Good morning, ladies and gentlemen, and thank you for holding. Welcome to the Qualicorp webcast to discuss the results for the second quarter 2023. Today, we have with us Mr. Mauricio Lopes, the company CEO, Mr. Carlos Vasques, the IRO and CFO, Mr. Eduardo Oliveira, Director, and Mr. Franco Abelardo, Investor Relations Superintendent. Some of the forward-looking statements in the webcast can be projections or expectations about future events. Such statements are subject to known and unknown risks and uncertainties, and can lead to having these expectations not materialize or be substantially different from what was expressed. This event is being broadcast simultaneously through internet and can be accessed at ri.qualicorp.com.br, where the presentation is also available. This event is being recorded, and all participants will hear the past during the company presentation.
Ensuing this, we will go on to the question and answer session, when further instructions will be provided. I would like to give the floor to Mr. Mauricio Lopez, who will begin the presentation. You may proceed, sir. Well, good morning. Thank you, everybody. It is a pleasure to be here with you. I would like to greet the community of investors that have joined us, and a special greeting to all our colleagues who are following this presentation on our platform. I have been in the company for a fortnight, and the welcome that I received from you, the will to work, shows that this company will perform ever better. A special greeting to our CEO that has allowed for a very soft transition. Thank you for the transition, and let's get to work. I have been here for a fortnight.
We have already changed the structure of the company. We have the incoming of Marcos Brusso, an executive and our new Commercial Director. He has worked with Group Medicine and other groups. He has been for one week with us. In my two weeks, I would like to introduce myself. I am a veteran in the sector. I have worked at a regulator and two different health plans, cooperatives, national and international insurance companies, service renderers, which was my last position. I have significant relationships and broad experience with Quali. I know Quali since 2004, 2005, when I began to work in one of the health plans. I think I have very good visibility of the market, and this can lead to an increase in profitabilities in products and the market situation as a whole.
In these 15 days, of course, we do not have a strategy to change the way we work. Quite the contrary, in these 15 days, I have invested my time intensively to understand the levers, opportunities and threats for the company. I have done this in the most productive way possible. First of all, looking at figures, the team, stakeholders, regulators, service renderers, trying to compare the figures in the company with the figures outside and see how these figures could materialize through minor strategic alterations. In these 15 days, I have come to have some certainties. Certainties that it has changed. The loss ratio pattern of the market has changed and will continue to change, and perhaps there will be a slowdown in the coming cycles. I'm also convinced that we have never seen such losses, continuous losses, among health operators. Of course, this has changed everything.
Everybody has become more cautious. Now, we have seen a severity, a broadened use of medical technology and the pressure for readjustment disseminated throughout all of the segments. These readjustments are almost linear in the retail part, affinity companies or in the corporate segments and managed costs, products, all with very high costs. Of course, this points to the new market reality that we will have to understand how this will apply to our structure and to our company, Qualicorp. I'm also certain that we have not changed in terms of our leadership. The capillarity of our distribution system has nobody similar in the market, and our delivery system hasn't changed. It continues to be permanent and will allow the company to grow.
Our need to understand the customer continues the same, and our capacity to lead and innovate in the sector is the main asset we have in the company. Obviously, through all of this, we will have a deep relationship with all stakeholders in the market and build the following cycle of the company with this different market profile. Now, among these certainties, what are we intending to do? We are going to work with new cycles, strengthen the management, work with innovation, as we have always done. The certainty that we're going to look at all of the stakeholders to benefit our customers, and here we will need a new design for product portfolio, very aligned with a better profile for use, a channel for procedures that are effective to truly service customers' health, sustainability, and minor readjustments through time.
Of course, as long as all of this is aligned with our outside customer, who will receive a good resolution and excellent service. What will improve is our operating efficiency. Efficiency and discipline in capital allocation, this is key, especially in a country with such high interest rates. Without this, the company will not have a very long future. We are going to pay attention to these cycles and continue to care for the company in the medium and long term. We're going to do this very responsibly in the coming months with the board and with all of our teams. I would like to thank all of you once again. I greet the group of investors that are with us, analyzing, investing since we carried out our IPO, and very soon we will be back with new novelties, more structured, with information to share with you.
