Vitru Limited

Good evening, ladies and gentlemen, and welcome to Vitru's third quarter 2021 earnings conference call. All participants are in a listen-only mode now. Later on, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this call is being recorded and will be available on Vitru's IR website. Now, I would like to introduce the host for today's conference call, Mr. Carlos Freitas, Vitru's CFO. You may begin.

Thank you, Pereira. Good evening, everyone, and thanks for joining us. It's a real pleasure to be here with you all for the release of our 3421 numbers, as well as the numbers for the first nine months of this year. I hope all of you are doing well and healthy, and here with me I have Pedro Graça, the CEO of Vitruv, Maria Carolina González, the head of our Investigation Department, as well as Raquel Suzaki, all from our IR team. A slide presentation will be part of today's webcast, which is available in our website at investors.vitru.com.br. I trust you all have this presentation in front of you, but as usual, before we begin, I'd like to make note that as detailed in page two and three of the presentation, safe harbor is in effect for this call. So now I invite you to go to the page five, the first page of our presentation with the highlights for this quarter. So the first highlight, it's not new, is the announcement of our agreement with for the business combination with them. That was announced three months ago. But we are never tired of reinforcing the beauty of this deal. They are the leading institution in Brazil in terms of quality indicators for this learning in the Brazilian segment, besides having a sizable and growing business of medicine and other health-related courses. So, later on, I'm going to go back to this information, I'm going to show you more figures about the clinic in the market. We also had this quarter unexpected in the past. We launched new courses, specifically the course of nursing was offered in August of this year and in a couple of months, in two months, already became the number one course in our current intaking cycle in our portfolio of undergrad courses. So it's a huge success and it reinforces our speech and our belief that the digital education segment is going to increase even further throughout the country. We have reached almost 260,000 digital education students, with a 27% increase in intake, in the current intake cycle, compared to the same cycle, same period of last year, with a relevant growth in the southeast region, which is, as you know, our new growth frontier. The net revenue in our core digital education undergrad segments increased by around 20% this quarter, with a consolidated net revenue growth of around 17%. The EBDA increased 26% in the first nine months of this year. It's always better to show the EBDA numbers on a year-to-date basis because of the sustainability we have in our business. So the 90-month EBITDA growth is 26% with an adjusted EBITDA margin of 29% growing as well, one point compared to the same period of last year. And finally, last but not least, cash flow from operations reaching 130 million reais in 9 months with an adjusted cash flow conversion from operations of 92%, so we not only grew our revenue but also generated a lot of cash from our operations. So now, before we move forward to show what were the main figures of this quarter, let me show to you on page six a brief reminder, a refresh of what we have been delivering over the last 12 months. We have now the first, we had the first anniversary of our IPO in September of this year. At that time, one year ago, when we were going through the IPO discussions with you guys, we said that we would grow in four growth avenues, three of which organic and one inorganic. We have been delivering what we promised over the last year. The first one was the ramp up of current hubs. We said that this was going to be the main organic growth driver in our revenues, which is being delivered. We have now more than two-thirds of our student base in new hubs, in expansion hubs, the hubs that were opened in the last four years, while one year ago, this number was 59%. Today, we have more than 90% of the hubs still in ramp-up phase, still maturing over time. our season base also by around 25% in these 12 months. We opened more than 240 hubs, of which 100 hubs in the Southeast, of which half 50 in Sao Paulo. So we are growing in the Southeast as we were announcing before. And also we expanded the course offering. So as I said, first new big course was nursing. So nursing already, again, the number one course in the current intaking cycle. It is a premium course. It is a course with a ticket that is 50% higher than our normal ticket. And hopefully soon we will have offerings also in law and psychology. And for example, in law we have already the authorization, the great evaluation, sorry, from the Ministry of Education with a grade five, the highest grade possible, and the possibility to offer 22,000 seats per year. And in the case of nursing and psychology, it's 11,000 seats per year. So this will be an important growth avenue going forward as well, and an important level to sustain tickets as well. And finally, inorganically speaking, we announced, as I said, the deal which is The best view we could ever consider, we always consider them to be the benchmark company in Brazil when we think about quality indicators in digital learning and digital education in the country. So with this transactional one, if it's allowed to be concluded and closed by the undersourced authority in Brazil, we will become the number two, the second largest digital learning player in Brazil with the best quality indicators. So now, on page seven, some more information about Unicef do Mar. Before we come back to Vitruv. So this combination will create this disruptive player, a reference player when you think about high growth business in the higher education segment in Brazil. Unicef do