Cogna Educacao S A S/Adr

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Cogna's earnings conference call for the first quarter 2023. We would like to remind you that this meeting is being recorded and all participants will be in listen-only mode during the presentation. Later, we'll start the Q&A, and at that time, further instructions will be provided. Should any of you require assistance during the call, please ask for assistance from an operator by pressing star zero. This is also being broadcast live via a webcast and can be accessed at the address ri.cogna.com.br where you will also find the respective presentation. you will be responsible for changing the slides. You can replay the event right after it's closed. And you can also submit via the website questions for Cogna that will be answered right after the end of the conference. Before proceeding, I would like to remind you that any statements that may be made during this conference call relative to the business outlook of Cogna Projections, operating and financial targets are based on the beliefs and premises of the management of the company, as well as on information currently available. Future considerations are not guarantees of performance as they involve risks, uncertainties and premises, and they refer to future events that depend on circumstances that may or may not occur. Investors and analysts should understand that general conditions, industry conditions, and other factors may affect Cogna's future results and lead to results that differ materially from those expressed in such forward-looking statements. With this, I would like to turn it over to Mr. Roberto Valerio Cogna, CEO, who will start the presentation. You may proceed, sir.

Good morning, everyone. Thank you for participating in today's conference to discuss results we believe are excellent in the first quarter of 2023. With me today, Federico Villa, our Finance VP, Guilherme Melga, VASTA CEO, Eduardo Von Zack, our IR and Corporate Finance Director. This call will last approximately one hour, 40 minutes of our presentation, and then a 20-minute Q&A session. As I mentioned, we believe the first quarter has posted excellent results. It is our best quarter in the last four years. We feel happy about the results and excited about the prospects for 2023. All our three business units have had a growing revenue. Now, specifically about Croton, Croton had an excellent quarter. As I mentioned, in 2022, and the market could actually see that Croton had a growing EBITDA, and growing profitability, although the revenue was not yet growing in the first and second quarters. And I mentioned as soon as revenue began to grow, the results would be even better. And this first quarter is clearly showing that higher revenues have helped our results in EBITDA and also in cash generation. But specifically, I'd like to mention that Carleton first quarter had a 15% growth in revenue sustained by a larger student base. This is our fourth quarter of consecutive growth. the eighth quarter when we've had recurring EBITDA growth, 23%. We heard a question about expansion of margin. Well, we have delivered 2.5 percentage points in recurring EBITDA margin. I will give you more color on this. But even gross margin based on operating leverage has improved. All of that sustained by a strong growth, a 10% growth, in our student base. Last year, we celebrated 1 million students. Well, now in this quarter, we're celebrating 1.2 million students. 1,128,000 undergraduate and 75,000 graduate students. So 1.2 million students. And our intake is up 4.2% in volume. for almost three years now, but it is important to grow revenue in the intake cycle because if revenue grows and we have a quality intake, we ensure growth in the future. So this 15% growth in net revenue is showing that our student base is growing with quality. That's why we have better results. Now, the great highlight looking at each segment or each product, we delivered freshmen ticket growth. I don't remember when companies in our industry have managed to do that. Well, we have delivered freshmen tickets increase. So it shows that we have an edge in the competition and we see the possibility for the market to resume growth. Now, for graduate students, we have grown 27% in new enrollments, and the student base is up 20%. Dropout rates remain under control, and we've had a reduction of 1.1 percentage points, which is great, and the ADA which is our proxy for on-time payments. So the allocation for doubtful accounts is down 11.13% compared to 13% last year of the net revenue. So we've been able to reduce the PDA over net revenue ratio. Now, CrotonMed, one of our growth avenues, the medical programs is... growing 35% in revenue and 62% in recurring EBITDA. Now VASTA also had great results, growing 17% in the cycle. I mean, if you add the last quarter and this quarter, this result is in line with our guidance. VASTA has delivered 65% of the ACV guidance for this year. So we have great outlook for VASTA performance. Now the subscription revenue has grown 17.7%, which was part of our strategy, growing in complementary solutions. We've grown 44% in complementary solutions. in this quarter when compared to the same quarter last year. Now EBITDA, recurring EBITDA up 12.2%, great growth despite the pressure. We've had a higher cost of paper and printing. And so We also have a provision because there's a retailer in a judicial recovery process. We've had to make a higher provision for the accounts receivable of this retailer. And you see that being reflected. Now, in terms of quality, we've had a large number of students approved in the best universities in Brazil. At USP, up 27%, 12% up for UNASP and up also in UNICAMP. We are leaders in the SISU exam, showing the top quality of our products and the positive impact in the lives of our students. Now, looking at the future, we begin operations with a bilingual premium franchise. with a good performance because we have included elements from Anglo, which is a very strong brand, and Meliga will talk a little