Qualicorp : 3Q23 Conference Call Transcript

Conference Call Transcript

3Q23 Results

Quali (QUAL3 BZ)

November 10, 2023

Operator:

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Quali webcast to discuss the results for the 3Q23. Today, we have with us Mr. Maurício Lopes, the Company's CEO; Mr. Carlos Vasques, the IRO and CFO; and Mr. Franco Abelardo, the IRsuperintendent.

Some of the forward-looking statements in this webcast may be projections or statements about future expectations. These statements are subject to risks and unknown risks and uncertainties that may lead such expectations not to materialize or to be substantially different from what was expected. This event is also being translated simultaneously through Internet and can beaccessed at the address ri.qualicorp.com.br, where you will find the respective presentation.

Please bear in mind that this event is being recorded, and that all participants will hear the webcast during the Company presentation. And doing this, we will go on to the question-and-answer session when further instructions will be provided.

I would like to give the floor to Mr. Maurício Lopes, who will begin the presentation. You may proceed, sir.

Maurício Lopes:

Good afternoon to all of you to the entire community of investors that are attending this and special thanks to our entire team and Qualis that are accompanying this call of results. I would further like to thank you for the warmth with which you received me. I have been working at Quali for 3 months, and I am very proud of working in this journey and working on this turnaroundthat we are going to achieve with speed for the future of the Company.

As I mentioned in the 2Q call, a week after I had begun to work with you, we began the turnaround 3 months ago, and we are quite diligent. We are quite motivated in doing this in avery short time, a simple and rapid turnaround.

The Company is working on 4 different currents that we have been working on a focus on cash generation and capital allocation, consecutive actions and operational efficiency and a redesignof our value generation proposal that will be aligned with our strategy that we see at present for the health market.

This is where we have devoted the energy of the Company quite intensely to give you a better idea in terms of operational efficiency. We are in the implementation of 20% reduction in the SG&A. We have already implemented the contracts, which tend to be 12 months. So monthafter month, we have savings.

In terms of the team, we have achieved a substantial reduction of 20% in the Company headcount comparing the 3Q23 and the 2Q23, and 25% versus the end of 2023. We are downto 1,900 employees compared with 1,950. We have divested some operations that are outside of our core. For example, the divestment of Escale with a reduction in lead generation of R$6 million year after year and a cash inflow, although this has a negative accounting effect.

Conference Call Transcript

3Q23 Results

Quali (QUAL3 BZ)

November 10, 2023

The entire physical structure has been changed in the Company. We have returned several units and buildings and renegotiated the contracts of the remaining units. We have closed physical customer points, and we took this decision very aware of the fact that the digital channels, the telephone channels are robust, they are adequate and they can certainly offer the service that our clients need. And because of this, we have closed all of the physical customerservice point.

Finally, as part of the restructuring, we have changed the internal structure, especially in the commercial part. We have a new team that will work with more synergy and new expertise and commercial understanding of insurers and HMOs. We thought this would be the correctmovement because of the market we need to have a better alignment with HMOs.

And the best way to do this is to bring in a team that thinks as an insurer as an HMO, and thinks more technically. I say this because our greatest challenge at present and through our activitiesof reducing SG&A is to revitalize our product portfolio, the revitalizing of the product portfolio that we are working with along HMOs is something we will devote more energy to in the coming months, not only to revitalize Affinity plans, but also to find other channels that we may not havetackled or that we have to develop from scratch.

Now alongside with it, alongside with the changing of the commercial structure, we have changed our relationship with brokers and partners. We have reviewed the entire relationship structure. We have moved away from one-size-fits-all to a highly segmented model regionally. Now besides the regional segmentation we are segmenting based on channel and type ofproduct for each different type of commercial model.

This is how we will gain speed and allow greater adherence to the regional realities of the country. Each region has its own reality and its own need for products and the one-size-fits-all structure is no longer adequate to work with adherence and speed in a country that is a continent. These are the points we have been working on the commercial realignment in fullexecution.

We have a great deal of work when it comes to creating products and the operational efficiencyis well underway. The results are beginning to appear. But of course, we will pursue other points to bring in efficiency, revitalizing the Company and reviewing the internal processes. We are working diligently in these 3 pillars.

I end here, I will give the floor to Carlos Vasques, CFO, and I will be available during the question-and-answer session. Thank you very much.

Carlos Vasques:

Thank you, Maurício. Good afternoon to all of you. We are now going to speak about the financialhighlights speaking about the behavior of the Company in the quarter.

I begin with a material fact disclosed last week, the divestment of Escale and the important pillars in our journey mentioned by Maurício, focus on operational efficiency and optimizingcapital allocation.

