Earnings Call Transcript - AUNA Q2 2025

Ana Maria Mora, Head of Investor Relations

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 regards to Mexico and Colombia, unless we note otherwise. Let's move to Slide 2. In addition to reporting on audited 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 carefully read the definitions of these measures and metrics included in our earnings press release of yesterday to ensure that they understand them. Non-IFRS financial measures and operating metrics should not be considered in isolation as a substitute 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 is not limited to, our expected adjusted EBITDA growth, the expected impact on revenues and profitability of certain initiatives we are pursuing in Mexico and long-term financial position and flexibility as a result of certain initiatives we are pursuing related to payers in Colombia and our target leverage level. For a description of these risks, please refer to our Form 20-F filing with the US Securities and Exchange Commission and our earnings press release. Slide 3, please. On today's call, we have Suso Zamora, our Executive Chairman and President; Gisele Remy, our Chief Financial Officer and Executive Vice President; and Lorenzo Massart, our Executive Vice President of Strategy and Equity Capital Markets. They will discuss Auna's consolidated and segment financial and operating results for the second quarter, and we'll also provide updates on our various strategic growth initiatives. After that, we will open the call for your questions.

Jesús Antonio Zamora Leon, Executive Chairman and President

Thanks, Ana Maria, and good morning, everyone. We appreciate you joining our latest results call. During the second quarter, our Mexico business resumed its growth, while our Colombian operations strengthened with EBITDA growing again in this segment as well. Combined with the top line and EBITDA growth of our Peruvian operations, this resulted in consolidated FX-neutral EBITDA growing 5%, slowly reasserting our trajectory. All three geographies contributed to the quarter's growth in the respective areas. This demonstrates the strength of our regional health care platform fundamentals and is encouraging with respect to recovering more growth during the remainder of the year. We remain bullish in the medium to long term. We turn to the quarter's highlights. A key aspect of Peru's performance was retaining within our health care network more patients from upstream services such as emergency treatment and outpatient visits, leading to increased surgery volumes that have a higher average ticket. OncoSalud, the health plan side of our Peru business, delivered another solid quarter with respect to revenue and EBITDA, in addition to achieving a record low oncology MLR. In Mexico, we stabilized our doctor-supplier relationship, and there was a nascent volume recovery from the first quarter, indicating that the adjustments we have made are working. These adjustments enable physicians to more easily transition to our standards and practices in this particular area. As a reminder, this hasn't been the first time we've encountered operational setbacks when bringing Auna's care model to a new market, which is a complex and gradual process and which, of course, is disruptive to legacy medical protocols and practices. Also, as a reminder, our model is the one sought after by Mexico's insurance companies and other payers with the aim of improving patient outcomes while effectively managing the cost of health care. Another bright spot in the quarter was our results in Colombia, where EBITDA and margin improved versus the first quarter as the tactical measures that we've implemented to manage risks and improve cash flows have proven to be effective. Although our leverage ratio remained unchanged, rest assured that we haven't lost sight of our medium-term target of 3x net debt to EBITDA. Now turning to Slide 5. Auna's total capacity utilization decreased 2.5 percentage points to 64%, mainly explained by Colombia where we have intentionally slowed growth by proactively managing contracted services with intervene payers to mitigate payment risk and prioritize a positive cash cycle among other measures we've taken in Colombia. In Mexico, utilization ticked down again this quarter on lower surgery volumes and emergency visits that eventually drive hospitalizations and ICU admissions. As we managed to improve physician recruitment and engagement, we expect capacity utilization to recover in Mexico, and we remain focused on utilization related to high complexity services, consistent with our growth strategy. At OncoSalud, the growth in general health care plans remained strong, growing 10% again this quarter, while membership in oncology plans grew 2% and the MLR of these plans fell for the fourth consecutive quarter to below 50%, which reflects efficiencies that we've gained with respect to pharmaceutical costs. Let's now take a closer look at each of our segment results, beginning with Mexico on Slide 7. Revenue in Mexico grew 5% year-over-year despite fewer surgeries and emergency treatments. This was due to higher average tickets for these services as well as the repricing of other services such as radiology and chemotherapy. The lower mix of high complexity services in the quarter meant that the pace of EBITDA growth was slower than revenue growth, something that you also see reflected in the margin decline in the chart on the right of this slide. Nonetheless, Mexico's margin level is a healthy one and ongoing efficiency initiatives have lowered our pharmaceutical costs and those related to surgical equipment. Although we expect the adjustments that we've made regarding the implementation of the AunaWay, will help recover growth going forward. Market conditions remain soft as the impact of tariff uncertainty continues to ripple through Mexico's economy, particularly in the north of the country. A brief word about OncoSalud Mexico. We continue making headway on this important growth front. Our policies now provide nationwide coverage through a network of doctors and hospitals as well as ancillary medical services like labs and preventative care. In addition to Monterrey, this now includes Mexico City, Guadalajara, and Tijuana. This is an important step forward towards scaling this new business and capitalizing on the massive gap in Mexico's health care market. Now let's turn to Peru on Slide 8. The 5% revenue growth in Peru's healthcare services was mainly driven by the increase in surgery volumes, price increases, and an improved services mix across our network of facilities in the country. OncoSalud revenue grew 7% and a 10% increase in total planned membership that I highlighted before, in addition to price increases that we made relative to inflation in the medical services sector. Besides a strong improvement in Peru's oncology MLR, its total MLR decreased 3.7 percentage points to just under 55% and an increase in general health care plans within the product mix. Now moving to Colombia on Slide 9. The strong improvement in Colombia resulted from implementing risk-sharing models and diversifying our base of payers away from intervene ones. Salud Total, for example, is a payer that Auna began serving in Colombia on July 1 under a PGP contract with them and we should start seeing this increasingly contribute to the top line in the upcoming quarters. Although Colombia's revenue was flat year-over-year, EBITDA increased 9% and the margin expanded 1.4 percentage points. As you can see in the chart at the right of the slide, the sequential improvements were even stronger. Also noteworthy is the quarter's lower provisions for impairment losses, which reflects the timely receipt of outstanding payments from Nueva EPS, the largest intervene payer that we serve in the country. With that, I'll turn the call over to Gisele, who will provide some detail on our financial results.

