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spk00: Ladies and gentlemen, thank you for standing by. And welcome to the VTru Limited 4th Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star then 1 on your telephone. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker for today. Carlos Frentes, you may begin.
spk03: Carlos Frentes Thank you, Claire. Good afternoon, everyone. Thanks for joining us. It's a real pleasure to be here with you all for our first public release as a public company after the full year results. Hope all are doing well and are healthy in this strange time. A slide presentation has been made available for us for today's webcast. This is available, as you know, in our investor relations website, which is investors.v2.com.br. I trust you all have this presentation in front of you. And, of course, before we begin, I'd like to make note that as detailed on page two of the presentation, safe harbor is in effect for this call. So now I invite you all to go to page four of the presentation. So this page basically summarizes what 2020 was for us and what 2021 will be for us. First, last year, which despite all the challenges that we all have faced and are facing today still, this was a tremendous year for us here at the VITRO, full of accomplishments, including, of course, our IPO in the US six months ago. Last year, we continued our growth journey. on several fronts of business. First, growth in the numbers of students, sales, ABBA, net profit, and margin. Second, growth in quality. For example, with the new versions of our content platform and our app, which is available to all our students. Quality as well, confirmed by the latest results of the IDB indicator, as released by the Ministry of Education in October of last year. This IUD is, again, the highest among all listed players in Brazil. That's a certification of our quality standards here at Vitrum. And third, growth in the satisfaction of our own employees, as measured by the most recent survey of great pitch work that we conducted here last year, in which we reached our highest grade ever. All of these issues will be discussed in more detail throughout my presentation for you today. Looking forward to this year, we are very excited about 2021. First, we will deliver, again, an important organic growth in our numbers. As you know, the strong growth we have delivered so far has been purely on organic data. This growth will come again this year from the maturation of our hubs. the opening of new ones, as we have done so far, throughout the country, and also our constant focus on operational efficiency and leverage. But we are truly convinced that we can also create value for shareholders through M&A and this deployment of our distal expertise, and we have the balance sheet to do so. And all of these issues I'll be discussing with you a bit later today. Now moving to page five, please. Let me reinforce some of the highlights for this quarter and for the full year. As a mission, we launched this new brand version of our Geoconda digital platform, and also an enhanced version of our app, which is called Leo. Improving even more the user experience, we started two new business, both still as part of the project. First, a partnership with Marksheet, and new technical courses, Both of them with a lot of attention. We reached last year a very important milestone. We have now more than 300,000 students in digital education. That's a huge achievement. And, of course, financial performance was also very strong. Net revenue in our core digital education undergraduate segment increased by 26% in 2020. and 33% in the fourth quarter of last year compared to the fourth quarter of 2019. The consolidated adjusted ABV grew by 25% last year versus 2019, with the adjusted ABV margin reaching 28.2% last year, an increase of 2.5 points versus 2019, and 100 base points above our guidance that we provided in November of last year. and adjusted net income at 70% last year compared to 2019. Now, let me explain better about each of these points for you, starting on page six. That's, here on page six, the very core of our digital delivery for our clients. We are always looking to improve this academic experience for our students with digital solutions, which became even more important now with the pandemic. So we are very, very proud of the new versions launched last year of our Geoconda digital platform in the Leo app. For example, the Geoconda platform, which is here on the left corner of the slide, now has some adaptive learning tools through which the student has a much more customized student experience and much more of, say, a personalized experience for him or her. The new app here on the right provides a full mobile and user-friendly access to our students, which is more and more important in a mobile-oriented country such as Brazil, as you know. All the academic content is available there at our mobile app. It has, as well, an integrated support for WhatsApp. And last year, we changed, as well, the apps. So now the internet access is paid by us. So the student has no additional cost to exploit the full capacity of the new Liu app. Now on page seven, to go a bit deeper about this partnership with Marksheet. Those partnerships, they are also very instrumental in the