Vitru Limited

Ladies and gentlemen, thank you for standing by, and welcome to the VTru Education third quarter results conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. As a reminder, this call will be recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Carlos Freitas, Vitru's CFO. Thank you. Please go ahead, sir.

Carlos Freitas Thank you, Pedro. Good morning, everyone. It's a pleasure to be here with you all for our first release after our IPO. Here with me are Pedro Graça, the CEO of Vitru, Maria Karina Gonçalves, the Head of Investor Relations, and Paulo Pandini, also from the Investor Relations Department. Before we begin, I'd like to make note that, as detailed on slide two, during today's presentation, our executives will make forward-looking statements. In addition, measurements may reference non-IFRS financial measures on this call. These non-IFRS measures are not intended to be considered in the isolation or as a reconciliation of these non-IFRS measures to the most directly comparable IFRS measures. In our early release, as well as in the end of this presentation. A slide presentation will be part of today's webcast, which is available in our Investor Relations website at investor.vitru.com.br. I trust you all have the presentation in front of you, and now I invite you to move to page three. So, as you remember, we executed our IPO in the US two months ago, more or less, and we are very proud of this achievement, which was only our first step in our life as a liquid company. We raised a gross amount of $96 million and the net proceeds of this primary offering will be used, as we discussed throughout the IPO process, basically for M&A purposes. And as you know, this strong growth we have delivered so far has been purely on an organic basis, but we are truly convinced that it can also create value for shareholders through M&A and the deployment of our digital education skills. So, today we have active discussions with 10 position targets and we hope we'll be able to announce our first deals soon. Now, moving to page five. Actually, for here, the main highlight for this quarter. First one is that in the last census released by the Ministry of Education in Brazil, We were confirmed, again, as the number one peer player in digital education in post-secondary market in Brazil. We have been growing much faster than the market. This makes us very proud, and I'll get back to this a bit later. The second point here on the slide is that also in October, the Ministry of Education released the latest results of the NIDD of the last evaluation cycle. Our average IED was 27% above the market and the highest among the listed players in Brazil. As a reminder, as you know, the evolution of the student throughout the whole secondary education is measured by the IED. And that's why we believe the IED is the best indicator to show the real added value we have on the life of a student. Third one here on this page, and that's about intake. our intake in the current cycle grew 40% versus the same period of last year. And as a reminder, in the first semester of this year, our intake grew 30% versus the same period of last year. And also important on fourth point is that this increase in intake did not come at the expense of average ticket. That's very important. Our average ticket increased by 2%, so more or less close to the IPCA variation in the period. And this despite the sizable number of new students. I mean, as you know, we have a modular academic approach through which a new student can join us throughout the first semester, or the semester in fact. So most of them do not provide us with a full semester of readiness. So it confirms that we have been saying, we have a different market position and we deliver a different product. The fifth point here is about natural revenue. So with this increase in intake, days, and tickets, our natural revenue in digital education undergraduate, which is our main segment, our main business, increased by 32% this quarter. And again, this purely on an organic basis, which shows the compelling strength of our business model. Finally, adjusted BDA increased in the period as well. And would have increased even further, would not for the low PDA basis in the third quarter of last year, before we implemented a stricter PDA policy in the fourth quarter of last year. And I'll come back to this a bit later as well. So now on page six. As you can see, according to the data that I just mentioned, released by the Ministry of Education, the private digital education undergrad market in Brazil grew by roughly 19% per year since 2016, while we grew by 42% in the same period. Once again, purely on organic basis. So this is a market that has been expanding a lot. And in our opinion, it will expand even further in a post-COVID scenario. And within this growing and appealing market, we have grown even faster in the market. Our current market share in the latest census increased by 1.5%, so it went from 10.8% in 2018 to 12.3% last year. And this gain of 1.5 points was the strongest gain in share among all players in Brazil. And also important to mention that we gained share throughout the country. You can see here in the slide, in the chart, or in the map, that we expanded our market share throughout five