Qualicorp : 1Q23 Conference Call Transcript

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Conference Call Transcript

1Q23 Results

Quali (QUAL3 BZ)

May 11, 2023

Operator:

Good morning, ladies and gentlemen, and thank you for holding. Welcome to Quali to discussthe results of the 1Q23.

Today, we have with us Mr. Elton Carluci, the Company's CEO; Mr. Carlos Vasques, the IR Officer and the CFO, Mr. Eduardo Oliveira, Director; and Mr. Franco Abelardo, IRSuperintendent.

Some forward-looking statements made in this webcast can be projections or statements on future expectations. These forward-looking statements are subject to known and unknown risksand uncertainties that can lead results to differ materially from those expressed.

This event is also being broadcast simultaneously over the Internet and can be accessed at theaddress ri.qualicorp.com.br, where the respective presentation is also available.

We would like to inform you that this event is being recorded and all participants will be in listen- only mode during the Company's presentation. Ensuing this, we will go on to the Q&A session,when further instructions will be provided.

I would now like to turn the floor over to Mr. Elton Carluci who will begin the presentation. You may proceed, sir.

Elton Carluci:

Good morning. Hello, everybody. It's always a pleasure to be with you at another call for Qualicorp. Today, I would like to begin speaking about what is happening with thesupplementary health sector in Brazil and how we are facing the challenges of this scenario.

According to recent data published by the ANS, in 2022, we had a historical level of claims andof course, operational impact. And we are in an environment that continues to be highly challenging.

In this context, in the Company's management, we have acted in a very strategic and conservative fashion, especially when it comes to the short-termcapital allocation, and theresults that we attained in the 1Q simply confirm that this strategy was correct.

We have worked significantly on reducing expenses. We have enhanced the Company's working capital. We have rationalized some investments. And this is the way that we have been able to generate R$ 140 million in free cash flow, the best of the last 8 quarters. And as a result, this reduced our net debt by approximately 5%. Of course, all of this is connected with our creditrating for our debentures.

Recently, this was reaffirmed as AAA, which shows the financial soundness of the Company despite the highly challenging environment as the one we are navigating through recently. Besides the issue of governance in the last assembly held on April 28, our shareholders approved some important points, once again, reinforcing our governance, and we approved the

Interno

Conference Call Transcript

1Q23 Results

Quali (QUAL3 BZ)

May 11, 2023

payout of R$ 22 million in dividends that have been scheduled to be paid until December of thisyear.

To speak about the operational aspects of the Company, which I would like to underscore. Of course, we face some challenges on the part of beneficiaries. And this is due to the reduction in sales, especially because of the limitation of offer of some products and the levels of cancellation that remains stable. But once again, the sales were quite challenging, and we did not attain theperformance we desired in our portfolio.

The take rates were somewhat lower than what we are used to working with compared to our historical levels due to the high level of claims in the sector. Despite all of this, we work towards offsetting the impact of these factors. We had an increase in the average ticket, which aided andembedded the Company to maintain relatively stable revenues in the 1Q.

If you look at our adjusted EBITDA, it reached R$ 210 million with a modest contraction when we look at the 4Q22, showing once again the efficacy of our cost control and control of expensesvis-à-vis the fixed costs of the Company.

In the operational context, still, I would like to highlight a very important topic for Brazil. Quali has been working arduously with partners in the detection and prevention of fraud. Operationally, this is an extremely relevant issue for the sector. And as all of you are aware andas has been disclosed by the press, it has had an impact on the claim levels of operators.

Qualicorp, as the largest administrator benefits in the country, will continue to act very stronglyto reduce the fraud in the system. We have been working broadly in this area in all of the Company systems, following up with artificial intelligence to reduce and prevent this highlyrelevant topic, which is fraud.

Commercially, I would like to underscore the following. We have renewed our agreement with the Ministry of Justice to offer a health plan to public servants, and we received an award for thebrand that was relaunched in the Company.

Another very important topic is not only the cost reduction, but also the enhancement and the importance of digital channels and the role that they have played in the Company. We have increased the use of the digital channels and because of this, we have decided to terminate our activities in the physical stores. This not only correlates the cost issues, but also to the relevanceof the digital channels in the Company, which also contributes towards reducing fixed costs.