growth that we deliver and the expansion of our offerings. So this is just the first partnership with Marksheet that we signed and released to you in January of this year. This is clearly a very good partner for us. For those reading abroad and who don't know it, SmartFit is the largest company of gym centers in Latin America. They have around 865 fitness clubs, of which slightly more than 500 in Brazil, with a solid brand and fast growth in the last year, just like UNICEF, by the way. We are now offering a graduate course in fitness for their employees. And besides, we launched a new course model with them, open for the general public, in which we provide the digital and, of course, the academic experience for students. And SmartFit provides the gym facility, the gym centers, for the practical classes. Again, this is so far just a pilot work, and we have nothing to report, still. But the potential here is clear. particularly because health and wellness is a field that is increasingly more important to consumers, especially now after the pandemic. So more partnerships will come, and we hope we can announce more of them soon. Finally, as I briefly mentioned, we launched new technical courses, which are also part of our strategy to expand the offerings, and we will come back to that later on this year as we have more numbers to show to you. So now moving to page eight, which provides a glimpse of the growth of our student base. We have almost 310,000 students, 97% of them enrolled in digital education courses. And if you focus on the student base in digital education under graduate, which again is our main business by far, you can see that we have had a trigger of 32% in the last five years, 2016, and we have maintained this level of growth last year. As we have also disclosed in the release of our third quarter of last year, our intake in the second semester of last year was 40% higher than the intake in same period of last year. In the first semester of last year, the intake growth was 30%, so a substantial improvement and growth here as well in the . These numbers confirm the effectiveness and the comparative advantages of our model. So as we have been saying and trying to highlight since the IPO, we do have a different product. And the market dynamics was also very interesting last year. As you all know, on one hand, the current economic crisis did, of course, affect the willingness of some of our prospects to enroll in our courses, that's clear. On the other hand, with our hybrid model, we do offer a compelling and high quality alternative for those people, for those prospects who need the support and the sense of belonging offered in on-campus courses, but they cannot pay high and expensive tuition. And we do offer, in our hybrid model, this sense of belonging, this hand-holding support with tutors, and this experience of going to university. So this fact, together with the cultural changes brought about by the pandemic, about working from home, buying from home, studying from home, of course, this represents a huge market opportunity for us going forward. On page nine, we showed the increase in our digital education student base throughout the year. Last year, we expanded substantially in the whole country, well above the market growth rate. That's important to highlight. And this is a market that has been expanding a lot in the last four or five years. And in our opinion, we'll expand even further now in a post-COVID scenario. So within this growing and appealing market, we have been growing faster than the competition. Our growth was, last year, especially important in the Southeast region of the country, where we have been historically, I would say, shy, but where we have been expanding a lot in the last two years. This is a huge and a very competitive market, of course, but where our hybrid and tutor-based different academic model can attract a lot of students, and it puts itself as the best learning option. So once we enter a new region, once we enter a new city, we quickly grow and we quickly attract new students to our hybrid and tutor-centered model. Here on the right part of the slide, we can see, as well, the evolution in the number of our hubs in the last five years. We have been opening, on average, slightly more than 150 hubs per year, mostly with pocket, which is our business model. 88% of group hubs were opened after the change in regulations that took place in 2017. So they are still not mature. Those are what we call the expansion hubs. And we shall maintain a substantial growth in the student base in our digital education undergraduate segment. And our more than 630 expansion hubs have been mature over time, which is better illustrated on this page. So here, this is a chart that I like a lot because it shows the companion strength of our model and the consistent growth of our cohorts. This is by far, by the way, this is by far the most important driver for our organic growth, the maturation of our expansion hubs. These expansion hubs, which we split by cohort here in the chart on the right, they are still ramping up. This growth pattern is very consistent over time. They are maturing over time, and they shall reach maturity after seven or eight years of operation. So none of them are mature. None of these