This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Thank you for standing by and welcome to Arco Platform's second quarter 2023 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 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 Roberto Otero, Arco's CFO. Otero, you may begin your presentation.
spk00: Thank you. I'm pleased to welcome you to Arco's second quarter 2023 conference call. With me on the call today, we have Arco's CEO, Aridji Sarkovo-Continente. During today's presentation, we'll 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 products 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 Action 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, as 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 for revenue, gross margin, sale 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's comparable period, unless otherwise stated. We also note that year-over-year comparisons are affected by acquisitions not included in our 2022 financials. With that, I'd like to turn the call over to Adi, our co-CEO.
spk03: Thank you, Otero. I would like to start with the highlights of the quarter on slide three. 2023 second quarter post-IFRS. strong operating cash flow dynamics across all business verticals with consistent improvement of all important underlying cash flow drivings such as operating working capital and capital allocation. Arco's pedagogical segment comprising both our core and supplemental solutions have maintained solid operational performance in the current 2023 cycle. yielding an adjusted EBITDA minus CapEx of 453 million Reais, a 56% growth year over year. This represents an expansion of margin of adjusted EBITDA minus CapEx of seven percentage points compared to the prior year cycle. This is also a strategy of capturing efficiency gains with centralized functions while increasing operation leverage with our continued growth, effectively mitigating the recent volatility in cost pressures highlighted in our previous reports. Our free cash flow to firm for the pedagogical segment in 23 cycle is 205 million reais, up from minus 81 million reais during equivalent period last year. The 20 percentage points improvement in free cash flow to firm represents the result of optimized working capital dynamics, reducing effective tax rates, and better allocating capex. Our financial management solution segment, referred to as F&M, continues its accelerated growth trajectory posting a 104% increase in net revenue year-over-year, reflecting the segment's product-market fit aligned with solid execution. This growth was accompanied by an adjusted EBITDA margin expansion of 86 percentage points, reaching minus 2.4 in this quarter. These gains were enabled by our focus on scalability and pursuit of operational efficiency with healthy delinquency levels in our portfolio. I will now turn the call to Otero, who will continue the presentation. Otero, please go ahead.
spk00: Thank you, Wadi, and good evening, everyone. We'll begin by presenting the results of our pedagogical segments initiated on slide six. Considering the fluctuations in revenue recognition over quarters, we strongly advise investors to analyze our business performance on a cycle-to-date basis. In the 2023 cycle, net revenue grew 18% year-over-year, reaching R$1,532,000,000. Our car solutions marked 17% year-over-year growth, and supplemental solutions grew 24% year-over-year. As anticipated, this quarter posted lower ACV recognition compared to the second quarter in 2022, This shift was driven by our new supply strategy aimed at streamlining operations and reducing delivery count, resulting in concentrated ACV on the first quarter of each cycle. Additionally, a portion of revenues expected to be recognized in June were deferred to July for an impact of 36 million reais. For this reason, we are bringing P&L figures for this cycle between October and July. Moving to slide seven, we discussed the pedagogical business adjusted EBITDA. In the 2023 cycle up until June, our margins remain in line with the previous years, despite recent cost pressure. To account for the formation deferral of June ACV to July, we present cycle-to-date results up until July. Between October and July, we presented a 36.3% adjusted EBITDA margin, up from 34.8% margin in the same period in 2022. Our projected 2023 adjusted EBITDA margin guidance for the 2023 fiscal year of between 36.5% to 38.5% remains on track. This outlook benefits from normalized ACB recognition curve alongside the 2024 cycle growth and the implementation of new printing contracts that will impact the later half of the year. Moving to slide eight, we disclose our CAP Act results. Current cycle date figures show CAPEX at 6.7% of net revenues, a 7.7 percentage point reduction compared to the corresponding period in the 2022 cycle. This attests to our optimized capital location strategy, which reflects an increased collaboration and investment coordination among our brands that continues to reflect our focus on product evolution and quality. On slide nine, we disclose adjusted EBITDA minus CAPEX. 