Good morning, ladies and gentlemen. Thank you for waiting. Welcome to the Qualicorp's video conference to discuss the results for the third quarter of 2024. We have here Mr. Maurício Lopes , CEO, Mr. Eder Grande, CFO and IR, and Mr. Eduardo Garcia, IR Superintendent. Some forward-looking statements here mentioned may be projections or statements on future expectations. These statements may involve known and unknown risks and uncertainties, which may cause such expectations not to be met or to be substantially different from expected. This video conference is being streamed and recorded, and it can be available at ri.qualicorp.com.br, where the presentation is also available. Please note that the meeting is being recorded, and all participants will be only watching the video conference during the presentation, and then we will begin Q&A sessions when further instructions will be provided. I would now give the floor to Mr.
Maurício Lopes, who is going to open the presentation. Please, Mr. Lopes, you may proceed.
[Foreign language] Thank you. Good morning, everybody. It's a pleasure to be here with you for one more conference call. I thank all the investors, partners, and our colleagues who are here with us and work on a daily basis with our customers. What we are foreseeing in this quarter, we don't have significant changes in the scenario as compared to the previous one that we had our call in August. It's about the same dynamics. The sector is being reorganized with signs of improvement, step by step. This process is not over, and we believe that the resilient companies will have a better market in the future. However, the key here is resilience to wait for this better moment of the market that is coming soon. In Quali, we keep paying attention to redesign the sector.
We'll go on with our technical protagonists and capillarity in the administration of the product, generating results in a resilient way, improving quarter over quarter. Regarding the quarterly results in this mode of turnaround that we will keep as the market reorganizes itself, it's quite consistent. We have fixed expenses stable. We see opportunities in fixed expenses and also in variable expenses that's maturing. Much has been done, and we are seeing the results quarter over quarter, and we'll keep seeing that. In spite of the base of members being reduced, we can maintain an Adjusted EBITDA margin minus CAC stable, so we fluctuate a little bit, not much, and we see that we are well designed in this model of having the capacity of cash generation and result regardless of the market. In the portfolio management, we keep with the same principles.
We're quite focused in having a process of accepting and product design and quality on sales, best in class, and we believe that in the short run, yes, it's a little bit holds the sales, but it's the key of success in the long run. This system only works in retail if you have an adequate product, an adequate acceptance process, and also payback to the stakeholders and working for the client to have less readjustments in the long run, reducing the churn, the turnaround portfolios, and everybody remaining and being happy. This is our guidance. It's implemented in everybody's head, and it's the way that we have been working in the last 13 months when the turnaround began, and we are relentless and confident in this model.
Some interesting data that came out of all that, besides being able to maintain EBITDA minus CAC stable, besides reducing fixed and variable expenses in a fixed way, we're also seeing the smallest churn of the last four years in the third Q. There was a smaller readjustment. The product's more adequate to what we understand as long term. The retention structures are working better within the company redesign processes, and this is becoming true in this low churn in third Q, and the more we prosper in this model of product design, acceptance, and management, the more we're going to have good churns in the future. Regarding portfolio, we keep going forward in our portfolio. I think that we have a portfolio that's quite interesting.
We launched three other HMOs in this quarter, and we are maturing in the book of HMOs that we need in what we have been working in the last two months. Within this book, how do we make true favorable conditions for the client in the book that we already have? But maybe we will not go as actively towards a set of HMOs for the coming cycles. Now, I give the floor to Eder. I announced in the last call, and we announced in the last Fato Relevante. He has been with us for 40 days, quite experienced. He has been in many industries, what's important for us besides health industry. We wanted to bring somebody with the capacity of adding knowledge of other sectors to our health structure since we are trying to rewrite part of our management.
It is important to bring new oxygen to this model of redesign. And we were really active in the search, in this quest to find Eder Grande for our structure. So, Eder, it's with you, and I'll be back in Q&A if there are any at the end.
Thank you, Maurício. First, I would like to thank the company for the warm welcome from everybody, the team, the peers. I'm so proud to be part of this team. Regarding the figures, the portfolio managed, we closed with 663,000 lives, almost 23% less than the same quarter last year. Although this 5.2 drop, the drop in revenue was very low because in the third quarter, we have a concentration of readjustments, so that helped a lot. We had a drop in agency and the revenue because of cancellations from second quarter.
