Instituto Hermes Pardini S.A. and subsidiaries Quarterly information (ITR) at March 31, 2017 and report on review of quarterly information

Transcription

1 Instituto Hermes Pardini S.A. and subsidiaries Quarterly information (ITR) at March 31, 2017 and report on review of quarterly information

2 Report on review of quarterly information To the Board of Directors and Stockholders and subsidiaries Introduction We have reviewed the accompanying parent company and consolidated interim accounting information of ("Institute"), included in the Quarterly Information Form (ITR) for the quarter ended March 31, 2017, comprising the balance sheet at that date and the statements of income, comprehensive income, changes in equity and cash flows for the quarter then ended, and a summary of significant accounting policies and other explanatory information. Management is responsible for the preparation of the parent company and consolidated interim accounting information in accordance with the accounting standard CPC 21, Interim Financial Reporting, of the Brazilian Accounting Pronouncements Committee (CPC), and International Accounting Standard (IAS) 34 - Interim Financial Reporting issued by the International Accounting Standards Board (IASB), as well as the presentation of this information in accordance with the standards issued by the Brazilian Securities Commission (CVM), applicable to the preparation of the Quarterly Information (ITR). Our responsibility is to express a conclusion on this interim financial information based on our review. Scope of review We conducted our review in accordance with Brazilian and International Standards on Reviews of Interim Financial Information (NBC TR Review of Interim Financial Information Performed by the Independent Auditor of the Entity and ISRE Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Brazilian and International Standards on Auditing and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 2 PricewaterhouseCoopers, Rua dos Inconfidentes 911, 17º e 18º, Belo Horizonte, MG, Brasil , Caixa Postal 289 T: (31) , F: (31) ,

3 and subsidiaries Conclusion on the interim information Based on our review, nothing has come to our attention that causes us to believe that the accompanying parent company and consolidated interim accounting information included in the quarterly information referred to above has not been prepared, in all material respects, in accordance with CPC 21 and IAS 34 applicable to the preparation of the Quarterly Information (ITR), and presented in accordance with the standards issued by the CVM. Other matters Statements of value added We have also reviewed the parent company and consolidated statements of value added for the quarter ended March 31, These statements are the responsibility of the Institute's management, are required to be presented in accordance with standards issued by the CVM applicable to the preparation of Quarterly Information (ITR) and are considered supplementary information under IFRS, which do not require the presentation of the statement of value added. These statements have been submitted to the same review procedures described above and, based on our review, nothing has come to our attention that causes us to believe that they have not been prepared, in all material respects, in a manner consistent with the parent company and consolidated interim accounting information taken as a whole. Belo Horizonte, May 4, 2017 PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5 "F" MG Guilherme Campos e Silva Contador CRC 1SP218254/O-1 "S" MG 3

4 Earnings Release 1Q17 EARNINGS CONFERENCE CALL (In Portuguese with simultaneous translation into English) Date: May 5, 2017 (Friday) Portuguese: 10:00 a.m. Brasília English: 9:00 a.m. US ET / 2:00 p.m. London Connecting numbers: Brazil: USA: London: Password: Grupo PardinI Webcast: TICKER: PARD3 Total number of shares: 130,978,595 Free float: 46,193,096 shares (35.3% of the total) CONTACT: INVESTOR RELATIONS ri@grupopardini.com.br website: Phone No.:

5 Belo Horizonte, May 5, 2017 ( IHP ), one of the largest reference diagnostics laboratories in Brazil, presents its operational and financial results for the first quarter of 2017 (1Q17). Except where otherwise indicated, amounts in this document are expressed in local currency (Brazilian Reais). The consolidated financial statements for IHP were prepared according to the general accounting principles used in Brazil, based on the local corporate law legislation (Lei das Sociedades por Ações) and on the regulation of local securities exchange commission CVM (Comissão de Valores Mobiliários). 1. Operational and Financial Highlights 1Q Highlights 1Q17: Completion of the IPO process, with the Company raising about R$187 million in the Primary Offer; Increase in Gross Revenues (+27.2%), Adjusted EBITDA (+24.9%) and Net Income (+51.2%); Persistent high profitability margins: adjusted EBITDA margin of 24.1% and net income margin of 11.7%; ROIC (Return on invested capital) without goodwill of 30,8%; Funding of a total of R$210 million, through a simple, non-convertible debenture issue (CVM476) with a total period of five years and CDI % rate; In the General Shareholders Meeting held on April 28, the shareholders approved dividends distribution of R$ million, equivalent to R$ 1.21 per ordinary share (PARD3) Highlights of the Lab-to-Lab segment: Consistent growth in volume of tests (+26.3%) and in the revenue per client (+12.8%); Commercial strategy has resulted in the increase of the client base: over 4,800 clients generated revenue during the 1Q17; Expertise on client relationship and high quality of services has resulted in improvement in the Same Lab Sales indicator, which grew by 14.7% Highlights of the PSC segment: Expansion in Rio de Janeiro, with the opening of one new store in São Gonçalo (service area of 800m2), capable of offering clinical analysis and imaging tests; Increase in the number of tests (+7.4%), despite the challenging macroeconomic context; Focus on the optimization of the use of assets: gross revenue per m2 increased 33.5%, supported by the mix of services from Guanabara; NPS (Net Promoter Score) for Hermes Pardini reached 73% during 1Q17; Resilience in a market of high concentration of lives among a few healthcare operators: increase in same store sales (SSS) basis of 7.5% Operating Highlights: We have officially started Project Enterprise 2018, with the distribution RFI (Request for Information) to the largest technology suppliers for laboratory automation; Construction of the Núcleo Técnico Avançado NTA (advanced laboratory) in Rio de Janeiro, with opening expected for May, This laboratory will be an important support to our strategy of increasing clinical analysis services in Guanabara and to strengthen our competitive position in the Labto-Lab business in Rio de Janeiro through (i) offering Total Support and (ii) improvement of the service time to our clients. 1 of 68

