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spk03: Good afternoon, everyone. Thank you for standing by and welcome to ARCO Platform second quarter 2021 earnings call. This event is being recorded and all participants will be in a listening-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 at investor.arcoplatform.com, where the presentation is also available. Now, I will turn the conference over to Karina Carreira, ARCO IR Director. Karina, you may begin your presentation.
spk01: Thank you. I'm pleased to welcome you to ARCO's second quarter 2021 conference call. With me on the call today, we have Argo's CEO, Eridu Saka Bocanti Neto, and Argo'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 or actually result to differ materially from those contemplated by these forward-looking statements. Fortlogging 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 on the information available to us as of the day hereof. You should not rely on them as prediction 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 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 2020 financials. Let me now turn the call over to Ari, our co-CEO.
spk04: Thank you, Karina, and thanks, everyone, for joining today's conference call. We hope that you and your families are all healthy and safe. We would like to present four topics today, as shown in slide 3. First, on the results, we had 21.9% revenue recognition in the quarter, leading to a net revenue of R$ 588 million for the first six months of 2021, or an 18% increase versus the same period of 2020. Adjusted EBITDA this quarter was impacted by lower revenue recognition, product development, and sales force increase as we prepare for a post-pandemic recovery. leading to an accumulated adjusted EBITDA margin for the first six months of the year of 32.4%. Despite an even softer third quarter ahead, following historical seasonality trends, as Otero will show in a few minutes, we are confident that the fourth quarter will lead us to meet the adjusted EBITDA margin guidance of 35.5% and 37.5% range. The free cash flow improved this quarter as we collected the receivables generated by the extension of the payment terms to assist our partner schools, taking us back to our strong cash generation profile. Second, the commercial cycle for 2022 school year continues to show encouraging results as pandemic-related restrictions are progressively lifted. At this point, we see organic growth pace for core solutions in line with pre-pandemic levels, while supplemental solutions accelerate versus 2020, but indicate a two-step recovery to pre-pandemic growth rate levels. We are achieving great results from our cross-sell initiatives, which will now be powered by the creation of a centralized supplemental business unit called ARCO+. Third, As we continue to search for innovative ways of better service our clients and consolidate our leadership position in the industry, we launched this year SaaS Adapt, a customizable and data-oriented version of SaaS, our most premium core solution, allowing us to better serve the premium segment. SASADAPT was developed on top of EDUCOS LMS, a solution we acquired in July that will integrate our ArcoTec portfolio and has great data analytics capabilities. And finally, we concluded our first step towards disclosure improvement and commitment to increase our impact with the release of our first ESG report. I will now turn the call to Otero to discuss the results for the quarter. Otero, please go ahead.
spk05: Thank you, Adi, and good evening, everyone. Thank you for your time. I also hope that you are all safe and healthy. Moving to slide five, net revenues for the second quarter of 2021 were R$ 256 million, representing a 9% year-over-year growth and 21.9% of revenue recognition. below the historical average for the quarter, impacted by the second wave of COVID-19. As a result, net revenues for the six months of 2021 totaled R$ 588 million, 18% above the same period for last year. Lower revenues added to higher costs related to product development and higher selling expenses aiming a stronger sales cycle led to an adjusted EBITDA for the quarter of R$72.3 million, 28% below the second quarter last year, with a 28.2% EBITDA margin. Adjusted EBITDA for the first six months of the year totaled 190.6 million reais resulting in a 32.4% accumulated margin. Finally, adjusted net income was 36.4 million for the quarter with a 14.2% net margin and 97.5 million for the first six months with 16.6% margin. On slide 6, we present a breakdown for our receivables, which reduced 19% from the first quarter level as we collected the receivables from our partners' calls to whom we provided support through more flexible payment terms. That, added to the lower effective tax rate resulting from the corporate restructuring, led to a significant improvement in the free cash flow this quarter. On slide 7, we present an update on our ongoing corporate restructuring, which will further contribute to our cash generation in the future. We concluded