Good morning, ladies and gentlemen, and thank you for holding. Welcome to Qualicorp Q4 2024 Earnings Webcast. Joining us today are Mr. Mauricio Lopes, CEO; Mr. Edgar Grande, CFO and IRO; and Mr. Eduardo Garcia, IR Superintendent. Please note that some statements made during this webcast may be forward-looking in nature. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those anticipated. This event is being streamed live over the Internet and can be accessed at ri.qualicorp.com.br, where the corresponding presentation is available. We would also like to inform you that this event will be recorded. Participants will be in a listen-only mode during the company's presentation, after which we'll begin the question-and-answer session when further instruction will be provided. I would now like to turn the floor over to Mr.
Mauricio Lopes, who will kick off the presentation. Mr. Mauricio Lopes, please proceed.
Bom dia a todos. Prazer estar com vocês aqui hoje.
Good morning, everyone. It's great to be with you in another earnings conference call. I would like to thank our community of investors, partners, and Qualicorp for joining us in this call to discuss the earnings results of the Q4 of 2024. Although there haven't been many changes in the landscape of the industry, Qualicorp has had great interactions with the HMOs. Looking at 2024, we had major launches of products throughout the year, and we'll go back to that later on, with a large number of HMOs. In spite of the difficulties in the industry, we have new entrants and a group of HMOs that are getting organized and a set of portfolios that are being better designed in order to serve the population.
At Quali, we continue with our strengths and certainties to help in the growth of this industry with our capacity to redesign products, processes, underwriting, interaction with HMOs, redesigning portfolios, and our great footprint in the administration and distribution of products. We continue working from south to north of Brazil, strengthened with our regional offices spread throughout the whole country. And more than that, during this time of reorganization, we've seen at Quali a great capacity to generate results. We are very resilient, and we've been so in all recent quarters. We'll talk about the quarter results in a minute. The turnaround process continues as planned. We started 16 months ago, and we have been consistently doing what we planned for this process that started in August 2023.
This internal restructuring, design of operational processes, underwriting, capital allocation, we are very focused and generating results like we planned for the period. When it comes to capital structure, we continue deleveraging the company, reducing our EBITDA/Net Debt ratio, continuing with our deleveraged plan. This has been led by the financial team at the company. In portfolio, we have been advancing. We had 138 products launched in 2024, nine HMOs, most of them exclusive, which is very positive to us. Whenever we have this exclusivity with an HMO in their portfolio, we can design a better distribution model, and we can offer products with greater accuracy to all consumers without having to struggle with a CAC. And therefore, we continue working well. When it comes to expenses and operational efficiency, we were able to reduce BRL 110 million in fixed expenses and BRL 55 million in commissions throughout the year.
We've been talking about that with you quarter after quarter, but this is just a consolidation of the full year, and this leads to an improvement on our adjusted EBITDA minus CAC margin. Capital allocation is now being more accurate, and that improves an indicator that is very, very important to us together with cash generation, which is adjusted EBITDA minus CAC. We are performing as planned, and we continue working, launching new products. These products that are now being launched with the new HMOs have proven to be well accepted by the audience, sustainable products, and a very good offer. Our focus is to launch well-developed and well-designed products for the target audience with a well-performed underwriting process so that this can lead to a product with very mild MLR variation.
This leads to greater customer satisfaction, fewer lawsuits, and that's a topic that is quite common for everyone working in this industry. We are trying to create a more stable portfolio, a better developed portfolio. Another important point regarding Q4, although we do not measure the company by the number of lives, we had the lowest number of churns in the last 10 years for a Q4. This is not one of our main targets, but that is an important point that we would like to highlight in the last 16 months. Now I would like to turn the floor over to Edgar, who is going to talk about our financial performance, and then I will be back for the Q&A session. Thank you very much. Thank you, Mauricio. Good morning, everyone. I am going to give you some numbers that reflect the landscape that Mauricio has just described.