6 2. Message from Management We have pleasure in presenting to our shareholders and the market in general the Earnings Release of Instituto Hermes Pardini, for the first quarter of 2017 (1Q17). 1Q17 will go down in the history of the Company as the quarter when we completed our IPO process. The IPO attracted offers for more than 46 million common shares (PARD3), equivalent to approximately R$877 million, including the basic offer and the greenshoe option. In the primary offer the Company raised some R$187 million which will be used in expansion projects. Flotation of the Company is one more important step in the process of developing our corporate governance. Our shareholders consist of more than 4,000 individuals and some of the largest and most respected fund managers in Brazil and worldwide, and they will accompany us in our new cycle of growth, and will be able to help us build an even more profitable and competitive company over the years ahead. In this first quarter of the year we have witnessed a continued worsening in some important macroeconomic indicators, such as the unemployment rate. According to the IBGE (permanent PNAD survey), the unemployment rate had reached 13.2% by the end of February, the highest level since counting started in 2012, representing 13.5 million people out of work. On the other hand there have been significant improvements, such as shrinking inflation, cuts in interest rates (SELIC) and improved market sentiment as to a possible recovery in economic activity in the quarters ahead. The economic crisis and the rise in unemployment levels, as was to be expected, affected the private healthcare sector, particularly when we consider the number of health plan beneficiaries. According to the Brazilian healthcare surveillance agency (ANS), more than 130,000 people lost access to healthcare plans during 1Q17, leaving the total number of people with coverage 0.3% below the figure for December Even in this challenging macroeconomic context, we were able to show strong improvement in operational and financial metrics in 1Q17, in both our business units. In the Lab-to-Lab segment in 1Q17, expansion continued at a rapid rate, as we had seen in We carried out some 15.2 million tests during the quarter, 26.3% more than in 1Q16. Gross revenues totaled R$152.5 million in 1Q17, a 19.0% increase year-on-year. The significant improvement in these growth indicators is the result of a commercial strategy aimed at (i) expanding our portfolio of clients and (ii) increasing our share of wallet in the existing client base. In respect of the first objective, it is notable that by the end of the quarter we had 4,847 revenue-generating clients, in various parts of the country, an increase of 5.5%. As to the second objective, average gross revenue per client is one noteworthy aspect it rose to R$31,500 in 1Q17 (+12.8% against 1Q16) and another is the Same Lab Sales indicator, which grew by 14.7% in comparison with the first quarter of In the PSC segment, we carried out 5.6 million tests during the quarter, with gross revenues of R$140.5 million, improvements of 7.4% and 38.6%, respectively, over 1Q16. We should mention that both the growth indicators were helped by the merger of Laboratório Guanabara (RJ), which we acquired at the end of When we look at regional results, we can see that our São Paulo operation is the one that has been most affected by the economic crisis. The year-on-year shrinkage in gross revenues reflects a fall in the average ticket and a reduction in the number of lives covered by the healthcare operators. As a consequence, the operating margin for the quarter was below the previous average, principally because of high operational leverage, a reflection of the mix of revenues which is more dependent on imaging tests. On the other hand, the first quarter results from Rio de Janeiro were a pleasant surprise, beating our own forecasts. In January we started integrating Laboratório Guanabara, and we have already succeeded in implementing some one-off improvements in customer service. We also inaugurated the São Gonçalo unit, with a usable area of some 800 m² and capacity to offer clinical analysis tests and imaging services. This new service unit has been maturing much more quickly than the average in the past, reinforcing our view that demand in the local market is for laboratories that can offer high quality at a competitive price. The results were also helped by the fact that the service unit was accredited by the main healthcare operators immediately after its opening. In the second quarter we expect to open the Advanced Technical Center (NTA) in Rio de Janeiro, which will not only allow us to 2 of 68