I will give the floor to Carlos Vasques, who will present the figures for the quarter. Thank you very much. Well, good morning. Good morning, everybody. Mauricio, welcome. I'm sure that your knowledge and your broad experience will do a great deal to Qualicorp. I would like to refer to the results for the second quarter. I will simply mention some highlights. Our net revenue was BRL 435 million for the quarter, 10% lower year-on-year, 11% for the quarter. The EBITDA of the company was BRL 194.8 million, with a 44.8% margin, minus 16.8% in the quarter. This reflects the scenario of a reduction in our base in Affinity, which ended with 998 lives at the end of the quarter, with a drop of 18%.
Still with a negative impact for the quarter. I would also like to highlight the free cash flow for the company of BRL 148.1 million. It was BRL 288.6 million for the half of the year, 13 times higher year-on-year. Already reflecting some initiatives for discipline in capital allocation. The results of this was a net debt, ending the quarter in BRL 1.3 billion, 11% lower year-over-year, and ending well, the leverage ratio of 1.55 x adjusted EBITDA, with a strong cash generation in the quarter, which allowed us to reduce the net debt and consequently, even despite the environment of high interest rates, the company has a very stable leverage ratio. Next slide, please.
If we look at our income statement, I would like to highlight the costs and expenses for the company that had a drop of approximately 6.2%, accumulated 9.6% year-on-year, reflecting the company efforts to contain its expenses more in line with its revenues. Several actions are underway for this. Of course, this is part of the Quali structure to find the path of efficiency and to review the structures for costs and expenses. Our margins, the EBITDA margin for the quarter was BRL 194 million, with a margin of 44.6%, a reduction of 262 basis points for the quarter, and for the half of the year, 389. We clearly have opportunities to improve this. Of course, we're devoting efforts to this cause for operating efficiency. Next slide, please.
When we look at our cash flow, this has been one of our significant focuses for forecast especially. This type of attention, this type of detail, is important to find solutions. The free cash flow totaled BRL 148.1 million in the quarter, BRL 288.6 million for the half of the year. If you observe the line of acquisitions, it had a drop of 95% year-on-year, reflecting our greater selectivity in terms of investments. If you look at working capital, we have sought to perfect, enhance our internal controls and to hold a better dialogue with the operators. The line item for commissions is dropping year after year, quarter-over-quarter, and this also refers to the implementation of a strategy to better survey our investments.
We have the discipline in terms of capital allocation, also in this line item, ensuring that despite having a lower EBITDA, we have been able to manage the other line items so that we can optimize the company resources, seeking solutions along the way. When we look at the cash flow down to the last line, it's important to refer to the financial results. In the quarter, we paid the interest rates of debentures, close to BRL 165 million, which of course, is a significant amount when we observe the level of interest rates that we have at present. Of course, this hampers the ability for the company to generate cash. Our cash variation was BRL -52 million.
Nevertheless, the final cash was BRL 880 million, showing a very sound company, with the ability to fully explore its potential and find the path towards sustainability. As I mentioned formerly, something that will make sense for all of the links, and also something that will be beneficial for the customer. We have a robust cash position to face the challenges in the coming periods, and this gives us the calmness, therefore, to seek out our objectives. With this, I would like to end the presentation of our financial highlights, and I would like to return the floor to the operator. Thank you. We will now go on to the question-and-answer session. Should you wish to pose a question through audio, please type in your name and the company name in the Q&A icon.
Questions will be answered in the order in which they are received. Our first question comes from Leandro Bastos, from Citi. Your audio has been unmuted. Good morning. I have two questions at my end. The first, by looking at this half of the year, you have had a concentration of readjustments. You spoke about record readjustments at the beginning. How are you working with strategies to retain your customers and avoid cancellations? The second question refers to a comment made by Mauricio. I know he has been in the position only a fortnight, but what do you foresee for the Affinity group compared to the SME? Your work with the brokers and operators, how are you thinking of positioning the Affinity group going forward? How are you going to work with this product? Thank you. Thank you, Mauricio. Thank you for the questions.
