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spk11: Everyone, thank you for standing by and welcome to ARCO platform fourth quarter 2020 earnings call. This event is being recorded and all participants will be in a listen-only mode during the company's presentation. After ARCO remarks, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. This event is also being broadcast live by webcast and may be accessed through ARCO's website at investor.arcoplatform.com, where the presentation is also available. Now I'll turn the conference over to Karina Carreira, ARCO's IR Director.
spk07: Karina, you may begin your presentation.
spk06: Thank you. I'm pleased to welcome you to ARCO's fourth quarter and full year 2020 conference call. With me on the call today, we have ARCO's CEO, Ari de Sacalo Pinchenec, and ARCO's COO, Pedro Guerra. During today's presentation, our executives will make forward-looking statements. Forward-looking statements generally relate to future events or future financial or operating performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those contemplated by these forward-looking statements.
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spk06: Forward-looking statements in this presentation include, but are not limited to, statements related to our business and financial performance, expectations and guidance for future periods, our expectations regarding strategic product initiatives and their related benefits, and expectations regarding the market. These risks include those set forth in the documents that we issued earlier today, as well as those more fully described in our assignments with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on the information available to us as of the date hereof. You should not rely on them as predictions of future events, and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, management may reference non-IFRS financial measures on this call. The non-IFRS financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IFRS. We have provided a reconciliation of these non-IFRS financial measures to the most directly comparable IFRS financial measure in our press release. Please note that except from revenue, gross margin, selling expense, GMA, and cash flow from operations, all other financial measures we discuss here are non-IFRS, and growth rates are compared to the prior year comparable period unless otherwise stated. We also note that year-over-year comparisons are affected by acquisitions that were not included in our 2019 financials. Let me now turn the call over to Pedro Guerra, ARCO COO.
spk10: Thank you, Karina, and thanks, everyone, for joining today's conference call. We hope that you and your family are all healthy and safe. We'd like to discuss four topics today, as shown in slide three. First, our financial results for the quarter and for the 2020 fiscal year. Despite the challenging scenario, we delivered solid revenues of R$1 billion and an adjusted VIDA margin of 38%, above the guidance provided for the fiscal year. Second, the confirmation of our ACV for 2021 of R$1,163,000,000, representing a 21% growth versus the 2020 school year. This number is already net of 96 million reais of lost ACV due to COVID impact in the number of students in our partner schools. We are also providing a guidance for the 2021 fiscal year adjusted EBITDA margin of 35.5 to 37.5%, reflecting our commitment to continue strengthening our winning factors while sustaining a healthy margin. Third, an update on our recent acquisitions. with additional details on current actions and mapped opportunities for CoC, Don Bosco, MiSalva, and Escola de Inteligencia. Finally, our three priorities for 2021. Leverage stronger winning factors to continue growing in a large and untapped market, drive K-12 digitalization, and further pursue ESG impact. Moving on to slide number four. Net revenues for the fourth quarter of 2020 were 296.5 million reais, representing a 20% growth year over year. Our net revenues for 2020 were 1 billion, 1.7 million reais, 75% above 2019. Growth margin was 77.6% for the fourth quarter, in line with the same period in 2019. For 2020, the gross margin was 77.9%, down 1.6 percentage points year on year due to small differences in the cost structure of Positivo acquired in the final quarter of 2019. Adjusted EBITDA was 125.9 million reais for the fourth quarter of 2020, from 106.3 million in the fourth quarter of 2019 with similar adjusted EBITDA margin for these periods. Adjusted EBITDA for the full year 2020 was R$381 million, with the margin expansion to 38% from 36% in 2019 and above the guidance provided for the year. Finally, adjusted net income was R$67.4 million for the fourth quarter of 2020, from 77 million in the fourth quarter of 2019. When looking at full year results, net income increased 30% to 220.3 million reais in 2020 from 169.5 million in 2019. The lower adjusted net margin in 2020 is mainly explained by two factors. First, higher net financial expenses driven by a lower cash position in 2020 generating less financial income and that generating higher financial expenses. And second, higher taxes due to the migration of some of our solutions to actual profit method from deemed profit in 2019. Important to note that we have already started to benefit from Positivo's goodwill tax benefits in 2020, and we still have 92% of the total tax benefit to be captured in upcoming years. Turning out to slide number five, our ACV bookings for the school year of 2021 amount to R$1,163,000,000, representing a 21% increase compared to 2020 cycle. The core segment grew by 16% year over year to R$913,000,000 in ACV and 1.27 million students. Despite the shorter sales cycle in 2020, when schools were closed for almost six months and the challenging environment due to COVID,