7 analyze in-house the samples we take in our own service units, but will also make our Lab-to-Lab operation in the region more competitive. In Belo Horizonte, our perception is that the strength of the Hermes Pardini name has allowed our local operation to maintain the volume of tests even in a shrinking market. While our major competitors decided to close service units during the quarter, we opted to keep our 64 units open. This decision led to a large increase in the number of imaging tests, the highlight being a 10% rise in the number of MRI scans. Finally, we saw a good recovery in operating margins in Goiânia, in comparison with previous quarters, primarily due to a recovery in the number of tests in the region. The growth in the number of tests resulted in better operating margins: the gross margin for the quarter was 37.7% in the Lab-to-Lab segment (37.1% in 1Q16) and 31.1% in the PSC segment (29.7% in 1Q16). Another point that merits attention is net income, which was R$31.3 million, a 51.2% increase over the same period of the previous year. The net margin also improved during the year, rising from 9.8% in 1Q16 to 11.7% in 1Q17. The quarterly operating performance, with some R$8.8 million cash generated, and the proceeds of the IPO allowed the Company to maintain an extremely healthy leverage ratio. We ended 1Q17 with net cash of R$60.7 million, even after paying dividends of R$64.7 million in February. So as to optimize our capital structure, we shall in the next few quarters resume working with a net debt position, while maintaining a healthy level of leverage, so that we can reduce our weighted average cost of capital (WACC). We continue to be optimistic about the operating and financial outlook for Instituto Hermes Pardini. In the short and medium term, a fall in interest rates (SELIC) and the prospects of an economic recovery in the next few quarters, which, timid though it may be, is anticipated by a number of market analysts, should help to create new job vacancies and so increase the number of people with access to healthcare plans. In the long term, the sector is expected to benefit from the aging of the Brazilian population, given that there is a strong correlation between the number of tests, the average ticket and the age of the patient. We can also see opportunities in the Lab-to-Lab segment for growth in the level of revenues and in profit margins. First of all, the potential recovery in economic activity may lead to a higher volume of tests for our clients, and this, naturally, will benefit the Company. Secondly, we believe that the trend towards outsourcing clinical analysis tests is likely to continue over the next few years. Finally, our focus on research and development will allow us to continue to design new tests for our clients and increase our portfolio of tests. Our strategy for the PSC business unit is to make the best possible use of our assets in Belo Horizonte and Goiânia, where we opened a substantial number of service units between 2013 and Leverage is higher in this segment, because a significant portion of the costs are fixed. Thus the potential recovery in the economy over the next few quarters should help this business unit bring its profit margins back towards the levels seen in the past. Our strategy in São Paulo and Rio de Janeiro over the next few quarters will be to seek growth opportunities. We plan to open new service units in both these states during Finally, we shall continue to make every effort to maintain Instituto Hermes Pardini as one of the soundest and most profitable companies in the market, honoring our corporate commitments and operating ethically, responsibly and, above all, to the highest technical standards; and we shall constantly reinforce the pillars of our brand: medicine, health and wellbeing. Thank you very much. Roberto Santoro Meirelles Chief Executive Officer 3 of 68

8 3. Income Statement for the Quarter 3.1. Gross Revenues Gross revenues from services provided were R$289.1 million in 1Q17, 27.2% up against 1Q16. This increase was seen both in the Lab-to-Lab segment, where gross revenues rose 19.0% year-on-year, and in the PSC segment, where the increase was 38.6%, mainly due to consolidating Guanabara s results with those of the Company as from December 23, Gross Revenue (R$ MM) - Quarter % % 55.8% 1Q % 52.0% 1Q17 R$ MM 1Q16 1Q17 Variation Lab-to-Lab % PSC % Eliminations % % Lab-to-Lab PSC The share of the PSC segment in the Company s total gross revenues increased from 44.2% in 1Q16 to 48.0% in 4Q17 mainly due to the incorporation of the revenues from Guanabara. The eliminations shown in the above table are mainly intercompany transactions, which are ignored for calculating gross book revenues. Gross revenues of the Lab-to-Lab segment In the Lab-to-Lab segment, gross revenues amounted to R$152.5 million for 1Q17 against R$128.2 million in the same quarter of 2016, an increase of 19%. 4 of 68

9 6,000 5,500 5,000 4,500 4,000 3,500 This increase was due mainly to higher numbers of clients and tests during recent quarters. The number of tests in the Lab-to-Lab segment was 26.3% higher in 1Q17 than in the same period of 2016, with a total of 15.2 million for the quarter. The number of clients producing revenue was 4,847 in 1Q17, an increase of 5.5% over 1Q16. Lab-to-Lab: Number of tests (millions) and average price (R$ / exam) % Number of clients (generated Revenue in the period) + 5.5% ,594 4,732 4,823 4,906 4, Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Number of Tests (MM) Average Price 0 1Q16 2Q16 3Q16 4Q16 1Q17 The increase in the number of Lab-to-Lab clients in recent quarters has been due to the Company s strategy of expanding its client base, especially in existing commercial routes and through the opening of new routes on strategic areas in the Northeast, South and Central West regions of Brazil, without having to make significant investments in operational bases. This increase also shows IHP s strategy to increase not only the number of Labto-Lab clients but also to introduce new tests on the portfolio of its existing client base and increase the share of wallet amongst outsourced tests. As a result, the average number of tests per revenue-generating client rose approximately 19.7% in 1Q17 against the same period of The average ticket per test for clients in the Lab-to-Lab segment fell by 5.7% in 1Q17 against 1Q16, primarily as a result of the increase in the number of clients during It is normal for new clients to start a relationship by sending IHP less complex tests, and as a result with lower average fees. After a client has been in the Company s active client base for some time, they start sending tests with a higher level of complexity, and offering new tests, which become part of their portfolios as they establish a commercial relationship with IHP. This fall in average fees per test was more than offset by an increase in the number of tests processed, with the result that revenue per client showed year-on-year growth of 12.8% in 1Q17, rising from R$27.9 thousand to R$31.5 thousand per client per quarter. Gross Revenue per Client (R$ thousand) % Q16 2Q16 3Q16 4Q16 1Q17 Gross revenue per client during the quarter / number of clients generating revenue during the quarter. Gross revenues from same lab sales were 14.7% higher in 1Q17 in comparison with 1Q16. An analysis of the same lab sales indicator suggests that about 75% of the growth in gross revenues in the Lab-to-Lab segment comes from clients who were actively doing business with IHP during the previous year. 5 of 68

