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spk08: Good afternoon, everyone. Thank you for standing by and welcome to ARCO's platform third quarter 2021 earnings call. This event is being recorded and all participants will be in a listen-only mode during the company's presentation. After ARCO's 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 will turn the conference over to Karina Carreira, ARCO's IR Director. Karina, you may begin your presentation.
spk01: Thank you. I'm pleased to welcome you to ARCO's third quarter 2021 conference call. With me on the call today, we have ARCO's CEO, Aridi Sakavalkanti 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 or actually result 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 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.
spk02: 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'd like to present three topics today, as shown in slide three. First, on the results, we had a 16% revenue recognition in the quarter, leading to a net revenue of R$ 1,057,000,000 for the 2021 cycle. Excluding new business, which our business not accounted for in the nine months of 2020, our G&A expenses started to reflect efficiency measures, which will lead to improved profitability and earnings quality. while selling expenses increased aligned with the successful 2022 commercial cycle. We highlight and will detail further ahead the positive performance of our allowance for doubtful accounts, which dropped 61.8% year over year and has returned to historical levels with a sequential increase in our coverage index. The adjusted EBITDA margin for the quarter was 8.6%, the lowest margin of the cycle as expected due to historic seasonality. Additionally, it reflects product development and investments in sales and marketing, as well as the new business which carry lower margins as they are still in early stages of maturation. Margin for the 9 months of 2021 was 26.8%. Excluding the acquisitions concluded in 2021, the 9-months 21 margin was 27.3%. Second, we reiterate our 2021 adjusted EBITDA margin, which will be between 35.5% and 36%. We will present the drivers that will take us to this result further ahead. but I wanted to emphasize that this will configure an important achievement and indicates our commitment to the guidance we disclose to our shareholders, despite the lower than expected revenue generation this year, which was not anticipated by us by the time of the guidance announcement. Finally, we are announcing today our guidance for next year. We're very proud to say that we have a very strong commercial cycle, despite the fact that our commercial activities start later than usual this year because of the second wave of COVID in Brazil. We expect revenues to grow between 27% and 29% organically in the 2022 cycle, or 38% to 42% with recent M&As. We are also moving the announcement of our adjusted EBITDA margin guidance for the upcoming fiscal year to the third quarter as we have revisited our budgeting process. We are moving our EBITDA margin guidance range to 36.5% to 38.5% for 2022, from 35.5% to 37.5% for the last three years. as ARCO continues to reinforce its platform profile and benefits from a more efficient structure. I will now turn the call to Otero to discuss the results for the quarter. Otero, please go ahead.
spk04: Thank you, Wadi, and good evening, everyone. Thank you for your time. I also hope that you and your relatives are all safe and healthy. Moving to slide five, net revenues for the third quarter of 2021 were R$ 183.3 million, a 12% reduction year over year, and leading to a 16% revenue recognition, below the historical average for the quarter, impacted by the COVID-related dropouts in the year. Net revenues for the nine months of 2021 totaled R$ 771.2 million, 9% above the same period last year. With the results of the third quarter, we conclude the 2021 cycle with R$ 1.5 billion in revenues, 9% below the ACV booking provided in the beginning of the year, as schools incurred in dropouts as a result of the pandemic. As we show on this slide, we historically incurred a very small variation between ACV and collected revenues in the cycles. What makes it clear that 2020 and 2021 were directly impacted by the pandemic outbreak. We don't expect revenues to be below ACV in 2022, as schools were, in general, conservative with the size of the contracts, and we are not assuming any positive organic variation in our ACV guidance for next year. On slide 6 and 7, we present the year-over-year dynamics of our G&A and selling expenses. Starting on slide six on G&A, the growth in both third quarter and nine-month G&A figures reflect expenses related to new businesses acquired in the last 12 months and therefore not incorporated in the same period last year. It also reflects non-recurring 30-party services related to new businesses acquired, mainly CLC and Don Bosco. And finally, the fair value update on Geeky's stock option plan, which is 100% connected with the acquisition price of the company as explained in the financial statements. When we look at G&A only considering the same companies that were consolidated last year and excluding the RSU plan, we see a 19% drop in the third quarter year-over-year and 10% down in the nine months. This is a first signal of the efficiency measures we are putting in place to drive higher profitability of our operation. On slide seven, we discuss the performance of our selling expenses. The higher Q3 and nine-month selling expenses reflect first Expenses related to new businesses, similarly to the trends witnessed in the GNA. And second, the resumption of traveling and events, key factors of our commercial strategy. We wanted to highlight the