Now, to answer the first part of the question, referring to readjustments. Yes, we see a strong readjustment in all portfolios, stronger in the third quarter than in the fourth, considering the data we have observed in the last few weeks. What we have done is to pay a great deal attention to the internal commercial teams have displaced themselves, given the knowledge they have on the products, and we have spoken at length with our customers. The customer has proven to be less resilient than in other years, considering the amount of the readjustments. Obviously, we're going to have to create a more cost-effective group of products, more adherent to the needs of the customer, something more sustainable to enhance our flow in the coming months. This is what we have done jointly with the operators to have a more adherent portfolio.
Speaking about the Affinity product and the outlook for it, it's something I used to say in the past. Now, this Affinity portfolio has space, very good space. It is something permanent. It services a group of the population that will not have an individual product or an SME or in the network they would like to have. Affinity portfolio fulfills their needs, and we have that strategy of the operator of working with two, three, or four lives, which in the past was never a practice. It was more for companies and not family groups. Well, you're quite aware of how we work with this. I have spoken to the operators this last fortnight to see how we can go back to the risk side that a premier group should have.
It is four small entrepreneurial groups, and we have to put people in the right pool with the right risk for them. Affinity, of course, is the right portfolio for this, for a regional council, for a class association group. This product does have a good horizon, and it has to have products to service its groups. If we have a good value proposition for the operators, they will be able to understand and know that not all groups will communicate in the same way, and this can help us to reduce the pressure for commercial cost of this, for the administrator and the operator, and also eliminate a bit that need for readjustment. Now, the SME groups had a very low readjustment last year.
It was never aligned with Affinity portfolio, and perhaps we're working with heterogeneous risks in the pool of risks that will no longer be possible going forward. In the future, we have to give a new meaning to the product, give a new, Well, new look to this portfolio, also addressing the risks of SME. All, all of these are retail products, so we're going to revise the portfolios if everything works out. We do have the capacity to distribute SME in the way that it should be interpreted and as we would like to do it, so we have an interesting hedge here. If I have not answered your question, please point it out. I'm at your disposal. No, that was very good. Thank you, and good luck in your future work. Our next question comes from Emerson Vieira from Goldman Sachs.
Your microphone has been unmuted. Good morning, Mauricio and other directors. We have two questions at our end. You have mentioned that the take rate continues because of the high sensitivity of the industry, and that operators have made some enhancements. I think there's a delay in the enhancements as perceived at the end and the take rate of the company. How long does it take, on average, to resolve this? That if there has been an impact on take rate that was more structural and not necessarily related to the loss ratio. This is the first question. The second, we saw very interesting performance with a drop of double-digit on the quarter-on-quarter comparison in terms of your CAC. If your present day CAC is a balanced one, will it extend throughout the rest of the year? These are the two questions. Thank you very much.
Emerson, good morning. This is Mauricio once again. I will answer the first question, Vasques will answer the second. Take rate, well, there is a 12-month lag, and the pressure of the operator from the past is being negotiated with quite a reduction of take rate because of the. This will extend for the coming 12 months. There's always that lag. Now, the same logic applies to service renderers, and the adjustment for customers will be the same. There's always a time lag that extends for 12 months, and we think that we have agreed on a take rate between the operators and ourselves for the coming 12 months. What we're going to do in the new design of product portfolios is to find a take rate negotiation that will make sense for everybody involved.
Of course, operators do this concerned about their profitability, and they carry this forward to customers and more. We will be working with this lower take rate until we design this better. In terms of Pacvida, I will give the floor to Carlos Vasques. Hello, Emerson. Good morning. Regarding the CAC, life, incessantly, we have been surveying this, and our goal is to understand each and every one of the products and have clarity in terms of which are the investments required by each product. We do want to continue to invest in all products, but with a better understanding of how much investment each product can support to have a sustainable dynamic in the sector.
Now, after what you have seen in the second quarter, there will be a trend for new patterns, new decision-making processes for the investment of capital based on the life CIC. CAC, I'm sorry. Thank you. That was very clear. Have a good day. Our next question comes from Mauricio Cepeda from Credit Suisse. Your microphone has been unmuted. Good morning, Mauricio and Vasquez. Thank you for taking the questions. I will go back to the initial comments that the strategy is undergoing changes. Perhaps this is premature, but there are two products with a strategic operation, which would be the ideal Affinity product in this moment of expansion, where coverage is more limited and where you have a greater concern with fraud, where operators are adopting restrictions in terms of the network and verticalization, which would be the ideal Affinity product for this specific moment?