The company closed Q4 with 639,000 members in our Affinity Managed portfolio, down 1.6% versus Q4 2023 and down 0.8% against Q3 2024. We had the greatest growth adds with 58,300 new members in our base. This continues with the trend of the deceleration of the loss of members. Churn was the best for a Q4 since 2020. This reflects the actions that we've been implementing for retention. In terms of gross adds and this improvement of churn, this is only possible because of our work in developing a complete portfolio of products, and this is a process that is still under maturation. Net revenue, the company closed the quarter with BRL 389 million in revenue, 2.3% lower than the previous quarter and 7.2% lower year over year. This is due to the movement that we have seen in the managed portfolio.
As we said in previous calls, but we would like to highlight here once again, this shows the resilience of our business model. In the lower right corner of the slide, you can see our adjusted EBITDA minus CAC totaling BRL 105 million in Q4, 27% lower than the previous quarter and 23% lower year over year. This was impacted with lawsuit expenses that have been impacting the whole industry and that have also impacted Qualicorp. We did not see the same effect in previous quarters, unlike the rest of the market, but unfortunately, this has reached us in Q4 2024.
Talking about recurring costs and expenses, on the chart on the left, fixed expenses in Q4 totaled BRL 114 million, BRL 7 million lower than the previous quarter and BRL 24 million than the same quarter last year, a reduction of about 17% in fixed expenses. Year over year, this reduction was 19%.
That is BRL 110 million. This is a direct result of our operational efficiency work that started in mid-2023, and the company will continue to focus on that throughout 2025. We know about the recent facts, restructuring of the board. This all aims to improve efficiency and reduce costs at our company. On the chart at the center, you can see recurring variable expenses. We have broken this down in two parts. One for variable expenses, over which we have some type of control, and another one for those that are out of our control and are industry-related. Those that are out of our control are lawsuits. We had a significant increase in lawsuits that impacted the numbers of Q4. Most of those lawsuits come from unilateral cancellations that happened in the Q2. Nevertheless, this increase is not restricted to us.
This is something general happening throughout the whole industry. Unilateral cancellations led to a significant volume of lawsuits, but in our operations, we can already see a relevant increase in cases. The silver lining is that all variable expenses that are under our control, such as commissions, have shown significant reduction, both in absolute numbers and in percentage of revenue. This reflects our commercial realignment strategy that we started to execute early in 2024. On the chart on the right, you can see our organic CAC over net revenue. We have had an increase year over year, as well as quarter on quarter. This is no surprise. We talked about this in our previous quarter's earnings calls, but this is a sustainable and reasonable increase, and it's in line with our capital allocation strategy.
As a result of this whole process, improving operational efficiency, commercial realignment, and capital allocation, we closed Q4 with a recurring free cash flow of BRL 85 million, an adjusted EBITDA minus CAC reduction of around 81%. This free cash flow generation led to a reduction of cash leverage and a reduction of our net debt of 20% as compared to Q4 2023. Capital structure and leverage is no longer a challenge for us. This concludes the main financial highlights, and I'd like to turn the floor over to Mauricio once again. Great. Thank you. When it comes to products, just to give you a bit more flavor, in the first nine months of 2024, we had launched eight new HMOs, eight new payers, and we launched yet another one in Q4 2024 focused on having exclusive products.
As I said earlier, exclusive products bring an ability to organize distribution to us. We can size the distribution channel and size our sales force appropriately and the CAC that we aim to allocate to each one of the products, and that increases the options for our consumers that need new products and products that are more aligned with their needs. Products with co-participation, with a network that is more focused and with a more modern claim approach. In the first nine months of 2024, we launched 94 new products, and we have launches in the pipeline for the coming quarters. Our managers are looking at the launch of new products. This used to be a challenge for us.
We talked about that in previous conference calls, but now I believe this is a challenge that is behind us, just like the capital structure challenge that we used to have when I joined. I believe that now we will focus on increasing our sales pipeline and not the product pipeline and how to reduce the portfolio's churn rate. A topic related to CAC is the increase in sales, and another topic related to churn reduction is the improvement of internal processes and our ability to offer products for those that need so that they can come into our portfolio. This concludes our presentation, and now we would like to open for questions. Should you have any questions? I believe we already have some people waiting in line to ask their questions. Let's get started. Thank you. We'll now begin the question and answer session.
If you'd like to ask a question via audio, please raise your hand at the bottom toolbar, and we will enable your microphone. Questions will be answered in the order they are received. Please hold while we pull for questions. Nossa primeira pergunta vem de Lucca Marquezini. The first question is by Lucca Marquezini from Itaú. Luca, we have enabled your mic. Please go ahead.
