Now, I will turn the conference over to Mr. Romeu Côrtes Domingues, Chairman. Mr. Romeu, you may begin your conference.

Transcription

1 Operator: Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to DASA s 2Q12 earnings results conference call. Today, we have a simultaneous webcast that may be accessed through the website, The slide presentation may be downloaded from that website as well. There will be a replay facility for this call on the website, for a week. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of DASA and on information currently available to the Company. They involve risks, uncertainties, and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of DASA and could cause results to differ materially from those expressed in such forward-looking statements. Today, with us we have Mr. Romeu Côrtes Domingues, Chairman, Mr. Octávio Fernandes, VP of Operations, Mr. Emerson Gasparetto, Director of Imaging, and Ms. Cynthia May Hobbs, CFO. Now, I will turn the conference over to Mr. Romeu Côrtes Domingues, Chairman. Mr. Romeu, you may begin your conference. Romeu Côrtes Domingues: Good morning and good afternoon, and welcome to our 2Q earnings call. Please, go to slide three. I would like to highlight some important points about our company, such as growth, quality, and return to shareholders. In terms of growth, our gross revenue grew 6.2%, reaching R$623.5 million in this quarter. Since 2011, we have had more than 50 PSCs remodeling, from which 31 were done in this 2Q. Our goal is to launch 20 new PSCs this year, and we have already launched 11 of those. In the hospital business, we had an impact due to Hospital São Luiz contract loss, but we have already started the operations of the hospitals AC Camargo and Sepaco in São Paulo last April. Furthermore, we have signed a new hospital contract in Rio de Janeiro to provide clinical and image service starting in the 4Q12. In the Public Sector, we had an excellent result of 20% growth due to the implementation of a new contract in Pernambuco, and we have also recently signed a new contract in Rio de Janeiro of around R$50 million revenue for this year. In terms of quality improvement, we have centralized our Rio de Janeiro call center and expanded from 300 to 670 workstations. Also, in São Paulo, we have currently 650 workstations with this new technology. These improvements, combined with quality initiatives, all aimed to offer a better customer service, caused an increase in our cost and expense. 1

2 Regarding scientific results of our medical staff, we would like to highlight some points. We had the honor of an invitation for RSNA, which is the most important radiology committee in the world that we are going to have three physicians from our group giving talks. We have published 25 international articles in important journals; especially I would like to highlight the cover of the Radiology Magazine or Journal from last April, was from our group. Also, I would like to reinforce that 50% of the scientific Brazilian articles and papers from clinical analysis and imaging are from our group. Regarding return to shareholders, our EBITDA reached R$103 million this quarter with no adjustments. We generated an operating cash flow of R$65.8 million, high enough to fund CAPEX, which was R$49.3 million in this period. We maintained a coverage ratio of 93.2% in this period. We are determined to guarantee an improvement in our revenues and balancing our cost structure, and consequently we have had the support of INDG, an important Brazilian consulting company, to review our process. Thank you very much, and now I am going to move to Cynthia Hobbs, who will explore our operating results. Thank you, Romeu. Good morning, everyone. Moving to slide four, our gross revenue grew 6.2% when compared to the 2Q11, reaching R$623 million in the 2Q12. On the next slide, number five, talking about patience service centers, revenue grew by 6.5% in the 2Q, with the same-store of 5.1%. Imaging grew 7% compared to 6.2% growth of clinical analysis. This standard brands grew to 12.8% in the quarter, compared to 3.7% in the executive and premium brands over the same period. The average requisition price was impacted by the higher growth of the standard brands, but we were able to increase R$2.20 per requisition. The units renovation, equipment replacements, and problems in the call center impacted our revenue by approximately R$20 million this quarter. Part of this impact is due to replacement of five MRIs and two CTs that has happened over the 2Q and finished in July. Our call center had a 24% growth in incoming calls, and only 6% growth for calls received. These indicators have shown the need to improve the quality of service. If we have maintained the conversion rates in the calls answered, we could have had a much higher sales growth. On the next slide, six, we have the revenues for hospitals that reached R$60.8 million in the 2Q, impacted by the loss of the São Luiz Hospitals, which had an impact of approximately R$13 million in the quarter. We are committed to restore growth of this market, seeking to increase the services offered in hospital we already operate and seeking new partnerships. We have already started operations in AC Camargo and Sepaco in April. In the 4Q, we will start the operation of another hospital with clinical analysis and imaging services in Rio de Janeiro. Going to slide seven, the revenue for lab-to-lab was R$60.6 million, up 5.5% compared to the 2Q last year. The competition in this market remains quite strong, but we managed to increase the number of requests by lab by approximately 6.6%. 2

