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spk09: Good evening, everyone. Thank you for standing by and welcome to ARCO Platform first quarter of 2021 earnings call. This event has been 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 via webcast and may be accessed through ARCO's website, investors.arcoplatform.com, where the presentation is also available. Now, I turn the conference over to Karina Carreira, ARCO's IR Director. Please, Karina, you may begin your presentation.
spk01: Thank you. I'm pleased to welcome you to Arco's first quarter 2021 conference call. With me on the call today, we have Arco's CEO, Ari de Sá Cavalcanti Neto, and Arco's CFO, Roberto Otero. 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. Forward-looking statements in this presentation include but are not limited to statements related to our business and financial performance, our expectations and guidance for future periods, our expectations regarding strategic product initiatives and their related benefits, and our 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 findings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based in the information available to us as of the day 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, G&A, and cash flow from operations, all other financial measures we disclose 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 2020 financials. Let me now turn the call over to Ari Arcos, CEO.
spk04: 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 would like to present three topics today as shown in slide three. First, our healthy operating results for the quarter despite the challenging scenario. with a strong 28.5% revenue recognition and an adjusted EBITDA margin of 35.7%. We are maintaining our margin guidance of 35.5% to 37.5% and expect our free cash flow to improve along the year as we collect the receivables, reduce capex, and benefit from a lower effective tax rate. As we now have better visibility on the actual numbers of students enrolled, revenue recognition for 2021 is leading to slightly lower versus ACV impact by the second wave of COVID-19 in Brazil. Second, the commercial cycle for 2022 school year continues to show encouraging results, and we are excited about our recent movements for growth in the years to come. We have strengthened our core segment with the acquisition of COC and Don Bosco. We are achieving great results from our cross-sell initiatives and continue to leverage on our superior value proposition and consistent improvement in our offering. And the entries in B2C will allow us to explore this huge and promising market. And finally, we will present an update on our ESG agenda and we conclude our materially assessment. I will now turn the call to Otero to discuss the results for the quarter. Otero, please go ahead.
spk07: Thank you, Adi, and good evening, everyone. Thank you for your time, and I also hope that you and your relatives are all safe and healthy. Moving to slide four, net revenues for the first quarter of 2021 were 331.7 million, representing a 27% growth year over year. Revenues for car solutions increased 20% versus the first quarter in 2020, and supplemental solutions delivered a 64% growth, impacted by the addition of Escola de Inteligencia to the portfolio. Cost of sales increased 30% year over year, leading to a gross margin of 73.7%, in line with the same period last year. When excluding depreciation and amortization related to our educational platform, Cash growth margin actually expanded 160 basis points to 78.7%. Semi-expenses, excluding depreciation and amortization, increased 35% year-over-year, representing 36% of revenues versus 34% last year. This increase reflects the additional sales personnel resulting from the restructuring of the commercial teams from recently acquired solutions, such as Positivo. General and administrative expenses, excluding depreciation and amortization, on the other hand, increased only 7% to 22% of revenues, from 26% in the first quarter last year, as a result of a reduction on travel expenses and gains of scale. As a result, adjusted EBITDA reached R$118.4 million, 22% above the first quarter last year, with 35.7% EBITDA margin. Finally, adjusted net income was $61.1 million for the quarter, from $56.2 million in the first quarter of 2020, with adjusted net margin of 18.4%. Turning to slide 6, we'd like to make a quick recap on the dynamics for ACV bookings, revenue recognition and cash collection for our business. We kick off the commercial cycle for the ACV bookings on the year prior to the beginning of the school year. and it starts to recognize revenue as we deliver the material to partner schools. For the car segment, we have on average four deliveries per year, usually one month prior to the usage in the classroom. For the supplemental solutions, we usually deliver the material twice a year. The cash collection matches the fiscal year or the school year. In a normal year, the vast majority of our partner schools pays for our solutions in up to eight installments, with only a small portion paying in up to 12 installments. However, due to the COVID-19 pandemic and the challenging environment for the educational segment, we opted to support our schools and protect our pricing and retention through slightly more flexible payment terms. Therefore, receivables from 2021 school year are more concentrated between the second and fourth quarters, with only 2% having slipped to 2022. On slide seven, we present the breakdown for our receivables. and the year-over-year increase mainly relates to the neither past due nor impaired portion, reflecting the more flexible payment terms. As the profile of our receivables improve and we evolve our return processes, we see the allowance for doubtful accounts returning to pre-pandemic