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spk10: SAS and SAE grew at the same pace as the previous cycle. Positivo accelerated growth from 2020, and Geeky, our fully digital and customizable solution, was a major winner with relevant growth acceleration. These results highlight the strength of our business model, the brand equity of our solutions, the high quality offerings, and our constantly evolving ability to distribute our solutions. Our supplemental segment, comprised of international school and PES brands in English, the second language, Escola de Inteligencia and Pleno in social-emotional learning, and Nadia Vela in STEAM Maker, grew by 45% considering the acquisition of Escola de Inteligencia, reaching an ACV of 251 million reais and 515,000 students. Organic growth for the segment was impacted by COVID, as schools opted to postpone the decision to adopt new supplemental solutions. We believe the structural trends for this segment will continue driving strong organic growth for years to come as educators, parents, and students demand that 21st century skills take a leading role alongside traditional cognitive development. And the migration from out of school to in school lowers the cost of education and delivers more convenience to parents and students. Moving now to slide number six. ARCO's growth relies on our ability to retain our clients, improve our value proposition driving price increases, upsell our solutions, and attract new partner schools. We retained 92% of our customer base in 2020, while adjusting prices on average by 7%. Even in such a challenging year, we were able to deliver a retention rate in line with the previous cycle and a healthy price increase. We highlight that we face the revenue reduction of 44 million reais due to student dropout in 2020 and additional 52 million reais impact in the 2021 ACV as we believe schools were conservative in the number of students recorded in the contracts due to COVID uncertainties. These factors resulted in a 96 million reais COVID related impact equivalent to 10 percentage points of revenue growth potential. Our base case scenario reflects a conservative zero recovery of the COVID impact and a gradual improvement of the pandemic. With the evolution of the vaccination and consequent normalization of in-school activities, we expect to recover this impact over the upcoming cycles. Important to mention that despite our conservative approach to the 2021 ACV, COVID scenario is still uncertain. and schools could be further impacted and prevented from operating for a longer period of time. I will now turn the call to Ari for an update on recent M&A transactions and priorities for the year. Ari, please go ahead.
spk08: Thank you, Pedro, and good evening, everyone. Thank you for your time, and I also hope that you and your relatives are all safe and healthy. Moving now to slide 7 to start discussing the recent evolutions of our latest acquisitions. First, the acquisition of CoC and Dobosco, two of the main core learning systems in Brazil that have built solid and nationally known brands over their 50 plus years of history. We see clear value creation opportunities arising from the transaction. It reinforces our leadership position in core solutions for the private K-12 segment by complementing our portfolio with brands that have different price positioning, geographical footprint, and pedagogical approaches, allowing our platform to better serve the overall market. We believe that by implementing Arco's expertise in high-quality content, relevant technology, reliable customer service, and effective distribution, we will positively impact students' learning experience, strengthen our relationship with partner schools, and deliver attractive growth. And we believe that by adding CoC and Nombosco to Arco's platform, we can leverage their strong relationship with partners close to capture current and future Cross-L opportunities. We already have an integration team in place to define strategies related to brand, product, go-to-market and people. So when we close the acquisition, expected for the second half of the year, we are ready to apply ARCO's winning factors and start unlocking value. This acquisition will be paid using our current cash position. According to our initial assessments, we expect the amortization of intangible assets and goodwill to generate a tax benefit with net price value of 214 million reais, a relevant value creation lever.