The second question is a value proposition for the administrator, which is a proposal that the administrator can pick up to justify the brokerage fees, and how can Qualicorp position itself to maintain these economics of the administration rate so that it will end up being attractive? Thank you very much. Well, thank you for the questions. When it comes to the product, Mauricio, the operator portfolio is becoming more homogeneous in all channels, in the corporate, in the SME or Affinity channels. A smaller network that is more geared with a lower volume of resources, notably when you come to medical fees and therapies because of the fraud we have found in the sector and focused on somewhat more controlled risks.
Now, very open entities are no longer part of the plan, and audiences with very little similarity and similar risk profiles, this is no longer being used, and the profile of pricing for some groups has changed drastically, especially in the retail products. This change, which is structural for the sector, will capture the Affinity group. How do we have to prepare to be able to work with the operator and service the customers? The process that is outsourced by the operator has to be very adherent. You cannot have these processes that are not sized according to the products that are being sold, and I believe that the market has made mistakes in this and has done so consistently. We have accepted this without carrying out the necessary due diligence. Now, any operator should do this with all of its other products.
We can expect a smaller portfolio with less networks, more tiered, and with more stringent acceptance in groups that are better defined. In the value proposition of operators, you have to calculate how much commissions the operators are paying. The take rate, that generates price spreads, what it pays for the relationship and permanence. Now, as these rates are dropping in the market, and they have been dropping consistently because of the macroeconomic situation, the cost of maintenance of Affinity is quickly close to what we see with SME. If this, in fact, is happening, and you can check this with the operators if you find it convenient, I think we have a better value proposition. We're holding back on bad debts. We work with the acceptance. We work on collecting the customers.
We give service in terms of invoicing for the network, and this is something that SME does not have there resort to operators. Now, if we think of the customer maintenance cost through time, additionally to bad debts, I would say that Affinity is reaching the same levels as SME. Which are the differences now? The cycle of acceptance of Affinity is not at the same level as the cycle of SME, and we have to have a better cycle of acceptance. I have observed the work being carried out by the teams, work that is of excellent quality, and I am now at the point where we can collect what we have done in the company through so many years.
If there are any abnormalities, we're going to go back to this cycle of acceptance with the operators to see if it is equivalent to what we have SMEs and put our portfolio to work. In terms of compensation, we have better proximity. Mauricio, I know you're very diligent. You're going to carry out the diligence on this topic, and then you can give me some feedback. I would be grateful for that. Well, thank you, Mauricio. Our next question comes from Estela Sano, from JP Morgan. Your microphone has been unmuted. Well, thank you for taking my question. In truth, I want to speak about cash generation. As you said during the presentation, your cash generation has improved during the quarter, and well, this is generating results. In that context, how can you look upon the cash generation in coming quarters?
Should we expect this level of operating cash generation or free cash flow, especially, now that you could have a higher number of cancellations? Which is the company expectation when it comes to its operating cash generation? Good morning, Stella. This is Vazquez speaking. Regarding your question, we don't offer guidance. What is important to underscore, and we would like to convey this to you, is that the level that we observe at present seems to be sustainable. It could be somewhat different from what we have observed in terms of the cash flow composition, because we have initiatives in practically all of the line items of cash flow, initiatives for enhancements. One way of thinking about the company capacity is to see what happened in this quarter, the previous quarter, the generation for three or four quarters, where we have repeated our cash generation.
It's important to observe those levels, of course, we're working for them to become sustainable. Who knows, by finding the right exits through time, they could even be better. For the time being, observe what we have done in the last three quarters, as company managers, we do think these are sustainable levels. Thank you. Our next question comes from João Pedro Piccoli from Banco Safra. Your microphone has been unmuted. Good morning, everybody. On behalf of Safra, we have two questions. First of all, we would like to understand the measures that Quali is adopting to control loss ratio, at which phase are you in terms of the implementation of these measures? Which is your expectation regarding the third quarter, as you will have a concentration of readjustment in that quarter? Thank you. João, this is Mauricio. Thank you for the question.