Gisele Remy Ferrero, Chief Financial Officer and Executive Vice President

Thanks, Suso. My review begins on Slide 11. Revenue increased across our business, except for Colombia, where we intentionally slowed growth, keeping revenue stable year-over-year as we focused on risk management and improving our cash conversion cycle. Although revenue growth in Peru slowed this quarter, it remained a strong contributor to our top line. The 8% growth was largely due to planned member growth, an increase in surgery volume, and changes in service pricing. Let’s move to Slide 12. Adjusted EBITDA rose 5% in FX-neutral terms for the quarter but fell 3% on an as-reported basis, with the margin staying nearly the same at just over 22%. Notably, the depreciation of the Mexican and Colombian pesos against the sol, our reporting currency, had an impact, with the Peruvian sol declining 16% against the Mexican peso and 9% against the Colombian peso year-over-year. In Peru, EBITDA grew by 8%, and the margin held steady at a robust 21%. In Mexico, EBITDA grew by 2% in local currency but was affected by currency devaluation on an as-reported basis. The growth in EBITDA in Mexico was primarily due to revenue increases and cost efficiency measures implemented late last year, which resulted in cost savings that were partially offset by higher expenses linked to initiatives aimed at enhancing physician productivity. Mexico's adjusted EBITDA margin remained strong at 32%. Colombia's margin significantly improved, rising 4.5 percentage points compared to the first quarter, thanks to a more profitable mix of payers, better payment flows from key payers, and reduced impairments on accounts receivable. Let’s now proceed to Slide 13. Adjusted net income increased 6x year-over-year, positively impacted by FX and EBITDA growth and an FX variance. The largest impact was the positive non-cash PEN 118 million FX variance primarily related to the appreciation of the Peruvian sol against the U.S. dollar outside the range of our call spread hedges. Net finance costs when excluding the foreign exchange effects fell by PEN 80 million versus the comparable period last year. Finally, income taxes in the second quarter were PEN 53 million higher versus last year, primarily due to the fact that we recognized a deferred tax benefit in the comparable period last year whereas our effective tax rate year-to-date is at a more stable rate of 37%. Moving on to cash on Slide 14. Our cash position decreased 13% versus the first quarter but remained at a healthy level. Free cash flow was PEN 143 million, versus PEN 155 million in the first six months of last year, primarily impacted by PEN 19 million in payments to the Opción Oncología doctors as well as collections in the first quarter. Interest paid was down PEN 41 million from PEN 264 million in the same period last year. At the end of the quarter, we maintained a healthy debt structure with approximately half of Auna's debt in local currencies and 86% of our U.S. dollar debt hedged to the Peruvian sol. In the second quarter, we refinanced just over $62 million of short-term debt, an issuance that was well received and oversubscribed. This refinancing improved our maturity profile. Auna will continue to take advantage of favorable debt market conditions to continue improving our debt profile. Lastly, as Suso noted, we remain committed to further reducing leverage to 3x net debt to EBITDA. That concludes my review. Now back to Suso, who will wrap up today's presentation.