the incorporation of SaaS subsidiaries on July 1st, leading to annual savings amounting to R$ 30 million. Next steps include incorporation of Naviavela this year and Escoli Movimento, Pleno and Estudos in 2022. As we incorporate businesses acquired in the past, we will be able to capture additional tax benefits and further reduce our effective tax rate. To conclude this session, moving to slide eight, we'd like to take the opportunity to make a quick recap on the seasonality of our business and how we expect this year to behave when compared to historical trends. Adjusted EBITDA and cash flow for operating activities have different behaviors along the year, as you can see in the two charts. The blue line for both charts represent the historical trend, while the red line represents the expected behavior for 2021. When analyzing adjusted EBITDA, best performing quarter for revenue recognition is Q4, when all solutions have their first content delivered to schools. On the other hand, the worst performing quarter is Q3, as most of the content has been delivered in previous quarters. This year, we expect a more accentuated seasonality, but still following historical trends. When analyzing cash flow from operating activities, as the majority of schools pay for our solutions in up to eight installments starting around February, Q2 is usually the strongest cash generator, while Q4 is the weakest. This year, as we extend the payment terms to assist our partners' calls, the cash collection behavior will be a little different from historical trends. Moving to slide 10, we are very excited about the return of in-person classes in most states in Brazil, as it increases the effectiveness of our commercial activities. At this point, 56% of the population received at least the first dose of the COVID-19 vaccine, and 24% are fully vaccinated, with vaccination of teenagers starting this month in some states. The reopening of schools and vaccination of the population has a direct impact in the commercial cycle, as principals become more optimistic and open to meet our team and discuss positive changes to their schools. As represented in slide 11, Despite in a still early stage, the commercial cycle for the 2022 school year is presenting a much faster organic growth pace versus last year, indicating that the worst is definitely behind us. For our car solution, year-to-date organic growth pace is in line with pre-pandemic levels, indicating a strong lead conversion on top of a suppressed demand. Positivo is the leading performer for the core segment, two times ahead of the commercial cycle for 2020, proving the effectiveness of our acquire and improve strategy. As for our supplemental solutions, year-to-date organic growth pace shows strong recovery versus last year, but indicates a two-step recovery to pre-pandemic growth rate levels. we had one of the best years for renewals last year. And at this point, renewal rates for car solutions are in line with historical levels, while supplemental solutions are presenting a stronger renewal performance. Moving to slide 12, Crossell has further accelerated and now represents 85% of the intake for supplemental solutions year to date. Important to mention that the economics for Crossell are better as we see a faster lead conversion. signing of larger contracts and usually with longer terms. And the relationship with the partner's call becomes stronger, increasing the retention rates. The possibilities to capture cross-sell opportunities are numerous, and here are some recent examples. In the first one, named Cross-Sell Intake, we signed with a large call that did not use any ARCO product before, adding both SAI and NAVE, our maker solution. In the second example, named Renewal Core plus Cross-Sell Supplemental, we extended the contract term with Positivo Partner School to five years and added Pleno. In the third example, named Upselling Supplemental plus Cross-Sale Core, we extended the contract term within International School Partner School while adding other branches of the same chain and including SAS, leading to a five times ACV increase. Finally, in the fourth example, named Renewal Supplemental plus Cross-Sale, we extended the contract term with Anescola de Inteligencia Partners School to four years and added SAI, PES and Plano, leading to a 10 times ACV increase. Moving to slide 13, we are now powering the cross-sell initiatives with the creation of ARCO+, a business unit that will centralize our supplemental solutions. This structure will allow us to extract synergies by centralizing activities that will lead to cost savings reducing time spent with repeated demands and challenges, assimilating cooperation between solutions, providing access to tools and resources from one to another, and leveraging on ARCO's employer branding. While, of course, maintaining strong brands, pedagogical approach with clear identities, fast response to customer needs, and focus on quality and innovation. I'll now turn the call back to Ari. Ari, please go ahead.