levels. Moving on to slide 8, we intensified investments in content development and technology in the first quarter to further strengthen our solutions ahead of the commercial cycle. Positivo was the brand with the largest investment, part of our goal to improve acquired solutions to increase customer satisfaction and retention rates, as well as accelerate organic growth. Investments should reduce as a percentage of revenues in the upcoming quarters and finish the year below the historical 10% level. On slide 9, we detail the corporate restructuring the company is undergoing and the potential for additional tax benefits. Today, only Positivo and part of SAS, both incorporated under CBE, or Companhia Brasileira de Educação e Sistema de Ensino, and SAI, benefit from amortization of intangible assets and goodwill from business combinations, representing around 60 million per year. This year, we should conclude the incorporation of the four remaining subsidiaries of SAS into CBE. and save additional estimated 30 million in taxes starting in 2022. As we incorporate other businesses into CBE, we will be able to capture additional tax benefits and therefore further reduce our effective tax rate, currently at 20.3% from 32% in the first quarter of last year. As a result of the improvement in the upcoming months in these three lines, receivables, capex and taxes, we expect our free cash flow generation to increase. In fact, results from April already show our free cash flow two times higher versus April in 2020, which means collection accelerated in line with our expectation and cash flow generation should be concentrated between Q2 and Q4. Finally, on slide 10, we present the schedule for the payment of our debt and seller's notes. Our cash position is enough to cover for the short-term and mid-term obligations, and we already have firm proposals from banks for a credit line between 600 to 700 million reais to strengthen the balance sheet at attractive conditions. I will now turn the call back to Adi. Adi, please go ahead.
spk04: Thank you, Otero. We are very excited about our recent initiatives and the prospects for the future. First, on slide 12, the acquisition of COC and Nobosco was very important in a strategic standpoint for ARCO. It was financially accretive as price paid is equivalent to 14.4 times 2020 EBITDA and is expected to generate tax benefit of net present value of R$ 214 million once the business are incorporated. COC and Don Bosco are very complementary to Arco's current portfolio, both on price and geographic presence. They are top-of-mind brands in the Southeast region, where 50% of their student base is concentrating, being 36% in the São Paulo state. According to a study concluded by EY Paternon in 2019, CoC is the top three brands in the high-priced tier with best awareness among parents and the top five brands with best awareness among principals. CoC and Don Bosco have a proven track record on students' admissions, with 48% of CoC schools and 28% of Don Bosco schools being among the top three in their national exam ranking of their cities. ARCO has an extensive NMAA track record of acquiring and improving and will accelerate growth of the acquired solution by applying its winning factors of high quality content, relevant technology, reliable customer service and effective distribution. Additionally, initial assessment from integration team already shows approximately 15 million reais in cost synergies, leading to a post synergy multiple of 11.6 times 2020 EBITDA. Finally, the deal includes a commercial agreement to distribute selected supplemental solutions from Pearson, which are complementary to our current offer. boosting cross-sell opportunities second on slide 13 we share the promising results from the strategy designed to capture cross-sell opportunities we have invested in more incentives bundle benefits and training and as a result 72 percent of 2022 year-to-date new school intake for supplemental solutions comes from cross-sell initiatives On slide 14, we are proud to present the results of our continuous product evolution. By putting investments in digitalization and innovation in first place, we deliver differentiated technology, content and pedagogical services, leading to high customer satisfaction and excellent academic results. In 2020, our NPS has increased 15% for our legacy brands, SAS and SAI to 88 and 13% for Positivo to 75, making us leaders in the industry. We are also leaders in academic results related to admissions in public universities through the national exam, NN, far ahead of the second player on students admitted in first place, students admitted in second and third place, and students admitted in fourth to tenth place. On slide 15, our B2C debut through the acquisition of Missalva in March is showing promising early results. We have already started investing in team and marketing while focusing on increasing the share of premium offerings such as medicine test prep courses to accelerate Missalva's growth. As a result, Missalva's sales is expected to nearly double in 2021. By leveraging on Miss Alva's outstanding test prep offering, we expect to launch a B2B test prep solution to partner schools already in the second half of this year. Moving to slide 16, our ESG agenda evolves as we conclude our materiality assessment. We have engaged many stakeholders in the process, and I would like to take the opportunity to thank all of you who took the time to contribute to such an important theme. Our materiality map confirms the relevance of topics related to impact in education and team as an asset in line with our strategy. Next steps include the definitions of main indicators and disclosure of results in upcoming months. Thank you very much for your time. Operator, we can now open for questions.
