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spk04: Good evening, everyone. Thank you for waiting and welcome to VTRU's second quarter 2023 earnings conference call. We advise you that the video conference is being recorded and will be available on VTRU's Investors Relations website, where the complete material of our earnings call can be found. You can also download the presentation from the chat icon. During the company's presentation, all participants will have their microphones disabled. Then we will start a Q&A session and at this point you'll be able to use your microphone. To ask questions, click on the Q&A icon at the bottom of your screen to join the queue. If you prefer to write a question, please follow the same steps and you'll be joining the queue as well. When your name is announced, a request to activate your microphone will appear on the screen, and then you must activate your microphone to ask questions. It is recommended that you do all questions at once. We emphasize that the information contained in this presentation and any statements that may be made during the earlier calls regarding VTOL's business prospects, projections, and operation and financial goals constitute the beliefs and assumptions of the company's management, as well as information currently available. Forward considerations are not performance guarantees. They involve risks, uncertainties, and assumptions, and they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions, and other operating factors may affect Vitru's future performance and lead to results that differ materially and those expressed in such forward-looking statements. Today, we have the presence of the company's executives, William Matos, Vitru's co-CEO, Carlos Freitas, Vitru's CFO and IRO, and Maria Carolina Investor Relations. I will give the floor to Mr. Carlos Freitas. You may begin.
spk00: Thank you, Pereira. Good afternoon, everyone. Thanks for joining us again. It's a real pleasure to be here with you all again for the release of our second quarter, 23 results. As said, here with me, I have William Matos, our co-CEO, Maria Carolina Gonçalves, the head of our IR department, and also Raquel Suzaki, Daniel de Souza, and Luis Felipe da Silva from our IR team. This slide presentation in front of you will be part of today's webcast, and it is also available in our IR site at investors.vitru.com.br. Before we begin, as usual, I'd like to make sure that, as detailed in slide two, that you know that Safe Harbor is in place for this call.
spk05: So now I invite you to go to page four. which is here.
spk00: So here we show a few key operational highlights of the quarter. The first is that this is the first anniversary of the closing of our business combination with Unicef do Mar, that we closed in May of last year. And as we know, as we have been following the company, we have been advancing a lot in the integration process of both Vitru and Unicef do Mar. We reached in June of this year, nearly 920,000 students, 97% of them in digital education, with a 17% increase in the first intake cycle of this year, in the first half of this year. The average ticket increased about 3%, 3.2% in the first half of this year, which is a better indicator for the full academic cycle, the semester number, conforming our approach to pricing, our price discipline, and our product differentiation. On slide five, we have the main financial indicators for this quarter. Net revenue from our core business, which is, as you know, digital education undergraduate, was up 58% in the quarter, with the overall net revenue increasing almost 70% in the second quarter of this year. The adjusted EBITDA increased by 73% for more than the increase in revenue, which means that our margins increased and this time to 38.8% in the second quarter compared to 38 in the second quarter of last year. Adjusted cash flow from operations also increasing even further, 119% increase quarter on quarter with a solid cash flow conversion from operations of 86.7%. And finally, the adjusted net income was up almost 100% as well, reaching 123 million reais in the quarter, despite our current debt. So on page six, this is a new slide that summarizes how we position ourselves and what we have achieved since the 2020 IPO, we have always. said to you that we are the only player on little player in Brazil with true focus on digital location, we are now. the largest player in digital location in Brazil. So with not only our focus on what is growing the most in the higher education sector in Brazil, but also the largest player in this sector. And here are some indicators that show our performance of the vitro now compared to the vitro pre-IPO. I know that most of you know the numbers, but it's also interesting to highlight what we have been able to grow in the last three years, both in terms of revenue or financial indicators and also operational indicators. So revenue up by 290%. ABDA, we were a company with 117 million reais ABDA before the IPO. Now we reached 650 million reais in the last 12 months. The number of students also increased a lot. Hubs, cash flow from operations, 500% increase over the last three years. So this is just to illustrate what we have been able to grow in the last years. On page seven, the numbers of our digital education undergraduate segment students, reaching 837,000 students. So a 13% growth year on year and almost 900,000 in digital education as a whole, including our graduate segment. So this is an important growth. We are reaching the number of 1 million students, which we're probably going to reach