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spk00: Good evening, ladies and gentlemen, and welcome to VITRU's first quarter 2022 earnings conference call. All participants are in a listen-only 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 introduce the host for today's conference call, Mr. Carlos Fritas, VITRU's CFO. You may begin.
spk04: Thank you, Claire. Good evening, everyone. Thanks for joining us today. The pleasure to be here with you all for the release of our fourth quarter 722 members. Here with me are Peter Grasser, our CEO, Maria Carolina Donsalves, the head of our IR department, and Raquel Sovacchi, with Felipe da Silva and Elio Pesco Jr., also on our just-recent team. A slide presentation will be part of today's webcast. which is available at our investor relations site at investors.vitru.com.br. And before we begin, I'd like to make note that as detailed in page three, in fact two of our presentation, State Harbor is in effect for this call. So now I invite you to go to page five of our presentation with the choice you all have in front of you. So now, on page five, We have the main highlights of this quarter. I guess the number one, as you know, the authority of Brazil, CADE, has approved the bill of condemnation within that we announced in August of last year. We are still in the middle of the 15-day additional waiting period for the transaction to close, which is the period we're going to finish tomorrow. The 15-day period will begin tomorrow on the 7th of May. And after that, so on Monday morning, we're going to tell you the date in which we're going to invite you for a new conference call and to define the date of the closing. Still on page five, we reached almost 282,000 digital education students which was an important landmark. Our intake in the first quarter of this year includes 36% in our core business, which is a digital education undergraduate. This was actually a very important growth, 36%. In the calendar quarter, we don't expect this number to be the same level for the full intake cycle. As you know, last year, the whole process was much more But anyway, we still expect the intake for this current intake cycle to be around mid-20s, higher than what we had last year. On page six, not only we grew a lot, but also we increased average tickets in our digital education segment. We increased 8.5% on average. comparing the first quarter of this year to the first quarter of last year, which reached more than $300 per month per student, which shows and confirms the resilience of our model and how we are positioned different than the other competitors. With that, the net revenue in our core business grew around 30% this quarter compared to the first quarter of last year, while the overall consolidated net revenue was 18% higher than what we had last year. We got the margins. Our margin was stable at 26.7% this quarter, which means that our adjusted BBA grew again 18% compared to what we had last year. And finally, regarding adjusted cash flow from operations, we had an increase of 20% more or less, which is 47 million reais in the first quarter of this year, which means the cash conversion of 116%, again, higher than 100% that we had last year. So now, before we jump into the numbers of this first quarter, let's just remind what we have been doing, what we have been delivering over time on page eight. So just quickly, as you know, had our IPO in September of 2020. Since then, we have been expanding and ramping up our current hubs. In the last 12 months, we went from 62% of students in expansion hubs to now 70%. We reached around 980 hubs, increased at 240 hubs more or less in the last 12 months. A big chunk of them in the southeast, In the southeast we have now 258 hubs and today already our second biggest state in terms of hubs is Sao Paulo. So we are believing on what we said, which was that we were going to grow in the southeast. Also expanding cross-operating, again, nursing was a big step. revenue contribution this quarter as it was in the first quarter of last year, and we are eagerly waiting for the next authorization to start offering psychology and later on law. And finally, inorganic growth into the market, which as you know is a major transformational deal for the whole sector. So on page nine, more details on one part of our current hubs. As you know, we are still maturing most of our hubs. More than 9% of our hubs are still maturing. Those are the hubs that were open the last two, three, four years. And the current maturation index of these hubs is around 37%, which means that if we decide not to open any more hubs going forward, we're still going to grow in these hubs more than 106%. Almost 200%. So this is growth with limited education. This is the most important driver of growth going forward for Gitche is the maturation of the health we have so far, which already represents 70% of the size of all our student base that we have today. On page 10, the overall expansion of our health and student base throughout the country. As you can see, in the last 12 months, we have been growing throughout the country, not only in our incumbent region, which is the south region of Brazil, in which we grew 16% in the last 12 months, but also in the center, almost 40%, almost 40% as well in the southeast, 25, 34% in the north of the country. So we are growing throughout Brazil. as we have been doing in the last year. And we increased as well by 32% the number of hubs in the last 12 months. And again, the most important reason in terms of number of hubs is now the southeast with 268 hubs. And on page 11, just to wrap up again, new courses. We have been offering nursing. And we are eagerly waiting for law and psychology, which is going to be another very important revenue contribution for GISA going forward. And on page 12, just another reminder of what CIDEMART is. They reached 1,000 hubs in December of last year. They had 1,700 medical students. And to wrap it up, they are going to reach around 2,500 students in medicine education, up to 726 or 7. They had a 30% ABBA margin in 2021, with 290 minor errors in just ABBA, and a 32% figure in number of students. So this is a major component that we are combined with, and as I said, We are