Qualicorp Consultoria e Corretora de Seguros SA

BOVESPA:QUAL3

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Qualicorp's conference call to discuss the results of the fourth quarter 2018. With us today we have Mr. José Seripieri, CEO; Mrs. Grace Tourinho, the CFO and IRO; and Mr. Pedro Rocha Nocetti, the IR Manager.

This event is being broadcast live via webcast and may be accessed through Qualicorp's website at http://www.qualicorp.com.br where the presentation is also available. This event is being recorded. [Operator Instructions] I will now turn the floor over to Mr. José Seripieri, who will begin the conference call. You may proceed, sir.

[Grace Tourinho, executive]

I will begin the call and then we will give the floor to Mr. Seripieri. Good morning, and thank you for participating in our earnings conference call for the fourth quarter '18.

When we assess the year -- fourth quarter '18 as a whole, the company was able to contain the loss of life even after the results and even after readjustment that was way above the average inflation of the country.

Financially, we were able to maintain relatively stable operational results even in a challenging cycle when it comes to revenue generation, which means we did our homework. Qualicorp was elected the best company in the EXAME/IBRC ranking as a benefit management company. This was the first time that Qualicorp took part in this ranking, which is one of the most important in the market. The company was ahead of other large companies in the sector acknowledged for their quality in customer service.

This achievement is due to a series of initiatives adopted by Qualicorp in the last year through -- and has been enhanced year after year to make our service to customers more decisive, customized and expeditious.

We also made strides in the digital area and the sales sector, making available to brokers of software to expedite sales. And we're working with a sole financial RFP in this quarter that was implemented in January 2019. After we control the software in the company, we will have created more value and control within the company areas, not just speak of the savings compared to our previous system. For 2019, the company has engaged and will continue to enhance processes to retain customers with more accessible products and a more active communication.

I will now give the floor to Pedro, our IR Manager.

[Pedro Rocha Nocetti, executive]

Thank you very much, Grace. A good morning to all of you. Thank you for participating in our results call. We begin on Slide #4 on the portfolio. And we have been harping on this throughout 2018, a consistent improvement in our churn figures and in absolute and relative trend when it comes to our customer base.

This churn is the work of the company as a whole work that comes from having new products that we can offer and a retention that in 2018 had truly excellent performance for the company, enabling us to hold back the customers and generate value for the customers and show that Qualicorp is side-by-side with the customer.

Our focus is the customer, and this is a focus that will remain within the company for 2019. And while we have the customer by our side, we will be producing results. When we speak about growth as they have grown in the annual comparison with totally retail sales, here we did not have any portfolio novelties or other sales.

What you observe, it is 7% higher than the fourth quarter 2017, and this is a performance fully in retail with a share of 22% in the Health Club segment. With this, we ended our affinity in medical hospital portfolio with 23,000 lives less vis-à-vis September. When we observe the same period last year, the improvement was 25%. And for the accrued figures of 2018, the performance improved 70% in terms of net lives in our portfolio vis-à-vis the year 2017. When it comes to self-management and the corporate, we had a loss of sales, and it is important to reinforce something that grave draw attention to previously. Although you observe a reduction of more than BRL 2 million sales in December '17 and '18, the impact of this on our results is very small, more than 90% of our net revenues come from the Affinity and medical hospital segment, although you do observe a reduction in volume of sales. This sales reduction has a minor impact

[Audio Gap]

in our portfolio. And this continues to be our focus for 2019 going forward.

Please go on to Slide #5, where I will speak about revenue. Here you will observe a revenue of BRL 479 million for the fourth quarter, a reduction once again due to a smaller portfolio and a reduction in the average customer base in terms of revenue.

When we compare the fourth quarter '17 and fourth quarter '18, we do have a certain stability. This is thanks to the price readjustment vis-à-vis the smaller portfolio and a small drop year-on-year. When we analyze the evolution of Qualicorp after readjustments, the downgrade and the mix, we have a reduction of approximately 9%.

I would now like to ask you to go on to Slide #6 that refers to cost, where you will observe the growth margin for the fourth quarter '18 with a growth in the year-on-year comparison and in the sequential comparison. And between the lines you can observe that we have a very consistent value capture in our expenses with ROIC and our expenses with personnel. This is something that has been underway for several years and that quarter-on-quarter we have gradually been able to show the positive impact on our results, but also a consistent impact. And you will observe this in growth margin. If you look at the last 5 quarters, we were able to grow the gross margin. Once again, this is consistent and this continues even within a very challenging scenario when it comes to revenue growth.