Jesús Antonio Zamora Leon, Executive Chairman and President

Thanks, Gisele. Before taking your questions, I'd like to leave you with some key takeaways from what was another complex quarter. First, we are quite confident that our strategy, in particular, the AunaWay is the right model, a proven one, to transform health care in Spanish-speaking Latin America. In Spanish-speaking Latin America, where private health care remains fragmented, inefficient, and underpenetrated. Through our regional platform, we are modernizing and integrating patient care to improve the patient experience and, most importantly, medical outcomes. In doing so, we expect to sustainably drive value for our fellow shareholders over the long term. Of course, there can be setbacks along the way, as we've seen recently in Mexico and in Colombia. We have many years of experience that challenges will invariably arise and that operating environments can change, periodically throwing up obstacles to growth. But we have always adapted and overcome them, and our most recent quarterly results are encouraging. We believe we have made the right operational adjustments at Auna's Mexican and Colombian segments, and we expect their performance to continue improving during the rest of the year. Auna's near-term growth outlook has obviously changed. And it is difficult to tell how we'll finish the year. Given the trade and tariff uncertainty that is playing in Mexico's economy and the lack of an immediate resolution for Colombia's intervene payers. Our Peru business continues making solid contributions in terms of growth and profitability and demonstrates the robustness and strong potential of our vertically integrated model when it's mature and operating at scale. Colombia remains an important contributor of scale as well as of medical best practices. The risk mitigation measures that we've implemented are proving effective, evidenced by intervene payers' continued compliance with their payment plans. We will continue to diversify and reprioritize our payer mix in the country, utilizing risk-sharing models and proactively managing contracted services, all with the objective of safeguarding cash flows and overall operational stability. In Mexico, we expect volumes to continue to recover, having calibrated the implementation of our model in a way that allows physicians to more easily transition to Auna's care model and enables us to re-engage high-performing doctors and strengthen our relationship with them. We remain excited about the enormous potential of OncoSalud, which is bringing an entirely new insurance product to Mexico and also about our overall oncology offering, which we're beginning to scale with the recently acquired Opción Oncología practice group, an offering that we expect will be best in its class. That concludes our prepared remarks. Operator, please open the call for questions.

Operator, Operator

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

Leandro Bastos, Analyst

This is indiscernible. I have two questions. First, could you provide an update on the situation in Mexico regarding the challenges faced earlier this year with physicians and suppliers? You mentioned making some adjustments and addressing some issues. It would be helpful to know the current status and also your outlook for volume growth in the region. The top line improved in the second quarter, but volumes seem to remain weak. What are your expectations moving forward? My second question is about oncology MLR, which reached record lows during the quarter. Do you see room for further decline, or is the strategy to maintain prices at current levels? Those are my questions.