extension hubs, none of them are mature. And to reflect this growth potential, we created this theoretical maturation index, which is basically the number of students currently enrolled in these hubs divided by the future number of students in the same house once they reach maturity. So this index is current at around 30%, which means that is a huge potential. And those have the capacity to increase their base threefold in the next years. Of course, just a slight reminder, it's important to highlight that this index takes into account all extension hubs. So it can, in fact, even decrease from month to month. as we work on new hubs. But for example, if we take only the 2018 cohorts, just to compare apples to apples, the maturation index of these hubs in this cohort increased from 36% in December of 2019 to 50% in December of 2020. They went from 44,000 to 55,000 people over the last year. And finally, just to remind you all, this is growth with limited execution risk because all these hubs are already open. We have already found the partner and hired and contracted the partner, the tutors. The only established brand is already there working in our favor. So there is already a virtuous cycle working in our favor there. So this is growth with limited execution risk. Now on page 11, you can see more details on the tuition and maturations for our digital education undergraduate segment. There was a substantial growth in both the annual and especially the quarterly figures for the fourth quarter of last year. This was due to a combination of, first, strong intake, as I mentioned already, and the maturation of hubs, with controlled dropout and a slight increase in average tickets, as we can see now on the next page, page 12. Here on page 12, on the left part, we highlight that the increase in intake and the expansion in our student base did not come at the expense of average ticket. Our ticket was, this quarter, or this half of the year, in fact, increased by 3.5%, versus the second half of 2019, which meant an increase more or less over this period. And this was despite the sizeable number of new students. I mean, as you remember, as you know, we have a model of academic approach through which a new student, he or she can join us throughout the semester, throughout the first semester of classes. So most of them do not provide a full semester of revenues. So it confirms the strength of our brand and what we have been saying to you. We have a different market positioning and we offer a different product. It is important to highlight here as well that there is substantial fidelity in the dynamics of every ticket throughout the year. So please only compare year-on-year numbers. Never compare quarter-on-quarter or the first half of the year with second half of the year. The dynamics throughout the year is different. Now, on the center part of the slide, you can see here the contribution of health care and engineering increasing. So the increase in tickets was also supported by our mix of courses. And now we have a higher participation of health care courses, such as nutrition, pharmacy, and biomedicine, for example, and engineering, slightly but steadily growing as well. provides a nice prospect for . Finally, you can see on the right part of the slide that our retention rate was even slightly better than what we saw last year, or in 2019, in fact, despite the effects of COVID, which affected the retention rate in the first half of last year. Here, I think it's important to highlight that we improved our retention rate slightly, even growing a lot our intake seaters. And as you know, the dropout and PDA, by the way, is much higher among new students than among seniors. So we not only grew a lot the new student base, but also improved flights and the and tickets. Moving on to page 13. As you remember, we, in November we provided you with our guidance for the full year of last year. This was exceptional because we were in the first relief after the IPO. So we provided guidance on net revenue and adjusted degree margin for the full year. As you can see, our final net revenue for 2020 was at the very high end of the range, which is 519 million reais. Regarding the adjusted degree margin, we exceeded, as I mentioned before, by 100 base points, the range, and reached 28.2% last year. So we are delivering and will keep delivering the expansion in revenue and margins that you all expect from us. Now on page 14, you can see the growth in our business in every financial perspective. First, growth in net revenue, led again by expansion in digital education undergraduate, as we have just discussed. Second, an important increase in gross margin and gross profits. And this led by gains of scale by a constant focus on personal cost efficiency and increased digitalization. And third, expansion in our adjustability margin, which explains better in a few minutes. First, let's talk about revenue on page 15. We provide this bridge with the main variation in net revenue between 19 and 20 and fourth quarter of 19 and fourth quarter of 20. So if you focus now on the earlier numbers, you can see that growth in net revenue was, again, driven by the expansion in digital education under the grid. And this growth was diluted, if I may call it. by reduction in both