Cogna Educacao S A S/Adr

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Cogna Educação's first quarter 2020 earnings conference call. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the company's presentation. After the company's remarks are complete, Further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. Also, today's live webcast, both audio and slideshow, may be accessed through Cogna Educacion's Investor Relations website at ir.cogna.com.br by clicking on the banner 1Q20 Webcast. The presentation is also available to download on the company's website. The following information is available in Brazilian reais in accordance with the Brazilian corporate law and generally accepted accounting principles, BRGAP, which now conform with International Financial Reporting Standards, IFRS, except when otherwise indicated. Before we proceed, we would like to clarify that any forward-looking statements are based on the beliefs and assumptions of Cogna management and on information currently available to the company. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of the company and could cause results to differ materially from those expressed in such forward-looking statements. Now, I'll turn the conference over to Cognos CEO, Mr. Rodrigo Galindo, who will begin the presentation. Mr. Galindo, you may begin the conference.

Good morning, everyone. Thank you for participating in this conference call to discuss the earnings in the first quarter 2020. With me today, Bruno Jardino, IAR Officer, Jamil Marques, Finance VP, and the CEOs of each business unit, Paulo Valério Grosso, Paulo Desarcio Pleitos, Paulo Cirino Saber, and Mariubio Basta. The first few, this is the first time we will present our earnings break down by a vertical unit. And we are certain it will provide more transparency about performance challenges and opportunities in each operation. So on slide four, I'd like to speak about our current context with the pandemic that has affected our lives, the lives of companies, and we see a big impact on our society. As a company, we have to react quickly and prepare for this moment as soon as we heard about the first cases of COVID in Brazil, we set up a crisis management team and a reaction plan to deal with all the impacts. The plan is based on seven pillars. Our first concern was to ensure the protection of our students and employees. That is why we decided to close our units on March 16th and on the same week, All our employees were moved to home office. At the same time, we made available telemetric psychological help to our employees. The second pillar, we talk about the continuity of academic services. We continue all our operations, mitigate the impact for students. We always see an impact, but the more we see migration of students from on campus to the digital platform, we would be able to reduce the impact. We will be talking about the status of engagement and satisfaction of students in K-12 and also in post-secondary. But the results were very well managed. We've been able to deliver very adequate academic services without any interruption of activities. The third pillar focuses on liquidity, cash, and financial soundness. And the fourth pillar will ensure the financial stability in this scenario. Today's presentation will provide more details on pillar two, academic services, pillar three, financial soundness, and pillar four, our strategy. So pillars from one to four deal with very punctual emergency issues. In addition, we have to strengthen the company for the post-pandemic. So now we focused on pillars one through four. After that, we began to look at more structural issues. The fifth pillar looks at the new organization we will build as of the second half of 2020. And the sixth pillar looks at all strategic possibilities that may come up. Finally, we are also providing services in corporate responsibility, corporate social responsibility. So we provide content and classes free of charge so that people can study. Also, we provided donations and Donations of face masks, head sanitizer, in addition to financing to our students because they were engaged, but maybe they lost their income during the pandemic. There are many actions on each pillar. We could have a long meeting to talk about these pillars, but as I mentioned, we will focus on pillars two, three, and four in this presentation in the interest of time. Now, slide six. like to look at some highlights of new enrollments in the first half of 2020, which was impacted by the quarantine imposed by the COVID pandemic. We had to close our Tempe and distance learning centers as of March 16th. In the last fall, we had 70% of our target already achieved. We continued with new enrollments including the admission exam, 100% online, but we saw a reduction in the number of new entrants, especially on-campus students. Even with all the impact of closing our units, we closed the cycle with a growth of 8% in new enrollment, but a different mix. On-campus had a 23% decrease, but distance learning more than offset this drop. So finally, a growth of 8%. Now, distance learning. We have 255 new students. It's an increase of 33% if we compare to last year. We know that after the new legal framework for distance learning, we had much more competition as of 2018. As of the midpoint of 2018, we could see stabilization of the competition. And then in 2019, The situation is more stable in terms of offering, the growth of new offers and also prices. And now we have the opportunity to resume the market share we lost. Continue to invest in our digital transformation, which has provided this readiness for us so we can begin to regain market share. Although we have fewer new entrants on campuses, were students who were at the