Auna SA

Good morning and welcome to our second quarter 2025 earnings conference call. My name is Ellie and I will be your operator for today's call. At this time, all participants are in listen-only mode. Please note that this call is being recorded. There will be an opportunity to ask a question at the end of today's presentation. Now, I would like to turn the call over to Anna Maria Mora, Head of Investor Relations. Ma'am, 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 regards to Mexico and Colombia, unless we note otherwise. Let's move to slide two. In addition to reporting and 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 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. These include, but are not limited to, our expected adjusted EBITDA growth, the expected impact on revenues and profitability of certain initiatives we're 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 U.S. Securities and Exchange Commission and our earnings press release. Slide three, please. On today's call, we have Suso Zamora, our Executive Chairman and President, Giselle Remy, our Chief Financial Officer and Executive Vice President, and Lorenzo Mazart, our Executive Vice President of Strategy and Equity Capital Markets. They will discuss AUNAS consolidated and segment financial and operating results for the second quarter, and will also provide updates on our various strategic growth initiatives. After that, we will open the call for your questions. Please go ahead.

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 in EBITDA growth of our Peruvian operations, This resulted in consolidated FX neutral EBITDA growing five percent, slowly reasserting our trajectory. All three geographies contributed to the quarter's growth in the respective agencies. This demonstrates the strength of our regional health care platforms 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. Return to the Quarters highlights a key aspect of Peru's performance was retaining within our healthcare network more patients from upstream services, such as emergency treatments 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 operation setbacks when bringing a illness 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 healthcare. 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 risk and improve cash flows have proven to be effective. Although our leverage ratio remained unchanged, Rest assured, we haven't lost sight of our medium-term target of three times net debt to EBITDA. Now, turning to slide five, AUNDA'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 intervened payers to mitigate payment risk and prioritize a positive cash cycle. among other measures we've taken in Colombia. In Mexico, utilization takes down again this quarter on lower surgery volumes and emergency visits that eventually drive hospitalizations and ICU admissions. As we manage 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 healthcare 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 seven. 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 AUNA way will help recover growth going forward, market conditions remain soft as the impact of tariff uncertainty continue to ripple through Mexico's economy, particularly in the north of the country. A brief word about uncle said in Mexico. We continue making headway on this important growth front. Our policies now provide nationwide coverage to a network of doctors and hospitals as well as ancillary medical services like Latin preventative care. In addition to Monterey this now includes Mexico City while I had a and he went. 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 eight, please. The 5% revenue growth in Peru's health care services was mainly driven by the increase in surgery volumes, price increases, and an improved services mix across a network of facilities in the country. OncoSalud revenue grew 7% on the 10% increase in total plan memberships 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% on an increase in general healthcare plans within the product mix. Now moving to Colombia on slide nine. The strong improvement in Colombia resulted from implementing risk sharing models and diversifying our base of payers away from intervened ones. Salud Total, for example, is a payer that AUNA began serving in Colombia on July 1st under a PGP contract with them, and we should start seeing this increasingly contribute to the top line in the upcoming quarters. Although Columbus 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 intervened payer that we serve in the country. With that, I'll turn the call over to Giuseppe, who will provide some detail on our financial results.

