Qualicorp Consultoria e Corretora de Seguros S.A. (QUAL3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for holding. Welcome to Qualicorp's Third Quarter 2025 Earnings Webcast. Joining us today are Mr. Mauricio Lopes, CEO; Mr. Eder Grande, CFO and IRO; and Mr. Eduardo Garcia, Head of Investor Relations. Certain statements in this webcast may be projections or statements about future expectations. Forward-looking statements are subject to known and unknown risks and uncertainties that may cause these expectations not to materialize or to be substantially different from what was anticipated. Please note that this event is being broadcast simultaneously over the Internet and can be accessed at ri.qualicorp.com.br, where the corresponding presentation is available. We also inform you that this event will be recorded. Participants will listen to the webcast during the company's presentation. After which we will begin the Q&A session. Further instructions will be provided. Now I would like to turn the call over to Mr. Mauricio Lopes, who will begin the presentation. Mr. Mauricio, please go ahead.

Good morning, everyone. It's a great pleasure to be with you this Friday in our third quarter 2025 earnings webcast. I would like to thank our investors, partners, employees and all the market partners with whom we have a great relationship. The best way to summarize our third quarter results is consistency. The company has been consistently working with the same business model, just like we did in the last two years. So this quarter is quite consistent with the turnaround journey that we started two years ago. Our focus is on cash generation. We've been generating BRL 2 million in free cash flow. We are also adjusting our product portfolio and our distribution model, either with partner operators in the distribution channel or other channels. So we had the lowest net portfolio loss since 2021. This is a common quarter with high churn where we apply the adjustments of June, July and August. So we usually have a higher churn in Q3, but we didn't. And since we have a more comprehensive product portfolio with more options to customers. And if we have the capacity with our retention team to offer these products in an accurate and diligent way for customers that want to change their plan, we can reduce churn. And this is what we have been seeing quarter after quarter, a reduction of our churn rate compared to the previous quarters. As a consequence of this, we have a similar sales movement to last quarters and increased retention. So our net revenue grew by 4.3% quarter-on-quarter, adding up to BRL 372 million, a revenue growth that we hadn't seen in a while. As a consequence, we have not only free cash generation, but also increased sales. This led to an adjusted net income of BRL 19.7 million, up 8.8% quarter-on-quarter. Now we've been talking about this strategy in recent quarters. We've been very transparent with everyone. And we have also completed the eighth debenture issue worth BRL 400 million aimed to improve our capital structure. We are at a very comfortable position right now, considering all of our commitments and obligations to the beginning -- until the beginning of '27. So we feel very comfortable right now. Additionally, we continue obsessed with going back to our core business. We firmly believe that we need to reduce complexity at this company. And this is possible. And we still have a lot of room to do this. So, as subsequent events, we have the transfer of the corporate portfolio with [ ANS ], so retail and corporate channels were transferred, and we also divested Gama. And these are aimed at reducing our operational capacity so that we can focus on our core business where we have good cash generation and revenue growth potential as well as EBITDA generation potential. Now I'd like to turn the floor over to Eder for him to detail our financial performance. But just to summarize, we're talking about consistency, focusing on reducing complexity and improving our operational efficiency, focusing on our core business. This is what we see. Another important highlight that I'd like to mention is that we don't measure our company by the number of lives or the number of products. But this year, we were able to launch 340 new products in our portfolio. This is an all-time record. Not all products are products that found a good market position, but these are products that have been meeting the demands of some types of customers. And it's important to have a comprehensive portfolio so that in micro or macro regions, we have sales or retention options for customers. So, of those 138 last year, so a threefold growth that shows our technical capacity to launch new and more sustainable products for sales and retention of customers. Now I turn the floor over to Eder to give you details about our financial performance.

