Auna S.A. (AUNA) Earnings Call Transcript

Good morning, and welcome to Auna's Second Quarter 2024 Earnings Conference Call. My name is Rob, and I will be the operator for today's call. [Operator Instructions] And please note that this call is being recorded. There will be an opportunity for you to ask questions at the end of today's presentation. Now I would like to turn the call over to Ana Maria Mora, Head of Investor Relations. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Auna's conference call to review our second quarter results. Please note that there is a webcast presentation to accompany the discussion during this call. If you need a copy of the presentation, please go to our Investor Relations website or contact Auna's Investor Relations team. Please note that when we discuss variances, we will be doing so on a year-over-year basis and in FX neutral or local currency terms with regard to Mexico and Colombia, unless we note otherwise. Let's move to Slide 2. Before we begin, we would like to remind all participants that our comments today will include forward-looking statements. In addition to reporting unaudited financial results in accordance with International Financial Reporting Standards, we will discuss certain non-IFRS financial measures and operating metrics including foreign exchange neutral calculations. Investors should read carefully the definitions of these measures and metrics included in our earnings press release of today to ensure that they understand them. Non-IFRS financial measures and operating metrics should not be considered in isolation as substitutes for or superior to IFRS financial measures and are provided as supplemental information only. Before we begin our remarks, please also note that certain statements made during the course of today's discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs and which are subject to a number of risks and uncertainties that could cause actual results to materially differ, including factors that may be beyond the company's control. This includes, but are not limited to, expectations and assumptions related to the integration and performance of the businesses we acquired. For a description of these risks, please refer to our Form F-1 filing with the U.S. Securities and Exchange Commission and our earnings press release. Slide 3, please. Speaking on today's call is Suso Zamora, our Executive Chairman and President, who will discuss our nonconsolidated and segment financial and operating results, as well as provide updates on our various strategic growth initiatives. Gisele Remy, our Chief Financial Officer and Executive Vice President, will follow with a more detailed review of Auna's consolidated financial results. After that, Suso will provide a wrap-up of our second quarter performance as well as discuss our performance outlook. We'll then open the call for your questions. Suso, please go ahead.

