Fleury S.A. (FLRY3) Earnings Call Transcript

Good morning, everyone. I would like to welcome you to the Grupo Fleury conference call for the third quarter 2025. Joining us today are Ms. Jeane Tsutsui, Chief Executive Officer; Mr. Jose Filippo, Chief Financial Officer; and Mr. Renato Braun, Investor Relations Officer. I would like to inform you that this event is being recorded, and we are also providing simultaneous translation into English. Initially, we will present the company's results. And in doing this, we will go on to the Q&A session. At the end of that session, Ms. Tsutsui will share her closing remarks. All figures mentioned here today are compared to the same period in 2024, unless otherwise specified -- have been rounded to the nearest thousand. Before proceeding, I would like to clarify that this presentation may contain forward-looking statements. Such information is not merely historical in nature but reflects the intentions and expansion -- expectations of the company's management words such as believes, expects, plans [ foresee ], estimates, project, aims and similar expressions are intended to identify statements that necessarily involve known and unknown risks. Known risks include uncertainties not limited to the impact of price and service, competitiveness. Uncertainties also include market acceptance of the company's services, transactions carried out by the company and its competitors, regulatory approval, foreign exchange fluctuations, changes in the mix of services officers and other risks described in the company reports. I would now like to turn over the floor to Ms. Jeane Tsutsui.

Good morning, everybody, and welcome to the earnings call for the third quarter for Grupo Fleury. We're going to share with you an overview of our strategy and strength. We will then detail our recent M&A activity and finally present financial highlights for the quarter. The combination of discipline, operational efficiency and medical and technical excellence has once again enabled Grupo Fleury to deliver strong results. It was a period of accelerated expansion, reflecting our leadership in the diagnostic medicine market and the success of our growth strategy. This strategy can be seen in Slide #5. Today, Grupo Fleury has a B2C diagnostic medicine network, acting in a premium intermediate and basic segments. We are present in 13 states of federal district, and our expansion is disciplined and consistent. Our B2B platform supports partner laboratories and hospitals throughout Brazil, strengthening their operations and positively impacting the Brazilian health care system far beyond our own units in addition to diagnostic medicine, which is the core of our business. Grupo Fleury also offers prevention and continuous care services, vaccination, checkup, telemedicine consultations and several medical specialties. This is a business known as [indiscernible] New Links. All these initiatives reinforce our vision of integrated health care journey, including health promotion, diagnosis and outpatient treatment all accessibly. Slide 6 shows you the composition of our business units, which reflect this integrated care journey. B2C diagnostic medicine account for 69% of total revenue, with over 570 service units and 61% of total revenue. We have 3 regional units. Mobile care represents 8% of total revenue and 11.4% of the B2C revenue. Revenue generated by 73 service units, B2B diagnostic medicine represents 22% of total revenue with national coverage through Lab-to-Lab, and partnerships with hospitals across Brazil. There are over 8,000 clients present in 2,200 municipalities in more than 35 hospitals nationwide. New Links accounts for 9% of total revenue, including 5 medical specialties, 10 brands, 33 service units, telemedicine and infusion therapies. In Slide 7, we highlight Fleury Group consistent growth trajectory and revenue diversification with a CAGR of 13.8% per year. Since 2021, Fleury has more than doubled its revenue going from BRL 4.2 billion to BRL 8.3 billion at the end of 2024, closing the third quarter '25 with a revenue of BRL 8.8 billion for the last 12 months. This strong pace of expansion was accompanied by a broad diversification of revenue streams, making the business more resilient and well positioned to capture additional market share. Our recent activity of M&A will be shown as of Slide 8. We announced 2 relevant acquisitions consistent with the expansion strategy we have just described on Slide 9. At the end of the quarter, we announced 2 relevant acquisitions of [ Laboratorio Sao Lucas ] with 3 patient care services in Rio Claro with BRL 34 million -- with gross revenue of BRL 24 million, the Laboratorio Sao Lucas, the market leader in its region strengthens our presence in an area with high -- testing power and significant penetration of supplementary health plans. In June of this year, we completed the acquisition of Confiance with 25 patient service units and, [ Campinas ] only 80 kilometers separate Campinas from Rio Claro, increasing the potential for synergies and operations. The EV EBITDA multiple was 3.4x. On November 4, we were happy to announce the acquisition of the Femme laboratory, one of the brands that's known with a focus on women, as you can see on Slide 10. With 12 patient care units and BRL 287 million in revenue last year, Femme represents an important step to increase Fleury Group presence in the mid-tier segment in Sao Paulo. As with Laboratorio Sao Lucas, this was another transaction fully aligned with the discipline we apply to our acquisitions. Femme was valued at BRL 207.5 million, 3.3x [ EBITDA ] post synergies and 5.5x before synergies. Completion of this acquisition is subject to conditions [indiscernible] including the approval by [ Cadete Brazilian ] antitrust authority. We are very pleased with these 2 transactions and enthusiastic with the opportunities they create for Fleury. We now go on to the financial highlights. On Slide 12, we recorded strong 11.5% growth in gross revenue, which reached BRL 2.4 billion. The main highlight of the quarter was the B2C business unit, which grew 12.9% organically. This figure demonstrates the trust placed in our brands by both medical community and our clients. When we include the inorganic impact of Confiance and [indiscernible] Lab, the growth was 16% in the period. Individually, our brands had a remarkable quarter. The Fleury brand grew 12.2% year-over-year. In the Sao Paulo market, the other group brands, [indiscernible] SP, [ Pardini ] [indiscernible] and [ Pardini ] Express each with a specific positioning recorded revenue growth of 27.1% or 12.1%, excluding acquisitions. In Rio de Janeiro and Minas Gerais, our B2C operation advanced 10.4% and 15.5%, respectively. In other regions of the country where we operate through local brands, growth reached 17.6%. As mentioned previously, mobile service, a model quickly embraced by the market for its convenience and asset-light nature grew 11.6% and now generates revenue equivalent to 73 physical units. Growth in the third quarter '25 came without compromising cost and expense discipline. In the quarter, EBITDA totaled BRL 599.4 million, up 11.5% and a 27.4% margin, stable compared to the same period in '24. Net income reached BRL 184.9 million with an 8.4% margin. These results reflect the strength of our brands in their respective markets and the effectiveness of the group's strategic geographic expansion of its core business carried out over recent years. I'll now hand the floor over to Jose Filippo, Chief Financial and Investor Relations Officer, who will comment in more detail our financial performance.

