Qualicorp : Dados Econômico-Financeiros

Third Quarter 2023 Results

Third Quarter 2023 Results

São Paulo, November 9, 2023. Qualicorp Consultoria e Corretora de Seguros S.A. ("Quali" or "Company") (B3: QUAL3), a leading full-service healthcare benefits broker, administrator, and health management services provider in Brazil, announces its consolidated results for the third quarter of 2023 (3Q23) and first nine months of 2023 (9M23). The operating and financial data are presented on a consolidated basis in Reais ("BRL" or "R$"), in accordance with Corporate Law and regulations of "Comissão de Valores Mobiliários" - CVM. The figures as well as their historical series are available in MS Excel format on the website ri.qualicorp.com.br.

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Free Cash Flow: R$113.7 million in 3Q23 (+2.3x vs. 3Q22) and R$402.2 million in 9M23 (5.6x vs. 9M22), with cash commissions (CAC) of R$35.9 million in 3Q23 (-32.5% vs. 2Q23).

Lives Portfolio: 845.6 thousand Affinity Health lives in 3Q23 (-9.0% vs. 2Q23), with organic gross adds of 56.9k lives and 140.3k cancellations (50 bps improvement in churn rate vs. 3Q22). SME portfolio of 94.3k lives in 3Q23 (+2.7% vs. 2Q23).

Net Revenue: R$443.2 million in 3Q23 (+1.9% vs. 2Q23), with improvement in average ticket and stable take-rate; Revenue of R$1.335,5 million in 9M23 (-10.9% vs. 9M22).

Adjusted EBITDA: R$199.8 million in 3Q23 (+2.6% vs. 2Q23), with 45.1% margin (+30 bps vs. 2Q23) and R$604.9 million in 9M23, with 45.3% margin (-290 bps vs. 9M22).

Adj. EBITDA (-)CAC: R$163.9 million in 3Q23 (+15.8% vs. 2Q23, +14.0% vs. 3Q22), with 37.0% margin (+440bps vs. 2Q23), and R$451.5 million in 9M23, with 33.8% margin (+350bps vs. 9M22).

Net Income: R$-54.2 million in 3Q23, or R$14.8 million excluding non-recurring effects (+4.6% vs. 2Q23 and -70.3% vs. 3Q22); R$-23.8 million in 9M23 (or R$48.8 million adjusted).

Net Debt: R$1.26 billion in 3Q23, -5.0% vs. 2Q23, equivalent to 1.53x Adjusted EBITDA LTM, vs. 1.55x in 2Q23 and 1.52x in 3Q22. Cash and equivalents above R$1 billion at the end of Sep/23.

Key Indicators (R$ MN)	3Q23	YoY	QoQ	9M23	YoY
Affinity Portfolio (thous. lives)	2,173.6	-12.3%	-6.4%	2,173.6	-12.3%
Affinity Health (thous. lives)	845.6	-20.4%	-9.0%	845.6	-20.4%
Gross Adds - organic (thous. lives)	56.9	-45.4%	-25.7%	197.1	-40.7%
Churn (thous. lives)	(140.3)	-21.7%	28.7%	-356.6	-19.7%
Net Revenue	443.2	-12.6%	1.9%	1,335.5	-10.9%
Adjusted EBITDA1	199.8	-14.9%	2.6%	604.9	-16.2%
Adjusted EBITDA Margin	45.1%	-120 bps	30 bps	45.3%	-287 bps
Adj. EBITDA (-) CAC	163.9	14.0%	15.8%	451.5	-0.5%
Adj. EBITDA (-) CAC Margin	37.0%	863 bps	444 bps	33.8%	353 bps
Net Income	(54.2)	NM	NM	(23.8)	NM
Adjusted Net Income	14.8	-70.3%	4.6%	48.8	-72.3%
Free Cash Flow	113.7	127.7%	-23.3%	402.2	457.7%
Net Debt	1,258.0	-15.7%	-5.0%	1,258.0	-15.7%
Net Debt / Adj. EBITDA LTM	1.53x	0.01x	-0.02x	1.53x	0.01x

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More choices for you.

More Quali for your life.

Management Highlights

Quali remains aware of the still complex moment for the healthcare sector and finds in this scenario a favorable situation to proceed with the adjustment in its strategy, with the objective of rescuing a value generation proposal in its business, after a search for growth over the last few years. As part of the current strategy, the company continues to focus on efficiency in the capital allocation, optimizing the CAC and generating free cash flow, resulting in lower net debt, and achieving a cash position above R$1 billion at the end of the third quarter. In recent months, we have also begun a rapprochement process with strategic partners and other stakeholders, looking for levers to revitalize the Affinity segment, seeking a better return on sales incentives, and with actions that reinforce Quali's leadership role as a Benefits Administrator.