The message therefore is that Qualicorp continues to do its homework regardless of the revenue scenario of the company. We will continue to do our homework to always be an efficient company.

We go on to administrative expenses on Slide #7. There was a drop of 6.4% vis-à-vis the previous year and a slight increase in the sequential comparison, this due to an increase in amortization and more expenses in services with third-party as attorneys and consultant fee. In the annual comparison of the fourth quarter '17 and the fourth quarter '18, there is a significant drop in other administrative expenses. This is due to a one-time event in the fourth quarter 2018 due to regulatory contingency. And of course, we have a gain of results in -- for '18 because we have less regulatory contingencies.

In the graph below, you'll see the consistent work and the evolution in administrative expenses, although we do have some oscillations year-on-year, we have been able to improve our percentage of SG&A as a percentage of net revenue.

Before I give the floor back to Grace, I would like to end with the selling expenses. You will observe the main selling expenses, which refers to commissions, those that are linked to new sales. Since 2018 we have been capitalizing and amortizing them for 24 months. There is an increase in the amortization of commissions of 7% in the fourth quarter '18 vis-à-vis the fourth quarter 2017. If we were to use the former model before the IFRS in this line item, the expense amount would be BRL 4 million. Now it would be BRL 17 million in the third quarter '18 and BRL 16 million in the fourth quarter '17.

When it comes to the sales campaign, which is also a very significant area of work for the company in the last quarter, it has been our focus and we're capitalizing this, especially the campaign that refers directly to new sales. If we were to adopt former practices, we would be spending approximately BRL 12 million in this quarter.

Now before I give the floor back to Grace, I would like to end by saying the following. 2019 begins with a strong sales campaign geared and efficient with products that have great liquidity and with the engagement of our brokers, something important that was mentioned by Grace. In this year, we began our digital sales for the entire sales channel. And in March 2019, we already see more than 35% of our sales being carried out without any paperwork. These are more expeditious pay for sale with greater efficiency, saving us unnecessary expenses.

Having said this, I give the floor back to Grace.

[Grace Tourinho, executive]

We go on to Slide #9, profit-sharing plan. Here we have an improvement in the quarter-on-quarter comparison. It is important to state that part of this result is due to the intense work on the losses calculated in previous quarters, including the Aliança segment. We have more than doubled our volume of recovery. Besides this, as a nonrecurrent event in the fourth quarter 2018, we recovered almost BRL 5 million among our partners, referring to the returns of customer amounts. If we were to take away this one-time adjustment in the fourth quarter, we would have had 6% of the total net revenues.

If we analyze the improvement of our profit-sharing plan in the exercise 2018, regardless of nonrecurring effect, both positive and negative, we do have a constant work of the company to work closely with the customer, not only to retain the customer but also to guarantee the customers' capacity to pay.

We go on to Slide 10, financial income. In the comparison with other quarters of 2018, there's a slight drop in our financial income due to the lower volume we had in cash throughout the fourth quarter.

When it comes to our financial expenses, there is an annual improvement and the lowest interest rate, which reduces the cost of the interest of debentures with payments are made in the second and fourth quarter of each year.

We go on to Slide #11, where we speak about EBITDA. And in line with what was said by Pedro formerly about our EBITDA, we have a strong annual recovery in the fourth quarter '18, mainly associated through an improvement in expenses with contingencies and incollectable debts that allows for a growth of more than 18% in volume and 8 percentage points in margin.

In 2018, we have less revenue but we were able to maintain our EBITDA margin. And it is important to reinforce that the company maintains its pursuit to control cost, to use resources rationally and improve operation. We have the matricial expense management that surprises us constantly with the alternatives and controls to optimize cost. This is the attitude that has brought us to a good level of results, and we are able to work with all of the levels. And what is more important that is we will be able to leverage this when we once again resume our growth.

We go to Slide #12, comparing the fourth quarter of '18 with the fourth quarter '17. We had a growth in net income, especially thanks to the improvement in operational profit obtaining a margin of 20%. When we compare this with the third quarter '18, the drop comes not only from EBITDA but also from an increase in amortization.

