Equity Research

Latin America
Healthcare
Company Note
02 December 2015

Fleury
Feedback from the road: the right strategy in place

Rating

Getting increasingly confident with initiatives to sustain LT profitability

12m Price Target

R$15.00/US$3.88

We recently hosted a round of meetings in the US with Carlos Marinelli (CEO) and

Price

R$16.21/US$4.19

Adolpho Souza (CFO), and came away more confident that, bottom-up, Fleury is

RIC: N.A., BBG: FLRY3 BZ

Neutral

following the right strategy in order to deliver sustainable results over the long run. They
believe that continuous enhancement of quality perception / brand awareness (for
clients and physicians) will assure bargaining power to sustain pricing / frequency
levels. On efficiency, Fleury sees room to improve disallowances, costs and G&A levels
(mostly dependent on internal controls) which, combined with behaved capex (focused
on Fleury brand), should support ROIC. We also welcome positive contributions that
Advent is already bringing to its day-to-day activities. Full details on the following pages.
but exogenous factors may prevent EBITDA margin growth in 2016
Despite strong EBITDA margin expansion in 9M15 (+2.6p.p. y/y), Fleury recognizes
that a weaker economy may hold back margin expansion next year. Mainly focused on
A/B income classes, Fleury tends to be relatively more protected against any sharp
drop in revenues, but remains concerned with OPEX. Material costs (~10% of sales,

Trading Data and Return Forecasts

52-wk range
R$18.86-13.42/US$6.23-2.04
Market cap.
R$2,534m/US$655m
Shares o/s (m)
156.3
Free float
40%
Avg. daily volume('000 Shares)
236
Avg. daily value (R$ m)
3.9
Forecast price appreciation
-7.5%
Forecast dividend yield
1.6%
Forecast stock return
-5.8%
Stock Performance (R$)
25.0

120

20.0
90

mostly FX-related), are expected to jump at least 10-15% (depending on negotiations),

15.0

while high inflation may pressure other expenses. But, by focusing on efficiency, they

60
10.0

reiterated the goal of bringing margins back to 23% over the medium-term.

30

5.0

ROIC should become part of management compensation from 2016 on

managements total compensation for 2016, especially given that capex is a very

Price Target (R$)

Stock Price (R$)

2-Dec-15

2-Jun-15

2-Sep-15

2-Mar-15

2-Dec-14

2-Jun-14

2-Sep-14

2-Mar-14

2-Dec-13

2-Jun-13

2-Sep-13

2-Mar-13

2-Dec-12

0.0

We welcome the fact that Fleury is studying the possibility of including ROIC metrics in

Rel. Ibovespa

important component of their (capital-intensive) business model. Current management

compensation includes a higher focus on corporate financial metrics (Revenues,
EBITDA and Net income), while for Fleury's PSCs staff, regional operating metrics
(including quality KPIs) have a higher weight.

Fabio Levy
Brazil Banco BTG Pactual S.A.
fabio.levy@btgpactual.com
+55 21 3262 9638

Bottom-up improvements may still be offset by a gloomy ST macro outlook

We like Fleurys efforts to generate LT value for shareholders, but remain concerned
about Brazils economic situation, as a deterioration in COGS structure may offset
bottom-up improvements in the ST. The combination of earnings momentum risks and

Rodrigo Gastim
Brazil Banco BTG Pactual S.A.
rodrigo.gastim@btgpactual.com
+55 11 3383 2468

a rich 19.5x 2016 P/E valuation lead us to remain on the sidelines for now.
Valuation
RoIC (EBIT) %
EV/EBITDA
P/E
Net dividend yield %

12/2013
7.9
12.0
25.9
0.0

12/2014
9.1
10.0
17.7
0.0

12/2015E
10.4
8.6
21.9
0.9

12/2016E
12.3
7.2
19.5
1.7

12/2017E
13.7
6.2
15.4
2.1

Financials (R$mn)
Revenues
EBITDA
Net Income
EPS (R$)
Net DPS (R$)
Net (debt) / cash

12/2013
1,657
278
111
0.71
0.00
(470)

12/2014
1,679
308
143
0.92
0.00
(552)

12/2015E
1,882
347
159
1.02
0.15
(463)

12/2016E
2,041
407
196
1.25
0.28
(389)

12/2017E
2,239
459
227
1.45
0.35
(314)

Source: Company reports, Bovespa, BTG Pactual S.A. estimates. / Valuations: based on the last share price
of the year; (E) based on a share price of R$16.21, on 30 November 2015.

