I will now turn the floor over to Mrs. Tourinho, who will start the conference call. Mrs. Tourinho, you may proceed.

Transcription

1 Operator: Good morning, ladies and gentlemen. Thank you for waiting. Welcome to Qualicorp s conference call to discuss the results for the 2Q18. We have with us, today, Mrs. Grace Tourinho, CFO and IRO; and Mr. Pedro Henrique Rocha Nocetti, IR Manager. This even is also being broadcast live via webcast and may be accessed through the website where the presentation is also available. This event will be recorded and participants will be in listen-only mode during the Company s presentation, after which we will begin the question-and-answer session, when further instructions will be given. If you need assistance during the conference call, please press *0 to reach an operator. I will now turn the floor over to Mrs. Tourinho, who will start the conference call. Mrs. Tourinho, you may proceed. Good morning, everyone. Thank you very much for participating in this conference call. You who have been our investors for some time know that this is the most challenging period of the Company between July and September. This is when we readjust most of our clients, accounting for almost 90% of our revenues and 83% of the lives in our portfolio. We make the readjustment precisely in this period. Thus, I would like to start this call by giving you an overview of this period. We have set up a project involving all areas of the Company. We have proactively communicated the annual readjustment to our customers and each one of them got additional downgrading offers, so that they could migrate, if needed, from one plan to another. We have developed also products together with the operators in order to be able to properly meet the need of our customers in this period, in order to make available more affordable health insurance plans in cities, such as São Paulo, Brasília and Salvador in the same format we already have in Rio de Janeiro. These products, which are available in our retention today, will also be on the market, starting on September 10, in order to enhance our salesforce. It is important to highlight the performance we have already managed to achieve in July 2018, even with an average annual raise of 17.7%. We bet we could improve our performance vis-à-vis the previous year by 35% comparing to the same period in Regarding August, we have partial results. Of course, August has not ended yet, but it is very close to what we had in July. Just to remind you, in August 2017 we lost 32,000 lives. At least

2 the first 15 days of this month point to the same percentage 35%. We continue to work in order to deliver the best value possible to our shareholders. Our focus today is to retain our customers. Now I will give the floor to Pedro, our IR Manager. Thank you, Grace. Good morning, everyone. I would like to start on slide four, talking about portfolio. I think one of the highlights here is the improvement in the churn level. We finished the 2Q with 94,000 lives leaving the Company. I think we have started pointing out in the previous conference call that the competitive scenario was more favorable and that retention by means of new products in key areas, as Grace has mentioned, has already started to yield some result. When you compare it to the 1Q18, we see an almost 4% improvement. When you compare it with the 2Q17, we have an even greater improvement. We have to highlight that, in the 2Q17, we had people leaving the portfolio because of the internalization of the health club. Even taking that into account and when I make the comparison we had an improvement of almost 15% in the level of churn when compared to the 2Q17. Regarding gross adds, it is growing in a sequential comparison. It is important to say that we have total sales in retail. This is day-to-day sales by Qualicorp. It is a result not only of the products, but also of the enhancement in sales campaigns. All these initiatives taken by the Company have started to show results. We always want more, of course. Anyway, we have already started to see some response regarding all the work we have been doing. It is important to mention the health club segment here 27% of sales in the 2Q18. Before I talk a little bit about SMEs and CPA, I would just like to add to what Grace has mentioned. Now it is time to be very close to customers, providing alternatives, affordable products and investments in good services. We are very confident for the 2H18. The first indicators point to a clear improvement 35% in July and between 30% and 35% in August. I also think that the scenario is more favorable; a better readjustment than last year. The disbursement between readjustments in different portfolios is better. We do not see any readjustment way above the average. All this leads to better retention and contribute to a portfolio performance that will be better in the 2H18 when compared to No change in TPA. The changes in the annual comparison are due to closing TPA contracts, as we mentioned in the previous quarter; also due to an increase in SMEs. Portfolio has to do with one acquisition. As we mentioned in previous calls, it is related to a corporate contract. We had a reduction of 430,000 lives. We closed a deal, but there was not much impact on Qualicorp s revenue volumes. There is no downward trend in the Corporate segment or other segments, as I am going to mention on the next slide slide number five, about net revenues.