Regarding the 2018 year, we have an improvement of 4%, highlighting that we have nonrecurrent negative impacts in the net income of 2017. Effective tax rate stood at 38.6% in the fourth quarter '18 vis-à-vis 34.9% in the third quarter '18 and 32.8% in the first quarter '18. Somewhat higher in the fourth quarter '18, where we have already begun working to reduce this tax rate.

We go on to Slide 13 to speak about CapEx and investment. In September of 2018, the company signed a noncompete agreement with the founding shareholder with a cost of acquisition was BRL 206.9 million. And this has been amortized since October for a period in which it is in effect, which is 72 months. If we exclude this noncompete effect, the company would end 2018 with net cash even after having paid BRL 354.9 million in dividends. And after having carried out the buyback of its shares in a volume of BRL 130 million in the fourth quarter of 2018, the company bought back 2,370,000 shares at a total cost of almost BRL 30 million.

Cash flow. We go on to Slide #14. The operation of cash flow after CapEx negative in BRL 130 million for the quarter is due to a worsening in working capital and a cash outflow due to the investment in PP&E and the interest rate paid on debentures as mentioned. Finally, we're continuing on with our company restructuring process, and we will deliver value to our shareholders, both in the short and the long term.

With this, we end the presentation and open the floor for questions and answers. Thank you.

[Operator]

[Operator Instructions] Mr. Marco from Itau would like to pose a question.

[Marco Calvi, analyst]

I have 2 questions, if you allow me. The first refers to the sales scenario and the evolution in your life base. The fourth and third quarter seemed to be healthier, although the Health Club has had a minor drop, which were the main initiatives that you are putting in place and that you used during the fourth quarter to allow for this better net sales figure even if you're losing share.

The second question refers to the commission of third parties in the commercial expenses or selling expenses line item. Of course, we see that this is having an impact on retention. What is the company planning in terms of this line item for 2019?

[José Filho, executive]

Marco, thank you very much for your questions. When it comes to our sales, we have been offering timely incentives in some areas and only for some products. Well, of course, these are offered through time, but we're carrying out a geographical analysis of where it is that we want to sell, which are the regions where we would like to have greater sales for Qualicorp, and we're working with products that offer more value to the company. And of course, we're giving more incentives to those who bring more sales to the company. To give you an idea of January and February of this year, although these tend to be weak months, we truly believe that we will have a good resumption in 2019. Unfortunately, this year, carnival began almost at the beginning of March, but we are planning a recovery already as of the beginning of March. I give the floor to Pedro.

[Pedro Rocha Nocetti, executive]

Marco, if you look at line that refers to recurrent commission, this line item varies based on the logic and the strategy of the company, not only to maintain the external sales channel motivated for sales but also aligned with the company's retention strategy. Although we do have an internal retention channel with a very good performance, it is also important to have partner brokers working in partnership with us. When Qualicorp speaks to these brokers, it's important for these brokers to be very active to maintain the customers within the Qualicorp portfolio, even when we've changed the products or even when we have changes with the customers, per se. And all of this is part of our strategy not only to reinforce sales but also to retain customers. And that is why this will remain in the year 2019. And in 2018, of course, the performance was much better vis-à-vis 2017.

[Operator]

Mr. Rodrigo from BTG Pactual would like to pose a question.

[Rodrigo Gastim, analyst]

And I have 2 questions. The first refers to your average tickets. We seem to have a drop in the second quarter, impacted by the downgrades that you have done the consolidation of the Health Club and so on. So which is your forecast for average ticket in 2019? Obviously, it should be lower than 2018, but I would also like to know which will be the impact of the products that you have in the main region. This will also have an impact on your average ticket in the company. The second question refers to the second strategic line of the company of 2018 of offering sales incentive to improve retention and much more. I presume that this will continue to be the scenario in 2019, and which are your initiatives to struggle against margin pressures in terms of selling. The company is doing very good work, and which are the efficiency gains that we can expect in 2019 to offset the selling part?