Thank you all. Thank you, Mauricio. Thank you, everyone. Okay. Our operational performance. We had a mild loss of lives in this quarter. Net adds, 44,000 lives, a bit above second quarter. But the third quarter is usually more complicated because of the readjustments. Churn was a positive highlight at 10.3%, the best in for Q3 in the last five years. As Mauricio said in his opening remarks, the churn rate is quite relevant to us, and this is in line with our strategy. We now have more moderate readjustments and good negotiations with operators for the launch of products. And with more competitive products, we have better sales, of course, and we can also have a better retention process. This retention process is translated into these churn rates that have been improving quarter after quarter. Now when it comes to revenue, we grew 4.3% quarter-on-quarter, the first growth in the last two years, so we should be celebrating. Fixed expenses are above last quarter because we have been spending with consultancies and attorneys, but it was actually BRL 7 million lower than last year third quarter. And we have judicial claims throughout the industry, as you all know, and that's what led to these higher fixed expenses. Still talking about judicial lawsuits or although the number of lawsuits is still high, the volume of new lawsuits is reducing quarter after quarter. So if this trend continues, we can expect that at a certain point in 2026, we can see reduced expenses. We still expect high expenses related to judicial claims, but at a certain point in time, we expect this curve to slow down. Now when it comes to CAC, our cash CAC is at 10% of the revenue. above last quarters, but still at a very controlled level. So this is an acceptable level. It's under control, and we want to highlight that the CAC investment is done on a case-by-case basis. We consider the product margin, the region, the availability of products in that region and other factors. So it's not just random investment here. This is well thought of and measured. So we do take a detailed approach to make these CAC investments, and this is at a very acceptable level. EBITDA minus CAC is at 28.7%, greater pressure compared to previous quarter, but still healthy and enough for our next moves. When it comes to cash generation, we have another quarter of strong cash generation, BRL 102 million. We reduced our net debt by around BRL 50 million. And this cash does not contemplate the proceeds coming from the sales of the corporate portfolio, which is worth a bit over BRL 50 million that you'll be able to see in our cash in Q4. With the fundraising that we announced, we have now a very comfortable capital structure for 2026. We're not going to have major challenges related to this, but we are already talking about the schedule for 2027 and 2028. And that's all. I would like to wrap up now and open for questions. Liara, can you please open for questions?

Thank you. We will now start the question-and-answer session. [Operator Instructions] Our first question is by Renan Prata with Citibank.

I have two questions. The first, I think Mauricio said well that the number of new products that you launched was quite high, but I'd like to understand, based on ANS data, we see a general improvement in operators' indexes. So I'd like to understand what the conversations are like in the industry. Do you see more appetite from operators to grow? We know that when the insurance business is doing well, operators try to pass through prices so that they can grow. So what is this environment like right now? I just wanted you to give us some more color on this. Now Eder talked about CAC, which is well controlled, but we see a significant growth in CAC this quarter. So can you tell us about the future expectations of CAC per life?

Renan, this is Mauricio. Thank you for your questions. I will answer the first, and then Eder can answer the second. About products. Well, actually, last year and this year, we went to the market to try and collect a large number of products, exclusive products mainly, and we got many of them. Exclusivity is quite interesting for operators because that's when we can control sales quality more effectively. You burn less CAC, although we have to buy the exclusivity, you burn less CAC during the distribution and you have greater visibility about where you can grow because you can look at the municipality, the state, the products that sell the most or not. and where they have more sustainability, lower readjustments. And so we can redirect the distribution channel to those locations. So we continue focused on having a comprehensive product portfolio, and we keep on talking to the main operators to find the best selling terms. When we talk about negotiating with operators, and then we can move on to your second question about the environment, we have seen an increment of eligibility and a continuous pricing adjustment for the affinity products. This is not an isolated movement. We see retail reducing prices very quickly. Focused on some regions. So, in certain regions, the market is a bit more competitive, others not so much. In the affinity block, we are confident that our pricing is accurate, and we will have lower readjustments in the coming cycles as a result. I am quite repetitive when I talk about this, but this is a flywheel with -- if you have the right product at the right price with the right subscription process, you can have lower readjustments, lower mitigation costs, cash generation and deleveraging. So this is where our focus is. The SME market is at lower prices than we expected for certain operations. And so this should lead to some detachment of the flywheel from the affinity to the SME portfolio. But for the affinity portfolio, we're very aware of what we're doing and quite aligned with this long-term sustainable model. This is a cycle. Operators see greater profitability and the decreased prices. The readjustments are affected and the prices go up. So it's like a seesaw, and this is happening more in SME than in the affinity portfolio. Eder, would you like to talk about CAC?

