Cogna Educacao S A S/Adr

Good day, everyone. Thank you for waiting. Welcome to Cogna Education's second quarter 2023 earnings conference call. We'd like to inform you this is being recorded and all participants will be in listen-only mode during the company's presentation. After the company's remark, we'll begin a Q&A session. At that time, further instructions will be given. If you need assistance during the SCAW, please press star zero to reach the operator. This call is streamed live via webcast and may be accessed on ir.cogna.com.br, where you will also find the presentation available for download. The event replay will be available after closing the call. Let me remind you that you may register on the website to ask questions to Cogna, which will be answered after the conference by Cogna IR team. Now, before proceeding, let me mention that forward-looking statements that may be made during this call relative to Cogna's business perspectives, projections, operating and financial goals are based on the beliefs and assumptions of Cogna management and on information currently available to the company. They involve risks and there are no guarantee of performance. They involve risks and certainties and assumptions. And therefore they depend on circumstances that may or may not occur. Investors and analysts should understand that general economic conditions, industry conditions and other operating factors may also affect Cogna future results. and may cause results to differ materially from those expressed in such forward-looking statements. Now, let me turn the conference over to Cogna's CEO, Mr. Roberto Valerio, who will begin the presentation. Mr. Valerio, you may begin the conference. Good morning, everyone. Thank you for joining us in this call to discuss our results in the second quarter of 23. With me today, Federico Vila, our Finance VP, Guilherme Malaga, Vasta CEO, and Radovasa, our IFO and IRO. This call will last approximately 60 minutes. We'll have 40 minutes of a company presentation and then 20 minutes for a Q&A session. I'd like to begin our management is extremely happy with the results, not only because of the numbers delivered in this first semester, but because of the consistency of results. ever since we had our restructuring that we began in 2020. In this quarter specifically, our growth in revenue, EBITDA, and cash generation are very clear and driven by all three business units, Groton, Vasta, and Sabir. All three business units are growing revenue, EBITDA, and cash generation. We are growing steadily, we have business consistency, and all three business units are driving robust results. On slide three, we have a few highlights of operations, beginning from Crota, net revenue reached $1,800 million in the first semester of 2023. which means a 13.1% growth versus last year. This is the fourth semester in a row that we're growing net revenue double digit. So we have to be happy as we look at these results and very optimistic as we look into the future. Of course, our revenue has been driven by a number of indicators. Our student base is growing almost 6%, 5.8% in this semester. It's the eighth consecutive quarter of growth, and we're growing on both segments of students. high on-site attendance as well as low on-site attendance. The average ticket is also growing as we look at all four categories, you know, on-site attendance, premium, on-distance premium, and distance learning. They're all growing. We're going to talk about that later on. So as we have a higher ticket and a bigger, a larger student base, of course, we are growing. I'd like to talk about the high onsite attendance average ticket growing 10%. So we are focusing on high lifetime value programs, such as law and medical and a few other. Now, the third thing is about operating leverage at Groton. We are also improving. We've improved three percentage points on the gross margin this quarter. We spoke about that on Cogna Day last December. This is the result of having a focus on hybrid and digital programs. So our cost is more fixed than variable. So most of the revenue growth translates into a higher gross margin. It's very clear this quarter, also in previous quarters, we had an improvement, but now three percentage points of gross margin increase. Now recurring EBITDA reached $689.9 million, a 15% growth versus the first half of 2022. And if we compare the quarters, again, more than 10% growth. So after I'm going to talk a bit more about specific lines such as BDA, marketing, general expenses, but it's important to say that our strategy specifically Specifically thinking about marketing, I mean, I've spoken about that three quarters ago that we would resume investment. Although we have increased our margin expenses, the EBITDA margin remains stable. The other highlight is the PDA to net revenue rate. We have said our strategy was to grow revenue, but revenue with quality. So bringing out of pocket students that have a lower default risk. And we have improved our PDA to net revenue ratio, reducing from 13 down to 11.2%. So we are gaining margin here too. As we look at expenses, we've had higher expenses in marketing compared to previous quarters. We've spoken about our strategy to consolidate Vivar and Pitágoras in a single national brand, which is Anhanguera. We are paying for the transition cost, but now we will improve Anganguera awareness so it becomes a reference. And so in the next quarters, we will continue to invest in marketing to strengthen this brand. Now, Crofton, Great increase in net revenue in Cropton Med, more than 27% and recurring EBITDA growing more than 50% in the second Q of 23. In FOSTA, we're also very happy with