Cogna Educacao S A S/Adr

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Cogna Educação's second quarter 2020 earnings conference call. We would like to inform you that this event is being recorded and that all participants will be in listen-only mode during the company's presentation. After the company's remarks are complete, there will be a question and answer session for analysts and investors. At that time, 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 Educação Investor Relations website at ir.cogna.com.br by clicking on the banner 2Q Webcast. The following presentation is also available to download on the company's website. The following information is available in Brazilian reais in accordance with Brazilian corporate law and Generally Accepted Accounting Principles, BRGAP, which now conform with International Financial Reporting Standards, IFRS, except where otherwise indicated. Before proceeding, let me mention that 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 Cognizant's CEO, Mr. Rodrigo Galindo, who will begin the presentation. You may proceed, Mr. Galindo.

Good morning, everyone. Thank you for participating in today's call to discuss the second quarter 2020. With me, Bruno Jardino, our IR director, Jamil Marques, our finance VP, and the managing directors of each unit, Roberto Valério Croton, Paulo de Tarsio Pleitos, Paulo Serino Saber, and Mario Guilho Vasta. I'd like to begin today's presentation from slide four with an overview about the first half of 2020, where we see a neutralization of quarterly seasonal effects, recurring EBITDA growing except for graduation, CROTN. So Vasta, Saber, and Platus had a good performance, even with the impact of COVID. But Croton was pressured by COVID and the graduation of Fies. Now here we see a positive post-CAPEX revenue in the second quarter 2020. It's a relevant positive performance considering all the pressure on operating results. Solid cash position, adding $3.7 billion in the second quarter 2020 with a long-term debt profile. we will provide further details during the presentation. These 3.7 billion do not yet include the IPO proceeds concluded early this month. In the central portion of slide four, we have a table with net revenue evolution and recurring EBITDA in each unit, plus the behavior of the recurrent EBITDA margin, considering the pro forma view on Croton and Vasta. In Croton, we had a relevant volume impact with the graduation of FIES students. We also had new enrollments and renewals strongly impacted by COVID. And we had to reinforce our provisioning also because of COVID-19. So we had a 25% reduction in net revenue and 43% in recurring EBITDA with a drop in EBITDA margin for Croton. The negative impact of Croton was concentrated in in-person education. And during the presentation, we will talk about the future and how to improve this performance in in-person programs. All the units have had a good performance. We had 23% saber going up, 12% in net revenue, and 23% in recurring EBITDA. Cogna had a drop of 19% because of the impact of Croton and a drop in margins because Croton has a great weight, has a lot of weight. So this is the analysis of the first half of 2020. Three units did very well, but Croton had a negative performance, concentrated in in-person programs. In slide five, I'd like to show you perhaps the most important moment in the digital transformation of the company. So let's focus on this slide showing the company's strategy for the next quarters. For a few years, we have been very clear and transparent in our perception But we are going through a strong digital transformation since 2017. We needed a cultural change, first of all, so that we would have a deeper change in business. In 2017 and 2018 were important years for us to build this new frame of mind. We implemented a cultural change, including technology and business. We provided more agility to our operations and this was essential for us to enter new segments. So we were able to acquire Somus working on K12 and B2C and B2B. So between 2019 and 2020, we came to a second phase of the digital transformation, which was on K12 digitalization, creating the platform concept and working on B2B in K12. What was the result? We were able to build a platform as a service, with a strong demand, and we will talk about this demand, but regardless of the result we had from the IPO or the proceeds of the IPO, the fact is that we now have a platform which helps us provide services to third-party units, help them in their digital transformation, and we have a huge growth potential in K-12. This year, we have a new phase, which is the digitalization of post-secondary. We see a migration of demand towards digital, and this was accelerated by the pandemic. We believe that the changes brought about by the quarantine will not be only circumstantial, but structural. We have overcome the cultural barrier of digital post-secondary studies. Students now see the value, the quality, and the benefits of lower cost and flexibility in digital programs. So that will help us start a new journey of transformation in the company. which would happen naturally, slowly. However, it's been accelerated because of the pandemic. We now view post-secondary in two clear segments that have very different opportunities for us. The digital platform of post-secondary education, and let me talk about that first. So it includes all offers