very positive performance of our allowance for doubtful accounts, which reflects the quality of our receivables and the success of our cash collection performance, which we detail in the next slide. As we have been discussing with the market, ARCO was extremely diligent with the quality of its receivables. We opted to not flexibilize on pricing conditions or aggressive commercial terms to retain our clients. Instead, we flexibilized on payment terms, with slightly longer installments. As a consequence, our allowance for doubtful accounts have now returned to pre-pandemic levels, with delinquency dropping and our coverage index expanding sequentially. We continue to see a very healthy operating cash flow conversion, which is a characteristic of our business model. Moving to slide nine, the revenue contraction naturally impacted our EBITDA and net earnings. The Q3 is usually a weak quarter in terms of EBITDA and net profit contribution to the year. And in 2021, it was not different. In the third quarter 2019, we generated negative adjusted EBITDA, while in the third quarter 2020, our EBITDA was positively impacted by lower than usual selling expenses as a result of the social distancing measures in Brazil. We also remind that our revenue recognition last year in the same quarter was higher than the revenue recognition in the third quarter this year. As a consequence, our adjusted EBITDA reached R$15.8 million in this quarter or R$206.4 million in the ninth month, for an accumulated margin of 26.8% or 29.2% if excluding the recently acquired businesses. Duplicated profit compression combined with higher depreciation and amortization led to an accumulated net profit of R$85.5 million in the nine months of 2021. Moving to slide 11, we wanted to once again reiterate our EBITDA margin guidance for 2021. We expect the margin to be at the bottom of the range, between 35.5% and 36%. On top of historically strong Q4 contributing to the annual EBITDA, we will collect the benefits from the several efficiency initiatives being put in place, mainly on supply chain and G&A, which we will discuss in more detail on our upcoming ARCO Day, on December 6th, as those initiatives are part of a more comprehensive plan. I will now turn the call back to Ari. Ari, please go ahead.
spk02: Thank you, Otero. Moving to slide 13, we're very excited about the year-to-date results of our commercial cycle for the 2022 school year. At this point, we are providing an ACV bookings guidance for 2022 of 1.475 billion to 1.515 billion reais, which translates into an organic growth of 27 to 29%, or a total growth, including recent M&A, of 38% to 42%. On slide 14, we share some qualitative and quantitative aspects of this expected ACV growth. New student intake and upsell for both core and supplemental solutions were extremely positive. At the midpoint of the guidance range, we have ARCO core expositivo brands with organic growth of approximately 37%, while positive brands accelerated to approximately 17%. Supplemental solutions recover significantly versus 2020, with approximately 35% organic growth. Cross-sell initiatives were quite relevant for the year, contributing to 31% in the number of our core schools using at least one supplemental solution. Contracts originated by a cross-sell initiative represents 70% of the supplemental contracts closed year to date for the 2022 cycle. Retention rates were consistent with historical trends, while average price increases also presented a very healthy performance, even in such challenging macro scenario. Finally, we are confident that this positive outcome was possible because we are always committed to our client satisfaction, which translates into our NPS that has increased 18% in the last two years. with highlight to positivo brands, strong sequential improvement. Moving to slide 15, as I mentioned before, we are moving the announcement of the adjusted EBITDA margin guidance to the third quarter. We expanded the range for 2022 fiscal year to 36.5% to 38.5%. reflecting Arco's integration initiatives and corporate restructuring in place as we pave the way to become a portfolio hub of education solutions and a more profitable and efficient company in the years to come. Important to mention that this guidance includes all recently acquired business to date. When excluding operations still in early cycle of maturation, such as Missalva, Educo and Edupass, which actually carry negative margins but have higher growth, our adjusted EBITDA margin for 2022 would be 180 bps higher. In slide 17, let me use this opportunity to quickly comment on the $150 million investment from Dragoneer and General Atlantic, announced two weeks ago. The investment was made through the acquisition of convertible senior notes that will mature in seven years and bear interest rates at 8% per year fixed in Brazilian reais. The investment reinforces Arco's cash position so we can continue to fund our growth strategy in the education segment while bringing on board two highly renowned growth-oriented investment funds that will advise us in paths to continue impacting the lives of students all over Brazil. I would also like to invite you all for our first ARCO Day, which will be hosted on a virtual format on December 6th at 12 p.m. Eastern Time. We are excited to have our leaders sharing their views on their business and great opportunities that we have in the years to come. To end this call, I would like to thank for all the effort and talent of our team. Our people were responsible for achieving great results in a very adverse period of our company, and we were very excited with the 2022 year and the years to come. Thank you very much, operator. Now we can open for questions.
