Qualicorp Consultoria e Corretora de Seguros S A : 1Q24 Conference Call Transcript

Conference Call Transcript

1Q24 Results

Quali (QUAL3 BZ)

May 9, 2024

Operator:

Good morning, ladies and gentlemen, and thank you for holding. Welcome to Quali's webcastto discuss the results for the 1Q24. Present with us today is Mr. Mauricio Lopes, the Company's CEO; Mr. Carlos Vasques, the IRO and CFO; and Mr. Eduardo Garcia, Investor RelationsSuperintendent.

Some statements in this webcast may be projections or statements about future expectations. Such statements are subject to known and unknown risk and uncertainties that may cause suchexpectations not to be realized or to be materially different from what was expected.

This event is also being broadcast simultaneously over the Internet and can be accessed atri.qualicorp.com.br, where the respective presentation is also available. We would like to inform you that this event is being recorded and participants will be able to listen to the webcast duringthe Company presentation. Ensuing this, we will go on to the Q&A session.

I would now like to turn the floor over to Mr. Mauricio Lopes, who will begin the presentation. Mr. Lopes, you may begin.

Mauricio Lopes:

Good morning, everybody. It is a pleasure to be with for another earnings result call. Before we speak about the call per se, on behalf of the entire Qualicorp team, I would like to offer our solidarity with the population of Rio Grande do Sul that is undergoing unprecedented problems.

Through our teams, we are working on donations from our associates, but also corporatively, we will carry out donations through two local partners to mitigate the pain that the local population is undergoing. Once again, we offer the solidarity on behalf of all of the associates ofQuali.

To speak about our quarterly results, the phrase that best explains what we are doing is that the turnaround project is being carried out exactly as planned. It has been 7 months since we have begun this project. It began on the first opportunity with a restructuring, a redesign of operations,acceptance, and a huge focus on allocation and use of our capital.

This agenda is well advanced, we are collecting positive results every quarter. In the capital allocation turnaround, we had an issuance of R$200 million to help us roll over our debt, and we are very comfortable with the size of our cash and the ability of the Company to pay off its debtin the short and long term.

Regarding the product portfolio, we continue to work diligently to enhance the process of acceptance to have a better designed portfolio. We are offering the operators a huge range of products to attain sustainability, which means lower readjustments in the short term, longer permanence of beneficiaries portfolios that are more adherent, a more geared network, a more gauged participation and brokers at work more towards what clients need with a better resolution and well-defined protocols. This is what we are doing here. Day after day, we launch newproducts, and we are doing well.

Conference Call Transcript

1Q24 Results

Quali (QUAL3 BZ)

May 9, 2024

In the last few months, we had the relaunch and a price rereading in several areas, a rereading of products in areas where the portfolio has been weakened. We are working with operators where we did not really have a portfolio and repositioning of some projects we had lost sometime ago.

So these 7 months give us the certainty that we are on the right path when it comes to the portfolio. It's not a short-term earning. We are restructuring, but when we look at the salesvolume for the last two months, we are convinced that once again, we are on the right path.

The health sector continues to be very challenging with high levels of claim. People are still hesitant in maintaining some products. But when we look at what we are building here, we are quite optimistic once again, and we are building this with technical skill with capacity with theoperators and an ever great focused on acceptance.

To look at this, I would like to give Mr. Carlos Eduardo Santos, the welcome. He becomes a statutory Director of the Company as Chief Medical Officer, and most of his mission here is to guarantee a sustainable portfolio guarantee, the acceptance process and to ensure that theportfolio adheres to the market needs.

I would also like to make the most to welcome two advisers, Ricardo Bottas and Luiz Cruz, both with enormous experience in the health market. In the past, they have held executive and investment roles in the sector, reinforcing the concept that we have at Quali of having a benefit management that can offer integral products to our beneficiaries to our entities, products that are sustainable and adhere with the long-termmodel of the sector. I think that is well done so that we can have less readjustments, more permanence without cancellations in the long term.

Thank you once again for our two counselors. I thank Carlos Eduardo for becoming a statutoryDirector. I would like to thank the Quali people, who have been working night and day.

I will give the floor now to Carlos Vasques, to speak about our performance for the 1Q24. Thank you very much.

Carlos Vasques:

Thank you, Mauricio, and a good afternoon to all of you. We are going to speak about our financial performance, and the main indicators that reflect the message that was just mentionedby Mauricio.

We look at the first slide, at the top left, we had a reduction in the base of clients and the managed portfolio reached 63,000 beneficiaries. And one of the challenges we face with all of these actions is linked to the portfolio management, product management, as described byMauricio.

Despite this, alongside with this strategy, we are also continuing on with our turnaround project. And you can see that this is the reflection of joint effort of a group that is now coordinating the Company, coordinating all of the fronts, very attentive to the action that need to be adopted toface this challenging moment in the Company and in the health care sector.