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spk08: Moving now to slide eight, Arco's pro forma business profile for 2021. The acquisition of CoC in Don Bosco results in a company that will serve almost 2 million students in 6,900 partner schools with an ACV of 1.3 billion reais. The scale allow us to increase investments to enforce our winning factors. linked to long-term value creation, attract the best talent, and offer a phenomenal venue to distribute additional solutions in line with our vision to become a one-stop shop to K-12 schools. Moving now to slide 9, to discuss another recently announced acquisition. The acquisition of MiSalva allows ARCO to enter the exciting test prep and tutoring supplemental vertical. a fragmented and still mostly offline 5 billion reais market with a high-growth, high-quality company. Additionally, it complements Arco's portfolio with a fully digital B2C solution and allows our company to start delivering high-quality education to public sector students. We expect to accelerate the Misalva growth in its core B2C market by providing resources, talent, and advanced technology features. Additionally, Misalva will strengthen our B2B2C value proposition by offering specific test prep courses to partner schools. The acquisition of Misalva has already closed, and the company will be operated as an independent unit focused on expanding its base of active users and profitably growing its revenue. We are already ramping up team and marketing strategy to accelerate growth in 2021. Moving now to slide 10. Our final highlight on the M&A front is a quick update on Schola da Inteligencia, the national leader in social-emotional learning. Since our last earnings call in November, we have received the antitrust approval and closed the acquisition in December, proceeding with the back office integration, which is now almost complete. We have also designed a new go-to-market strategy already being executed for the 2022 commercial cycle with revised frontline incentives, training and structure. and have rolled out a new model of client relationship by farmers. Together with reinforced cross-selling, we expect these changes to start accelerating Escoda Inteligencia growth already in 2021. Moving to slide 11, we have elected three main priorities for 2021. Leverage stronger winning factors to continue growing in a large and untapped market. Drive K-12 digitalization by continuously evolving our tech platform, intensifying the use of data, and ramping up fully digital B2C offerings. Finally, show and pursue ESG by expanding our disclosure and increasing our impact. Moving on to the next slide on details of our first priority, leverage strong winning factors to continue growing in a large and untapped market. ARCO emerged stronger from 2020 with a revamped go-to-market strategy that relies on fully digital lead generation and hybrid online-offline negotiation process. We have also significantly evolved our solutions by launching several digital innovations such as 100% of our content available in video, tools for live classes embedded in our platforms, essay correction, online adaptive assessment, and personalized learning tracks. Finally, our brands also emerged stronger from 2020, following record levels of customer satisfaction. Together with an improving COVID outlook for the education sector in Brazil, and the suppressed demand we carried in 2020, in our base case, we have the necessary ingredients to deliver robust growth for 2022 ACV. We are already seeing positive early signs for 2022 ACV build up, with over five times stronger new school intake for the first three months of the year, when compared to the first three months of 2020 and 2019. The positive outlook is further reinforced by the fact that we are still in the early days of our journey, as we can see in the next slide. Currently, we only have a 5% share in a huge and fragmented market. Our core solutions, the largest part of our business, serve only 16% of its addressable market. Additionally, we have an upsell potential of around 480,000 students with our partner schools, and a cross-sell potential of around 1.1 million students, as almost 90% of our core partner schools student base do not yet use any of ARCO's supplemental solutions. Specifically on cross-sell, we have structured several initiatives for the 2021 commercial cycle, including a fully dedicated team stronger related incentives, attractive bundle conditions, and frontline trading.