Thank you. My review begins on slide 11. Revenue grew across our business, with the exception of Colombia, where we intentionally tempered growth, maintaining revenue flat year over year. as we remain focused on risk mitigation and improving our cash conversion cycle there. Although Peru's revenue growth slowed in the quarter, it continued to be a strong top line contributor. Its 8% growth was mainly due to total plan member growth, as well as surgery volume growth and price service mix. The top line of Mexico's healthcare business improved for the second consecutive quarter, with revenue growing again year over year, mainly due to a better pricing mix. Let's turn to slide 12, please. Adjusted EBITDA was 5% higher in FX-neutral terms in the quarter, and down 3% on an as-reported basis, with the margin practically unchanged at just over 22%. The depreciations of the Mexican and Colombian pesos relative to the Sol, our reporting currency, are noteworthy, with the Peruvian Sol versus the Mexican peso declining 16% and the Peruvian Sol versus the Colombian peso declining 9% year over year. Peru's EBITDA grew 8%. Overall, Peru's margin remained unchanged at a very solid 21%. Mexico's EBITDA grew 2% in local currency and was impacted by devaluation on an as reported basis. EBITDA growth in Mexico was mainly due to revenue growth and cost efficiency measures implemented towards the end of last year. Resulting cost savings were partially offset by higher expenses associated with initiatives to enhance physician productivity. Mexico's adjusted EBITDA margin remained at a healthy 32%. Colombia's margin improved considerably, up 4.5 percentage points versus the first quarter, with a more profitable mix of payers, improved payment flows from and lower impairments on accounts receivable. Let's now move to slide 13. Adjusted net income increased six times year over year, positively impacted by FXN EBITDA growth and an FX variance. The largest impact was the positive non-cash 118 million soles FX variance, primarily related to the appreciation of the Peruvian sol against the US dollar outside the range of our call spread hedges. Net finance costs when excluding the foreign exchange effects fell by 18 million soles versus the comparable period last year. Finally, income taxes in the second quarter were 53 million soles higher versus last year, primarily due to the fact that we recognize 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 $143 million versus $155 million in the first six months of last year, primarily impacted by 19 million soles in payments to the Opción Oncología doctors, as well as collections in the first quarter. Interest paid was down 41 million from 264 million soles in the same period last year. Slide 15, please. At the end of the quarter, we maintained a healthy debt structure with approximately half of our owner's debt in local currencies and 86% of our U.S. dollar debt hedged to the Peruvian flood. 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 try and continue to take advantage of favorable debt market conditions to continue improving our jet profile. Lastly, as Suso noted, we remain committed to further reducing leverage to three times net debt . That concludes my review. Now back to Suso, who will wrap up today's presentation.

Thank you, Sal. 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 Yona Way, is the right model, a proven one, to transform healthcare in Spanish-speaking Latin America. And in Spanish-speaking Latin America where private healthcare remains fragmented, inefficient, and under-penetrated. 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 know from many years of experience that challenges will invariably arise and that Operating environments can change. Periodically throwing up obstacles to growth. But we've 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 plaguing Mexico's economy and the lack of an immediate resolution for Colombia's intervening payers. Our Peru business continues making solid contributions in terms of growth and profitability, and it 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. Evidence by intervened payers continue to compliance with our 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 a care model and enables us to reengage high-performing doctors and strengthen our relationships with them. And 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.

Thank you. At this time, we will open the floor for your questions. As a reminder, you can also submit your questions online by using the Q&A function of the webcast platform. If you'd like to ask a question in the conference line, please press star and then one on your telephone keypad. That's star and one on your telephone keypad. We will pause for a brief moment to wait for the questions to come in. Your first question comes from the line of Leandro Bastos of Citi. Your line is now open.

Thanks. Hey, guys. Good morning. Good to see you. Two questions on our side, actually. First one for Mexico. If you could just update where we are, considering the headwind you had by the beginning of the year with physicians and suppliers. You mentioned that it made adjustments that some of the issues were addressed, so if you could just provide a broader update on how the situation is today. And also, how should we think about volumes growth in the region, right? I mean, top line already improved in the second quarter, but volumes remain kind of a few weeks, so if you could provide some outlooks, so how could we think about that going forward? I think it would be helpful to hear. So that would be the first question. Second, about oncology MLR, which reached, I think, record lows during the quarter. Just to understand if you see room to go further down from here, or if the strategy would be to eventually try to run past moral crisis at current levels. So that would be my question. Thank you so much.

Great. Thank you very much, Leandro. I appreciate the different questions. I'm going to make sure I answer them all, or else, if you can compliment it, I'd appreciate it. Mexico. So in Mexico, margins remained in the 30s, and we think that we'll repeat those margins in the future. This is a product of slightly higher growth as volume from physician groups stabilized. And it's also important to know that the second quarter is normally better than the first quarter. But I think that we remain very optimistic that our physician relationships have not only stabilized, but seem to promise alignment with our doctors. We think that the implementation has occurred enough to start harvesting the volumes of the doctors will be bringing again. It's important to recognize and more than recognize, to be realistic about the speed of such implementation. And physicians that are not aligned with their model, they take surgeries elsewhere seeking the high-conditioned suppliers to grant them. And physicians that are aligned come to us and move their practices to the owner but this move is slower as they benefit from the allocation of all our volume. So there's a little bit of a dislocation there, but we're excited about what we see in the near term. In terms of MLR, I'm gonna jump to MLR. MLR is, is something that, as you well know, we've been very successful in managing for years, you know, and we do that given, you know, our model. NLR fluctuates according to the product mix in the membership and the cost associated with our service. We've been operating at 50%, a little bit of another percent in the last 15 years. Quarter fluctuations are not meaningful and should not be taken as special. You know, our 50 to let's say 54% MLR, you know, results from continuous cost containment and price adjustments to our plans. And this is a pillar of our strategy and results. But I want to emphasize the predictability and the result in that range is our strategy. So I think that on MLR, it should not be read as anything that we're within the range, and we will continue to deliver within the range. I don't know, Gisele, if you would like to add anything in addition.