10 Gross Revenue Growth YoY 24.4% 23.5% 23.7% 17.7% 13.9% 18.7% 13.7% 16.3% 19.0% 14.7% 1Q16 2Q16 3Q16 4Q16 1Q17 Lab-to-Lab Same Lab Sales Gross revenues of the PSC segment In the PSC segment, gross revenues amounted to R$140.5 million for 1Q17 against R$101.3 million in the same quarter of 2016, an increase of 38.6%. Excluding the effects of Guanabara, gross revenues for the PSC segment increased by 4.8% in 1Q17 against the previous year. The service units in Minas Gerais, where the Company operates under the names of Hermes Pardini and CEMEDI, accounted for some 52.5% of gross revenues for the PSC segment in 1Q17. Rio de Janeiro, where the Company operates mainly through nine Guanabara brand service units, contributed about 24.4% of revenues in 1Q17. The other markets where the Company operates in the PSC segment, Goiás (Padrão brand) and São Paulo (Hermes Pardini brand), accounted for shares of 12.0% and 11.1% of gross revenues in 1Q17, respectively. All the markets where the Company operates showed an improvement in gross revenues in 1Q17 against 1Q16, except São Paulo, where the volume of tests was affected by the closure of two service units during 2016 and the continuing adverse economic situation. PSC Gross Revenue (R$ MM) PSC Gross Revenue (R$ 140,5 MM) % RJ 24.4% Q16 2Q16 3Q16 4Q16 1Q17 PSC Ex Guanabara 97.9 PSC Guanabara SP 11.1% GO 12.0% Gross revenues including home collections and DAE (company service department). MG 52.5% Unemployment and the economic slowdown continued to limit increases in the number of tests in the PSC segment during 1Q17. Excluding Guanabara, the number remained practically unchanged in 1Q17 at about 5.2 million. Including Laboratório Guanabara, the number of tests was 5.6 million in 1Q17, a year-on-year increase of 7.4%, reflecting the good performance of the Rio de Janeiro operation. The average ticket per test, excluding the effects of Guanabara, was 6.1% higher in 1Q17 than in 1Q16, rising from R$19.3 to R$20.5 per test primarily as a result of a greater share of imaging tests, especially in Belo Horizonte, and of high-complexity clinical analysis tests. Including the effects of Guanabara, the average ticket rose to R$25.0 per test in 1Q17 (29.1% more than in 1Q16) mainly because of the greater share of the imaging segment in the portfolio of services. Imaging tests accounted for approximately 50% of gross revenues in the PSC segment in 1Q17. 6 of 68

11 PSC: Number of tests (millions) and average ticket (R$ / exam) + 7.4% Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Number of Tests (MM) Average Price In 1Q17, gross revenues per service unit increased 15% in comparison with 1Q16, reaching R$1,301.0 thousand, including the effects of Guanabara as from 1Q17. Gross Revenue Growth per Store (R$ thousand) (*) % , Q16 2Q16 3Q16 4Q16 1Q17 (*) Gross revenues for the quarter / number of service units generating revenues. In January 2017 we opened a service unit, under the Guanabara brand, in the municipality of São Gonçalo, which is the second largest in Rio de Janeiro state in terms of population, with more than a million inhabitants. Including the nine Guanabara brand service units, the Company had a total of 112 service units at the end of 1Q17, one fewer than a year earlier. We should mention that although these numbers are practically the same, the Company opted to close some units in the names of Hermes Pardini, Padrão and Digimagem during 2016, since they did not reach the projected levels of profitability. As a result of the inclusion of the nine Guanabara units, total area rose from 73.1 thousand m² in 1Q16 to 77.6 thousand m² in 1Q17. The average area was m² at the end of 1Q17 against m² a year earlier, an increase of 7.1%. This increase reflects our strategy for larger units, which can offer a good range of both clinical analysis and imaging tests. Stores 1Q16 1Q17 Variation M² (Thousand) 1Q16 1Q17 Variation MG % MG % GO % GO % SP % SP % RJ % RJ % Total % Total % Number of units and areas at the end of the quarters, including Progenética (RJ) and Diagnostika (SP). Gross revenues from the PSC segment were also higher in terms of revenue per square meter. In 1Q17, gross revenues per m² amounted to R$ 1.9 thousand, while in 1Q16 they were R$ 1.4 thousand, a 30.1% year-on-year increase. The significant advance in 1Q17 principally reflects the impact of Guanabara, which posted gross revenues of R$ 34.3 million in a total area of about 6.3 thousand m², i.e. about R$5.5 thousand per m². However, even if we ignore the effects of Guanabara, the Company achieved an increase in revenues per m² from R$ 1.4 thousand in 7 of 68

12 1Q16 to R$ 1.5 thousand in 1Q17. This rise was due to greater usage of the Company s operating assets and the closure in 2016 of units that had not achieved the expected growth. As for same store sales (SSS), gross revenues grew by 7.5% in 1Q17, an increase against the 4.4% recorded for the PSC segment as a whole. Gross Revenue Growth YoY 14.1% 12.9% 11.7% 12.3% 6.8% 8.8% 7.5% 6.4% 4.7% 4.8% 8 of 68 Stores Same Store Sales Same Store Sales: Gross revenues divided by the number of service units generating revenues during the quarter Deductions from Gross Revenues 1Q16 2Q16 3Q16 4Q16 1Q17 Service tax remained stable, at a level close to 6% of gross revenue. Provisions for disallowances totaled R$ 3.3 million in 1Q17, against R$ 2.6 million in 1Q16, because of the increase in gross revenue, with the percentage remaining unchanged at 1.2% of gross revenue. We believe that this level of disallowances is adequate for the Company s profile. Total deductions and rebates remained constant at 7.5% of gross revenues in both quarters. R$ MM 1Q16 1Q17 Variation Disallowances (2.6) (3.3) 27.8% Cancelled Sales and Other Rebates (0.5) (1.1) 110.2% Taxes on Services (13.8) (17.2) 24.2% Cancellations and Deductions (R$ MM) (17.0) (21.6) 27.4% % Gross Revenue 1Q16 1Q17 Variation Disallowances -1.2% -1.2% -1 bps Cancelled Sales and Other Rebates -0.2% -0.4% -15 bps Taxes on Services -6.1% -5.9% +14 bps Cancellations and Deductions / Gross Revenue -7.5% -7.5% -1 bps