the results. We've had a growth of more than 20%, actually 22% in the 2023 cycle compared to 2022. We've reached 82.3% of the ACV guidance for the year and we still have a quarter ahead of us. So we are in line with our guidance. And the highlight, as we've seen in previous quarters, we've had an important growth in subscription revenue, which is recurring revenue, growing 18%. in this quarter. And we want to highlight also complementary solutions that have grown by 45% this quarter, which is very relevant. It shows we have a great capacity to penetrate in these programs. solutions to teach English, social, emotional programs, robotics. So we're very optimistic on this front. Recurring EBITDA grew 22%, comparing both cycles. And an important highlight is new business, A new business line in Vasta, we spoke about that in the last quarter. We closed two deals for Vasta. So the franchise of Anglo Start, which is bilingual performance franchise, we will begin to harvest results soon. A little bit further on with the franchised schools and another business line that has brought 40 million revenue this quarter are our educational solutions B2G for state and city governments. Let me mention, Melega is going to talk more about this. But I wanted to highlight that Vasta and Saber, they have complementary products because Saber has a broad commercial team that sells the national book and text program they have access to city and state governments and government owned schools so and this is a broad presence that we have now vasta focuses more on state and large city governments providing customized solutions that is we have two different approaches And the portfolios are complementary, which we believe is very good because we are making the most of Cogna capacity to grow B2G in both Sabir and Vasta. Now, Cogna, the results in the second quarter 2023 have been very positive. It's the ninth consecutive quarter of strong recurring EBITDA, net revenue growing 20%. 16% in the quarter. Same thing about recovering EBITDA, growing 20% in the quarter. We always say that our priority here is operating cash generation. It has grown 52% year on year. So that's a relevant improvement in terms of EBITDA conversion into cash. 8.4 percentage points. Adjusted net profit this quarter totaled $11 million, 130% higher than in the second quarter of 2022. We continue to work so that we can grow more in net income, which together with cash generation, these are our two main goals. The next highlight is about our leverage. It has been reduced further. We're now at 1.98 times EBITDA, which is our lowest leverage since the fourth Q of 2020. We said we were confident in the company's cash generation that we would continue to reduce leverage and we remain optimistic as we look at our cash generation. So we'll continue to reduce leverage. Our team continues focused on liability management. We were the first to use FINEP financing as we announced in the last quarter. And now Cogna again is the first in the education industry to issue ESG labeled debentures with a social bias. This is a 500 million dead at CDI plus 1.9%, which improves the cost of our funding. And the term is 24 months. Let me reinforce that for the company. We still want to further reduce leverage. Now, on slide five, I think I have spoken about our student-based growth growing 5.8%. And it's balanced growth looking at high on-site attendance and low on-site attendance. High on-site growing a bit more, 7%. and low on-site attendance growing 5.1%. This is consistent growth. Percentage of freshmen is growing in the student base. So that is good to reduce dropout. We are very rigorous in terms of dropout. When we see the student is not engaged, we recognize that as a dropout. And so we no longer include that revenue stream. So that helps us have a very engaged student base. What you do not see in these numbers, I'd like to talk about postgraduate programs. Very consistent results. We're growing double digit. in the last few quarters. And here again, we grew 20% the student base in postgraduate in the second quarter 2023. The numbers are not here. Here it's only undergraduate. Now, if we move on to slide six, average ticket, also on-site attendance growing 9%, 100% digital going up 6.8%. When you look at the overall mix, I mean, the first chart that talks about high on-site attendance, the average ticket, is down 0.6 percent it's influenced by the mix because we have students on high on-site attendance who are more on premium programs so premium programs influence the average ticket bringing that down but if you compare premium to premium there is a slight drop of four percent and the question is why we have three segments going up and only the premium segment is coming down the explanation is easy premium that is basically engineering programs and healthcare programs there are a number of new schools on physiotherapies and nursing, so many new schools, and they are entering the market with very low prices. We're using all our intelligence. We have to modulate our pricing not to lose market share, but we feel pressure on the premium segment. Now, the highlights, although this market is very competitive, we are growing the average ticket on low on-site attendance by 6%. And if you look at the number of students, we're growing 4.8%. So now we have this growth of 10.7%. So we're always talking about our strategy is to grow revenue. And this chart, you can see very clearly, we're growing revenue by 650 million up to 719 million. This is low on-site attendance. As you know, most of this cost is fixed. And it's low cost if you want to add more students. So the revenue growth translates into EBITDA. And