Qualicorp Consultoria e Corretora de Seguros SA

BOVESPA:QUAL3

Earnings Call Transcript 2020-Q3

[Operator]

Good afternoon, ladies and gentlemen, and thank you for holding. Welcome to the Qualicorp conference call to discuss the results for the third quarter '20. We have with us today Mr. Bruno Blatt, the company's CEO; Mr. Frederico de Oldani, the CFO and IRO, Mr. Elton Carluci, Sales Innovation and New Business Manager; and Pablo Meneses, Vice President for Operations and Relationship.

This is -- the -- some of the forward statements made here may refer to the company's assumptions. Once again, all of these represent risks, which means that they may not occur.

This event is also being broadcast live and may be through accessed Qualicorp website, www.qualicorp.com.br/ir, where the respective presentation is also available.

We would like to inform you that this event is being recorded. [Operator Instructions] We will hand the floor over to Mr. Blatt, who will begin the conference. You may proceed, sir.

[Bruno Blatt, executive]

Good afternoon to all of you. And I would like to begin by introducing and thanking our team for their resiliency and for facing out through the challenges.

It hasn't been easy, and we have been dealing with several agendas during these last few months. And despite the pandemic, we continued to do our part. We have invested BRL 13 million in social action and pandemic combat. Besides what we did in the last quarter, we gave out 110,000 disposable masks, many of them for students in the schools in São Paulo. 30,000 rapid COVID tests. And we have set aside BRL 2 million for the TamoJunto fund for the brokers that may be impacted by COVID.

I would like to highlight the effort that we're deploying in the company with important names. We have the arrival of a new operations and service manager, [indiscernible], who in his 23 years of career, has worked in Vivo, TIM and SKY. He is responsible for 300,000 contacts per month through the telephone with our clients. In IR, you know the people we have. He has been for more than 15 years in B2W companies. In business marketing, we have somebody who has been in the company for 20 years and has gone through Vivo, Telefônica and others and is responsible for enhancing marketing operations, artificial intelligence and maintaining and working, supporting the sales operations in the company, responding directly to the Communication and Marketing Director, who is Ricardo.

We created a new Board with [indiscernible] people and culture. She has been through the [indiscernible] and other companies. Besides the traditional contributions in people management, [indiscernible] will continue on with projects for diversity and inclusion that we launched recently. We have an incomparable distribution strength. And we have a new commercial director with a focus on sales, but also with a regional focus to increase our penetration throughout the country. He has 30 years of experience and a very strong link with distribution channels.

I would also like to refer to our cultural transformation agenda. Since the beginning of the year, we have delivered 64 initiatives with a great diversity and 94 of these initiatives are underway besides the implementation of OKRs with, again, our innovation program, Quali, to overcome challenges as these situations have had been set forth in the social field, distance education training models, digital environments for distribution besides the Programa Ideias in health program with new ideas. And Quali also works through the incentive law for culture, carrying out actions. And we teach marketing to prospects and create personalized projects that will reflect our Quali way of being and to offer tangible and measurable goals to the company, of course, enhancing our longevity and our relationship with stakeholders, clients and partners.

We highlight our support to projects such as Museum of Modern Art in São Paulo; the Criar Institute cultural projects fostered by the main client entities; the cancer hospital and the hospital called Small Prince (sic) [ Little Prince ].

Speaking about awards, we're extremely satisfied to share our achievements. We're finalist of Melhores e Maiores from Exame. We won Great Place to Work in the third quarter. And we are champions in Top of Mind for human resources.

We'll speak a bit about financial results. We had sound results in the third quarter, despite all of the challenges. As I have mentioned other opportunities, we're focusing on the agenda for growth and innovation. Despite less adjustments, we reached adjusted EBITDA of BRL 273 million in the quarter, the highest ever attained in the history of Quali because of stringent control of cost and expenses with a drop of 11% year-on-year.

We have a net income over the growth of 18% and a free cash generation of around BRL 200 million. More than 20 products will be launched [indiscernible] expectation that they will attain maturity in the coming quarters. We have point of sales. We have [indiscernible]. We're going to launch campaigns, and of course, relationship with the clients in terms of providing the product. Our strategy continues to be the same. We're going to grow focused on clients, closing product offering gaps and seeking greater regionalization through partnerships and M&A.

In the last 2 months, we did mention some portfolio acquisitions, increasing our foothold in the market. The acquisition of [indiscernible] Fortune 1000 lives. And now the Plural, they show our continuous quest for good assets in different regions. In terms of the Plural acquisition, I would like to share with you some highlights.

