Qualicorp : 1Q22 Conference Call Transcript

Conference Call Transcript

1Q22 Results

Qualicorp (QUAL3 BZ)

May 11, 2022

Operator:

Good afternoon, ladies and gentlemen, and thank you for holding. Welcome to the Quali webcast to discuss the results of the 1Q22. Present with us today are Mr. Bruno Blatt, the CEO, Mr. Fred Oldani, Chief Financial and Investor Relations Officer. Mr. Elton Carluci, Vice-President for Commercial, Innovation and Business.

Some statements in this webcast may be projections or statements about future expectations. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause them not to materialize or to differ materially from what was expected.

This event is being broadcast simultaneously over the Internet at ri.qualicorp.com.br, where the respective presentation is available.

We would like to inform you that this event will be recorded and that the participants will listen to the webcast during the Company presentation. Ensuing this, there will be a question and answer session when further instructions will be given.

I would like to give the floor to Mr. Bruno Blatt, who will begin the presentation.

Bruno Blatt:

A good morning to everyone. It has been a little more than 40 days since I was here presenting the results for the year 2021. We are here again together to share our results, our achievements and our evolution.

I am coming from a big event in Bahia with more than a thousand brokers and partners from all over Brazil. This event, after two years of pandemic, served to celebrate our commercial achievements.

We have changed levels. We are now able to sell half million lives a year. It was great to see the sales champions of Tamo Junto Corretor program celebrating the highest number of sales in the Company's history. Yes, these were days to celebrate, as we said, but there were also days of hard work to ensure that 2022 will be as remarkable as 2021.

We have finally returned to the office after two years of remote work during the pandemic. The Qualis have now gone back to live their day to day life. Our headquarters in Sao Paulo moved to Av. Paulista, a symbol of city. We also have a new delivery, a new office in the historic center baptized Qualicity, on the street 15 de Novembro, a symbolic landmark of the birthplace of the activities of both the Company and the health insurance brokers.

Conference Call Transcript

1Q22 Results

Qualicorp (QUAL3 BZ)

May 11, 2022

The building, which was completely renovated and restored, serves as a co-working space for Quali employees, and as a relationship point with the broker channel. We can speak about products, campaigns, market and events to boost our sales, of course.

In Rio de Janeiro, we inaugurated Qualistage, the former Metropolitan, a venue for major cultural celebrations in the capital city of Rio de Janeiro. This will strengthen our brand and bring us closer to the consumer market.

We have also launched Qualiclass, yet another proof of our spirit of innovation and our vocation to take care of lives. Qualiclass is much more than a health concern service, it is a quality health management that is integrated and multidisciplinary, and we have the possibility of offering more chances of cure and better quality of life.

Now, Qualicity, Qualistage, Qualiclass, Qualiviva, Qualistore, Qualiseguros, Qualivendas, they are not just acronyms. They are deliverables. They are concepts transformed into reality. That is why I speak about a company that is ever more solid, that works with a vision for the future. Each delivery requires planning. An integrated, cohesive team led in the direction of doing the right thing for our shareholders, our employees, and our clients. To think in the short term is to disregard the importance of our business and its huge potential.

It is never too much to remember that one of the biggest dreams of every Brazilian is to have a health plan. And we are here for that. The crisis we are living in the world and in Brazil is not news for any of you. It is a hindrance to the Company, including ours. The return of inflation, the increase of unemployment, default and interest rates are problems for everybody.

The pandemic is not over yet. We cannot stop for one minute to look and try to understand the world we are living in. This scenario still impacts us with a significant number of cancelations.

With all the deliveries made, plus the case by case follow up, we are starting to show results. In the 1Q22, we had a reduction of cancelations of 12.7% over the previous year and 16.9% over the 4Q21. This brings the churn to the lowest level in the last five quarters. We are still not satisfied. We look at this daily to be convinced that we are on the right track.

In sales, we had gross add-ons of 115,200 lives, respecting the typical seasonality of the quarter and reflecting the omicron challenges at the beginning of the year. Despite this, we had a growth of 15% over the 1Q21. Thus, we continue to converge towards our goal of presenting organic growth in our subscription portfolio.

With our growth pillar in mind, we continue expanding our portfolio of HMO. We have added 67 new HMO, we have signed new partnerships in several cities around the country. We have Unimed Guarulhos, Sulmed in Porto Alegre, and São Cristovão in São Paulo, besides expanding the offer of new products of the current operators in our portfolio.

Conference Call Transcript

1Q22 Results

Qualicorp (QUAL3 BZ)

May 11, 2022

When I see a company capable of making these deliveries that is lighter, more open to diversity, more ethical and happier, I thank the team we were able to form and the image we were able to build in a country so lacking in correct examples. A team that transformed the Company, which today is multi-product,multi-channel. A platform ready to ensure a bigger and better company. Congratulations, Quali.

We have 200 Qualis listening to us, and this simply reinforces the passion for our Company. We have problems in common, we have problems in that country, and they are able to lead us to better times. We are ready for these new times so that we can grow in a sustainable way in any scenario. This is and has always been the focus of this management.

I would like to thank you for your trust, and I leave other details for our Vice-President, Elton Carluci.

Elton Carluci:

A good morning to all of you. And thank you, Bruno. It is always a pleasure to be with all of you in the earnings release call. I would like to refer to the figures of the 1Q22.

We go straight to the figures, and I would like all of you to go to slide 15, where I will begin speaking about an important point which has had a positive impact on our cost of acquisition. It is our partnership with Escale.