bit about that, the Anglo Start, which opens up a new avenue for Vasta operations. Second highlight, Vasta is now working with the public sector, providing our solutions Obviously, this segment is much bigger, you know, five times more students than the private sector. So not only do we have a great performance in our core business, but we now have these two future possibilities that may have a good impact in the future. Now, talking about Cogna, because all business units are doing well, including Saber, that had a great result in the first quarter. Cogna had net revenue growing 13%, also recurring EBITDA up 12% for the eighth consecutive quarter, showing consistency and all business units contributing positively. Our OCG post-Gapex up 27%, which is an increase of 5.8 percentage points in recurring EBITDA conversion. Now, in closing, talking about leverage, We've reduced our leverage. We're now at 2.03 times over EBITDA and the covenants have a threshold of three times. So we are in a comfortable position. All our initiatives of liability management together with the certainty of cash generation because of the very good results from our business units we have we did a buyback for one billion of our debt. This buyback has already been concluded with gains of 10 million reals because we were able to buy back below par, showing our strength and our confidence in terms of cash generation. So as regards debt, This is an important topic. We follow this number weekly, but we feel very confident that this number is under control and we do not have any points of attention for 2025. With that, I will move on to slide five to talk about our student intake cycle. So the volume of student intake is growing, but look at the average ticket in all segments. 100% on-site up, premium distance learning also growing, and 100% online, which is, of course, the most competitive segment, remains stable, which is good news. Let me go back to say that more important than growing volume, we want to grow revenue year after year. as we have growing revenue and we've had that 15 higher revenue for croton which proves our strategy is correct and we've been able to pursue this strategy for the last three years moving on to the next slide talking about our student base a 10 growth I'd like to highlight we're growing on high on-site attendance and we're also growing in low on-site attendance. That is, we're growing in all segments. You can see the dropout rate is down, especially in high on-site attendance. When you look at low on-site attendance, there is pressure because as we have a large number of freshmen that has an impact on the dropout rate. Let me highlight, this is the seventh quarter in a row when we've had student-based growth. Last year, we celebrated 1 million students. Now we are celebrating 1.2 million students if we add graduate students. Seven consecutive quarters of growth. So it will lead us to more revenue growth. the new students have a higher average ticket so we feel confident these are top quality students we have a number of gateways the students have to pay their bills they have to sign their contracts they have to show continuity before they are recognized as a student so we feel confident that there will be growth in the near future now slide seven I have spoken about the 15% growth of our net revenue year on year. And this is because we are growing in student intake, we are growing in re-enrollments, and we have greater efficiency in discounts. So the credit quality of our students has improved. we are a bit harder in the renegotiations to improve the quality of our student base but look at this chart showing the evolution of the net revenue in the first beginning in the first quarter of 2021 Until now, until Q1-23, there is a steady growth, as we mentioned in the past. And talking about the second quarter of 2023, it's coming on strong. We believe we will have a double-digit growth again for the fourth consecutive quarter. Now, slide eight is really interesting. I'd like to dedicate some time to it. If you remember, as we closed last year in the fourth quarter, we received a few questions about opportunities. I mean, where could Droughton improve its results further? And we mentioned we could improve gross margin, which is a result of operating leverage. So that's fixed cost versus revenue of 100% online students for every 100 additional rails in revenue. We add very few rails in cost. So look at the gross revenue, two percentage points up on digital, on medical programs. Corporate expense, we've been able to reduce, you know, as proportion as a ratio of net revenue. Higher operating expenses, of course, because we have more on-site activities, more marketing investments, basically related to the strategy of consolidating our brands. Consolidating in a single brand makes sense for us to invest more in marketing. And we already had a very positive ratio. We thought we had room to increase marketing expenses. And this is what you see on the chart. We also spoke about this opportunity to improve our provision for doubtful accounts because of higher efficiency, reduction of default rate. And here it is. So all these three lines, I mean, especially these two lines, total cost, So, gross margin and PDA as a ratio of net revenue, we mentioned these were the greatest opportunities, and now we can show we have delivered these results. This process we believe will continue, and the result so far has been a 2.5 percentage points gross margin gain, which we believe is an excellent result now slide nine as a result of all of these factors it bit up 23 and the margin is no longer 33.9 it is now 36.4 you know as a result of the aspects i've mentioned On slide 10, you always ask us about campus productivity. Well, this chart is an answer to this question. It's showing our productivity between the first quarter of 2020 and now the first quarter of 2023. For high attendance students, that is the students that really use our classrooms, our laboratories, we had 1,949 students per campus and today 2,402, so a 23% productivity