Operator:

Ladies and gentlemen, and thank you for holding. Welcome to Quali's conference call to discuss the results for the 4Q23. Present with us today are Mr. Mauricio Lopes, the Company's CEO; Carlos Vasques, Investor Relations Officer and CFO; and Mr. Eduardo Garcia, Investor

Relations Superintendent.

Bear in mind that some statements in this webcast may be forward-looking statements. Such statements are subject to known and unknown risks and uncertainties that may cause such expectations not to be fulfilled or differ materially from what was expected.

This event is being broadcast simultaneously and participants will be in listen-only mode during the Company's presentation. Ensuing this, we will go on to the questions and answer session, when further instructions will be provided.

I would now like to give the floor over to Mr. Mauricio Lopes who will begin the presentation.

Mauricio Lopes:

Good morning, everybody. It's a pleasure to speak to you today, analysts, investors and Qualis that follow up on this conference and make things happen.

I would like to highlight that we have not had any change in the dynamic of the sector nor change in the plans set forth in previous quarters. The planning was done, the turnaround has been structured, and we continue to execute the planning presented to the Board of Management very diligently.

We have a focus on capital allocation, whether it is debt, cash allocation, CAC allocation. We are testing the validity of CAC, in the retail market, there is more compression. And we try to understand the point of balance of the CAC vis-à-vis the products we have to sell.

Along with this, we are seeking a new level of internal efficiency to have a company giving us more results. After the restructuring, we have carried out a rightsizing in the Company, and we are now working based on science to understand the pockets of profitability we have now reached. And we are also designing a product portfolio.

Quali has the best sector in the market in SME and with our existing products, although we still think the portfolio is below what we will have in the future.

If we look at the dynamic of the sector as a whole, we still suffer pressure because of the product, the difficulty in cash and so on and so forth. But in this scenario, we have been able to have new possibilities of products, new possibilities for operators that are less incumbent, and this can enhance our sales performance.

This is the portrait of retail going through a very strong restructuring and Quali is the Company with the greatest resilience in this sector. We remind you that the retail structure sustains most of the operators but we do want to have a very good portfolio with more than 100 operators and more than 400 entities that we work with in this structure.

We are convinced that we are the protagonists of the restructuring of the sector, the restructuring of the retail market, and we are going to lead the changes that are necessary to favor the sector.

I would now like to give the floor to Carlos Vasques to speak about the results, and I am at your disposal for questions at the end.

Carlos Vasques:

Thank you, Mauricio. Good morning, everybody. I am going to refer to the figures in the Company, what we attained in the 4Q.

The Company reported total net revenues of R$414 million in the 4Q, a reduction of 6.6% quarter-on-quarter due to a reduction of the Affinity portfolio, with a reduction of 6.9% in the quarter, ending the year with 785,000 beneficiaries. We had 2,000,103 clients in the portfolio, a drop of 21.7%. Year-on-year, we began with 1,005 million clients in the portfolio. But what is important to say is that thanks to the sale of 245,000 lives and a churn of 462,900, a churn of 50%, which is still quite high considering the normalized market rate.

The net revenue totaled R$1,749.9 billion, a reduction of 10% year-on-year because of the customer base with a reduction of 21.7%, partially offset by the increases of price readjustments during the year.

To speak about costs and expenses, the Company in the 4Q had expenses totaling R$244.7 million, but that represents 0.6% increase quarter-on-quarter, and if we look at the accrued figure, minus 5.1% year-on-year. If we look at quarter-on-quarter, we already observed a reduction of 12%.

Fixed expenses totaled R$138.2 million. When we analyze that table below and observe the package of costs, we can see a reduction very clearly, 12% year-on-year, and we believe that in the coming quarters, that trend will continue on because of all of the activities that are being carried out in the Company.

We remind you that this does not pertain necessarily to the 4Q. We are going to look at all of the impacts because the actions began in the 2H23.

We look at variable cost, totaling R$106.5 million in the 4Q, consuming 25.6% of revenues on our recurrent base, 23.7%. This is a front that involves the new models that are being set in place and discussed with the partners throughout the period.

It's a redesign of what should be done. Therefore, we have several conversations with the channels, with quantities with the brokers, and this is a front that is underway, and it is a point of attention for the Company management. We do hope to have good behavior here throughout 2024, on that front of variable expenses.