continuing education and on campus segments as it appears on next page, page 16. So on page 16, if you focus first on the continuing education, we had an 11% growth in the revenue, the gross revenue of graduate courses last year. So there was a slight growth of 11%. This is a business that suffered more than the undergraduate segment, the effects of the pandemic. especially because the hub workload and those hubs need to be an important piece in the sales machine of our graduate quarters. But we recently made some changes in the marketing and intaking process here, so now we present a very positive runway, so we should expect a nice growth already in the numbers of the fourth quarter of this year. There was another factor that explains the decrease in the performance of the continuing education as a whole, which is here, the yellow part of the chart. In 2019, we had a very high bar, especially in the first half of 2019. We benefited from some contracts, which in Portuguese is called , which basically disappeared last year with the pandemic. So now we have time to come back, so that was a a matter of high comparison based in 19, and now we expect to deliver more numbers on that in 2021. Regarding our legacy on campus segment, it has been declining over time, as you know, as we have been saying, and that's in line with our view for the whole post-secondary education sector. It's not much more concentrated on courses not offered through these locations, such as law, nursery psychology, for example, and we do believe that it's relevant for us, we reduce over time, which means that the weighted average growth, the consolidated growth going forward, tends to increase as this business tends to be less and less relevant over time. On page 17, we provide the bridge with the main variations in the V3DA for both the core and the full year numbers. we have three main highlights. First, the continuous increase in our operational leverage and expansion of our growth margin and net margins. As you can see, the cost of services and the GMA as well were virtually flat over the year on annual basis, and they reduced to roughly 44% of net revenues in 2020. I mean, 34.7 for cost-affirmed, plus 9.2 for GMA. Selling expense as well is another highlight. It increased slightly to 16% of net revenue. As a reminder, most of the expenses are related to the intaking process, especially and basically for digital education and the graduate segment, which means that they are incurred to attract the students. So the stronger the intake, the higher the selling expense. And then what matters more here is the CAC, or the Customer Recession Cost. And I'll come back to this a bit later. Finally, PDA, it also increased a little bit in 2020 to 14.8% of net revenue. Here we have a combination of needs of students and the population of the country. We'll shed more light on all of these issues in the next slides. So, page 18, we come back to the gains brought by operational leverage. First, cost of services, as reported in our JPA calculation, reduced slightly on a yearly basis from 182 to 180.4, reflecting gains of scale, optimization of personnel costs, and the increased digitalization throughout the segment. As a percentage of net revenues, as you can see here, there was an important reduction from 39.5 to 34.5% of net revenues last year. G&A expenses, again, as reported in our just-to-be-day correlation, increased by only 11% last year. It means that as a percentage of net revenue, G&A expenses were slightly smaller than in 2019. And they shall keep reducing over time, as a percentage of net revenue report, with our gain of scale and dilution of this fixed cost. This performance illustrates our constant focus on maintaining a lean admin structure and to support our digital and agile strategic orientation with efficiency in mind. Now, going to the semi-complete expense on page 19. First, selling expense on the left part of the chart. Last year, there was an increase in selling expenses, roughly 1% of net revenue from 49 to 60%. Two reasons for that. First, last year we were, and we are still today, at the peak of this ratio between intake and finish. Second, the hubs play an important role in the selling process. So they were closed, so we had to rely a bit more on digital media last year. This will be the case as well this year. However, if you look at the CAC, as I mentioned before, there was an increase in efficiency. So when you take this annual selling expenses and divide them by the yearly intakes of digital education undergrad grade segments, you can see, and that is now released, that the duration was slightly smaller in 2020 than in the previous year. Regarding PDA on the right, as explained to you in the last call, we adopted the change in the fourth quarter of 19 our PDA policy, we had a more strict PDA policy in 19 as appropriate for the IPO, and that's why the PDA curve in 19 had this strange profile. But at the end, there's more here. It's the yearly PDA as a percentage of net revenue, which went from 12.6% in 19 to 14.8% last year. There were three reasons for such increase. The first one the higher percentage of newcomers in our base, ASXM4, which explained as well the increase in selling expenses. Second, and this is technical, the average aging in our