spk08: Thank you. The floor is now open for questions. If you have a question, please press star 1 on your touch-tone phone at this or any time. If at any point your question is answered, you may remove yourself from the queue by pressing star two. 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. Please hold. Our first question comes from Vinicius Figueiredo, Itaú.
spk07: Good evening, everyone. Thanks for taking my question. The first question regards the ATV guidance for 2022. Taking a look at your breakdown, you can see that the core expositivo and supplemental are rebounding already quite well, but positivo should be the latter. What the company still needs to do to accelerate the growth for this specific brand, and when should we expect it? Additionally, if you could give us more detail on the non-recurring third-party expenses that we saw this quarter, it would be great. Thanks.
spk05: Sure. Hi, Vinicius. Thanks for the two questions. So starting with the second one, the third-party services is mainly driven by the payment of the fee related to the acquisition of COCO and Don Bosco. Okay, so on the financial statement, we are breaking down this amount, but it's roughly 90%. of the third party services refer to the banking fee and the legal fees related to the acquisition. On the first one, yeah, I mean, to your point, Positivo could be considered a laggard, but actually we see the 17% growth as a quite strong figure. If you remind, by the time we acquired this company, Positivo was growing around 5%. Then last year, So 2020 was the first year after the integration, right? But COVID came and pretty much we couldn't collect the benefits from all the efforts we had put in place at the company, both in the product technology and the sales force. However, I mean, this year we think we are collecting this benefit. So 17% growth versus around 5, 6%, which is where the company was growing two years ago. We think it's a very good number. And as I already said in the beginning of the call, this sales cycle pretty much started by end of May, beginning of June. That's the truth because of the second wave of COVID. We think that in a normal year, probably growth would have been higher. And I think that when we look at the qualitative aspect of the growth from Positivo, we see improvement in several lines. So not only in the number of new students coming to the base, but also on retention, And in NPS, which was, I mean, among the most important metrics, right? So, I mean, we are happy with the results. We think that of course, this, this sale cycle had started earlier or in line with the usual timeline. Probably the results will be even stronger, but I mean, compared, compared to where it started, by the time we acquired the company, we think it's a, it's a, it's a big success.
spk07: Okay. Perfect. Perfect. Thanks for that.
spk08: Thank you. Our next question comes from . Please proceed.
spk06: Good evening, everyone. Two questions on our side, which I think are correlated. The first one is about the shared base compensation. compensation plan, I'm sorry. I understand, I wanted to understand better the year-over-year increase, considering this recent stock performance. And the second one is about financial expenses. I believe that both of them could be kind of correlated with the stock option plan of Kiki, but I just wanted to get a little bit more color on these two questions. And that's it. Thank you.
spk05: Sure. Sure. Yeah. Thanks for the question. Uh, yeah, I mean, we, in the presentation, uh, on the footnotes, we explained, uh, the dynamic, but pretty much by the time we acquired, uh, Geeky, we also agreed to acquire, uh, the, the, the management, uh, related stock option, uh, plan. Right. So this was part of the agreed price. and part of the disclosed agreed price of these acquisitions, okay? So every time we recalculate the value attributed to the stock option, we have to update both the account payment, the account payment to shareholders, like the seller's note that we have on the liability, and also update the RSU. So this increase is 100% related That's the earn out of Geeky's payment. Okay, so this has nothing to do with our calls, our issue plan. I just said, I mean, the stock price is down. So, I mean, it wouldn't make sense. So this is 100% connected with the earn out of Geeky, which is composed also by the purchase of their stock option plan. Okay, so, and Geeky had a very good commercial performance. year, so this reflects on this line and also the account payment to selling shareholders.
spk07: Perfect. Thank you.
spk08: Thank you. Our next question comes from Vinicius Ribeiro, EUBS.