Good morning, everyone. Thank you for taking my question. About contingencies, this is a line that has increased this quarter and that has impacted the company's profitability. Can you tell us about the levels you expect for 2025, and what is your take on the level of lawsuits in the industry? Will this have a major impact in the number of 2025? Thank you.
Hi, Lucca. The contingencies are an industry challenge that must be addressed in a structural manner. Individually, it's very hard for the company to address that topic on its own. In spite of that, we have internal initiatives aimed at minimizing this impact. Of course, without structural adjustments, we cannot expect the volume of lawsuits and the impact it has on P&L to be very different from what we had in Q4. This shows a mild reduction, and lawsuits have impacted us mainly due to the unilateral cancellations that happened in Q1. We expect some pressure and lower levels than what we saw in Q4, but not a significant change. This is Mauricio speaking now. Let me just give you some context. Quali, broadly speaking, is not the target of those lawsuits.
What is being discussed in those lawsuits is a discussion between the HMO and the member about some kind of coverage, a denial, a reimbursement that was denied, or some kind of discussion on readjustments, and not our role as administrators. When a member goes to court, they include as part of their complaint both the HMO and the administrator, and that's where we come in. That's why the lawsuits tend to take a bit longer to reach us, because the obligation to perform is not that of the administrator. We do not have our own network of providers. We do not define the coverage and so on and so forth. This is what happens throughout the whole healthcare industry. At the end of the year, the judicial sector said there were 309,000 new lawsuits in 2024 alone in the private healthcare system for healthcare plans.
On Qualicorp's side, the discussion of coverage or reimbursement or whatever is not under our control. We're just listed in the complaint together with the HMO. We may have some lawsuits related to unilateral cancellations that happened in 2024, Q2 and Q3, and these cancellations materialized in the contingencies that we saw. Additionally, there was a set of actions related to readjustments of contracts. This happens every year. In 2023 and 2024, we had readjustments that were much higher than what we used to have in the past. It's important to highlight, however, that when we look at the full year of 2024, readjustments, they were substantially lower than those of 2023. That was very high. '23 and '24 had high readjustments, but '24 was better than '23. In 2024, we expect to see lower readjustments as the industry reorganizes itself.
With lower readjustments, we have fewer lawsuits and fewer cancellations as a result, and therefore we can lower the provisioning as a result. I think things are aligning for the future, but that is the context for the industry as a whole. Thank you. Great. Thank you very much. Nossa próxima pergunta.
Our next question is by Thiago Marmo, from Safra. Tiago, we have enabled your microphone. Please go ahead. Senhor Thiago, seu microfone já está liberado. Thiago Marmo, we have enabled your microphone. Please unmute and ask your question. Nossa próxima pergunta. Our next question is by Renan Prata, from Citi. We have enabled your microphone. Please go ahead.
Good morning, everyone. Thank you for taking my questions. I have two brief questions. One is a follow-up on the contingencies issue. You said in your release that you expect a partial offset of those provisions with cash conversion. What do you expect there? Have you been able to get any type of reversion of this, and what do you expect for the rest of the year? My second question is to Mauricio. Mauricio, you said that the product portfolio is now developed and aligned with your plans. You have talked about that last year. What can we expect for 2025? What are the challenges that you have ahead of you at the company, considering that the product portfolio seems to be an issue that has already been addressed now? Thank you.
Thank you for your question, Renan. About that offset, it's hard to fully offset that effect, but this is a recurring work that we do every month. We see the position, and we negotiate with the HMOs.
As Mauricio said, this is not a responsibility of Qualicorp, but we always analyze the case, and we try to settle agreements and negotiate that with the HMOs. That is a process that takes time. It is a complex process that always takes time. This is something we have been doing on a recurring basis. Now the volume has increased, so we need to focus a bit more on this front. This is Mauricio speaking now. About the challenges for 2025, our take is that indeed we have been able to bring all of the products we wanted to the portfolio, especially with HMOs with greater appetite. Now several large HMOs are more hesitant and careful with some product launches. The challenge we have is to do the right sizing here at the company to ensure we have the right capital structure.