that's what you see in our gross margin. Now, if you look at high onsite attendance, the average ticket is stable, but the number of students is growing. so this revenue growth is very positive it means we have more students in every class and so we did our team did very good work on average tickets this result it shows consistent work not only this quarter but in previous quarters as well now looking at slide seven revenue I think I have spoken about what is driving revenue, almost 12% growth in this quarter, 13% growth in the semester, ticket going up. Of course, we have a higher net revenue, but we always want to show you the evolution of our net revenue quarter by quarter. So you can see this is the fourth quarter of double-digit net revenue growth, showing the quality of our work. On slide eight, showing how we've gained efficiency and where we are investing more. On the right hand side, you can see total cost as a percentage of net revenue came down from 22 to 18%. It's a three percentage points improvement, which is operating efficiency, operating leverage, And this is a mix of hybrid and 100% digital programs. Now, corporate expense, relatively stable, down 0.3 percentage points. Operating expenses have had an impact. Some items, you know, first, the collective bargaining agreement of employees that was concentrated here, and also the new long-term incentive program for executives, approximately 75 people who are now our shareholders and this was a program that was approved in the general shareholders agreement and it continues up to 2027. Now the highlight here will be marketing expenses. We have said in previous quarters that we were going to resume marketing investment because efficiency was improving. We already have some of the best numbers on the market. And with that, as we have centralized these brands under national Anhanguera brand, we invested in marketing to make Anhanguera brand even more relevant. So that's why we decided to invest in marketing. We said we were going to do that it was already our plan now it's important to say we are using marketing expenses enough to build our future so that we have future growth but without compromising our margins if you look at PDA it's also improved by two percentage points and we've kept a stable margin. The conclusion is that the management of the company is piloting this on fine-tuning. We see we are gaining margin in direct cost in PDA. We are trying to use that to invest in marketing expenses because that is building our future. we are investing more in margin in in marketing but we're not losing a bit down margin it has remained stable a little bit better on this semester well just a bit lower in this quarter you know we've kept it stable so this is what i wanted to highlight on slide nine that is our average collection period comparing the second quarter of 22 to the second quarter of 23 we've reduced by seven days the average collection period growing in student base but we are improving our receivables and the average collection period although we know the overall scenario is very challenging but we keep accounts receivable quite healthy. You can see the coverage ratio is well balanced and we feel happy about what we have achieved. As we look into the future, we're also very optimistic on this line. Moving on to slide 10, I think it is a result of everything I have said, almost 10% growth in recurring EBITDA. in this quarter, 15% EBITDA growth in the first half of the year. As we look into the future, we believe that Croton has all the necessary tools to continue to show these very strong results. If we move on to slide 11, that's something we always like to talk about. This is a question we often hear from you it is about the productivity of our campuses as you know we've restructured our campuses in this quarter we did not shut down any campus we remain with the same number of 112 units but we are being able to use our spaces better and we're increasing productivities. That is the number of students per campus. If we look, I mean, from the beginning of the restructuring process, we've improved our productivity by 22%. When you reduce the number of campuses, obviously you also reduce expenses with rental and other expenses. So it does not really impact EBITDA, but it impacts our cash. That is why we're also improving cash generation. If we move on to slide 12, Croton Med, we've said Croton Med would be an avenue for growth together with digital programs and our VASTA platform strategy. Croton Med had a very important revenue growth, 27.7% this quarter, more than 30% in the semester. And this growth comes from the maturing of our medical programs, especially in Bacabal, Eunapolis and Codó. We have already built and it's ready. We will receive the visit of the government authority to approve Ponta Porã Unit. So we believe in 2024, we will already begin operations in Ponta Porã, which will help us improve the revenue. The average ticket in this segment, as you know, we can always transfer the inflation to freshmen and senior students. And specifically about Crofton Med, the medical programs of Croton Med. These are premium regional brands. And we have been able, as I said, to transfer inflation to the students also in the other programs. Now about the margin, the margin continues to grow. be increased. We had 53% margin in the semester, 54% in the quarter. This is because we have unified the academic model. We made some process improvements and system improvements, which has improved our efficiency, so we've gained margin. With that, I will close Krotten, and let me now give the floor to Guilherme Meliga. He will talk a little bit about K-12.