Conference Call Transcript

3Q23 Results

Quali (QUAL3 BZ)

November 10, 2023

Once again, this has controlled our attention. We decided to carry out the divestment of Escaleto focus our actions on our own distribution with our Quali way of doing things. And this generated an accounting impact of R$63.3 million, with an impact on net profit, but it also released R$29.7 million in cash, and this cash position will be used to seek sales and distribution levers, beginning in 2024. I would like to thank Escale for the partnership, and we wish them agreat deal of success in the new enterprise.

If we look at our portfolio, we ended the quarter with 845,600 Affinity Health lives, with a drop of 9% quarter-on-quarter, with 20% year-on-year, reflecting the challenge of the Company.

However, in turn, we had a quarter with strong readjustments, as you can see in the press release of about 30%. And this reflects the moment of the sector, with high claims compared to historical patterns. The churn of the 3Q was of 14%, slightly below that of the previous year. Sowe are within a trend that we have observed in recent years.

If we look at gross adds, 56,900 lives, a volume lower than what we had been doing. And this is why we are revisiting our strategy. We spoke about moving away from one-size-fits-allto a moreregional analysis, and this will have an impact on this analysis through time.

If we look at costs and expenses, we reported total expenses of R$243.4 million in the 3Q, repairing a slight increase quarter-on-quarter,but a reduction of 10.7% year-on-year.When we think about this package and we separated in fixed and variable expenses. In fixed expenses, we have R$141.4 million in the 3Q, a slight drop of 1.7% quarter-on-quarterand 15.6% year-on-year.

In terms of variable expenses, those that are linked to our commercial activities directly linked to the commercial performance, we had R$101.9 million in the 3Q, a growth of 5.8% quarter-on-quarter and a reduction of 2.8% year-on-year.Now as Maurício mentioned, we are forcingsavings of R$120 million annualized.

The work has not been concluded. There are new opportunities for enhancement for company designs that we are exploring. And in terms of fixed expenses, we got 31.9% of net revenue compared to our historical average of 33% or 34%. We are still not where we would like to getto. And to the right, you see recurring variable expenses with an increase regarding revenue, reflecting the current patterns of commercial contracts.

We refer to our EBITDA and the customer acquisition culture. The adjusted EBITDA was R$199.8 million in the 3Q, a slight increase of 2.6% quarter-on-quarter with a 45% margin forthe period.

And if we look at EBITDA minus CAC, we are referring to part of our CAC cash flow, we are not speaking of depreciation and amortization that reflects the CAC of previous periods that we have followed up on. We understand that the CAC cash, commissions in the cash flow better reflectsa moment of investments and decisions to allocate capital compared with the EBITDA plus sales and inventory.

This totaled R$163.9 million in the 3Q, a growth of 15.8% quarter-on-quarter and a 14% growth year-on-year, with a margin recovering the levels of 37%. And that, we see in the historical levels

Conference Call Transcript

3Q23 Results

Quali (QUAL3 BZ)

November 10, 2023

of the Company and more coherent with our profitability levels. We understand that adjusted EBITDA minus CAC reflects the capacity the Company has of generating operational cash.

To speak about cash going directly to cash generation. The free cash flow after taxes totaled R$113.7 million in the 3Q, close to 2.3x, the free cash flow of the same quarter last year. And when we analyze the 9M, it represents R$402.2 million in the 9M23, 5.6x the cash generationof the Company year-on-year.The EBITDA conversion and through free cash flow around 87%, and this shows the Company's capacity of converting its accounting figures into cash.

Now, if we look at the Company's net debt, the debt had a reduction because of the growth of cash. Cash ended the quarter, a little above R$1 billion, R$1.03 billion, and because of this, our net debt EBITDA ratio for the covenant ended up at 1.53x, lower than 1.6x with which we beganthe year, and within the limits set forth with our creditors.

This company cash generation reflects the strategy, which is focused on generating value, something we have adjusted gradually through the last quarter, then that has been reinforced ina relevant way through the changes that Maurício has already presented. This involves a great focus on operational efficiency, a better efficiency in capital allocation. And we understand thatthis strategy is better fit to the market moment because of the macroeconomic scenario.

With this, I would like to end the financial highlights, and we can go on to the questions-and-answers. Thank you.

Gustavo Miele, Goldman Sachs:

Good afternoon Maurício, Vasques, Franco. Thank you for the presentation. I have 2 questions on the main topic, your relationship with your salesforce. I would like to go more in depth in the relationship of commissions cash an interesting idea. Now based on that, how are you reevaluating the remuneration of outsourced brokers? How has this impacted your cash and which has been the feedback of the brokers because of this way of rationalizing their payment.

A second question that is more strategic. We have seen the Company carrying out a very clear movement of revisiting its portfolio, including products with higher added value. This should also mean change in mix of your brokers. You have worked with your own labor force for this. Now as the Company has worked with projects with a higher ticket, does it make sense in bringing your salesforce in-house,working with your own brokers in terms instead of outsourced brokers?And which would be the impact of doing this?

