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Edited Transcript of QUAL3.SA earnings conference call or presentation 14-Nov-19 2:00pm GMT

Q3 2019 Qualicorp Consultoria e Corretora de Seguros SA Earnings Call

Sao Paulo Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Qualicorp Consultoria e Corretora de Seguros SA earnings conference call or presentation Thursday, November 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruno Blatt;President

* Grace Cury De Almeida Gonçalves Tourinho

Qualicorp Consultoria e Corretora de Seguros S.A. - CFO & IR Officer

* Pedro Henrique Rocha Nocetti

Qualicorp Consultoria e Corretora de Seguros S.A. - IR Manager

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Conference Call Participants

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* Frederico P. Mendes

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Joseph Giordano

JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst

* Pedro Henrique Mariani

BofA Merrill Lynch, Research Division - Research Analyst

* Thiago Capucci Macruz

Itaú Corretora de Valores S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. And thank you for standing by. At this point, we would like to welcome you to Qualicorp's conference call to discuss the results for the third quarter 2019.

We have with us today, Mr. Bruno Blatt, CEO; Mrs. Grace Tourinho, the CFO and IRO; and Pedro Nocetti, IR Manager.

This event is being broadcast live via webcast and may be accessed through Qualicorp website, www.qualicorp.com.br/ir, where the respective presentation is also available. This event will be recorded. (Operator Instructions)

We now will turn the floor over to Mrs. Tourinho, who will start the conference.

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Grace Cury De Almeida Gonçalves Tourinho, Qualicorp Consultoria e Corretora de Seguros S.A. - CFO & IR Officer [2]

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Good morning, everyone, and it is with great pleasure that I begin our third quarter 2019 earnings call. This has been a very challenging quarter to be able to achieve everything we wanted, and this was done with the help of all of the areas in the company. Before talking about the results, it is important to talk about important changes in the company that were reported in recent days.

On the 12, we concluded the sale of approximately 10% of the company capital owned by founding shareholder José Seripieri Junior., to Rede D'Or. Also, last Tuesday, the Board of Directors elected Bruno Blatt, Chairman of the Qualicorp Group to replace the company's founder, who remains a relevant shareholder. On the same occasion, Heráclito Gomes was unanimously elected Chairman of the Board.

The following are also part of the Board, Otavio de Garcia Lazcano, Financial Vice President of Rede D'Or São Luiz and Mauro Teixeira Sampaio, Legal and Human Resources, Vice President of Rede D'Or. Leaving the Board are José Seripieri Jr., Leonardo Pereira and Raul Rosenthal.

Founded in 1997, Qualicorp is nowadays one of the leaders in the administration management and sale of collective, corporate and affinity health plans, providing health services to over 2.5 million beneficiaries. Therefore, Qualicorp owes sincere (technical difficulty) thanks to José Seripieri Filho, who worked as Director and Adviser of the company.

The company would also like to thank Leonardo Pereira and Raul Rosenthal for their services. I take this opportunity to welcome President, Bruno Blatt, and Heráclito and Board members.

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Bruno Blatt;President, [3]

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Good morning to all of you. And I would like to thank the shareholders and the members of the Board of Management, who elected me unanimously. Today is a special day. We began a new cycle at Qualicorp, and I have received several messages from operators, brokers, distributors and leaders. But I was especially warmly welcomed by employees, and this gives me great joy to work. For many years, I worked as an entrepreneur, as an executive, I founded a broker. In 5 years, we created a portfolio of 1 million-and-some lives. And during this trajectory, I carried out a very good relationship with operators, and I led an area for product development, expansion strategy. I have a great deal of enthusiasm and very confident in the challenge that I am now taking on in this company.

The Qualicorp team has carried out excellent work in terms of reducing costs and increasing retention. And now is the moment to focus on market motivation to expand our portfolio to create more competitive products and, of course, to work on M&A. We have more than $10 million premiums, and our mission is to offer quality services to companies. I have great passion for what I do, and I feel that I will be very qualified that will bring in new experience and new ideas in this new cycle for Qualicorp. Our team will, of course, pursue all the opportunities.