As part of variable expenses, we have the PDD. And what I would like to highlight here are two events in the quarter, one that we decided, it was a one-off event due to a migration of systems for the invoicing of the Company where the management adopted the necessary measures for situations such as that one, partially migrating the systems-only part of the Company to beginthe turnaround. And this has been done gradually compared to other strategies that could increase the risk in the operation. We carried out that migration last year, we did face challenges. And that is why we have that provision highlighted as being nonrecurrent and representing R$30 million.

In the second effect that you can see on the graph, the R$106.5 million. This refers to the R$8 million that originates from the review of clients in the Gama Group. We had already seen a very high credit risk. Therefore, we decided to interrupt some services to have a healthier credit conditions through the coming quarters.

If we look at the Company EBITDA, the Company posted an adjusted EBITDA of R$169.7 with a 40.9% margin. That still is not the standard that we desire. We are heading towards our standard. Notwithstanding this, the efficiency strategy of operational cost as well as discipline in capital allocation have enabled us to generate a CAC EBITDA of R$137 million with a 33% margin, which is a much healthier margin.

The performance quarter-on-quarter reflects the base. And we hope that throughout the period, this will be regauging the investments in the different channels, enabling us to grow in a sustainable fashion.

Now, look at our effective cash generation in the Company. The Company ended the quarter with R$109.4 million of free cash flow. This is the cash flow before amortization, before taxes and before dividend. I would like to highlight that in that quarter we paid the interest rate of debentures amounting to R$511 million. These are interest rates paid every half of the year.

Now, if we look at the accrued figures, we see a company that generated R$511 million for the year. This R$511 million were used to pay R$235 million in expenses for net interest rate from the financial expenses. This ended up with a final generation of R$576 million, enabling us to continue on with our strategy of readjusting our capital structure, ensuring that the net debt of the Company could end at R$1.220 million.

I would like to add here that we had a material fact in the last few days for a new fundraising carried out by the Company of R$200 million. This is part of the program for the reduction of debt that is underway, and we believe that this will reinforce the Company liquid. It is significantly so that we can have security during this process of implementing the turnaround plan that we have been discussing with you broadly.

With this, we would like to end the main highlights of the financial part, and we would now like to open the floor for questions and answer.

Yan Cesquim, BTG Pactual:

Good morning. I have two questions at my end. The first refers to dividend. Which is the outlook for the payout in 2024? If you are expecting a payout with your minimum levels of 25% or if you are thinking about something different.

And the second question is about your budget plan. Has it been approved at the Board already? And if you could give us more color in terms of your budget, if it contemplates a stable base of members during the year or any other comments that you may add. Thank you very much.

Carlos Vasques:

I am going to begin here speaking about dividends. The dividends were paid in the 4Q, representing R$23 million approximately. These dividends come from 2022, and they refer to the minimum mandatory dividend. They were part of our balance since last year and management has the obligation to comply with the minimum mandatory dividends. We carried out the payment in December.

Looking forward to 2024, and for this, we have to look at the accounting results of 2023, due to the restructuring cost through time, all of the plans that we have put in place here, this created an accounting loss. We will not have any provision of dividends for 2024, precisely because of these restructuring costs.

Our vision in the midterm is that the Company will be profitable, will be lucrative, it will continue on with its restructuring and reduction of leverage and comply with the minimum mandatory dividend payout. We believe that beginning in 2025, the Company will once again resume the payout of dividends. And of course, once we have results, we will go back to the mandatory minimum dividends. We need to be sustainable in the medium and long-term.

When it comes to the second question, it's on the stabilization of the base.

Mauricio Lopes:

I will tell you what we are looking at, Yan, the base stabilization goes through some drivers. One is what you are doing with your operators and this connects directly with the churn, our capacity to sell our products, and the third is the macroeconomic situation of the country.

In terms of the magnitude of the readjustment applied, it is our perception that the situation is somewhat better than it was last year. In January and February, we have a more balanced readjustment with a lower pressure on churn. We are going to see the readjustment of July. And we will see if the market is somewhat more balanced. We need to follow up on this. We still do not have a response on this.

Regarding sales, as I said, we are testing the resilience of the CAC, to see which is the point of balance, our internal reading is that the CAC is lower than it should be and that is why we are investing more here. If we have a response from sales we will find a better point of balance, for some reason, we do not attain this. We will have to work with a lower CAC without major problems.

And finally, the macro situation, the capacity of payment of families in Affinity or individual plants rather imprecise. We have the internal perception that these 3 elements that we are working with the CAC readjustment with operators and products are being well worked on.

And of course, macro is imprecise. We do not have guidance, but if we could speak about which are the 3 areas we are working on, it is this current, and the third one, we do not control.