3 Going to slide eight, in the Public Sector we reached R$44.6 million in revenue for this quarter, up 20%. This growth was mainly due to the implementation of the Pernambuco contract. In early August, we began the operation of a contract with the City of Rio de Janeiro, with a term of six months. This contract will have an additional revenue of R$15 million. Going to slide nine, cash costs of services provided in the 2Q totaled R$364 million, an increase of 10.5% compared to the 2Q11. Compared to the 1Q12, we have increased 6.9%. This increase was very concentrated in the cost of personnel related to improving the quality of services in our units and the increase in the number of employees for new units. In this quarter, part of the increase in personnel cost was due to the union retaining of 5% in São Paulo. There will be no additional hiring for the units already opened. We are vigilant in personnel costs, and this cost is under control. Regarding the cost of materials, we kept our costs stable, reflecting the productivity gains in our laboratories. Dr. Octávio Fernandes will comment on that. For the line of cost of services and utilities, we had an increase in doctor s fees in line with revenue growth for imaging. Cost increase in telecom, to provide redundancy and contingency systems, and we were also impacted by an increase in occupancy costs. Now, I turn to Dr. Octávio. Octávio Fernandes da Silva: Cynthia, thank you very much. The efforts of the Vice-President of Operations have a target to maximize the benefits of DASA s clinical analysis volume scale and stabilizing production costs. Let us now move to slide ten. Indeed, from 2009 we can note the progressive reduction in the clinical analysis total costs when measured in the same basis. Comparing the 2012 total clinical analysis costs versus 2009, we noticed a 5.2% reduction. This success is derived from a defined strategy of continuous interaction with suppliers, which has resulted in decreasing variable costs in the last year, offsetting the fixed cost, which has been impacted by headcount and union bargaining effects. Aligned with this strategy, we have been able to deploy a more balanced internal supply of share distribution in the last years in DASA, fomenting competitiveness with the major industries of material suppliers and consequently generating a major pillar value for our business. The perspective to foster even more automation, conveyor belts, and technology has sustainably increased our productivity, reaffirming the strategic moves deployed in São Paulo and Rio de Janeiro and also projected to be deployed for Recife and Brasilia. Indeed, we had increased our employees productivity in 22% since I will now turn it back to Cynthia. Thank you, Octávio. On the next slide 11, our cash G&A was of R$104.5 million in the 2Q, an increase of 11%. We changed in the 1Q12 the accounting procedure for provisions for doubtful accounts, which is now being recorded as a deduction from gross revenues. The 3

4 general and administrative reached R$98.5 million compared to R$94.9 million in the 2Q11. This increase is related to the call center and receivable areas. With the consolidation of the call center in Rio de Janeiro, we increased the number of employees starting in May, and we canceled the third-party contracts in August. We had an impact of R$2 million in the 2Q and will have the same impact in the 3Q. The focus in the call center quality, increasing service capacity, reducing waiting time, reducing the number of missed calls, will contribute to revenue growth in the following quarters. The call centers shall be already normalized in the 4Q12. Also in this quarter, we had an impact of R$6.4 million related to payment of 2011 employee incentive plan. Going to slide 12, our EBITDA reached R$103 million, with a margin of 18% compared to the accounting margin of 21.7% last year. EBITDA this quarter was impacted by lower revenue growth, as previously mentioned, and mainly the fixed and expenses cost structure. Going to next slide, number 13, income tax, based on the standard rate of 34%, we benefit from the amortization of goodwill and added the non-deductible expenditures. The effective rate was 16.7%. Important although we are capturing the benefit of the goodwill from the acquisition of MD1, but some companies are still paying income tax due to the CADE decision, and this is because these companies have not yet been consolidated. On slide 14, we see that we have a coverage rate exceeding 90%. Our accounts receivable reached R$512 million, with a 93.2% coverage. We continue the process of improving receivables. On slide 15, on cash flow, our cash flow from operations reached R$65.8 million, and here we can see improvements in the accounts receivable process obtained through the efforts made by the Company since This quarter, the Company generated a positive cash flow after CAPEX of R$16.5 million. We have already reduced the financial costs. The reduction in the interest rate is having a positive impact. In this quarter, we had US$3 million charge due to the exchange rate devaluation. Going to slide 16, our return on invested capital this quarter was 14.2% due to the volume of investments made in the past months. On slide 17, our CAPEX in the quarter was R$49.3 million and reached R$122.3 million in the 1H12. CAPEX of R$250 million for the year is maintained. We are still working with a number of 20,000 units in I will now turn to Dr. Emerson, who will explain the equipment investments mainly in São Paulo and advances in medical relationship. Emerson Leandro Gasparetto: Thank you very much, Cynthia. It is very important to emphasize that we have old and obsolete diagnostic imaging equipment, especially in São Paulo, which were acquired on average ten years ago. These equipment have high maintenance costs due to more frequent repairs and higher prices, low productivity due to obsolescence and repairs, and 4