That used to be a major concern we had six months ago, but we've addressed that, and our debt structure is now on the right track. This is no longer a challenge. Now, a second step that was happening in parallel was to review the acceptance process and portfolio management. This has been addressed. We talked to the HMOs and showed them the great technical work that we've been doing. Meanwhile, we ended up renegotiating our whole sales structure. We replaced most of our sales structure with Bustos. Joining the company, his new team came in as well. This team got together to restructure, to get in touch with the brokers, and we changed the compensation model.
We now have a more modern compensation model, which is not perfect yet, and that's a challenge because most of the industry continues with a compensation model that focuses very much on brokers, and that's not what we want. We want to change this dynamic. We changed the commissioning model of the whole industry. 100% of the contracts were amended to change that model, and that created a large sales challenge. That's our number one challenge now. We want to sell more, and the whole corporation has a commercial thinking and has sales responsibility now. On the other hand, we are very comfortable in not selling anything that is not 100% adherent to our contract with customers. We want the sales to be transparent, focused on the long run, and sustainable. We firmly believe in this, and we'll continue working on this obsessively.
We have been increasing the CAC quarter after quarter, and we talked about that some quarters ago. We were testing the elasticity of the CAC since Q3 2023, and now our CAC is much lower as compared to the premium. We think that we still have room to increase the CAC, but we do not want to do that in a way that is not careful. We are implementing compensation models for different products. Some products react better to one type of CAC, and others react better to another type of CAC. We are going to start working on a new sales model in March. We want to increase sales, but we want the sales to be sustainable. Another challenge is to control our churn rate. We have changed our retention strategy. We have been performing really well.
We are structuring retention sales here at the company, but we think that we still have a way to go here in terms of technology and offering the right product to customers that are leaving, the best way to offer this, and the best compensation for that process. I think that would be the tripod of 60% of our work here at the company. 20% of our focus is on the engagement with the HMOs to continue devising portfolio and to help HMOs that have cash needs. We talked about that some calls ago and how we can do that in exchange for good commercial terms. The other 20% focuses on internal efficiency, optimizing and streamlining operations, reducing our inventory of systems, and we continue also focusing on operational and admin efficiency. These are our challenges for 2025, four different pillars that we've been working on.
Some of them have progressed more than others already. This is our focus now for 2025. That was very clear. Thank you very much. Nossa próxima pergunta.
Our next question is by Flávio Yoshida from Bank of America. We have enabled your microphone. Please go ahead. Good morning, Mauricio, Edu, Edu.
Thank you for taking my question. I actually have two questions on my side. First, I'd like to hear from you. What is your rationale and your take on the CAC? You have just said that the CAC is increasing, and this is going to help you achieve robust growth. This higher CAC has led to an impact on cash generation. Can you walk us through your thinking when it comes to this dynamic? Now a question about the lawsuits.
You said that at the end of the day, you are part of a larger landscape. Since the main lawsuits here refer to coverage and reimbursement, do you feel that this is actually something that relies more on the HMOs and not on you? The cost that you will have to incur related to those lawsuits is near zero, or do you think that you will have to end up helping in that provision as well? Hi, this is Mauricio speaking. Let's start with CAC. We do not see a landscape in which we will increase CAC substantially. That is not what I meant. We believe that the CAC must be changed surgically. This older format of paying high brokerage fees that is not tied to customer pay, and we did not see whether the distribution of the broker was correct or not.
I mean, that old process consumed a lot of CAC, and it was not right for us. Now we want to choose a set of products, a set of locations, and a set of partners with better results, and then we will surgically change our CAC here and there depending on that. Specific locations like Belo Horizonte. Belo Horizonte is a very stable location with good coverage, good offers, with stable products. We should not increase CAC substantially there because that is not going to lead to a major increase in lives. Here, we want to focus on long-term relationships with HMOs, with brokers, and strong partnerships. A location like São Paulo, on the other hand, has many new entrants, many new products, many hospitals repositioning themselves, and lots of volatility.