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 6

Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Fleury
02 December 2015

Feedback from the road: the right strategy in place

Focus on quality remains a mantra and we see no reason to change it
All Fleury strategic guidelines stem from the mantra of being recognized as 'the best
service choice' for clients and physicians, based on the excellence of its diagnostic
procedures. Fleury believes continuous enhancement of its quality and branding
awareness will bring higher bargaining power when negotiating with the main
operators, which is also valid for regional brands operations.
With that in mind, Fleury has been focusing on its relationship with both customers
(trying to improve customers experience at PSCs) and physicians (providing
innovative and integrated diagnostics). In order to measure its progress on the quality
side, Fleury closely follows its Net Promoter Score (NPS), which has been showing
signs of improvement recently (NPS increased to 73.2% in 3Q15, from 71.1% one year
earlier) while initiatives remains in place, which should allow NPS to keep improving
going forward.
According to Fleury, healthcare operators believe that keeping Fleurys services (and
here we also include its upper-intermediate a+ brand) in their coverage networks is a
relatively cheap option in order to maintain the attractiveness of the plans (especially
when downgrading contracts to avoid churn). When plan downgrading occurs, payers
usually focus on hospital networks (taking Albert Einstein or Srio Libans out of the
coverage list, for example) rather than on Labs. Labs represent just 3% of total health
plan expenses (while more than 50% comes from hospitalization procedures).
However, negotiating with main payers (namely Bradesco, Amil, SulAmrica and Omint
which, altogether, represents 52% of Fleury's sales) has always been a challenging
task for the company (its exposure to Unimeds is more concentrated in Curitiba, Porto
Alegre and Recife). In 2015, Fleury said that it has been able to pass through 80-90%
of inflation (with an aim of reaching 100% when negotiation starts).

FX to impact from Q2 on; Fleury expects material costs to go up at least 10-15%

Given the significant FX depreciation in 2015 (up ~45% YTD), pass-through to the
material cost line (10% of sales and mostly FX-related) seems unavoidable and should
start impacting costs from Q2 onwards. However, Fleury believes that part of this
impact could be mitigated by contract negotiation with its main suppliers.
A relevant portion of Fleury's contracts are volume-driven, and prices are set on an
annual basis in local FX (R$), as most of its suppliers have subsidiaries in Brazil (90%
of purchases occur within the country). In most cases, if Fleury reaches the minimum
volume agreed in the contract, it could, in theory, negotiate better pricing terms for the
extra volume needed.
Negotiations with main suppliers (Roche and Abbott, for example) have always been
tough, but the next round (expected in 2Q16) should be even more challenging given
the strong FX depreciation. Despite its confidence in a favorable negotiation process

page 2

Fleury
02 December 2015

with suppliers, Fleury expects its materials cost P&L line to jump at least in the range
10-15% y/y in 2016 (vs. a 5% increase in 2015).

Still room for efficiency gains, without impacting quality of service provided
Aiming to bring EBITDA margins back to IPO levels (~23%), Fleury should still be able
to rely on the positive contributions coming from efficiency efforts, mostly internal
controls (Fleury still sees room to improve costs and expenses in 2016 while preserving
quality of services).
A more integrated IT system (e.g. implementation of a new SAP (ERP) version), the
integration of RJs front office system and further integration of technical areas (Fleury
has seven today) should also contribute to improve results. These initiatives could help
bring disallowances to below 3% levels (vs today's ~3.5/4%), improving collection and
reducing the number of employees responsible for paper work in the back office. Most
personnel efficiency gains will be concentrated in back office areas, while the company
keeps strengthening employees skills in the front line (those with a direct contact with
customers and impacts on NPS scores). It should also help to improve PSC's
processes, better optimize physician time sheets and better distribute the tasks to be
performed (basically analyzing exam results).

Full capex to Fleury brand; working other brands idle capacity is also key
Fleury expects to spend ~R$110mn in 2015, way below its initial budget estimate
(~R$150mn), as part of 2015 investments will be transferred to 2016 (we model for a
capex close to R$160mn). Fleury will stick to its strategy of concentrating most of its
investments in its Fleury brand expansion plan (especially in the metropolitan region of
SP). For regional brands, the focus remains on profitability levels, implementing rebranding processes and leveraging its idle capacity (RJs PSCs, for example, have
plenty of idle capacity since Fleury disaccredited Unimed-RJ in 2013, which used to
represent ~30% of the companys sales in the region).
Fleury is also working to implement a Diagnostic Center (with imaging exams) in some
PSCs that currently work only with Clinical Analysis. The opposite is also true: in Rio
and Bahia, where Imaging services are already strong, they will continue to expand
Clinical Analysis services.
Fleury believes that developing Diagnostic Centers may leverage Clinical Analyses
services: according to the company, for each imaging exam, Fleury can get seven extra
Clinical Analysis exams. In order to optimize capex, Fleury's expansion plan will also
focus on building fast sites, which tend to cost less than R$2mn per unit (vs. ~R$1015mn for a regular site). Fleury expects to open 16 fast sites from 2016-20.

page 3

Fleury
02 December 2015

Advent already lending a hand; no changes expected in shareholders structure

Fleury does not foresee any relevant changes to its shareholder structure, at least in
the short-term (there is a shareholder agreement in place, but without controlling
power). Also, alignment of Integritas group (founder physicians, ex-CORE) with Fleury
operations now appears more stable after the payment of 100% of their debt
(generated by the put options exercised by the Moll family after the Labs DOr
acquisition).
Despite the short time (the deal was only concluded in October), Advent has already
helped Fleury on the operational side, with know-how and improvement in internal
controls, procurement processes and rental/personnel costs dilution. In other words,
we believe Fleury is taking advantage of having a free consulting firm working with
them. Fleury also expects Advent to be helpful in analyzing potential future M&As.