next year. And we had this 13% growth in student base in June of 23 compared to June of 22, which we believe is a remarkable achievement. knowing that we had a very high comparable basis of last year and the fact that this is the first full year of the first real year after the pandemic. I mean, it is no surprise that the digital education segment uh grew a lot in the last three years and we agree and we grew uh even more uh so we gained market share within this growing sector uh and just illustrate just to to remember that last year our intake growth was particularly strong we grew uh the the intake of 26 percent of uni ourselves and and 54 percent in the case of sedumar So that's why here in the bottom right part of this slide, we show here as well the CAGR, the annual growth in the last two years. So 21% CAGR between June 2021 and June 2023. On page eight, some indicators of our growth. So our maturation index around 48%. So we have the capacity of more than doubling the size of our student base with our current hub base. So the cohorts of hubs keep growing over time. As we have always said, this is an important growth driver for revenues with limited execution risk. following page on page nine we have the breakdown of our student base per region in brazil so 13 overall in the last 12 months with a important growth in the southeast of 21 and also in the northeast and the center west of the country so now we have almost 200,000 students in the southeast of the country, which represent already more than the biggest region in terms of hubs for us. So around almost 800 hubs that we have only in the southeast. Which, by the way, is highlighted on the next slide, just to summarize. Growth of hubs, 18% year-on-year. Growth in student base, 21% year-on-year. And this is an important growth driver. This was something that was asked about a lot during the IPO, our capacity to grow, to execute growth in the Southeast.
spk05: And we are showing that we can do it.
spk00: Page 11, the breakdown of our hub footprint, which, as you know, is quite complementary between Serdomar and UniaSelvi. We keep growing. We keep... opening hubs throughout the country. Not opening hubs for the sake of opening hubs. The size of a company is not measured by the size of hubs or the amount of hubs. But we open hubs when we do feel that there is a demand in that given area or city. But we keep opening hubs because we do believe that there is space to be occupied in the country. And why do we grow more? Because of our focus on technology and a differentiated customer experience. Again, this is a slide that we show every quarter. Just to highlight that, which is public information, which is comparable, we have our apps rated 4.8 out of 5, so a very nice rating. And this is very important because the cell phone is the the most used means to reach our students our students they are everybody has a cell phone or more than one not everybody has a computer and in our case people commute people study with a cell phone people listen to videos etc and the having a very nice and tech oriented app is a a way to reach the students and a indicator that of our focus on technology So on page 13, in this slide, we show details of the intake and average ticket for each of our brands in the digital education undergrad segments during the first semester of this year, which, as I said, better reflect the academic cycles. So regarding intake, the intake growth in the first half of this year was around 17%. which is very close to the intake growth that we showed already in the first quarter of this year. Again, a strong performance, especially considering our quite high comparison basis of last year. Regarding the current intake cycle that we are still going through, we are halfway in the process, but what we are seeing so far and what we expect for the rest of the cycle is a similar intake growth throughout the second semester of this year. Regarding tickets, in the case of Unia Selvi, a strong growth in every ticket, growing above inflation, 8.5%. year on year. This is mostly due to our pricing discipline, our marketing intelligence, and the tools and procedures that we have been developing over the last years, as we have showed to you since our IPO. In the case of Únice do Mar, there was a slight decrease in tickets, especially given the carrying effect that I explained in the last quarter, the carrying effect of the substantial volume of new students that were enrolled throughout last year and now our seniors and they have replaced seniors in the last year, which had higher tickets. So those new students, they entered last year at lower tickets. So there is this caring effect. But what is important to highlight is that anyway, where we are seeing, we saw already the first signs of the new pricing approach that started to be implemented. in the first intake cycle of this year. And we're seeing that intake tickets for UNICEF are growing or grew, in fact, in the first half a little bit above inflation. So in a nutshell, the consolidated average ticket grew a little bit below inflation, so 3.2%. And going forward for the year, we're probably going to see a similar growth, either equal to inflation or slightly below inflation on average. On page 14, some key financial indicators comparing the quarter and the semester. So strong growth in net revenue, in gross profit, in margins, in adjusted BDA. So very strong performance this quarter and this semester. And by the way, it is important to bear in mind that this is a cyclical business. And that traditionally in the second quarter of