Thank you, Roberto. I'll start on slide 14, discussing net revenue. Let's remember that the second quarter usually is lower. The concentration of revenue in our business occurs in the fourth and first quarters, but in the second quarter, we've reached 271 million of revenue, up 43% versus the second quarter last year. Here we also have the recognition of 40 million from the B2G segment. Excluding this revenue, we would have growth of 21% in our private core business. Now looking at the chart below that, which shows the commercial cycle, VASTA's commercial cycle from the fourth quarter to the second quarter. This year, we reached $1,179,000,000 in sales, that is 21.7% higher than the 22 cycle. In the next slide, we take a look at the revenue in this cycle, starting with the lower charge, and breaking down 1 billion 179. Here we have 1 million or 12 of subscription services, 126 million from non-subscription and the new segment B2G of 40 million. With this, we reach growth of 27.1%. Looking at our core in the graph above 1 million 12 can be broken down in 757 million coming from our learning systems up 18.6 percent in core content and a very substantial growth in our complementary solutions business reaching almost 45 percent growth totaling 153 million in this cycle comprising three quarters Then we have 101 million on par, very close to our guidance of 20%. And we are expecting that all of this will be recognized by the end of the quarter. Now, B2G. B2G and what led us to go into this market. Here, B2G, as you know, has 31 million students. It's five times as big as the private market. And we had, of course, to identify this opportunity, and we... we try to identify the market that would provide the best fit for our solutions. This represents 87 billion BRL. And when we believe that we can change more quickly, we are starting to prioritize of this 90 million BRL. became a reality in this first go-to-market. We closed the deal with the state of Pará to help students in the fifth grade with materials focused on remedial work in Portuguese and large-scale evaluations, additional platform content, and pedagogical support. So it's an ecosystem focused in the improvement of those grades. It was a spot contract, and we worked with them in the second quarter. What are we doing to market to B2G? We have a senior team that is focused on relationships with secretaries of education, mayors and governors. We know how important it is to relate to this audience and customize solutions, as Roberto said. It's a very different way of serving this market. It's very different from something that has a great deal of capillarity through the national textbook program and also that distributes complementary solutions. For us to have responsible conduct in this segment, we have structured corporate governance programs. to guide us with step by step, you know, from the initial contact to the signing of the deal. We have compliance officers and attorneys supporting us so that everything is done transparently. Now going to slide 17, I will focus Well, this is the cycle vision, which is the best for comparison purposes. And we see that the total costs of VASTA had an increment of 1.3 percentage point in the first quarters. As a result of the cost increases with paper and printing, this directly impacted our costs. and that reduction of our gross margin in those two percentage points, they were recovered very responsibly, especially when you consider corporate expenses that will offset this impact of cost increases that put a dent on our gross margin of two percentage points. greater discipline in costs, and as a result of this, our EBITDA for the quarter reached 31.6%. But I will talk about the EBITDA of the cycle in which we've reached 354.9 million, growth of 21.9% in recurring EBITDA. This is... a sign of a company that's growing, that delivers on ACV, and that explores new markets, always with cost disciplines, resulting in an increase of 21.9% and margins that remain at 31.6%. Before I hand it over to Fred, I would like to say that the Vasta team is feeling very satisfied with the performance. Our growth strategy and responsibility and discipline are supporting our growth. B2G started very well with this agreement in the state of Pará, and we believe that we'll be able to support several other states. Now, also with the intake cycle,

