Vitru Limited

Good evening, ladies and gentlemen, and welcome to VITRU's fourth quarter and full year 2021 earnings conference call. All participants are in listening mode now. Later on, we will conduct the 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 your host for today's conference call, Mr. Carlos Fritas, VITRU's CFO. You may begin.

Thank you, Pereira. Good afternoon, everyone. Thanks for joining us again. It's a pleasure to be here with you all for the release of the fourth quarter 21 numbers, as well as the numbers for the full year of 21. A slide presentation will be part of today's webcast, which is also available in our investor relations website at investors.vitru.com.br. I trust you all have the presentation in front of you. And as usual, before we begin, I'd like to remind you that as detailed in slide two and three of this presentation, safe harbor is in effect for this call. So now I invite you to go to page five. Here on page five, we have the main highlights for last year and fourth quarter of last year. The first one, which is not new, was the announcement of the combination with . which is, as you know, a leading institution here in Brazil with the highest quality indicators in the higher education sector in the country, besides a very sizable business in medicine. This transaction is, as you know, still being evaluated by the last U.S. authority in Brazil, and I'm going to show again to you some numbers of into the market in a few minutes. Second important remark, also not new, is the nursing course that we launched in August of last year. And just after a couple of months, it quickly became our number one course in the intake of the second semester of last year, which is important not only for the expansion of the market as a whole, but also as a tool to sustain tickets and improve tickets over time. Third highlight is that we reached, at the end of last year, nearly 360,000 digital education students, mostly in our core business, which is undergraduation in digital education, in which we had an increase of 27% in the intake of the second semester of last year, and by the way, 32% increase in the first semester of last year. and a very important growth as well in the southeast region where we grew around 45% year on year between December of 21 and December of 20. Going to page six, another important remark is the average ticket. I cannot repeat myself just to say that we have a different business and we have been able to sustain and improve tickets over time, given that we sell a different product than the market. Our average tickets in our core business, again, digital education under graduation, increased by around 6% in the second semester of last year, when compared to the second semester of 2020, and now it reached 278 reais per month. This is a, I'd say, remarkable achievement. We have always said that we have a disciplined approach to tickets. We don't want to grow just for the sake of growing, but we want as well to sustain and improve the tickets. By the way, this was not only the effect of nursing. Nursing is a premium course in which the average ticket is way higher than our normal traditional course. Without nursing, the increase in tickets would have been around 5%. The increase as a whole here in the ticket is in function of our continuous effort to sustain and to maintain a disciplined approach to tickets. Regarding financial numbers, net revenue in our core business increased by 26% last year and the consolidated net revenue increased by 22%. Adjustability increased by 24% last year, with a slight increase in margins as well. Adjustability margin now reaching almost 29%. And finally, regarding cash flow from operations, we had 137 million reais last year, increasing from 2020, with a nice cash conversion ratio of around 83%. So now, on page seven, before we deeper into the numbers of the year. Just a reminder of what we have been doing since the IPO. We said at the time that we would grow in four growth avenues, three organic and one inorganic. We have been doing so. We have been delivering what we promised. Now, the first one was ramp up of curbed hubs, which now represents around two-thirds of expansion hubs student-based and more than 91% of our overall portfolio of hubs is still ramping up, which means an important growth driver with limited education risk. As I said, we grew to 265,000 students as a whole. We opened, as well, around 240 hubs 230 hubs last year, of which almost 100 hubs in the southeast and of which 50 hubs in the state of Sao Paulo. We said a few times that we are still a bit shy, we were still a bit shy in the southeast and that's why the most important organic region for us is That's where we've been focusing and we're doing a lot there in the states in the southeast. Third one would be course offering. I said already about nursing. And soon we will have psychology and law. Law will also come to digital education. That will happen hopefully soon. And once it happens, we'll be again changing movement for the whole industry. And fourth, inorganic about the transaction with Uncidamar that I mentioned a few times already, which is the page now on page eight. Just as a reminder, Uncidamar is a company, an institution with a size more or less similar to the one that we have. These here are the numbers for the second quarter of 2021, which are the latest public information that we show to the market. In a couple of weeks, we're going to release to you the number of pseudo-mortem for 2021 as a whole. But so far what we have here are the numbers for the second quarter of last year. So 40% of just the margin is very nice business in medicine. They are the fifth best education institutions in medicine in Brazil. Medicine represents around 25% of the revenues of the only pseudo-mortem. And they have, as I said before, the best quality indicators when we see the digital education business emerging. On page nine, it's important to highlight and to emphasize that we are going to maintain both brands because they detect different markets. Also, there is an important commercial synergy to be exploited here. Currently, there are around 600 series in which you have only a hub of ownership of the market, but not only a service or vice versa. And here on the right, these are the numbers for the market share and the growth in the market as a whole, which do not yet reflect the new numbers that were released by the Ministry of Education a few