13 3.3. Net revenues Because of the increase in gross revenue in the Lab-to-Lab and PSC business units, as described above, the Company s net revenue rose by 27.1% against 1Q16 to a total of R$267.4 million in 1Q17. Net Revenue per Business Line (R$ MM) % % 55.9% 1Q16 Lab-to-Lab 47.8% 52.2% 1Q17 PSC R$ MM 1Q16 1Q17 Variation Lab-to-Lab % PSC % Eliminations % % The purchase of Guanabara, in December 2016, increased the share of the PSC segment in our consolidated net revenue. In 1Q17 the PSC segment accounted for 47.8% of total net revenue, 3.7 percentage points more than in 1Q Cost of services Cost of services was R$ million in 1Q17, 25.7% more than in 1Q16, mainly as result of consolidating the costs of Guanabara. Despite such increase in value, costs of services as a percentage of net revenue decreased from 66.0% in 1Q16 to 65.3% in 1Q17. Costs per Business Line (R$ MM) % Q16 PSC Q17 Lab-to-Lab R$ MM 1Q16 1Q17 Variation Lab-to-Lab % PSC % Eliminations % Total % Costs in 1Q17 consisted chiefly of materials and staff costs. The chart below shows the Company s main costs in 1Q17 and 1Q16. 9 of 68

14 Costs Breakdown (R$ MM) Costs Breakdown (% Net Revenue) Personnel Expenses Materials Other Costs Freight and haulage Rental and Maintenance of Mach. and Equip. Depreciation and amortization Personnel Expenses Materials Other Costs Freight and haulage Rental and Maintenance of Mach. and Equip. Depreciation and amortization 4.3% 4.5% 3.0% 3.1% 3.0% 3.2% 11.0% 10.6% 21.9% 20.2% 22.1% 24.3% 1Q17 1Q16 1Q17 1Q16 The main changes in costs of services rendered between 1Q16 and 1Q17 were: Staff costs: increase from 20.2% of net revenues in 1Q16 to 21.9% in 1Q17, due to collective bargaining agreements in 2016 and additional personnel engaged to meet the growing volume of tests. Materials: reduction from 24.3% of net revenues in 1Q16 to 22.1% in 1Q17, due to negotiations with suppliers and to a higher mix of imaging services rendered by the Company. In terms of value, the increase of 15.7% 1Q17 when compared to 1Q16, was due mainly to a higher volume of tests in the Lab-to-Lab segment (+26.3%), as well as to an increase in the price of certain materials. Freight and carriage: increase of 19.2%, with the introduction of new routes to serve clients in the Lab-to- Lab segment and an increase in the number of tests. In terms of percentage of net sales, freight and carriage costs decreased from 4.5% in 1Q16 to 4.3% in 1Q17, because of negotiations with suppliers and better use of existing routes Gross profit Gross profit was R$ 92.9 million in 1Q17, against R$ 71.5 million in 1Q16, a rise of 30%. gross margin in 1Q17 was 34.7%, about 75 bps higher than in 1Q16, thanks to improved margins in both segments. R$ MM 1Q16 1Q17 Variation Lab-to-Lab % PSC % Eliminations % Gross Profit % Gross Margin (%) 34.0% 34.7% +75 bps 10 of 68

15 In the PSC segment, gross margin was 31.1% in 1Q17 (+133 bps), due mainly to (i) incorporation of results from Guanabara, (ii) higher number of tests, particularly in Belo Horizonte and Goiânia, (iii) closure of certain service units in We should mention that operating leverage is higher in this segment, since a substantial portion of costs are fixed, and so a possible recovery in economic growth during 2017, as projected by market analysts, should contribute to increase the number of tests and improve margins of this business unit. In the Lab-to-Lab segment, the 62 bps rise in gross margin (37.7% in 1Q17 and 37.1% in 1Q16) is related to the consolidation of certain clients which joined the active client base of IHP during It is normal for new clients to start a relationship by sending IHP less complex tests with lower average fees. After a company has been in the Company s active client base for some time, they start sending tests with a higher level of complexity, and asking for different tests, which become part of their portfolios as they establish a commercial relationship with IHP. We should emphasize however that our strategy of increasing the numbers of active clients will continue throughout 2017, and these new clients will also go through a period of maturing until reaching their full potential Operating Expenses (Selling, Administrative and Other) Operating expenses totaled R$41.2 million in 1Q17, an increase of 27.7% when compared with 1Q16, principally due to the consolidation of Guanabara in the Company s figures. Although up in absolute terms, operating expenses remained unchanged in relative terms, at 15.4% of net revenues in both 1Q17 and 1Q16. Operating Expenses (R$ MM) and % Net Revenue % % 13.9% % % % % % 18.8% 15.4% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 R$ MM Operating Expenses (R$ MM) % Net Revenue 1Q16 1Q17 R$ MM % Net Revenue R$ MM % Net Revenue Selling Expenses % % General and Administrative Expenses % % Other Operating Income / Expenses % % Total Operating Expenses % % 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% The most relevant factors that contributed to the increase of R$ 9.5 million in general and administrative expenses were: Additional expenses related to the operation of Guanabara: + R$ 4.3 million; Personnel expenses: + R$ 4.1 million, due mainly to collecting bargaining agreements in 2016, additional personnel engaged to meet the growing volume of tests, payment of a higher amount of profit sharing in 1Q17, among others; Expenses related to the integration of Guanabara: + R$ 0.5 million. Other operating expenses represented circa 1.0% of net revenue in 1Q17 against 2.5% in 1Q16. This decrease was due mainly to the fact that in 1Q16 the Company wrote off R&D projects for approximately R$ 3.7 million and this did not recur in 1Q of 68