that will be accelerated in the second half of the year.

We see some very positive signs for 2024. Thank you very much, and now I'll hand it over to Reggie. Thank you, Melega. Good morning to all. I will start my presentation focusing on SABIR. Just to remind you, this comprehends our National Textbook Program, Red Balloon Sets, and other businesses. I would like to start on slide number 20, financial highlights. Our net revenue in the second quarter of 2023 grew 100%, reaching 88 million ERL, thanks to the positive performance in all of our operations, both the textbook program and several other services. gained positive revenue and growing revenue. And now going to recurring EBITDA and EBITDA margin, looking to the quarter and the half of the year, the semester, we see an improvement in the second quarter. And by looking to the lower chart to the right, we see that we reached 32 million in the semester approximately, Saber's revenue grew 43%, thanks to the increase in net revenue in all of our business lines, which more than offset the reduction that we had in EBITDA margin, especially owing to the increase in paper and printing costs, as we have mentioned. In spite of the negative result, it's a result that's above the company's expectations considering the current cycle, which is a moment in which we're selling the programs for 2024. So this reinforces our confidence. On a second half, it will be positive and in which we'll see an expressive increase both in EBITDA and in revenue. Now, moving on to Cogna, which is, of course, what ties up all of our businesses. Roberto talked about Trot and Meliga talked about Trust. And I just gave you a very quick presentation on Sabir. Cogna, turning to slide 22, we discussed the financial indicators of Cogna, net revenue indicators. is up 20% into Q23 in the semester. Growth amounted to 16%. So in the first quarter of the year, revenue or the first half of 22 was 2.3%. And then in this quarter, we saw increase of recovery beta by 20%. We maintained the margin and we reached 426 million of recovery beta. And in the first semester, we reached 878 million BRL with the same stability of margins of 23.3%. Now, moving on to slide 23, operating cash generation. This is an important lever for the company as Cogna. Well, we always discuss operating cash generation, leverage, and discipline in allocating capital. They're very important principles to us. In the quarter, OCG reached 71 million upwards. 51.9% with conversion of recurring EBITDA into OCG of 40.1% in 2Q23 and growth of approximately 8.4 percentage points versus 2Q22. In the semester, we reached 398 million BRLs Expressive growth of 37%. Just to remind you, last year Cogna had OCG of $540 million BRL. So this shows that the growth of revenue that we are generating in all of our businesses and also EBITDA, is what makes us believe that we'll have a positive second half of the year also considering operating cash generation. Going to slide 24, adjusted net profit and also adjusted net margin, here we reached growth of over 500 percent semester on semester with an increase of four percentage points in the adjusted net margin this is the result of the combination of a few factors improving operating results as we have mentioned when i was talking about the beta of the company an increase in our contingencies and reversals of contingencies and also an improvement in the financial results. In this quarter, we had an increase of 1.5 million the comparison with the comparable period and with the reduction of the interest rates by coupon we can envision improvement in our financial results for the second half of 2023 and 24. Net profit was positive by 7.1 million in the semester and In the comparison between first semester 22, we had losses of 114 million BRL in our books. Moving on to slide 25, leverage and indebtedness. Since the second half 2022, we have been reducing our leverage which is, of course, net debt over adjusted EBITDA. That's the indicator. We reached a multiple of 1.98 times, which is the lowest level since 4Q20. And our net debt grew 1.4% compared to 2Q22 due to the earn out from the acquisition of VASTA and the 11, group price adjustment. So for informational purposes, excluding the two effects, net debt would be reduced to 3.3 billion. So with a reduction, therefore. Now moving on to my last slide on cash position and indebtedness, I would like to call your attention to a few highlights. Our gross debt is 4.7 billion. We finished with a solid cash position. And looking at our amortization schedule, For the first year, starting with a cash position of 1.5 billion, next week we'll be amortizing, paying out over debentures approximately 800 million BRL. In August, we completed a debenture that Roberto was talking about in the ESG highlights of approximately 500 more billion with remuneration of the interbank interest rate plus 1.90%. The objective here is liability management because we understand that we have debt that will be paid off in 2025 at a higher cost rate. than we could get today. And for the end of 2023-24, we also have some internal actions to be able to improve our financial results through liability management. We closed the second quarter with free cash flow of approximately 90 million PRL, excluding funding and interest payments. In this case, the FCF was approximately 38.9 million in Q23. So the key message here is that we are paying attention to our leverage, but we just detected that interest rates are going down and with with a net debt of 3.3 billion BRL, every percentage point of increase in the SELIC rate makes a difference. And with this, the company will be able to obtain improvements of approximately 30 million reais in our bottom line. With this, I... I close my presentation and I'll turn it over back to Valerio for his final remarks. Thank you very much, Fred. Now, moving on to the final remarks on the side of Croton, we continue to look to the future. We'll be able to deliver the growth of volume and revenue, managing dropout rates increasingly better And so we're still in the middle of the intake cycle, but the results are quite positive. So we continue to feel confident that we will be able to replicate what the experience of the previous cycles. And by the way, improvements in our operational efficiencies. I think that we can also mention some improvements in cost management. 86% of our programs were evaluated by the Ministry of Education and were rated four and five. This reinforces the quality of our products. NPS is still on the rise once again. is an indication that our re-enrollment rates will continue to go up in relation to the gross margin, considering this on-campus, online mixed strategy. When we look at the default rates, it's continued to improve, not because of the current economy, but because of the efficiencies and opportunities that the team has been exploring And also because of the better quality of the students that come in our intake cycle. But we would like to reinforce that we'll continue to grow investing in Anhanguera as a brand. So marketing expenses will put pressure on the EBITDA margins. but with a lot of fine tuning on our part, we'll continue to make the right decisions. From the cash perspective, We have been very efficient. Efficiency is something that will also be seen in the renegotiation of agreements that have an impact not on EBITDA but on cash, and we have been doing it very successfully, the renegotiation of these agreements. pains of course will come gradually because the maturity and the term of the contracts is not the same I think that Vasta had a great quarter We see a growing level of revenue. The B2G initiative is already showing some positive results. And in spite of the fact that we lost some primary margin because of paper and printing costs, we know that this is seasonal. There are always ups and downs and we can also transfer the inflation pressure to our products. And we know that margins will be not under pressure forever. We'll be able to overturn this. Cogna, which is a combination of our units, well, still feeling very optimistic. We are very confident in improvement of EBITDA and cash generation and liability management actions are being executed with a view of finding other solutions. And I would like to mention sustainability as well. We launched our sustainability report very recently. You're all invited to find out more about the actions and impacts we are creating. And in this quarter, we became the first educational institute to support the five objectives of the Global Compact, and we'll be showing you more about this. With this, I close the session, and I thank you all for participating, and then we can move on to the Q&A. Ladies and gentlemen, we'll now start the Q&A session. To ask a question, please press star one. To remove yourself from the line of questions, please press star two. Our first question is from Luca Marchesini, Itaú BBA. Good morning, everyone. Thank you for taking my question. Well, firstly, about low on-campus content tickets. You were talking about sustainability of this ticket. And how about your competitiveness? There is pressure on marketing and sales. So what have you been doing in relation to this? What's still to be done? Can you give us a dimension of the impact of this in Croton's margins?