[José Filho, executive]

Thank you for the question, Rodrigo, and I will begin speaking about the ticket and then speak about the initiative. While we speak about average ticket, Rodrigo, as you mentioned, to simply to give you an idea, when we speak about the Qualicorp average portfolio at the close of 2018, the consolidated ticket, the Health Club, Qualicorp and Aliança, the average ticket was BRL 788. When we compare this with the entry average ticket, those who come in to the company have an average ticket of BRL 469. As you mentioned, although we do have a lower share of the Health Club, we have observed an average ticket that is much lower, which of course is natural what we are seeking, and the great opportunity that we foresee is to have lives coming into Qualicorp in the middle and higher segment. And it is in this niche that we truly have a challenge not only in terms of seeking new products in different regions to increase our share but also work with customers that is more sensitive to readjustment and to a more complex financial scenario.

Yes, we will have this disparity between the entry ticket and the average portfolio ticket, but this is the customer that we want, that Qualicorp, and this will allow us to grow our portfolio.

I will give the floor to Grace to speak about marketing initiative -- margin initiative.

[Grace Tourinho, executive]

We have several opportunities in terms of margin in 2019. Our company is working in a very consistent way, entering the digital world. We have introduced a software, and we have delivered this software to all brokers so that they can expedite the sales. But in terms of control in the cost of the company, there will be a significant decrease.

Another opportunity that we have been working with that we have not announced is to also service the customers digitally. In a more effective way, it is cheaper than using a call center. And this will leverage the company, allowing us to obtain an expressive cost reduction. When it comes to royalties and profit sharing, we will continue the work that we began in 2018. In terms of the commercial part, we're going to give it a greater thrust to have a resumption of sales.

We do want to offer a very productive figure at the end of the year in terms of our activity. There are several opportunities in-house thanks to the new system in the financial area. Now this readjustment still has not been done because we're still stabilizing things.

The company is learning how to use the new system. There is a learning curve, but once this becomes more mature in the company, we're going to migrate and have more consistent savings, which means that we will no longer have those peaks that we had in the last 3 or 4 years. We have implemented novelties in our operation, and they will enable us to work at different cost levels and work in a better way.

Now if there is a resumption of growth, we're more prepared, and we will have better operational costs in our operations.

I hope that I have responded to your questions, Rodrigo.

[Operator]

Mrs. [Brandl] from Crédit Suisse would like to ask a question.

[Unknown Analyst]

First of all, I would like to have an idea of your strategic vision in 2019. In terms of downgrade, we see that it is around 30%, and there is a drop in the volume. If you would look at this sequentially, this is a very relevant issue and what will happen to it through the year. And the second is a follow up of the former question. You're going to seek an efficiency enhancement in other businesses and other lines, but in the personnel line, is there still room for improvement or not -- personnel line, is there room for improvement?

[José Filho, executive]

Good morning, and thank you for the question. Well, the issue of the downgrade is based on a strategy that was intensified in 2018, and we base ourselves on a strategy of making active offers to the customers that were receiving that proposal for price readjustment. And I think all of this was highly effective, it reduced the loss of lives and also improved our image among customers. They -- in fact, incentive that was mentioned by Grace and the award mentioned by Grace shows that we are offering the customers more value.

Now the downgrade strategy remains for 2019. We will continue to have price readjustment that will be lower compared to 2018. This will still have an impact on the customers' pocket, and we do have an economy that is under recovery. Of course, we can enhance all of this. We can always do things better, but the work in 2018 was highly effective. We'll continue on in 2019, and we will perhaps not have an increase in the average ticket but the great focus at present is the customers.

Now Grace will speak more about efficiency.

[Grace Tourinho, executive]

Allow me to complement the part of downgrades where we have an opportunity. The company is prepared to carry out the downgrade of several customers in several of our main markets in our portfolio.

Now the question is, how we can have a resumption and the need for doing the downgrade is something we have to get prepared for.

Now if the economy does have a resumption, it is very possible that the company will not have to do all of the downgrade they did in 2018 and would still have to do in 2019. We are ready for this if the economy does not show an improvement. But if there is a slight resumption, this will be of great help for us. And instead of doing the downgrade, perhaps, the customer will do an upgrade. We know that none of the customers is happy in doing a downgrade in their coverage in the hospitals and in the health providers. And it's important to mention that as soon as we see a resumption in the economy, we will be able to show improvement in this field.

When it comes to personnel, we have a very broad opportunity, especially when it comes to cost. Not only in terms of cost but also third parties that represent most of our cost. When we offer service to the customers through the digital means, we would have an opportunity therefore.