Thank you, Annie, and welcome, everyone. Let's begin our review on Slide 4 with a few highlights on the quarter. OU growth -- first of all, our growth momentum accelerated in the second quarter as we continue to scale our vertically and horizontally integrated health care platform, as well as benefit from various synergies that we achieved through regional integration and scale. We continue to grow consistently and more predictively. Auna's adjusted EBITDA increased 25% on an FX-neutral basis while our margin expanded 2 percentage points. Growth reflects the consistently strong performance of our operations in Peru and Colombia. And it validates once again, the strength of our diversified and scalable health care platform as well as the effectiveness of our growth strategy, implementing the AunaWay at our health care network in Monterrey is gradually beginning to bear fruit. We are seeing productivity starting to rise among new and existing own physicians, along with increases in certain high complexity services. OncoMexico is another pillar of our growth plan for Mexico, and we have launched in Monterrey, the 2024 pilot of this integrated cancer insurance. This is the country's first monoline oncology insurance, fully integrated into our network of health care services in Monterrey and will potentially grant access to many families to full health care solutions. With that context, let's take a closer look at our second quarter performance, beginning with our consolidated results on Slide 6, please. So our top line growth of 12.5%, combined with improving operational efficiencies, drove operating income 29% higher versus last year's quarter, and our adjusted EBITDA margin expanded 2 percentage points, helping drive adjusted EBITDA 25% on an FX-neutral basis higher along with an improved services mix and higher occupancy levels. As such, we remain on track to achieve our 2024 guidance for adjusted EBITDA growth of 20%. Also on a constant currency basis. Peru and Colombia continue to perform strongly, underpinning Auna's growth while we deploy our business model in Mexico, where we expect to replicate our success on a much larger scale, given the size of Mexico's health care market, of course, and the low penetration levels of private health care in the country. The implementation of the [Audio Gap] Monterrey is a gradual and a deliberate process of skill building that will result in improved engagement with physicians that will produce increased volume and more so of high complexity procedures, and we are beginning to see the results of our engagement with physicians and as well with payers. Our future success in Mexico is a function of our capacity to replicate the consistent and predictable performance of our Peruvian and Colombian operations over many years. As you can see in the bottom left of this slide, occupancy across our health care platform increased 3.7 percentage points as we ramped up new and expanded care facilities. The vertically integrated model in Peru continued to deliver strong results, demonstrating again the value of our business model, at maturity and at scale. Now let's review our second quarter performance on each of the business segments that comprise Auna's diversified and integrated health care platform. Can we go to Slide 8, please? So here, our health care business in Mexico in the fast-growing Monterrey area is steadily delivering better results, thanks to improving productivity and higher surgery volumes. This reflects the progress we are making with finding a recruitment and incentive model with physicians. Occupancy levels were flat and 3% revenue growth was primarily driven by mix that is growth in high complexity services. Adjusted EBITDA was flat versus last year with a healthy 33% EBITDA margin. Aside from physician improvement, we also intend to increase capacity utilization through initiatives with our payers, offering tailored products and bundled services. We are creating win-win partnerships with insurance companies and employers as we do in Peru and Colombia. Longer term, OncoMexico will be another growth driver. During the remainder of 2024, we are establishing the necessary operational capabilities in clinical and commercial areas as well as risk underwriting and other key functions. Let's move to Slide 9, please. So in respect of Peru, our fully integrated operations there, saw adjusted EBITDA almost double from last year's second quarter, as well as a continued margin expansion. Revenue grew 15%, mainly on a sustained occupancy level of nearly 72%, as well as the growth in planned membership and revenue mix across both segments. All of this reflects the harvesting of growth investments made in prior years focusing on high complexity and capacity utilization as well as synergies achieved across the platform. We have maintained the gains in EBITDA margin seen last quarter with our consolidated Peru margin at 21% for the second quarter. Our Healthcare Services business benefited from an improved mix of high complexity services across our health care footprint in Peru. In our health care plans business, in addition to member growth, sales increased on higher revenue from our integrated hospitals, including copayments and non-covered expenses. Revenue also benefited from price adjustments to our health care plans. In addition to top line growth, adjusted EBITDA benefited from a decline in SG&A, while member acquisition costs decreased in higher efficiency level. Our Oncological MLR is at 54.7% year-to-date, increasing versus 51.5% in the last quarter, mainly impacted by an increase in intercompany fees between our OncoSalud insurance company and our integrated oncology hospitals. Given that the intercompany effect is eliminated at the gross margin level in our healthcare plan business, gross margin remained flat in healthcare plans versus the first quarter of 2024. Lastly on Peru, we continue implementing a number of strategic growth initiatives related to our healthcare network. We're seeking to convert more of the outpatient services we perform by cross-selling adjacent services. We are strengthening our B2B relationships nationally to increase patient referrals to this channel. And on the high complexity front, we are recruiting new doctors in the field of neurosurgery and trauma [indiscernible]. In the healthcare plans business, new growth initiatives include increasing the productivity of the direct sales channels by improving the sources of new leads and referrals, acquiring more B2B customers and we continue to capture more of the healthier lower risk prospective customers who have a history of good health. If we move to Page 10, we can do a dive into Colombia. In Colombia, driving the 18.3% growth in revenue was a greater mix of high complexity services and occupancy, which increased 6 percentage points to 81%. The more profitable mix of high complexity services, coupled with higher occupancy drove a more than 10% increase in adjusted EBITDA, and also helped Columbia maintain healthy margins. Additionally, we kept levels of SG&A expenses in check, thanks to efficiency initiatives and post-merger synergies we have achieved. Given the current regulatory environment in Colombia, we will continue prioritizing working capital and profitability. With that, I'll turn the call over to Gisele for a more detailed review of our second quarter results.