of distance learning for end consumers. So B2C with or without in-person activities using third party centers or our own units. In addition to solutions that provide content and technology to other users. institutions of higher education. We have high operating margins in this operation, low use of fixed assets, low use of working capital. So a strong cash generation and high growth prospects because of the moment we live in digital programs in the country. Our focus here is growth. On the other hand, we have the second segment, which is Krotten in-person programs, including all in-person graduation programs, which will require restructuring. This restructuring has started to adapt to the new market reality. The number of students already show a migration from in-person to digital, and this will be accelerated by the pandemic. The change will be quicker, so we will be even more agile to restructure our operations for this new reality. That will include a reduction in the size of operations, renegotiation of contracts, reduction of units, repositioning our portfolio, focusing on premium programs. focusing on these premium products product programs so in person programs will be these premium um courses so that we will have more cash generation and stronger margins this is a very relevant moment of reorganization in the company and we will provide more information in the future. Now moving on to slide six, we provide some additional details. On the left side of the slide, you can see the digital platform for Undergraduate and graduate programs, including B2C distance learning degrees, that is the offer to our students directly to end consumers in third party centres and also in crotons in person. And this platform also provides B2B2C distance learning degrees and digital services in B2B and B2C models. That is, in addition to digital B2C digital programs, this is a complete service platform for B2B and B2B2C. Now, these services have a growing participation in our net revenue. Last year, 26%, and now this year, 32%. And we believe this growth trend will continue. We'll see more digital in our net revenue. The tickets are smaller, but the share is growing because this platform is growing much faster than in-person activities. And we believe the pandemic will only accelerate this process. Now, we see two great opportunities. So the first one is distance learning. learning degrees B2C, that is our direct offer to end consumers, but we will also accelerate our growth on two fronts. First, the organic growth of our current centres. Since we are migrating students to digital, we will no longer provide all programs in in-person education because students are choosing to migrate to digital. So this is an opportunity for organic growth. The second growth front is the maturation of centers that were implemented a few years ago. So this is already contracted growth. It's natural maturity. And a third lever or front of growth will be new distance learning centres. We now have seven work fronts open to ensure that we will grow in the number of centres. But we also have a second opportunity of growth, which is to strengthen the concept of platform as a service, which was successfully implemented. How do we do that? Offering complete access offering the complete end-to-end solution, distance learning undergraduate and graduate programs to support smaller institutions and also K-12 schools in their digital transformation. Now on the right side, we talk about in-presence activities at Croton. But Croton will also become a distance learning center. And what are the services provided? Groton has a smaller share of the net revenue because the digital platform is growing. So it was 74% in 2019 and it came down to 68% in the first half of 2020. And the trend is that this share will be further reduced because digital is growing faster. Now, here we have some important opportunities. We will restructure our in-person camping, renegotiating contracts, restructuring and unifying units, and also provide more distance learning opportunities. a broader distance learning offer because the digital platform is growing and its revenue share is also growing. The other relevant movement we see is repositioning our in-person portfolio, focusing on premium programs. So in-person activities will be the place for premium programs, more basic programs where we have a reduced demand. We will see this migration towards the digital platform, keeping at Croton the more premium programs. So it makes sense for the company to study potential acquisitions of in-person educational institutions, provided they have premium programs such as medicine. Our goal is to have a premium portfolio for in-person education that is profitable and can generate cash. Today, we see hybrid programs. But the pandemic has actually changed this scenario. We had a positive growth and going from cash consumption to neutrality and with a prospect to have positive cash generation in 2021. Smaller units also suffered because of the reduction of FIES students, but the trend was positive for 2021. However, the pandemic changed the scenario. So students who used to resist digital programs, they now prefer distance learning. That is, the barriers that students had are no longer there. So today it makes more sense to... take these students to help them migrate to digital. So at higher education, we have the digital platform plus in-person