weeks ago, with the first numbers of 2020 census. Here you have only the numbers between 16 and 19. This is because we are still waiting for the microdata to be made available by the Ministry of Education. But according to the first numbers that were released, the combined market share of UNEF Selvi and UNEF Zomar reached 20%. It was 10%, 10.5% in 2016, growing over time, so we have been able to grow faster in the market and to gain market share with that. We had 18.5% market share according to the census of the MEC in 2019, and now we have around 20% of the priority digital education market. So we keep gaining market share in function of the differentiation aspect of both institutions, which is here on page 10. Just a quick reminder that we offer our typical hybrid academic model, while we offer a hub-based, home-to-set online model, and we have a different product, that's why we have been able to grow faster than the market. And finally, on page 11, before we jump into the financials, this here is the validation by the clients, by the market. On the left, the grades that we have of our apps, and the app of Sysmart. This is the weekly average between Play Store and Google Store and Apple Store, with the app for the same purpose of each player, with the highest number of evaluations of each player, in fact. And you can see here that we have the highest rate in the industry, knowing that the maximum is five, so we have 4.4. So this confirms the tech-driven approach that we have to education. And by the way, our app now represents around 60% of our enrollment. And this is something we started to offer more or less six, eight months ago. And now it represents around 60% of our intake cycle through our app. So it's a totally different experience for the newcomers. On the right, the reputation index with the in which we have 7.6, 7.8.2. These are, again, the highest numbers among the listed players in Brazil. Jumping to page 12, as I said before, nursing is being offered. We are sustaining tickets with nursing, and we will be able to do so even further with law and psychology once it is approved by the Ministry of Education, which we hope to take place soon. Now, going to the numbers of last year on page 13. We have now around 260,000 students in digital education, 265,000 in total, including the 6,000 we have in on-campus courses. In the chart you have on the right the resolution of digital education students in undergraduation. And by the way, this has been purely on an organic basis, as you all know. So we grew 18% last year, year on year. which is an impressive achievement given the tough comp of 2020. As a reminder, we had a 40% increase in intake in the second semester of 2020. So the bar was already quite high here. Phase 14, as I said, we had an increase in intake last year. of 27% in second semester and 32% in the first semester of around 30% increase in intake last year. And the pie charts show the breakdown of the intake in 2020 and 2021. So here there are a number of points to bear in mind. The first one is the reduction in the black part here of the pie, which is vocational. Vocational means, in Portuguese, , which are shorter courses, courses that have a duration of two years, 2.5 years. So they were 36% of intake. Now they are 32% of intake. And most important is the increase in premium courses. I mean health-related courses and engineering, which have a higher ticket. The average ticket of engineering or health courses such as nursing and nutrition, biomedicine, etc., physical education, is a bit more than 400 reais per month, which is more or less 50% higher than what we have in our average ticket. When you see here the intake of the premium courses, it was 23%. of 2020, I mean 4% in engineering and 19% in health courses. And now, or last year, they grew to 32% of intake. But those courses, they still represent only around 20 something, 22, 23% of the overall student base last year. They were 32% of intake, but still they are a bit more than 20% only of the whole base of last year. So the trend, the trend is that premium courses will represent a higher and higher share of our base, which will be an important driver to sustain even more our tickets. And I'll get back to this a bit later. On page 15, the breakdown of our growth in our student base in digital education undergrads throughout the country. So we grew 18% year-on-year for the whole country. including 10% in the south, which is our incumbent region, around 36% in the center west, important growth there, around 15% in the north and northeast, and as I said before, 45% in the southeast. On the right, you see the breakdown of the number of hubs per region. This is new information. Here you can see the evolution of the hub base. throughout the country in the last four years. Now, for the first time, the southeast region represents the biggest region in terms of hubs. We had an increase of 61% in the number of hubs in the southeast, which now has 245 hubs out of the 939 that we have in the whole country. This is, again, an important growth driver for the future, which is here on page 16. we have intensified the presence in the southeast, which represents 40% of the whole market in the country. So as I said, 61% growth in HUDs, 45% growth in signal-based air. And when you see the whole intake numbers, the southeast was 8% in 2019, and then grew to 17%. in 2020, and then 19% in 2021 of the whole intake. So we are increasing our footprint in the southeast. Page 17, our famous chart with the evolution of the student base per cohort, knowing that a cohort is the number of hubs that were opened in a given year. So we keep increasing, and we keep maturing As I said, this is an important driver with limited education risk because the hub is there, the partner is there, the only accepted brand is there, and word of mouth is working in our favor. We keep increasing our maturation of hubs. Today, the theoretical maturation index of the overall portfolio of hubs is around 33% But it's important to highlight that this index takes into account all the expansion hubs. So when we open several hubs at the same time, we have a dilution effect of this index. And in fact, it may even end up in the lower index. But for example, if we take only the 2018 cohort, the maturation index of these hubs increased from 36% in December 19 to 50% in December 20, and now to 60% in December 2021. So we will keep increasing the maturation of our hubs. On page 