Fred Mendes, Bank of America:

Good morning. Thank you for the call. I have two questions here. It has been 7 months that the new management came in for the turnaround. I would like to understand your mindset about the status of the turnaround, are you at the beginning, in the middle or coming close to the end? And along those same lines, where do you see that Qualicorp will head for in the next 2 years? Will it be a company with more SMEs? With more Affinity plans? This is the first question.

My second question is for Vasques, referring to the debt market. You recently worked with debentures of R$200 million, secondary market. If you could give us an updated review and if it's necessary to issue more debentures, how do you consider this market for Quali? Thank you.

Mauricio Lopes:

Fred, thank you for the question. What is it that we decided when the new management entered the Company was that we were going to focus on the fundamentals of the house of back to basics. And then this back to basic, the first thing we looked at was debt, how to restructure this or stabilize the capital structure of the Company, paying out debt and much more.

The faster solution was to work with the rightsizing in-house to have cost more adherent to what the Company sees in the outside market. And I think this has been done, if we think about the internal structure and the structure of our suppliers. Obviously, we cannot do a rightsizing in 1 month and resolve everything in a month.

We can show you and the fixed prices give us a good vision of this. This will improve in the coming months as we grew our gains. We have been able to work with a significant compression that will generate cash and generate results. Of course, there is much more going on. But this was a way of beginning the actions and to take them to giving us results, and that has been done.

When we speak about the debt and with this issuance that we carried out last week, to have an efficient capital structure, the sales dynamic does not matter, the dynamic of the market does not matter, what is important is to have tranquility to be able to navigate through this. So I check the box. This has been done.

What we have been working strongly on is how to generate internal efficiency. One thing is to work with the rightsizing. Another thing is to gain efficiency, to have a better look at our products, and we have been working on this during the last 2 or 3 months, we think we will have positive results. The time to launch a product must be much faster, not 3 or 4 months. The time to train and develop the sales force and commercial partners should not be a long period. It should be done in 30 days.

But in the meantime, we were restructuring the commercial model of the channel. We did this in December and January. We rolled out a new brokerage contract to all of our brokers, aligned with the practices that we want to see in the long-term in agreement with operators. We are requesting assertiveness in the sale, a very early churn. Sales that focus on the clients with a better claim, with a better price product, which means a client that potentially could have a bias in the sales done and where they should have a temporary coverage according to the legislation.

We have been able to roll all of this until the end of January. So this is where we are at, generating efficiency for the Company and realigning the commercial channel.

There is a third moment that will begin in some months which is when we will begin to see the results of our new product portfolio. The market is under greater stress than we would like it to have, and this covers the entire sector. The market, therefore, is in a situation of stress, and it's always more difficult to hold the discussions of having lower prices at different pricing or a market with different possibilities. And this brings ever more complexity to our work.

When we look at our product portfolio and the product portfolio of competition, our SME portfolio is quite full, we have all the right operators. And in the Affinity portfolio, we have 2 or 3 players offering us better prices. We had 15% of average discount, something that began on March 1, and this, of course, will bring about significant changes. We are seeking exclusivity that is important in distribution.

We will have a better control of CAC and the quality of what is being sold. We will have a channel that is more aligned with the Company in terms of what operators are seeking. And this, I believe, is the third phase that is still incipient but should roll out in the coming months.

Regarding the future, well, we see going forward, we are going to redesign the retail segment.

It has always been the segment giving operators the most profitability. It could be scarce in terms of cash, it generates less cash, but generates long-term profitability. This is not something that we saw in previous quarters. So we have to increase the share of SMEs, perhaps individual plans, we are removing the SME for 2 lives in our portfolio because of the complexity and operators have understood this the right place for these clients is in an Affinity portfolio or individual portfolio.

A large operator has already withdrawn these products from their portfolio. So we will have a capacity of distribution in the retail market. We can distribute everything.

And when we look at the take rate of these products, they are all very equivalent. It includes the management spread and much more. So we are in the right position to market all these products, and we are working with the commercial channels and distribution channels to understand this. This is not something that happens overnight, but I think we will have a more balanced company in the midterm.

In the retail sector as a whole, with a focus on Affinity also greater protagonism for SME and products where we have greater exclusivity. It's work in progress, in the full sense of this world.

If I have not addressed your question, Fred, please feel free to ask a follow-up question.

Fred Mendes:

No, that was very clear, Mauricio, as always. I do not know if Vasques could refer to the debt market.