Thank you, Jeane, and a good day to all of you. We continue on detailing the information for the last quarter. On Slide 13, gross revenue for the Fleury Group reached BRL 2.378 billion in the third quarter, a growth, as mentioned, of 11.5%. The performance shows the capacity of execution of our brands, the consolidation of our growth strategy and was also benefited by a favorable calendar effect. The comparison base for toxicology and dengue is now normalized as the peak occurred last year until the end of June 2024. We go on to Slide 14, and we see an organic growth of 12.9% in our patient service units. Including the acquisitions of the last 12 months, the expansion is up 16%. We had strong organic growth in all markets among consolidated brands like Fleury that grew 12.2%, and in our regional brands that grew at a fast pace of 17.6%. On Slide 15, we show you the performance of our B2B units still impacted by the exit of a client in the hospital. This was offset by a good Lab-to-Lab performance and the normalized toxicology and dengue test volumes. The revenues of B2B grew 2.1% in the quarter, reaching BRL 511.6 million. In the next Slide #16, we see that revenues of Novos Elos and the Health platform grew 3% in the quarter, reaching BRL 204.3 million. This segment has been affected by a greater market supply of infusion services, but also had outpatient care. Additionally, in this quarter, there was the application of high cost medicine. New Links represented 8.6% of the company revenue in the third quarter. Let's go on to Slide #17, we see that gross profit grew 10.6% year-on-year, reaching BRL 615.8 million, a margin of 28.1%, down 27 basis points in the period. This performance is explained by facilities and utility services that had higher costs with outsourced service providers and depreciation, amortization that was greater because of a higher technology investment with accelerated depreciation schedules, which will enhance productivity gains over time. Operating expenses reached BRL 249.5 million, up 15.08% year-on-year. Operating expenses over net revenue had an expansion of 34 basis points, reaching 11.4% in the quarter. The highlights are the reduction in general and administrative expenses showing the cost discipline and commercial expenses concentrated in Lab-to-Lab operations. We also see an increase in expenses with depreciation and amortization, as mentioned previously. On the next slide, #19, we see that EBITDA grew 11.5% year-on-year, reaching BRL 599.4 million with a margin of 27.4%, stable versus the third quarter '24. On Slide 20, we see net income with a slight drop of 3%, reaching BRL 184.9 million, with a net margin of 8.4%. Besides the growth in depreciation, net income was impacted by the higher interest rates than the last year from 10.75% to 15% per annum, leading to an increase in financial expenses. Although we maintain the leverage of the company, our additional effective tax rate was 22.8% for the quarter. In the next slide, #21, you will see that our CapEx for the company was of BRL 126 million in the third quarter, an increase of 11.8% year-on-year. The main driver was 29% increase in IT and digital investments, fundamental for our innovations. Going on to Slide 22, will show you our operating cash generation, BRL 718.5 million, up 28.6% year-on-year. Our cash conversion reached 91% in the 9 months of '25, maintaining the capacity for cash generation in the company. Let's go on to the next Slide 23, where you see a summary of our financial discipline, leverage at a double level of 1.0x despite the high interest rate. The capital structure enables us to carry out strategic movements, reinforcing growth in our market position regarding return on invested capital, 16.5% in the third quarter. There was an increase of 250 basis points in the second quarter of '23. This reflects consistent capital allocation and disciplined investment strategy. On Slide 24, you see cash position and debt amortization schedule. Our robust cash balance funds our liabilities. At the end of September, we knew that we had sufficient cash balance to extend until 2028. We had a significant reduction in the cost of debt and an improvement in our ratings. Before going on to the question-and-answer session, I would like to return the floor to Jeane for the closing remarks for the presentation.