Conference Call Transcript

1Q24 Results

Quali (QUAL3 BZ)

May 9, 2024

Net revenue, as you can see with a drop similar to the base, 12% sequentially. We look at annual basis, although the base dropped 18% and net revenue dropped 9%. And we see the internal efforts in the Company, enabling us to reach R$152.9 million of EBITDA, CAC, sequentially visa -visthe 4Q23 and very similar to what we saw last year of R$146 million. So we see a beginning of stabilization in the Company cash to favor this movement that we saw as of the second half of last year. Next slide, please.

Here, we observed some of the effects that have driven the impact on the CAC EBITDA, mainly linked to operational efficiency and capital allocation. We are undergoing a renewed culture of operational efficiency in the Company. We are rationalizing the scope of activities. We keep asking ourselves that this is the right time to do things. And we are focusing on what truly createsvalue for the Company.

Besides this, we implemented since last year and have become more mature and effective implementation of new strategy and discipline in capital allocation. We have already captured some benefit in fixed and current expenses, redefining the scope of efficiency, focusing on the core and what can allow us comparative differences a sequential drop, a significant one of 24%.

And if we adjust for the R$12 million, as we described in the release, impacting this group, we would still reach R$116.8 million of these expenses, a reduction of 22% year-on-year and a gainof margin of 32.9% last year to 29.8%, 4 p.p. gain.

We have relevant balances that are being addressed. We hope to obtain the benefit soon. Here, we observed the impact of operational challenges linked to invoicing and efficiency in the revenue cycle of the Company, as well as some effects of contingencies due to an increase in complaints because of the readjustments carried out recently. We believe that this is a momentof attention. The Company is very attentive to that, and we will seek normalcy going forward.

In the third chart to the left, you see the capital allocation. Since last year, we were investing 14% of our revenues in customer acquisition. We have reached a value of 7.9 last year, and now we are speeding up investments once again as the products are once again put on the Company shelf so that we can reach ever more customers in our addressable market. TheCompany is ready to speed up on the path towards sustainability. Next slide, please.

All of this ends up in a strong cash generation, operational cash generation for the Company. I would like to highlight that net debt of the Company fell R$269 million in the last 12 months. 1 year ago, our debt was R$1.418 billion. As you can see to the right of the slide, presently, we ended the 1Q with R$1.149 billion, a significant reduction in the net indebtedness of the Company. Free cash flow in the quarter was R$111 million, a very strong conversion of adjustedCAC EBITDA of 63%. And culminating in a robust cash of R$1.1 billion.

The figures that you see here are a sign of our commitment of resuming sustainability in the Company with operating parameters that seek the best efficiency benchmarks. And I believe that this reduction in indebtedness begins to show the effects of the restructuring of the capital structure of the Company. Of course, we look at the projects, but we also look at the entirecompany to have a company that is ever more balanced through the coming quarters.

I would also like to ask you to look at the cash flow the table at the level. We are speaking of the Company's working capital. This quarter was -25.It will fluctuate during the quarter. This is what

Conference Call Transcript

1Q24 Results

Quali (QUAL3 BZ)

May 9, 2024

tends to happen. But in the last 12 months, we were positive in R$7.2 million. And this is howwe would like to continue to manage that part of the Company.

And I draw your attention to the maintenance CAPEX. It does not include the CAC. We see thisin the line of commissions, but the CAPEX of maintenance includes enhancements, technological events in the Company. And in the last period, it was R$13.9 million. This year, itis at R$7.6 million. We understand that we can continue to work with this level, recognizing the scope and the cost center of the Company.

With this, I would like to end the main financial highlights of the Company. and I now open thefloor for the Q&A.

Leandro Bastos, Citibank:

Good morning, and thank you. We have two questions at our end. The first, we see the news of large operators moving away from the channel, especially since the last call. Which have been the initiatives for retention that you are working on in your portfolio? And how successful hasthis cleaning out of your portfolio been? This is the first question.

The second question refers to CAC. In the last call, you mentioned that you were working with elasticity, that you were somewhat below the optimal cost of acquisition of customers. When can we expect an acceleration of the CAC? And which is the dynamic of investment in thischannel? Thank you.

Carlos Vasques:

Leandro, I will begin to answer your questions. I begin with the CAC, and then we will speak about our portfolios. The CAC has a new investment. Since the 4Q23, we put a break on adjustments to once again include the parameters within the benchmarks. Through the 1Q24, we have been able to obtain the first results of this portfolio management. Thanks to this, we have been able to gradually resume our sale. Because of this, there was an increase ofinvestments from 7.9 to 8.9.

If we look at our background, this figure was almost 20%, 14%, and we believe that a figure standing at 14% will be more reasonable through time. But we will only make investments if we have the opportunity to do so. We cannot invest if we do not have the opportunity. We are running after opportunities, building new avenues in the Company to make investments withdiscipline and the profitability standards that we expect for investments in CAC.

We want customers, but we want customers that guarantee our performance. Sequentially, we have had some growth, and this figure should be closer to 15% through time in net revenue,and we are making efforts to attain that goal. Those were my remarks on CAC.

