Earnings Transcript for VTRU - Q1 Fiscal Year 2024

Operator: Good morning, everyone. Thank you for standing by. Welcome to the Vitru Brasil's Q1 2024 Earnings Conference Call. [Operator Instructions] I'd like to inform you that this video conference is being recorded and will be made available on the company's IR website investors.vitru.com.br. where the complete material of our results disclosure is available. [Operator Instructions] Emphasize that information contained in this presentation and any statements that may be made during this video conference regarding business outlook, projections and operational and financial goals of Vitru Brasil, constitute beliefs and assumptions of the company's management as well as information currently available. Future considerations are not guarantee of performance. They involve risks, uncertainties and assumptions as they relate to useful events. And therefore, they depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operational factors may affect the future performance of Vitru Brasil and lead to results that materially differ from those expressed in such future considerations. Today, we have the presence of the company executives, William Matos, CEO; and Maria Carolina, Head of Investor Relations and her team. I'll now give the floor to Mr. William Matos.

William Kendrick de Matos Silva: Good morning, everyone. Welcome. Today, it's a pleasure to be together to present Vitru's first quarter results for 2024. I am William Matos, CEO of Vitru, temporarily, I'm also serving as CFO. I'm joined by Maria Carolina, our Head of Investor Relations and Luiz Felipe [indiscernible] IR Analyst. And we also have here our [indiscernible]. The results presentations that you're also going to see here are available on our IR website, along with the quarterly results release. So we're going to begin on Slide 4 with the highlights of this quarter. It was a very important quarter. We delivered solid reasons and proudly like to begin by highlighting that that recently Vitru was recognized by 2 of the most important outlets in the U.S. as one of the top 5 EdTechs in the world. TIME magazine in partnership with Statista, that's a leader on data markets educations. They disclosed the ranking, considering all the top EdTechs in the world. And Vitru was on the fifth place in this recognition build out -- reinforces our focus on delivering quality digital education. I think it's important to highlight that we finished our first quarter with almost 940,000 students, a record for our company, which shows the strength of our brands and justifies our expectation for a very good year. This number was brought by the strong growth of our continuing education area. It's a great movement that we've been able to build loyalty in our students. I have to highlight and emphasize that this growth was not only greater than that because Vitru alongside with this integration and the best practice between Uniasselvi and Unicesumar has unified some criteria for the student activation. And I'm going to talk a little about here shortly. Another highlight that's very important here is the advance in this listing process from Nasdaq to B3 on April 19 shareholders approved in the general meeting the merger of Vitru Limited by Vitru Brasil. And then initiated a period where shareholders must express their choice to receive shares pre or some temporary ADRs of to Vitru Brasil to the election form. And we have to remind you that the period for submitting that form ends on May 21. So following the slide, we can see that our differentiated strategy and positioning have led to a new expansion of the average ticket of the distance learning graduation in this quarter. And this time by 3.4% compared to the first quarter of '23. Percentage is very close to the inflation variation in the period. And this number is, for sure, the validation of our strategy that is to have like always have, competitive prices, but keeping the pure quality of the products. Regarding the financial highlights, we can mention 13.5% increase in consolidated net revenue. This increase was based on the strong expansion of our continuing education [ in ] medicine and nearly a 10% increase in revenue for graduation in the quarter. So it's important to notice that all this growth in the first quarter of '23 was purely organic. Down below, you can see the adjusted EBITDA for this quarter that has a modest growth of 1% and a margin decrease to 33.9%, which is still higher than the average in the sector. As you will see shortly, this margin decrease was part of a strategy to advance the enrollment of students for the year. And the EBITDA margin for 2024 is expected to be slightly higher than the margin for the year 2023, important to highlight that we expected this number. It doesn't worry us. It's part of our strategy this year. And it's likely that it's going to decrease amongst the following quarters and it's not going to repeat the same amount. Finally, based on our model, both asset-light and our scale and the quality of our operations, we've had a high cash conversion with a strong growth in cash flow this quarter. Those numbers are solid proof of the efficiency of our business model and the efficiency of our management model. Now moving on to Slide number 6, I'd like to start by providing some more details about the harmonization of criteria for student activation this year. As we announced previously in our latest disclosure and as a part process of exchanging best practices between our 2 brands, we made some adjustments in Uniasselvi in 2024 to align the criteria for student acquisition for the purpose of recognition in the student base with the standards that we use at Unicesumar. In the short term, as we observed, it means a lower nominal growth in 2024 compared to 2023, both in the student base and also the net revenue. But we understand that this harmonization is paramount, essential for us to have a strategic view of the business. And from that on, we are going to be able to plan our growth in a sustainable way in a very precise way. And this movement is also a proof of the trust and the confidence that the investors can have in our management. Therefore, as you can observe on this slide, the impact of this harmonization are approximately 94,000 fewer students in March 31, 2024 or about 11% of the [ calculation ] of this business evaluation and approximately BRL 18 million less in net revenue for the first quarter of '24. It totals about 3.5%. So it's important to highlight that this harmonization has no impact on our cash flow. I repeat that, just to be clear, it has no impact on our cash flow, because this invoice is generated for non-engaged students, were not paid and later they turned into allowance for doubtful accounts, PDA with [indiscernible] the 12 months following the invoice issuance. So it's going to have a positive effect for Vitru, which will be the reduction of this revision for delta accounts throughout '24 and '25 as well as better attention rates for students. Of course, this is something that cheers us up. And another aspect of this harmonization last bullet point is that we're going to have a positive tax effect, a slight reduction in the payment of ISS that is a tax on services or these invoices for non-engaged students, which were not paid. So moving on to Slide 7. We show that our enrollment in long-distance graduation grew by 10% this quarter. It's important to highlight that because we had already grown very strongly in the years of 2023 and 2022. Additionally, we can also see that the growth of the consolidated enrollment in long-distance graduation of Vitru's over the last 3 years was 21% per year. Those numbers reflect our competence of leadership in long-distance graduation. In the graph on the right, we also show the breakdown of the enrollment this quarter between engaged students who are recognized enrollment and in student base and non-engaged, who are no longer, starting this quarter, recognized. So you can see that approximately 25% of the enrollment this quarter was from non-engaged students. Moving on to the next slide. We show the continuous growth of Vitru student base. As you can observe in this quarter, it increased by 6% when we look only to long distance graduation, the growth was 5.6%; remembering that we are the largest distance learning company in the country. Therefore, we have a very high comparison base and a strong historical growth. This growth is now supported by much more engaged students and we are confident on the advantages of the way we have walked -- the path we have treaded. So from the first quarter of '24, the non-engaged students at Uniasselvi, meaning, those students who signed a contract with Uniasselvi, but did not take any exams and did not paid any monthly payment. They are no longer included in the student base. As you could see, it clearly has an effect on the total size of the base. It now reflects much more engagement. Again, for you to have a good perspective on the solid results, in our previous criteria, we would have 94,000 more students, which would mean a growth of approximately 17% in this snapshot of the long distance graduation student base in March 2024 compared to '23. In other words, it would be like 11 points more. To explain that a little bit better, I can tell you that I am very, very excited about that and I've been using a metaphor. Just like a racing driver that Formula 1 and that's what the delayed years that is ahead, has been investing a lot in the best mechanics, but it feels that the car is not delivering the best performance. Now we could see that the right weighing and not had a different angulation. It was simple to solve to fix and it's brought a great result. So as Vitru, we have been investing a lot. And we have been putting all the effort on the quality of our products and courses. And the whole engagement was not making sense and the ADA was not making sense. But with all those adjustments and observing the [indiscernible] of some numbers, it doesn't take us from the first place out of the first place. And we are very excited with the results that we're seeing ahead. So now to move on, I'd like to give the floor to Carolina, Carol, our Head of Investor Relations to communicate to you and follow the information.