accounting, in our transfer table, is now, was in December of last year, slightly older than in the previous year, which means that starting in 2020, we already recognize a bit more of this PDA losses in our P&L. than what we had done in 2019, which means an expected low recognition in 2021. And third, of course, the economic crisis that we are also facing and the effects in the capacity of payment of our clients. So in this context, I do believe that this slight increase in PDA was just viable. Now moving to page 20. you can see that there was a substantial expansion of our just net income in 2020, which increased by 70%. The main driver for it was the expansion of the business as a whole and the expansion of 25% in the EBITDA number last year. We also had the positive effects of a higher recognition of the four tech centers, which will have a positive cash flow impact this year in 2021 and in the next year, and also had some effects last year just after the IPO. On the right, we have the cash flow from operations, which improved substantially last year, including 44% to 142 million last year. Once again, this includes driven by the outstanding performance of additional education on the web business. That, of course, backed by our continued dividend in receivables management. With that, our just cash flow conversion from operations reached 88% last year, coming from 25% in 2019. So this financial position enables us to support our growth plan, which are in the next two slides. The organic growth, and again, so far, all our growth has been purely organic. This has been accomplished, or will be accomplished next year, to the ramp-up of kernel hubs, as I mentioned already. By adding new hubs, as a reminder, we have the capacity, the regulatory capacity, to open 500 hubs per year. We also expand by providing new courses. as they are allowed in this education, and especially law, one day. But also psychology and nursing, this will come soon. And, as I mentioned before, by adding technical courses. And finally, by going further, the continued education and graduate courses, which increases the lifetime value of our students at a marginal cap cost. Finally, to close on page 22, Let's talk a little bit about inorganic growth opportunities, which means M&A. As you remember, the net proceeds for our IPO, slightly less than $100 million, will be used basically for M&A. So we have today several discussions, several active discussions with potential targets in these three pillars that we defined before the IPO. Investment in editex to bring new features for our services. to enhance our portfolio and, of course, when we can create value, consolidation. And we do hope and we will announce to you soon our first M&A. So, with that, this ends the first part of this meeting and we are now ready to take your questions. So, operator, please open the line for questions.
spk00: Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Thiago Bordalucci with Goldman Sachs. Your line is open.
spk02: Yes. Hi, Carla Benteen. Thanks for taking our question. Moving to the forward, one question that we're currently getting here on our blood retail coverage is the financial health of the franchisees. In this sense, I'd like to hear from you guys an update on the accelerated rebate curve, especially if you have been able to apply the higher fees as per original plan, and if so far you saw any changes in terms of churn regarding the owners of the hubs. That's the question. Thank you very much.
spk03: Thank you for the question. No, there was no change in turn, no change in the satisfaction level of our partners. Our turn is quite small. It's around 3% per year, every year. It did not change in the last month. So the partners, they make money with us. That is very important. We always try to make them make money with us. we create this, let's say, declining curve so that they are incentivized as well to expand with us and to look for the scale. So that's what they've been doing. And we have been opening, again, more than 150 hubs, most of them with . In fact, in our most recent opening of hubs that we are doing in the beginning of this year, more than 90% of them are with . You remember that historically, our number was around 84% with partners. Now, already this year, and hopefully we are opening in the fourth quarter of this year, more than 90% are with partners from 2021, in fact, for the whole year. So, just to show and to prove that they are happy with us and they are making money with us.
spk02: That's clear, Carlos. Thank you very much. Thank you.
spk00: Thank you. Our next question comes from the line of Javier Martinez with Morgan Stanley. Your line is open.
spk01: Thank you. Thank you. Hi, Carlos. One of the key debates we had with investors during the IPO and after the IPO was about prices, the capacity to keep the good historical performance of prices. It was quite impressive. once again, you are increasing prices above our expectation. It may be quite impressive, given that the weight of newcomers is increasing. So maybe you mentioned that part of that is mixed, but if you could give us a little bit more color, how much of that is mixed, how much of that is like-for-like prices, and if those dynamics, if you expect those dynamics to continue going forward.