Thank you, Filippo. I end the presentation reaffirming our commitment of leading Fleury with financial discipline in the long term. We had consistent results with a growth of 11.5% in growth revenue. The highlight was a B2C unit with an organic growth of 12.9%, aided by a favorable calendar effect and market share gains because of the acquisition -- the trust in our units in different areas. We also had inorganic growth contributions from Confiance and [ Campinas ] and [indiscernible] Lab in Mina Gerais. This thanks to our cost and expense discipline, the strength of the Fleury Group are based on that confidence for innovation and technology of the latest state of art, so that we can have the services offered to our customers. The 2 acquisitions announced recently, the Sao Lucas and Femme Lab reinforce our determination of increasing diagnostic medicine and enabling further synergies and market gains. We have a highly -- strategy supported on an efficient and efficient business model that enables us to go through different cycles with a robust cash. Until the third quarter of '25, we had an EBITDA to cash conversion of 91%. Our commitment with financial discipline enabled us to get to a leverage of 1.0x at the end of the quarter, a comfortable situation in a macroeconomic scenario with the highest interest rate in 2 decades. The ROIC was 16.5%, reflecting consistent value creation. Thus, we believe that the company's capital structure support strategic growth moves and market leadership consolidation. We continue steadfast in our purpose of leveraging Fleury's impact by offering an ever-growing number of people, sustainable health care journey. Thank you very much, and we are now at your entire disposal for questions and answers.

We will now go on to the question-and-answer session. [Operator Instructions] I will give the floor to Mr. Renato Braun to moderate the question session.

The first question from BTG from Maria [indiscernible]

I would like to speak further about Femme, a somewhat different transaction vis-a-vis the last ones you have carried out. This is focused on the health of women. Why have you focused on this asset? And if this transaction is a company move of increasing your effectiveness also to speak about these transactions, if you could speak about your M&A more. Now the question is if all of this will increase its pace in the coming months.