Quali's largest acquisition in 8 years with a portfolio of 96,000 lives and average ticket of about BRL 300 with 21 new operators, 79 new entities, 13 branch offices where we did not -- in regions where we did not have offices and 5,000 brokers and 500 platforms, we're not just acquiring client portfolios or increasing our foothold in new regions, we have a very valuable asset, which is the experience and experience of the executives of Plural and other companies with the experience of Quali.

As we communicated in the new way of being of Quali, more than the search for acquisitions and portfolios, we're diversifying our regional growth platform and our diversification of products, we are convinced that this will only be possible with the strengthening of 43,000 brokers and 920 platforms. And of course, we have a great access to health plans for Brazilians.

With this, I would like to give the floor to Elton Carluci who will speak about our main commercial strategy.

[Elton Carluci, executive]

Thank you, Bruno. Good afternoon to all of you. It is a pleasure to be with you in another Quali call. I'll begin speaking about sales and perhaps respond to your main doubt this quarter.

The negative evaluation of number of lives is the result of an exchange of portfolio with one of our main partners in the North and Northeastern region. Because of the pandemic and the rates, it took us 45 days without selling this product, which of course had an impact on the number of lives for the quarter. Now this effect has been readdressed. Throughout the fourth quarter, we observed a recovery, and we believe that beginning in January of 2021, this will have been completely overcome, thanks to the new positioning. We don't deem that there will be any impact in the long-term dynamic because of this replacement of product that caused this temporary effect.

What I would like to highlight that in volume of premiums we sold practically the same volume in the third quarter vis-à-vis the second quarter, which helped us, of course, to sustain our top line. And we were able, through a mix, to sell products with a higher added value, and this helped us maintain our invoicing.

Still speaking about portfolio, as you may have observed, the churn continues to present an improvement vis-à-vis the same quarter in 2019. Now this is a seasonal characteristic because of the adjustments that we have. That is the good news, and it confirms our expectation of an improvement in this indicator throughout the year 2020.

Very quickly, I'll speak about IT and innovation. We're focused on improving our systems. And our data front is quite accelerated more than ever before. We are able to plug in any type of data into our data link. And we have an ultra-robust system. When it comes to data, we work with data scientists, statisticians and developers. And this, of course, is giving us a competitive edge for the long run.

We spoke about the new Quali, an innovation program, where we have 6 priority fronts. We have ambassadors, mentors, everybody aligned with our goals. Bringing in this option into our ecosystem, we hope that in 2021, we will have a strong positive impact in the company, thanks to this program.

A last point before I give the floor to Frederico, I'll speak somewhat more about the Plural acquisition. This is a transaction with extremely low overlap of products. Practically, 90% of the Plural portfolio is made up of operators we had no relationship with. And Plural worked with extremely good planning, because they operate in regions where we were not active. And this should give us a great deal of synergy. The average ticket is of approximately BRL 300. And I would like to underscore that we're strengthening some regions where we already have a presence, and we're opening up a new front for growth in the Northern market, Amazon and Rondônia; and in the Central West, the Federal District, Mato Grosso, Mato Grosso do Sul, where, without a doubt, we will expand our distribution.

Now as part of their portfolio, Plural does not have a heavy concentration on a single operator. And a very interesting highlight is their presence in Unimed. The 21 new operators mentioned by Bruno, 11 are from Unimed, regional operators. And they also have operators that we have in our portfolio, which strengthens our relationship with present day partners. This is a highly synergic operation for the company.

As Bruno mentioned, they have branch offices. We believe that this will aid and abet our distribution channel to continue taking accessible health plans to more Brazilians. And this, of course, reinforces our mission of servicing the different areas of Brazil with an ever more regionalized approach, as we have mentioned in the call, and of course, selling quality products and generating savings for our clients. I would like to wish a great deal of success to the Plural team. I hope they feel very welcome. And from now on, Plural is Quali.

I will now give the floor to Frederico Oldani.

[Frederico de Oldani, executive]

Good afternoon. I'm going to begin speaking about the financial highlights on Slide #9 and speak about the highlights for the quarter.

We begin with lives and speak about the Affinity portfolio with a slight reduction in the quarter. Here, we have 2 factors that are important: the improvement of churn, a significant enhancement of churn, vis-à-vis the last quarter. The third quarter is always the quarter with the highest churn seasonally because of the readjustment. After the price readjustment, we tend to have a great loss of lives. This year, as the readjustment was suspended and because of the activities that we adopted in terms of retention, we have a significant improvement in churn vis-à-vis 2019 and vis-à-vis what we have seen in previous years.