18, I see here some key financials. So maturation, as I said, growing by around 22% on a consolidated basis. Gross profit increased 31% in the whole year, reaching a growth margin of around 62%, an increase of 4.5 points between 2020 and 2021. And then I'm going to get back to you to show the reasons. And adjusted BDA growing, as I said, 24%, reaching a margin of 28.9% in the year. On page 19, you see here on the left, For example, the digital education undergraduate net revenue grew 26% in the year, driven by the expansion of student base, but also by the expansion of tickets. Here are the numbers. As I said, we had now in the second semester of the last year, 278 reais, which is around 6% higher than one year before, which was around 4% higher than one year before. So we keep increasing our average ticket because of the differentiation aspects of our product. And again, as I said, this increase of 6%, 1% of it is nursing. The other 5% is indeed the overall portfolio that we had already before. This mixed effect is important. As I said, the average ticket of premium courses is around R$400 per month. Because we have R$250 of our average ticket, it means that the average ticket of the traditional courses is around R$241 per month. As I said before, we expect the relative weight of premium courses to keep increasing over time, not only because of the higher penetration of our current courses, such as nursing, but also in the near future, psychology and law. So just as an example, so if we had, for example, 50-50, so 50% of two-month courses, which now, as I said, represents more than 20%, and 50% of traditional courses, our average ticket would have reached $320. I mean, $400 for the premium and $240 for the traditional, $320 on average. So there is still a lot of potential here to sustain tickets. And this not counting with inflation and any other effects. Just on a mixed effect, we still have a lot of space to increase tickets as we increase the relative weight of premium courses in our overall portfolio. On page 20, the contribution of the other segments for continuing education grew by 29% last year, which is explained by higher offerings and higher digital marketing that we increased last year. On the other hand, on campus, there was a decrease of 16% on year-on-year basis, which aligned to our vision that this is a business that will keep suffering a little bit more over time because we do believe that there is a trend, a continual trend of migration of interest from on-campus to digital. On page 21, the net revenue was boosted by digital education segment. The increase of 26% in visual location undergrad, 29% in continuing education, and a decrease of 15% in the net revenue on campus. The consolidated number is 22% for net revenue. We're going to see about cost on page 22. The cost of service. declined from 34.7% to 30.5% of revenue. This was because of overall optimization of personal cost. As we go further, we are able to more and more optimize the ratio between students per tutor. So this is a function of growth. And also, of course, the natural gains of scale as we go further, we can dilute more and more fixed costs. On the right, the GNA. GNA now represents only 8% of our natural evidence, which is way lower than competition, which shows our continued efforts to maintain a lean and agile structure, which we expect in our culture. So we had a growth of around 8% only of G&A cost last year, G&A expenses last year. On page 23, on the right, on the left, selling expenses grew by 34%. This increase was a function mostly of the increased intake that we had last year. As I said, we had increase of around 30% last year. And the the selling expense increased 34%, which means that the CAC increased a little bit, increasing around 3% when you see the year-on-year comparison. So I think it was a normal increase in the CAC of around 3%. And also because the hubs were again closed last year. Just as a reminder, the hub is an important piece in our overall selling machine. So now as we resume operations at the hubs. We are now resuming our operations at the hubs. So this will be also important to use the hubs in our selling machine further throughout this year. And on the right, the PDA, which is called net impairment losses on personal assets. So it's the same as PDA. It increased last year from 14.8 to 17.5 last year and this is a fucking fourth of the pandemic and also because of the higher share of newcomers and new students in our student days as you know most of the PDA is concentrated in new students coming from the first semester and also because again the hubs were closed so in our academic model part of the experience is to meet your colleagues at HUBs. So when we lose this piece of the whole experience, this part of the experience, we are not in our full potential of the overall experience. So now as we resume the physical encounters, the weekly meetings at the HUBs, we expect the overall retention and PDA levels to go down this year. Now jumping to page 25, adjusted net income and cash flow. Adjusted net income declined 10% last year. The first reason was the high comparison base of 2020. In 2020, we recognized for the first time the full tax assets. This made a tip-off for Self-Inventing. Also, we gained 13 million reais just after our IPO in F-Tech Bank, which is part of net income of Self-Inventing. Besides that, last year, as you know, we had a huge increase in IPCA, Inventation Ratio of Brazil, which went from 4.5% in Self-Inventing to 10%. Most of our debt is in IPCA. It's a slight decrease of net earnings, net results. In cash flow, we had an increase of 11% last year. The reason for this increase of only, I would say, 11% was, as I said, the gain in SX of 13 million reais. This is in IFRS. This is part of the operational cash flow. If it were not for the 13 million reais gain in SX, our net income in 2020 would have been around 110 million reais. We would have had a growth of a bit more than 20% in cash flow operations, which is aligned to our growth in EBITDA. Again, they met a nice cash conversion ratio of 83%. So that was it that I had for now. And now let's open for questions.

If you'd like to ask a question, please press star then 1. If your question hasn't been answered and you'd like to remove yourself from the queue, press the pound key. Our first question comes from Victor Balta with Goldman Sachs. Your line is open. Thank you. Victor, your line is open. Sorry.