the year is our strongest quarter in the year, both in terms of revenue and in terms of EBD margin. So this is because in the second quarter of each year, we have the full impact of the intake cycle of the first quarter, which is the strongest intake quarter in the year, as you know. But we don't have the marketing expenses for this growth. So the market space are spent mostly in the first quarter of each year. And also, we still don't have most of the dropouts of new students. So it's usually the strongest quarter every year, the second quarter. To go into more details on page 15. the net revenue composition in the quarter, growing almost 70%, as I said before, led by the growth in digital education, undergraduate, but also in the medical business. And here in the right part, you see the breakdown of this revenue. So today, in the second quarter of this year, we have around almost 80% of our net revenue coming from digital education, either undergraduate or the continued education business, plus 13% coming from a very resilient medical business. So it is another way to illustrate our competitive advantages and our differentiation. On page 16, the digital education undergraduate revenue growing 58 and 76% in the semester, growing a lot and with a very important opportunity regarding the mix of students. You can see here in the right part of the slide, the breakdown today and the breakdown in June of last year of our student base. And we grew a little bit, but we are growing the weight of premium courses, namely health courses and the engineering courses, which went from 25% to 28%. uh and so this is important because those uh health courses especially they are mostly new uh for example in nursing in the case of both brands uh some some health courses that were not offered in the only summer brand are now being offered so going forward we do believe that there is important potential of increasing the relative weight of premium courses and to sustain tickets over time as well, especially because, as I said, health courses, some of them have just started to be offered. And also in the medium term, not this year, but in the medium term, we do expect other courses to be allowed to be offered in these locations, such as psychology and law. P17, our medical business, just to remember, to highlight that a very high quality business, the fifth best private medical school in Brazil with high scale, Maringá being the largest medical campus in the south of Brazil, which means high margins and high leverage, operational leverage. So net revenue in this business offered only through the Unisomar brand reached 6,000 million reais in the quarter. Tickets today are around 11,000 reais per month, increasing above inflation, and the seats are still maturing. So we expect promising results from our medical segment this year. Page 18, on the left part of the slide, the on-campus ex-medical business. There are important contributions of Sesumar to the overall numbers, given the resilience and the high quality of especially the health-related on-campus courses of Sesumar. which just as a refresh, those courses represent more than half of the overall on-campus business of Unisismar X-Medical. So it means high ticket, it means resilience. And again, we are growing intake and tickets in this segment as well. Intake, for example, growing around 20% in Unisismar compared to last year. For continuing education on the right part of the slide, also a strong growth in this segment, which comprises not only our graduate courses, but also a growing business of technical courses and preparatory courses for the first job. this is a promising area and we do believe that we can offer complementary products to our students we have the tools and and intelligence to to do so in a lifelong learning approach So again, margins growing page 19 from 38 to 38.8% in the quarter on a semester basis growing from 33.8 to 38.4 in the first half of this year. And on page 21, you can see that the biggest contributor of this increase in margins is our operational leverage. So cost of service. as a percentage of net revenue going down, both on a quarter or a half year basis. This is due to synergies. This is due to operational leverage and economies of scale as we grow the business. on expenses in the right part of the slide, now represented 5% only of net revenue in the second quarter of this year, which just to show, to illustrate that we are a quite lean company, which means more agility, which means more flexibility, and also as a consequence of the integration process with Sesumar. Page 22, selling expenses and PDA. So for selling expenses, a slight increase in the quarterly expenses as a percentage of net revenue, but an important reduction in the semester numbers. The main reason for that is that we closed, as I said, the business combination in mid-May of last year, when the first intake cycle of Sysmod was already over. And in the second quarter of this year, we had the full consolidation of the overall of the whole quarter. So on a normalized basis, the quarterly expenses as a percentage of net revenue would have been more or less flat at around 12% of net revenue. uh for pda uh on the right pd was the reverse it was higher in the second quarter of this year compared to second quarter of last year but flat on the semester basis and anyway uh this is reflects our growth profile and the strong weight of new students in our overall student base and and as i said going forward we do expect the yearly PDA of this year to be more or less close to the number that we had last year.