And I would now like to turn the floor over to Grace and Pedro, who will refer to the results.

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Pedro Henrique Rocha Nocetti, Qualicorp Consultoria e Corretora de Seguros S.A. - IR Manager [4]

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Thank you, Bruno. Welcome, once again.

And gentlemen and ladies, I begin with Slide #4. Speaking about our portfolio, in the last 7 quarters that we have reported, we -- when we think about the same quarter in 2018, we observed an improvement in the churn year-on-year. We have observed an improvement in the churn and it has not been different in this third quarter of 2019. As everybody knows, this is a quarter that concentrates a large part of the readjustments in our medical and hospital portfolio.

I highlight the work of our customer management, a management that works with a focus not only on retention but on the customer journey within the company in the quest to deliver satisfaction and a perception of value, the perception that Qualicorp delivers very good services. This has enabled us to improve our churn year-on-year since 2017.

Regarding the growth as for the third quarter, we have a growth in both comparisons as a result of our sales campaigns that began, especially, in the second fortnight of May with a focus on digital sales. This has already generated a positive impact on the third quarter. Above all, we have been able to convert practically all of the sales that are incoming to the company to the digital channel.

In January, 12% of the sales were done through the digital channel, 71% in June, and we ended September with 96%. Preliminary data for November point to 98%. And with this, we have been able to obtain gains that you will be able to observe in our operational costs and expenses.

To still speak about growth as we acquired a portfolio of 6,000 lives in the southern region. This not only aids us to reduce the volume of lost lives during the quarter, but also opens room to develop a portfolio in a region that is very interesting for us to increase our share. With this, we end the quarter in terms of lives and affinity with a net loss of 25,000 lives of performance, 39% better vis-à-vis 2018.

When we look at the consolidated figures for the 9 months, it shows us where we will be able to obtain greater stability in our beneficiary base, especially when we compare 2018 and 2017.

In the other segments, we have an increase of lives in the corporate and SME segment and in TPA, and the latter has had an impact on revenues, that is not very significant.

On Slide #5, we're now going to speak about net revenue, an increase in the annual and sequential comparison. And here, we have the impact of the price readjustment in most of our portfolio. Because of this, the average ticket increases, giving us more revenues and, of course, an increase in brokerage in the Affinity segment. We also have had a growth in the other segments. Thanks to the increase of our portfolio, both in the corporate and SME segments.

We go on to Slide #6, referring to costs. Gross margin increased more than 100 basis points in the comparison. And here, we observed a reduction of expenses with personnel. Thanks to the improvement and enhancement of the processes because of the great predominance of digital sales and a reduction in expenses with severance pay that has an impact on the first semester in the company. You can also observe an increase in some services then refer to IT systems that were used at the beginning of the year, and that will replace our legacy systems. It is very possible that in coming quarters, we will discontinue these legacy systems, and this should show an improvement vis-à-vis prior quarters.

In terms of royalties, we have a savings of 6% for the 9 months for the -- because of the work of the company. Gross margin, as a whole, do observe that in the last 5 quarters, we have been able to maintain our gross margin above 81%, which is very important. We have taken additional steps towards improving the enhancement of margin, the enhancement of processes enables us to have greater efficiency.

I now go on to Slide #7 to speak about SG&A. There is a drop of almost 5% in the sequential comparison, an improvement in expenses with personnel. The first semester quite impacted with severance pay. The third quarter no longer with this impact, and we have a natural drop in expenses with personnel, leading to a reduction of administrative expenses. I would also like to refer to the reduction in amortization, thanks to the maturity of investments made by the company.