spk09: Thank you. The floor is now open for questions. If you have a question, please press star 1 on your touchtone phone at this time or anytime. If at any point your question is answered, you may remove yourself from the 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 headset to provide optimum sound quality. Please hold while we poll for questions. Our first question comes from Pedro Mariani with Bank of America. Please, Pedro, go ahead.
spk06: Hey. Good evening, all. Thanks for the opportunity here. I have two questions for me. My first one is related to the impact in revenue coordination. I mean, Otero, if you could please tell us again, what is the expected impact coming from this lower recognition of revenues due to the COVID-19 second wave? And also, I mean, what has changed in the environment compared to the ACD confirmed last quarter? This is the first question. And my second question goes to Arik. regarding the B2C product. Ari, could you share what are the commercial initiatives already method in order to expand this business line, right? And if possible, I mean, how much of your total revenue do you expect this to represent in five years from now? These are my two questions. Thanks, guys.
spk03: Thanks, Pedro. I hope you're doing fine. So thanks for the question. So as we mentioned in the presentation, we expect the revenue recognition for this year to be slightly below the ATV announcement, maybe a low to mid single digits. This reflects the pandemic, of course, and lower enrollment for 2021 than initially expected by the schools. So as you know, we delivered the content to schools divided in four deliveries along the year. We are now concluding the second delivery which allows us to have a much clearer bill on revenue for the year and the size of the enrollments. And this is the reason why we are providing such guidance to the market at this time. This potentially lower revenue recognition doesn't include any potential upside, right? So this could come from eventually re-enrollments in pre-K and kindergarten or supplemental products being sold in the second half of the year. But we prefer to be conservative here for the benefit of transparency. I'm turning to Hardy for him to comment on B2C.
spk10: Hello, Pedro. Thank you for your question. So regarding your question on Missalva, we really expect Missalva to be a sizable portion of our business in five years. I think there's a big opportunity there. Just to remind you, we have a 70% of the students coming from public school. So it's a large time that we don't address yet. And we already started to strengthen the team, especially in the commercial and digital marketing area, where we are investing to capture more customers. We also see an opportunity to extend the products that are offered there. So for instance, we right now have a course to med school that it's going very well with a very interesting ticket. So we are starting to work together with Miguel and we are very optimistic that in the long run, this will be a very strong and sizable business for ARCO.
spk11: Thanks a lot.
spk08: Our next question comes from Victor Tomita with Goldman Sachs. Please, Mr. Tomita, go ahead.
spk11: Hello, . Hello, and thanks for taking our question. So our first question would be if you could give us any additional detail on the initiative to provide more flexible payment for schools. So maybe here the percentage of schools that will negotiate the contract whether the negotiation plan included expanding their commitment to paying with ARCO, and whether we could expect additional rehabilitation in the second quarter. And our second question would be also on this market will pay in terms of schools, but thinking about your overall market, if you are already seeing a significant number of schools closing down due to financial difficulties, And if you have, can you go back to our company and other truck track schools for their own.