Thank you, Suso. Good afternoon, everyone. Let's move on to our consolidated results for the quarter, starting with revenue on Slide 12. As Suso mentioned, we delivered solid revenue growth in the quarter. We grew 18% in Soles year-on-year or 13% in FX-neutral terms as our mature segments in Peru and Colombia continue to drive growth, and our Mexican business steadily positioned itself to replicate the same success. All our businesses have shown consistent growth on a year-on-year basis. Let's move on to Slide 13. Adjusted EBITDA growth for the quarter was 31% year-on-year in Soles, or 25% on an FX-neutral basis with the margin expanding to 22.1% off the back of strong margins in the three geographies. Strong revenue growth, coupled with efficiencies across the local and regional levels drove EBITDA growth and margin expansion. Operation in Peru maintained the margin gains that we saw in the first quarter of this year, with an adjusted EBITDA margin of 21% while our operation in Mexico sustained a 33% adjusted EBITDA margin despite investments and increases in costs and SG&A given the local and regional capabilities that we continue to build. Colombia had a 15.3% margin. Finally, across the region, we continue to be very disciplined with our SG&A. Let's now move on to Slide 14 to talk about net income. Auna maintained a positive adjusted net income in the quarter. [indiscernible] the comparable period last year, adjusted net income in the second quarter of 2024 was favorably impacted by an increase in operating profit as well as a deferred tax benefit. However, these benefits were offset by the FX variance for the quarter mainly due to the accounting impact of the movement of the Peruvian Sol below the floor of the call spread hedges in place in Peru, generating an FX loss for the quarter versus an FX gain for the comparable quarter in 2023.Let's now move on to Slide 15 to look at cash flow generation thus far in 2024. Year-to-date, operating cash flow generation remains solid off the back of growing operating results, coupled with a stable cash conversion cycle. Organic CapEx also remained stable versus 2023 levels. Investment cash flow for the quarter had an extraordinary impact related to the PEN 47 million payment of our IMAT Oncomedica earnout obligation. Let's now move on to Slide 16 for an update on our balance sheet and debt position. Leverage continued to fall according to plan to 4.13x net debt to adjusted EBITDA in the second quarter of 2024. We continue to maintain steady deleveraging on the back of solid growth. Debt levels remain stable to what we saw in the first quarter of 2024 and we continue to maintain a healthy debt structure and maturity profile in support of our growth strategy. Finally, we continue to focus on cash flow generation and deleveraging with the objective of reaching our medium-term target of 3x net debt to EBITDA. This concludes our discussion on the consolidated financial results. I will now let Suso wrap up our presentation with his final remarks before we move on to Q&A.

Thanks, Gisele. Before we open the call for questions, I would like to end the remarks with our outlook and near-term priorities. Please turn to Slide 17. First, we remain on track to deliver adjusted EBITDA growth of at least 20% in FX-neutral terms in 2024, as the fundamentals of our operations remains strong. Peru will continue to have a very material and positive impact on 2024 growth, while growth in our operations in Mexico will be more back-ended towards the second half of the year as the aforementioned initiatives mature into the second half of the year and 2025. Finally, in the case of Colombia, we will grow moderately within the context of prioritizing cash flow. OncoMexico will become another key growth driver in the coming years as we leverage our 35 years of experience with OncoSalud and leverage [ Zentaya ] now Auna Seguros capabilities to roll out OncoMexico at scale. Lastly, we remain excited about our Auna's future given that we are only in the early stages of penetrating and consolidating Spanish-speaking Latin America's highly fragmented and efficient and underserved health care market with our proven operating model and scalable regional platform. For perspective, despite Auna's size and scale, we only have 1% market share today. So our gross run rate is quite low. As always, Auna's patient centricity and value-based care are at the heart of what we do each day with a focus on providing long-term patient care and excellent medical outcomes through prevention, detection and treatment. With that, that concludes my remarks. Operator, please open the call for questions.

[Operator Instructions] Your first question comes from the line of Samuel Alves from BTG.

Two questions here from our end. The first one regarding the deceleration in top line in Mexico, what do you guys believe that drove the deceleration? If it was caused mostly by a total comp effect versus 2023 in the second quarter? That's the first question. And the second question, regarding Colombia, you guys comment on the press release about an increase in the impairment for PDAs just as a clarification if you guys could provide like the amount of PDAs that jeopardizes the second quarter results? And how do you guys are monitoring this situation?

With respect to Mexico, I'm not concerned. There is some seasonality as we discussed in the first quarter. No, but we are working in high complexity and the shift to high complexity has a certain impact that you will see very positive in the second half of the year. And so I see -- and of course, see how high complexity is penetrating the revenue mix and how our physician hunting is delivering the right doctors and the right incremental volume and what we want to be doing in Monterrey. So I'm not concerned. It's in line with what we expect, Samuel. With respect to Colombia, I don't know, Gisele, do you want to respond to Samuel?

Yes, sure. Samuel, could you repeat the Colombia question, which I couldn't hear that well on this end?

[indiscernible] the question was regarding -- Yes, the comment that you guys are making in the press release about the increase in the impairment for PDAs for [indiscernible] accounts, just if you guys could provide the amount of PDAs that are jeopardizing the second quarter results? And also, if you guys see risks for higher PDAs in the coming quarters?