M&A in the spotlight? Economic downturn may bring good opportunities

Since 2012, with the acquisition of Papaiz (leading Dental diagnostics player in SP),
Fleury hasnt made any major M&A moves, possibly explained by its complex / tough
experience integrating Labs D'Or in Rio. However, now they are willing to once again
consider M&A opportunities. Fleury believes that the tough macro scenario should
bring some acquisition opportunities, as the market remains extremely fragmented and
smaller players may start to struggle.
However, Fleury seems to be more interested in the regional footprint of these smaller
players, especially considering that most of these potential targets have a low quality
base of payers. Large acquisitions are also at Fleurys radar, but move tends to be
slower.

page 4

Fleury
02 December 2015

Fleury

page 5

Fleury

Income Statement (R$mn)

Revenue
Operating expenses (ex depn)
EBITDA (BTG Pactual)
Depreciation
Operating income (EBIT, BTG Pactual)
Other income & associates
Net Interest
Abnormal items (pre-tax)
Profit before tax
Tax
Profit after tax
Abnormal items (post-tax)
Minorities / pref dividends
Net Income (local GAAP)
Adjusted Net Income
Tax rate (%)
Per Share
EPS (local GAAP)
EPS (BTG Pactual)
Net DPS
BVPS
Cash Flow (R$mn)
Net Income
Depreciation
Net change in working capital
Other (operating)
Net cash from operations
Cash from investing activities
Cash from financing activities
Bal sheet chge in cash & equivalents
Balance Sheet (R$mn)
Cash and equivalents
Other current assets
Total current assets
Net tangible fixed assets
Net intangible fixed assets
Investments / other assets
Total assets
Trade payables & other ST liabilities
Short term debt
Total current liabilities
Long term debt
Other long term liabilities
Total liabilities
Equity & minority interests
Total liabilities & equities

Company Profile:
Fleury is one of the main Brazilian providers of diagnostic
medicine services, with a substantial presence in the city of So
Paulo, performing moderate and high-complexity testing for
approximately 3,000 laboratories. The company also offers more
integrated services and solutions through preventive and
therapeutic medicine. It operates under a vast portfolio of brands
including Fleury, which is highly recognized and has more than
95% of patient satisfaction levels.

12/2010
872
(670)
202
(32)
170
0
27
6
202
(26)
176
0
0
176
164
13
12/2010
1.34
1.25
0.00
7.77
12/2010
164
32
(35)
0
173
(85)
40
16
12/2010
543
240
783
180
334
41
1,338
90
43
133
78
108
318
1,020
1,338

12/2011
1,126
(926)
200
(58)
141
0
(8)
(59)
75
(26)
49
0
0
49
167
34
12/2011
0.37
1.27
0.00
12.43
12/2011
167
58
(35)
0
73
(182)
1,045
(57)
12/2011
486
388
874
376
1,474
108
2,832
148
232
380
588
231
1,200
1,632
2,832

Financial ratios
EBITDA margin
Operating margin
Net margin
RoE
RoIC
EBITDA / net interest
Net debt / EBITDA
Total debt / EBITDA
Net debt / (net debt + equity)

12/2012
1,502
(1,187)
315
(100)
214
0
(59)
(2)
154
(1)
153
0
0
153
157
1
12/2012
0.98
1.00
0.00
10.91
12/2012
157
100
(49)
0
205
(219)
(28)
(305)
12/2012
181
482
663
424
1,529
122
2,738
145
99
244
496
292
1,032
1,706
2,738

12/2013
1,657
(1,379)
278
(109)
170
0
(58)
0
111
0
111
0
0
111
111
0
12/2013
0.71
0.71
0.00
10.81
12/2013
111
109
4
0
224
(153)
424
359
12/2013
540
515
1,055
455
1,534
168
3,211
178
83
260
927
335
1,522
1,689
3,211

12/2014
1,679
(1,370)
308
(114)
194
0
(51)
0
143
0
143
0
0
143
143
0
12/2014
0.92
0.92
0.00
10.06
12/2014
143
114
36
0
294
(116)
54
(35)
12/2014
505
512
1,017
458
1,533
201
3,210
183
82
265
976
396
1,637
1,573
3,210