As mentioned, we did have a specific issue of not marketing a particular product during 45 days. We offset this with a better churn and retention, and we do have a slight drop in our medical hospital portfolio. We have the addition of 272 lives that come from SulAmérica that created a relevant growth of 21% in the Affinity portfolio.

We go to the financial results. Net revenue reached BRL 524.6 million, a growth of 8.5%. Adjusted EBITDA of BRL 272.9 million, a 5.5% growth year-on-year. And 200 basis points in EBITDA. Net income, BRL 130.9 million, a growth of 18.1% year-on-year. Now despite the low growth of revenues, we had a good performance in EBITDA for the quarter. And we will speak about what underlies these figures through the presentation.

And finally, highlight the cash flow generation, reaching BRL 195.7 million. Thanks to this, we ended up with very low debt, a bit more than BRL 390 million, approximately 0.45x EBITDA, a relatively low and comfortable level.

We go on to the following Slide #10 to speak about the income statement. First of all, speak about the EBITDA performance, that was driven by a reduction of 24% of SG&A in the quarter now vis-à-vis the same quarter last year. It's important to highlight that despite having had part of the EBITDA growth this quarter because of the savings of expenditures, going forward, we believe that our growth will come from a growth in portfolio and number of lives.

Of course, we do have several fronts for improvement, for efficiency and enhancement in expenses, but we're going to work a great deal in regearing the resources in the company towards growth and innovation front, bolstering the commercial team.

When it comes to growth, we had 18%. 2 important points here: the growth of EBITDA itself; and secondly, what is worth mentioning is the reduction of the effective rate that we had last year. And although we did not have an impact this quarter, at the beginning of the fourth quarter, we began to distribute interest on shareholders' equity. And the intention is to continue to do this every quarter, and this should benefit us in the coming quarters.

The suspension of readjustment for health plans by the National Health Agency had an impact on the figures of this quarter, and we're going to speak about them on Slide #11. When we look at the impact that we had because of the readjustment -- price readjustment, although the readjustment was suspended, what the National Health Agency set forth is that operators and benefit managers should provision revenues for the readjustment as this is due in truth.

And by complying with the issues of competency, the administration has provisioned BRL 32 million of net revenues in the quarter, BRL 34 million in gross revenue. We also had BRL 2 billion in cost and services that were provisioned and that will be due by the partners once we receive this. And the management decided to have a provision for bad debt of BRL 17 million for the quarter, which once again will give us a net effect of BRL 12 million in EBITDA for the quarter.

It's worthwhile mentioning here that the management has decided to be quite conservative in its estimations. Why? Because part of the clients -- when we in truth work with the new prices in January, part of the clients will have left the company. And we're still not sure which will be our capacity to collect from these clients and if we will be able to recompose our capital. That is why we have adopted this conservative position. And it is only the coming year where we will discover the impact.

We go on to Slide #12 to speak about costs and expenses and the performance. It's worthwhile mentioning the drop of 7.3% in the annual comparison in total costs and expenses and nonrecurring effects. The total figure for cost and expenses this quarter is fully aligned with the same quarter last year, although we have that additional provision of BRL 18 million for bad debt. Myself and Bruno have remarked about this, and this is very good for the quarter.

Now if we look at the figures in greater detail, first of all, a reduction of personnel with 2 effects mainly: first, a correction in our accounting since last year with an impact of this payment of expenses between 2019 and 2020. And we can also observe that there was a significant reduction in management remuneration, showing the new levels for this type of expenses going forward. We would like to mention reductions and other important line items, especially third-party expenditures and, in other expenses, the issue of fines relating to the National Health Agency.

During the quarter, we had BRL 4.3 million in nonrecurrent expenses. And of these, BRL 3.6 million in donations for activities to combat COVID. As we had done in the second quarter, we continue on with these activities. They were mentioned at the beginning of the call. And we also had a nonrecurring effect of BRL 1.7 million for the quarter because of betterment write-offs in buildings that we have left during the third quarter.

We go on to Slide #13, which is the last slide of the presentation, to speak about our strong free cash generation for the quarter. As mentioned, it was quite strong of approximately BRL 196 million for the quarter, reinforcing the capacity of our business to generate cash and converting this result in an effective cash generation. We have 2 impacts here that I would like to remark on. First, the negative impact in cash flow of BRL 12 million net of the bad debt because of the suspension of the price readjustment. This is a negative effect.

On the other hand, we had a positive effect, nonrecurring one, that will be reverted in the fourth quarter of BRL 65 million in working capital change because of one operator that delayed the sending of invoices that should have been paid in September and ended up being paid in October. This represents BRL 53 million of gain, a nonrecurring gain for the third quarter. And part of this, of course, will be normalized in the fourth quarter, we hope.