going to close this deal very soon once the 15-day period from CADRE expires. And we are ready for it. We have gone through a full-fledged preparation for the integration. And once we finish the 15-day waiting period, we are going to invite you all for a new conference call with more details about the integration, about the webinar, and, of course, the synergies that we expect to have from the combination. On page 13, as you know, we are going to maintain both brands because they do step into different markets. They attract different people. And here on the right part of the slide, we have created the chart with the latest figures from the EMEX census. in which we have been growing, again, more than the market. We have been gaining market share. The whole market has been growing at around 21%. But we, within this growing segment, we have been gaining market share on a yearly basis. So now, when we expose it to the market, we have around 20% of the market. And this is levered on our, let's say, focus and technology and reputation. On page 14, you can see that when you see the public validation from our clients, the students, when they evaluate our apps, for example, once you go from up to five, as you know, either in Play Store or Apple Store, the grade, the weighted average rate of one to the one is 4.7, while the one of Unicef is 4.6. which are the highest in the market. When you see the whole universe of academic acts in Brazil. And also when you see to see the public reputation of the brand and how we are perceived by our customers, both in the server and to the web, have the highest grades among the different players in Brazil. So now, on page 16, we start talking more on the numbers for this quarter. We grew by 26% in our digital education undergraduate student base, reaching 332,000 students, and overall growth to 382,000 students in digital education, including graduate courses. When you see our core business, In the intake, as I said, we grew 36%, reaching 170.9 thousand students in the first quarter, the first calendar quarter of this year. The intake is still going on. We still have multiple weeks in intake for this current year. So what we do expect is a slightly smaller growth this year. As you remember, last year the whole MM process was delayed, so the whole intake process was much more back-ended than what we had this year. So the comparison between the curves, the profile is different. But anyway, we expect to have mid-20th growth in the current intake cycle this year. On page 16, just to illustrate that growth has been spread throughout our cohorts. As you know, we define cohorts as the group of hubs that were opened in a given year. So in all cohorts, we have been growing as usual. And this maturation of the hubs is an important piece in our growth engine and, in fact, the movement of the driver for our growth going forward. So now we have expanded from 272,000 people to 342,000 students enrolled as of in the March of this year. Of 2017, we start with financials. As I said, growing at 18%, reaching 178 million Riyals in quarter. A slight decrease in the cross-profit margin, and I'm going to explain this a bit later to you. And the WBA with a stable margin at 27% in this quarter. When you see the performance of net revenue per segment on page 18, as I said, a 30% increase in our core business, digital education undergraduate. which now represents 8% of our overall net revenue. And we had a decrease in continuing education and on-campus undergraduate business, which I'm going to explain to you a bit later. So still on our core deals, page 19, a 30% increase in net revenue and 8.5, so 9%, increase in average tickets, which is more than $300 this quarter. So this is an illustration or a confirmation of how resilient and different we are positioned in a different way in the market. And we have been offering a hybrid model, which is different from most of the and we are seeing overall in Denmark a much more, let's say, rational commercial approach from all the peers. And even in apart from that, we are growing our tickets. We do about around 8.5%. Remembering that last year, in the second quarter of last year, we did 6%. In the second quarter of 2020, we did 4%. So, again, we are expanding every ticket slightly below inflation, but expanding a lot the second day. And I want to highlight that most of the increase in tickets is not due to a mixed effect. I mean, we all know that there is a mixed effect. We are increasing the weight of our training courses, mainly health and engineering, which has every ticket of a bit more than $400 per month. Those courses amounted to less than 21% of options based in the first quarter of last year, and now they represent around 25%. And out of this 8.5, 9% growth in every ticket, 2% is accountable to this mixed effect. So which means that 6.5% is due to an apple-to-apple comparison. Anyways, we expect the relative weight of student courses to keep improving over time, not only because of a higher competition overall in our current courses, but also, as I said before, in the near future with psychology and law. So on page 20, we have a decrease in revenue of computer education and on-campus education. Regarding computer education business, In the last quarter, this has been negatively affected by the reduction in the average duration, every length of our graduate courses. This is a market trend, which is affecting not only D2, but several other players, by the way. Anyway, it's important to highlight most of this shift is over. The reduction has taken place throughout last year. So we do expect the moving shift is over and net revenue this quarter was already higher than what we achieved in the fourth quarter of last year. And we do expect that the net revenue in the second quarter of this year shall be higher than what we achieved now in the fourth quarter of this year. Looking with a more medium-term view, besides ready courses in the settlement, our continued education business includes technical courses and professional qualification courses. And we believe this has the potential to be quite important in the future, an important additional force of revenue for us. And it is part of our overall strategy to expand