2023 cycle to date posted 29.6% margins versus 22.4% in the previous cycle to date, a significant 7 percentage points expansion. We are on track for our fiscal year guidance for adjusted EBITDA minus CAPEX, trending towards the higher end of the 26.5% to 30.5% margin guidance provided last year. Moving to slide 10, we disclosed the main drivers behind the significant improvement trend in the pedagogical business working capital cash generation. Days of sales outstanding remained flat year over year, while delinquency improved 1% point year over year. On a comparative basis, we improved days of inventory by 9% year over year. We are disclosing pro forma days of inventory due to a one-off initiative to capture better conditions in our supply chain. in which we advanced 58 million Reais to anticipate paper acquisition for the 2024 cycle with printers, guaranteeing better conditions for the next cycle. As a result, in Z11, we showed a consistent improvement across drivers in our pedagogical free cash flow firm cycle to date, leading our pedagogical business to a free cash flow firm of 205 million Reais in the cycle so far, which represents 13.4% of net revenues of the period, at 286 million expansion versus the negative 80 million free cash flow registered in the equivalent period in 2022. On slide 12, we highlight the consistent improvements over cycles. Now, moving to slide 14, we disclose our financial and management segment. In the second quarter of 2023, our net revenue amounted to 75 million reais, growing 104% year-over-year when compared to the pro forma net revenue of the second quarter last year prior to the acquisition. Accumulated net revenue for the first half of 2023 reached 137 million reais, a growth of 116% year-over-year. Adjusted EBITDA margin in the quarter reached minus 2.4%, a very important 86% points year-over-year expansion. Adjusted EBITDA margin in the first half of 2023 landed at minus 12%, an 80 percentage points year-over-year expansion. This improvement in margins is tied to scale and efficiency gains enabled by the growth and tech-enabled profile of our platform. We're confident in achieving our net revenue guidance projected to be between 300 and 350 million reais and our minus 10% adjusted EBITDA margin guidance for this segment in this fiscal year. On slide 16, we provide a snapshot of our consolidated ARCO second quarter 23 and first half 23 results, combining both pedagogical and the financial and management results. Second quarter consolidated figures delivered a net revenue of 471 million reais and adjusted EBITDA of 83.5 million, with adjusted EBITDA margin at 17.7%. Adjusted net income was 78 million reais, representing 16.6% adjusted net income margin. The first half of 2023 delivered a net revenue of 1 billion and 5 million reais and adjusted EBITDA of 194 million with 19.3% adjusted EBITDA margin. Consolidated adjusted net income was 36 million reais, representing 3.6% adjusted net income margin. Moving to slide 17, consolidated free cash for the firm for the first half of 2023 reached 252 million reais, including ISAC, representing 25% of net revenues in the period, a 6.5 percentage points expansion versus the first half of 2022. Turning our attention to slide 18, we present ARCO's net debt and obligations as of June. Our commitment to reduce and leverage remains a focal point enabled by organic cash generation growth. In the second quarter of 2023, our net debt over the trading 12 months adjusted EBITDA was 3.3 times. To account for the formation deferred of June ACV and EBITDA to July, we also present a pro forma net debt over adjusted EBITDA last 12 months as of July, which reached 3.1 times. Moving forward, we continue to deploy a balance sheet management strategy in we have issued a non-convertible debenture amounting to 550 million reais with an interest rate of CDI plus 2.6 paid semi-annually and amortized over three years starting in 2026. In July, we also have another important milestone to share. ISAC has successfully raised a K-12 dedicated FIDIC. This FIDIC, or a Receivables-Backed Investment Fund, secured 112 million reais to be amortized in 2025. This allows ISAC to raise capital from third parties to fund its revenue guarantee product capital requirements. The fatigue was oversubscribed despite the lack of a well-established track record and will boost ISAC's growth even further. Taking into account these issuances in early third quarter, our pro forma cash position totals 1.2 billion reais. This financial position comfortably covers our short-term obligations and we are confident in our cash generation capacity and future perspectives to implement a full deleveraging process in years to come. On slide 20, we disclose a brief process recap of our recently announced agreement to take ARCO private. Upon the receipt of the initial non-binding proposal from the bidders at $11 