Among the priority subjects for Quali in the short term, we highlight: 1) a focus on operational efficiency in order to recover margins and increase cash generation; 2) a commercial policy review with rationalization of incentives and the search for greater alignment of the remuneration model in the health plan distribution chain; and 3) evolution in the product innovation and health management fronts, which involve more intense actions by Quali in controlling loss ratios and with greater rigor in lives acceptance, as well as revitalizing the company's portfolio by offering plans that are better aligned with the new market reality and with the beneficiaries' needs.

On the efficiency front, the work over the last three months was focused on organizational restructuring efforts, with the rightsizing of structures and teams, as well as a wide-ranging review of contracts and expenses in all the Company's areas, with targets of lowering costs. The practical actions already implemented to date include: i) a reduction of around 20% in the Company's headcount in 3Q23 (and -25% compared to the end of 2022), with positions closed in several commercial and administrative areas that brought our structure back to the size of 4 years ago (around 1,900 employees in Sept/2023 versus 1.950 in the end of 2019); ii) divestment of Escale, according to the Material Fact of November 6, with a negative accounting effect of R$96.3 million on the income statement, but with a residual cash inflow of R$29.7 million in 4Q23, in addition to the expectation of reducing expenses; iii) reassessment of the physical structure for employees with objective of optimizing occupancy costs; iv) closing of Quali's customer service physical locations, prioritizing digital channels; and v) changing the main leaders in the Commercial and Products areas, with the arrival of professionals with experience in insurers and healthcare operators that complement the expertise of the professionals who remain at Quali.

The work already done should bring savings of at least R$120 million in annualized expenses, with a restructuring cost that was partially accounted for in 3Q23 (R$7.6 million in severance costs). In addition, and on top of the savings already implemented, there are new efficiency opportunities being identified that possibly can, over the next few quarters, bring improvements in variable costs. Also, on the capital allocation and commissions fronts, we are testing the elasticity of sales x CAC per

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life, moving away from a "one size fits all" remuneration policy in the channel to greater segmentation of CAC by product type, price range, and by region.

Moving on to the operating and financial results, it is important to remember that the third quarter seasonally concentrates the highest volume of contract renewals in our Affinity portfolio. And that the high loss ratio resulted in 30% average price increase to our portfolio, the highest ever applied in Quali's history. Despite the record readjustment, we saw a slight improvement of 50 bps YoY in the churn rate this 3Q23 (to 14.7%), because of retention efforts and with a gradual improvement in the sales mix.

We also observed a deceleration in gross additions that were 56.9 thousand lives in Affinity Health, as a result of a lower product offering and the restructuring of Quali's commercial teams, which momentarily reduced the focus on sales. Thus, due to seasonally high churn and lower sales, our main portfolio showed a sequential reduction of 9% in 3Q23. However, an improvement in the average ticket and the take-rate's stability resulted in a 2% growth in revenue compared to the previous quarter. On a year-on-year basis, the 12.6% drop in net revenue still reflects the take-rate drop of around 200 bps, while the increase in ticket compensates for practically all the volume loss in the portfolio.

Another positive highlight in the quarter was the slight 30 bps QoQ expansion in the Adjusted EBITDA margin to 45.1%, remaining in a relatively stable level (at "mid-40s") since the beginning of the year, and which does not reflect recent restructuring efforts yet. Moreover, when we subtract sales commission disbursements (cash CAC) from EBITDA, we arrive at an "Adj. EBITDA - CAC" indicator of R$163.9 million in 3Q23, which showed growth of 15.8% QoQ and 14% YoY. Our "Adj. EBITDA - CAC margin" was 37.0% in the third quarter, compared to 32% in the first half of 2023 and around 31% in 2021 and 2022, without considering the high costs with acquisitions (M&A) in these previous years. Our net income was negative by R$54.2 million in 3Q23, impacted by the write-off of Escale and by restructuring expenses, but grew 4.6% to R$14.8 million when adjusted for these non- recurring effects.

In addition, we generated operating cash flow of R$114 million in 3Q23, following efforts to optimize commissions and to normalize working capital. In first nine months of 2023, cash flow generation exceeded R$400 million, which is 5.6x higher than the cash generated in 9M22 and more than double that of the cash flow for the full-year 2022. As a result, our indebtedness level (net debt/Adj. EBITDA) remained stable at 1.5x.