Thank you, Maria [ Eduarda ], for the questions. We truly are very satisfied with the Femme acquisition. Of course, this has to go through the approval of the Brazilian antitrust company. Now Femme was created 52 years ago by gynecologist and it's highly recommended by the physicians in Sao Paulo and [ Osasco ], where they are active, and it has strong recognition in the market. By entering that segment of female health, we have an expanded portfolio for women. It includes adolescence until the mature health of women, including services such as fertility. This is a focus of Fleury and Femme will only complement our position of looking at the full journey of women. An important point when we look at the number of clients of Fleury, 62% are women, 38% are men, and Femme has a positioning that sets at a [ site ] in Sao Pa and in Osasco. Regarding the synergies, Maria Eduarda, the acquisition was [ BRL 207.5 million, ] EV EBITDA, 5x and postsynergy [ 8.3% ]. So we see that there is enormous value to capture through synergies. These synergies as a priority will involve costs, but we also will have additional revenue. And we have these synergies and our other assets that have been acquired. We have a structured process for the integration to capture synergies. These are not minor assets in the partnership with Pardini. We structured this process to capture and follow up on synergies as soon as we obtain the approval of CADE and the closing of Femme, we will put in place that integration and rapidly capture synergies. We're very optimistic with Femme because it is complementary. It is positioned in women's health. It does have synergy with other services such as the fertility service that has had robust growth in Fleury and other services geared to women's health. We have an integrated service for endometriosis at Fleury and other services geared to women's health. As I mentioned, we intend to quickly capture synergies as soon as we get the approval of CADE about our acquisition pipeline. I'll give the floor to Filippo.

Good morning, Maria Eduarda. Regarding our pipeline, our M&A section is very structured. You know that our growth comes from a combination of organic and inorganic growth. So M&A does play an important role in our growth with quality, of course. What we have observed is that recently because of the increase in the capital cost of companies some of these businesses are more difficult. We're prospecting businesses of high quality, they have a high value. So the negotiations are more difficult and the pace will have to decrease. Now to carry out an acquisition, we assess strategic aspects, the positioning, the type of business economic and financial aspects, multiple returns and cultural aspects as well because we have a very accelerated, integrated plan to capture synergies as soon as possible. We base ourselves on the pre-synergies. Now the M&A process will depend on the potential of negotiations of complying with these parameters. I will also mention the leverage. We're concerned with maintaining a leverage at a low level because of the high interest rates and the asset are operational, they already bring in EBITDA, and they will not have a huge impact on our EBITDA. So we are looking at new businesses. The priority are for diagnostic medicine in regions close to where we operate. If other opportunities come up, if the parameters are in accordance with what we demand, we will take a look at them.

The next question from UBS is from Andre Salles.

We have 2 questions. And besides exploring the part of M&A, besides Femme that has a very specific profile, in your more recent moves, you seem to have focused on the [ inter ] lens of Sao Paulo. Does it makes sense that in the short term, this will also attract you to other states? Or was it simply a matter of opportunity in the region? My second question refers to the expansion of Lab-to-Lab in Sao Paulo. I see that you have made relevant investments there. If you could give us more color on the potential of this opportunity. And if this could speed up the opportunities of M&A with a relationship in other laboratories.