3 Here, since the 1Q, we have been reporting revenues based on IFRS15, where we no longer have recognition of royalties revenues by contract. We used to include that on reported revenues, now we are reporting it as net costs what we have in terms of royalties. Regarding revenues itself, we have R$483 million a slight reduction when compared to the annual revenues, because of a smaller portfolio; and a small increase because of the brokerage revenue we received. Going to slide number six, I will talk about costs. Gross margins grew in the annual comparison. We were able to capture some value regarding expenses with personnel and royalties. As we can see, this increase in relation to the 1Q, this is very much related to payroll costs, particularly payment to executives, some dismissals in the cost center and services provided, as well as greater costs with medical services to employees. Qualicorp pays for the medical expenses of our coworkers. On slide number seven, I will talk a little bit more about administrative expenses. There was an increase when compared to the previous year. It increased around 15% and, comparing it to the 1Q18, it increased by 16%. Here, I would like to say what impacted most this line in the 2Q18: we had non-recurring payment to executives, an increase in coworkers medical expenses, as was the case in costs, leading to an increase in PPR 2017; and we pay PPR in April, after closing the balance sheet of the previous year. Since we make these payments, we calculate all targets not only overall targets of the Company, but also department targets and individual targets for every worker. We have made this adjustment and we may pay more than what was forecasted. These expenses with personnel went a little bit up in the 2Q18, because of the profit-sharing program. Regarding the payment to the executive, I would like to clarify one thing here. It happened because we no longer have the stock option program in this Company. We have not grant stock since February The Company, as reported before, has put together a new program for restricted stocks and this program is a great tool. As a matter of fact, it has been approved in April. However, over the past 12 months, we have neither issued nor granted any new stocks. The Company paid some bonuses to executives, but I stress that this is not a recurrent payment. This plan was approved during the last assembly and we will use it as a tool to retain executives. Regarding the increase in other administrative expenses, this is very much related to regulatory contingencies. The graph below shows the trends in administrative expenses, but the reversal in the trend is very much related to non-recurring expenses. The Company follows its guidelines to rationalize expenses increasingly more efficiently and this has not changed. It is still the same.

4 Now let us look at selling expenses, on slide number eight. Here, I remind you, once again, the impact of IFRS15. We are no longer recognizing commission in sales competence. This applies to the internal and external sales team. We have capitalized amortization for the period of 24 months. In order to guarantee comparison, we maintained amortization inside selling expenses. If we considered these commissions as expenses, it would be R$16.7 million in the 2Q18, compared to R$14.9 million in the 1Q18 and R$18.8 million in 2Q17. Regarding third-party commissions, these are just recurring commissions and co-brokerage is a policy we have, which is linked to the sales channel performance. An annual reduction and sequential improvement will be related to the performance of our sales partners and how much we will compensate them in order to make things better for the Company. Now I would like to talk a little bit about sales campaigns something we have been working on and we are, once again, investing more heavily. We have been doing that over the past few months. Investments have been made and the reason why you do not see any change in this line, particularly when compared to previous periods, is because we understand that this campaign model fits in the practices of IFRS16. So, it is a campaign model and the compensation is fully linked to a new line. It is like a commission, thus we decided to activate R$6.5 million in compensation in the 2Q18; they will be active over the next 24 months, as we do with sales commission. A message for the future: our sales strength lies in brokers engagement and we are not afraid at all to review it and, if necessary, increase or enhance our award policy, provided it will bring lives that will be profitable for the Company. We did this review earlier this year and we can do it again if we think this is strategic. Having said all that, I will now give the floor back to Grace, who will talk a little bit more about allowance for bad debt and other financial highlights. Thank you, Pedro. Going to slide number nine: bad debt. We have as our basis IFRS9 and we started to report not only actual losses, but also forecasted or expected losses based on a history we have of default. Allowance for bad debt is stable when compared to the 1Q17. However, it has gone up when we compared it to the same period of the previous year In our analysis, what can we see here or highlight as a worsening is the Aliança segment. Actually, it has been worsening, particularly because of the exposure of most Aliança customers, members of public organizations. They are having a hard time making payments in