Now before giving the floor back to Grace, I would like to refer to Slide #8 to selling expenses. You will observe that the amortized volume for commissions on new sales that also involves awards increases in the annual and sequential comparison, reflecting not only an increase in sales, as mentioned previously, but also our policy to award for new sales, a policy that came into effect in May, and the trend is for this volume of amortization to grow. We are dealing with commissions, well -- based on the old regime before the IFRS. And because of competence, we would be spending almost BRL 19 million in the first semester. If compared to other semesters, it would be BRL 17 million. In the third quarter, BRL 18 million, and BRL 17 million in the second quarter of 2019.

Now before returning the floor to Grace, I would like to conclude in terms of our commercial performance. As important and increasing sales is ensuring they become effective so as to generate longer-term effects for the company. Under this vision, Qualicorp is doing very well with this new tool and is fully confident that with more accessible products and with the engagement that we have from our sales force, we will go back to having a consistent growth in our beneficiary base.

I now give the floor to Grace, who will speak about other highlights of the company.

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Grace Cury De Almeida Gonçalves Tourinho, Qualicorp Consultoria e Corretora de Seguros S.A. - CFO & IR Officer [5]

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Thank you, Pedro. We now go on to Slide #9, where we can speak about bad debt/uncollectible receivables that is undergoing its best moment, thanks to successful initiatives, downgrades the retention of customers, working closely with our customers.

Now when we analyze the results of the 9 months, we are able to observe that we have generated more than 2 percentage points in margin for the company. We maintain our focus and we continue to be confident that we can obtain better results as we are able to reduce the loss of lives as a whole. This would have a very positive effect.

We go on to Slide 10. Financial income in the third quarter. We had a very special situation where we have the financial expenses with the new debentures, but also a strong increase with the cash investments that remained within the company. This revenue will drop in coming quarters as we paid out capital in an amount of BRL 980 million in the -- on November 5.

We go to Slide #11 to speak about EBITDA. And the situation could not be different. We have been carrying out in-house work. We have one more quarterly historical record for the company based on the growth of revenue and margin. I highlight the work of the company in terms of adjusting processes and implementing the digital transformation. We have developed this in-house when we think about the strategic planning of the company, these are the guidelines that we have and we are convinced that the results have been consistent but they can also improve further.

We go to Slide #12 to speak about net income. In the third quarter, there is an increase in the comparisons, reflecting a higher operational result, 39% increase. Now this is surpassed in terms of the rate. Now as I'm going to speak further ahead, we are going to reduce this fiscal inefficiency in the coming quarters.

In Slide #13 to conclude CapEx and indebtedness. The company ended the third quarter with a net debt of BRL 108 million. We remind you that we paid BRL 182 million in dividend in the month of August. This position will change in the fourth quarter '19 because of the payment of capital.

We now speak about cash flow on Slide 14. The operating cash flow after CapEx stood at BRL 100 million for the quarter, lower than the previous quarter due to a higher volume of taxes and commissions paid, and also a slight drop in our working capital accounts. These are the main items that happened. Most of this is due to the premiums that we give to the operators.

As the last day of the month fell on a Monday, and I remind you that in the last quarter, the closing of June, this happened in -- on Sunday. This hampered us somewhat, and the immediate cancellation that we have, this is the most difficult period for our customers because of the seasonal increase. And there's a natural law, we will recover this with our operators, we're intensifying this, and we will probably recover this in the fourth quarter.

Before going on to questions and answers, I would like to refer to what has been done to enhance the fiscal and company -- structure of the company.

We go on to Slide #15. And first of all, I would like to thank our shareholders at Qualicorp that approved the capital reduction at the extraordinary General Assembly on August 15; thank the legal area teams that organized this entire process, IT because of all the operations we had to do within our system; thank the commercial teams that had to make adjustments, enabling us not to lose any revenues and we achieved very successfully the operational and financial segments; therefore, I would like to thank the entire company for making any difference.

The payment of this reduction was paid out to shareholders, and they were with us on October 18. The conclusion of this operation, along with the new debentures positions us with a much more efficient capital structure, one that will generate value for our shareholders. Presently, we have 50% of resources of third parties and 40% are our own resources. And because of this, we have accrued BRL 1.3 billion, paid out to shareholders between dividends and capital reduction.