end of the cycle. So now these were more aggressive commercial products and we analyzed the performance of these products and we reached the conclusion that they generate less revenue and less cash. So therefore It's important to keep in mind that the impact in volume was bigger, 3%, but the impact of revenue was less than that. And the impact on cash generation is even less, actually minor, because these were students that had a higher dropout trend and lower cash generation. So 2020, the first half of 2020, has a mix that is, that is healthier with a lower dropout trend and a higher potential of cash generation. And it's important to highlight that, again, with all of this impact of the quarantine, we grew 8% in new enrollment with a different mix. Now, on the right side of this slide, it's important to talk about the results by channels. So we see a more hybrid product. The division between on-campus and distance learning will become less relevant. We'll have to be looking at channels. So with our own unit and the partnership, and this view will gain more relevance in this process of more hybrid program, which was already a trend, but it was intensified by the pandemic. If we look at the analysis by channel we look at our own unit that grew 13 percent in new enrollment so this increase in distance learning more than offset the drop we had in on campus so the volume of new students had a growth of four percent and it shows our commercial strategy in the distance learning they have a more and advanced more an anticipated calendar so We see the results earlier. Distance learning shows that our own units are very relevant for distribution. It doesn't matter if we distribute on-campus products or distance learning products. It's important because they provide capillarity, which is an important asset today. We see a strengthening of hybrid products as students break their prejudice against distance learning and they begin to value the convenience. So here we're fully prepared to provide different levels of presence to use all the opportunities with robust platform. Next, we were able to keep our graduation basis because distance learning grew by 12% reaching 600,000 students. And if the world post COVID will be more digital, then the result of our new enrollment and the results we will soon present show that we're very well prepared for this new normal. Now, slide six, where we're going to be talking about access and engagement Post-secondary, on the left side, 100% of our on-campus students have access to a V8. The chart shows the average score in activities until week 13 last week. As we land, We had an increase in the number of accesses and engagement, an increase of 25% compared to last year, and an increase of 5% if we compare it to the last half year, that is the second half of 2019. Engagement is one of the most relevant indicators because we know that lower engagement leads to a higher dropout. If we have more engagement, then dropout should be lower if everything continues smoothly as we talk about engagement i mean it's not just one variable but this variable engagement is much better than it was last year in the lower line we look at the levels of satisfaction with our digital solution the average content quality evaluation looking at the content that was made available on the platform and the evaluation of the quality of classes, of digital classes. We had an average score of 9.39 out of 10 in the average content quality evaluation and 4.78 out of 5 in the quality of live classes, showing we are delivering digital content with high quality to students who used to be on-campus students, and they still look at the content very positively and evaluate very positively. And primary education, 100% of Saber and Vasta students are already on our digital platform. The number of students went up from 923,000 to 1.2 billion this month. Our app is the one that has the most downloads compared to all other closed educational apps. And the NPS is very high, 75%. Out of every five Brazilian private students, one uses our platform. And the number may even go up to one out of every four if we exclude kindergarten. We are very close to the number of 1 million live classes since we closed our unit, the daily average of 23,000 live classes growing every day. 1.4 billion activities conducted by our students, which is 1,100 average activities per student. That's why we feel comfortable and We know about the success of our solutions. They were on-campus students and now they migrated to digital platforms. And everything was smooth in this migration. So we were able to deliver this high quality because of our digital transformation process, which is the differentiator that favors our company. On slide seven, our leverage and debt. On the left, the chart shows we closed the first quarter with three billion reals in cash, receiving the funds from our follow-on offering. We consider that our loans and other obligation receivables in the long and short term lead to a net debt of 5 billion. In addition, we also announced an issuance of debentures. We actually issued last week 500 million reals due date in three years to strengthen our cash position and stretch the profile of our debt. We made the decision to issue that given the attractive cost, 2.95%, and we can prepay if we think it is convenient. So we ensure a more comfortable cash position and a longer debt profile. On the right, our amortization schedule. The next payment of principal amount is in August 2021. So our cash position is very comfortable to face the current scenario. Slide eight. important information i'd like to give you some more qualitative information on receivables in april and may our due date receivables students who pay on time