premium programs. And these will be working together with a different focus on the digital platform. Growth is the name of the game. And in-person, Croton, we will need to refocus on premium programs. But some of the assumptions will be protected. We shall not lose synergies in the process. Secondly, we will keep the operating capacity using the omni-channel concept that is for customers. It will be transparent, no matter what channels they use. All in-person Croton Kempe will start working as distance learning centres. we are taking advantage of this change to make the most impactful change in higher education, preparing our higher education for this new phase. Slide seven now. we have some news about our operation. Let's go back to the concept of PEP. It was the Special Private Installment Program we set up in 2015 to provide credit, student credit, because FIES had a smaller offer. So that was a transition product from FIES, Public Financing Program of High Volume, And FIAS had that drop, so we needed PEP for this transition because there was a demand for those in-person programs. However, the market has evolved. and commercial processes have also evolved and PEP became less relevant. As you can see on the chart, it came down from 29% of new renewals to estimated 6% in the second half of 2020. So at the moment when PEP was created, it was the only way to provide credit to in-person programs. Today, our portfolio or practically all of the portfolio is also provided as distance learning. So it makes more sense to provide a lower tuition that students can pay for. And for the company, it's also better because although the average ticket is smaller, we have higher margins and we have a reduction in accounts receivable. So facing this scenario, we decided to close down PEP in new enrollments as of 2021. But the students who are currently using PEP will continue to have the product until they graduate. So these two factors have led to discontinue PEP as of 2021. We have an equivalent portfolio in distance learning that we can offer to students so we will not lose these students and also Today, there is a clear acceptance of digital programs by students. And so PEP lost relevance. For this reason, we decided to discontinue PEP as of 2021. Now, slide eight. Let us talk about the IPO, VASTA IPO, which was successfully concluded after one year of intense dedication. We listed 24.9% of the company at NASDAQ. for US$405 million, the largest IPO of a Brazilian education company. The price was $19 above the indicated range between 15.5 and 17.5. And we've had 15 times higher volume than what was offered with 280 orders, generating cash and working as a complete platform of products and services. positioned to support the digital transformation of Brazilian schools. With that, I'll close the first post and give the floor to Bruno Jardim, our IR Director, to talk about finance in the second quarter of 2020.

Thank you, Rodrigo. I would like to turn now to slide 10, where I will present the results of articles Croton and Plantes. Starting with Croton, in line with what we did in the previous quarter and also for comparison purposes, we excluded from two Q20 results the deferred revenue of $35 million from the late re-enrollment curve, besides the complementation for out-of-pocket PDA and PPPMT of the pandemic, $93 million and $229 million, respectively. In this context, net revenue saw a reduction of 27% owing to decrease in the student base and lower on-campus ticket, reflecting FIAS students' graduations and the impact of the pandemic in new enrollments. These effects were partially offset by the increase in the digital students' base, following the re-acceleration of new enrollments. Recurring EBITDA for Croton dropped 36% as a result of the reduction in revenue and dilution of fixed costs and expenses resulting from the substantial reduction in operating and corporate expenses resulting from the company's pandemic emergency plan and savings in marketing expenses. It's important to note that no adjustments to the faculty costs were made in the first half of 2020 in view of the loss of revenue caused by the pandemic. Moving on to Platos, net revenue followed the positive trend shown in 1Q20, growing 8.5%, reflecting the increase in the average ticket and new enrollments, whereas... Recurring EBITDA dropped 3%, impacted by the seasonality of expenses, especially marketing, as we had anticipated last quarter. However, we saw an increase of 23% in recurring EBITDA in the semester with a gain of 4 percentage points. Moving on to slide 11. Let's look at the numbers related to our K-12 operations. Starting with VASA on the top side of the slide, there was a reduction of 24% in net revenue because the billing cycle was moved forward to initial months of the commercial cycle. Additionally, there was a reduction in orders placed by partner schools that had higher dropout rates, mostly in early childhood programs because of the temporary lockdown of schools and also because of the sales lowdown in Liverpool's physical stores. In the semester, Vasta posted growth of 9% in line with what was indicated in Vasta's IPO prospectus. As for subscription revenue, it increased 16% in line with ACB growth for 2020, discounting the 40 million that were announced as a material fact. Similarly, as in the last call, we showed the numbers of 2019, considering editorial expenses and COGS. And