We go on to Slide 16 to speak about our incorporation. This was approved on October 31, but we still have a great deal to do. This means that we now have an operating holding that will generate revenues opening up space to redress fiscal inefficiencies. And we will reduce our rate of taxes to a more acceptable level. This also opens up opportunities -- to think about opportunities that could deliver greater value to our shareholders in the medium term. We are ready to hire this, the results of all of this work in the coming quarters.

Thank you very much to all, and we can now go on to our question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Mr. Joseph Giordano from JPMorgan would love to post a question.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [2]

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The first question is to Grace. I would like to better understand the part referring to expenses, if there is still the effect of restructuring and which will be the level of expenses going forward for the company as part of the marketing strategy and the new activation of this channel, which will be the behavior of this line item in coming quarters? Churn has improved, and which will be the behavior? And if Bruno can respond to the second question, what are you thinking in terms of the growth for Qualicorp going forward?

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Grace Cury De Almeida Gonçalves Tourinho, Qualicorp Consultoria e Corretora de Seguros S.A. - CFO & IR Officer [3]

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Thank you, Joseph, for your questions. When it comes to our expenses, I do request some trust from you. We have carried out a great deal of work to make this operation effective, especially because of the speed with when it was done. But you know me very well. We cut down our expenses day after day. We always find new things, but more importantly then that we are focused on our customers, all of the expenses that we are reducing have to be done to create value for our customers. 58% of our service is being done by the digital platform. And nowadays, our customers are able to see that we offer much better services and this gives the company a very important return. We know that we are offering better services. But of course, we will continue to improve on this. Pedro will speak about marketing and the channel.

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Pedro Henrique Rocha Nocetti, Qualicorp Consultoria e Corretora de Seguros S.A. - IR Manager [4]

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When it comes to our campaigns and the awards. The award that we mentioned has fully complied with its goal. We have the engagement of the broker to ensure the cell is done digitally. We have created a channel to service the broker in a more expeditious and direct way. When it comes to the awards, per se, this level should be maintained until the end of the year, at least. So once again, we're always working in this process. We could optimize these awards and ensure that we can generate more value in the long term. And if it becomes necessary to increase expenses to grow once again, we will not fear making this investment, Joseph. But we're thinking of accounts were increasing the volume of activations in the quarter. And this, of course, will increase our commercial expenses. I now give the floor to Bruno.

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Bruno Blatt;President, [5]

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Joseph, good morning, and thank you for your question. I feel very comfortable at responding your question. We have a good relationship with operators and distribution channels. We have 10 initiatives to sell more competitive products. We are working in new markets. We have several ideas that we would like to implement here. And of course, we know the potential the company has. This is my second day in the company. Without a doubt in future meetings, I will have more details regarding this new action plan. I will participate in all the conference calls and will be available to all of you to be able to offer this information to you in a timely fashion. Thank you, Joseph.

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Operator [6]

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Citibank would like to pose a question.

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Unidentified Analyst, [7]

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Good morning. And first of all, I would like to congratulate Bruno for the new position. Good luck in this new challenge. I have 2 questions. The first is a follow-up in terms of the company restructuring. This was made very clear by Grace. I would like to know if there's anything you would like to share about this new structure. And as the restructuring happened this year, if it makes sense to think about an extraordinary effect for the fourth quarter, something that will be annualized, I would like to understand this dynamic. Now the average readjustment was of approximately 17.5% this year, which I believe is quite steep. I know this is strategic with you, but if you could share with us the negotiation with the operators, and if you could improve this level of readjustment.