on campus students have no impact not in april not in may but the students On-campus students who usually pay in a delay, we also had a small impact on these late receivables. In distance learning, the impact was minor. among all students, those who pay on due date and those who pay later. It is still early to evaluate the impact. We will still have more negative impact because of the crisis, but it's a good sign, actually better than the stress scenario we designed to make emergency decisions. It is worth mentioning that even without great impact so far, even without seeing a higher default rate among on campus or distance learning students, we are conservative. So we increased our provisions by 7% already in the first quarter. Any possible default we already have the higher provision. Now let me talk about some emergency measures we're taking to mitigate the impact. And the results of these measures will be felt as of the second quarter. That is, they have not yet been captured in the results of our first quarter. First, the main cost, payroll. We decided to push vacation forward. So many of our employees went on vacation. Secondly, we had some temporary flexibilization of labor laws allowed by the federal interim measure 936 so that we have savings and at the same time we protect jobs. 90% of administrative employees had 25% reduction in workload and wages for three months. By doing that, we neutralized any impact of employees who receive 3,000 RALs or less per month. We suspended 5% of our administrative employees for 60 days. So we had reduction of workload and also suspension of some employees for 60 days. And we reduced the pay of managers between 27% and 38%. That includes wages plus bonus. So the highest levels of the hierarchy had the highest reduction between 27% and 38%. This was the premise. More reduction to those who have a higher income. And those who have salaries up to $3,000 had no reduction. Now, the other emergency packages, we reviewed and negotiated all costs and expenses, including rental, marketing expenses, utilities, technology, travel, third-party services, among others. always taking care not to cause any harm to our operations. We also reduced organic and extension investments, except investments in digital transformation, which were protected because we believe that this is our great differentiator and it will be even more relevant in the post-pandemic new normal. Finally, we decided not to pay all dividends in 2020, but we will review this issue next month so that we can make recommendations for the 2021 shareholders assembly. So even in the worst scenario designed, we can ensure there will be no cash consumption in 2020 and all covenants of our debt will be complied with. With that, I'll close the first part of my presentation and I'll give the floor to our IR director, Bruno Jardino, to present the financial highlights in the first quarter of 2020.

Thank you very much, Rodrigo, and good morning to all. Moving on to slide 11, I would like to explain the main changes that we have made in this release. The first, in regard to the analysis of the four companies that make up COPA. We hope that with this, we'll give the market a better understanding of the challenges and opportunities that each vertical offers. Clouton concentrated on post-secondary graduation operations, both in all units and partner pools. Cloutos, which is our educational services platform for post-secondary education, is a bit comprehending our own K-12 schools and those managed by contract, VASTA, our integrated education solutions platform for K-12 schools, and finally other businesses, including the National Textbook Program, SEDS, ELF, FG, and other services. A new development in this quarter is that we're making a more granular disclosure of our earnings, with individual results of each company being presented, net of opening balance sheet reversions, particularly in the case of SOMEN. We also disclose a detailed breakdown of accounts receivable with a focus on the Crofton operations. Therefore, we present to the market a diagnosis of accounts receivable and PEP provisioning our installment plan product. Let's go now to slide 12 with the results of our vertical Crofton. For comparison purposes, we included in the 1Q20 results the deferred revenue of 75 million relating to the delays in the renewal of PS students, And we excluded the additional provision created this quarter for losses related to COVID-19, in fact. In this scenario, net revenue showed a 23% drop caused by the reduction in the volume of new on-campus students since the quarantine began during the student recruitment phase, in addition to the reduction of the PS student base. And these factors have been partially offset by the robust performance in DL recruitment, as Rodrigo mentioned. Consequently, Crofton's EBITDA dropped 50% with the loss of efficiency and dilution of costs and expenses arising from the fallen revenue. Here it is appropriate to underscore that the cost for the semester had already been contracted before the pandemic. Our teachers continued to give classes as usual, and we also made investments to guarantee the structure of our synchronous and asynchronous models on the same day as the closing of our unit. Looking at the bottom slide, Platos, net revenue grew 16% supported by an increase in the average ticket, while EBITDA rose 62% supported by efficiency gains captured in the quarter. Proceeding to slide 13, we see the figures related to our K-12 operations. Starting with VAS at the top of the slide, we present the 1Q19 numbers classifying editorial expenses in cost of goods sold. Additionally, we exclude the and confidence tax credits that drove down VASTA's SG&A expenditures in 2019 for bearer