gain. This is because we've had a 10% growth in student base, but also because we shut down a few hubs. We used to have 176 hubs, today 102 hubs, and that has helped us improve our productivity. Rental costs are relevant for us, so we are paying close attention to our rental contracts. Whenever we have an opportunity to renegotiate the rental or make a change and streamline our campuses to improve results. Of course, it does not impact EBITDA because of FRS but it is part of our strategy to continue to review the cost of campus operations. Now slide 11 talking about the average collection period or ACP. This is a reflexive default. Our default rates are improving so the average collection period is coming down. It was 72 days in the first quarter of 2021. And now in the first quarter of 2023, it's 45 days. And the coverage ratio remains steady, as you can see. Now moving on to slide 12, Cropton Med. The highlights here, we've had a great result from Cropton Med up 35% revenue, up 62% EBITDA. We've had margin gains. And we have already mentioned that after we had the spin-off of Croton operation, as we now have the Croton Med, we can have a different view, a dedicated team, and we mentioned that we would find opportunities to gain efficiency. And this is the result. Now you have efficiency in the negotiation of re-enrollments. Of course these students have a high purchasing power and their commercial conditions was more similar to the average of Groton. So now we are tapping this opportunity for our medical seats. We still have the Ponta Bora unit which will start operations in 2024, in addition to the fact that we've been able to pass on the inflation rate to both freshmen as well as students. So when you can do that, I mean, not only in medical programs, but we've been able to do that in other health care programs. We've had a one-off effect of V.S. contracts because it was in the fourth quarter of 2022 and it was finally posted now. But it's not relevant to the point of making a difference. I mean, the operating result has created this higher margin and higher EBITDA. Now, let me give the floor to Guilherme Malaga, VASTA CEO, to talk about VASTA results.

Thank you very much, Roberto. Good morning to all. I would like to start with slide 14 to discuss Vasta's revenue in the first quarter. We had 403 million with an increase of 16.6%. And we would like to focus on the fourth quarter plus the first quarter because this better reflects our performance. in accumulated figures, we reached growth of 16.6%. Now decomposing this number, the total of subscription was 801 million, a growth of 17%. With this, the result of subscription reached 703 million, up 28%, which is the focus of our strategy. And in the subscription products, the highlight goes to complementary products, which as Roberto mentioned, grew 44% and they are central to our growth strategy. Now, moving on to slide 15, we'll give you an overview of our costs and expenses at Fastas, also considering the cycle that was an increase of 19.1% in costs and expenses driven by SG&A that grew 20% because of the price increases in paper and printing. I think it's important to highlight as well is the provision for DALTO accounts plus equity that grew 2.5%. And the justification for that is that There was PDA that was extraordinary because of the judicial recovery of a large retailer and also our investment in the equity in Duke Bank that didn't exist before. So the combination of these two factors explain our growth. But we had productivity in the operating expenses, corporate expenses, and also expenses with marketing and sales. there the concentration will start from Q2 to Q4. Going to slide 16, in EBITDA, we reached a total in the cycle of 323 million, 12.2% up in the comparison with the previous cycle. And even with the impact of costs in paper and printing, our EBITDA continues to grow thanks to the recovery of our business after COVID. Now I would like to make some highlights of our operations. This year, we started off with two major growth projects. One of them is Start Anglo that we are now announcing at BED. It's our franchise of bilingual schools with management systems and also marketing systems with support for enrollments and financial management. It's a full stop solution for the business entrepreneurs in the area of high performance bilingualism in association with the Anglo brand. And then we have our return to the public sector. As you know, this area has five times as many students as the private sector and VASA could not afford to be away from this market with our current portfolio. So we segmented this market and identified 1.9 billion of addressable market. And this will be our focus in the first year of operations. and operations that is already in go-to-market phase and that we see in a very positive light. So for the rest of the year, we continue to be very optimistic with the performance we had in 2023 and with the building of the commercial cycle and the prospects for growth in 2024. With this, I close Vasta's presentation. I turn it over to Fred Villa, who will give you the results on Sabir. Good morning, everyone. I'll start speaking about Saber in a brief presentation. We are now on slide 18. Just to remind everyone, Saber comprehends the National Textbook Program, Red Balloon Sets and other initiatives. So we start on slide 18. Net revenue grew 31% with good performance in all of Saber operations. And we were able to capture in the first quarter also the larger part of the purchasing cycle in the national textbook program, which is making us feel optimistic for the next quarters. In terms of recurring EBITDA, Saber grew 7.3% due to the increase in net revenue, which offset the decrease in the recurring EBITDA margin. because there was a very strong increase in paper and printing costs amounting to 26% approximately. So to close, well, we now move on to Cogna, as Roberto mentioned before, when he, and also Malaga explaining Vasta, and I spoke about Saber. Our three units grew, so in Vasta, growth 5.1, Sabir 31%, and