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Grace Cury De Almeida Gonçalves Tourinho, Qualicorp Consultoria e Corretora de Seguros S.A. - CFO & IR Officer [8]

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Leandro, thank you for the questions. An excellent question. When it comes to the tax rate, we do want to get to 34%, below 34%. Obviously, when we speak about the fourth quarter, this is a vision that we have. We're concluding an internal study to avoid the fiscal losses that were part of the holding and that we had not foreseen before incorporating the brokerage company. This study is underway. And next week, we should conclude it to be able to include this in our studies. Of course, this will be subject to several in-house approvals as well as an audit. But of course, we are working on this very productively. And this should allow us a very good outlook when it comes to that specific line item of our results in the fourth quarter, that will be annualized, so that we can use it throughout coming years, especially the year 2020. The idea, yes, is to have a much more efficient rate below 34% for taxes. And we want to use the interest on shareholders' capital as well. This has been the company desire as we pay out great dividends and would like to continue to do so. 100% of dividends, this is not a commitment. But if we don't have cash availability, of course, this is what we would like to aim to do, once again, subject to the necessary approvals. I will give the floor to Pedro now.

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Pedro Henrique Rocha Nocetti, Qualicorp Consultoria e Corretora de Seguros S.A. - IR Manager [9]

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And when it comes to the readjustment, we do have a brokerage company while we're speaking to the operators. And for this specific point in time, we cannot speak about lower readjustment for the coming year. We do have room for a slight improvement but it will continue to be a challenging scenario when you transfer this to the Qualicorp customers. And we're in that daily struggle of being able to put on the shelf and in the channels, new products that can be used as an alternative. But when we speak about the readjustment, there is room for a reduction, but nothing significant.

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Bruno Blatt;President, [10]

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Leandro, good morning, and thank you for the welcome. To reinforce what was said by Grace and Pedro, we do have several initiatives in terms of competitive products. This will allow us to have a significant increase in beneficiaries and new competitive products, that will perhaps help us to work less aggressively in terms of the readjustment. We're working arduously on this for the year 2020. Thank you.

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Operator [11]

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Mr. Thiago Macruz from Itaú BBA would like to pose a question.

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Thiago Capucci Macruz, Itaú Corretora de Valores S.A., Research Division - Research Analyst [12]

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Bruno, and if you allow me, I have 2 questions. We see improvements year-on-year. Now are you planning an improvement going forward? Or have you done all the increments that you can imagine? And what will be happening in November?

Second question. Of course, one of the great focus is for you is a retention. Now we have seen a lower number of downgrades and an improvement in retention. Now the question is, if with customer retention, you were able to maintain the conditions that customers had previously or not?

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Pedro Henrique Rocha Nocetti, Qualicorp Consultoria e Corretora de Seguros S.A. - IR Manager [13]

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Who is speaking is Pedro. To respond to your question that was very interesting, I would like to go back 1 year, when in 2018, we intensified the process for customer retention and the downgrade in products. That year, this was done because of a necessity and the demand in the company to be able to show the customer that we were working close to them, and we actively offer practically 80% of our beneficiary base and alternative product so that the customer could face up to their readjustments. Of course, when you adopt this strategy, you take a customer that needed to do the downgrade, to truly doing the downgrades. And sometimes, although it was not a priority for the customer, the customers did accept to do the downgrade. So this is a position that will be ever more consolidated. And in the coming quarters, the customer that did a downgrade last year will remain in a more comfortable position in the coming quarters. And this is what we foresee, thanks to this retention strategy. There is a macro issue, which is a resumption of employment in the country. And although the readjustment is quite steep, customers are now able to think that they will be able to maintain themselves in our portfolio. More specifically speaking about the fourth quarter, remember that the fourth quarter will still have a remain of the readjustment. So for a month or more, we have that loss of live. But as I mentioned in my speech, we are doing well. We're heading to our more stable portfolio for the year 2019 as a whole.

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Operator [14]

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Our next question comes from Bank of America.

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Pedro Henrique Mariani, BofA Merrill Lynch, Research Division - Research Analyst [15]

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Welcome, Bruno. In terms of how to work with more accessible products, more competitive projects, do you think that your partnership with Rede D'Or could add to this aspect? And which are the projects that need to be changed to attain this goal in terms of the remuneration of the channel or the operators you work with? Which are the variables that you would be changing in this case?