Hello, Luca. Thank you for the questions.

I think I'll take the two of them. In relation to low on-campus content ticket Well, looking to the future, this is a highly competitive market. It's the largest number of players and products. So we believe that there was an increase in demand overall. I think that all players have been more rational in their offerings as well. in terms of pricing. It's very difficult to predict the future in such a competitive market. But I think that the price reduction is behind us, the price reductions that we saw. And we are going to see more stability. We have several initiatives underway. to maximize our tickets. And we're always very happy when we succeed in this. But it's very difficult to tell what comes in future. I think I'm more neutral to positive. In relation to the brand, our branding strategy is to make a gradual transition. We didn't discontinue any of the Pythagoras brands to change it. to Anhanguera. So depending on where you live, you'll see that we have the two brands even in the same unit, Pitágoras and Anhanguera. So it's indeed a transition, but for at least another year, we for the second quarter next year, we'll continue to invest in our branding. I think this is a good way to invest in the future. It's not only an expense. It shouldn't be seen as an expense. We have the lowest unit acquisition cost in the market, and the investment in marketing is to fuel our growth in the future and to expand our market there. But I think the horizon is one year. Thank you.

The next question is from .

Hello, good morning. and others. I have two questions.

Firstly, payments, timely payments in your programs.

When you look at the ADA divided by revenue, you know, the PEP was around 60% in the quarters and now I think it's down to 43%. And now, What were the positive developments? Anything changed in the outlook for on-time payments in this product and also in relation to the court orders in relation to your medical schools? I think that there was... there was a decision and some of those injunctions in the processes that are more advanced in the courts can continue to move forward. So how many openings are being closed? Can you give us an overview? Good morning, Fred here. I will take the first question and then the second will be answered by Valerio. Well, default rates. We have a strong focus on operating cash generation and, you know, property tracking active students. And we have been we've been recording improvements in the default rates quarter on quarter and in fact there is a slight a slight improvement in the pep cash we we are getting more income from this program we didn't change the accounting criteria in either out-of-pocket PMT or PEP and in late enrollment programs just to remind you we don't have We don't have this program. It has been changed. So the cash actually corresponds to the invoice of the month. So we have been looking at the different... Well, we have been tracking the active students, and this is what is helping us in both out-of-pocket and... uh the other programs so there is an increase or rather an improvement in default rates before we had an ada of 12.3 and now we have ada over a net revenue of and in the first quarter of 2022 we were at a level of 13.25 And this is the best indicator for the second half. And when you look at 2024 and 2025, we believe that we'll maintain the same level of efficiency of ADA over revenue, around 11%, 11.5%. I'll turn it over to Roberto to talk about the medical programs. Marcelo. As I said, there are several initiatives, operational initiatives, such as the launch of new applications, monitoring of PEP students. Those are minor actions, small innovations with great results in terms of default rates. Now, specifically about the legal situation of the medical programs. my decision is taking much longer than anyone could have anticipated. And since we are monitoring this very closely, it took over 12 months to get to the decisions. And looking at the number of injunctions that had been filed, nobody knows exactly how many, but we heard 200, 250 injunctions. So that's why we decided to file some petitions and the lawyers are still assessing the potential for advance in those that have already been decided upon. The text is not very clear. And I think that what I can tell you is that right now, yes, there are some opportunities. The only thing I cannot say for sure, I don't know how many of those core orders will go all the way to the end. But as soon as we have more clarity on this, we'll inform the market.