This is a location where we should have a bolder commercial strategy, the launch of new products, new portfolios, exclusive HMOs. Here we should increase the CAC a bit more. That is what we have been talking about, how to calibrate the CAC by location and by product and not something widespread in the market as it used to be in the past. We do not think this is going to consume cash substantially. Of course, it will consume a bit of cash, but it is not going to make us lose sleep at night. When it comes to the lawsuits, we have three blocks. For Qualicorp, we are included in the readjustments, cancellations, and coverage/reimbursement block. For the readjustment block, we see the readjustment percentage decreasing over the last years.
Twenty-four was lower than twenty-three, although it's still very high, and twenty-five is expected to be lower than twenty-four. As a result, since this is a consequence of the readjustment, we expect the lawsuits related to readjustments to decrease as well. We do not think this is going to be a major offender for 2025 onwards. In the block of unilateral cancellations, our interpretation is that HMOs are being more careful with unilateral cancellations. In 2023, for small companies, we saw many cancellations that led to a legislative discussion with some HMOs. In 2024, we saw that expanding in small companies' portfolios and reaching affinity portfolios as well and corporate portfolios. The HMOs called this a cleanup, but this is actually cancellation due to readjustments. We saw this happening in 2024, though not as much as we saw in 2023.
We do not expect this to be significant in 2025. The HMO said that they are reviewing this, and as a result, we believe that the lawsuits will decrease. We are starting Q2, and we have not seen any relevant movement of unilateral cancellations by the HMOs so far. Now the other block, the final block, is about coverage. I think that will depend on the behavior of HMOs, but I have been reading here. E que eles estão entregando aos consumidores. They have been a bit more stable in terms of what they deliver to consumers. I think that maybe 2024 was the peak of lawsuits in the healthcare industry, and we expect this to decrease in 2025. Of course, there is no crystal ball, but we believe there will be a reduction because of all of these issues that we have discussed. Okay, thank you very much.
Our next question is by Gustavo Miele from Goldman Sachs. Gustavo, you have the floor.
Tudo bem, pessoal? Mauricio, Eder, Edu, obrigado pela apresentação. Hello, Mauricio, Eder, and Edu. Thank you for your presentation. I have two questions on my side. The first is to Mauricio. Can you comment on the feedback of your commercial partners about this alignment of targets that you have set with your commercial partners? Have you had to recycle any of those partners? Was there any attrition there? Can you tell us about the metrics that you have? Só pra gente ter pouco mais de sensibilidade. Just wanted to have some more color related to that. My second question is about the lawsuits as well, but from a more technical perspective. When we look at a quarter-on-quarter comparison, we see a significant increase in contingencies, but PCLD has not changed.
In this lawsuit discussion, I think there is a subtopic, which is the impact of Resolution 593 that extends the deadline for unilateral cancellations to two months. Então, eu só queria entender se o entendimento de. That should not be in the contingencies line. Has it all been included in the contingencies line or also PDD? Por conta dessa nova. São esses dois pontos, pessoal. Muito obrigado. These are my two questions. Thank you. Abriu, abriu. O Mielli, obrigado. Mauricio. Hi, this is Mauricio speaking. Thank you for your question. Reciclagem de parceiros comerciais. About the recycling of commercial partners, that was the expression you used. We feel very reassured. What happened was that in the beginning, the HMOs were still very much focused on gross ads, and this discussion was so top of mind to everyone that HMOs also had that vision.
In analyst reports, we often see what they call gross ads. I think that this is now changing. A gente está muito mais preocupado em. We are now very much focused on having a view on customer stay, customer permanence, and stabilization than only growth for the sake of growth. The affinity product, if well executed, can address many problems. Ele consegue ser produto. It can be a broad spectrum product, a national product, or a retail product. It can have a great footprint, and if it's well accepted, well underwritten, and well devised, a good permanence. Customers have been staying with us for a longer period of time, and we measure three, six, and nine months, and the MLR is quite appropriate for what the HMOs want. We will continue focusing on reducing costs for customers because that's our number one focus: to serve our customers.
We are here to create access, to offer sustainable access to the whole Brazilian market. In order to generate sustainable access, we need a good portfolio management in partnerships with HMOs, with brokers, with service providers, and so on and so forth. We've been working with the HMOs to see if we can focus on specific locations to see who the good providers are and the optimum co-participation level and how we can compensate this channel. I think that's our journey from now on to have good sustainable portfolios. Sustainable portfolios have low readjustment levels and lower costs for everyone to keep them in their portfolio. We can focus on the NPV of the administrator, the HMO, and the benefits offered to members. We are well aligned, and we believe we will attract more HMOs in the future.