Jesús Antonio Zamora Leon, Executive Chairman and President

Thank you very much, Leandro. I appreciate the different questions and will ensure I address all of them, with Gisele providing additional input if needed. Regarding Mexico, margins have remained in the 30s, and we believe we will maintain those margins moving forward. This is due to slightly higher growth as volumes from our physician groups have stabilized. It's also worth noting that the second quarter typically performs better than the first quarter. We are optimistic about our supplier relationships, which have not only stabilized but also appear to be aligning with our doctors. We think that the implementation process is beginning to yield results as doctors bring in volumes again. It’s important to be realistic about the speed of these implementations. Some physicians who are not aligned with our model seek surgeries elsewhere for the higher commissions suppliers offer, while aligned physicians are transitioning their practices to Auna. However, this transition is gradual as they adjust to our volume allocation. While there is some dislocation, we are excited about what we see in the near term. Now, moving on to MLR, we've managed this successfully for many years. MLR fluctuates based on product mix, membership, and associated service costs, and we have been operating at just over 50% for the past 15 years. Fluctuations in any quarter are not significant and should not be viewed as structural. Our MLR typically ranges from 50% to 54% as a result of ongoing cost containment and price adjustments, which is a key aspect of our strategy. I want to emphasize that operating within this predictable range is part of our plan, and we will continue to deliver consistently within it. Gisele, would you like to add anything?

Gisele Remy Ferrero, Chief Financial Officer and Executive Vice President

No, Suso, nothing on my end. I think that's very clear.

Jesús Antonio Zamora Leon, Executive Chairman and President

There was a general question that I missed in the middle about growth. I couldn't hear it. I had a little bit mumbling. I don't know if I missed anything, Gisele.

Gisele Remy Ferrero, Chief Financial Officer and Executive Vice President

Regarding the topic of Mexico, I believe it relates to volume levels. As Suso noted earlier, we are seeing stabilization in volumes following the impacts from our supplier-doctor relationships that we discussed last quarter. There are positive indicators, but I would also emphasize that, as Suso pointed out, this is a gradual process to stabilize the new model and the rotation of doctors that may arise from it.

Operator, Operator

Your next question comes from the line of Artur Alves of Morgan Stanley.

Artur do Amaral Alves, Analyst

I have a quick question about Colombia. Are you forming any new agreements there, specifically regarding additional risk-sharing contracts and your relationship with the new payer? How is that progressing, and do you have any new updates?

Jesús Antonio Zamora Leon, Executive Chairman and President

Great. So in general, and starting with the latter part of the question, we are making great progress in terms of collections. That is being represented in less provisioning, and you'll see that in the future. We're excited about what the team has achieved in Colombia. And there's been a reversal of higher provisions that we had in the past. Our collections in cash in Colombia has definitely improved, especially with the interim payers, especially with Nueva EPS. And more importantly, the dialogue we have with Nueva EPS is very constructive. They are very respectful. They've been delivering on an agreement that we signed many months ago on monthly payments with respect to the Pasa Consult. So I think the cash cycle in Colombia has much improved, and we will continue to improve. In terms of new agreements, we have also made good progress in terms of revenue tied to intervene private payers. We've decreased our concentration from 90% to around 26%. And likewise our risk-sharing models have increased from about 7% of total revenues in Colombia to a little over 10%. We continue to see that as a very important avenue of growth in Colombia.

Gisele Remy Ferrero, Chief Financial Officer and Executive Vice President

No, Suso, I think that's complete.

Operator, Operator

There are no more questions from the phone lines. So I will now turn the call over to Ana Maria Mora from Auna, who will proceed with the questions from the webcast platform.

Ana Maria Mora, Head of Investor Relations

Thank you, operator. The first question comes from Alex Zefferson from Mangrove. What gives you confidence that utilization in Mexico will increase given market softness?