With this, I would like to end my part of the presentation of results for the third quarter, and we would now like to open the floor for the Q&A session.

[Operator]

[Operator Instructions] The first question is from Samuel Alves from BTG Pactual.

[Samuel Alves, analyst]

I have 3 very quick questions. The first is, which will be the invoicing of the companies, if you could disclose this? The second question to understand if the 96,000 lives are part of the Affinity group, the medical hospital Affinity group? And which is the agreement for the purchase of the 25% that remain? Will there be a valuation? Or will you be doing something different in the future?

[Elton Carluci, executive]

This is Elton Carluci. Thank you for the question. Now we purchased this portfolio, most of them are part of an Affinity group. This is the company portfolio. The running rate for invoicing is of approximately BRL 60 million. And we do have a call option in the fifth year, a put call. So basically, this is what has been agreed upon. There is no trigger or anything that will anticipate this trigger, whatever it is the profit or the number of lives.

[Operator]

Our next question comes from Fred Mendes from Bradesco Bank.

[Frederico Mendes, analyst]

I do have 2 questions. The first is more strategic. We know that other operators can do this kind of sales. So what are you thinking of doing in the small- and medium-sized enterprises? The second question, what draws attention is a relevant reduction of BRL 6 million in what is owed to the National Health Agency. I think this is relevant. And I would like to understand if you can work somewhat -- wait somewhat more in this line item.

[Elton Carluci, executive]

Let me speak about small- and medium-sized enterprises, and then we distribute this through our team. We know that some operators, the regional operators, tend to do this. But we are competing with those teams when we have the product. And we have been expanding this strategy, not only offering SME in our base of cancellations. It's something we used to ignore. We were somewhat hesitant in doing this type of offer.

And we have some in our base that are ineligible for this offer. And if we didn't make the offer, we would lose them to the channel, which did make sense, because we could have done this in-house. And so we're using business intelligence, and we do believe that we will expand this position. We tested it. It has worked. It has been efficient. We see the figures. It has been growing monthly year-on-year with an expressive growth, not only in premiums, but also in lives. And we are going to expand this SME regionally with regional teams making this offer in each different region. And of course, without neglecting the possibility of an M&A, we continue assessing the opportunity of an M&A for SMEs. I will now give the floor to Pablo.

[Pablo dos Meneses, executive]

It's a pleasure to speak to you. And the first thing we did here was to implement the culture of priority, the client as a priority to look in-house and see where our operation was failing. And perhaps this law was not good for the client and it led to a fine. So what we did was to look in-house, see what we could readdress. We found several opportunities for enhancement, opportunities in the service or the client. And this has generated savings.

The second aspect, which I deem to be very positive is that once that we are called upon by the client, because they have a problem or a pain, we try to resolve this in-house. We put all of our qualities so that they can resolve the problem. A third aspect with good results is that when eventually we do end up having a complaint with a regulating agency, we act very strongly to attempt to resolve the problem and avoid the cancellation of the plan.

All of this has generated positive results. We have great expectations, and we're working arduously so that this reduction can be ever more significant and so that we can bring you novelties in the coming quarters.

[Frederico Mendes, analyst]

Elton and Pablo, if you allow me one more question in terms of Plural. Are you thinking of working with a specific partner from Plural? And if you are thinking of this partner and if you are able to hold this relationship, what is it that you would plan to do in which region? This is my third question.

[Elton Carluci, executive]

I think that the main characteristic is that we have a synergy and that we are very complementary as companies. So we end up having access to several regions that we did not have access to, selling several of the products that we have. And ticket of BRL 350 that can be sold, this is a high ticket for some regions. And so we're expanding this. We're expanding our portfolio in a very relevant way. And this is how we're also going to expand access to health plans.

As I mentioned before, Plural was very strategic. It did very good planning and is in regions where Qualicorp was not. So we're gaining something observed without counting that we have just added 96,000 lives to our portfolio, an enormous synergy, as you can see.

[Operator]

Our next question comes from Eugenia Cavalheiro from JPMorgan.

[Eugenia Cavalheiro, analyst]

I have 2 questions. The first, if you can give us an update in the churn and cross-selling in the month of October and up to mid-November. And another question about M&As. I know that you cannot disclose too many details, but what can we expect on that front? And how will the company be behaving? Which are the kinds of companies that you are considering?

