt, there is something close to BRL 1 million maturing in the short term for 2026 versus the company's cash position that is still slightly lower. What are the liability management plans like for future months with the rolling of the debt so that amortizations can be met within those times?
Hi, Miele, good to talk to you. Thank you very much for being here. Thank you for your questions. First, the hospital and clinic business unit, and then I'll talk about leverage. This is the business that we have increased the most, our commercial discipline, and have reduced our sales during the year with a 6% drop in year-to-date numbers in revenue so that we have the necessary commercial discipline and renegotiate, not just considering margins, but also times. We think that we were very successful in doing that, especially in the second quarter this year. The market is still growing. There is growth to be captured in this market. We decided to organize things not to grow right now.
The good news is that when we look at September and October, in September, we are even as compared to the previous period. In October, we have had significant growth in hospitals and clinics, growth in margin levels, and with appropriate working capital levels. From now on, yes, we can expect that gradual recovery of growth in the segment of hospitals and clinics, considering what is suitable to our cash generation and our deleveraging process. As to the KPIs, there are many things that we monitor: service level of the contracts that they're very demanding.
The good news is that we have very positive feedback of improvement in our services. The margins of our products, compliance with the mix. If the contracted mix complies or not with the mix that we are selling on a day-to-day, and many others that we analyze internally and sit down to discuss with our customers every month. The overall message is that yes, we are going to recover growth in this channel to add an appropriate ROIC level. As to maturity dates after next year, every period that are important maturities over the next five years, BRL 1 million next year, and then a volume slightly below that in 2027. In the company's vision, all of this is going to be refinanced.
We haven't yet started conversations with our creditors to work on that financing, but our idea is to start this work after the third quarter. We haven't started these discussions because in our understanding, we needed at least to have three or four quarters with consistent results, considering what we discussed last year when we asked the renegotiation of our covenants. We have been delivering strictly what was discussed and even slightly better. We think that from now on, we are at a result level that allows us to sit down with our main and to rediscuss the refinancing after 2026. We are going to start on the fourth quarter, and this will be discussed along the first quarter next year.
Very well. This is clear. Thank you, Leo. Thank you, Fred.
Our next question comes from Gustavo Dizeo from Bank of America. Gustavo, please.
Good morning, Byrro and Oldani. Thank you very much for taking my question. I have two questions. One about cash generation and the other one about the fourth quarter. We have seen providers with a very high volume of procedures that may have helped the industry as a whole to be slightly stronger. Do you see any seasonality in the third quarter that may have helped you with your margins, maybe to structure better in terms of cash generation? Or is it just a flow that this is what you have redirected? There is a whole work and margins will be slightly more structural in the future. The second is related to structural cash generation from now on. You have better margins and that might come up in the future.
If you look at receivables, as you mentioned during the call, how much space is there for improvement looking into the future? Can you reduce it by five or six days so that we just have a feeling of the potential reduction to try and match the evolution in cash generation and to understand it slightly better? Thank you very much.
Thank you, Dizeo, for your questions and for being here. The seasonality, we did not see much difference in the third quarter. This improvement in margin and mix is much more related to our internal work to look at each product category, each business unit, each contract to improve the mix. We did not see seasonality.
September was a good month for us, and October going to the fourth quarter was also a very strong month, and same thing as September, and we are seeing November at the same levels. Yes, there is an improvement of procedures and everything, but we do not understand the results of the third, fourth quarter will have any impact, and we think that the market has been going at double digits, and we can go back to capturing market share at ROIC levels much better than we had last year in the beginning of this year. As to the generation of structural cash, Fred is going to comment on that.
Okay, as to improvement in the cash cycle, yes, we do see improvements. It is not so much. These are more one-off effects, one, two, three days sometimes. Inventory, we are still seeing some between one or two days, and it is not going to be just one quarter. We have been working very hard to have an accuracy level that will be much better. We are at a very good level already, but maybe we still have one or two days to improve in terms of inventory. Accounts receivable, the renegotiation that we had this year was very important, but has not yet led us to the levels that we would like to have. For example, I have no more, I only have a few times of 90 days, but the idea is that next year we will no longer have any payment times greater than 60 days.
We did not want to go straight from 120 to 60 because this is a very big impact for our customers, but we want to take it down further and further, closer and closer to 60 days. This is going to happen next year in the second half of next year when we move on to the renegotiation round. However, accounts receivable is related to current days. Inventory, not. We are improving it gradually along the quarters. This is related to internal management and accounts receivable. We are going to have a very good cycle next year.
Of course, yes. Thank you very much.
Our next question comes from Renan Prata from Citibank. Mr. Prata, please, you may ask your question.
Hello, good morning. Thank you very much for taking my question. Number one is just a follow-up on the presentation. I think the beginning of the presentation, Leo said that you still have BRL 95 million in provisions of default related to 2021. Can you explain that to me, please? Why did not you reverse it now? Is it going to be reversed or not? Just a quick follow-up on that. The other is the competition in hospitals and clinics. You say they are still growing at double digits, but we see both Viveo and a few other players with a slight slowdown in the growth in that segment. What is the competition like? How do you see competition in that segment? Thank you very much.
Renan, I am going to start with default, and then Leo is going to go into the second part of the question. The trial in the Supreme Court was related to 2022. It was not related to default 2021. Default 2021, the discussion is state by state. It's different from default. It's related to the Supreme Court modulation. If you cancel the collections of everyone that had a lawsuit for 2021, it's different state by state. In some states, we had favorable decisions. Why do we still have provisions? In some states, we're expecting to win, but in some states, we're forecasting that we will lose. This amount is related to states where we might lose. We still have default 2021. We think that in the next two years, we will have 100% of the court decisions finalized. It's important to make it clear that default 2022, which was the highest amount, was closed with a final decision by the Supreme Court now in the beginning of October.
Now, as to the competition, as I said, our business is a business of operational excellence, low margins to make the everyday happen, but there is a growth. The market's still growing at dual digits. We see this not just in medications, but also in materials. In materials, we have been growing a lot during the year. In government too, growing, and we are very selective for whom we sell in the government and many other categories. We are still growing. For the competition, what we saw happening along the year is that our movement of commercial discipline has led many to follow us in this movement, and we're able to follow this trajectory, also relieving in terms of interest rates and dynamics.
We have one competitor that is usually more aggressive than us in terms of payments and prices, but on the average, we have seen the competition being more disciplined, following our movement of leadership and making that happen. We expect this to happen next year too, so that we are still within the line of discipline that Fred has just mentioned, seeking better negotiations of commercial times and terms, and the competition will follow us in this movement. We think that it is better than it was one year ago.
Great. It's very clear. Thank you so much.
Our questions and answer session has now ended. I would like to turn the conference over for the company's closing remarks.
Once again, I would like to thank everyone for your presence here today. I would like to end saying that the fourth quarter of 2024 makes us confident that the improvement, that all operational indicators that improved in the third quarter will continue to improve better cash generation, as you said, for the fourth quarter and for 2026. Our priority is to continue reducing expenses, many initiatives that will improve our efficiency and reduce expenses during the first quarter of next year, initiatives to improve the working capital, either by the absolute reduction of inventory, better funding of accounts receivable, and a few days to seek in accounts receivable and a renegotiation of the times and contracts for next year, and the gradual recovery of the growth in a segment of hospitals and clinics with ROIC and profitability that are suitable to the company's levels. Thank you very much once again, and we are available to any questions you may have in the future. Goodbye.
Viveo video conference has now ended. We thank you very much for your participation and have a nice day.