Carlos Vasques:

The Company, Fred, played a significant role in the market. We have a debt that totalizes R$2.2 billion and 100% of our fundraising is devoted to the channel. We saw that, that channel wasundergoing greater stress. We did not agree with the interpretation that was taking place in that type of funding, and that is why we have thought out funding diversity.

We have spoken to our banking partners who follow up on our business, and we have opened up this new front. And this new front, therefore, will be taken out by one of our partners. We are coming closer to the banking sector to convey a message of security to the capital market.

Our process of conversing with the partners has had a higher demand than this volume because we are discussing price, but we cannot see the liquidity. We do not identify problems of liquidity in the transaction. And this operation gives us the comfort that we will have a very low risk of having to roll the debt in the next 2.5 years.

So the Company, therefore, is doing what it used to do in the past, which is to diversify its sources, 100% of the debt was linked to the capital market. We are now working with the banking market. And we think that this operation, given the circumstances, will be better and at a cost that for the time being, would allow us to work with this.

Once again, we have returned to working with the banking market to diversify because in the capital market, the prices were somewhat restrictive. Once again, the Company has liquidity that has been fully reestablished after the cash generation of R$275 million, free cash flow at the end of last year plus this fundraising.

We diversified our channels, and we are going to continue along these lines. We might seek out other channels, and this is a win-win situation for everybody. We will have the banking market, the capital market as well as other fronts that we are conversing with. So we believe that this will enable us to have a better, sound situation when conversing with the capital market.

Gustavo Miele, Goldman Sachs:

Good morning. We have two questions, the first focused on results, perhaps for Vasques. Let's go back to the provisions that you explored in the presentation. When you adjust those nonrecurring effects of R$31 million, we still see those provisions representing 8% of the revenues. It seems to be the highest in the Company since the 4Q21, unless I am mistaken. Is there seasonality in this process? When we look backwards, it seems the 4Qs have higher volumes than other quarters. Perhaps this is due to the higher readjustment that concentrates in the 3Q. Or has there been another event that you could highlight in this more recurrent provision that we see in the 4Q?

And the second question, for Mauricio, a follow-up on a comment he made in the previous question. The duality of the SME and Affinity products, this is one of the discussion we have with the investors, that this placement of the risk and how the category of products seem to be somewhat peculiar when we look at your historical average. So for Mauricio, what is happening with your conversations with operators for the new price of SME products and the individual plans, as you mentioned in the previous question? If you could give us more details, that would be wonderful. Thank you.

Carlos Vasques:

Seasonally, the 4Q does have higher provisions because of the interest rate adjustments, and this has an impact at the end of the year and at the beginning of the year, seasonally, we are stronger in terms of default. The largest effect here is the recurrence. That has to continue to be analyzed, and we have highlighted the one-off events so that this would not hamper your understanding of the business.

The cleanup of Gama, we looked at the portfolio. We had 2 or 3 small operators that had a very high credit risk. The risk was materializing, and therefore, we decided to restructure that portfolio.

Now secondly, one of event that may not have happened in the migration of the system among all of the playbook, we chose a regional company, a small one and expand the system transition vis-à-vis a model that would not place the Company at risk. So this represents less than 5% of the total revenue of the Group, but we did get problems with invoicing.

Once again, this was a one-off effect, and now that we understand that we think there will be more of that seasonal effect and not that one-off effect that was caused by Gama impacting the invoicing of the Company. We should always recall the seasonal effect at the end of the year.

Mauricio Lopes:

If we look at the second point, SME versus Affinity, the structure of distribution of SME in the last few years will lead to difficulties in the risk pool through time. Operators have brought into this risk pool. You know that there is a geographic breadth of the product, whatever the readjustment will be the same. And we have focused on structures that are completely asymmetrical, and this, of course, is not sustainable. And we have been very focused on this agenda with operators.

We have 2 jobs here, technical convincing, which is easier. The discussion is quite simple. If it's not dogmatic and the second more complex part, after the technical convincement, how to alter the route of the operator structure? How can the operator deleverage from this small company and move to Affinity, which is the right place where the contracts of 3, 4 live should be.

It's not a simple task to hold this discussion, but it has proven to have put better reality during the last few months. We have a large operator that in January or February, if I am not mistaken, suspended the SME for 2 live, and there will be followers, 3 to 4 lives will be taken off the shelves in the coming months because this is the right thing to do, if Affinity shows a good sales performance.

And it's not just about selling it, selling in alignment with what the operator and the client want to see, a sustainable portfolio, a sound risk assessment that will allow for a mutual agreement, not working with highly adverse risk.