[Operator]

JPMorgan would like to ask a question [Mrs. Camilla]

[Unknown Analyst]

In truth, I have 2 questions referring to cost. I would like to gain a better understanding in the significant reduction of headcount in the company, now if you have more space in this or if you're very close to the maximum headcount that you can cut and the advances for operators, if there is a specific operator that has had a greater weight in this line item, and how can we look upon this going forward?

[José Filho, executive]

Thank you very much for your question. And once again, when it comes to opportunities, we also have an opportunity in greater reductions in cost in the administrative part. Yes, we do have some things that we will deliver this year in a consistent way. Evidently, the sake of it has already been done, and we have some innovations that will enable us to further reduce headcount but service our customers very well.

Now part of this question refers to the operators. We offer support to some operators, we offer them advances, but we do have receivables from them and from the customers, and all of this is normally finalized during the month itself or during the quarter. There are some very timely cases that go from one quarter to another, as happened now on December 31, 2018.

Nevertheless, we do not tend to disseminate the name of our partners because this is a listed company and they are our partners, they have been our partners for many years.

[Operator]

Mr. Mendes from Bradesco Bank would like to ask a question.

[Frederico Mendes, analyst]

Well, most of my questions have already been responded, simply a follow-up. I would like to understand this increase in management cost of 15%, perhaps through a better mix of customers or something you could get around this?

[José Filho, executive]

Excellent question, Fred. Thank you very much for the opportunity to explain this more in depth. Looking to that, we would like you to look at -- you should look at the management rates and the condition. This is a good mix for the company to work with going forward. Now when you look at this, in truth, the increase was not considerable. There was a slight replacement between one line item and another, and this year the company will try to recover its margin, which is the great focus for the company. But we want to serve our customers in the best way possible, making available not only more products but also combination of factors. Therefore, do not only focus on the brokerage line where there has been a reduction in the management line item where there is an increase. If you think of them jointly, perhaps, it will better reflect the efforts that the company is making in this field.

[Operator]

Mr. Rodrigo from BTG Pactual would like to pose a question.

[Rodrigo Gastim, analyst]

Well, simply another point here. You mentioned the health operations for the quarter, now I would like to gain a better understanding of which is the company raise in terms of health, the synergies that you have. If you could share this in terms of the Health Club Clube de Saúde?

[José Filho, executive]

Good morning, Rodrigo. The Health Club is another of the group of Qualicorp. And we have been working on a model with SulAmérica, and we have had a certain margin from this. The Health Club, the Clube de Saúde is just another product, which is on our shelf at present. But it is a product of a different nature. And of course, it's different from what we do with our other partners.

One does not enter and shock with the other, it complements the other. And we're trying to work with all of them and ensure that they function properly. Now during our entire life in the company, we have deployed our energy to retain our customers. Now if you don't work on customer retention, so downgrades our users or customers will leave, they're quite smart. And the work that we carried out in 2018 to retain the customers from downgrade was a work of retention. Had it not been for this, several of our customers would have left. So we have changed what would have been canceled, and we're working on the downgrade. It's not about how much the customers will pay. And the Health Club as well as other products are simply more tools that we have on the Qualicorp shelf.

[Rodrigo Gastim, analyst]

Excellent, very clear. If you could share with us the features of these new products? The pricing of the products, the profitability for the company and the operators that you're going to speak to have more health products, how is this going to operate? Could you share this with us?

[José Filho, executive]

Well, we're still in a stage of pregnancy, as we would say, we're only in the seventh month. We're going to be closing all of this in a few months before we give birth to all of these products. Therefore, anything I would say to you now could undergo changes in the next 30 to 60 days. And because of a precautionary responsibility, I obviously prefer not to speak about this. We prefer to wait a little more because we're still in a stage of gestation of these new products.

[Operator]

We would like to end the question-and-answer session by returning the floor to Mrs. Grace Tourinho, the company's CFO and IRO.

[Grace Tourinho, executive]

Thank you very much for participating in one more call, and myself and my IR team, once again, are at your entire disposal, should you have any additional clarifications even after this call. Thank you very much, and have a good day.

[Operator]

The Qualicorp's conference call ends here. Thank you very much, and have a good day.