spk03: However, in practice, it's a mix of several things. First, it's a mix of when the students or the new color join us as I explained before. It is a matter of what is the runway ticket that this guy will pay in the beginning of the second semester, for example. It is also a matter of mix of and a matter of the annual adjustments that we make . So far, we have been able to have a nice performance. The mixed contribution here, last year was not that important because it is still growing. the engineering and health care are new. So in terms of base, they're still growing. So going forward, they will be a more important contributor. But quite frankly, in 2020, there was not that much contribution from that. In 2020, I think the contribution was, first, the discipline in the and we applied discipline on that. I think one very important thing that we do to try to maintain a balance between growth and pivot. The second important thing that was especially important last year and this year will be different is the profile of the increase. The profile of the increase. This quarter is different from what we have been seeing and that's not new for everybody. For last year we had a very And for this year, the change, the profile has changed a little bit, so it's a bit more delayed, the intake. We have now a strong intake. So far, we have grown intake in high teens, high teen up here today, until the 31st of March. And all that before NM. In principle, not that irrelevant, but in fact it is, because it is when people are looking to . So we have seen already in the last two days a very important increase in interest and in new enrollment. So last year, the curve was very, very normal, very strong in the beginning of the year in January, for example, which helped in the application. And finally, it's also very important, throughout the course, we increase the price for seniors at the vacation. We did this this year as well, as we have been doing in the last years. And this is a very, very important sustaining factor for every ticket because the price of the seniors are very, very important to sustain the overall ticket. So going forward, I think the only thing that will change, or the most relevant thing that will change, in fact, this year, or this impact cycle, is the curve, is the profile of newcomers, which is more back-ended. So in terms of revenue recognition, this quarter, we already see this change. But the numbers are good. As I mentioned, we are already in high teams. It increased year over year so far. If you take the same period up to March of last year. And remember that last year, with the pandemic, the intake cycle was very poor. So we are confident that we will still deliver a nice close ahead of us for the intake.
spk01: Carlos, if I may follow with another one. So obviously the retention rate was good and improved. At this point, it's still probably a little bit early, but maybe talking about the seniors, you mentioned about the seniors, you already have some information on the re-enrollment. So how is that moving? Is next year, is 2021 going to be another good year in retention rates?
spk03: So far, the re-enrollment is good. It is as expected, which means it's slightly smaller than what we had last year. And that's the clear difference between the pre-pandemic and the post-pandemic reality. It is a good number so far, but it is slightly smaller than what we had last year. Thank you, Carlos.
spk00: Thank you. As a reminder, ladies and gentlemen, that's star one to ask the question. I'm sure no further questions in the queue. I'll turn the call back over to you, Carlos.
spk03: Thank you. So I'd like to wrap up now on page 23, please, with the key takeaways from our call. We had a very solid quarter and a very solid year, which positioned us quite well for future growth. We, as you know, we are based on the disruptive student-centric model, hybrid model, which emphasizes flexibility. It combines the flexibility with affordability with, as I mentioned before, the sense of belonging and the hand-holding and the support from a tutor. So this is proving to be an efficient and a consistent way to go with that. We delivered this growth prospects, as discussed, we used during that and we remain focused on this long-term shareholder value creation by keep expanding top line and bottom line, and margins, of course. Enrollments and student base are increasing, as I mentioned before. And we do believe that we can further build on the momentum to keep expanding, keep maturing the hubs, which is an important way to go with the numbers. All of that together with M&A expansion that I mentioned already to you, and we hope to announce to you soon at Alford Deals. So we are, in a nutshell, very excited about the future, and we believe we have the right path for Alford Deals. So with that, I leave you. Thank you very much for your interest about our company. Look forward to meeting you all. Thank you.
spk00: Ladies and gentlemen, this concludes today's conference call.
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