regions in Brazil. And also important to highlight here, the growth in the Southeast. In the Southeast, we expanded a lot between 18 and 19. It's from 1.4% to 2.3%. This 1% increase is a lot because the whole Southeast, as you know, represents around 40% of the whole market. And here on the right, about IDD and quality. Not only we grew a lot, but also expanded our average IDD. which is now 27% above the market. One year before it was 11% above the market, now it is 27%. And again, the highest among listed players in the country. So it basically means that we improved the added value for our clients, which are the more than 240,000 post-secondary digital education students who trust their higher education to UNESL. Now on page seven, We provide here a glimpse of the growth in our student base. We have almost 300,000 students, 97% of them enrolled in digital education courses. If we focus on the student base of digital education undergraduate, which is our main business as I mentioned, you can see that we have a CAGR of 34% since 2016. And we shall maintain this substantial growth in student base of our visual education on the grad basis as our 578 expansion hubs mature over time. Finally, as I have shown before, our intake in the 2020.2 cycle, the second cycle of the year, was 40% higher than the intake in the same period of last year. The growth in the first half of this year was 30%. And this process in the last intake cycle was pretty interesting to see. On one hand, it is true that the current economic crisis does affect the willingness of some of our prospects to effectively enroll in one of our quarters. But on the other hand, we have seen a lot of the students who in principle would go for the on-campus quarters, but now are deciding more and more to go to digital education. particularly a hybrid model such as the one offered by us. This trend has just been confirmed by the recent surveys conducted by the insights about increased interest among prospects in digital education. So this fact, together with the cultural changes brought by the pandemic about working from home and buying from home and of course, studying from home, this represents a huge market potential going forward for us. And finally, just as a reminder, the latest census, last year already there were more new students and newcomers joining digital education courses than on campus. So it is poised to outpace the whole basis of students in post-secondary education in Brazil in two years from now. Now moving to page eight, we show the increase in our digital education base and in the number of hubs between September 19 and September 20. Again, throughout the country, we have grown a lot. Even in the South region, which is the first region where we were based and created, growing 12% in the South region, and then growing a lot throughout the country. Again, particularly in the Southeast, which we grew 130%, from 12,000 to 28,000. It is poised to become quite soon our second most important region in the country. The number of hubs also expanded over time. We expanded a lot in the last year. Even in the last 12 months, we expanded by almost 40% the number of hubs. On page nine, we focus on, in our opinion, the most important driver for our organic growth, which is the maturation of our expansion hubs. As I said, we have now 578 expansion hubs, which are still ramping up. And to illustrate this growth potential, we calculated this so-called theoretical maturation index, which is basically the number of students currently enrolled in the hubs divided by the future number of students in the same hubs once they reach maturity, which is usually after seven or eight years of operations. So the overall index is curved at 30%, which means that those expansion hubs have the capacity to increase their student base threefold. And also important to highlight here that this index takes into account all expansion hubs open at a given point in time. But for example, if we take only the 2018 cohort, which as you can see here in the chart, went from 34,000 in September 19 to 46,000 students, this cohort, the maturation index of this cohort, went from 36% last year to now 48%. So this is the beauty of the model. The maturation curve of this cohort is quite consistent and quite predictable, and it represents a important growth avenue at a limited execution risk. Because all those hubs are already open, all those hubs We have already the partner, the contact with the partner, the hubs are there in place. The brand equity of Unia itself is already working in our favor there in a given region or city. So this potential growth will come from the expansion of these hubs. So on page 10, We show here the expansion in the digital education undergraduate despite the changes of this year. First, substantial growth in tuition and net revenue, not only in the quarter, but also in the nine-month period throughout the year. And on the right part of the slide, we show again the increase in every ticket, reaching 263 reais per month for students, and it's important to bear in mind that there is a substantial seasonality in the dynamics of the average ticket throughout the year. So we should always make year-on-year comparisons about tickets and not compare with the previous quarters. Finally, as you