complimentary offerings throughout the student's academic journey. Regarding our own campus segments, our intake in this 2022.1 cycle was a bit higher, about 11% higher than what we had last year, but that was not enough to avoid the overall reduction in bays and net revenue. We believe that the post-secondary on-campus business has become a trend, has become a secular trend, although with the start of the year, it might regrow this year, but coming from quite low comparison basis. Now jumping to page 22. going to be paid about the components of our BDA. Cost of service is certainly higher than what we had last year. 2% of net revenue higher than what we had last year. Basically for two reasons. Third one was the lower, slightly lower contribution of computer education, which is a higher margin business. It's a higher one we have among the three businesses we had. But also we had last year a 3 million cost recovery that was one-off, which represents around 2% of our revenue. So, whether it's not for this one-off effect, our gross margin will have been quite similar to what we had last year. When we look at GMA, GMA was more stable to what we had last year, which means that we decreased the GMA as a percentage of net revenue. from 8.6 to 7.1%. So we are keeping V2 as lean as possible to be and to remain as agile and as fast as possible as a company. On page 23, selling expenses and PDA. So selling expenses was slightly higher than what we had last year. increasing 1.4 points compared to what we had last year. But the tax, the cost to acquire a new customer decreased 9% than what we had last year. So we increased 24% the cost of semi-expressives, but the interest was much higher than that. So the tax was slightly lower than what we had last year. And for PDA, we decreased PDA in two points from 16.6 to 14.5%, which was a function of a slight improvement in collection. Our average collection time, or number of days, was slightly lower than what we had last year. So with that, we were able to reduce it a bit in two points, in fact. And we believe that going forward this year, the overall PBA for the whole year shall be a little bit lower than what it had last year. So now on page 24, for net profit, net income, it's 66% interest in net income, which is $25 million this quarter. not only because of higher DBA, but also because of higher financial income this quarter. And finally, regarding adjusted cash flow from operations, we reached $37 million this quarter, in fees of 20%. Our cash flow conversion was 116%, which means that we have been, again, generating cash. We not only are growing cash, our revenue and also our cash flow generation. This number here is before CapEx, so after CapEx, which was around 10 million this quarter, this would have been around 36 million annually in total cash flow generation in the quarter, in line with what we have been doing in the last quarter. So that was from my side. I think that we have delivered a very nice quarter. Now I'm going to open for questions.
spk00: If you would like to ask a question, please press star, then 1. If your question has been answered and you'd like to move yourself in the queue, press the pound key. Our first question comes from Vitor Tomita with Goldman Sachs. Your line is open.
spk03: Hello, good evening, all, and thanks for taking our questions. There are two questions from our side. The first is if we should expect selling expenses falling year-on-year in the second quarter, given that this year's intake cycle was more concentrated in the first quarter. And our second question would be if you are considering the smaller M&A yields, if they could be a potential option for increasing your portfolio in continuing education. Thank you.
spk04: Okay, I'm going to start with the second one. So, yes, you're fully right, Victor. Thanks for your question, by the way. Looking forward, we are going to resume M&A capability. Before the deal with the internet, we were already looking at some potential deals to complement our portfolio. either with graduate courses, either with what's called free courses, either with prep courses for the first job. So the idea is that we have a longer relationship with the same customer, not only, for example, doing four years for undergrad, but also after the person leaves high school and engage in a prep course to get the first job, and then having an undergrad course, and then a grad course, and then a lifelong experience overall for the person. So yes, in the medium term, we are going to look for more M&A opportunities, including to reinforce our graduate business. For the first question, I could hardly hear you. I think that you were mentioning about the increase in the second quarter, right?
spk03: Actually, the question was about selling expenses in the second quarter, if we should see an increase as well, or if that could change given the different seasonality for in-place.
spk04: Okay, good. Yes, selling expenses, most of selling expenses is related to the increase in the second quarter. So especially regarding our undergrad business, which is our core one. So when we look at our second quarter, we will have not as high growth in intake as we had in the first quarter, because last year, the whole intake focus was much more back-ended. So when you see the overall intake focus, we shall have a reduction in CACs for the whole intake cycle when you look at the first and the second quarter of the year. In terms of intake, an intake in the second quarter will not grow 30% compared to what it was in the second quarter of last year.
spk03: Very clear. Thank you very much. Thank you, Peter.
spk00: Our next question comes from Luca Marquezini with Etow. Your line is open.
spk01: Luca Marquezini Hi, good evening everyone, and thank you for taking our question. So regarding PDA, the company reported a decrease in the PDA as a percentage of net revenue, which is different from what we saw in most of the companies in the sector. One of the reasons for this lower PDA was the lower contribution from the continuing education segment. What should we expect for the PDA for the rest of the year? see an additional dilution, or should we consider this as a new normal level for this expense line? Thank you.