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

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

I mean, on the Mexico topic, I think it was relative to volumes. And I think what Suso mentioned in the first part of the answer as far as, you know, the stabilization of volumes after the supplier, doctor-supplier relationship impacts we measured, we mentioned in the last quarter. what we're seeing is positive signs, as Suso mentioned. But I would also add, as he mentioned, that, you know, this is a process which takes some time in stabilizing the new model and basically stabilizing the doctor rotation that we might have as a product of the new model.

Great. Yeah. Thank you, Nishan.

No, that's great. Thank you so much, guys. Have a good day.

If you'd like to ask a question, please press star followed by one on your telephone keypad. Your next question comes from the line of Artur Alves of Morgan Stanley. Your line is now open.

Good morning. Thank you for taking our question. Just a quick question on Colombia. We were wondering if you were making any new agreements in Colombia. particularly additional risk sharing contracts and also the relationship with the new payer and how is that going? And if you have any new developments there. Thank you.

Great. Thank you. So in general, and starting with the latter part of the question, we are making a great progress in terms of collections. And that is being represented in less provisioning. And you'll see that, I think, in the future. We're excited about what the team has achieved in Colombia. And there's been a reversal of, I think, higher provisions that we had in the past. Our collections in Castellano, Colombia, has definitely improved, especially with the intervening payers, especially with Nueva EPS. And more importantly, the dialogue we have with Nueva EPS is very constructive, very respectful, and they've been compliant. They've been delivering on an agreement that we signed many months ago on monthly payments with respect to the PASA account. So I think the cash cycle situation in Colombia much improved, and I think will continue to improve. In terms of, we have made also good progress in terms of revenue tied to intervene private payers. We've decreased our concentration from 20% to something like 90%. And in the same view, our risk sharing models have increased from like 7% of total revenues in Colombia to a little over 10%. And we continue to see that as a very important avenue of growth in Colombia. Yeah, I don't know, Gisele, if there's anything else you want to compliment?

No, Susan. I think that's complete.

Okay, great.

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

Thank you, Operator.

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

Great. So we believe that our model in Mexico is gaining traction. And we can also see how the volumes, for example, in Opción Oncología, our recently acquired doctor group, you know, the leading oncology group in Monterrey, produces higher volumes in their networks. So high complexity again, you know, capitated models 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 capacity locations in our hospitals in Monterrey. I think maybe just to find out, I think that market softness is here to stay, but our model, no, is one that is promising. And given that health care is many, many times does not correlate so closely with them, with the economic growth, I think we'll see some recovery of that. I think the shock in northern Mexico or the tariff uncertainty and its relation to formal employment, of course, formal 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. Thank you.

Thank you, Zuzel. The next question comes from Saikat Majumder from HSBC. What is your market share in Monterrey?

Okay, maybe you can help me with this one. Maybe I would just direct the answer. When one counts beds, And I'm served by 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. I just want to indicate the trend. And what we want to measure more is 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 five years to more than double digit, to more than two times what we currently have. So this is a clear and key strategy in Monterrey. And that we will be measuring and maybe reporting in the future for investors to see. That is what we focus on in Monterey. More than the beds, what is the market share we have in chemotherapies, in radiation therapies, in oncological surgeries, in obstetric procedures, in orthopedic procedures? So we'll be focused very much on that in the future, and you'll see how we move those figures as well.

Thank you, Suso. The next question comes from Gerard Forbes from Suda. Looking at your historical results, your effective tax rate has shown significant volatility with a tax benefit in 2Q24 and a more normalized expense of around 36% in 2Q25. 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?

Yeah, 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 recognize 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 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. And that's why this year, in 2025, what we're seeing is 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%.

Thank you, Lisa. The next question comes from . What is, I'm sorry, what's your view on the negative free cash flow after interest costs and liquidity?

Thank you, Alex, for the question. So what we've seen year to date, as we mentioned previously, Basically, 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, and also the 19 million soles 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, you know, in what's to come of the year, organic free cash flow more than covering interest costs.

Thank you, Giselle.

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.

Well, thank you very much, everybody. We remain excited about the future of AUNA and the 3D geography we have. We're growing as we expect with, as I said before, some minor headwinds that we resolved in Colombia, I believe, and that 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 AUNA way model and its implementation in the three countries. Thank you again.

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