Thank you for the question. As you mentioned, with the new acquisitions, are in Sao Paulo, Laboratorio Sao Lucas and Rio Claro and Gertrudes and our other acquisition, now I draw your attention to that strategic aspect mentioned by Filippo. That takes us to acquiring assets that are recognized by the medical community and local customers, that local aspect is important but also regions with a high potential for economic development. Last year, we carried out an acquisition in [ Vale ] with [indiscernible] , that has had relevant economic growth, an in [ campaign and surrounding ] region. Rio Claro is a city where besides the economic performance, it's a city growing above the national GDP and it has a percentage of high supplementary medicine. In Rio Claro and region, 40% of the population has access to supplementary medicine. Well, the rest of Brazil represents only 25%. In Campinas, once again, there's a high access to supplementary medicine and in Sao Paulo as well with them. So we're entering regions with a potential for economic development. [ MO Lab ], we are in the region of [ Conceirola ] [indiscernible] it is an industrial -- that is growing considerably. Therefore, in the [ hinterland ] of Sao Paulo, where we have that economic development and high coverage of supplementary medicine with enormous potential in other regions of the country with the same characteristics. The cultural aspects are essential. As mentioned, we carry out a quick integration and otherwise, in Campinas and Rio Claro, we have EV EBITDA of 4.5x. This multiple will go to 3.4%. And in Femme, 3.3x. So we have followed up on all of these moves. And Confiance, the acquisition we just made already has growth and we are capturing the synergies that we had planned. So this is truly important. Organic growth that was robust in all markets this quarter, double digit in all of our regional markets as well as the inorganic growth. In Lab-to-Lab, we have good growth. Now in the third quarter, the organic growth of Lab-to-Lab was of 7.8% and we're increasing our capacity of production. We increased the production in Rio Grande do Sul, the second largest market of Lab-to-Lab. And the implementation of that productive area in [ Paras ] already points to significant growth. And in the region of Sao Paulo, we have an increase of production capacity in the building where we already have a technical area. We inaugurated a floor fully geared to Lab-to-Lab to process 84 million tests per year, once again, focused on Lab-to-Lab. And we have a potential market in Sao Paulo and the [ hinterlands ] of Sao Paulo. So the state of Sao Paulo does pick up the pace of growth in Lab-to-Lab and others in organic terms. In the Fleury brand, we grew 12.2%, showing you the strength of the Fleury brand in Sao Paulo and other cities where we are present like Campinas and [indiscernible] besides the mobile care. In the other brands in Sao Paulo, we grew organically 12%, showing you the strength of our brands in Sao Paulo. I draw your attention that in other regions, we also have good organic growth, showing the strength of the Fleury Group, Andre. Thank you for your questions.

Well, thank you, Jeane, and have a good day.

Our next question from Goldman Sachs with Gustavo Miele.

Thank you, Renato. Have a good day. Good morning, Jeane and Filippo, thank you for the presentation. I would like to explore 2 topics about the Fleury brand in principle. Simply to further understand, how much of that performance of the 12.2% growth was due to a favorable calendar? We were trying to estimate the growth of the CAGR 2 years ago to correct the base. Well, this ended up being a very positive surprise for us. How much of this growth is due to the calendar effect or a more healthy underlying? And perhaps we could think of a stronger growth for the fourth quarter vis-a-vis 2024. A second question. This robust growth of the premium brand, why didn't it bring about margin expansion? There was an expansion in EBITDA, but a gross margin -- is there another effect that was [indiscernible] in terms of profitability? These are my questions.

Thank you, Gustavo. The Fleury brand is truly extremely resilient. It has 99 years -- it has a positioning with a high market share in the AAA segment of Sao Paulo and surrounding region. And it has had exceptional performance. The calendar effect that we mentioned in the release in the quarter generally has the impact of [ 1.2 positive ]. That effect shows that the growth that we have had in the third quarter does have other components. And I reinforce several initiatives related to relationship with physicians and [ PS ] that is kept quite high, that trust and the good service on the part of all of our brands, an expansion of agendas. In Fleury brand, we have carried out retrofits with an increase in the supply of exams and services. Besides the renovation last year, we spoke about integrated centers in neurology, endometriosis and other services. In the context of a resilient brand that is very well recognized by the medical community and clients shows the strength of the Fleury brand for the year. We had a growth of 7.4% for the Fleury brand, and we're quite optimistic regarding the fourth quarter. We're not offering guidance, but the potential that we see in our different brands remains. And this shows us that all of the actions that we carry out besides the calendar effect that was 1.2%, bring about considerable results. So we are optimistic, not only with the Fleury brand, but with the other brands of the B2C very generally. Regarding margins, I would like to ask Filippo to respond to this.