spk04: Thank you, Otero. Innovation has always been part of our DNA, especially when it translates into delivering a better product or service to our clients. On slide 15, we present SaaS Adapt, a version of SaaS, our most premium brand, that offers more customization possibilities, generates more data on students' engagement and pedagogical gaps, and allows for higher connectivity among all content available in the platform. It's a solution that fits well with the demands of school segments that want to customize their content, which in turn will provide valuable feedback that will guide us to further improve our solutions. SAS Adapt was created using Studos and Educos features, which are now part of ArcoTec, alongside Escola em Movimento, our app communication solution, and WPensar, our ERP solution, as presented on slide 16. ArcoTec was recently created with the goal of centralizing the technology backbone of our solutions, gathering the best features from all platforms acquired along the years that can be the common tool into one single strong backbone. It will allow for us cost savings and better user experience as we will be able to implement improvements and add new features much faster. Besides strengthening our employer branding to attract talents on the technology segment. Educo acquired in July is a great complement to ArcoTech's portfolio, as it is a powerful LMS that provides a personalized learning experience and helps schools to acquire more students based on data intelligence. On our final slide on page 18, we bring a summary of our ESG report released last week. Our first step towards mapping our strengths and gaps so we can further expand our impact on Brazilian education. The materiality analysis presented last quarter guided us to focus on three main topics which are fully aligned with our strategy. Impact on education, focus on people and strong and sustainable structure. The report brings relevant information on each of these topics and challenges us to continue pursuing better practice going forward. ARCO is undergoing relevant changes. M&A was key to support our mission to scale quality education across Brazil. And now is the time for us to organize our structure and further extract the benefits of having reputable brands quality solution, and a highly talented team. The creation of ARCO Tech and ARCO Plus allow us to centralize a structure that will generate even more value when combined. And there is more to come as we deep dive into our processes, generating savings that will translate into freeing capital to invest in what really creates value, serving well our clients, and unlocking value to grow. Thank you for your time, operator. We can now open for questions.
spk03: Thank you. The floor is now open for questions. If you have a question, please press star 1 on your touch-tone phone. Edit this or any time. 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 our questions that you pick up your headset to provide an optimal sound quality. Please hold while we poll for questions. Our first question comes from Victor Tomita, the Goldman Sachs.
spk02: Hello, good evening all, and thanks for taking our questions. Two questions on our side. The first one is on ARCO+. if you could give us some more details on the type of activity that will be centralized, particularly if you will have a single commercial team for all brands now, and if so, if you see any risks to brand perception in using the same team for higher-end and lower-end supplemental brands. And the second question would be on ArcoTech. especially how it will interact with the various core brands other than SAS Adapt, or how separate the technological backend currently is between different core brands, and if there could be significant cost savings arising from unifying the technology backbone across core brands. Thank you.
spk06: Hi, Vitor. Thanks for the question. It's Otaru here. On ARCO+, I would say that there's no changing mindset here. I think that's something that we always mapped that was going to happen. We were just waiting for the right timing to do such integration. So the idea here is really to join efforts in a more efficient way across those brands. Okay. So in terms of what is going to be centralized and integrated. We here internally are saying that everything that is behind the curtain, right? So everything that would not prevent the client from perceiving the unique identity of the brand. Okay. So everything related to operations and back office services will at first be integrated. Um, with regards to the sales team, the idea here is to keep them independent, right? So as we discussed in the presentation, we already have a team dedicated to the cross sell. So this team, uh, dedicated to cross sell is already selling all brands, but we're going to keep independent sales team for each of the brands as well. Right? So this is what, uh, will drive clients and customers to perceive the uniqueness of each of the brands. but behind the curtains, we will integrate, uh, uh, uh, uh, several areas. Okay. Um, as to, uh, Arco tech, I'll say that similarly to our Arco plus, uh, here, there's no change in mindset as well, right? So it's really about finding the right timing, uh, to do it. As you know, we made several acquisitions, uh, over the last, uh, two, three years. And the key priority, uh, at first was really to improve the content to improve the product, to improve the customer service, and to improve the go-to-market strategy, and to use the local technology at first, right? So that was the strategy for those acquisitions that we made. Now we think it's the time to drive the integration of the technology platforms. So what we're gonna do is create one single technology backbone, right? Backing those platforms and the front end is going to be independent, right? So we're going to have a local team at each of the brands driving the uniqueness of the front end to students and to schools, but we're going to have the centralized backbone driven by Arcotech, right? So the idea here is to drive more efficiency, is to drive more agility, right, and to allocate the best resources possible to all the brands, right? So that's the idea here. Thank you.