spk05: Finally, on page 23, net income and cash flow.
spk00: So a very strong growth in net income, driven, of course, by the business recommendation with higher margin. uh reaching 23 percent uh this year the net net income margin of the company and this despite our our leverage and uh for cash flow on the right part of the slide We have an important increase as well in cash flow from operations, reaching 160 million reais in this second quarter with 86% cash conversion. It's important to highlight that this is cash flow from operations, which means that it's before CapEx. Our CapEx in the first half of this year was 5.6% of net revenue or 54 million reais, which means that if you take it out from the first half of this year, we had more or less 230 million reais in cash flow from operations after CapEx. uh and this strong cash flow generation also reflected in the reduction in our net debt uh net debt in june of 23 i was a bit lower than 2 billion reais uh on a x ifs 16 basis i mean without leasing as a liability uh our adjusted bda as i showed in the in the fifth slide i guess uh in the last 12 months was 654 million reais uh and around 600 million reais uh when we have a x ifrs 16 basis so having included the living expenses so two billion reais net debt 600 million rise adjustability for 3.3 the the ratio of net debt over adjusted bda x ifr 16 which is way below our governance our covenant was 4.5 for the june of this year uh this number of 3.3 uh was much higher in the beginning of this year because we didn't have the full impact of sudomar and this number we believe that it shall reach three around three by the end of the year as we generate more cash flow And we do generate more cash flow than we accrue interest. So our net debt decreases over time.
spk05: And as we grow EBDA as well. So that was it. And now I'd like to open for questions.
spk07: Thank you. We will now begin the Q&A session.
spk04: Remember that to ask questions, you must click on the Q&A icon at the bottom of your screen to join the queue. If you prefer to write your question, please follow the same steps and you'll be joining the queue as well. Upon being announced, a request to activate your microphone will appear on the screen and then you must activate your microphone to ask questions. We kindly request that all questions be asked at once.
spk06: Let's go to our first question.
spk04: It will come from Pedro Caravina, Sales Site Analyst from Credit Suisse. Pedro, we will open your microphone so that you can ask your question.
spk07: Please proceed.
spk03: Hello, Carlos. Thank you for taking my question. So I got two on my side. First, I would like to hear your thoughts on the recent decision of the Brazilian Supreme Court on prioritizing new medicine courses through Mais Médicos. We believe this may represent an opportunity for larger groups. And I would like to hear on Vitro's point. What is the strategy for Vitrus, thinking that Unicezumar's solid medical business is performing very well? Is there an opportunity for trying to expand its seed space? Or should we expect a prioritization on distance learning and maybe thinking on selling the medical business? So if you could comment on that. And also, going through the release, you mentioned that there is a challenging macro scenario. And even so, UNICEF has been able to to pass through tickets on a sustainable level above inflation and doing it pretty well. Now that the semester is over, I would like to understand better, where did the demand for new students came from? Are larger groups gaining share from smaller ones? Is it the sector is expanding because looking at other sectors, other educational groups results, we saw a very strong first semester in terms of student base, which wasn't expected by the end of 2022. So if you could provide us more color on that, I'd be grateful. Thank you.