This drop, or better, the revenue being stable, reinforces the resilience of the operation. It gives us strength and breadth for the coming quarters. Something to emphasize, as Maurício mentioned, is the churn reduction in a quarter where we have a concentration of readjustment. We had a drop of churn that was important vis-à-vis the second quarter, a reflex of improving processes, better retention of products, process of acceptance that was more compliant, and we closed third Q with BRL 143 million in EBITDA that's stable, which shows the results of what we did in this turnaround process more than a year ago, and now it's a constant dynamic. We're always looking inside, trying to improve processes and looking to optimize resources. The recurring expenses closed this quarter in BRL 221 million. Fixed expenses BRL 121 million, so BRL 2 million drop as compared to the previous quarter, 30.8% of net revenue.
Variable expenses were above the previous quarter because of some operational aspects of the first quarter, first half, actually. However, it's manageable, and we expect that fixed, variable, and recurrent expenses, there will be a trend to reduction in the coming quarters. Our expectation is positive in this sense. Organic CAC has a low level, so it gives room for the company to allocate capital in a more efficient way. And it's worth emphasizing that this allocation does not mean that the company is not going to reduce indebtedness. The intention is to increase investment in CAC, but in a diligent way and always thinking about the company's debts, so the market should not be concerned with that.
Cash generation, we had one more quarter that was quite interesting. The cash flow was BRL 103 million in the quarter of adjusted EBITDA minus CAC, 79% in cash, reduction of the net debt as compared to last year's 19% and leveraging 1.44 times EBITDA. It's worth emphasizing that the company is quite comfortable regarding the cash. The cash is quite strong, can face the cost of debt and amortization for 2025, and we have some credit avenues, so we are comfortable. This investment in CAC and the trend towards debt, along with credit avenues, credit lines, we're comfortable. [Foreign language]
Going towards a growth scenario with capital responsibility.
I don't know if Lopes would like to say something or Eduardo would like to say something.
Just one thing to add, we were talking about variable cost. It's worth emphasizing two avenues to understand the variable cost that is growing this quarter. The first avenue is that sustainable and long term is commercial realignment that was done as a strategy of turnaround, so we could capture one more gain in the third quarter, and that should last for the future when we look at the result of the company. On the other side, we had an effect that part of this gain that was because of contingencies and other things that Eder has commented that still have impact this year. But this is a one-off effect and can be changed in the future, and we are confident that we will generate good results for the company. [Foreign language] So this is it. I give the floor back to Mr. Lopes.
Okay, last slide. I didn't notice it. What's going on? We have three other HMOs that we adopted, so to say, this last quarter: Nova Saúde, Atitude Saúde, Américo Saúde, three HMOs that have lots of capacity of regionalization, 16 new products that are launched. There is a pipeline of products, as I mentioned, that is quite large. We're more selective now. The pipeline is still large, and within our book of products, we want to have better commercial conditions for the clients. The slide shows that we keep being quite attractive commercially-wise. And what's interesting right now is the amount of HMOs that have appeared in regions trying to grab market spaces that the incumbents are setting aside because they're focusing on a different niche or product. And we are paying attention to that. We're grabbing these niches in a diligent way.
And so the mean time that we are taking to utilize our product has gone down in relation to the management from three months ago, and that facilitates a lot for us. When we find these opportunities, we do a quick launch. I just wanted to mention that we have a good portfolio, just like last quarter, and I think that now we will head to Q&A.
Thank you. Now we begin Q&A sessions. If you wish to ask a question, please raise your hand on the lower part of the screen, and we will open your microphone. The first question comes from Felipe Amâncio from Itaú BBA. Please, Felipe, open your microphone.
Good morning. Thank you for answering my questions. First one is about new products. If you could share how much these products this company has launched, how much it represents in sales. And second, about contingencies. In this quarter, we saw an increase in contingencies because of unilateral cancellations. How much of this is recurrent, or most of it can we consider as a one-off impact?
Felipe, this is Maurício Lopes. About new products. And our products, some of them have capacity of growth. They have representativity in some regions. What we did three months ago, and this is the dynamic that we're going to follow. For those who have been following the four last video calls, we left that model one-size-fits-all, and we decided to become regional for everything. So this product, they have to do with these regional structures. They really match, so it's really working. At large, we consider that they are quite relevant, and our expectation is that they become good flags throughout time. Some of them will become national. I think they have this capacity. However, the most important vocation of all of them is to be an excellent player in a relevant region. Regarding contingencies, we can think about two great factors that impact this quarter.