To speak about fixed costs, and before I turn over the floor, we are going to continue to devote ourselves to the control of costs with great discipline in our capital. This will enable us to better face the present economic situation of the market. Additionally, we are always seeking levers to add value for the medium and long term, reinforcing our competitive edge, acting with ourpartners, working with new products.

New companies can develop products and increase the penetration of HMOs in Brazil, of course, acting towards a better sustainability for the sector, alongside with our partners. And we will continue on in that front as we normally do and as we have done in the last years. I would like to thank all of you for the continuous confidence and support of all of you, and we reaffirm

Interno

Conference Call Transcript

1Q23 Results

Quali (QUAL3 BZ)

May 11, 2023

our commitment towards transparency and a quest for excellence in the management ofQualicorp.

I am going to give the floor to Carlos Vasques, and will be back during the Q&A session. Carlos Vasques, you have the floor.

Carlos Vasques:

Good morning, everybody, and thank you, Elton. Let's speak a bit about the Company results and some points already reflect the strategic priorities for 2023, of course, at different stages.We are going to begin speaking about the 1Q23 results.

I highlight the free cash flow totaling R$140.4 million with a growth q/q of 20.3% in y/y of 15%, 6x the cash flow of the same quarter in 2022. And I think this already goes back to what Elton mentioned at the end of his presentation, we have concluded the live portfolio with 961.5 affinity health lives 4.3% less q/q. This ended up with a revenue of R$ 457 million for the quarter, 0.9%q/q and 8.9% lower than the 1Q22.

The adjusted EBITDA ended up at R$ 210.3 million, a margin of 46% once again, a reflection of our base. And this is the level we are going to continue working on to defend ourselves and contribute ever more to this item. These figures have taken us to a net debt of R$ 1.4 billion, a net debt that is 1.59x our adjusted EBITDA within the guidance that we agreed on with ourdebentures.

We go on to the next slide where I would like to highlight the work of controlling costs and expenses that the Company has been carrying out. When we look at the q/q, we have COGS, which is the first line item, R$ 215.9 million. Q/q, there was a reduction, but we do have the one- off adjustments of the 4Q. When we look at this, recurrently, we have 1.7% drop of COGS andSG&A q/q, and -0.9%y/y.

This is the second or third quarter where we have presented reductions in this line item. And ofcourse, we are on that path for austerity and efficiency in the allocation of our resources.

We have the EBITDA, which we already mentioned. If we look at D&A and the financial results, they pressured our net revenue. D&A reflects the amortization of previous investments and the financial result in this environment of high interest rates, also pressuring our financial results,offset partially, of course, by the reduction of taxes with a net income of R$ 16.7 million.

So D&A and the financial results with a greater impact on our results. And we are going to work on the line items where it is possible to do that and improve this while the interest rates continueto be very high, pressuring our results.

In the following slide, we go on to the cash flow, and this has been one of our main goals in this moment of difficult types in the market. This is one of the most stable things that we have undergone as Elton mentioned in the first part of the call, we had a good conversion of EBITDA. We had R$ 205 million adjustments and working capital once again positive, R$ 28.8 million, not as high as in the last quarter but reflecting our efforts to enhance the control in that specificline item.

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Conference Call Transcript

1Q23 Results

Quali (QUAL3 BZ)

May 11, 2023

As the EBITDA conversion has been positive, I also highlight the commissions. We see an enhancement in our mechanisms for follow-up and pricing of our products, which has enabled us to better rationalize with efficiency and intelligence. Now commissions and cash are a reflection of that. We also have the taxes paid as something that you can check in the balance with greater detail, you will see that we had a drop of 30% to 20% after some actions adoptedin terms of efficiency in this line item.