can see about retention rates, this was virtually stable this quarter, despite the effects of the COVID-19 pandemic, which had affected our retention rate in the previous quarters, in the previous two quarters, in fact. Here, I think, it's important to highlight two things. First, we have been growing a lot, as we know. And the dropout rate is, as we all know, much higher among new students than among seniors. So because we increased a lot the intake in the last year, and especially this year as well, we have a huge frontage of newcomers in our base. And the second important remark here is that we do not provide discounts to senior students as they renew their enrollment with us. So in the balance between student base, retention rates, and average ticket, we usually prefer to maintain our discipline in the management of our average ticket. Now moving to page 11, we can see growth in our business in every perspective. First, growth in net revenue. led by the expansion in digital education under graduate, as we have just discussed. Second, an important increase in gross margin and gross profit, led by the end of scale, a constant focus on personal cost, as well as increased digitalization throughout the three segments. And third, expansion in our just-a-BDA, although margins were temporarily affected by changes in the PDA policy, which I will explain in a few minutes. But before that, on page 12, we provide the bridge with the main variations in the net revenue between 19 and 20. As you can see, the growth in the consolidated net revenue was driven by the strong increase in our digital education undergrad segment. Such growth was diluted a bit by the reductions in both continuing education and on-campus segments as detailed on the next page. So on page 13, There was a nice growth in graduate courses, both in the quarter and the nine-month period, despite the pandemic. But there were some revenues in continuing education last year that we didn't have this year. So, for example, last year, especially in the first half of last year, we benefited from some public building contracts, which in Portuguese are licitasões. This year, with the pandemic, this type of revenue source basically disappeared, as the governments refocused their budgets. Regarding our legacy on campus segments, it has been declining over time, in line with our view for the whole sector. And it's now basically limited to courses not offered, in our case, through digital education, such as law, dental care, and psychology, for example. And we do believe that its relevance For us, we reduced even further. So now, on page 14, finally the bridge about the main variations in the JustFBA between 19 and 20. I believe there are three highlights in this slide. First one, the continuous increase in our operational leverage and the expansion of our growth margins. As you can see, the cost of service and the G&A were basically flat both in the third quarter and in the 90-month period of this year compared to the specific period of last year. And we will shed more light on this issue in the next slide. The second point here to highlight on this page are the selling expenses. As a reminder, most of these expenses are related to the taking process, which means that they are incurred to attract new students. In both third quarter of this year and the nine-month period of this year, there was an increase in selling expenses of roughly 2% of natural revenue in the period. Two reasons for that. First, this year we are at the peak of that ratio that I mentioned between intake and renewed seniors. And the second point is that the hubs do play an important role in the selling process. And some students used to go to the hub, for example, to conclude their enrollments or the basic vendor to enroll themselves. So now with the pandemic, we had to rely a bit more on digital media and increase the cost in digital media. Finally, the PDA. Last year, as a preparation for our IPO, we adopted in the fourth quarter of last year, a stricter policy for the calculation of PDA. As you can see in the chart in the bottom right, there was a substantial PDA charge in the fourth quarter of last year, which compensated the very low PDA charge in the third quarter of last year. So it means that we have a very low PDA compared from basis this quarter, but it's simply a temporary issue. And for example, if we were to normalize the PDA in the third quarter of last year by using, for example, the average PDA of 19, which was 12.6% of net revenue, As you can see here in the chart, our adjusted BGA would have grown this quarter by 31%. That's why we are providing guidance of a huge increase in the adjusted BGA for the fourth quarter of this year. Now, on page 15, we come back to the gains brought by operational leverage. The cost of services, as reported in our adjusted BGA calculation, reduced slightly, reflecting Gain of scale, optimization in personal cost, and increased effort in digitalization throughout the company, throughout the four segments, the three segments that we operate. G&A expenses, as reported in our GDP calculation, were basically flat year on year. Importantly, we were able to leverage our linear structure. And at the presentation of revenue, G&A expenses were 140 basis points lower than the