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spk08: Finally, on M&A, we are in a winner-takes-most market. And this vision demands a multi-brand portfolio to be executed. We are currently engaged in talks with 10 M&A targets on three pillars. Core, with the goal of gaining scale and continue to reinforce our leadership. Supplemental, to strengthen our portfolio and verticals you already have presence and enter new verticals. and tech to improve our value proposition to clients through additional services and tools. Moving to slide 14, the digitalization of the K-12 education sector has accelerated post-COVID and continue to capture this trend will be a priority for our company in 2021. First, we'll continue to use our scale to develop an exceptional backbone, deliver advanced tech features, and supply high-quality content to our clients. In 2021, we will focus on engaging and gamifying hybrid content, the use of technology to personalize the learning experience of each student, features to reduce teacher workload, such as automated essay correction, and tools that bring parents closer to education life of their kids. Second, the use of data has also become increasingly relevant to our business and to our partner schools. Schools are eager to benefit from student data analysis and innovative market mapping tools have the potential to reduce customer acquisition costs by better targeting new schools and cross-allying opportunities. Finally, the third part of this agenda for ARCO is to consistently track and disclose data on material ESG topics, allowing our company to share with shareholders, community, and team the impact that we have on students' outcome and workforce development. for example, while creating the basis for continuous improvement of relevant topics. Finally, MiSalva's acquisition is the first step to start exploring fully digital B2C business models. This business has the potential to offer high-quality, affordable education at scale directly to students, an urgent need in a country with large discrepancies of education quality. Our third priority for the year relates to ESG, a relevant topic that has proven to drive long-term value and business resiliency across all industries. We have hired this year a consultancy firm to assist us in expanding the disclosure of results and met opportunities to increase our impact and further improve the sustainability of our business. We will define our material themes and indicators in the first half of 2021 and will disclose results to stakeholders in the second half of the year. After this initial cycle, we will focus on long-term continuous ESG improvement. To showcase the importance of this theme to ARCO, I'm happy to announce that we have appointed Juliana Gregory as ARCO's ESG leader. Juliana is a highly talented leader with global experience in education and sustainability, and I wish her success in this exciting theme. On the next slide, I'm happy to welcome to our board two new members, Beatriz Fátio and Carla Schmitz-Perge, two exceptional professionals that will bring diversity of expertise and background to our board. Beatriz has a remarkable knowledge of technology and education investing, while Karla brings to the table her remarkable experience in brand development and global operations. Together with the other members of our board, Karla and Beatriz will sharpen our decision making and accelerate our mission to deliver high quality education at scale. I thank our partner investors for your support and guidance. our sell-side analysts for their dedication, ARCO's team for their results, hard-working and long-term focus, and our client schools for all their trust. Thank you very much for your time. Operator, we can now open for questions.
spk07: Thank you. The floor is now open for questions.
spk11: If you have a question, please press star 1 on your touch-tone phone at this time or any time. If at any point your question is answered, you may remove yourself from the questioning queue by pressing star 2. Questions will be taken in the order they are received. We do ask that when you pose your question that you pick up your handset to provide optimum sound quality.
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spk11: Hi, guys. Hope everyone is fine, and thanks for taking our question. But first, just on the last comment, I'd just like if you guys could try to help us reconcile your indebtedness level after the boost in assets payments by the end of 2021 with your M&A pipeline. Should we expect considerably lower, smaller targets, or Should we see more stock-based operations or something like that? My second question will be on the supplemental solutions. Do you guys have any specific strategy besides M&A? So we completely understand that COVID was really a drag down. for the sector, for the segment as a whole. But assuming that we don't have any kind of visibility as to vaccinations by the second half of 2021, do you guys have any kind of approach or strategy to try to offset these impacts with new sales, be it through some kind of commercial approach or prices or something like that? That would be the first. Thanks, Chris.
spk10: Hello, Vinicius. Pedro here. Thank you for your questions. Regarding the M&A pipeline, as Adi mentioned, we have around 10 targets today in our M&A across core, supplemental, and tech companies. We do expect the M&As in the short term to be smaller. Therefore, both for our current seller's notes and other smaller M&As in the future, we'll take care of the payments using our cash position, and eventually that's without the need to go to the market for additional cap raises. On your second question on supplemental, first, there is a component of portfolio. We still see space to continue complementing our supplemental portfolio with additional brands in the segments we already serve and enter new verticals in segments we don't yet serve, such as coding and robotics. We can do that through M&A. We can do that through in-house projects. We have pursued both in the past. And we're also going to do that through the partnership that we've entered into an agreement with Pearson to distribute specific supplemental product that complement our current offering. The year for supplemental has started strong. Similar to core, we are already seeing supplemental a much larger and stronger intake of new students compared to the years of 2020 and 2019. That's the reason why we believe it shares the same ingredients with core to have a strong year. We pressed demand from 2020 that was not executed. A improving outlook situation for COVID in Brazil with schools expecting 2022 to approach normality and stronger brands and companies from a go-to-market perspective and technology adoption. Given those factors, our base case is both for core and supplemental to have a strong organic growth.