5 some areas of Brazil and we have had more allowance for bad debt in this part of the business. This is related to the current economic hardship in some Brazilian states and cities. I would also like to highlight the work we have been doing in order to try and recover credit from customers, giving discounts and making campaigns in order to return this money to the Company. That has already helped us recover over R$12 million in the 1H18 48% above the recovery during the 1H17. I understand that, for the remainder of this year, our retention work will be extremely valuable for us to improve the allowance of bad debt, by keeping customers with us and preventing the impact of default or non-payment. Going to slide number ten: financial income. This is a little bit of what has been happening in the previous quarters. Starting in October 2017, we started to charge a 2% fine for delay in payments. We used to charge 10%. This is one of the reasons why we had a decrease in our revenues compared to the annual numbers. Regarding investments, we had a reduction in SELIC Brazil s prime rate and this impacts our debentures. Now, regarding financial expenses, if you recall, we paid down part of the acquisition of Aliança, which used to be readjusted. Now, because of the payment in 2017, we will not have that in Regarding interest rates on debentures, we make payments in the 2Q and 4Q of every year. Now, on slide number 11, EBITDA: we had a drop in the margin this quarter, which is basically related to occasional expenses with personal, as mentioned previously by Pedro, as well as operating expense, aimed particularly at retaining customers, which had and will probably have a positive effect on our churn. I highlight that we still focus on having an efficient company, with a lot of room for further improvement. Going now to slide 12, net income: comparing 2Q18 to 2Q17, we have to mention that we had this 24% increase in the year due to the great impact of Potencial last year. Our tax rate closed the 2Q18 at 36.5%, against the 2Q17, when the rate was 37.6% and the 1Q18, when it was 37.3%. The tax rate is still high for the level we want to achieve. We have been working inside the Company so that we can reduce this tax rate. I think that, over the next quarters, we will see some improvement in the tax rate. This was probably presented in the last quarter. In the past quarter, I talked about corporate restructuring and opportunities to add or deliver value to our shareholders. By the way, in June, we approved a change in the bylaws of the controlling company. Now we will have brokerage activities as part of the holding, Qualicorp S/A.

6 These opportunities are still here and the Company will work on them in order to deliver maximum value to its shareholders at the right time. The current cycle requires total focus on managing customers, not only to retain the portfolio, but to start growing again. On slide 13, CAPEX: in May 2018, we signed a contract with Hapvida R$10 million in order to get preference rights in the selling of healthcare contracts for five years. Regarding net debt, which slightly increased in 2018, it is important to highlight that we have used additional cash to pay and anticipate dividends to our shareholders. In the 6M18, we have already paid out R$355 million dividends to our shareholders, accounting for almost 7% of the yield for this period. On slide 14, cash flow: after a CAPEX of over R$83 million in the quarter, considering expenses with personnel and payment of debenture interests, when we compare it to the 2Q17, cash flow improved over 20%. I would like to thank you all very much and now we will open for questions. Rodrigo Gastim, BTG Pactual: I have two questions. Grace, you said you saw an improvement in churn in July and early August. I would like to understand that better. Over these 45 days, what changed in your view for the 2H18. I know it is early to talk about the 2H, but is there an improvement in churn? What are the outlooks you have for the 2H? This is the first question. My second question: how do you see the average ticket account. If we look at the consolidated numbers, average ticket has improved because of downgrading and change in the mix. Could you please help us out in this regard? Maybe there was an improvement in volume because of new products and downgrading. How bad will it impact average ticket and how will it impact the Company as a whole? Regarding the 2H18, we see a significant improvement versus last year, but of course, we still have a long way to go in the 2H. August 2017 was a very tough month. We lost almost 32,000 lives. However, it has been pointing to an improvement, ranging from 30% to 35%. I believe this will remain forward. We have some products that used to be only in the retention channel and now in September will be offered elsewhere. Maybe, we will be able to maintain the pace of sales or even increase sales. We have a much better trend than last year, which does not mean that we will not lose lives. We are estimating that we will lose much fewer lives than we did in the 2H17. Now, about your second question, the average ticket dynamics is strongly impacted. We changed this readjustment process slightly. Now we have an active offer of products to virtually