As mentioned before, we will continue throughout 2023 to dedicate ourselves to expenses control, with discipline in capital allocation and searching for new products, in order to face the current sector situation in the best possible way. In parallel, and with important reinforcements in its Management, Quali will continue to seek value-generating levers for medium and long-term to reinforce its competitive differentials as a leader in the Benefits Administration segment. And, together with its partners, it will continue to work towards the sustainability of the healthcare sector.

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Lives Portfolio

Lives Portfolio

Portfolio	3Q23	3Q22	Var. YoY	2Q23	Var. QoQ	9M23	9M22	Var. YoY
Affinity Health Lives
Total Portfolio (BOP)	929,016	1,132,353	-18.0%	961,468	-3.4%	1,005,090	1,169,061	-14.0%
(+) Gross Adds	56,901	104,123	-45.4%	76,596	-25.7%	197,103	332,439	-40.7%
(-) Churn	(140,340)	(179,267)	-21.7%	(109,048)	28.7%	(356,616)	(444,300)	-19.7%
(+) Portfolio Acquisition	-	5,508	NM	-	NM	-	5,517	NM
New Lives Added (net)	(83,439)	(69,636)	19.8%	(32,452)	157.1%	(159,513)	(106,344)	-33.3%
Total Portfolio (EOP)	845,577	1,062,717	-20.4%	929,016	-9.0%	845,577	1,062,717	-20.4%
Affinity Other (Massified)
Total Portfolio (BOP)	441,793	529,144	-16.5%	452,894	-2.5%	496,423	538,936	-7.9%
New Lives Added (net)	(90,272)	(18,432)	389.8%	(11,101)	713.2%	(144,902)	(28,224)	413.4%
Total Portfolio (EOP)	351,521	510,712	-31.2%	441,793	-20.4%	351,521	510,712	-31.2%
Affinity Portfolio	1,197,098	1,573,429	-23.9%	1,370,809	-12.7%	1,197,098	1,573,429	-23.9%
Corporate	243,621	236,913	2.8%	228,656	6.5%	243,621	236,913	2.8%
Gama	638,585	586,051	9.0%	629,707	1.4%	638,585	586,051	9.0%
SME	94,311	82,641	14.1%	91,831	2.7%	94,311	82,641	14.1%
Corp., Gama and SME Portf.	976,517	905,605	7.8%	950,194	2.8%	976,517	905,605	7.8%
Total Portfolio	2,173,615	2,479,034	-12.3%	2,321,003	-6.4%	2,173,615	2,479,034	-12.3%

Quali ended 3Q23 with a portfolio of 2.17 million lives, 6.4% lower than previous quarter, mainly due to the 12.7% QoQ decrease in the Affinity portfolio, which was only partially offset by a 2.8% QoQ growth in other segments (Corporate, SME and Gama). In the YoY view, the total lives portfolio decreased 12.3% compared to the third quarter of 2022, due to 23.9% drop in Affinity portfolio and the growth of 7.8% in other segments.

Affinity Portfolio

We presented a 9.0% decrease QoQ in 3Q23 in our main portfolio, the Affinity Health Lives segment, with net losses of 83.4 thousand lives. There was a deceleration in gross adds to 56.9 thousand lives in the quarter (-25.7% QoQ and -45.4% YoY) due to: i) the restructuring process implemented during the period, in which several leaders in the commercial area were replaced; ii) lower product offering by the HMOs in the segment; and iii) the continuation of the strategy to rationalize incentives/commissions in the broker channel.

In turn, we had cancellations of 140.3 thousand lives in 3Q23, an increase of 28.7% QoQ due to the seasonal effects of the price readjustment concentration, but with a 21.7% YoY reduction after greater retention efforts. As a result, our churn rate in 3Q23 was 14.7% of the average base for the period, a 50 bps improvement over the 3Q22 churn peak.

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In the Other Affinity portfolio, which includes massified plans (mainly dental), we had net losses of 90.3 thousand lives in 3Q23 (-20.4% QoQ and -31.2% YoY), largely in line with the decline in the main portfolio.

Corporate, SME and Gama Portfolios

Our SME plans portfolio increased 2.5 thousand lives in 3Q23 compared to the previous quarter (+2.7%). In the YoY comparison, the SME segment had net adds of 11.7 thousand lives (+15.0%) and ended the quarter with 94.3 thousand lives.