spk07: Great. Thanks for the answers. Our next question comes from Diego Aragon with Goldman Sachs.
spk11: Yes. Hi. Thanks, Arif, Pedro, and Tim. Thank you for taking my question. Actually, I just wanted to follow up on this question regarding your M&A strategy. I mean, now that you have acquired, let's say, three traditional learning systems such as Positivo, CoC, and Bombosco, how do you see your position, your business position, and what exactly are you looking to acquire in the core solution segment? I mean, almost half of your revenue in the core segment seems to come from more traditional, legacy platforms that apparently are growing at a very low pace, right? So I am wondering what type of growth First, you should be able to achieve in the segment until you can really ramp up those business and what kind of business you are looking for in the core segment. And maybe just a final question, if I may. You know, now that Pearson and Aleva are basically out of the core company business in Brazil, is there any other player outside of you and VASA that we should be aware of?
spk09: Thank you. Hello, Diego. Thanks for the question. Good to hear from you.
spk10: Regarding the core, we have engaged in M&A in the past, both from acquiring exceptional brands that we believe we could ramp up growth, but also acquiring smaller companies that we rolled up into one of our existing businesses. We expect to continue this strategy. We continue looking for exceptional brands, and there are still a few in Brazil that we'd love to do business with, but also pursue smaller brands that were already fragilized pre-pandemic due to the lower scale, smaller scale, and the pandemic with additional need for scale to invest in technology became further fragilized. Regarding the growth for those companies, we believe that there are two categories here. Positivo being on one side, it's the market leader. It's by far the largest company in the sector. And although we already saw an acceleration of the growth of the company in 2020, it is our expectation that it will have somewhat lower growth rate compared to SAS and SAE have had in the past, given the size of the company. However, for smaller brands such as CLC and Geeky, we see a lot of potential for those companies to continue growing at attractive rates comparable to those of SAS and SAE in the past few years. Regarding the second question, could you please repeat the second question, Diego, if you don't mind?
spk11: Yeah, I guess the second question was more related to, you know, the competitive landscape. You know, I'm just curious to hear from you now that, you know, both Pearson and Aleva, they basically sold their content business, right, for K-12 in Brazil. Is there any other player, you know, outside of Vasta that, you know, we should be aware of?
spk10: Perfect. In our estimate, in the core segment, Vasta and ARCO have around 30% of the students in the K-12 private sector in Brazil. So there is around 70% of the market that is comprised of weaker, smaller learning systems and textbooks. In the learning system space, There's still quite a few regional or even brands that belong to international groups. We have brands from Santillana. We have regional brands such as Poliedro, Bernoulli, Objetivo, Etapa. And it continues to be quite a fragmented market that offers opportunities in M&A, both from exceptional brand standpoint that we believe could grow at a faster pace within ARCO, but also smaller brands that we believe could roll up into one of our brands.
spk07: Okay, that makes sense. Thank you, Pedro. Our next question comes from Javier Martinez with Morgan Stanley.
spk11: Hi. Thank you, Adri, Pedro. I would like to ask three questions, if I may. The first one is on the bookings. I wanted to double check if the guidance you're bringing on the table is or not corrected by the fact that many private schools may be losing students to the public schools this year, no? Maybe it's corrected, and if not, if you have some disability on what may be that figure. That will be the first one. Maybe if you want, we'll go one by one.
spk10: Sure, Javier. We can start here with this one. So regarding bookings, we have 96 million reais, around 10 percentage points, of lost revenue due to COVID that we're not considering to be recovered in the 2021 guidance of 163 million reais. we expect, that is our base case scenario, we expect these almost 100 million reais of revenue to be recovered in upcoming cycles as the dropout is recovered by the private sector schools. We don't see in the moment schools in the private sector losing students to schools in the public sector. If you take the number for Sao Paulo, for example, the increase has been absolutely immaterial. What we see is mostly parents taking their young kids out of school because they don't benefit as much from technology as the older kids. So we expect those kids to return to school once the COVID situation improves.
spk11: So this booking that you mentioned today, 21% growth, it's already taking into consideration those students that probably are not going to be there at least in the first half of the year or maybe in 2021?