7 all customers that are having this readjustment this raise in price. With that, you increase movements for the portfolio as a whole. We have been retaining most of these customers due to downgrading. If we are talking about a lower price readjustment, we are talking about a readjustment in average ticket that is lower than was the case last year. Rodrigo Gastim, BTG Pactual: OK. I got it. Very clear. Can you share with us how much these improvements that you started seeing in July and which you are seeing in August and you expect to see over 2H18 are related to a macro improvement in the margin or if they are due to the fact that this year you have many different products, downgrading products? How much of this improvement come from one factor or the other? Could you say that? Grade Tourinho: Actually, I can show you what we feel. What we feel is that this improvement is a result of us making available more affordable products to our customers. In July and August, we see a greater level of downgrading. We have more downgrading than what we used to have. We have a higher level of downgrades. This is very strong in our Company and the feeling we have is that customers do not want to stop having a health insurance. The thing is that they are often not able to pay for it. This is what we will try to build together with operators, together with our partners. We still have not managed to achieve what we wanted. We want to have affordable products in every place where we work, but at least we managed to have these more affordable products in 80-90% of places where we operate, like Brasília, São Paulo. And Rio is doing well. I do not see this as an impact of the improvement of the macroeconomic scenario. But we hope that his improvement in the macroeconomic scenario will take place after the presidential elections, starting in January. But we cannot just cross our arms and wait for the macroeconomic scenario to improve. We cannot do that. We have to try to give alternatives to our customers providing better services, being better prepared, with better-trained people. We have made an effort and huge investments to really retain and maintain our customers. This is our big focus now. I do not see a real improvement in the macroeconomic scenario that helps us yet. When this happens when the macroeconomic scenario improves it will be very beneficial to our Company. Rodrigo Gastim, BTG Pactual: Thank you very much, Grace.

8 Luciano Campos, Bradesco BBI: My first question is about the raw material behind the work you do the products for retention and future growth and the relationship with the providers of these products, which are health insurance operators. We have been talking to many of these operators, even big ones; and they mentioned an interest in providing more affordable products, but on the other hand, they say that they have to have a new pact, so to say, regarding brokerage. When we look at your numbers for the 2Q and we make a pretty straightforward comparison brokerage revenue by member divided by administration rates, by member we see a change; it used to be 47% and now it is around 41-42%. Could you please, Grace, if possible, say something about it? Is that a trend on the market having a better offer with more products in exchange for a change in this brokerage relationship? Secondly, has this change in brokerage rates had an impact on the numbers we see in the 2Q? Thank you for your question. First, I would like to show you the scenario. Actually, Qualicorp s brokerage revenues is one of the lowest on the market at large; just to make this very clear. Actually, Qualicorp has a default non-payment rate that covers operating expenses, seven-day acceptance, all the documents meaning all the red tape, all the bureaucracy is here. And we make the same as a regular market broker. This has to be made very clear. Qualicorp is open to affordable products. You should not doubt that. As I have been telling you, it is important to look at it as a whole the brokerage we have within the administrative company. If you look at these things as a whole, we see that there was a slight decrease in brokerage, but it has been growing at the other end. We work together with operators. We are particularly willing to do it if it brings improvements, so that we can grow again. We will try, whenever possible, to keep our brokerage margin as a whole. So, do not look just at our brokerage revenue. Look at it as a whole. This is important. It is an equation we have in our Company. Usually, our side is offset. Did I manage to answer your question? Luciano Campos, Bradesco BBI: Yes. Can we be optimistic with these new products or it is still too early to say that we will really have more products available?