When it comes to the loss ratios, we have two significant fronts that are happening, happening simultaneously. Once again, the work with acceptance. If acceptance is poorly done, it will become very difficult to control the loss ratio in the short term. We're working diligently on this. We're structuring the process. Along with the operator, we seem to find the best network for that patient for specific pathologies, and we're trying to find ways of gearing the patient to the best network, not the cheapest or the most expensive, the one that will offer the best solution. Now, the operators have also carried out negotiations, follow-up of networks, and have worked diligently on us regarding the issue of fraud. Fraud has never been so broad spread, and ANS has focused a great deal on fraud, trying to offer more balance to the sector, and we are following suit.
Everything we see in our portfolio, we work diligently with the operators to try to have the right tariff in our portfolios, so everybody has the same nature of risk or has been put in a pool with similar risks. If somebody is carrying out fraud, they're transferring their risk to somebody else's portfolio. We're working with operators who are focusing on loss ratio. A third point, it is only through the redesign of product portfolios can we hold down the loss ratio in the mid- medium term because of what we're being faced with. Now, as this is in the medium term, we will have parts of our portfolio that has been segmented, where reimbursements have been given, but we're going to measure them more broadly, more than we were used to measuring.
It is very probable that we will have a volume of addition of customers and products that are better geared or that are segmented, verticalized. This is what operators have been doing for many years, and we hope that this will help us exert control faster. If we fight against fraud along with operators, that we will have a higher impact. If we can offer the adherence that the customer wants at the price they want to pay, we will be able to have a better loss ratio. Of course, if we work with pricing in our present-day portfolios, this will allow for a better readjustment in the portfolios going forward. This will lead to a lower churn if everything works out, and a more balanced sales process. It's a continuum, and this will not be reserved in three months.
It will take at least one year and a year and a half. We're all engaged in this. We do want to control the segment, more efficiency, and control the patients in a better way, enabling them to have a plan according to what they have in their pocket. The key word here is alignment for all stakeholders. When it comes to the third and fourth quarters regarding cancellations and much more, we're changing the commercial part. As we have already mentioned in questions about permanence or not, of a lower CAC, questions made by Emerson and others, I still do not have visibility of how this will work. What I can say is that I have less concern with net adds than the management had in the past.
I want to have a good capital allocation that will lead to a better investment and lower churns in the long term. It makes more sense to invest energy in the retention process than to invest energy and capital allocation in portfolios with high churn, in tickets that will have no permanence, and the company costs will never be the right one to have profit. This is what I have discovered in the 15 days I have been in the company. I'm beginning to learn about this process, and very soon, perhaps I can give you a better-founded and more correct answer. We do not have any net adds protection to share with you. I'm sorry to frustrate you, but this is the situation. That was very clear. Thank you very much. Our next question comes from Samuel Alves, from BTG Pactual.
Your microphone has been unmuted. Good morning, Mauricio Vasquez. We have two questions at our end. The first, without compromising yourselves with terms and much more, if you could tell us what you imagine as being feasible for the strategic direction of the company, when you can present this to the board to begin executing it? This is the first question. The second question is about the regulatory agenda. You were speaking at length about the redesign of products, of product portfolio, active management on fraud and loss ratio. If the company management could eventually become engaged in a more proactive management when it comes to the regulatory agenda, a more important enforcement or greater flexibility in the readjustment for smaller groups, something of that sort. These are our two questions, and I do wish you very good work at the helm of the company. Thank you very much.
Thank you, Samuel. I'll begin, and then others will add. When it comes to the terms, I still cannot say when we will begin with this turnaround. The short-term agenda for the company is operating efficiency. This is something we will resolve very quickly. We're going to work with the right sizing of what needs to be in the company in the coming three months. Alongside this, the product development, this began some weeks ago. There is a great deal of goodwill and understanding of the operators to work with our portfolios. It's important to change our portfolios. Samuel, you know that a product portfolio that is not updated or oxygenated will not go very far. This is a liability for the operators at present and something very important for ourselves.