same period of last year. This performance illustrates our continuous focus on maintaining a lean admin structure, which is important for our digital and agile strategic orientation. That's very important. That's a key differentiator of digital and self. On page 16, to talk a bit more about net income and cash flow. First, net income. This temporary increase in PDA that I just explained, coupled with a one-time income tax effect of 11.7 million Reais, which was related to the restructuring of our first stock options plan, impacted our Just Net Income in the quarter. By contrast, when we look at the full year, the year-to-date figures, our Just Net Income was up 47% driven by the significant expansion in our digital education undergrad segment. Cash flow from operations on the right improved substantially in the third quarter, 57% to R$52.4 million, and a substantial growth as well in the nine-month period of this year. Once again, this increase was driven by the outstanding performance of our digital education on the right segment, backed by a continued discipline in receivables management. And finally, regarding the huge improvement in cash flow conversion from operations is explained not only by this increase, this higher cash flow from operations that I just mentioned, but also the higher level of PDA in the third quarter versus the third quarter of last year, as previously explained, which is a non-cash expense. So now let's move to page 17 to talk more about the seasonality, which matters a lot. I'm going to provide you with more background info in order to help you to build your model going forward. Revenues and intakes are not distributed equally among courses. So first, starting with intake. Our courses are structured around separate monthly modules, which, as I said, enables students to enroll at any time throughout the semester. Still, we usually experience a higher number of enrollments in the first and third quarters of each year, which corresponds to the beginning of the cadenza semester in Brazil. On top of that, we typically have a higher number of enrollments in the first semester of the year than in the second semester. And this trend can be seen on the right side of the slide. As a result of what I just mentioned, we usually record higher revenue in the second and fourth quarters of each year. However, this year specifically, especially in the second quarter of this year, seasonality was not as apparent, reflecting the impact of COVID-19. I mean, our net revenue should have been slightly higher in the second quarter of this year. You can see this trend more clearly on the chart at the left of the slide. Finally, also important to highlight that a relevant portion of our expenses are also seasonal. For example, we see higher selling and marketing expenses related to the first semester, which has a higher intake, especially in December, January, and February. Finally, about guidance on page 18. Since this is the first release after our IPO, we exceptionally provide guidance in these slides on the net revenue and adjusted BDA margins for the full year of 2020. As you can see, our guidance for net revenue and annual net revenue shall be between R$210 and R$220 million, while the annual adjusted BDA margin shall be between R$26.8 and R$27.2, which represent an important growth for the last year. This is shown here on the chart on the left. Here in the chart on the right, we show again the impact of the changes in our PDA policy in the quarterly adjusted BDA numbers. Again, we had a very low PDA comparison basis in the third quarter of last year, but on the other hand, a very high PDA basis in the fourth quarter. So we still have a huge increase in our adjusted BDA numbers in the fourth quarter of this year compared to the fourth quarter of last year. And therefore, these numbers, The numbers regarding the second semesters of 2019 and 2020, here on the right, in the chart on the right, provide a more normalized vision of the just ability growth. Before we conclude this presentation, some highlights on ESG issues on page 19. I'm very happy to report that this year, in fact, two weeks ago, or last week, in fact, we knew the results. of our employee satisfaction survey, and we reached the highest rate since we started to be measured by Great Space to Work. We improved 10 points in the last four years, and this is very important for us, and we truly believe that as an education company, the satisfaction of our employees is a key driver and a real competitive advantage for us. Also, we are very engaged with corporate social responsibility. Some highlights are, first, the first National Autism Symposium in Brazil, which was sponsored by us, which discussed, among other things, the importance of including autistic people in the education process, and the How to Teach at Distance project, which was created after the outbreak of the pandemic, through which we offered free online training for public school teachers, reaching more than 84,000 features nationwide. So this ends the first part of this meeting, and we're now ready to take your questions. Operator, please open the line, please.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Our first question comes from Mauricio Cepeda with Credit Suisse. Your line is now open.