Of course, the HMOs will choose their administrator that they want to become a partner, but those that are with us, we intend to keep them for a very long period of time. About the Resolution 593, I'd like to turn the floor over to Edgar. Edgar. Yes, Resolution 593 is a concern, but the company has been talking to HMOs and adjusting internal processes to make sure it's well aligned with the HMOs and so that we mitigate the risk of having overdue payment. We've been doing that by using suspension. Our internal process has been adjusted and aligned with most of the HMOs. We're still working with only two or three, and the goal is to minimize that impact. Yes, that is a concern that requires a process alignment with the HMOs, but we believe this is under control.
We don't expect to see any increase in delinquency as a result. Our teams of operations and systems worked hard in recent months to try and redesign all of the contact manuals, and we forward customers to the collection and retention cells, and everything that is being sent to customers has been reviewed in preparation to this new resolution. Some HMOs make decisions very fast, others take a while, and we're still trying to see how they will behave. In our 80 to 20 of HMOs, we've been able to do that. With the new processes in place, considering the regulatory changes, I'd say we are well prepared. Let's see how the next quarters play out. I'm sure you'll be there to see as well. That was very clear. Thank you, Mauricio and Eder. Have a good day. Nossa próxima pergunta vem da senhora.
Our next question is by Stella Estrano from JP Morgan. You have enabled your mic. Please go ahead. Good morning.
Thank you for taking my question. My question is about cashback. With the structure at the pace that you expected, as you commented in your call, and with this deleverage and cash generation accelerating, can we expect more dividends to be paid out in 2025 or 2026? Thank you.
Estela, obrigado pela pergunta. Hi, Estela. Thank you for your question. Para 2025, a probabilidade de distribuição de dividendos é. The likelihood of dividend distribution in 2025 is minimum. We'll pay only the compulsory level, the 25% that is compulsory. Now, for 2026, that will depend on the company's performance, stabilizing the customer base, and cash generation. That's not a priority.
Our priority is to deleverage the company and have a more stable number of lives, but we would love to be able to announce that in 2026. Mas de fato não é algo que a gente está. For now, that's not something we are considering, at least not in the short term. Ótimo, obrigada. Okay, thank you. A sessão de perguntas e respostas está encerrada. Gostaria agora de.
The Q&A session is now over. I'd like to turn the floor over to Mr. Mauricio Lopes for his final remarks.
Vamos lá. Acho que é uma chance que fica do nosso lado. I think. Acho que é uma chance que a empresa inteira. The headlines for us is that 2024 was an interesting year for us, a year of full turnaround, adjusted net profit going up, product portfolio expanding, capital structure well aligned, churn reducing.
We did most of our homework we had for 2024. We still have homework to do for 2025, but we did our homework for 2024. The work performed by all teams was quite positive. It was a hard year for our company. Just to remind you, this company had, at the end of 2022, early 2023, almost 3,000 employees, and now we have about 1,500 employees, and we're very proud of our team. We have a premium, highly skilled, and engaged team, and I want to thank all of our qualities, all of them, everyone who believes in what we are building day in, day out, a team that is half the size of what it was in the past. This is proof that with good organization, efficiency, and focus, we can deliver return for shareholders and satisfaction for members.
Thank you from the bottom of my heart, all of our stakeholders and our board of directors that continue to support the work we do. The company will continue with this turnaround model till the industry and the market readapt. We think this is a good mindset for the long run. This creates a resilient company, and in the healthcare market, we must be resilient because we know this market suffers many pressures because of its nature, and this creates great champions, great companies, but we're always under pressure, and we are confident about the way to go and will continue progressing. Então, agradeço de novo. Thank you. Once again, I want to thank all of the stakeholders, commercial partners, and employees, and let's keep on working. Have a great carnival, everyone. A apresentação de resultados do quarto trimestre de 2024.
This completes Qualicorp's full quarter 2024 earnings webcast. Thank you all for joining and have a great day.