spk03: Thank you. Hey, Vito. Thanks for the question. Uh, so, uh, as you know, I mean, we have a lot of disciplines, so we care a lot about the brand reputation and we don't use prices, discounts, or create a creative, uh, contracts to, I mean, renew. or add schools to the portfolio. But the schools are, the market or the schools, they're going through a very difficult, unusual environment. And it's our role to provide support and to help them, and to help them navigate this period. Of course, without causing any damage to the business model, without causing any damage to our operations and to our financials. So, I mean, giving a little bit more detail on what we brought in the presentation, basically, for some specific cases, very specific cases, we renegotiated the length of the contract. So, we prolonged in 30 days, 40 days, right, the contract. So, allowing the schools to have one month of breath, right, and then returning to payment to us again, right? So, this is exactly what we did. not providing any sort of discount or any sort of financial aid that goes beyond extending a little bit the contract. So that's pretty much what you see on the aging of the receivables. We're not concerned with delinquency. If you see the provision for bed that actually came down, it's returning to pre-pandemic levels. We are not changing at all the policy here, so we are keeping exactly the same provisioning policy we have had over the last years, right? But we have improved the collection process, right? So the pandemic led us to improve the collection process internally, and as a result, we are seeing provisions for bad debt also coming down. So that's what we did, Victor. It's simple, right? So just prolonging a little bit in the payment terms for some specific contracts, right? We also asked about these schools closures. I mean, to be very honest, it's not something that has impacted ourselves very much. Actually, what we saw is the schools, of course, reducing in size. especially in pre-K, kindergarten, and for those who have, I mean, prep for university admission test, right? So on both extremes of the K-12 cycle, we saw the highest impact to schools, right? But in schools closures, given the profile of our clients, it was minimal. And as a consequence, you see in our financials that the provision for bad debt And even the receivables past due or interred actually have come down, right? So you're not seeing that affecting the business.
spk11: Perfect. Thank you very much.
spk09: Our next question comes from Caio Moscardini with Morgan Stanley. Please, Mr. Moscardini, go ahead.
spk05: Hi, good morning everyone. I was wondering if you guys can give some more color regarding the 648 million related to accounts payable to selling shareholders. How much international school represents from this amount and when do you guys expect to close the deal?
spk03: Hey, Caio. Otado here. Thanks for the question. So international school is almost half of that amount, right? Actually, this amount has not changed. There's been no update to that amount. As you know, I mean, you're seeing the arbitration process. If we have any update on that, we will automatically let the market know, right? But so far, we are keeping this in the short-term seller note payables. And as I said, almost half of that amount relates to international school, Caio.
spk05: Oh, that's a good call. Thank you. Have a good night.
spk11: Thank you.
spk09: Our next question comes from Lucas Berendim with Bradesco BBI. Please, Mr. Berendim, go ahead.
spk02: Good evening, everyone. A question from my side. Can you give us an update on how you are seeing the M&A market going forward, especially looking at other learning systems solutions after the acquisition of Koch and Donbass? Thank you.
spk03: Hi, Lucas. Thanks for the question. On the M&A side, I would say that when we look back, we have made, I mean, transformational acquisitions. We actually had the opportunity to buy what we wanted to buy. And this was a very successful move for the company in terms of capital allocation and discipline. We're still, of course, still waiting for the antitrust approval for COC and the goals on the most goals. So looking ahead, I would say that you should expect acquisitions to be more inclined to some sort of diversification of revenue pool. Of course, inside our core business, always inside our core business, but leveraging on the scale that we have gained over the years. So when we look at the scale we have today on the core segment, we can explore that in two ways, right? The first one is efficiency, of course, right? And the second one is growth. So we will look at the scale we have on the core business to generate incremental growth. And for that, we need to use supplemental and new products that will benefit from that scale. And it's not a coincidence that the cross-sell initiative has been put in place, right, finally. It's something that we've been talking about to the market for a while, and this is the reason why we have kicked off the cross-sell initiative now, because we really want to take advantage of the nearly 1.4 million students we have on the core segment. And M&A will be included in that as a way to expand the product offering and leverage on this scale. So more and more, you will eventually hear us talking about an output revenue metric as we'll expand cross-sell in our days, of course.
spk11: Thank you.
spk09: No, thank you.
spk11: No, thank you.
spk09: Seeing no further questions, that concludes our question and answer session for today. The Arcos video conference is concluded. Thank you very much for your participation. Have a great night and a good week. After saving with customized car insurance from Liberty Mutual, I customize everything.
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