spk03: Our next question comes from Pedro Mariani with Bank of America.
spk09: Hi, guys. Good evening. Thanks for the opportunity here. I also have two questions. So the first, if you could just provide an update on the ongoing commercial cycle for next year and how you're seeing the new intake dynamics for the most important business lines. What is the profile of these intakes, like if they're coming from competitors or through the conversion to their new systems? Uh, that would be super helpful. That's the first question. And the second is regarding the south adapt that you provided some information right now. I just wanted to understand what is the strategy here, right? So the profile of the schools you went to that, and if there is any difference in terms of tickets versus the traditional south. Okay. These are the two questions. Thank you.
spk04: Hi, Pedro. This is Ari. Thank you for your question. Regarding the commercial cycle, I would say that the early signs are very strong. We still are in the beginning of the cycle. Most of the contracts are signed in the second semester of the year between September and November. But I think the main difference here is that we are now able to visit schools. Our team is traveling extensively. We are able to receive schools in our headquarters, so we are hosting events very frequently. And this last step of the sales cycle to close the deal is very important. So we see that in CORE, we are multiple times ahead of 2020 and in a growth phase in line of 2019. In the supplemental in 2019, we were growing 60%. So I would say that in 2020, it's multiple times ahead of, sorry, in 2021, it's multiple times ahead of 2020, but I would say that the recovery to the levels of 2019, it's going to be in a two-step way. So we're very optimistic at this point, still early, but the Traction of the sales force and the sales team is very strong. We are very excited for the months ahead. Regarding SaaS Adapt, I would say that the idea here is most to address those schools that use textbooks and want to have a white label product and the ability to flexibilize their content and also to have the possibility that their teachers produce content and upload in their platform. I would say that these are, in most of the times, premium schools that they have their own content produced in-house. And regarding the pricing, it's the same pricing that we use as SAS because it's already a premium solution.
spk09: Super hot for you. Thanks so much.
spk03: Our next question comes from Vinicius Ribeiro with UBS.
spk07: Hello, guys. Good afternoon. Thanks for taking our question. Two things we'd like to discuss here, please. And first, thanks for the meters on the ATV. It's super helpful. You mentioned that Core Legacy sales are in line with 2019. We just wanted to clarify if those sales already include positive performance during 2019 or not. And the second question is, you guys reiterated your margin guidance and Adi alluded to the 4Q results. We just wanted to understand how dependent is this guidance on you achieving your internal goals for the ATV that should start being recognized during the 4Q and should result in operating leverage? Thanks.
spk06: Hi, Vinicius. Otero here. Uh, thanks for the question. Uh, as to the first one, uh, we are including Positivo, uh, in 2019. Okay. So, uh, same brands, uh, grow. Okay. um to the second one uh with regards to uh to the margin yes uh we are reaffirming or reiterating uh the the range between 35.5 and 37.5 uh i mean internally of course we assume that we will reach uh the internal uh goals for um for for next year right so as i mean traditionally uh we do right so uh we're assuming and based on the early signs for uh as i said for the commercial cycle they seem achievable, right? So we brought the expected seasonality for margins this year. So seasonality will reflect the historical trend, right? So we should expect a weak adjusted EBITDA margin in Q3 and a strong adjusted EBITDA margin in Q4. So there should be no surprises there.
spk07: Thanks, Zotero. Super clear.
spk06: No, thank you.
spk03: Our next question comes from Ian Seskin with Ibanco BTG Pac-12.
spk10: Good evening, Ari, Lotharo, and Karina. I have two brief questions here on my side. The first one, I just wonder if you guys could give us more color on the two-step recovery in the supplemental ACV. I mean, does it mean that it will take two years to fully recover Should we expect these supplemental ACV back to 2019 levels like in the 2023 cycle? That's the first question. And the second question, I just wanted to know if you guys could give us a breakdown on the non-recurring expenses that you guys published here today. Thank you.