We want to work correctly with our portfolio, and we have the technical capacity within the company to do this in a very structured fashion, and operators will understand their liabilities and will engage with us very quickly. Regarding the regulatory discussion, we are engaged. We have spoken with all of the other stakeholders of the federation, ANAB, Unimed, all of the large agencies. In what regards Affinity and SME, the discussion is less regulatory and more technical. I think we're bringing in risks to the SME pool that do not belong to that community. Now, Affinity has to be able to accept the risk with the right acceptance, and this is not what is happening at present. Affinity is facing readjustments, but it doesn't have the same dynamism that it had in the past when SME was working with only four or five lives.
We don't want to depend on the regulator to hold this conversation with operators. I think we have the technical capacity to hold these conversations, I'm betting my chips on this work. Once again, I am at your disposal should you have a future doubt. Thank you, Mauricio. Thank you, everybody. Our next question comes from Gustavo Tiseo from Bank of America. Mr. Gustavo, your microphone has been unmuted. We have two questions at our end. I'm sorry, Gustavo, your sound is extremely low. If you could increase it, please. Is that better? Yes, yes. Thank you. We have two questions at our end. The first, I know that you're changing the strategy, at the beginning of the call, you said that perhaps you will have a larger portfolio to guarantee products that will have a better retention.
In the last few years, you have acquired several operators. What could we think going forward? Are you perhaps lacking a bit of proximity with these operators? What is missing to have stronger retention in terms of the portfolio that you acquired in the last few years? The second question refers to operations. You have said that there's a trend towards a drop. You have had very good results in cash flow, which has been the reaction of competitors? Are they living with lower commission rates that are lower than in previous years? This to better understand the competition when it comes to the commission practice. Well, thank you for the question. This is Mauricio once again. Your question has two very interesting parts.
In fact, in the recent past, we were able to bring in a set of operators with a lower ticket, and we have to work with them more efficiently in-house. We also acquired, through M&As, a set of regional administrators that have highly regionalized portfolios, and we have to make this operation more dynamic, and they are our controlled companies. We have to use their regional portfolio in a more effective way and also share our portfolio with them. This does not depend on anybody else. It depends on us internally. It is our execution that is being put to doubt here, and we do have the efficiency to achieve better synergy and operating efficiency with the operators we have acquired.
An interesting point that relates to your question, when we look at the distribution of lower tickets for these new operators in our portfolio, we see that we have 50%-60% of what they distribute. Our distribution channel does have the capacity to distribute the product. Our cost of working with the product has to be worked on. We have the capacity, but we also have to have profitability, and we do not have the profitability that we want. Therefore, we need to work on this in coming months. It's something we have to do internally. In terms of the commissions, the line that will be adopted by the company is one of leadership. We have always been leaders in the market. I don't think this company should guide itself regarding what the competitors are doing in terms of CAC.
We have the ability of differentiating ourselves in the products and the way we distribute, and we shouldn't fight for a higher CAC. We know where this battle will end up. It happened in the digital world, and in this management, I truly would not like to repeat this. I would like to work on product differentiation that will be more efficient, offer what customers want and what operators expect from us. In the next calls, we will converse about this, and you can assess our strategy jointly with us. Thank you very much. Thank you, Mauricio. The question and answer session has come to an end. I would like to return the floor to Mr. Mauricio Lopes for the closing remarks.
Once again, I'm going to be very brief, simply thank all of our associates, everybody that makes this industry survive day after day, involved in the turnaround that we're making and that have the right reading of the challenge that we have in the supplementary health market, and we are part of that market. We're going to have to work diligently and expeditiously to carry out the turnaround in the company, change the portfolios and of course, focus on customers and product. The message is that, if we do not have alignment with all of the stakeholders in the sector, operators, consumers, administrators, distribution channel operators, and public operators, we will not be able to get back to the market we want to.
Quali is fully engaged in this process, and this will be instrumental to help the company come back with growth, sustainability and customer satisfaction. The final comment from all of the colleagues in the company is that we are part of the process, and we are the actors in this process, so let us get to work. Thank you for your reception, and we are going to start working. We would like to thank all of you for your presence. The results presentation for second quarter 2023 has come to an end. Have a wonderful day. Have a good day.