9 I have to be frank with you. Just for you to understand, we used to have that product in the past in Rio de Janeiro. We worked together with operators. Only almost three years after the launch of this product we were able to launch it in Brasília, São Paulo and Salvador. We try to have partnerships with other operators partners who are willing to enter this market with a lower ticket, particularly in this hard macroeconomic scenario, but it is not that fast, really. The difficulty operators have which we understand is that we do not have a market, like hospitals and clinics, like we have in Rio. They are different from the ones in São Paulo, which, in turn, are different from the hospitals, clinics and labs in Salvador. It is not easy for operators to bring more affordable products to the market. The difference is what you are going to see. It is not easy. Anyway, but we have been working very hard in order to make more products available. And I think that when one operator launches this new product onto the market, the others will follow quickly. We have been moving, that is for sure. Another important thing to highlight here is that there is a movement on the market, which I cannot prove yet we have to wait a little bit, particularly among hospitals. I guess hospitals are more partners of operators now, because hospitals want to have many patients at their hospitals. They have a lot of installed capacity and this capacity is not fully filled. I see that many hospitals, clinics and labs are sitting at the table in order to try to come up with other forms of treatment and visits, so that they better serve our customers. I already see an improvement there. This will help us next year, so that we do not have to readjust rates by 17% on average. We readjusted that last year, but that is too big a raise in price, considering the current interest rates we have in Brazil. I see an improvement in this direction and I hope that this period next year we will not have to raise the price at this level. Luciano Campos, Bradesco BBI: Another question: I do not know if you look at the figures this way, but if you do, could you maybe give a more quantitative type of answer? Otherwise, you may give me a more qualitative answer. If you separate the first group that entered the Company last year from older customers, like associations and from older patients from older associations, how does the churn profile of these different groups of patients compare?

10 I do not have this information. We do compare it, but I do not have this information here to tell you now; but I can send you that quickly after this call. Qualitatively, when you look at the past two or three years, there has been a greater share, not only in sales, but also in portfolio, of health clubs, which are lower-income customers. The turnover in this segment is much higher than the turnover of the rest. In closed associations, the profile of the members of these closed associations is people whose incomes are higher, so turnover rates are lower. As for the quantitative answer, we will discuss it and tell you later. Luciano Campos, Bradesco BBI: OK. Thank you very much for your answer. Joseph Giordano, JP Morgan: Hi. Good morning, everyone. I have two questions. Going back to churn and this profile of cancellation: you mentioned Aliança, which is a portfolio that has a greater number of premium plans than the average of the Company does. What is the churn like between premium plans, average plans and basic plans? I imagine that basic insurance plans have higher churn. More than that, in which part of the pyramid do you see more cancellations? What is the average ticket of customers entries? How does it compare to the Company s? When you look at the Company average ticket, has it decreased a lot comparing year to year? Great question. Just for you to understand, during the 4Q17, average sales were R$370 for Aliança, R$160 for health clubs and R$500 from Qualicorp. An in consolidated numbers, we are around R$400 per member, for each one of these different segments in affinity. Regarding the portfolio, there is Aliança with R$470, health clubs with around R$190 and Qualicorp at around R$750, roughly. On average, in the total consolidated figures for the Company, we have around R$630 in our portfolio. I would like to add the following: actually, when you look at the Aliança segment, it deals with many civil servants people working for local and state governments, in many different states

11 not only Rio and São Paulo. There is a crisis in many different public organizations. Sometimes employees do not pay it because they are not being paid by the local or state government. This is why we increased the allowance for Aliança s bad debt. Now, regarding sales, it is no secret. What we have been reinforcing in our offers since earlier this year is more affordable products and more affordable products have a different ticket, when compared to Qualicorp s portfolio, which was built on a very solid basis of high-end customers premium customers. There is this difference, this discrepancy. In total, sales today are around R$400 vs. R$720. And 50% of our portfolio are customers with premium products. 30% of the customer portfolio accounts for around 50% of our revenues. Joseph Giordano, JP Morgan: Regarding cancellations, people do not have your products again. The cancellation profile is between what is being sold and the stock profile. The cancellation profile is for medium-income people individuals who momentarily lose their income or maybe they are affected by this raise in price and they are no longer able to pay. This is more the average of cancellations; customers who fall within this average income range. Joseph Giordano, JP Morgan: Are you seeing a migration already to corporate portfolios or is it more individuals who are no longer able to pay? Actually, it is much more about being able to pay. The flow to the corporate portfolio does exist. I could estimate the total of people who just give up at around 20-25%, but I do not see such a big increase. This is really much more related to inability to pay. We have a survey here showing that almost 50% are just giving up and going to publicly-funded healthcare system they are not able to pay any health insurance and they just resort to publicly-funded healthcare.

