Qualicorp Consultoria e Corretora de Seguros SA

BOVESPA:QUAL3

Earnings Call Transcript 2022-Q4

[Operator]

[Interpreted]

Good morning, ladies and gentlemen, and thank you for holding. Welcome to the Quali webcast to discuss the results for the fourth quarter 2022. With us today are Mr. Elton Carluci, the company's CEO; Mr. Carlos Vasques, IRO and CFO; Mr. Eduardo Libera, Company Director; and Franco Abelardo, Superintendent of Investor Relations.

Some forward-looking statements in this webcast may be projections or statements about future expectations. These forward-looking statements are subject to known and unknown risks and can lead to results that differ materially from what was expected.

This event is also being broadcast simultaneously through Internet and can be accessed at the address ri.qualicorp.com.br, where the respective presentation is also available. This event is being recorded. [Operator Instructions]

I would like to give the floor to Mr. Elton Carluci, who will begin the presentation. You may proceed.

[Elton Carluci, executive]

[Interpreted]

Well, good morning to everybody. It is a pleasure to be with you in another Quali conference call. As a CEO, Quali is a company that I'm very fond of. I got here somewhat more than 2 decades ago. And during all those years, I had the opportunity of acting in different positions. I participated in important projects and have accumulated hours of experience. I have always had a commitment for deliveries, for being objective, for transparency and giving the best of myself with a deep sense of responsibility, especially in moments of change.

Well, to speak about changes as we have already informed the market, our reference shareholder [ editor ] transferred part of its share to Prisma, a professional manager, abdicating their seats in the Board of Directors with the view of having total transparency and improving the governance of the company.

I would like to highlight the arrival of Carlos Vasques, our CFO; and also underscore the promotion of [ Abelardo ] who -- I'm sorry, Eduardo Libera, who is our statutory Director, all of these join the other directors that are always in that quest for the better short-term results, always with a view towards evolution and strategic positioning of the company. I'm convinced that we're going to continue to work to guarantee the longevity of the business. And as people that work in a team, I can state that Quali has an incredible team, and it will be my role to motivate them always in that quest for the better results for Quali.

Now to speak about results and before we get to the figures of 2022, I would like to highlight the important legacy, the achievements of the company in the last few years. Especially in terms of cultural transformation with a focus on diversity, ethical relationships, the diversity of products and, of course, new partnerships and the digital transformation of quality.

It's important to keep in mind that 2022 was a highly challenging year for the health sector in Brazil. The high interest rates, the period of inflation, we had a slow growth of the population and other specific challenges for the segment and increase in claims. Despite these challenges, Quali was able to enhance its operational cash results in the fourth quarter. We reached somewhat more than BRL 110 million as a result of the entire team, in terms of acquisition of clients, a control of cost and expenses and a reversion in the consumption of working capital. We got to the fourth quarter, thanks to the result of everybody in the company.

In more than 20 years in this sector, I can state that we face the most challenging period in our history. Claims reached levels close to 90% as you can see here, in the A&S information, but I have participated in several processes. I have seen all of the players addressing these critical issues for the sector, the issue of fraud, overuse, operational efficiency, digital transformation. I'm under the impression that all of the players are working with a view to have a more efficient and more sustainable sector, making the most of this rather challenging and complicated moment to discuss all of these issues, but this does not make us lose our enthusiasm having a health plan as one of the greatest streams of the Brazilian population.

We know that the results are below what we deem to be the company potential. Notwithstanding this, I can guarantee that we can enhance the Quali performance. We have excellent commercial partners. And beyond that, we do have a strategy to address all of the present day challenges. To speak about strategy in 2023 that has already begun as another challenging year, we're going to continue on with rationalizing our capital investment and of course, looking at our commercial teams with a great deal of austerity in terms of spending and cost, always attempting to optimize our working capital and keeping our eyes open for opportunities in our tax structure.

So on this opportunity, once again, I would like to reinforce our commitment. We're working towards surpassing the challenges and to guarantee a promising future for Quali. These complex situations motivate me to offer my very best with a great deal of work. The entire team through its competency will address these topics that we have selected as being the most important topics for 2023 so that Quali can become ever more efficient, better and, of course, more sound. This is what we all want. This is what we all expect. And I'm convinced that we have an excellent plan to address all of these points.

That is all for the moment. Thank you for your attention. I will be back during the Q&A. Thank you once again, and I will give the floor to Carlos Vasques, who is participating as CFO in his first call.