Maurício Lopes:

Thank you, Gustavo this is Mauricio, thank you for your two questions. How do we look upon this channel? And I'm going to begin from back, frontward. We always have a greater appetiteof working with products that have a higher added value for the Company. These are the more premium products, not basic products. Having said that, the stage at which we are in is not onlya stage to look for products, A, B, C. We have to fill up our product portfolio.

Again, what we have understood in these months of work and based on the experience of the Company, the more complete the portfolio, the more assertive the efficiency of our sales teamin whichever channel because we will always have a lead that will be taken advantage of with

Conference Call Transcript

3Q23 Results

Quali (QUAL3 BZ)

November 10, 2023

an empty portfolio, we lose efficiency in the operation. Of course, we are going to head in that direction of having products that add more value for the client and for Quali, but we are focusedon filling in the portfolio.

Regionally, there are many opportunities and great opportunities in terms of products. In some products, our salesforce has been working better, working in specific markets regionally. So wedo not have to be that aggressive in our campaigns.

We can work with bonuses, discounts and other variations, of course. We have also worked a great deal with regional teams, so that as part of a rational strategy to improve the markets and products to bring together what we have available: campaigns, qualification and set up a moreadequate range for each of the products. This has been interesting.

The CAC has been dropping continuously, and we are testing price with elasticity of CAC. The model we have is not the end model. We are going to continue to test it, but it is very probable that it will be very different for each of the products, and this is what we have to see in comingquarters.

We have moved away from that one-size-fits-all model based on type of product and channel, and we are moving towards more customized products. So some brokers are happy. They have gone from an average team, and they have gone to a more privileged team. And the contraryhas also happened. It will depend on the market. Thank you.

Gustavo Tiseo, Bank of America:

Thank you. This is a single question simply to understand how the channel is doing as a whole, especially from the competition. When you speak about being more selective, the SME, does that also have a payment of CACs per region or our user first to do this and others will follow. Is this something that could happen if the SME of that region does not pay the same for CAC tosee how much influence you can have in the means of payment.

Maurício Lopes:

Gustavo this is Maurício, thank you for the question, in a single sentence, I will answer this Qualicorp is quite confident in the size and the relevance and in its leadership in the distribution channel. We are leaders and not followers regardless of the channel, and we will make thechanges that we deem to be necessary regardless of the reaction of the competition.

The market has been quite flattened in terms of products and results. And this is the right moment to make all of these movements and the pain that we feel in terms of our product shelfis probably equivalent to that of other distributors and competitors. And of course, we have a certain leadership here, and we will work diligently on these operations. At this part of ourguidance, we have decided which path to follow. We are at the execution stage at present.

Leandro Bastos, Citi:

Good afternoon. We have 2 questions, the first to speak about the commercial realignment. You have made changes. You are serving products relationship with other channels. If you could

Conference Call Transcript

3Q23 Results

Quali (QUAL3 BZ)

November 10, 2023

convey to us, which will be the timing of these commercial alterations, if you foresee a stronger 2024, if you will be more cautious in the short term. We know that this is difficult, but how canwe think about this new strategy. And if it will lead to a stronger 2024.

The second question, thinking about profitability. You are working on cost. When we think about revenues, there was a pressure on take rates. Is there the risk that there will be ever more pressure because of the sector. And if this will happen in the short term, these are my questions,thank you very much.

Maurício Lopes:

This is Maurício once again. I will answer about the channel, and then Vasques will speak about the take rate. When it comes to the channel, which is the decision we have taken in these 90 days of work. We are more concerned nowadays in having a portfolio with higher quality, perhaps with lower sales. We are going to focus on those sales that will dilute the CAC during more time, and that does not concentrate on CAC, and not think about the early churn that doesnot add anything.

It's terrible for an HMO. We spend a great deal on CAC. What we are trying to do with the channel is to gear the channel to think the same way. How can we remunerate the channel to have a distribution structure that will allow for the sales and also offer profitability andsustainability that the market needs.

Looking at the HMOs, this is what we are working on. The team is a new team. It's a significant mixture of many people coming from HMOs with a very robust team that we have in-house that was already working in the administrator. This mixture of the 2 works will lead to a very strong technical discussion with HMOs, and it also has deep knowledge of distribution, and what will come out of here, this is the mix we want. If this mix is done properly, we will maintain our abilityto continue to converse with the channel and improve the technical quality with the HMO.

The channel understands that we want a better quality sale. This is not something that will happen overnight. And as we are changing the prices of products and models. Of course, this will take some time, but I'm quite convinced along with the team that this is the best strategy to have a more sustainable portfolio, less prone to an early churn and more adherent to the CAC,we want to work with.

Vasques will respond to your second question.