comparison purposes. Therefore, we see growth of 24% in the quarter's net revenue in line with the 25% increase in ACB we had already reported. EBITDA grows 26%, with a 60 basis point increase in the EBITDA margin as a result of the higher level of efficiency in the operation, even considering the increase in marketing expenses. Saber, in turn, had an increase of 7% in net revenue, with EBITDA up by 44%, reflecting the turnaround we implemented in the vertical, with an expressive gain of EBITDA margin. Finally, let's analyze the results of other business and cognitive consolidated results on slide 14. In the other business segment, we classify editorial expenses, sold in 2019, and disregard the revenue and expenses relating to 1Q20 national textbook program, which normally have an impact in the third and fourth quarters. As a result, the comparison between the segments will not be adequate because of the seasonality of each product. Therefore, Cognos consolidated that revenue was 1.6 billion in the quarter, down 12% within EBITDA of 574 million, down 19%, impacted by protons dropping in revenue in EBITDA, and partially mitigated by the improvement in revenue in EBITDA in Platos, Vasta, and Saber. With this, I finish this section and head it over to our CFO, Jamil Marques, to proceed. Thank you very much, Bruno. Good morning to everyone. Moving on to slide 16, I would like to detail the behavior of accounts receivable or coverage index and the average time of receivables, both in our companies and also on Cogna Consolidated. Looking to our coverage index, it's adequate, especially when we look at the annual comparison, but it's important to highlight that in the Cogna consolidated view that includes other companies, we had an increase of 147 days to 175 days in the average term of receivables. This is a natural trend considering the maturing of our payment plan products. If we analyze the average term of receivables of Cogna excluding payment plans, This is 120 days, which is the same as the five days reported in 1Q19 and two days below what we saw in the fourth quarter of 19. We also see that our accounts receivable, of course, has the impact of Crofton as the most relevant. So let's turn now to slide 17, where we'll discuss those effects. Here, we have made a breakdown between the PS students graduating and dropout, and all products had a change at the end of comparison. In the following slide, I will detail the payment plan products, but first of all, I would like to say that PDA is adequate for all products in line of our coverage index. When we look to out-of-pocket, The level of coverage is consistent with our account receivables and with the level of uncertainty brought about by COVID-19. On the right side of the slide, we see that the average term of receivables follows the maturing curve. And the out-of-pocket average term had an increase of 13 days. And this, of course, reflects the impact of COVID-19, but it has remained stable in the quarterly comparison. reaching the 114 days that we saw in the fourth quarter, 19, and reaching 115 days. And finally, the average number for PS showed an expressive reduction as a result of the timeline of the program reported at 35 days. On slide 14, sorry, 18, considering that we are now breaking down information about tests in more detail, let's discuss the level of provisioning for the product and how it compares to our initial estimate, which pointed to a level of 15% provisioning. If we look to the middle of the column here, we notice that the revenue breakdown between graduating and dropout students, and it's slightly different with 54.7% of our revenue coming from dropouts and 45.3% from graduated students. And from the credit perspective, the profile of the students has deteriorated in relation to what was planned, which was basically half and half. And this is because we have more participation of dropout students with a profile pointing to lower chances of receivables. We also see that the expected losses are better than what we had anticipated at the top part of the chart, we see that the graduating students are slightly better at 22.8% compared to 20%, but we see that the dropout rates are better than what we had predicted. Two-thirds of recovering of those payments. As a result of this, And also considering the graduating and dropout students, the losses for PEPI would be 46.8%. In spite of this, considering the uncertainties we are experiencing because of COVID-19 and the potential impact that this will have on our collection rates, our expectation for recovery of PEPI in the next 12 months would be 0.2, 40.3 in losses, still below the 50% we had predicted earlier. And this reinforces that our provisioning for PEP is adequate, even considering deterioration caused by COVID-19. Now, moving now to slide 19, we will present CAPEX developments, investments in expansion, and cash generation. starting with the left side of the slide, our CAPEX, including investments in expansion, reached $119 million in 2020, equivalent to 7.3% of net revenue, down 21% in the annual comparison once the company finished its project for opening up new units. And what's missing now is only the expansion of said units, current units. With regard to cash generation, in the first quarter, as we know, cash consumption predominates. In 1Q20, we had lower consumption of cash, mainly because of the lower working capital consumption, in addition to the receivables related to PNLD 2020 that we had expected to receive in 2019. It's also important to highlight that with 2 billion cash generation positive as a result of follow-on, we have a very solid cash position to face this time of hardship. And with this, I turn it over now to Rodrigo for his final remarks.