Yes, sure, of course. So the impact of the additional impairment reflected in the second quarter is approximately $750,000 in the second quarter. And this is due to the fact that we have increased the impairment recognition given the current market context in Colombia. We see that accounts receivable, as you've seen in the press release are stable versus what we saw last quarter. We think that there will be a slightly higher recognition of impairment in the year to go, probably consistent to what we're seeing in this quarter. But this is mainly just reflecting the higher risk situation of the market currently.

Your next question comes from the line of Leandro Bastos from Citi.

I have two questions as well. First one, if you could just comment a little bit the early impressions of OncoMexico to the launch in July, how you're seeing kind of how the product is kind of evolving in the region? And that will be the first one. And then the second, if you could talk a little bit about margins in Peru. There was a big increase year-over-year, especially in hospitals. So just to understand whether there was any one-off last year? And what were the main levers to increase margins at both hospitals, also Oncosalud despite kind of a rising ML Loss if you can just kind of provide some color on this, year over year if you could be helpful.

Gisele, let me take the first one and maybe half of the second one, and maybe you can complement. So on OncoMexico -- and thank you for the question, so we are -- our goal, of course, in OncoMexico is to lead in the long-term private oncology market in Mexico. And to do that, we're deploying a set of initiatives. As you mentioned, as of July 1st, we launched our OncoSalud B2C insurance product for direct sales in our hospital floors. We have launched it in a pilot mode to test product market fit and to learn about the commercial channels and how they are performing. This, for us, is a critical stage for a predictable future escalation of the commercial efforts of OncoMexico. So we have put a small sales team in each of our hospitals to start creating awareness of the product. We have achieved some sales, a lot of leads, and we feel enthusiastic as we are opening new channels in the weeks to come. New channels, we're opening, I think, a week from now, two weeks from now, our digital sales. After that, a couple of weeks after that, telemarketing sales. And also, we were working with a large broker for B2B employer negotiations. So we are convinced that this product represents a new era in insurance in mono-risk insurance in Mexico. It is clearly a disruptive product that doesn't exist in Mexico and engagement with our sales force is really rich. In addition, when we see OncoMexico, we are in different stages as well of negotiations with two large payers in Monterrey, offering solutions to their challenges. For example, a breast cancer, value-based contracting model that we are leveraging, of course, from Colombia and Peru. This is the first of it's kind in Mexico. This would allow Auna to build the capacity to serve payers and position Auna as a value-based oncology organization that is part of the solution to the raising health spending in oncology in the world, but in particular, Mexico, of course, [indiscernible]. And in addition to that, very much related, we are also in the advanced stages of a physician practice association model, with the most reputable oncology group in Monterrey. Now this association will boost our local oncology activity and, of course, to help us build the local Oncology centers of excellence that we have planned now. I want to [indiscernible] question, Leandro, because we are very much focused on this, and I love it as the market is focused on this as well. This is the highest priority project we have. Given that it does not consume capital, until later stages, for we are, of course, using the installed capacity in Monterrey for the deployment, and it promises a total addressable market of at least 10x where we have already developed and harvested in Peru. So that's on OncoMexico. And on Peru, I would just like to introduce the response from Gisele. It is again what we have done and what we know how to do and how scale works in our favor. And Peru is harvesting. This is a very successful model, vertical integrated model of care. And the more we penetrate our sales with that or revenue that, the more scaling [indiscernible], the higher margin is also delivered. So Gisele, can you complement this?

Yes, of course. Margin for the consolidated Peru business will be at the approximately 20% level for Peru this year. And you guys already saw us at 20% in the first quarter. So the 21% that we're seeing this quarter is just, basically, consistent with that and maintaining the gains that we had already seen in the first quarter of the year. Growth versus last year as far as the EBITDA in Peru does have a slight seasonality impact in the base of last year because of some SG&A seasonality last year. However, the 20% margin levels for this year are sustainable and that is what we should be seeing in 2024.

Your next question comes from the line of Paul Mauricio Cepeda from Morgan Stanley.

So, two questions. The first one, again, about Colombia. We know that the discussions about the health care system seems to persist there. How are your risk assessments about future impact, notably in terms of the cash flows from the EPS or from [ address ] or even risks of having to negotiate tickets and other things like that. So a little bit on your risk assessment about the country. And second, second question about the MLR in Peru. We saw it's kind of varying a little bit, very net now. So if you see that is a problem of seasonality or the fact that the mix of the B2B mix or if there is any influence on freshness of wallet or lack of freshness of the wallet. If there are differences in the designs of policies or health technology pressure. So whatever reason that is making those MLR oscillate.