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Bruno Blatt;President, [16]

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Thank you for the question, and thank you for the welcome. One of the other challenges in Rede D'Or, of course, is the creation of new products. I have quite a bit of knowledge about this. And we believe that Qualicorp will look for this, not only in Rede D'Or but in the entire market. We have hundreds of options that we have that presently, we are not exploring. We can have more competitive, more accessible, more adequate products. We're quite calm that we do have these avenues, these possibilities. And we believe that this will bring back some customers that we're highly enthusiastic with the growth that we can have, not only with new products but new channels or through M&A. I hope I have responded to your question.

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Pedro Henrique Mariani, BofA Merrill Lynch, Research Division - Research Analyst [17]

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Yes, we'll continue this in our next conversations. In terms of the portfolios that have a readjustment in the fourth quarter, we have only Medi. What is happening with the mix of that portfolio? Is this a reason of concern for the fourth quarter?

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Bruno Blatt;President, [18]

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Bruno. This portfolio that you mentioned, specifically, has a much lower level of readjustment if compared to those who were in charge of that portfolio previously. This is not a portfolio where we foresee the risk of losses. As I mentioned, we're doing very well, and we will have stability in our portfolio for 2019.

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Operator [19]

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Mr. Fred Mendes from Bradesco would like to pose a question.

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Frederico P. Mendes, Banco Bradesco BBI S.A., Research Division - Research Analyst [20]

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Thank you for these new initiatives. I have 2 questions. In terms of your strategy, simply to try to understand what you're thinking about in terms of your projects in health, and perhaps leveraging greater efficiency and a more specific point that refers to your royalties with an increase year-on-year, what is it that we can expect for this line item in 2020? Will they continue to grow? Or will we begin to see a descend?

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Bruno Blatt;President, [21]

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Fred, good morning. Thank you for the welcome. As we mentioned at the beginning, health is one more project in the company. And I need some more time to fully grasp the meaning. I can promise that with time, not only health but also other projects will be developed in the company.

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Grace Cury De Almeida Gonçalves Tourinho, Qualicorp Consultoria e Corretora de Seguros S.A. - CFO & IR Officer [22]

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Fred, regarding the royalties, of course, this has been the work of the company in the last quarters. And we do have fluctuations that are in line with the price readjustments. That is why I always request that you look at the movement of the royalties accrued for 9 months, we have been able to achieve a reduction.

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Frederico P. Mendes, Banco Bradesco BBI S.A., Research Division - Research Analyst [23]

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Very good. And the question is if, going forward, this is a line item that will continue to grow with the growth of revenues.

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Grace Cury De Almeida Gonçalves Tourinho, Qualicorp Consultoria e Corretora de Seguros S.A. - CFO & IR Officer [24]

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Fred, simply to add to this, without a doubt, there is room. We have done a great deal. We have several achievements in terms of this line item, there is very small room when you compare the entire year, especially compare it with 2018. Now with the digital sales, we're also working to obtain some improvement in this line item. But if this is incipient work that is merely beginning now so that we can harvest some successes in the future. And we have to be very careful with this line item, we have a very good relationship with all entities. They are our partners. And this is important in our business. Without a doubt, we can make additional enhancements, but they will be done in a longer period of time in that line item that I mentioned, and everything will be based on a win-win situation. Once again, we do need this positive incentive to retain the customers in our portfolio. I don't know if this responds to your questions or questioning.

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Frederico P. Mendes, Banco Bradesco BBI S.A., Research Division - Research Analyst [25]

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Yes, it does.

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Operator [26]

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As we have no further questions, we will return the floor to Mrs. Grace Tourinho for her closing remarks. You may proceed, ma'am.

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Grace Cury De Almeida Gonçalves Tourinho, Qualicorp Consultoria e Corretora de Seguros S.A. - CFO & IR Officer [27]

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Thank you very much for this call. I would like to thank all of you for the confidence and have an excellent weekend with a holiday.

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Operator [28]

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The QualiCorp conference call ends here. We would like to thank all of you for your participation. Have a good day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]