spk09: Good afternoon, everyone. Thanks for taking our questions. Two on the ACV guidance, if I may. So first, is the guidance including the return of students that dropped out during 2021, or that would be an upside to them? And number two, a little more on the qualitative side, you guys can share with us anything about the commercial landscape. I mean, is there anyone that was more aggressive in terms of prices or more aggressive in terms of marketing expenses or something like that that would indicate a change in the industry? Or should we assume that the landscape continues the same that it was in the pre-COVID time? Thanks.
spk05: Sure. No, thanks for the question. So on the first one, in this ACV, we are not incorporating any assumption of positive organic variation. Okay, so we are pretty much assuming the number of students as per the contracts that were signed. So any positive organic variation would be an upside to a number. We think it's worth mentioning that even though we started the intake process by the end of May, the renewal of the contract started earlier in the year, which is pretty much when the second wave of COVID was hitting Brazil. So, I mean, when we look at the contract signed, for example, by the end of the first quarter, they were quite conservative, right? And we know that because we know how many subscriptions we provided to those same schools by the end of this year. And we know that those subscriptions were even higher than the size of the contract signed with those schools in the beginning of the year. So, I mean, being straightforward here, I mean, the ACT could have upside or the revenue, right, for next year could have upside depending on these positive organic variations that we could end up seeing, which we think that there's a possibility to happen. To your second point on competition, I mean, we cannot comment on the competitor's growth, but in general, we think the combination of our growth retention and the price increase showed that we were among the winners, for sure. I'll give you an example. I mean, if we take SaaS, which is almost the most premium brand, SaaS is the most premium brand in the market, and as a consequence, it's one of the most expensive learning systems in Brazil. which means that any competitor that approaches a SaaS school will probably bring a more competitive pricing condition, and this probably happened this year. Nevertheless, SaaS will post in 2021 a retention rate in line with its all-time high levels, around 97.5, 98%. So we think it's a proof that, yes, there is competition in the market, but I mean, quality, reputation, pedagogical support end up being key reasons why schools opt to stay with the, so yeah. Cool, thanks for the answers. Sure, so we have a question from Rodrigo. Good afternoon, just like to get an update on international school, the arbitration process and the commercial cycle. Sure, thank you for the question. So yeah, actually we have news regarding the arbitration process. Today, a couple hours ago, we received the decision from the arbitration court, which we will disclose tomorrow before the market opens in our financial statement at the SEC. The court has decided that Mr. Ulisses is not entitled to receive any shares of ARCO, and that the amount to be paid by ARCO shall be calculated based on 10 times the realized EBITDA for 2019 and 2020 school years, both net of net debt as determined in the investment agreement. This is 100% consistent with the calculation methodology that we used to estimate the provision amount in our balance sheet as reported. With regards to the commercial cycle of international school, I mean, the figures are quite encouraging. I mean, as Ari said, and as we show on the presentation, supplemental is showing a 35% organic growth year over year. This is a major recovery from last year. And international school, given its size, of course, is among the high growth. a product within Supplemental. So, yes, International School is performing quite well, and Supplemental as a whole, we think that it delivered a very good result, despite, again, the fact that the sales cycle started later in the year and the more discretionary profile of this product. So, it was a very good result for International School and Supplemental as a whole. And as I said, I mean, on the arbitration, we have a positive ruling from the court.
spk08: Our next question comes from Javier Martinez. Morgan Stanley, please proceed.
spk03: Hi, Ari. So thank you very much. In reality, my question was answered, but let me get a little bit more detail on International School. So what is the provision you have already? Can you remind us? And then the expectation is that that should cover 100% of the conclusion of the arbitration, correct?
spk05: Thanks for the question. Yeah, so today in our balance sheet we have roughly 370 million reais provision in the liabilities. So as per this decision from the arbitration court, the formula that we used to calculate this amount is in accordance with the interpretation from the arbitration court as being the most adequate way to calculate this remaining amount. Okay, so based on this decision, apparently, I mean, this number is the most accurate one. You're right.
spk03: Fantastic. Okay, thank you very much. No, thank you.
spk08: Thank you. Once again, if you have a question, please press star 1. And to remove your question, please press star 2. thank you at this time we have no further questions in the queue that concludes zarco's third quarter 2021 earnings call thank you very much for your participation after saving with customized car insurance from liberty mutual i customize
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