The first one, considering operational factors that the company had emphasized from the fourth quarter 2023, something systemic from the middle of last year, we had impact in the operation, and this generates some process things with invoices and also unilateral cancellations. And within this, even if the possibility is not from the administrator, but from the HMO, we work together, and that impacted on the result of this quarter. This is why I said that it may extend throughout the second quarter, the second half.
[Foreign language] Thank you. Thank you for your answers.
Next question. Yan Cesquim from BTG.
[Foreign language] Good morning, Maurício, Eder, Eduardo. Two questions. First one, on commercial strategy, I would like to understand whether you have seen effects that come from more focus on commercial strategy, maybe looking at October, beginning of November, if you see an acceleration of these cross-sells. And second question that has to do with commercial strategy and cash flow, I would like to understand a bit about the plan for the anticipation for partner HMOs. Can we think in the coming quarters about something in the same levels that we saw in the third Q, about BRL 25 million in advance?
Hi Yan, thank you for your question. Commercial strategy, yes, I think so. We are really picking those fruits as we advance. When you advance the product, you bring some confusion in sales channel because everybody wants to sell.
As they mature a little bit, we start to see the production line improving. I think we are doing well here regarding these advances. They are one-off effects. What we did was to open this chapter that we had not opened yet. We were trying to stabilize the relation with the distribution channel that was done, and we added everything we could, a huge amount, selling better quality, sharing some type of risk for the broker of the producer, focusing on good quality sales, and so on and so forth, and that demanded lots of energy. And now the topic with the HMOs, which was the launch of portfolio, that went well, as we have mentioned in the last half. And we are using the relevant cash in this moment.
How can we generate cash and help a partner that needs cash in the short run, and we want them for a long time? It's very simple. Nothing is permanent. It's punctual. It's on occasion for the partners that we believe that we can have a long-lasting relationship. And I think it's worth reinforcing that the risk for the company is about zero because the manager, the whole flow goes through Qualicorp, and we pass that to the HMOs. The moment we do that, the risk exposure is close to zero.
[Foreign language] Perfect. Thank you, Maurício and Eder.
[Foreign language] Next question from Gustavo Miele from Goldman Sachs. Please, Gustavo Miele.
[Foreign language] Hi, Lopes, Garcia, Grande. Thank you for your presentation. I'd like to ask two questions too. First of them, I would like to ask you to give an update on what you have been doing regarding increasing the alignment of goals with the sales force. The stabilization of the CAC and this level suggests that you have an incentive for the partners that are aligned, and within this context, could you comment?
Sorry, I can't hear him anymore.
[Foreign language] well, it seems that something happened to Mr. Miele.
Can you hear me now?
[Foreign language] Yeah, we heard the first question on commercial incentives.
[Foreign language] To match that with early churn, that would be interesting as a KPI to check the results. And also I'd like to understand what we should expect regarding rhythm and magnitude of CAC increase as the company regains this growth sales that you were talking about. Thank you, and sorry about the audio.
Okay, thank you for the question. That's okay.
The model is complete. There is some regional adjustment to be made. It has specific characteristics for site and date. São Paulo is different from Brasília, different from Salvador, Bahia, but we believe that as important as having the distribution channel at the tip is having the product of the HMO. The product is quite relevant. So what we have been doing along with the channel is to understand which products the HMO has the most appetite to distribute, and we have focused in paying for the channel and the specific products. The effect of all that is that we tackle the payment model. We put it on the 13th month. The result of all that is that we have seen early churn to understand quality of sales, and it's improving every day.
The percentage of lives that we lost in less than three months of a contract after a new sales, that's the definition of this indication. It's very low, the lowest we ever have, maybe too low. Part of that is how can we take it to a correct level that's more productive for the HMO and for the distribution channel. Maybe we're going to increase CAC a little bit because of that. However, we are at the level of CAC that is quite, it's well, it's doing well. And maybe what we have to deal with is the speed of delivering that. What we have to look at, we have found the plan for 2021 that had a large CAC, the new CACs that we are doing, we have less impact in the results. They are smaller. I think I answered your two points.
CAC has been explained, commercial alignment was explained, early churn. The KPI has shown good results for us.
Thank you, Maurício. Very clear. Thank you.
Next question by [distortion] from Citibank.