Mauricio Lopes:

Leandro, thank you for the question. Let's speak about the cancellation and the offer of products. Let's go back to the film that you mentioned. You are right, we are trying to organize things. Operators try to maintain products, the sale of products during some time. The claim levels continue to be high. They reached the conclusion that the products designed for the market with

Conference Call Transcript

1Q24 Results

Quali (QUAL3 BZ)

May 9, 2024

high reimbursement, open networks without co-participation are not good products for the retailmarket. Part of them is reformatting the retail format and launching new options.

Of course, it will take time. That is why we have a mismatch between supply and demand. There's a set of operators, not only Quali, but the whole channel of retails that have canceled some contracts. What is it that we did? We tried to find the best solutions in the most transparentway possible for our beneficiaries that received a letter of cancellation.

Obviously, we do not have products to service as we would like to. And when I say we, I'm not referring to Qualicorp, I'm referring to the market. Several operators no longer have products made available to the retail market at this point in time. And this will happen in the coming months. But as part of what we have available in the sector, we have the largest portfolio withno comparisons whatsoever.

Our portfolio is larger than we would like it to be, but it is the largest portfolio. Now operators have to reformat their portfolios with greater speed to offer a larger number of products to themarket. This should happen from now on until the end of the year.

See operators attempting to do this, but there are steps designed, tests that take longer than we had imagined. However, we have offered good coverage to most of our customers. Additionally, we have engaged strongly with operators to try to mitigate the cancellations that you mentioned.

The first wave were enormous numbers of cancellations. We are engaged with them saying there is a solution here, let's maintain the portfolio that design and let's do this alteration so thatcustomers do not end up unattended.

We have been successful in most cases. Depending on the operator, we do manage on behalfof the beneficiary, not on behalf of the operator. And I think we have been able to revert 50% of the cases of cancellation. Otherwise, we are offering portability to see which is the best solutionfor unattended customers.

Gustavo Tiseo, Bank of America:

Thank you for taking our questions. We have two. One, I would like to explore what you have just mentioned. Taking away the impact of these mass cancellations, what is happening with the new products? If we could have a flavor, if you have a good traction, if you have had anincrease in gross adds.

Secondly, you are doing a good job in terms of expenses. As you mentioned in the presentation,is there still room for further improvement? How can we imagine this going forward? Thank you.

Mauricio Lopes:

Gustavo, thank you for the questions. We see a recovery, yes. We have a very interesting partof the portfolio. In some regions, we have been able to redefine some projects. In larger operators, we have new pricing. Our pricing was highly detached. And in the last two months, we have already seen a volume of proposals that are transmitted, validated and then accepted.But we have had an increase in the number of transfer of proposals.

Conference Call Transcript

1Q24 Results

Quali (QUAL3 BZ)

May 9, 2024

And I think that the product portfolio has a better fit and is solidifying the new commercialstructure that was regauged, rebalanced in the last few months.

The sum of these two things brings us a more optimistic vision vis-a-vis last month. This is the only process we can undergo. There is no running away from this. If we did not reach acceptance, we cannot speak about products. If we did not have new products for the retail market, we would not have a portfolio. And if we had not trained the commercial area for this moment, we would not get anywhere. So everything is starting to fall in place in this new film that we are creating. And these last two months have shown better sales compared to the past.

Now we do have a group of operators with which we have contracts for new products, new prices and new launches in different regions. Regarding expenses, of course, there's room. We keep looking at fixed and variable expenses, both still have room for improvement in fixedexpenses.

We received good results in our payroll. In terms of variable expenses, we are making strides with exception of some contingencies that came in now because of readjustments,cancellations.

And of course, this materialized the higher number of contingencies. If we put aside the problemof contingency and see what happens with expenses, what is permanent, we are at a lower level, and there's room for further reductions. I think that part of the agenda is quite calm. The main challenge is the launch of new products that, of course, is progressing, but it's far frombeing what we wanted and the regauging of commercial teams.

Operator:

The question-and-answer session ends here. I would like to return the floor to Mr. MauricioLopes for the closing remarks.

Mauricio Lopes:

Once again, we would like to thank you on behalf of all of our associates that are working witha great deal of energy in this turnaround. We do have several achievements. The headlines are the same as they were in our previous call.

We have had significant interaction with the market since the last call, but what we are building has not changed. We have written a new chapter in this film that we are producing. This new planning began 7 months ago. The direction we are seeking is correct, and we are makingstrides despite the challenging moment in the market.

We have been able to increase cash, reduce expenses, work with operators, enhance internal processes and show you the statements as we have restructured them bringing members of theBoard that are very aligned with the health care sector.

All of this will bring us a more stable moment in the health care with a focus on this adjustment and more productivity for the beneficiaries. This, of course, is the goal to service the beneficiary as best we can so that they can have long-term plans that are more adherent to their needs. Sowe are all driven by this.

Conference Call Transcript

1Q24 Results

Quali (QUAL3 BZ)

May 9, 2024

Thank you once again for your attendance, and have a good afternoon.

Operator:

We would like to thank all of you for your attendance. The results earnings result presentationfor Quali for the 1Q24 ends here.

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