spk06: Hiya, Otaro here. So to your first point on the supplemental growth, as Ari mentioned, in 2019, this was a business unit that was growing close to 60%, right? So by saying that we expect this to be a two-step recovery, it's not that we don't think that 60% growth is no longer achievable, right? It's just because we think that to reach those growth levels, we would need to have a full one year of a normal commercial activity, which did not happen, right? So the truth is that our sales team was able to more intensively interact with schools from the month of May, beginning of June onward, right? And the level of stress at the schools was much higher in the first semester of the year, right? So our point here is that we think we would need a full year of a normalized commercial activity to be able to reach those growth rates. So we think that structurally this business unit is capable of having this growth. And by saying two-stage, we think that possibly this could happen in 2023. Let's see. As to the no recurring expenses, Could you just repeat the question? You wanted to understand what is included in non-recurring, right?
spk10: Yes, there is a line called the non-recurring expenses, but we don't have further details. So I just wonder if you could break it down for us. That's it.
spk06: Yeah, absolutely. So inside non-recurring, you basically have costs related to the SOCs. uh, implementation, um, or accreditation, um, to the company. Okay. And you have other, uh, expenses, uh, related to, uh, um, MNA, uh, uh, deals and due diligence process, uh, that we are undergoing. Okay.
spk10: Yes. Thank you. Very clear. Thank you guys.
spk03: Hi, thank you.
spk08: Good evening to everybody. I want to ask you again about the commercialization. I know that it's a little bit early, but I want to try to get some color on maybe some new trends. I'm trying to understand how COVID or affordability may be impacting the mix for next year. I don't know if you have noticed any different trends in SAI versus the new brands, and also in the supplemental international schools, the old supplemental products versus the new ones. That will be my first question, please.
spk04: Hi, Javier. Ari here. Thank you for your question. So we have seen, when you look at CORE, a strong performance for all the brands. I would highlight that SAS, which is the premium brand, is performing quite well so far. But I think the good surprise here is really positivo, where we have a two times higher student intake this year when you compare that to last year. And I think the reason for that is it's not the price positioning. It's mainly the changes and the evolution that we made in the product and in the technology. I would say that it has been a good year for replacing schools that use textbooks because they lack the technology necessary to pursue their activities in a post-COVID scenario. But I also would say that, especially for the less proximalized and smaller learning systems that lack the scale to invest, it has also been a trend that these schools look for more robust solutions like ours. So I would say that technology is playing a very important role in shifting schools from textbooks and small learning systems to our solutions.
spk08: Thanks, Ari. I remember when you both said that you had a bump during one year or something like that related with some churn related with the changing hands from the brand. So it sounds like this time you're going to be able to avoid that. That will be really good news. Should we expect the same for Don Bosco, for the ones that are under antitrust approval?
spk04: So I would say that we will not be able to execute a full cycle regarding both retention and commercial cycle, both for rotation and commercial cycle, because the deal is expected to be approved on the fourth quarter. So far, because of the antitrust, the limited figures that we have show us that the numbers are in line with previous years. But definitely, I think we won't have enough time to conclude a full cycle in CoC and Don Bosco because the antitrust will be approved on the last quarter of the year.
spk08: Makes sense. Thank you very much, Eric. Thank you, Javier.
spk06: Hey, guys. It's Otaru here. We have a question from Marilia from RSI from the webcast. So can you provide more color on Miss Alva prospects? How does the student growth look like and what are the opportunities identified for the D2C product? So Maria, thanks very much for the question. So we are super excited with Miss Alva. I think strategically this was a movement that we have been talking about for a while. We wanted to have the possibility to serve uh students um enrolled in public schools right so uh we wanted to impact those students but it was very challenging to to fight the right to find the right uh product right and to find equilibrium between what would be affordable for those students and the acquisition cost of those students since those are traditionally digital products. So MiSalva is a great fit to this strategy and we are confirming the thesis more and more as we know better the asset. Your point on B2C is actually very interesting because this is a possibility, right? So we think that the products offered by MiSalva and the profile of tutoring that they offer is highly capable of adding incremental value to these schools that we serve already. We are starting to test the appetite for this product already in this semester, right, in the second semester of 2021 through a Freeman feature. And let's see, I mean, we're testing appetite right now, and the idea is possibly next year upsell this product to a paid version.
spk03: At this time, I have no more questions in the queue. That concludes ARCO's second quarter 2021 earnings call. Thank you very much for your participation, and have a nice day.
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