Mar has a size, Close to ours, so as of June of this year, this is before June, they had a bit less than 800 hubs. Today they have around 900 hubs, such as us. So to combine we will have around today 1,800 hubs. More than 700,000 students combined with us. They had last year, sorry, they had in the last four years a CAGR of 49%. And last year, a net revenue of 610 million reais with a 40% adjustability margin. So it is higher than our margin with around 30%. And the main driver for that, the main reason for that is the business of medicine. Here on the bottom left part of the slide, you can see some information about their medical business. They are the fifth best medical course in Brazil among private institutions. which is a high-demand course, as you all know. It is an 11 to 1 ratio of applicants per seat, with an average ticket of more than R$ 9,000 per month. On top of that, here on the right, I show some quality indicators from SEDOMAR. They have an IBB of 3.75, which is 43% above the average of the market. Even above ours, our IDD is 3.3 in the last cycle, which is the highest IDD in distance learning among all literate players in Brazil. We have, UNICEF has, the highest IDD in distance learning among all literate players in Brazil, and Santa Marta has an even higher IDD ratio. This is satisfaction, this is contribution, this is value added that you bring to the students when you compare the NN grade with the NID grade. And they are, as ranked by the Ministry of Education, when you see the IGC courses rate, they are among the 2% best educational institutions in Brazil. So it's really a reference player, and together with them, we're going to be, I believe, a reference player. So, on page eight, We have more information about the profile of students and why we believe that we are going to keep growing hand-in-hand once the deal is approved. So here on the left, you see that the student profile is slightly different. That's why we intend to maintain, to keep both brands because they set different markets. The students that usually go to UNICEF have a lower income. and someone who appreciates the local tutor, the human touch, and needs the local presence of a person who is going to provide the hand-holding for the students. So this local support from a tutor is also very important for this public. On the other hand, they have a higher average income students, slightly higher, and also a more tech-oriented and tech-savvy students because they have a much more tech-oriented learning experience than the peers. So it is a different product to attract different people. In the middle we have a huge potential for commercial synergies. Today we have more than 600 cities. Today, or sorry, in June, that has either a hub of Unia itself, but not Sedomar, or vice versa. So here we have a huge potential to quickly deploy and offer both brands throughout the country. And on the right part of the slide, the whole market has been growing at around 19% in the last year. These are the information coming from the census made by the MEC, and together we have gained eight points in market share between 16 and 19. 19, as a reminder, is the latest available information we have. So we went from 10.5, combined with them, to 18.5 in 2019. And why was that on page nine? Because we have intrinsic competitive advantages. On page nine, we compare the models that we have in Brazil for distance learning. Unia itself is the sole player to focus on this hybrid model with a local tutor, so a tutor-centered hybrid model, with weekly meetings, lectured by local tutors, someone who provides the hand-holding, someone who is also playing a role model for the class, and you have this sense of belonging with our model. So this is our competitive advantage. the model, which is complex to create, but we know how to play it. On their end, offer a 100% online product, but they are, as I mentioned before, they are their reference player in terms of quality, so they have a much more tech-based methodology, with nice hubs as well, as we have, so that's why they are the reference player when you think about digital learning in Brazil. That's why both companies with this intrinsic competitive advantages are growing faster than competition. And on page 10, I have here some public information to confirm this reputation and to confirm our, I would say, competitive advantage. Here on the left, this is public information coming from the Apple Store and Play Store. If you go now with your cell phone at Apple Store, for example, you will see that the app of Onze de Mar has highest ranking, highest rate among all little players in Brazil. 4.7 out of 5. The second highest rank is UniaCelta with 4.3. The highest of 5 little players are between 2.7 and 1.8. So this is public information to show, to reinforce our tech-oriented approach. Our culture, our mindset much more oriented, much more, I'd say, concerned and much more, delivering a much better technological experience for our customers, our students. On the right, you see Reclame Aqui, also public information. Reclame Aqui, if you go now to Reclame Aqui to see it yourself, you'll see that we have a 7.6 rating, which is the highest score among all Brazilian listening players. Punta do Mar has an 8.2 ranking, even higher than ours. They have the best in Brazil. So this is public information. This is official information from Reclaim Aqui and from Google and Apple Store. So this is why we are, on which we are leveraging our reputation to build a solid business to create value for shareholders and to grow faster than competition. So on page 11, not back to Vitruv and UniaSelvi. Again, we're offering new premium courses to expand the market and improve tickets. So nursing already with 11,000 seats covered in three months, which represented 8% of the current intake cycle. Our intake cycle was 128,000 students of which 11,000 in nursing. and hopefully we will be allowed to offer Zoom, Law, and