[Foreign language] Good morning. Thank you for answering my question. It's a follow-up on churn. You have commented well about early churn. I would like to understand churn at large, the metric that you use [Foreign language] To measure. Canceling of the beneficiaries. What are the next steps to be able to hold this churn, to stabilize the lives portfolio since we have explored well the strategic commercial part of the new strategic commercial? Could you explore a little bit more regarding retention? What do you expect? What are the attitudes that are being taken into consideration? Thank you.
[Foreign language] I'll answer that. Three things that I find important. Churn is made out of what? Quality of product. The product is good, the network is maintained, has access to whoever it has to, the physicians available or not, but we cannot control that. HMO can. And second impact on churn, readjustment. Is it the product has served or the readjustment is the highest impact in churn? And the third item is quality of sales. We have mentioned before. I want to dwell on that. I'll talk specifically about readjustment and product component. For products, what we did with all the HMOs, and that's 80% of the portfolio, was to migrate to co-participation products and those that have a better managed network.
And that necessarily will lead to a more permanent product where the operator can honor the quality of service they have offered to the customers in the day of the sales. And we have a portfolio that's going to be more stable. It's more balanced. And the effect of that, we expect more and more to have a low readjustment. And it's going to be readjustment since we have inflation and many other things. And what did we do in the company? We redesigned the structure of retention that was external some time ago. It was internalized. It's something new we have at the company. It's the key of success for all of us to retain the product. The other condition is to have a portfolio of products for retention. In this portfolio launch, we gain more tools.
When the client does not want one product anymore, they can migrate to another product. In parallel to that, we have a set of HMOs, and we launch the special conditions for clients. So these two components, plus redesign of structural process, will lead to improvement in retention at large, added to a better design product, better quality, better quality sales. And all this comes together for a smaller churn. And of course, you can always have, as we had in the second quarter, a unilateral decision to cancel the portfolio. We cannot control that. However, in the normal course of business, I think we are in the best way of retention that we had in the last 13 months, which are the ones that I can look at in the company. If I did not explain well, please tell me.
[Foreign languaage] No, it's very clear, Lopes. Thank you.
Next question from Gustavo Tiseo from Bank of America.
[Foreign languaage] Good morning. Thank you for answering my questions. The first one, I would like to explore a little bit more what has been commented on growth strategies in investment and cash generation. Could you comment what is the cap on investment in CAC if we expect CAC investment to be less than BRL 100 million, to take less than BRL 100 million, the operational cash? And do you expect a pickup in the medium term, or are you going to be around BRL 100 million, whatever is above that you can spend on CAC? I would like to understand the strategy of cash generation. And also about SG&A reductions. And have you separated anything? What can you understand? Where do we have room to reduce SG&A? Is there room for that, especially on variable expenses?
[Foreign languaage] This is Maurício here. Thank you for the question. I'm going to answer a bit, and then Garcia will answer the rest. Thirteen months ago, we were obsessed. By doing a quick rightsizing to guarantee that we would have enough cash to honor any debt, at the same time that we would redesign the internal structure and the product portfolio. We're no longer in this phase. We have finished this chapter, and it's a good—and we have to make this clear. We turned this page. We're no longer concerned about indebtedness. We're no longer concerned about product portfolio, and we think that we have gone deep enough in the organizational redesign. This being said, we will keep looking for the most cash generation. We believe that cash is worth—it's worth more than EBITDA, and we will look relentlessly for variable and fixed costs and the risk opportunity.
I believe that we can simplify the process. We have to simplify the process of the company and render it more dynamic and more aligned to strategic partners. I'm going to give you an example that seems simple, however it's relevant. The amount of APIs available for the integration with our most important commercial partners is very low. If you don't have systemic integration in an effective way, you have to maintain an amount of resources allocated in exchanging information on a daily basis. You have to do it continuously. That could be automatized with the commercial partner and maintaining quality for Qualicorp. And we could focus more in process with more added value. However, this journey has to be done together, and we're trying to do it the best way possible. But that tells you that there is opportunity, and we are following them.
Also on variable expenses, when we align the commercial incentive with the channel, everybody gains. Everybody will have a product that will meet the customer's needs. The expenses will go up or down according to the needs, but it has to be aligned with the alignment as we created last year. We had the opportunity to reduce variable expenses. We interpret that there is a lot to deal with here, but we also can have better alignment, nothing that will impact on the customer. I would like to mention all that. Maybe Grande wants to say something.