spk10: You're correct. That considers our base case of those students not returning to school in 2021. So we might have some upside if, for example, vaccination happens at a faster pace than this base case of ours.
spk11: Fantastic. now the so with with that in mind so bookings growing 21 percent that is it's a good figure no and i will expect to see some operating leverage you know in the companies and you deliver already 38 percent bd margin adjusted margin 2020. so why the guidance below the margins of this year so the guidance is 35.5 to 37.5 shouldn't we expect some operating leverage and and just because you are growing top line margins expanding this year?
spk09: Perfect, Javier.
spk10: You're right. We have strong operational leverage. As we grow, we generate more income that we have traditionally chosen to reinvest in for business. We continue to see very strong ROI from investing in sales and marketing. and from increasing the quality of our solutions. From a sales and marketing perspective, our team yet doesn't touch on most of the schools every year in the country, so we take quite a few years to talk to every school in the country. We expect to continue increasing our capability to supply those schools with our solutions, and this will require additional investments. On the content and solution side, we continue to see a lot of space deliver additional technology features to our clients and they tend to reward us with higher retention rates better price increases upselling and useful intake that comes from stronger solutions so our guidance considers this factor that will reinvest most of our operational leverage into those factors of the business and keep the margins in line with past It's important to note that 2020 was a special year where most of our sales team didn't travel for most part of the year. Schools were closed for six months and our sales team wasn't able to travel, traveling being a large cost component for our company. As the COVID situation improves in Brazil, we expect to resume traveling, we expect to resume in-person visits. and that we tend to increase our costs. So those are the factors that we believe will drive margins to 35.5 to 37.5 for the 21 fiscal year.
spk11: Just to be sure about that, so thank you very much. I was wondering if maybe pricing dynamics may, yes or not, be changing, A, because of COVID, but also because with the acquisitions you did In the last few years, obviously, now you are covering a broader market. Obviously, SaaS may be more defensive, but you have also other brands that are covering a market that may be more focused on prices. I wonder if the price dynamics have changed or continue to be the same that we had in the past, where price is not the key factor in terms of sales.
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spk10: From our perspective, prices continue not to be an indecision criteria for schools. Schools decide based on brand, based on the quality of the solution, based on the trust they have on our commercial teams. And that is especially true in a situation where learning systems represent only a fraction of the expenditures of the parents in education. and where schools are effectively distributors of our solutions. So they tend to like better solutions that have stronger brands because it's easier to resell to parents. If you take a look in 2020, we had price increases, even considering Positivo, that is still in its initial years of the turnaround, we already had price increases that were above those of 2019. So even a very challenging year where schools were facing difficulties, we are able to increase our prices at health levels. And that comes on the back, not only on the first factors that I mentioned, but also because our price increases are usually related to more value created to schools, either improving the learning processes that help schools attract more students, or reducing costs in schools, therefore upsetting the price increases.
spk11: Very clear. So if I may ask a final one on retention rates and MPAs. I'm not sure if maybe the way or the semantic or the way we're talking about those metrics may have changed, or maybe it's because of NAICS, the new brands that may have impacted the calculation or the absolute figure. But if I remember well, in the IPO times in retention rates, we were talking about 95, 97, and MPAs of 86 to 90%. And now we're talking about 92 and 83. So still high. figures, so still good rotation and good NPS, but below the historical levels. I was wondering if this is true or maybe it's just a difference because of mix or maybe because of COVID, if something has changed over there.
spk10: Perfect, Javier. Your perception is correct. There's a mix factor, but there's also a COVID factor. On the mix front, the most discrepancy comes from Positivo brands. Positivo had a strong evolution in retention and in customer satisfaction, but their brands still lag those ARCO legacy brands in those two metrics. We expect to close this gap over the next two to three years. Regarding the COVID impact, what we saw was a somewhat lower retention, not on core, but had generally higher and record retention levels, but on supplemental. It was a tougher year for supplemental, and that also resulted in a bit slower retention rates for the supplemental solutions.
spk07: Thank you very much. Thank you. Thank you. This concludes the Q&A session.
spk11: As there are no further questions, our conference call is concluded for today. Thank you very much for your participation and have a nice evening.
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