Cyclones. Those three courses, as a reminder, represent around one-third of the products on campus market in Brazil. So it's a huge opportunity for a player as us, which has a hybrid model. This was on page 11, sorry. On page 12, The growth in our base was led by digital education segments. We grew 20% year on year, the student base. This growth was also important to highlight that this was coming from a very high comparable base. We grew last year, in the second cycle of intake, we grew 40%. And now we grew, on top of this base, 27%. So that's an important growth of 27% in the intake year over year, even though that comparison base is higher. And 138.6 new students in the second semester of this year, of which almost 113,000 only in the third quarter of this year. On page 13, growth was spread throughout Brazil. So even here in our original base, original region in the south of the country, we grew 13% year-on-year. Again, even knowing that the comparison rate was high last year. And in the southeast, 50% here on the left. On the right, the special hubs, as I said, 242 new hubs in the last 12 months. On page 14, the focus on the southeast region of Brazil. We opened there almost 100 hubs in the last 12 months and increased the student base by 50%. So we opened very recently a lot of new hubs in the last, I would say, three months, in fact. So we are preparing the base to accelerate even further the growth there in the tuition, which represents 40% of the total market in Brazil. On page 15, the maturation of our hubs. Again, the most important organic driver for growth, which is growth with limited execution risk. We keep expanding our maturation of hubs. If you see all the new hubs that we opened the last four years, we are still around 31% of the potential of those hubs. And also important to highlight here on the bottom left part of the slide, the share of newcomers and the share of intake in the overall student base. This is something that I mentioned already a few times in the past, but now we're showing you the numbers. If you see that we reach now in the first half of this year, what we believe to be the peak ratio between intake and overall base. Why is that important? First, because the slight decrease over time of this ratio, as we mature more hubs, as more and more hubs fill up and we increase faster the percentage of seniors compared to the percentage of newcomers, we are going to increase margins over time. we're going to decrease dropout ratios. We're going to decrease PDA ratios. Why? Because, as you know, newcomers, freshmen, dilute market. Most of our selling expenses is aimed at attracting new students. Newcomers, they drop more than seniors. And hence, PDA ratio is also higher among newcomers. So over the last four years, we have been increasing the duration, but now, according to our forecast, and from the first half already of next year, we are going to slowly but steadily increase more the participation of seniors compared to newcomers. So this is important driver of margin going forward. So on page 16, before talking about margins, Net revenue growing at around 20-25%, 20% in the quarter, 25% in the nine-month period of this year, driven by the expansion of days, as I showed before, 20% year-on-year, plus a 2% increase in tickets. This is also something that differentiates Vitro from the competition because we offer a different product because we differentiate ourselves from the competition, we have been able to more or less maintain tickets over time. So there was an increase last year, there was a decrease in the first half of this year, now an increase again, so more or less we are maintaining our tickets and in fact increasing 2% year on year on year, if you see the third quarter numbers, and this is conforming the resilience of our model. Now on page 17, some more financials. So the consolidated net revenue growing at around 22% on a nine month period. ABDA growing 26% and ROC margin growing 31%. I'm gonna show each of them now in detail. So on page 18, if you see the cumulative number for nine months, for example, the growth of 22% driven by the digital education business under graduation and graduation, mainly continuing education. Both segments growing quite a lot over the last year, as was the case over the last year, and on-campus segments decreasing over time, 17%, which is here on page 19. On page 19 you have more details about the continuing education segment and on-campus segment, So in continued education, the growth was driven by our digital graduation courses, which expanded a lot this year with more offerings and also leverage on digital marketing. On the other hand, on campus, segment two is declining over time, in line with our view for the sector, because slowly but steadily, there is this decline in the interest of on campus education the corresponding increase in the interest of digital education, which we don't believe will reverse once the pandemic is over. We have a lot of questions about it, whether there will be a decline in interest in digital education once the pandemic is over, hopefully next year. We don't believe in that. We do believe that there was a shift in mindset in the prior document about buying from home, working from home, and also studying from home. Nobody believes that e-commerce will go down once the pandemic is over, because people now have experimented this type of experience. And the mindset, the interest of digital education has also grown a lot and will continue to grow in the future. So, margins every day on page 20. Again, let's focus here on the nine month period. An increase of 21 to 28 to 39% of margin, one point. This increase was mostly driven by reduction in the cost of services and the percentage of revenues, which I'm going to show in the following slides. So, page 21. Cost of service, there was an important increase in efficiency over time. Four points increase, so 35 to 31% decrease in cost of