12/2015E
1,882
(1,535)
347
(126)
221
0
(61)
(24)
135
(6)
129
0
0
129
159
5
12/2015E
0.83
1.02
0.15
10.72
12/2015E
159
126
(12)
0
243
(131)
(23)
85
12/2015E
590
569
1,159
464
1,528
209
3,361
201
88
290
965
431
1,686
1,675
3,361

12/2016E
2,041
(1,634)
407
(139)
268
0
(53)
0
215
(19)
196
0
0
196
196
9
12/2016E
1.25
1.25
0.28
11.69
12/2016E
196
139
(55)
0
281
(163)
(43)
74
12/2016E
664
622
1,286
488
1,528
209
3,512
195
88
284
965
436
1,684
1,828
3,512

12/2017E
2,239
(1,780)
459
(149)
310
0
(39)
0
270
(44)
227
0
0
227
227
16
12/2017E
1.45
1.45
0.35
12.80
12/2017E
227
149
(55)
0
320
(190)
(54)
75
12/2017E
740
699
1,438
530
1,528
209
3,705
211
88
299
965
441
1,705
2,000
3,705

12/2013
16.8%
10.2%
6.7%
6.5%
7.9%
4.8x
1.7x
3.6x
21.8%

12/2014
18.4%
11.6%
8.5%
8.8%
9.1%
6.1x
1.8x
3.4x
26.0%

12/2015E
18.4%
11.7%
8.4%
9.8%
10.4%
5.7x
1.3x
3.0x
21.7%

12/2016E
19.9%
13.1%
9.6%
11.2%
12.3%
7.7x
1.0x
2.6x
17.6%

12/2017E
20.5%
13.8%
10.1%
11.8%
13.7%
11.6x
0.7x
2.3x
13.6%

Source: Company reports and BTG Pactual estimates. Valuations: based on the last share price of that year(E)
based on share price as of 30 November 2015

Fleury
02 December 2015

page 6

Required Disclosures
This report has been prepared by Banco BTG Pactual S.A.
The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results.

BTG Pactual
Rating
Buy
Neutral
Sell

Definition

Coverage *1

IB Services *2

Expected total return 10% above the companys sector

average.
Expected total return between +10% and -10% the
companys sector average.
Expected total return 10% below the companys sector
average.

44%

45%

51%

44%

5%

33%

1: Percentage of companies under coverage globally within the 12-month rating category.
2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
Absolute return requirements
Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed:
a) a Buy rated stock must have an expected total return above 15%
b) a Neutral rated stock can not have an expected total return below -5%
c) a stock with expected total return above 50% must be rated Buy

Analyst Certification
Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that:
(i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco
BTG Pactual S.A. and/or its affiliates, as the case may be;
(ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities discussed
herein.
Research analysts contributing to this report who are employed by a non-US Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not subject to the restrictions
contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst account.
Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by Banco BTG Pactual
S.A. and/or its affiliates.
Where applicable, the analyst responsible for this report and certified pursuant to Brazilian regulations will be identified in bold on the first page of this report and will be the first name on the signature
list.

Statement of Risk
Main risks are: (i) the company could suffer pricing pressure from concentrated payers base, given the high exposure of its revenues to healthcare plans; (ii) lack of track record and dependency on
Fleury brand, with low exposure to lower income groups; (iii) huge expansion CAPEX potentially compressing returns.

Company Disclosures
Company Name
Fleury 1, 4, 18, 19, 20, 22

Reuters
N.A.

12-mo rating
Neutral

Price
R$15.90

Price date
1-12-2015

1. Within the past 12 months, Banco BTG Pactual S.A., its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.
4. This company/entity is, or within the past 12 months has been, a client of Banco BTG Pactual S.A., and investment banking services are being, or have been, provided.
18. As of the end of the month immediately preceding the date of publication of this report, neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries beneficially own 1% or more of any class of
common equity securities
19. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries have managed or co-managed a public offering of securities for the company within the past 12 months.
20. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries engaged in market making activities in the subject company's securities at the time this research report was published.
22. Banco BTG Pactual S.A. or its affiliates or subsidiaries do not expect to receive or intends to seek compensation for investment banking services from the companies within the next 3 months.

Fleury
02 December 2015

Fleury
Stock Price (R$)

Price Target (R$)

30.0

20.0

10.0

Buy
Neutral
Sell
No Rating

Source: BTG Pactual and Economatica. Prices as of 01 December 2015

2-Dec-15

2-Sep-15

2-Jun-15

2-Mar-15

2-Dec-14

2-Sep-14

2-Jun-14

2-Mar-14

2-Dec-13

2-Sep-13

2-Jun-13

2-Mar-13

2-Dec-12

0.0

page 7

Fleury
02 December 2015

page 8

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