16 3.7. Financial result The financial result for 1Q17 was a net expense of R$ 4.5 million, against R$ 8.9 million in 1Q16. The main change in financial expenses was in the account Adjustment of debt for call option on investments, which fell from R$5.6 million in 1Q16 to R$0.3 million in 1Q17. This amount reflects the adjustment to the value of call options on shares of companies controlled by IHP. Since the Company purchased shares in practically all the subsidiaries in December 2016, the value of this account was substantially lower in 1Q17. R$ MM 1Q16 1Q17 Variation Net Finance Result % Finance Income % Income from financial investments % Others % Finance Costs % Interest on borrowings % Interest on installments % Restatement of investment call option debt % Other finance costs % Foreign Exchange Variation % Foreign exchange income % Foreign exchange expenses % 3.8. Income and Social Contribution Taxes (IR and CSLL) The effective tax rate for IR and CSLL in 2016 was 33.7% of earnings before taxes in 1Q17. The following table shows changes in taxation of income for the quarter: R$ MM 1Q16 1Q17 Variation Earnings Before Taxes (EBT) % Expected taxes (standard rate of 34%) % Effect on the results of subsidiaries taxed under the presumed profit method % Other exclusions (additions), net % Income tax and social contribution % % EBT -31.7% -33.7% -197 bps Current % Deferred % The Company intends to start amortizing the goodwill on company acquisitions (around R$ million, as explained in Note 10) in the second half of 2017, and this is likely to reduce the effective tax rate. The following table shows the estimated timetable for amortizing goodwill: Expected amortization 7.6% 20.0% 20.0% 20.0% 20.0% 12.4% 12 of 68

17 3.9. Net profit Net profit amounted to R$ 31.3 million in 1Q17, 51.2% more than in 1Q16, when it was R$ 20.7 million. The net margin was 11.7% in 1Q17, against 9.8% a year earlier, reflecting the increase in gross margin and the change in financial income. Net Income (R$ MM) and margin (%) % % 9.8% 1Q16 1Q17 Variation Net Income (R$ MM) % Net Margin (%) 9.8% 11.7% +186 bps 1Q16 1Q Non-accounting measurements Adjusted EBITDA and EBITDA Adjusted EBITDA, excluding non-recurring effects, amounted to R$64.4 million in 1Q17, an increase of 24.9% on 1Q16, when it was R$ 51.6 million. The adjusted EBITDA margin, however, showed a small decrease, from 24.5% of net income in 1Q16 to 24.1% in 1Q17. Including non-recurring and non-operating effects, EBITDA rose by 29.4% in 1Q17 against 1Q16, from R$ 48.0 million to R$ 62.1 million. The EBITDA margin also rose, from 22.8% in 1Q16 to 23.2% in 1Q17 (+40 bps). R$ MM 1Q16 1Q17 Variation Net Income % Finance Result % Depreciation and amortization % Income tax and social contribution % (+) Non recurrent/operating items % Adjusted EBITDA % margin 24.5% 24.1% -43 bps (+) Non recurrent/operating items % EBITDA % margin 22.8% 23.2% +40 bps In 1Q17, EBITDA benefited from a recovery in the PSC margins, principally due to the purchase of Guanabara and the closure of some service units in The Lab-to-Lab segment has also contributed to the increase in EBITDA, due mainly to higher volume of tests and better margins. Non-recurring and non-operating effects in 1Q17 totaled approximately R$ 2.4 million and consisted mainly of improvements on units that were subsequently closed (R$ 0.5 million), write-off of assets disposed of or obsolescent (R$0.5 million) and specific expenses associated with the integration process of Guanabara (R$0.5 million). We should mention that non-recurring effects in 1Q16 were higher than in 1Q17 principally because of the write-off of R&D projects for approximately R$ 3.7 million, which did not recur in 1Q of 68

18 4. Balance Sheet and Cash Flow 4.1. Accounts receivable The balance of receivables was 13.4% more than in 1Q16, mainly because of an increase in net revenues. During the period, there was a significant reduction in the average days of sales outstanding, which was down from 81 days in 1Q16 to 73 in 1Q17. The change is partly due to (i) higher participation of the PSC segment in the Company s revenue mix, which has a lower average number of days of sales outstanding, and (ii) changes in the payment policies of the sales area in the Lab-to-Lab segment. We consider that the Company s receivables portfolio is at an extremely healthy level, because (i) concentration levels are low, (ii) 88.5% of receivables are in order, one of the best records in our sector, and (iii) we have set up provision for all receivables overdue for more than 120 days. R$ MM 1Q16 2Q16 3Q16 4Q16 1Q17 Trade Receivables Current From 1 to 60 days past due From 61 to 120 days past due Over 120 days past due Other current amounts Provision for disallowances and doubtful accounts Total Current / Trade Receivables 86.6% 85.4% 86.0% 83.6% 88.5% Balance overdue until 120 days / Trade Receivables 8.4% 10.9% 10.5% 11.2% 7.0% Provisions / Balance overdue for more than 121 days 168.8% 263.7% 131.8% 168.5% 128.9% Net Revenue Days of Sales Outstanding CAPEX Investments for additions to property, equipment and intangible assets totaled R$10.8 million in 1Q17, against R$4.8 million in the same period of R$ MM 1Q16 1Q17 Variation Additions in Property and Equipment % Intangible % Total CAPEX % The main investments in 1Q17 were for (i) purchase of imaging equipment, (ii) systems and technology and (iii) improvements to existing units. More details are given below: Purchase of imaging equipment: investment of approximately R$4.0 million to buy a PET workstation for the increase of capacity in the PSC operation in Belo Horizonte; Systems and Technology: investment of about R$4.1 million in the purchase and development of software for the technical and administrative areas. Most of this total was registered as intangible assets. Improvements to service units: investment of approximately R$0.7 million in improvements to PSC units already operating in the city of Belo Horizonte. 14 of 68