spk00: Hi, Pedro. Thanks for your questions. So regarding the medical business and Mathematicals, we do believe that this decision helps to minimize uncertainty and risks in a sector which is always good. And we do believe as well that the opening of new medical courts should follow the Mathematicals legislation and the Ministry. legislations to maintain and to have a minimum standards of quality as well in the industry. So for UNICEF's mark, I mean, we have a very strong medical business with two camps, especially in the one of Maringá, a very nice brand in the area, in the state of Paraná, especially in the area of Maringá. So we will analyze. Maybe there is an opportunity to increase some medical seats here and there using the strength of the brand in the surrounding area of Maringá, for example, in the state of Paraná. So this will be analyzed on a case-by-case basis. This is not our core business, but it is a relevant business of the company. So we will analyze in due time. Regarding your second point for demand, where is demand coming from? I mean, it was always our belief in our speech, by the way, that digital education was not a temporary session. that digital education is here to stay and that there is a clear trend in the preference of the clients, of the students, of going more and more to this way of studying, to a digital education approach, especially in the case of Unicef do Mar and yourself, that we have a nice quality. So to us, it is no surprise that the segment is growing. And it's growing even, I mean, overall, the segment is growing less than what we grew during the pandemic, of course, because it was a different environment, different approach, a different context. But it is growing, as we said, that it was going to grow. We said that we believed that the sector would grow overall this year less than what we grew in the two years, but it was still going to be a double digit growth in the sector and in our case as well. So we are delivering what we said. It is an important segment for growth and today we don't have a very a clear picture of whether the big groups are gaining market share from the small ones. But it probably is the case. That's what we saw in the last census from the Ministry of Education. The new one will be released in a few weeks. We hope so. And we're probably going to see the same. The stronger players will probably gain market share because it is a business of scale. for you to offer high quality education and make money, you do have to have scale. Otherwise, either you don't have, you don't provide good quality education or you don't make money. So it is a bit of scale. And we do believe that demand is coming from the overall growth of the sector, but also the big groups are probably gaining market share as well from small groups.
spk03: That's very clear, Carlos.
spk07: Thank you and congratulations on the results.
spk06: Thanks, Pedro.
spk04: We remind you that to ask questions, you must click on the Q&A icon at the bottom of the screen and write your questions to join the queue. We now have a question coming from Fred Manges, Sales Site Analyst from BOFA.
spk07: So we're going to open your microphone so that you can ask the question. Please proceed, Fred.
spk05: Hello, good evening, everyone.
spk02: I have basically one question here. I'm just wondering, I mean, one of the players, also a large player on distance learning, it's been very aggressive in terms of increasing prices, right, for the segment. You're seeing above 15% increase for him. And then I think that's kind of setting the pace to the to the sector as well so just wondering if you're already seeing this impact kind of benefiting the competitive landscape uh if there is something you can also take advantage of it if something that you believe it is sustainable anyways how this let's say more aggressive on the positive side move towards the ticket on the distance learning how this how this is evolving the the competition uh in this segment thank you very much
spk00: Thank you, Fred, for the question. And I mean, this was and this remains a very competitive environment. But it is true that in the last, I would say, 12 months, we perceived a more rational approach, for the lack of a better word, to pricing. I mean, I don't believe that it is sustainable to grow tickets 15% per year forever. We do believe, and that's what we always said, that going forward we shall have a growth in tickets more or less in line with inflation, in some periods above inflation, as we have this year, for example, for Unicef, in some periods below inflation, as we have now for Montezumar, but growing slightly above inflation in the intake cycle. So it depends, but I think it's reasonable to assume that in the next, in the middle term, tickets in the sector shall grow in line with inflation. We don't see anymore a very irrational competition as we saw in some periods, but it is still a very competitive environment. So each player has to differentiate itself from the others and try to offer a better product for the client.