[Elton Carluci, executive]

Well, let's speak about growth adds then. We're working at both ends. We saw October and November as being better than September. So we continue to see an improvement in churn. And this continues, thanks to the work that we have been doing. We are in a pandemic, of course, and people are very fearful of losing their health plans. So we have been recovering the efficiency in some of our products. We did operate with a partial product in October with that partner where we ended up replacing the portfolio, and the situation is improving. And of course, we should have growth adds in the fourth quarter as well. This is the outlook. Everything will depend on the dynamic of this month and the month of December that we're following up on closely.

In terms of M&As, we continue to look out for opportunities, anything regional that will bring an advantage for Qualicorp or product expansion, as we spoke about SMEs. And of course, what we want to do is to bring to Quali and bring to our team people like we have brought in lately. We have André Vianna and Sergio who became partners and who founded Plural. They will continue working with us in distribution. And we also did this with other companies to help our expansion team. We brought in Antônio Carlos that comes from health. So this is the type of M&A that we're seeking, an M&A that will not only bring in new portfolio or other operators, but that will bring in new people that will help us in the expansion, very robust, bold and daring. This is what we are seeking.

[Bruno Blatt, executive]

Eugenia, this is Bruno Blatt. To complement your question about churn, for 2021, what we imagine is that Brazilians will be very hesitant of being left without private health coverage. This pandemic will extend itself until April or May. We truly have no visibility when we will be able to allow the population to feel calmer. So this concern, this purchase of health plans will continue to be very strong, which could give us good news in terms of churn.

[Operator]

Our next question comes from Vinicius Ribeiro from UBS.

[Vinicius Ribeiro, analyst]

I have 2 as well. If we could speak about the growth adds. And which are the open entities, which are not open, if you could give us a regional breakdown perhaps or base yourselves on your own division in terms of which has been their commercial behavior and what it is that you expect in terms of M&As. You mentioned in the past that SG&A would be dealt with and you would get to a point of greater stability. Now if going forward, can we expect you to maintain your margins, or can the situation be even more productive than it was this quarter?

[Frederico de Oldani, executive]

Vinicius, this is Frederico. And I'm going to begin speaking about the SG&A this quarter. It was very strong, and we don't expect this gain. Well, we hope to be able to maintain these levels during the coming quarters. We still have some front where we can continue to generate savings, but we're going to use all of those savings and reinvestment in Quali and growth and in innovation. Don't count upon an increase of margin as being our value drivers.

Our value driver is the growth of portfolios and the growth of margin. While we don't have a very clear scenario, until we come to a more positive and consistent situation for some time, this is something that we're not going to discuss internally G&A gains, which doesn't mean that we're not going to continue working as we have to seek even further savings. We are doing this, but we do have a pipeline of things that will have to be funded by the savings. So once again, do not expect additional margin gains. I'll give the floor back to Elton.

[Elton Carluci, executive]

Now in terms of gross adds, to give you a breakdown, I think this is strategic information. Competitors almost always listen to our call. Now we're working with those multi-professional entities and entities that represent a single profession. What we have observed is that because of our family of products and some of the things that we have done in terms of our rates, we end up bringing to these entities that represent a single profession one type of client that formerly would buy SME.

And when we launch as of the second life a discount, we observe that there is a transition from those that had companies, if they can resort to SMEs, they can work with other entities that represent engineers or architects. And this is where they're going to buy an Affinity plan. We know that there is a gap in terms of SME. Why?

They want to hold on to that product 6 or 8 months. They're then going to return to the labor market and things will change. So we see a change in the dynamic of people who formerly would offer one entity or another, and this is changing in-house. Without giving you any figures, we have observed a change, especially because of the competitiveness with Affinity that has gained a great deal compared to some of the SMEs in the market. This is all that I can disclose to you at this point in time. Thank you very much.

[Operator]

As we have no further questions, we're going to return the floor to Mr. Bruno Blatt, the company's CEO, for his closing remarks.

[Bruno Blatt, executive]

I would like to thank the brokers, the 43,000 people who sell our health plans and who help us expand access to quality health in Brazil. And thank the 100 partner operators that trust in Quali and work towards distributing its products. And thank the entities that put the life of their associates in the hands of Plural and Quali. And thank the 50,000 and more investors that deposit their trust in the company.

We also have 2,300 employees from Plural and Quali, which is the fuel that moves the company day after day. And thank the more than 2 million clients and lives that have a health plan with us. Our mission is to care for their lives and to do things ever more better. And for this, we need to grow. We have a good positioning. And in the face of so many challenges, we have been able to make strides. I'm convinced that the year 2021 will be better for all of us. And you can be assured that we have several novelties going forward.

Once again, thank you all for your participation.

[Operator]

The Qualicorp conference ends here. We would like to thank all of you for your attendance and wish you a very good afternoon.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]