12 At the right time, if there is a more favorable macroeconomic situation, people will surely return, because anyone who once used publicly-funded hospitals, if they experience that, when they can afford again, they will definitely go back to a private health insurance. Pedro, Bank of America: Hello. Thank you for this opportunity. Congratulations on your results. Regarding the bad debt allowance, it has been higher than expected for this quarter, particularly due to Aliança. Could you provide some color on how the allowance for bad debt will behave in the next period? Hi, Pedro. I did not see a very significant change in this line allowance for bad debt in July. What is important to say here is the following: the initiative of having new products and offering cheaper products is designed not only to retain customers, but also to avoid losing customers because of default. What I am trying to achieve in the 2H18 is to no longer have such a big difference in the allowance for bad debt, as was the case for last year. We are striving not to have such an increase in bad debt in the 2H18, but we analyze that on a day-to-day, on a month-by-month basis. So far, I have not seen any worsening in the allowance for bad debt in July. Rodrigo Gastim, BTG Pactual: Just another question, about future use of cash flow. The Company is still generating a lot of cash. It has a robust cash flow and you mentioned the change in the corporate structure. Could you please give us an idea of a schedule? What are the next steps to be taken? Do you have any extraordinary dividend payoff? What are your plans and what can we expect? Hi, Rodrigo. Thank you for your question. We are trying to optimize our cash flow as much as possible. We have actually anticipated the payment of dividends in 2018 R$355 million was paid to our shareholders this year, so far. Right now, our focus is on retaining our customers. We will now incorporate the brokerage company into our holding company. It is within schedule. Two days ago, we got an approval for that and right now, the holding became a brokerage company. We have days to get revenues from this brokerage company. This is the first thing. With that, we will probably benefit, because the problem of having a holding company with no revenue will be solved. Regarding the next steps, we have been working internally in order to

13 generate more value. I would like you to know that our focus now is to retain customers and, then, we will go through the second, third and fourth steps. Please be patient. We will be doing that when the right time comes. I do not know if I managed to answer your question. Rodrigo Gastim, BTG Pactual: Great, Grace. Thank you very much. Marco Calvi, Itaú BBA: Hello. Good morning. My question is about this expansion in the health club, trying to improve sales. Could you provide information on the difference of life profiles in health clubs regarding brokerage and other things? How do you see the return on these lives regarding the expansion in your basis vis-à-vis the average basis? Is there a significant difference in the return from these lives when compared to the basis of your Company? I will answer your question and Grace can add to it later on. When you think about the logic administrations, fees and brokerage, there is no significant difference, percentagewise. Now, we are talking about a life profile whose ticket is 3.5-4x lower than a Qualicorp ticket, so the gain per life is smaller. Regarding how we see this customer base, this product is very easy to sell. However, considering the profile of who is buying it, considering the target audience, these are individuals who are suddenly impacted by the market, if there is a strike or anything. They may give up their insurance plan. Therefore, turnover is higher in that basis. There is no doubt about that. I would just like to add to what Pedro said. This is very strategic. This is the first time this individual will even have a private insurance. This is very important, particularly when there is an improvement in macroeconomic conditions. This person is entering this plan and later they buy more premium plans. Health clubs are a different brand. It is not Qualicorp. It is a different corporate number, so we work different way, delivering value to the Company. I think it is a beginning. We are working on it differently. It generates value and opens up a major opportunity for us, particularly in strategic terms, considering the competition we have on the market. I do not know if I made myself clear. Operator:

14 We now close the Q&A session. I would like to give the floor back to Ms. Tourinho, CFO and IR Officer for her final remarks. Thank you very much for this conference call. We are all available to clear any doubts or questions you have. Thank you very much, and have a nice day. Thank you. Have a nice day. Operator: Qualicorp s conference call is closed. Thank you very much for your participation. Have a nice day.

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