Jesús Antonio Zamora Leon, Executive Chairman and President

So we believe that our model in Mexico is gaining traction. We can also see how the volumes, for example, in Opción Oncología, the recently acquired Doctor Group, the leading oncology group in Monterrey, produces higher volumes in our networks. So high complexity, again, capitated models with which we take risk-sharing like we discussed in Colombia, you'll see growth of that in Mexico in the future. That will sustain what we believe will be volume capacities in our hospitals in Monterrey. I think the market softness is here to stay, but our model is promising. Given that health care often does not correlate closely with economic growth, I believe we'll see some recovery. The shock in Northern Mexico or the tariff uncertainty and its relation to formal employment, of course, former employment with the highest penetration of insurance has produced a delay in medical treatment, surgeries, and things of that nature. But it has not eliminated that demand; that will come back.

Ana Maria Mora, Head of Investor Relations

Thank you, Suso. The next question comes from Majunder from HSBC. What is your market share in Monterrey?

Jesús Antonio Zamora Leon, Executive Chairman and President

Okay, Gisele, maybe you can help me with this one. When one counts beds in the private sector in Monterrey, we represent over 30% of the number of beds in the private sector in Monterrey. When we look at oncology services, which is for us or high complexity services, our market share is lower. I would say, and these are informal numbers, please don't hold anything against me; I just want to indicate the trend. We want to measure more high complexity market shares, and we're below, I would say, 10% in Monterrey, and we are very focused on increasing that in the next 5 years to more than double digits, to more than double the current share. This is a clear and key strategy in Monterrey, and that we will measure and report in the future for investors to see. That is what we focus on in Monterrey: more than the beds, what is the market share we have in chemotherapy, in medication therapies, in oncological surgeries, in obstetric procedures, and orthopedic procedures. We will be focused very much on that in the future, and you'll see how we move those figures as well.

Ana Maria Mora, Head of Investor Relations

Thank you, Suso. The next question comes from Gerard Forbes from Sura. Looking at your historical results, your effective tax rate has shown significant volatility with a tax benefit in 2Q '24 and a more normalized expense of around 36% in 2Q '25. Could you provide some more color on what drove this normalization and what should investors expect as a sustainable effective tax rate going forward in the short and medium term?

Jesús Antonio Zamora Leon, Executive Chairman and President

Gisele, do you want to take that?

Gisele Remy Ferrero, Chief Financial Officer and Executive Vice President

Yes. Great, Suso. Thank you so much for the question. What we've seen in the past and any volatility in the effective tax rate on the P&L has been more related to the stabilization of profit before tax and net profit as we've seen. Once we've started to stabilize profit before tax and net profit, and recognized deferred tax benefits from the past, given tax credits that we've built from basically 2022 when we had the impacts of the acquisition and in 2023 when we had the impacts of the refinancing, which basically resulted in tax credits, which then translated into the P&L as deferred tax benefits. That's why this year, in 2025, we're seeing a much more stabilized and normalized effective tax rate in the P&L, which should be around the levels that we're seeing this quarter of around 35% to 38%.

Ana Maria Mora, Head of Investor Relations

Thank you, Gisele. The next question comes from Alex Stefensen from Mann. What is your view on the negative free cash flow after interest costs and liquidity?

Gisele Remy Ferrero, Chief Financial Officer and Executive Vice President

Thank you, Alex, for the question. What we've seen year-to-date, as we mentioned previously, is that organic free cash flow has been impacted both by collections in the first quarter, specifically in Colombia, which we've stabilized into the second quarter, as Suso mentioned. We've also had the PEN 19 million in payments to the Opción Oncología doctors, which is not a recurring payment. Historically, what we've seen is that cash flow improves in the second half of the year, and that is why we do see in what's to come in the year that organic free cash flow will more than recover interest costs.

Ana Maria Mora, Head of Investor Relations

Thank you, Gisele. At this time, I'm showing no further questions. So I'd like to turn the call back over to Suso for his closing remarks.

Jesús Antonio Zamora Leon, Executive Chairman and President

Well, thank you very much, everybody. We remain excited about the future of Auna in the three geographies we have. We're growing as we expect with, as I said before, some minor headwinds that we resolved in Colombia, I believe, and then we're resolving in Mexico. Thank you again for your interest in Auna, and we'll continue to report as we make progress in the AunaWay model and its implementation across the three countries. Thank you again.

Operator, Operator

This concludes today's conference call. You may now disconnect.