So I'll try to give in directions on both and maybe you can complement, Gisele, as well. So on the first on Colombia, I think we've seen the worst of it. A lot of discussion on the reform that didn't pass, a lot of pressure. Yes, an intervention of a large payer. But with the agenda that these -- this interim payer should perform better than when it was not intervened. So in terms of a hospital group like us, we do not see our accounts receivables grow in a number of days. So, and notwithstanding that, of course, we're risk averse and we've taken a position to make sure that our revenues do not have risk of collection. So you'll see us -- I think if we didn't have that consideration, we could grow very fast in Colombia, but we are now being very conservative and trying to listen to make sure that everything we -- every service that we deliver and we issue an account receivable is because we're going to collect it within the days that we have as a policy and not anything more than that. So you'll see some growing but -- and we can grow faster, but we want to make sure we don't take any more risk. In general terms, I see Colombia and the whole discussion in the health care sector. I think, being directed to an important and successful [indiscernible] in 2025. So as I like to recall everybody, 85% of the hospital in household groups in Colombia are private. Are private. All of us depend on the payment system working well. That has been a very big concern of the central government as well as many regional government and that puts pressure on all the different stakeholders to make it work. And so that I would say as an introduction to Colombia. Gisele, do you want to add something else?

Yes. What I would add, Suso, just as we mentioned earlier, accounts receivable days have been stable versus last quarter as well as the net cash conversion cycle. So basically, as far as our risk assessment, given the market context, we are, of course, prioritizing cash flow, and we will be maintaining our accounts receivable days, and we will be managing the business as a function of make -- maintaining those days stable.

Yes. And on the MLR, Paul. So first of all, clarifying, we calculate our MLR for our healthcare plan business kind of stand-alone basis for the insurance subsidiary. Therefore, if our hospital subsidiaries increased intercompany fees, this is, of course, is reflected in MLR. So the increase in our oncologic MLR versus first quarter 2023(sic) [ 2024 ] is primarily due to higher intercompany fees charged to the insurance subsidy. And we made an internal policy change. Remember, we used to charge the insurance company the average cost of treatment of a third-party payer. And now we are putting a higher hurdle to the insurance company and putting the highest private payer for that service. So it's a higher threshold. It does not affect it at all. I do want to say that it changes the number a little bit but this is the way we make sure that the MLR is always totally manageable, the health care network has good margins, and there's no subsidy from one side to the other. The other thing that I would like to share is, again, this effect is eliminated at the gross margin level in the healthcare plans business and gross margin is flat versus Q1 2024. We do not expect our oncologic MLR in the low 50s to change materially because as you might recall, and as we've represented in the past, we continue to adjust our plan prices accordingly. No. So remember, in Auna, MLR is not a result, but it is baked into it. We will make sure that we price according to the MLR that we want. And that flexibility to do that in Peru, and in the future, in Mexico, is a very, very attractive condition to the market. Do you want to say anything else on the MLR, Gisele, that you want to complement? Thank you, Paul.

No, I think that was quite thorough.

Your next question comes from the line of [ Josseline Jenssen ] from [ Looker ].

Well, I've seen that in terms of consolidated cash flows, the net cash of operating activities cover the interest expenses -- so -- but still, there is -- the free cash flow is negative. So my question is regarding CapEx and which amount of CapEx are you expecting for the remaining of the year and for the next year? And when do you expect to have a positive free cash flow? And regarding M&A activities and dividends payments, are you still thinking of not -- do any of those activities or pay the dividends until that net leverage reached its 3x target? Those are my questions.

Okay. I'm going to start responding to that with the last part and then, Gisele, you're going to say our cash flow. So we're a growth company. And we don't -- we have a dividend policy of no dividends. So it's not a question on leverage. I don't think we'll change that policy for the foreseeable future. So we see ourselves as very much reinvesting our free cash flow in the future when those start to accumulate and grow, more than dividends. I think most of the shareholders know that's our policy and that's how we envision ourselves in the future. And Gisele, on the free cash flow, please?

Yes, of course. Thank you for the question. In the year-to-date numbers, you will note that we have an impact due to an extraordinary payment for the earn-out obligation related to the IMAT Oncomedica acquisition. So that was a nonrecurring payment. In the context of the year-to-go numbers, we should see in the year-to-go organic free cash flow covering the interest payments. And furthermore, as far as the annual CapEx numbers and plans, we do not expect annual CapEx to be more than $50 million for the year on a consolidated level.

Sorry, $50 million?

$50 million, for the year.