per share in November 2022, the board of directors formed a special committee consisting of four independent directors to evaluate the non-binding proposal. In January 2023, this special committee retained financial and legal independent advisors. In May, the special committee received a revised non-binding proposal from the bidders at $13 per share and agreed to engage in negotiations of definitive agreements. On August 10, 2023, ARCO entered into an agreement to go private, in which shareholders will receive $14 per share in cash, 38% premium versus weighted average for 30 days prior to the initial offer. The transaction is subject to closing conditions, including, among other conditions, the authorization and approval of the agreement by the affirmative vote of shareholders, representing at least two-thirds of the voting power of the company's common share present, and voting in person or by proxy at a general meeting of the company's shareholders, and require regulatory approval, the antitrust. Shareholders will receive proxy instructions for the general meeting in due time. The merger is currently expected to close during the fourth quarter of 2023 or the first quarter of 2024. With that, we conclude our presentation. Operator, we can now open for questions. Thank you.
spk01: 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 then 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. Please hold while we poll for questions. Our first question comes from Mauricio Cepeda with Credit Suisse. Please, go ahead.
spk02: Hi, Otero, Ari. Thanks for the opportunity. I have two questions from our site. The first is about the re-establishment of the margin equilibrium in relation to the paper, the cost of the paper. So, how confident you are that in the next cycle you'll be able either to negotiate with schools a service fee that is corresponding to the paper costs, or if you are kind of confident that there may be an alleviation in the price of the commodity. And the second question is a little bit to get details on this delivery postponement to July, if it was due to any troubles on cash cycle of your clients, or if it was an internal decision about logistics or any other internal factor. Thank you.
spk00: Thank you so much for the questions. So on the first one, actually, we are very confident with the recovery of gross margin already in the second half coming from, I mean, the better terms with the printing suppliers. Actually, those contracts have already been signed, okay? And so we have 100% visibility on the terms of those contracts. And for the first batch of deliveries, which are the ones that we send to schools between November, December and January, the price per page printed will be down in nominal terms around 12% year over year. So this is a proxy of a unit cost. per page printed all in, down 12% year over year in nominal terms. So again, we have visibility, those are contracts that are already signed, and this will impact the P&L mostly towards the end of Q3, beginning of Q4. On your second question regarding the revenue postponed from June to July, this is actually a very normal course of business. Sometimes it's a decision that comes from this call in some situations. So this call requesting to receive the packs of content in a certain week and for a reason this week slips to the next month, right? So the business operates under annual contracts. So it's very common to see the deliveries of the content moving from one week to another and as a consequence from one month to another and as a consequence from one quarter to another. Because really it's an annual business and that's how these calls also see the business. But as we report the earnings on a quarterly basis, sometimes we see these movements in revenue. This does not coincide with cash. This has no correlation with cash necessarily. It's much more logistics or operational decision either from the company or from this call to receive the content in a certain date. And we recognize the revenue as we deliver the content to this call.
spk02: Okay, thank you. And just to clarify, so about the first question, you are more confident on the reduction of costs through negotiations? than in necessarily adjusting prices?
spk00: Yeah, so the minus 12% that I mentioned too is the unit cost to print. And also in parallel, we are in the process of renewing ACV for the next cycle. And also, of course, during the intake process for new schools. and we are targeting a high single-digit price increase to prices, right? So, we're going to see those two components contributing to gross margin, the price increase and unit cost down in nominal terms for premium.
spk02: That's very clear. Thank you, Ozerio.
spk00: Thank you, Zepeda.
spk01: Ladies and gentlemen, There are no further questions at this time. So that concludes our Q&A session. That concludes ARCO's second quarter 2023 earnings call. Thank you very much for your participation and have a great night.
Disclaimer