Carlos Vasques:

Hello Leandro, regarding your question about take rate and how we can maintain our cash generation and results. We are still in an environment with a bit of pressure because of the claims in the entire sector. And this environment, of course, keeps us in the situation of maximum alert, which means that the discussion, speaking about sharing. All of this is on the table in acontinuous fashion.

What we can clarify here is that the cash flow is made up of several line items. This operational flow includes the CAC, taxes, working capital, and we do have the opportunity of working in

Conference Call Transcript

3Q23 Results

Quali (QUAL3 BZ)

November 10, 2023

these different line items and this free cash flow of above R$100 million is a show of theresiliency of the Company.

This management of a line item that does not work very well, means we are going to seek another line item to maintain the Company resiliency at the same cash generation level. Now the strategy of managing for cash of pushing the liquidity of the Company in this important yearof a turnaround and growth for value and by including the decision of the Company of seeking liquidity with a strategy for products that Maurício has described on several opportunities. Thatmeans we have a positive combination for the Company throughout the new quarters.

Estela Strano, JPMorgan:

Good afternoon. Thank you for taking my question. My question, once again, goes back to the portfolio and a normalized portfolio after the restructuring stage. Here is still in a period of testto find the ideal product, and you are working on pricing. I would like to explore with you which will be the duration of your portfolio and what we should expect going forward which is the target level for the Company? And if you could speak more about the churn as part of this new portfolioin quotation marks, which is a churn that the Company is pursuing.

Carlos Vasques:

Hello Estela, this is Carlos Vasques. When it comes to the target portfolio, we want to find a balance of early on through a good strategy of products that we have already mentioned. The first goal, of course, is to stabilize the portfolio. And secondly, to growth. These are the 2 stages that we are pursuing. We are speaking about a fine tuning that we are going to carry out. Maurício spoke about the regionalization strategy, having more offers so that we can use therelationship with potential beneficiaries, and we are working so that this will be materialized.

Regarding the churn rate, we do have an ongoing process of revision within that front of operational efficiency. One of the pillars depends on servicing and contact with the customerday after day.

We have devoted time to review those processes, inefficiencies of 2 or 3 contracts to be able to engage a client, the situation of retention. This is one of our operational efficiency pillars, to be closer to the client. We observed the churn nowadays, and we are working so that it can bebetter than it is today. We do not foresee a worsening.

Maurício, if you want to add something.

Maurício Lopes:

If you allow me, Estela, there are several facets here. One of the facets of your question is that any wholesale portfolio, especially portfolio, where we have Affinity or 2 or 3, 4 lives. The dynamic of this portfolio is to be able to stick in quotation marks a portfolio. As soon as you havea good subscription for it, does this mean those portfolios that have taken their product off the shelf to review the distribution strategy with HMOs.

Conference Call Transcript

3Q23 Results

Quali (QUAL3 BZ)

November 10, 2023

Those portfolios will undergo fine-tuning if they do not have good acceptance. If they have good acceptance and good distribution they will have a high reduction of claims. As the claims fall,they will be reduced, and so will the churn be reduced.

So we are going to see how the products are being worked on. We will see which is the acceptance. We have to have something balanced in the portfolio and as the subscription is good, we will improve the portfolio. This is what we have attempted to speak about with theHMOs. And in the final account, we will have more result.

This conversation began approximately 2 months ago. The first results are good. We have new products to put in the portfolio. They are not the products we want, but we do see a reaction. And this reaction will be fast if we are able to show that we have good underwriting and a channel that will generate value for the client and not only for the channel. The channel cannot exist onlyfor the channel, we need to bring profitability for the sector.

And this is what we are trying to build because of the tradition of Quali, and because of the teams, this is what will make a difference. And this shows you how important it is to have arobust portfolio for us and for the HMOs, not only to benefit the client and to benefit Quali.

Operator:

The question-and-answer session has ended here. Once again, we will give the floor to Mr.Maurício Lopes for the closing remarks.

Maurício Lopes:

I would like to thank all of you once again for attending this call. Thank our employees who are here supporting our management. And I would like to conclude by saying the 4 same things Isaid in the previous call.

Among the several doubts that I have and among the difficulties we are going to undergo, I have some certainties that have not changed after 3 months; the certainty that we will build a strategic plan up to the level of this company, we will have an effective relationship with the sector to benefit the client; we will proceed quickly through operational efficiency and capital allocation.

With these 4 certainties, I am sure that very consciously and diligently in the 4 months, we are going to put in practice our strategy. I thank the team, the Board of Quali in this journey that hasbegun just a few months ago.

Thank you, and have a good weekend.

Operator:

We would like to thank all of you for your attendance at the earnings release webcast for Quali.The call ends here.

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Conference Call Transcript

3Q23 Results

Quali (QUAL3 BZ)

November 10, 2023

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