[Carlos de Almeida de Carvalho Neto, executive]

[Interpreted]

Well, a good day to all of you. Thank you for your kind words, Elton. We're all imbued here, working together at Quali, attempting to better understand quality and seeking alternatives to optimize the results through time.

I'm going to refer to the highlights for the fourth quarter in the company and offer you some figures. The company -- well, we begin with a free cash flow. We achieved BRL 116.8 million in the fourth quarter, a growth of 134% quarter -- quarter-on-quarter, representing 60% of the free cash generation for the 2022 period, totaling BRL 188.9 million. The life portfolio ended the year with [ 1,500 million ] beneficiaries with a drop of 14% year-on-year and 5.4% quarter-on-quarter.

Now we had organic add-ons [ 71.2,000 ] lives. These are organic additions with a drop of 40% year-on-year and 24.9% quarter-on-quarter. We reached BRL 135.9 million with a drop of 13% -- 13.9% year-on-year. Now this is part of the challenge of the company. The cancellations have dropped. And year-on-year, we have a scenario where the add-ons drop less than the cancellations. The net revenue of the company totaling BRL 430-some million, a drop of 10.7% quarter-on-quarter, 13% year-on-year.

If we observe the revenues, they suffered pressure in the fourth quarter due to some onetime commercial concessions that the company made. The company, of course, is not insensitive to the market moment, the issue of claims, access to our operators. And we have to work jointly connected so that at this moment, our partners and ourselves can come out of this market moment much better.

The total OpEx, the COGS plus SG&A, drop of 3% year-on-year, but I would like to highlight a drop of 7.7% quarter-on-quarter. While we're seeking better efficiency standards in the company, we have very low tolerance towards inefficiencies. We're expediting processes and seeking all the possible opportunities to become more agile. All of this led to an adjusted EBITDA of BRL 215 million with a drop of 8.2% quarter-on-quarter and 17% year-on-year with a margin of 47.6%. A healthy margin, although lower adjusted net [ income ] and we are going to speak about this in the next slide was BRL 21.9 million for the quarter.

I would also like to underscore the capital structure of the company. We began the year with BRL 1.5 billion in net debt and BRL 2.2 billion of gross debt, BRL 1.7 billion in the company cash, ending up in this 1.5 net debt EBITDA, ending at 1.6x. And because of these difficult moments, there is a great deal of inflation in the sector, but there is also a macro situation with higher interest rates. And we believe that the company has a sufficiently robust capital structure to navigate through these moments.

Our -- next, maturity, the great maturity of the company is only in the second quarter of 2024. So this year, we have no maturity obligation to pay.

Now to look more closely at our EBITDA adjustments. The company reviewed some of its provisions, some of its processes, worked with risk management because of the market moment. And as a result of this, we have made some decisions to protect our balance. The total adjustments were BRL 164 million, linked especially to provisions of BRL 97.1 million.

And referring to credits, accounts receivables from operators, as I mentioned previously, we have had some situations where it was necessary to commercial consessions and accounts to pay to other entities or associations. Because of this, we came up with provisions of BRL 97.1 million because of the operators and entities. In the write-offs, we have deployed efforts to enhance the controls. We have made accounting adjustments, especially after legal controls review, enhancing the controls on that front.

We also had provisions with personnel, severance payments. adjustments of the company that were carried out in 2022, ending up in BRL 154 million. Once again, these are our main adjustments. As was mentioned, our cash flow is always very important and will continue to be important and in moments such as this becomes ever more important to work with the details and these KPIs linked to cash flow. I spoke about the free cash flow of BRL 166 million. Growth quarter-on-quarter, representing 60%.

I would like to highlight the level of our commissions already reduced to BRL 69.9 million, a drop of 31.3% year-on-year, 23% quarter-on-quarter. And there's the effect of this company decision to seek maximum efficiency in its capital. Another thing worth pointing out is our working capital, our efforts to recovering and increasing working capital. The positive scenario in the third quarter, of course, does not happen every quarter.

When we look at the company, this is how we have designed our working capital, and this is the efficient way of working with it. We did have a recovery. And at the end, we had a consumption of BRL 42.7 million, but of course, as part of a historical process that we observed in the company.

Very well. I would now like to return the floor to Elton Carluci to proceed with his closing remarks.

Well, I think we'll go straight to the Q&A.

[Operator]

[Interpreted]

[Operator Instructions] Our first question comes from Pedro Lima from BTG. Pedro, your microphone is on. Pedro, once again, we have unmuted your microphone. You may proceed. [Operator Instructions] Very well. The next question comes from Emerson Vieira from Goldman Sachs.