The better this design, the faster, we can move to Affinity in detriment of SME, and we are at this point in our journey, and day and night, we offer arguments to operators to convince them. I am convinced that this will work. But of course, we still have a few months for this to happen, and we deploy a great deal of energy to this. And we will maintain you updated in terms of the type of product we will work with.

Leandro Bastos, Citi:

Good morning. We have only two questions. First, to speak about products, the remodeling that you are fostering, if you could comment today on the main drivers of your portfolio of products, if you are thinking of co-participation or reimbursement. You said that this is work in progress. So what do you foresee in terms of product design? That is the first question.

The second question, which is your evolution of claims, not only in your portfolio, but for the market as a whole and your partners as well, if you could test the temperature of what is happening there?

Mauricio Lopes:

Two excellent questions, because they explain the short and medium-term trends, which are the two most important points of the structure and the restructuring of the retail segment. This product model at present, with a very broad network, high reimbursements and without co-participation will not be for the long-term for the retail segment. The retail segment cannot deal with this. We will have this in large corporate contracts where we have that mutuality in the contract, that's where we will find this.

It will set aside the retail market for great profit. This was not the case in the past. Well, perhaps it was there in the past. These fundamentals were forgotten, everything was put in the same bag, the retail market and larger groups. And now the time has come to work with a separation once again. Now large operators have co-participation. They have a very low level of reimbursement. But we see still some mix networks and we see very little attention on very broad products.

What have we done so we can work with the operator? We have changed the invoicing of co-participation, which is something that has become ever more prevalent. It did not exist in the past. We believe that we want higher added value for the network. So this will attract the client more. And so the system can be more sustainable.

Hospital products, for example, that are very difficult to sell. We are working with specific campaign to work with these. They have a very low claim level, and they help sell the portfolio.

When we look at the operators in our portfolio that have well-calibrated products, we see more interesting claim levels or the operators on the other hand that have lagged behind in the launch of new portfolios, more aligned with the market needs have shown to have higher claim levels.

So we can work with installments in the contract or have readjustments that are higher than we would like to have. And we have managed this situation as best as possible. We have reinforced the retention team. The retention team has been fully redesigned by the Board of Quali, a senior Board with a very long experience in this, and we have changed the structure.

The structure is robust, discipline that has been trained, and we are working with models where the client has been submitted to readjustments that are higher, and that's why we are creating something more sustainable in the new portfolio and with all stakeholders, whether they are entities, brokers, platforms. We have redesigned the incentive system.

We are preferring our readjustment of portfolios after 12 or 24 months and so on. We did not work with this. We would work with higher rates at the entry and then work with readjustments through the life of the portfolio.

This is not a good direction for those who want to have a permanent portfolio. So we are working with different commissions after the first readjustment, after the second readjustment and so on, successively, which should increase the lifespan of the product. This will help us in terms of permanence, and it is well aligned with what operators want.

We have had a quick reduction in claims throughout this year because of this, for those who have done their homework, and this will be the future of the retail segment. And this is what we have to focus on in product portfolio.

Felipe Amancio, Itaú BBA:

Good morning. Thank you for taking my questions. The first question was already asked by our colleagues. If you could remark on your mix compared to previous years, do you think that the vertical products continue to be important or not in your new sales?

The second question, if you could give us an update on the Company initiatives to help enhance the visibility of the quality and the claim of the portfolios that you are offering to operators. Thank you very much.

Mauricio Lopes:

In the growth adds, I cannot comment because it's not stable. We have put all of the contracts and the brokerage until the end of January or February. But we still do not understand how the channel is going to respond to this new model of contracting, and we are making changes.

What are we doing in the Company? We had a structure that was one-size-fits-all, in the North, West, East and South. Regardless of the product being premium or not, the channel was compensated in the same way. We have now worked with a third change in the last 7 months. The commercial team, the commercial managers and the brokers, they have compensation structures for Affinity that will change by type of product, type of operator, early churn, early claims and the use of our service channels.

These were some of the dimensions, and this is still very unstable. We truly do not know what will happen, but we think that we have ascertained in terms of our changes. And at the end of the 2Q, if you could please ask that question, again, I think we will be able to give you a better answer with a better interpretation and to say the mix is 80% Affinity, 20% SME or 60%, 40%, São Paulo, Bahia.

Today, we still have a great deal of turbulence with great variations month after month. In some months, we have huge increases in one market, decreases in another, and this points to the fact that it is unstable.

Felipe Amancio:

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Qualicorp Consultoria e Corretora de Seguros SA published this content on 01 April 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 01 April 2024 19:25:15 UTC.