19 1Q17 (R$ 10,8 MM) Maintenance 12.3% IT 37.5% Stores Expansion 50.2% 4.3 Debt In 1Q17, we once more showed a net cash position, totaling R$60.7 million, mainly because of the completion of the IPO. Taking the basic placement and the supplementary placement, 9,856,429 common shares (PARD3) were issued at a price of R$19.0 each, giving a total raising of R$187.3 million. As mentioned in the offering documents, the proceeds will be used for our expansion plan. During the quarter, we also completed funding of a total of R$ million, through a simple, non-convertible debenture issue. The total period is 5 years, with repayments of principal starting after a grace period of 2 years, and this has resulted in the extension of our debt profile: only 12% of gross debt is repayable in the next 12 months (short term liabilities). After these transactions, we ended 1Q17 with net cash of R$60.7 million, representing 0.3x EBITDA for the last 12 months. R$ MM 1Q16 1Q17 Variation Gross Debt (Borrowings) % Cash and Cash Equivalents % Net Debt % Net Debt / EBITDA LTM % EBITDA LTM / Financial Result LTM % Type of Debt - 1Q17 (100% = R$ 302,4 MM) Working Capital 14.4% Finep 9.9% Debt Index - 1Q17 (100% = R$ 302,4 MM) Benchmark Interest Rate (SELIC) 1.3% Others 4.0% Fixed Rate 15.4% Debentures 68.9% Finame + Finance Leases 6.8% CDI 79.2% 15 of 68

20 At the end of 1Q17, the debenture issue represented 68.9% of the Company s total gross debt, with about 79.2% of this total being indexed to the CDI rate. No discounting operations involving receivables were undertaken in 1Q17. The repayment schedule for the debt at the end of 1Q17 is shown in the following table: Debt Amortization Schedule (R$ MM) of 68

21 4.4 Cash flow Net cash flow from operations amounted to R$8.8 million in 1Q17, against a negative flow of R$24.0 million in 1Q16. The change was due mainly to improvement in the days of sales outstanding, as described in section 4.1. R$ Thousand 1Q16 1Q17 Variation Profit for the period 20,687 31, % Adjustments to reconcile net income and cash and cash equivalents provided by operating activities: Income tax and social contribution expenses recognized in the results for the period 9,599 15, % Provision for impairment of trade receivables and disallowances 777 1, % Depreciation and amortization 8,798 10, % Net book value on disposal of property and equipment and intangible assets 4,682 1, % Interest expense on borrowings and installment payments and loan agreements 3,463 5, % Provision for tax, labor and civil risks 604 2, % Restatement of liabilities for purchase of investments 5, % 54,214 68, % Changes in operating assets and liabilities: Trade receivables -69,154-19, % Inventories % Taxes recoverable 3, % Other current and non-current assets 4,736 6, % Deposits in court % Trade payables 6, % Tax, social security, payroll obligations, and installment payments -9,620-13, % Other current and non-current liabilities 1,899-3, % Cash from operating activities -6,331 36, % Other cash flows from operating activities: Payment of interest on borrowings and installment payments and loan agreements -5,544-6, % Payment of tax, labor, and civil claims % Income tax and social contribution paid during the period -11,712-20, % Net cash provided by operating activities -23,978 8, % Cash flows from investing activities: Acquisition of investment and goodwill Acquisition of property and equipment and intangible assets -4,837-10, % Receivables from related parties % Net cash used in investing activities -4,784-10, % Cash flows from financing activities: Capital Increase 0 187,272 n.m Share Issue Costs 0-1,255 n.m Borrowings: - Proceeds from borrowings 0 208,233 n.m - Amortization -10,224-84, % Installments: - Amortization -1,929-1, % Dividends 0-67,400 n.m Transactions with non-controlling interests 0 0 n.m Net cash used in financing activities -12, , % Increase in cash and cash equivalents -40, , % Changes in cash and cash equivalents Cash and cash equivalents at the beginning of the period 188, , % Cash and cash equivalents at the end of the period 147, , % Increase in cash and cash equivalents -40, , % 17 of 68

22 5. ROIC (Return on Invested Capital) ROIC excluding goodwill was 30.8% in 1Q17. (R$ MM) Q17 EBIT LTM NOPAT (EBIT LTM - 34%) Average Invested Capital ROIC without goodwill 31.0% 30.8% ROIC with goodwill 20.1% 20.5% 18 of 68