Our conventional Corporate segment portfolio presented a 6.5% increase QoQ and 4.4% YoY to 243.6 thousand lives in 3Q23. Meanwhile, Gama's portfolio, our health management business, expanded 1.4% QoQ and 9.0% YoY, ending the quarter with 638.6 thousand lives.

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3Q23 Results

3Q23 Results

Income Statement (R$ MN)	3Q23	3Q22	Var. YoY	2Q23	Var. QoQ	9M23	9M22	Var. YoY
Net Revenue	443.2	507.1	-12.6%	435.0	1.9%	1,335.5	1,498.3	-10.9%
(-) COGS and SG&A	(209.8)	(230.4)	-8.9%	(204.5)	2.6%	(630.2)	(678.5)	-7.1%
(-) Contingencies and Legal Exp.	(13.3)	(6.8)	94.9%	(9.0)	47.8%	(27.9)	(23.0)	21.1%
(-) Bad Debt Provision	(27.7)	(26.2)	5.5%	(25.0)	10.6%	(78.4)	(75.4)	3.9%
(+/-) Other Oper.	(97.1)	(9.9)	884.5%	(2.3)	NM	(104.1)	(5.0)	NM
EBITDA	95.3	233.8	-59.2%	194.1	-50.9%	495.0	716.4	-30.9%
EBITDA Margin	21.5%	46.1%	-24.6 p.p.	44.6%	-23.1 p.p.	37.1%	47.8%	-10.7 p.p.
(+/-) EBITDA Adj.	104.5	0.9	NM	0.7	NM	109.9	5.3	NM
Adjusted EBITDA	199.8	234.7	-14.9%	194.8	2.6%	604.9	721.7	-16.2%
Adjusted EBITDA Margin	45.1%	46.3%	-120 bps	44.8%	30 bps	45.3%	48.2%	-287 bps
(-) D&A	(120.9)	(106.3)	13.7%	(114.3)	5.8%	(349.9)	(303.2)	15.4%
(+/-) Fin. Inc. (Exp.)	(54.5)	(53.3)	2.2%	(56.4)	-3.4%	(177.7)	(145.9)	21.8%
(-) Income Tax./Social Contrib.	27.3	(22.9)	-219.7%	(8.0)	-443.3%	14.5	(87.7)	-116.5%
(-) Minority Interest	(1.4)	(2.1)	-29.9%	(1.8)	-20.4%	(5.7)	(6.9)	-17.9%
Net Income Controling	(54.2)	49.2	NM	13.7	NM	(23.8)	172.7	NM
Net Margin	-12.2%	9.7%	-21.9 p.p.	3.2%	-15.4 p.p.	-1.8%	11.5%	-13.3 p.p.
Net adjustments to EBITDA	69.0	0.6	NM	0.4	NM	72.5	3.5	NM
Adjusted Net Income	14.8	49.9	-70.3%	14.2	4.6%	48.8	176.1	-72.3%
Adjusted Net Margin	3.3%	9.8%	-6.5 p.p.	3.3%	9 bps	3.7%	11.8%	-8.1 p.p.

In this 3Q23, Quali presented an 1.9% increase in its net revenue vs. 2Q23 and +11.1% vs. 2Q23 due to higher average ticket that offset the drop in customer base. On a YoY basis, however, net revenue fell 12.6%, mainly due to the reduction in the Affinity Health take-rate (over billed premiums).

Adjusted EBITDA grew 2.6% QoQ with a 30 bps improvement in Adjusted EBITDA margin to 45.1%, following the revenue growth and a reduction in recurring COGS & SG&A. On a YoY basis, Adjusted EBITDA was 14.9% lower YoY, with a 120 bps margin contraction, mainly due to: i) operational deleveraging resulting from revenue decline; and ii) increase in contingencies and other variable expenses related to the total premium billed.

Net income was negative R$54.2 million in 3Q23 due to: i) lower revenue/Adjusted EBITDA in YoY vision; ii) 2.2% YoY increase in net financial expenses; iii) 13.7% YoY and 5.8% QoQ growth in Depreciation & Amortization expenses, mainly related to sales commissions; and iv) R$63.5 million write-off (after tax) related to the disposal of Escale.

In the first nine months of 2023, we reported net revenue of R$1.34 billion (-10.9% YoY), Adjusted EBITDA of R$604.9 million (-16.2% YoY) and 45.3% Adjusted EBITDA margin (-290 bps YoY), as well as a net loss of R$23.8 million.

On the following pages we comment the main variations over income statement, balance sheet and cash flow lines.

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