service as a percentage of net revenue. This was driven mostly by two reasons. First, the overall optimization in personal cost as we optimize the ratio between students per tutor and the overall growth of the business. As we go further, it is easier for us to optimize also the ratio of students per ratio and besides the implementation of the flex courses that we mentioned in the beginning of this year, that we created also this new concept of flex courses through which we We gathered non-optimized classes that we were offering in small cities, for example. We have a much more optimized ratio now with students per tutor, enhanced, driven, driving as well this expansion in margins, in gross margin. On the right, you see G&A, also an increased efficiency. reflecting our focus in maintaining to be a lean company, a digital-oriented company. We have now less than 8% of our net revenue in G&E. This is a reflection of how we operate. This is a consequence of how we drive the business. We are much more agile and lean than competition, that's why we react faster to change in the market, and that's why we have been growing faster than competition as well. On page 22, selling expenses and PDAs, so net impairment losses on second assets is what we call here the PDA. So selling expenses increased, so if you see again the nine-month period, there was an increase of 36%. this year, and again, two points from 16.8 to 18.8 of net revenues. This was caused by first, as we said before, overall throughout this year, an increase in online media as a result of the pandemic. So, last year, a big chunk of our intake in the first semester of last year was made before the pandemic, so when our hubs were opened, and the hubs are an important piece in our selling machine. So because we have this hybrid model, the student sometimes, not sometimes, usually goes to the hub to understand how would be his or her experience and then there in the hub, he or she decides to really to enroll. So now the hubs are closed so we had to invest more in online media. The second reason was the strong intake cycle, which is natural, and also the commercial efforts in new pre-owned quarters, such as nursing. So there is still a ramp up now in the efficiency curve for new quarters, such as nursing. So there was an increase of 30%, but if you see the cut, the customer acquisition cost, it increased only 3.6% in nine months of this year compared to the first nine months of last year. PDA, on the right. There was a big increase in PDA this quarter, if you compare to the third quarter of last year, of .9 points. Despite the need for students, despite the strong presence of freshmen and newcomers, as I said before, again, we have reached the peak in this ratio now, in the first half of this year. And also despite the current crisis in Brazil, which does not help at all Now, on page 23, to finish, net income, we have an increase when you see the quarterly numbers and a decrease when you see the 90-month numbers. This was due to two things. The first one was a couple of non-recurring items we had last year. The first one was in the first quarter of last year, we recognized for the first time before-tax assets. This was an amount of around 18 million reais. That was the first time we recognized before-tax assets last year, which improved our net results last year. And also, in the third quarter of last year, we had, as well, FX gains related to the IPO. So we raised funds in dollars last year, and we brought dollars to Brazil, so about 3 reais, at a higher rate. So we gained 13 million reais last year. So these two events represent 31 million reais. Together with the increase in financial expenses this year due to the increase of the PBI and IPCA, we have a reduction on a yearly basis of our net results. To finish on page 24, cash flow. Cash flow here also a bit affected by extraordinary events of last year. Again, this $13 million FX gain, for accounting reasons, this FX gain is accounted as part, of course, of our net results and as well as part of our cash flow from operations. Don't ask me why, but it is the way the rules are. We recognized last year this $13 million FX gain as part of our cash flow from operations. On top of that, we had, as well, in the third quarter of last year, a rectification of some prepaid expenses, 60 million reais that we had already prepaid in preparation of our IPO, that when we executed the IPO in September, these were reclassified to transaction costs of the IPO. When you see the cash flow from operations, they increased as well as improved the cash flow from patients last year in 16 million reais. So here on the right, we put a table trying to reconcile these numbers. So when you reconcile, when you normalize this cash flow from operations, you see that we have, when you see, for example, the third quarter numbers, a increase of 28% in cash flow from operations and 31% increase in cash flow from operations in the 90 months. When you see the cash flow from a conversion, we went from 98% last year to 112% this year in the quarter and from 66% to 92% in the 90 month period of this year. So a very important result as well from a cash flow generation perspective. So, that was it, so page 25, just to wrap up, we are the leading peer player in digital education in Brazil. Before Nesomar, with Nesomar we wanted to consolidate as the reference player in digital education in the country, delivering what we had promised in the IPO, which was expansion of markets, continue organic growth, and now with the best NADO we could ever dream of which used the transaction with Telemar. So thank you very much, and now I'd like to open for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw a question, press the PAN key, and please stand by while we compile the Q&A roster. Once again, please press the star, then the number 1 on your telephone. Your first question is from Vitor Tanita of Goldman Sachs. Your line is open.