we also excluded the provisions for variable compensation in relation to the numbers of 2020. We excluded some extraordinary impacts. such as the investments to face the current moment, the INSS expenses, and the adjustment relating to our e-commerce. So in the pro forma basis, there was an increase of 10% in recurring EBITDA. And moving to page 38, we see a comparison of the numbers shown with the VASTA numbers and... In the second quarter 2020, Saber posted a decrease of 12% in its net revenue coming from the impacts of the pandemic, especially in freshman years in the counter shift. And also there was the renewal, non-renewal of two contracts besides the revenue reversal. There was an increase of 34% in recurring EBITDA and the reduction of costs and the emergency measures taken during the quarter. Finally, moving to slide 12, let's analyze the results of other businesses and consolidated Cogna results. In the segment of others, we classify editorial expenses as cost of goods sold the absence of revenues coming from the national textbook program also was detrimental to the comparison. Considering all the effects, For Cogna consolidated results, we see a decline of net revenue in EBITDA in this quarter. This was the impact of the Croton vertical and also the seasonality that's different in VASA. Year-to-date, we saw a reduction of 19% in net revenue and 33% in recurring EBITDA. With this, I close this session. I invite our CFO, Jamil Marques, to continue. Thank you. Moving on to slide 14, I would like to give you some details on accounts receivable coverage ratio and the average term of receivables of our companies together with Cogna consolidated results. As we can see, we have adequate coverage ratios and average term of receivables under control for each operation. The increase of eight days that we see in Cogna in Cogna Consolidated comes from Croton, and this is something I would like to detail in slide 15. Moving on to slide 15 to the left side of the slide, we've broken down the numbers between payment plans out of pocket and FIES students, making it clear that all products had an increase in coverage ratio in the annual comparison. During this quarter, we observed a slight improvement in timely payments, which generated cash in the quarter. However, late payments deteriorated significantly, leading to a need to make a disproportionate increase of out-of-pocket PDA. also to face the aging of the receivables portfolio because the older the debt, the higher need for coverage for losses. So if we make a comparison, The PDA for out-of-pocket jumped from 16.1 in first quarter 2020 to 24.4 into Q20. And in the annual comparison, the increase was also significant. However, it's important to note that the reduction was above 20% in net revenue. And this, of course, impacts this indicator. If we look at the coverage ratio in counts receivables for out-of-pocket, this indicator reached 32.2% in 2Q20, a slight increase in comparison to 31.6% in the first quarter 20. And more relevant increase in relation to Q19 with 17.1%. Considering the payment plan students, the worsening of the payment in delay and also the increase in dropout rates considered also in the framework of a long recovery period after the pandemic, led us to revise the premises for the coverage for PPP and PMT, anticipating a higher participation of dropouts and also deterioration in the recovery of those dropout students. As a result, we increased PDA for those products to 58% over the receivables balance. or over the total revenue adjusted to net present value. And this created an impact in accounting of around 229 million. And finally, to the right of the side, we see that the payment plans average time of receivables follows the expected maturity with a reduction of 6% in the annual comparison, reflecting the increase in provisioning. Now, turning to slide 16, we take a look at the evolution of CAPEX investments and cash generation. Starting with the left side of the slide, CAPEX and investments in expansion totaled $89 million in the quarter, representing 6.5% of net revenue with a reduction of 3.4 percentage points in the annual comparison since the company closed the project for opening new units. And now all that's needed is to expand new units. It's important to remember that these results also had the impact of the action plan because of the pandemic that led us to revise some of the investments that were not considered sustainable for the business. Now, going to the analysis of cash generation and not considering the receivables of the amounts from the escrow account related to the national textbook program of 2Q20. We had cash generation after CAPEX and investments of 57 million in 2Q20. This is a very relevant and positive result considering the drop in EBITDA that reflects a lower consumption of working capital. Finally, let's turn to indebtedness in the quarter, moving to slide 17. On the left side of the slide, we show our solid cash position and leverage in the quarter with 3.7 billion in cash as a benefit of the closing of the three-fourths of the escrow account of Somos in June. But still, we are not considering the... remainder of this escrow account. To the right side of the slide, we see the amortization schedule and our next disbursement will be due only in 2021 August. With this, I close this part of the presentation. I invite Rodrigo for his final considerations.