Sure. Thank you for your question. Well, internally, we do not measure CAC in relation to revenue. We define the CAC investment based on the opportunities. We assess the potential for return and all of the variables are considered depending on the region, product margin and so on and so forth. So it's hard to estimate if the percentage of CAC over revenue will increase. CAC over measure is not a metric that we track. Of course, we do define how much we're going to invest. We have our thresholds of what is acceptable or not, but we're always trying to identify opportunities. If that's a good opportunity, if the math makes sense, if the P&P looks good, then we make the investments. And we may invest more or less depending on the quarter. But this is definitely not a metric that we track, CAC over revenue, CAC over revenue. So this can vary from one quarter to another. So if it's below or above the previous quarter, this is not something that we worry about. What we worry about is the profitability of the investment. So we weekly assess this rate, and we have a [ COMEX ] meeting with a dedicated team. So we can tell you that this is a very diligent investment that we make. We're very careful with our capital allocation, always aiming to bring returns to the company.

Our next question is by Ricardo Boiati with Banco Safra.

Good morning, Mauricio, Eder, Eduardo and other participants. My question is about what you expect for the Affinity portfolio, your core business. With this level of churn that we see that has been consistently improving since the new management took over and you accelerated CAC after careful consideration so that you can resume stronger sales levels. So looking ahead, can we see signs of this portfolio stabilizing or even showing some signs of short-term growth? Or is there still work to be done to resume growth in the Affinity portfolio? So this is my first question. My second question is about the acceptance process. This has been a historical problem at Qualicorp with a very large gateway -- entry gateway. But this process evolved quite a lot, and you're now a reference in the industry. So my question is, what makes you confident that this process is now on track so that you can resume investments to go back to a healthy growth level. Mauricio and Eder gave us some insights about the process and how it's running smoothly, which is key for the flywheel to spin correctly. So can you recap what the improvements were because you have reached an acceptance of excellence? And how has this been seen by the operators? Are they going back to selling specific products? Have they resumed sales of specific products? That's my question.

Ricardo, this is Mauricio speaking. Thank you for your question. When we have -- when we're going to have portfolio stabilization or growth, we don't know. That's the million-dollar question. What I can give you are indicators. We're more worried about revenue than lives, as we said earlier, but the portfolio has shown a good convergence to stabilization. So we are moving towards stabilization. Of course, we can have some hiccups, some ups and downs. If we can convert a portfolio or contract cancellation, we can have -- we can see some fluctuation of these numbers. But we are very much focused on the organic part of this. SME has had very competitive prices. SME has dynamic rates. We have daily movements of the prices here. But for the Affinity portfolio, prices are more stable. The prices are valid for a certain window of time. So we're always looking at these price fluctuations, and therefore, we can have some mismatch of time between the prices and the sales timing. But when we have lower prices in SME, then we have to tell that to the market. And when the prices go up, we can negotiate temporary promotions to improve prices here. But I think that we're doing this much better now. We are communicating better with operators, and we can now make these changes in the system more swiftly. So I'd say we're on the right track. And yes, I expect to be able to reach growth in the coming quarters. I am quite confident we're on the right track. Internally, I think that we have changed everything we needed to change. to focus on the drivers that can bring sustainability. So acceptance is very well calibrated. I'd say these are the best products we've seen in the company across the board. It's not for one operator or another. I think there would be no operator saying that we're not at a good wave, and this improves our stock. Every month, we help reduce MLR. And we have been making just 1-digit readjustments now, which is something we hadn't seen in a very long time for large operators. So I think things are going well. They're running smoothly, and I don't see a lot of adjustments to be made in the flywheel. But we can make adjustments to improve productivity with automation tools, AI tools and others, the potential is huge. So we are already evolving in this. We went from almost 3,000 employees to 1,300 employees approximately, but there is a lot of room to improve this without decreasing the service level. So the focus here is on communicating to operators about better pricing frameworks. And when we are more competitive, we need to communicate that to the market. And if we're not that competitive, we have to think about replacement products and then also work on improving productivity since we already have the foundations in place. We have worked on changing our foundations for two years now and communicating that to our partners, and this is now behind us. Thank you for your question. If you need further clarification, just let me know.

No, it's very clear, Mauricio.

Our next question is by Felipe Amancio with Itaú BBA.

I have two questions here on my side. The first is about contingencies. You mentioned in your presentation that you expect the digitalization scenario to be more profitable in 2026. So can you tell us about the KPIs or the trends that you have seen that make you feel confident that this digitalization scenario will be thriving in '26. And now my second question is about expenses. We saw a drop in your SG&A level this quarter, and you said that you can still improve productivity. So what is the size of this opportunity to reduce expenses from now on? I want to understand where the company can get when it comes to this line.