Croton 14.9% in growth. So all of these units, when summed, led to growth incognito of 13% and of recurring EBITDA growth of 12.6%. The growth, as we said before, growth of revenue and also operating efficiencies in our business units make this effect very positive for Cognam. Advancing to slide 21, we turn to leverage and indebtedness. This is a very important topic for the organization. And what we want to demonstrate to you is that leverage had been constant in the last four quarters. In this quarter, we are down to 2.5%. or three times, considering that our covenant is at three times. So we were able to reduce net debt in 0.5% for 17 million BRL. And additionally, we are reducing the average cost of new intake and funding. So this is a very important matter, and it's only a matter of concern because the rate interest rate is the leak which is high but if you look to the the curve you see that it's slanting downwards as of the fourth quarter okay now turning to slide 22 the strong uh revenue generation and also improvements in a gross margin and a bit led to Post CAPEX operating cash generation of 27.4% in 1Q23, reaching 227 million, with conversion of recurring beta into OCG of 15.2%. So this growth reflects operating leverage and revenue quality gains at Croton. And in Saber also, this reflects the longer purchasing cycle we were able to capture. moving on to the final part of my presentation on still speaking about cash and indebtedness in the first quarter we raised 500 million brl we amortize approximately 1.4 billion brl so we repurchased the principal and paid off the interest of this debt that we wouldn't pay this quarter, but we moved this payment forward. And we also have gains of approximately 10 million BRL in the quarter. In an incentive line, we've raised 85 million at an average cost of 63% of the interbank interest rate. combination of all of these actions and with our robust cash generation, we were able to meet our financial requirements for 2023 and there is no more need for raising more funding. Now, speaking of net cash generation that was negative at 625 million BRL, it's important to say that here we had amortizations. I had repurchase of one in addition to some payments of acquisitions and stock repurchase. All of this had an impact in net cash, but we're still very excited. And this is an affair that's being handled by the financial department together with the senior management of the company. With this, I turn it over back to Roberto Valeri for his final remarks. Thank you. Thank you very much. So now on slide 24, final considerations, general messages. Croton continues to make significant progress both in intake, average tickets, and this is reflected also in the increase of our student base. We are very optimistic in relation to the cycle that's starting now because we consolidated some brands in Anhanguera. And by analyzing Google searches, we see that there is higher interest and more desirability associated with enrolling enrollments in our brands. And Anhanguera is up in the searches 37%. So we are now starting the second cycle with a very well aligned strategy, concentration in a single brand, more investment, in marketing, which is giving us more traction. And this is just the start of the funnel. We are now creating leads and they're going to go into our funnel of conversion. Just to explain why we're feeling more optimistic about the cycle and Crofton's results. We have mentioned that there are opportunities for improvement in margins. and profitability, we continue to believe that primary margins can improve thanks to operating leverage as we have a wider base of online and part-time on-campus courses. This will improve. We also have opportunities for efficiency gains in our own operations. So actually, this creates in us the trust that's recurring a bit that will continue to be positive as it is now. As for cash generation, I think that the streamlining of the campus portfolios help us also reduce maintenance capex. We have long-term agreements And as the lease agreements expire, we'll try to capture these savings because leases are a significant expense. So finally, just to close my remarks about Croton, the first six months of an operation are determinant for the result of the year. So we have had a good six months and we're feeling optimistic about the future. Now, in relation to Vasta, considering the products will continue to grow, as Malika mentioned, but we're also feeling excited. It's the start of a cycle with the launch of the bilingual franchise that has a longer maturity cycle because, of course, we have to convert and make the franchise agreements. And the government, of course, we believe that the results will come in sooner. We believe that paper and printing costs, while the increase is something that is just a circumstance after COVID, but even with this pressure, we were able to keep our margins healthy and improve our results. We are having the BAT Brazil trade fair, which is the most important one for K-12 education. We were there showcasing our products massively and the reactions of our customer base was very positive. And as a consequence of that, Cogna, we are very optimistic about the fact that both Croton and Vasta are going well. And also because Saber has the bulk of its results concentrated on the first quarter because of the national textbook program. And we know that there will be large repurchase operations this year. And this gives us the confidence that the results for Saber will be highly positive. And by the way, all of the businesses comprised by Saber at Red Balloon and sets, et cetera, they're smaller operations, but we see this segment as very, very positive. And since we operate in different segments, we can be this, we believe that 2023 is going to be a good year for us. Thank you. We're now, we can open for questions. Ladies and gentlemen, we will now start the Q&A. To ask a question, please press star one. To remove your question from the line, please press star two. Our first question is from Marcelo Santos JP Morgan.