Thank you. Thank you for the answers. Our next question comes from Lucas Nagano from the Morgan Stanley. Hello, everyone. Good morning. Thank you for taking my questions. Two questions on my side. First, about student intake in the second half of the year. Now, what is your view on the interest, on the demand? And what would you say about the macro scenario? The second question is about Vasta B2G. You have a specific contract, but the potential market is so big that there is a lot to be tapped. What is your strategy in terms of go-to-market for the next few months? I just wanted to understand if you continue to have that as a steady stream or if there will be ups and downs. What do you expect? Thank you. Thank you, Lucas, for your questions. I'll take the first about... food net intake, and then Guilherme Melga will answer the second question. Now, we have a very optimistic view on this cycle. We believe there will be a growth, both in high on-site attendance and also in low on-site attendance, a bit also on price. So we have an optimistic look. However, we always keep our feet on the ground, as I've mentioned. in the second quarter after the reduction of the CELIC interest rate and the vote on the new tax reform, I think we all feel a bit more optimistic. So there should be an improvement in the economy. However, right now in the second quarter, as I said, we are optimistic about growth, but I cannot tell you that there will be a complete market recovery now. Malaga about B2G? Hello Luca, thank you for the question. Yes, let me share with you our review on B2G. Indeed, it's a huge market. We do have a structure to meet this market, providing solutions that will be sometimes spot solutions, and some solutions may become structural solutions, you know, permanent solutions in some large cities or states. So yes, you're right. It tends to become a new avenue for growth at Vasta, where a contract may have a long term, other contracts may be short term, but they may be renewed. Our expectation is that in the next few quarters, this will consolidate as a new revenue stream, stable avenue. Yes, of course, we may have ups and downs, especially now in the beginning. We have already begun with a medium-sized contract. And so let us see how this will mature so we can maintain the same level of contracts in the short term. Well, we may be successful or not in the short term, but we will certainly be able to do more on that in the medium term. We expect that to bring more revenue, which will not really change the profile of our company. We remain focused on the private market as a B2B company. This is additional revenue stream. that will help us leverage the products that we have developed first for the private market, and then we've customized them for the government market. Now, let me comment on what Meleka just said. I think they started really well. I mean, in just a few months, they had this contract, this deal signed, and they're also negotiating with more city and state governments. Also, we're learning more about this segment and we will be able to give you more visibility. I believe that from now until year end, we will have more information and we will be able to structure this information, you know, even for us and also to provide that to you. That's perfect. Thank you, Valerio and Malaga. Our next question is from Ian Sisking from BTG Pactual. Good morning, Valerio. Good morning, Fred. Good morning, everyone. I'd like to ask a few questions on my side. First, a follow-up on the question about the intake cycle. I wanted to understand a bit more. I think that, as you mentioned, things are going back on track towards positive results. Maybe not a complete market turnaround, but I'd like to know a bit more about volume and the number of enrollments now that we are at the midpoint of the cycle. The other question also about B2G, just to understand a bit more how you how you are closing these contracts i mean you've mentioned that not necessarily there should be big seasonal changes but is that i mean just to understand is that going to work in a similar seasonality as the national book and text program or i mean what what should we expect from this revenue stream in terms of annual activities and looking at the contract that you already have you know that the deal you've already signed and next i'd like to know a bit more about the national book and text program revenue has improved, but we still have an expectation of sales of textbooks in the second half of the year. So do you have any information about that?

So these are my questions. Thank you.

Meliga, do you want to take that? Yes, I'll begin from the B2G question. I'll give you some more color about this specific deal we've closed. This is for school content reinforcement. It is not a traditional sale of textbook where you have to deliver the books until January or February because classes will begin. Now, this specific product that we prepared and sold is content reinforcement. So it does not really have a rigorous beginning date. The schools will need two months to implement that, but it may begin in March or April or even in the second half of the year. So this product line can be sold in the first half of the year or in the second half of the year. This product would not be sold in the fourth quarter because that is after the national and regional exams. So we expect that it's more difficult to sell that in the fourth quarter, you know, because of the characteristics of the project, but we also have other types of product, textbook, large scale evaluations. And so for these other projects that we are developing and we still have to do the go to marketing campaign, these would be, you know, more traditional models that the sales would be more in the fourth quarter and beginning of the year. Thank you. Thank you, Malaga. Now, the other two questions. About student dropout and student intake. you know this cycle you know this process when the student intake is very strong there is more pressure on dropout because we have a higher number of freshmen in the student base but i may tell you that the quality of our student intake has improved so in the current enrollment cycle we see very positive characteristics or more clearly our re-enrollment or enrollment renewals is higher than in the previous cycle so we should end with a higher enrollment renewal rate but we still have some time ahead of us you know they will have time until the end of september for enrollment renewal we will still have to do some negotiation but the uh enrollment renewal is above the average rate and also we will have a graduation rate above previous numbers. So that will certainly generate a positive impact on our revenue from the student base. About the National Book and Text Program, the second quarter has been very good for Sabir, driven by the National Book and Text Program that has brought home additional revenue. As a coincidence, this was the moment of higher expenses because we are now in the go-to market campaign with the commercial team showing the products to the schools. That is why we still had a slightly negative result, but better than expected. And we remain optimistic for the second half of the year. there are new signs that we may have something different from what we expected. Because you might ask, I mean, what is the impact of the changes in the São Paulo state government in terms of using textbook or a learning system. So of course, Sao Paulo is a big state. It's relevant for the whole program. However, the impact for Cogna in terms of EBITDA is not really significant. It's just, you know, 10 million round about that number if Sao Paulo does not really participate in the national book and text program, you know. So it is not really very relevant for us.