23 Balance sheet All amounts in thousands of reais (A free translation of the original in Portuguese) Assets Note 3/31/ /31/2016 3/31/ /31/2016 Note 3/31/ /31/2016 3/31/ /31/2016 Liabilities and equity Current assets Current liabilities Cash and cash equivalents 3 348, , , ,402 Trade payables 11 82,267 82,887 94,735 95,734 Trade receivables 4 165, , , ,662 Tax, social security and labor obligations 12 34,042 48,285 49,072 65,894 Inventories 5 17,549 17,491 20,143 20,306 Borrowings 13 27,096 89,142 38, ,631 Taxes recoverable 6 1,581 1,583 11,062 10,268 Taxes payable in installments 14 4,552 5,035 9,539 10,148 Dividends receivable 25 7,081 7,081 Minimum mandatory dividends 24,417 91,817 25,064 92,464 Other current assets 7 14,222 22,492 23,517 31,065 Other current liabilities 18 4,857 1,404 6,410 3,013 Total current assets 554, , , ,703 Total current liabilities 177, , , ,884 Non-current liabilities Non-current assets Borrowings ,244 55, ,200 76,906 Long-term assets: Taxes payable in installments 14 28,726 28,973 37,641 38,266 Deposits in court 15 1,411 1,381 4,055 3,960 Provision for risks 15 8,337 7,729 32,556 30,711 Deferred income tax and social contribution 16 36,366 38,116 45,069 44,715 Deferred income tax and social contribution 16 8,746 9,005 Related-party transactions 25 21,147 41,107 Liabilities for purchase of investments 17 14,139 13,869 14,139 13,869 Other non-current assets 7 72,751 74,761 72,751 74,762 Other non-current liabilities 18 67,060 66,705 67,060 66,705 Total long-term assets 131, , , ,437 Total non-current liabilities 369, , , ,462 Total liabilities 546, , , ,346 Investments 8 299, , Property and equipment 9 145, , , ,555 Intangible assets 10 31,966 28, , ,341 Equity 19 Share capital 336, , , ,802 Total non-current assets 608, , , ,879 Expenses on the issue of shares (8,913) (8,913) Capital reserves 51,090 51,090 51,090 51,090 Carrying value adjustments (15,644) (15,379) (15,644) (15,379) Profit reserves 221, , , ,466 Retained earnings 31,529 31,529 Equity attributable to the owners of the parent company 615, , , ,979 Non-controlling interests 1,275 1,257 Total equity 615, , , ,236 Total assets 1,162, ,748 1,264,253 1,016,582 Total liabilities and equity 1,162, ,748 1,264,253 1,016,582 The accompanying notes are an integral part of these financial statements 19 of 68

24 Statement of income Three-month period ended March 31 All amounts in thousands of reais unless otherwise stated (A free translation of the original in Portuguese) Note Net service revenues , , , ,336 Cost of services rendered 21 (127,329) (113,225) (174,549) (138,872) Gross profit 71,741 59,755 92,877 71,464 Operating income (expenses) Selling expenses 21 (13,041) (11,654) (15,390) (13,235) General, administrative and other expenses 21 (16,287) (11,275) (23,267) (13,808) Equity in the results of subsidiaries 8 3,786 4,076 Other operating income (expenses), net 22 (1,858) (5,168) (2,587) (5,256) Profit before financial income (expenses) 44,341 35,734 51,633 39,165 Finance result 23 Finance income 6,426 6,066 5,092 4,874 Finance costs (5,649) (13,896) (9,886) (15,025) Foreign exchange variations, net 57 1, ,272 Profit before income tax and social contribution 45,175 29,179 47,160 30,286 Income tax and social contribution 16 Current (12,160) (10,998) (16,490) (12,214) Deferred (1,751) 2, ,615 (13,911) (8,571) (15,878) (9,599) Profit for the period 31,264 20,608 31,282 20,687 Profit for the year attributable to: Owners of the parent company 31,264 20,608 Non-controlling interests Profit for the period 31,282 20,687 Basic and diluted earnings per share R$ The accompanying notes are an integral part of these financial statements. 20 of 68

25 Statement of comprehensive income Three-month period ended March 31 All amounts in thousands of reais (A free translation of the original in Portuguese) Profit for the period 31,264 20,608 31,282 20,687 Other comprehensive income Total comprehensive income for the period 31,264 20,608 31,282 20,687 Total comprehensive income attributable to: Owners of the parent company 31,264 20,608 Non-controlling interests Total comprehensive income for the period 31,282 20,687 The accompanying notes are an integral part of these financial statements. 21 of 68

26 Statement of changes in equity All amounts in thousands of reais (A free translation of the original in Portuguese) Share Capital Profit reserves Expenses Proposed Equity attributable, on the distribution Carrying to owners issue of Capital Legal of additional Profit value Retained of the Non-controlling Note Subscribed shares reserves reserve dividends retention Total adjustments earnings parent company interests equity At December 31, ,802 51,090 13, , ,457 5, ,433 2, ,082 Profit for the period 20,608 20, ,687 Realization of deemed cost through depreciation 19.e (251) 251 At March 31, ,802 51,090 13, , ,457 4,833 20, ,041 2, ,769 At December 31, ,802 51,090 18,747 73, , ,466 (15,379) 405,979 1, ,236 Capital increase 187, , ,272 Expenses on the issue of shares (8,913) (8,913) (8,913) Profit for the period 31,264 31, ,282 Realization of deemed cost through depreciation 19.e (265) 265 At March 31, ,074 (8,913) 51,090 18,747 73, , ,466 (15,644) 31, ,602 1, ,877 The accompanying notes are an integral part of these financial statements. 22 of 68