spk02: Perfect. Thank you, Carlos. Very clear. And if I may do a follow-up. Sure. On the provisions front, when should we expect some type of normalization on this line? Anyways, if there is, if 2024, or we can see even earlier. Thank you.
spk00: Yeah, I mean, for this year, we, to be frank, as I said, we do expect that the PDA for this year shall be more or less the same level of last year. And this is linked to our growth profile. So the fact that we grow a lot, the fact that we are, sorry, we're increasing tickets as well in both brands in the intake cycle. At the end, it leads to high PDA because, as you know, most of the PDA and most of dropouts, by the way, is concentrated in freshmen and new students. So, I mean, for this year, I don't expect an improvement on that. It should be more or less the same level as we had so far in the last year as well. But going forward for 2024, we'll have two effects. One effect, which is that we will see clearly a reduction in the overall weight of new students in our overall student base. So I'd say the weighted average PDA will go down naturally. uh for next year and also uh which is also important uh as said by pedro before the macroeconomic environment uh as we start to see now interest rates going down uh let's see to uh to which number uh but uh it is a fact that we serve the lowest middle classes in brazil which have been affected by the current economic environment so as interest rates go down uh and uh activity picks up we shall see we show a few a improvement in this line next year perfect very very clear carlos thank you thank you fred uh the next question received comes from lucas david nagano cell site allen's from morgan stanley
spk04: We will open your microphone so that you can ask your question.
spk07: Lucas, you may proceed.
spk01: Hi, good evening, Carlos. Thanks for taking our questions. We have two questions. The first one is related to margins and synergies. It has been improving significantly in the last year, partly because of the consolidation of UNICEF-MAR, but partly because of the synergies as well. But now the comparable basis is getting tougher and the expansion is accelerating. Do you still see room to keep expanding margins through the rest of the year? Is there any further efficiency to capture on the cost savings front? And a second question is related to AI. We know that education is one of the sectors that could be mostly disrupted by generative AI. Can you comment on what opportunities and risks you see on the current business model and how you plan to position the company? Thanks.
spk00: Great. Thanks, Lucas. So regarding margins, you're fully right. Part of the margins is due to the incorporation of ownership model, which had already higher margin before, but also part is due to synergies. So we, we increase the losses at the margins, so reaching 38.8% now this quarter. We shall have a higher margin this year than what we had last year. But, I mean, as we consolidated SEDOMAR and as we advanced more in the integration, we had a smaller impact of synergies. So, in a nutshell, we can still increase SEDOMAR a little bit, but not as much as we increased so far in the last quarters. And anyway, I think it is with this level of market that we have today, I think it is quite a good shape. So we are quite happy with this emergence as well. And for AI, I mean, this is a very important, I'd say, this will be a very important thing for us. We do believe that we, being the largest digital education provider in Brazil with 900,000 students and the only little player focused on that. We will be a leading actor in the AI use for education in Brazil, that's for sure. For example, we are already working with two proof of concepts with two pucks uh one with microsoft and one with google for example i cannot comment much more than that uh and we do believe that ai can help for example our tutors uh the tours of only a server which provide the human touch for the student experience, for the learning experience, the tourists can be helped with AI in their approach. But anyway, it is going to be much more an opportunity, in our case, than a threat.
spk06: Very clear, Carlos. Thank you. Thank you, Lucas.
spk00: the q a session is closed and now we would like to turn the floor over to the company's closing remark so thank you all for your continued uh trust uh and and very following up on vitro and anyway if you have more doubts or questions uh our ir team remain remains open uh for questions thank you and good night
spk04: The video conference of results referring to the second quarter of 2023 is closed. The Investor Relations Department is available to answer other questions and concerns. Thanks so much to all the participants and have a good evening.
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