CAPEX R$ 13.9 million remaining at similar levels that we had in the past, resulting with a free cash flow of R$ 140.4 before the financial results and dividends. That is to say before capital holders and credit, 20% above q/q and sixfold higher y/y. We are very attentive to all of these points. We continue to seek enhancing our processes and methods. Elton also referred to fraud, which is extremely difficult, and we are seeking a good path for the sector and the Company is seeking enhancement in its different fronts of action to have an impact on the different line itemsof our cash flow and income statement through time.

With this, we would like to conclude the presentation of our finances, and we are at your disposalfor Q&A

Gustavo Tiseo, Bank of America:

Good morning. Thank you for taking my question. I would like to explore 2 points. First, in termsof margin that you remarked on in the presentation, you are attempting to come closer to those 46%. I would like to understand if this would be possible. And what it means impacting the cost, because you might lose some of your operational leverage with the beneficiaries, which is yourstrategy to maintain margin?

My second question refers to SG&A, which was positive, better than the market expected. But I would like to understand if there was a one-off effect, something that happened in the past or if we could expect a strong amount for coming quarters. We still do not have the impact of interestrates, but they will come. Thank you for taking my question.

Elton Carluci:

I am going to begin here. Vasques will also answer the question. To address the operational leverage in a very challenging environment, I had already remarked on this in the introduction.I can state that the Company has just begun the work. We are working with what was at hand in the short term, carrying out some operational enhancements. This is an enormous front of efficiency in the Company, especially in terms of the digitization of services. We still have a verylow penetration index that has evolved, but it continues to be low.

I will give you an indicator: the use of app went from something marginal to 16%, 17%. This is one of the good demand for the Company. And this brings about greater efficiency and cost optimization. The digital fronts will have a much greater participation in the coming months. Wehave a very aggressive growth and objective until the end of the year.

We were awaiting the confirmations. We measure touch points with customers to, in fact, understand if this is what we want to do, the level of satisfaction of channels to speed up our initiatives. And we are doing this with the security that, yes, our customers are being wellserviced through digital channels. There's an enormous front that will advance.

Interno

Conference Call Transcript

1Q23 Results

Quali (QUAL3 BZ)

May 11, 2023

Besides other fronts throughout the year, we should be able to see an improvement in the Company's fixed costs, basically due to better service and the use of technology. We are not doing anything that will compromise the satisfaction of our customers. Quite the contrary, we want to enhance this by using technology. Everything we have invested during the years hasbecome ever more tangible.

In the last 2.5 years, the Company has made relevant investments and we will now capture the synergies of this process. We are quite optimistic with the figures, and we are going to act on some areas that have been mapped. We need to review some agreements, of course, it is somewhat more complex, but we are acting strongly in this line because we believe in it, it is a moment for the sector to do this, everybody working arduously. And very soon in the coming quarters, you will be able to observe an enhancement in our claims and a better take rate in themidterm.

As we have done our homework, we have accelerated the technological front, working withCosan in the long term, the benefit for the Company will be very important.

Regarding cash, I will turn the floor over to Carlos Vasques, to help me.

Carlos Vasques:

To add to the question, the second part of your question, the cash flow, if there was a one-off event, I think this is pertinent. Your doubt is well founded. You do observe the variation ofworking capital and the cash flow is positive.

This is not a design that, in our understanding, will be recurring in terms of magnitude because that would give us a neutral cash flow. We are working with some recoveries from the past. Basically, if you look at a longer period, the variation in working capital will come ever-closer to being neutral and the moving average will be where we imagine that it should be. If nothingatypical happens, this is the work that we are doing day after day.

On the other hand, if this line it tends towards becoming more neutral, we do foresee opportunities in all of the line items of cash flow that we can work on. In any scenario where we will have a neutral working capital, we will have more work fronts in other line items to offset thissituation.

Gustavo Tiseo:

Thank you for your answers.

Ricardo Boiati, Safra Bank:

Good morning. My first question refers to the Company's growth strategy. If you could perhaps expand on this, I understand your focus on cash, which is very clear. And of course, you are focusing on cash generation to offer growth. But in the long term, what do we see in the market? We see companies being more passive in terms of growth. Will you concentrate on more profitable products? Is there room to expand your partnerships. Of course, you have already announced your agreement with the Ministry of Justice. And so, which is your mindset in this