You will all be able to observe that we have had a reduction in the costs this year vis-à-vis the 1Q21, and this is due to a gain in synergies, a reduction of costs, marketing expenses. We did have an important increase in quantity and quality of lives, of course, to service our commercial area, and cost reductions obtained because of this gain and operational efficiency, a consolidation of contracts. We had several contracts that have come about through Escale, and a management that is more focused on leads, always looking at conversion. Our remuneration model is based on conversion through acquisition and not based on the cost of generation of leads.

What I would like to highlight here, and most of you may have noticed, is that there was a reduction in the values of CAC that have been activated. They represent approximately 30%. But I would like to highlight that this level will still stabilize, so this reduction will stabilize at a level perhaps somewhat higher due to the deferment. This should take another two quarters, and around the 3Q, this figure will be normalized and we will have a cost of acquisition at the level that we have planned for the year.

Already taking away that issue of payment deferment, we go on to the next slide to speak about gross sales and the affinity sector. We have already mentioned the figure of 15% growth year on year. We attained this level, even despite the impact of omicron in January and February, which

Conference Call Transcript

1Q22 Results

Qualicorp (QUAL3 BZ)

May 11, 2022

did have an impact on our sales team as a whole. It spread throughout Brazil. We did suffer somewhat from this, but we were able to deliver figures within what we had imagined.

And to give you more color, we already have an impact of Elo. We have been speeding up the sales potential of the HMOs that have come with this management company, and we have confidence that we will reach the levels that we reached last year. The figures of April and may show you that we are within what had been planned, once again, despite the review of the incentives that we undertook.

We now go on to the next topic, which is churn. We have already mentioned this. We are now on slide 17. We have reached the lowest churn in the last five quarters. In the last call, which was very recent, It was mentioned that there was a normalization of the cancelations under request and that delinquency was somewhat higher than the historical levels.

This continues on in this quarter. We have not observed any change in cancelations based on request. They continue to follow the parameters of percentage on the base and readjustments. This has been maintained compared to our historical level, but delinquency continues to be somewhat high, and this is what we also observe with the credit, the bad debts, once again due to the delinquency that continues to have a significant weight in our figures.

We are carrying out a great deal of survey in terms of those who cancel because of delinquency. Of course, the entire Company is focused on addressing this point, and the problems are loss of income, inflation. They are difficult problems and they are causing pressure on delinquency.

We are also using some strategies to try to mitigate this impact, reviewing our terms to be able to pay your bad debts on installments. Those who have canceled can return to quality. We have become more flexible in this, but this continues to have a significant weight.

Another important point, and this will probably be a question in the Q&A, refers to the readjustment of prices. We mentioned this in the last quarter call, negotiations where between 12% and 15%. Some contracts have already been adjusted during that period.

Now, for most of our portfolio that undergoes a readjustment in July, the levels have gone up to 19%, 20%, very close to the readjustments of our partners of SMEs. One of our affinity partners once again is practicing this level.

And before I give the floor to Fred, I would like to quickly refer to our performance in SME. Nothing has changed. We have an expressive growth of 17% vis-à-vis last year. This is a channel with good performance. Of course, they were somewhat impacted by omicron like the affinity group, but in the 2Q, we see that this is very much in line with what we have planned for the year.

Conference Call Transcript

1Q22 Results

Qualicorp (QUAL3 BZ)

May 11, 2022

Very well. I would like to thank all of you for your attention. And without a doubt, I will be back with you during the Q&A. I will now give the floor to Fred.

Fred Oldani:

Thank you, Elton. A good day to all of you. We begin on slide 20. Speaking about the quarter highlights, when it comes to our affinity portfolio, I think that Elton has already referred to this thoroughly. The figures of the 1Q show you that we are converging towards our goal of coming to a positive result in our operation.

We see this with a reduction of cancelation, which is ongoing. It is sequential at levels that are higher than we believe. But we do see a trend pointing to normalization of cancelations as we attain a different sales level, and in the coming quarters this should enable us to meet our target to have more organic growth in the Company.

In terms of net revenue, we had a minor drop in the year on year comparison and in the quarter on quarter comparison. This effect is associated to the portfolio performance and the trade-out movement that we observed in the portfolio. And all of this, of course, has an impact generating this drop in revenue for the quarter.

Our EBITDA reached R$53.2 million. And despite the drop in revenue, the work that we have done in expenses and costs in the past has enabled us to have a slight expansion in margin. Our EBITDA margin reached 50.3% compared to 30% in the 4Q21, and it shows you how important these efforts have been in terms of managing costs and expenses, considering the inflationary scenario and the increase in costs.

We have done very good work holding back our costs. In terms of net income, R$74.1 million. And here we have a significant growth compared to the 4Q21, when we had several nonrecurring effects hampering that quarter.

It is also worthwhile mentioning the negative impact and the increase of financial costs because of the interest rate scenario. When we look at the past, we had very little interest rates. We are now at more than two digits, and of course this will continue exerting pressure on the coming quarters.

Our net debt stands at R$1.4 million, a drop of 7.7% when compared to the previous quarter, a level rage of somewhat less than 1.4x net debt to EBITDA. Our cash flow reaching 66.4 million, a minor retraction when compared to the 4Q21, and we are going to mention this in the coming slides.

In the next slide here, we have our consolidated results. We had that minor drop in revenues with a slight expansion of EBITDA margin, with a very good performance and costs and expenses.