[Emerson Vieira, analyst]

[Interpreted]

Can you hear me?

[Carlos de Almeida de Carvalho Neto, executive]

[Interpreted]

Yes. Yes, we can.

[Emerson Vieira, analyst]

[Interpreted]

Elton, Carlos and other directors. We have 2 questions at our end. The first, this is the second or third time that you mentioned in the release, a pressure in your take rate because of more restricted commercial situation, which has been the behavior of the take rate. Has there been a recovery in the first month of 2023? Or because of the challenging claim scenario, will you still have pressure in take rate? This is the first question. .

Secondly, about your incentives to the channels. For months, you have been working to reduce allocations in channels. Now based on the test that you have made, how much of a commission do you pay and which is the level of commission that will become recurrent in 2023? And how does this reflect in the new level of gross sales? These are our 2 questions.

[Elton Carluci, executive]

[Interpreted]

Emerson, this is Elton. I will begin and then the team can complement the answer if necessary. Let's begin with the take rate. What we have observed is basically a market moment in terms of claims. This is not something structural. We do foresee a resumption as soon as there is an adjustment in the market. This is a onetime event. Nothing has been done definitely. And there is adjustment with a permanent effect. This is the first point. Well, we're waiting for the market to recover and resume its normalcy.

Now to go on to the second question about the tests that we're carrying out with CAC and commissions. What is it that we have observed in the last few months with very stringent discipline in capital allocation, especially in CAC. Well, this is the item that most consumes the company resources. So we have been working with extreme discipline, looking at the ratio in the portfolio relating this to CAC seeking an optimization.

What we have also observed in some classes that are larger in the market, and we do have some examples that the results will become more clear as the coming quarters are reported by the company. In CAC, we have seasonal elements. We have awards. And this happened last year. We have a specific quarter where we deliver awards and the CAC always increases. We normally work with it, normalize. I think this will become clear.

And when we speak about allocation, we do have a metric which is CAC per life. Of course, this is easy for the market to accompany this metric. We have a internal metric that is more difficult. And we do look at this LTV CAC on the premium that we're bringing in. So it's not necessarily that ratio cost per life. The better data that the market can have is that one. But in-house, we have other metrics, other ratios that we work when prioritizing our expenses. And in the coming quarters, the markets and the investors will be able to see exactly what is happening and I can guarantee that this discipline will be maintained throughout 2023.

This is a joint discussion, not only the commercial area, but they are FP&A area as well. LTV CAC ratio to always seek the best allocation and the best results for the company in the long term.

[Operator]

[Interpreted]

Our next question comes from Pedro Caravina from Crédit Suisse.

[Pedro Caravina, analyst]

[Interpreted]

Elton, Carlos Vasques. We have 2 questions at our end. Well, the first you have already mentioned working capital. If you could give us more capi -- color in terms of what happened in 2022. Although there was an improvement in the fourth quarter, there is a negative working capital. This is not common. And you mentioned you're working on this for 2023. What has happened in this first quarter? And which are the efforts that you are deploying to enhance this?

If you allow me another question. We have spoken to several players in the sector. In fact, 2022 was a very challenging year and 2023 will also remain challenging, requiring adjustments. Well, I understand that Quali will continue on with these readjustments, which is the company's strategy to conciliate this with a reduction of churn.

[Elton Carluci, executive]

[Interpreted]

Well, working capital, I will begin answering. It was a challenging year for the sector. If we look at some players, they publish average terms of receivables, increasing the number of days and we have more than a dozen of million reais in premiums. So there is a flow of -- that we follow based on our invoices. And because of this scenario has become more burden some with -- some of our partners. Well, this is something the company has been addressing. I think this is one of the great points when Carlos Vasques arrived.

We conversed about this. And I devoted myself to this. Of course, that in the company, we had had something that was not very normal happening, and this is being addressed by the team. I'm going to give the floor to Carlos Vasques, and then I will return to speak about the readjustments.

[Carlos de Almeida de Carvalho Neto, executive]

[Interpreted]

Pedro, regarding the working capital, it was a very difficult year. The sector as a whole suffered with the lengthening of terms and the company perhaps suffered somewhat more or took longer to foresee these effects. And we saw fragmented effects on several fronts with several operators. I cannot underscore any specifically, but this is the situation we observed on several different fronts.