5 low quality with internal and external impacts. To have an idea, the number one complaint of our doctors was the old equipment. Regarding productivity, with the old MRIs, for example, we could scan an average of 250 patients per month. And now, with the new one, we can scan an average of 800 patients per month with the same PSC. We could make this substitution slowly, but bother us to have low productivity and low quality with the equipment. We chose to do a fast replacement of our old equipment, generating an impact in our results. The average time spent to substitute an equipment is 60 days to 90 days. During the replacement, we lose revenue from these machines, we increased investments in equipment and construction and we also increase pre-operating cost and expenses. As a result, the vast majority of our machines to be replaced were already done until July We replaced or expanded 11 MRIs and CTs until July So now, we have only one replacement and four new equipment already in installation process to be delivered later this year. Thus, we practically ended the replacement of our old machines. Today, we have competitive and excellent cost benefit equipment. In addition, we have machines with state-of-the-art technology in São Paulo, as you see in this slide, our new 3 Tesla and our new 128 channels CT scans already installed. In the next slide, we see in this final bullet that we have the final statement of the projection that the imaging area reached within the Company in line with our assumptions of efficiency and quality. Thanks. And now, I will go back to Dr. Romeu. Romeu Côrtes Domingues: Thanks very much, Dr. Emerson. Finally, let me emphasize that we have been expanding and remodeling our PSCs, replacing imaging equipment, implementing our front-end systems named INOVA, reinforcing our relationship with the medical community, all of these aiming at profitability and optimization of our cost and expense structures. We are absolutely confident that we are building the pillars of a sustainable and profitable company for the next years. Thank you very much for your attention. And I would like to open for questions and answers. Josh Milberg, Deutsche Bank: Good morning, everyone, and thanks for the call. My first question is if you could just give a little more perspective on the factors that pressured revenues, just starting with the call center issue? You mentioned that the situation will be normalized in the 4Q. Are you already at a point where you can handle 100% of the inbound calls? And also, did the equipment changes and unit renovations mean that those people who were able to reach a call center operator in the 2Q were effectively told that there was not availability for them to do the exams, or they could only kind of schedule the exams far in advance, because one thing we 5

6 are trying to understand is if this means that there was some repressed demand in the quarter and there could be some offset in the 3Q? And then just finally, we understand your interest in moving very quickly in replacing machines. But our concern is that did this not, in effect, force customers to go to other providers and perhaps mean that you lost some business that will not be so easy to recover? Emerson Leandro Gasparetto: Thanks, Josh. Regarding your second question, when we talk about being fast in the replacement and then we have less position for patients then you lose to another players. This is not correct, because when we talk about replacements, we are talking about around ten replacements up to the end of this year, MRIs and CTs, and the number of MRIs and CTs that we have now in São Paulo, for example, is much higher than that. So, we expect that a part of those patients we will have scanned in the remaining machine. So, we cannot grow during this period, but we will not lose all those patients to other players. What I can say in terms of the call center is that, end of this year, we will have the guarantee that we will be operating at 100%. We have in the 2Q momentarily lost market share, but as Dr. Emerson was saying, we expect to recover these patients in the future. Octávio Fernandes da Silva: Josh, in terms of call centers, we know that in the 3Q we still have to do some improvement in the call center. The call center is going to be working well in the 4Q, not today, not during the 3Q, and that is a progress really. People are learning how to use the system. We are hiring and training new people. So, it is going to be during the 3Q that there is going to be the improvement and the 4Q is going to be better. Josh Milberg: And what happened with the call center, people call now and the calls are being dropped still at a relatively high rate, or is it just that that the people are not yet fully trained to sort of handle the calls properly? Octávio Fernandes da Silva: Josh, we still have the dropout problem, but lower than it was in the 2Q. But it is going to be decreasing throughout the 3Q, to be in normal levels by the 4Q. Josh Milberg: OK. And then, as far as this lost market share, do you think that it is something that is sort of well distributed among your competitors, or there are certain competitors that you feel have gained substantial share? 6

7 Octávio Fernandes da Silva: Josh, it is very hard to answer your question really, because we do not have the data. Josh Milberg: OK. Thank you very much. Matt Neal, Invesco: Hi, thank you for elaborating on the timing of some of the benefits that you will experience from your investment in quality and improved service. But I guess I am hoping you could give a little bit more insight, I guess, beyond being back to, for example, past-operational levels at the call centers by the 4Q. When do you foresee actually receiving profitability benefits from your improvements in quality and improved service? And the point of this question is to try to focus in on what EBITDA margin you think you will be able to achieve going forward. Thank you. You will see the results of all these efforts in terms of quality and call center only fully in We will start this in 2012, but I prefer to be more conservative and tell you that fully the profitability will increase only in the next year. Matt Neal: OK. And the EBITDA margin was 18% this quarter, what levels do you foresee being able to sustain over, say, the mid-term? I do not want to give you guidance. What we expect is in 2013 in the same levels that we were operating in the 1Q12. Matt Neal: OK. Thank you very much. Romeu Côrtes Domingues: OK. Thank you very much for your attention, and I hope to see you again in the next quarter. Bye-bye. Operator: Thank you. This concludes today s DASA s 2Q12 earnings results conference call. You may now disconnect your lines at this time. 7

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