Yes, our indebtedness. We're quite comfortable about it. Of course, we want to go on along this track of decreasing it, and we will follow it, and we will look at variable and fixed costs.
What makes us comfortable is that it's a tangible process that we have conditions of reducing the debt, be it with partial or integral normalization by the middle of next year. So we're comfortable. So it's excellent if we can follow this journey of generating more than BRL 100 million. However, we do not depend on it. If it drops a little bit, it's not dangerous, so to say.
Excellent. Thank you. If I could add something. [Foreign languaage] Cash generation is comfortable along with indebtedness. So is there room for any payoff or the total payout, I mean, or payout will be later on? Focus of the company is to reduce leverage and grow. We are not under pressure of distributing, not in the near horizon. Thank you. Quite clear.
Next question. [Distortion] JP Morgan.
[Foreign languaage] Hi, everybody. Thank you for answering my question. In the last months, we saw something on ANS regarding the price of products. I would like to see with you what's your opinion regarding these new rules, especially regarding the type of risk of the contracts. Thank you.
Hi, Stella. Hi, Stella. This is Maurício Lopes. I love this question because it paints in yellow what we have mentioned. We are sure that the structure of PME has something wrong. When you increase the risk for whatever number of lives, the pool of risk, there's pool. The HMOs are allocating risk in the wrong place. They're putting a risk that belongs to the individual or addition company portfolio within the structure of PME. And when you increase the cost subsidy from large to small contracts, oftentimes it should be two, three lives, you will demand the HMO to be more and more competitive or have higher readjustments. And contracts that should have low readjustments to subsidize contracts that will be totally different, one, two, three, five lives. That will make worse what I have mentioned. I am sure of what I'm saying here. And most HMOs have understood that.
And some of them have removed these very small portfolios, especially incumbents. The new entrances have more appetite. It's very difficult to defend technically that a portfolio with one, two, three lives will be similar to a small company that will have 29, 30 lives, or 500 lives if this risk pool happens. It's totally different, and they should be treated like that. And the place of the risk is an individual plan or an addition plan.
Thank you. That was quite clear.
Our next question from Márcio Osako from Bradesco BBI.
[Foreign languaage] Good morning. Thank you. Just one question. Lopes, could you comment about gross sales? Why are we seeing a drop in the number of gross adds? If you have been launching new products, could you talk about these dynamics? These products are old products that are dropping. Is there a reduction of offering from some operators? Could you go into more detail about that?
Thank you, Márcio. What I think happened is that we launched too many products at the same time, and we placed the sales goal for everybody, and we tried to train everybody. And that was not good for the commercial dynamic. As the product matures, we start having more attraction in sales. We launched 78 products, I think, in last quarter. Five new HMOs all over the country. Now three new HMOs, 16 more products. It's a lot of products at the same time.
It's a good product. The deck of products is complete. The retention people are using this window, but it generates confusion in the commercial channel, not just for us, but also for the producers' team at field. They have to deal with too many things at the same time. But it completes the portfolio. This is something good. And we have to look for better conditions for sales now. Or just better conditions, sorry.
[Foreign languaage] Our Q&A session has been closed. I give the floor back to Mr. Maurício Lopes for his final considerations.
Thank you once again, thank you for all our colleagues that are working a lot, and thank you to our stakeholders, be them shareholders, commercial partners, board members, everybody who is here trying to make quality better and better on a daily basis. The administration, the managers maintain the company in this turnaround, although we interpret that we have finished turnaround a lot. However, this decision is, while we don't understand that the supplementary health market in Brazil is sustainable, we are responsible for believing that we have to be more and more efficient as fast as possible because this will separate us from this market being resilient, and the way we are constructing and everybody here is aligned in the long term, from shareholders to the board members, everybody's aligned.
We believe that this is the pathway. We have to continue with this obsession and cost, technical obsession, product design, channel alignment. This market needs a change and will be instrumental in this change. And we want to do it. We're happy about it. Everybody looking forward. We're not changing one centimeter the guidelines in the avenue we designed 13 months ago. We're going forward the way we have designed. And we have to understand that there were important changes in the health industry, in this type of healthcare. And we have to be obstinate. We have shown that in the last calls and this call. The company has lots of energy, and this is very good. We see the people aligned with what we see in the long run, the capillarity that we have mentioned. And we will keep running towards that every day. Very happy. So thank you and shall you have an excellent day.
We thank you all for being here. This video call is thus adjourned.