spk04: Hi, Luca. There are some more things in the line, but I'm going to answer what I think you're asking, but it's not the right question. Please correct me. So dilution of PDA overall, when you see the whole year, for example, we shall expect a flat reduction in PDA overall this year compared to what we had last year for a number of reasons. The first one is that part of the overall experience of the students is to meet colleagues in the Hub. For those classes that do have physical encounters in the Hub, those guys, they start to meet again or in some cases to meet for the first time this year, exactly in April of this year. So by the way, all the results in the first quarter of this year were before the start of the physical meeting in the House that we started in April of this year. So this is an important engagement sector for the class. So, and our model lies on a number of foundations First one is the peer. The second one is the meeting in the Hub for those that do meet in the Hub. So those guys that have a physical meeting in the Hub are again, or for the first time, for the newcomers, meeting their colleagues, and this engagement with the classmates is important for the overall process, at least at the end, represents a higher retention rate And as a result, lower PDA ratios. So for this year, we do believe that the overall PDA ratio will be small. For this reason, the second reason is that last year, in 2020, we grew a lot. We had a 40% growth in the second quarter of the second half of 2020 in terms of intake. So now we have a slightly smaller percentage of newcomers that started with us last year than what we had one year before. So the weighted average of the profile of the students, we have less newcomers than what we had one year before. So the two sectors, show me a slightly lower PDA ratio this year at the presentation of the next webinar. Can you repeat the first presentation, because I can hardly hear you?
spk01: No, that was all. It was all regarding PDA, and it made it very clear. Thank you.
spk04: Thank you, Luca.
spk00: Again, if you'd like to ask a question, please press star, then 1. Our next question comes from Mauricio Cepeda with Credit Suisse. Your line is open.
spk02: Hi, Carlos. Hi, everybody there. Thank you for taking our questions. So I have two questions. One, I'll go back to the seasonality aspect. We were talking with your competitors during this earnings season, and we we noticed that the seasonality in distance learning in general is something that seems to have changed for the industry, right? And I know that you are a little bit more accustomed to that because of the modular process and other value proposition you have. So how does seasonality change affect the competition in the first part of the question, the second part of the question? how it interferes with PDA or evasion and other parameters that we were much more used to see in kind of an alternative fashion between even and odd quarters. And my second question is not related to the operational aspect, but you were close to the closing with the deal with UNICEF-UMAE. And we know that the capital structure were thought about before all this interest rate rises in Brazil. So how this new interest rate scenario could change the way you were thinking about the capital structure of the new coal? Thank you.
spk04: Thanks a lot for your questions. The first one is regarding the energy and PDAs. Yes, you're right. We were already used to this, let's say, much more spread intake cycle throughout the year because of our modular academic approach. And so we realize our intake goes up to end of May for the first semester of the year. And we do see competition. which used to finish intake around mid-April, for example, in real life. Now they extend a little bit more, a few more weeks. But at the end, there's a new product. Because we do have a modular approach, which means we can affect people in a given month, for example, and that subject, that the person did not attend, he or she can attend and will attend later on. And when you see the competition, because you do have, for example, five parallel subjects in a given semester, you have a technical limit for that. So you realize, for us, there was no real change or no important change in our overall input process. And same for PGA. is already affecting that. What we had last year was out at the point of the curve, which was a much more back-ended intake. Now, this year, it's actually something in between what we had in 2020 and 2021. I think it's the new normal what we're seeing this year. It's actually more back-ended than what we had a few years ago, but not as much as we had last year. We are close to closing. We have secured a firm credit line from four top-notch banks in Brazil. There will be a five-year financing from those banks. Of course, we are looking to accelerate the leverage of the company. We're going to start with a quite high leverage. The company, the new vitro, do generate a lot of cash, and we can deliver over time, but we are not going to sit and wait for that, because in real life, as I said before, we are going to look for further M&A opportunities, and it is not a surprise The current interest rate is higher than what everybody thought one year ago. For that, we have a number of options. The first one is to go to the market and raise capital in the fall once the market is open. It's not the case today. The second one, we could also have a product placement. We do have a number of parties that are looking for that. Of course, there's also on the table the potential sale of the medical business that we're going to buy now, which a lot of people in the market is asking us whether we're going to sell it or not. There's no decision so far whatsoever. This type of discussion will take place in the board after the closing of the session, and it is a possibility to affect medical education and sell it to other peers that are more focused on that than what we are. So we have the two possibilities. We don't have any words for that, but we do have options to accelerate the leverage of ECT.
spk02: Very clear, Carlos. Thank you.
spk04: Thank you.
spk00: If you would like to ask a question, please press star then 1. There are no further questions. I'd like to turn the call back over to Carlos for any closing remarks.
spk04: So thank you all for your interest in Beachwood. And our team here is more than available to answer any further questions you have. Thank you, and good night.
spk00: This concludes the conference call. You may now disconnect.
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