Thank you.

Our next question comes from Pedro Caravina from Credit Suisse. Hello, good morning, everyone. Thank you for taking my questions. Most of my questions about Groton have been addressed, but if I could do a follow-up question, I'd like to understand a bit more now that you've closed the first half of the year. if you know where the stronger demand came from in the first half of the year. I mean, although you had a higher dropout and so therefore a smaller student base, in general, education companies did really well in the first half of this year. And I wanted to understand that a bit better, you know, if it was because of the macro economic indicators or if you gained share. And then what do you view for the future, you know, for now the second half of 23 and then 2024? Another question about VASTA. What about the negotiations for learning systems and textbooks? What about this supply of books and papers? What can you tell us about these negotiations? Thank you for taking my questions.

Yes, Pedro.

OK, thank you for your question. I'll talk about higher education and then Fred can talk about the cost of paper and print. Now, I think the growth reported by open companies comes from a number of factors. Yes, I think the market is a bit better, but this is not the number one factor. I think companies have gained efficiency in most cases. In our case, we've had an improvement in the geographic distribution. You know, we have grown the number of distance learning centers or as they mature, we see a natural and organic growth. And also we are very rigorous on cost. So we're having more distribution, more students. I do see an improvement in the market, but I don't think this is because the market has a stronger demand. I just think that companies are now better structured and they have gained efficiency. Now, Malaga, yes, know about cost. Pedro, what do we view? Talking about this cycle. I mean, in the midpoint of the year, we usually have this printing window for the following cycle. So yes, our products are being produced at the current cost that we have today. You know, we've had an increase in the cost of paper and print. So first and second quarters, we already know the cost. So that is why our pricing strategy for next year has to include this. So now that we're working on pricing and traditionally in the K-12 industry, when the increase is very significant, we try to veer. look at pricing to see how we can correct the price for the following cycle. So we have to include inflation plus the impact of specific costs. Now, as we look ahead, the first negotiations with paper companies, we do not see any more pressure on paper cost. No, I believe the cost will be more in line with inflation. But the negotiations are not yet closed. We will be closing them in the next few months. But our first impression is that there will be only the inflation impact on this cost. Very clear. Thank you. Our next question comes from Mirela Oliveira from the Bank of America. Good morning. Thank you for taking my questions. It's very brief questions. I'd like to understand if you could give us some more color on our methods of recognizing dropout. I mean, how do you calculate dropout today versus the way you did it in the past? And also, if you could give us some more color of where you are unifying the brands in INGWAD, if you had any difficulty in competition, and what is your performance in these specific regions?

Hello Mirela, thank you for your questions.

Well, about the dropout calculation method, I'll give you a general explanation of how we recognize dropout students. When you look at the enrollment, we have a few gateways before we recognize someone as a student with a revenue stream. First, the student must have signed the contract. There is a digital acceptance. He has to log in and accept the contract and pay the first monthly payment. And then we have a third gateway which is that we measure the student engagement. So if he has paid for the enrollment, if he has paid for the following monthly payments, also academic engagement. So if he signs the contract and then pays for the first monthly payment, then he is recognized as a student. And then if that student doesn't pay the monthly payment or does not have academic engagement, then we recognize that as a dropout student. So even before the enrollment cycle, and then we no longer recognize that revenue stream. So we have a very rigorous criteria to recognize a student as a student or then as a dropout student. So I'm not sure if I've answered your question. But if you need, we can provide more details. About the brand unification, yes, you're right. Each location has its own dynamics. In some marketplaces, Pitágoras and Uno, but are very strong brands. And so we decided to have the brands living together during this transition. So you have two brands living on the learning center. In only a few cities, we decided to remove the older brand. And at first it does have an impact on student intake, but we did that only as a test. And so we tested and where we removed or where we replaced the previous brand, we lost commercial momentum, but this was not our policy. It was just a test.

We are now closing the Q&A session.

I'll turn it over to Mr. Roberto Valério for his final considerations. Thank you very much. We thank you all for participating. We're feeling very optimistic, very positive, not only in relation to how consistent we are in execution, but also in relation to the outlook. I thank the team that has been supporting us in this quest for better results. and our IR team is available for whatever questions you might have. Thank you very much. Have a great day, and we'll see you all in our next conference call. Thank you.

With this, we close Cognizant's conference call.

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