Now what is it that we're working on? We're enhancing some details of our working capital. We work on this day after day. We're very attentive to maturities, collections and cash flow. We're working in terms of payments, in terms of receivables, lengthening payments, in some cases, guaranteeing the payment of assets, and we're enhancing this process. It's a teamwork involving the commercial area, the financial area and of course, our operators.

As I mentioned, the fourth quarter was positive, thanks to initial adjustments. And going forward, we hope to have a working capital more similar to what we saw historically. We do observe a working capital that is less relevant, BRL 160 million, ending the year at BRL 146.6 million, not so different from what we foresee as we move forward.

Now the second question about readjustments, what we have been observing here and quality has carried out more readjustments in the first quarter. They're serving as our guidance, we have between '20 and '29. We began the year as 2022 ended with these efforts in the market as a whole, the new taxes, the claim indices post pandemic, understand what is structural, what refers to the situation per se and readjustments. Readjustments in tables and prices, all of them have increased in all of the products. But we do have to hold the conversation with the sector for this.

Last year, we began with lower readjustments that were accelerated during the year. Now this year, the contrary will happen. We are holding conversations with the sector. We're beginning with higher readjustments. And as we begin to see the impact a balance, we will perhaps head for lower figures vis-à-vis those we began with. All of this based on what the sector is saying. I don't guarantee that this will happen, but it is a consensus. We speak with the main operators, and this is what everybody expects.

We began with a strong adjustment that should taper out, become more normalized. At least this is what we have heard from our partners. Of course, in a more complex year with higher interest rates, there is a challenge of retention, the challenge of cancellation. We're working arduously on that. And we do expect a certain base point that will be reduced eventually. I don't want to anticipate the first quarter. We're looking at this with an eyeglass allocation and the retention as well because of the readjustments and prices and gross adds are somewhat more under pressure, perhaps because of the products -- new products that are being unharnessed.

Anyway to respond to the last question, we're doing very well in terms of commercial incentives. After several tests, we have ascertained what we're doing. We need more tests. We're going to have to work more in terms of retention and speed up what we're doing in terms of loyalty. We do expect a reduction in the coming quarters. And this will begin to appear. Of course, I can't promise to give you any guidance, anticipating figures, but we have been working arduously to reduce the line item, the percentage of churn to help us in the company's cash generation.

[Operator]

[Interpreted]

Our next question comes from Estela Strano from JPMorgan.

[Estela Strano, analyst]

[Interpreted]

I have a question. Now given the new company's strategy, we understand that your cost and expense structure will change, especially in terms of the commission's dynamic. Now besides the variable part, are there any additional changes that could lead to a savings perhaps?

[Elton Carluci, executive]

[Interpreted]

Estela, this is Elton. I will begin by answering your question. We have been working on operational efficiency based on leveraging everything that we have already invested in technology, there's a huge front in terms of digital transformation. We're beginning to test some AI tools for some processes.

Besides working with robots, we do have a great deal of room for this, especially when we begin to bring in our customers with a more digital experience, we have a specific director working with the Board, we have a CTO working specifically on that. And the main goal of this person for this year is to increase engagement in the digital part, offering the customers a digital journey where they can resolve all of their problems.

Quali has made investments in the last 2.5 years, almost 3 years, where it is practically possible to do everything in our digital products. Of course, there are some pending doubts. And if the customers wish, they will be serviced as well. We do have a loyalty structure that can be used for this. But we have a very interesting digital journey, where customers can do practically everything. We have a good engagement. Small number of these tools were concluded a few months ago, and we do have room for a reduction in COGS and SG&A based on technology. This is an important front for us. And of course, we're going to look at all the line items and we have interesting work being carried out by Carlos Vasques in terms of the closing of our results.

I can bet, and I trust in the digital transformation team to enhance engagement. We have low engagement levels, and I deem this to be an opportunity. Now if engagement increases, we will certainly see a better process and an increase in the company's P&L.

[Operator]

[Interpreted]

[Operator Instructions] The question-and-answer session ends here. I would like to return the floor to Mr. Elton Carluci for the company's closing remarks. You may proceed.

[Elton Carluci, executive]

[Interpreted]

Well, thank you. Thank you all for having attended the call. Once again, I would like to thank you very much for your attention with Quali. Have a very good day, and we hope to see you in the next call or in our next investors event. Thank you, again, for your attendance.

[Operator]

[Interpreted]

Thank you. We would like to thank all of you for your attendance at the release of the fourth quarter 2022 results. Have an excellent day.

[Portions of this transcript that are marked

[Interpreted] were spoken by an interpreter present on the live call.]