Maria Carolina: Moving on to Slide 9, we show the growth of the long distance graduation creates in every region of Brazil, considering the DE criteria of student activation. Looking at the map of Brazil in the graph of sentiments by region on the right side of this slide, we continue to progress in the southeast region of the country, it's very evident. So we already present in all states. But recently, we have accelerated the penetration of our brands in the city of Sao Paulo. And besides that, it's important to remember that the Southeast region has a tense population concentration and many opportunities for expansion of both brands. Therefore, the number of centers in this region is going to gain relevance. Now we talk about Slide number 10, where we see the international presence. In the table on the left, it's visible how the brands connected each other directly. Vitru has nearly 1,500 centers distributed across more than 1,400 municipalities in line with our synergy plan, what we call gross expansion. We reached a milestone of offering 717 cities, offering both brands. It's almost 73 cities more and there. On Slide 11, we demonstrate some of the quality metrics from our students' perspective. Our focus is on delivering quality education and is evidenced by the ratings that users gave to our apps. We have the highest rating apps amongst suppliers. First, remember that our apps have rated proprietary and host constitute an important part of our learning journey. So we are committed to deliver an excellent experience of the growth. On the right side, we also highlight the valuations on the Brazilian website, Reclame, tried to resolve all the issues reported by our students in the best possible way. Therefore, our reputation is above the average for the other listed players. So now I give the floor back to my colleague, William to move on the presentation. So moving on Slide number 12, we move on the average ticket data. You can see that there was an evolution growth, an average growth in the account at 4% in the last 3 years, already considering Vitru as a whole that was Unicesumar. Before this variation, very close to inflation confirms how different our products are and our positioning as a quality player in digital. It's important to note that the average ticket increased even with a slight change in total enrollment this quarter, the decrease in the representation of premium courses that are like the health care courses and engineering courses, which, as you know, have a higher ticket price. And we had an increase in the weight of the technology courses which have a lower ticket price as we demonstrated on the right side of the slide. Moving on to Slide number 13. We follow with the main financial indicators for the quarter highlights. As you can see, as we saw earlier, we had an expansion of approximately 14% in net revenue and 1% in adjusted EBITDA. It's important to highlight the increase of 2.8 percentage points in this quarter for the gross margin, marketing the benefits of integration and the savings in scale of the company. On the following slide, it's interesting to see that this quarter, the main paths for growth in revenue were medicine and continuing education. The business of continuing education increased its net revenue by 46%, which was quite impressive and demonstrates the great attention for additional lifelong learning in Brazil. We believe it was a very assertive movement that we have made this year based on the breaches of growth that we could observe, especially with the assumption of being like the Vanguard is a big market. And we can look to our medicine operations, which we could see a 30% increase in revenue for Q1 '24 due to a combination of maturation of new vacancies and an increase the average ticket size. The revenue of those segments we discussed in more detail shortly. In this regard, on Slide 15, we see that the proportion of those 2 businesses within business of our portfolio, an increase in the first quarter of '24 compared to the first quarter of 2023. In other words, you can observe that the continuing education business has increased its representation of 5% to 6% of Vitru's total, while our operations in medicine have risen from 13% to 15%. On the other hand, the share of long-distance graduation decreased from 72% to 70% of total revenue, especially as we are already considering. It's important to say that the new criteria for a student activation, as I explained before. And moving on to Slide 16. We see the 10% growth in net revenue of long distance graduation in the EAD. Additionally, in the graphs on the right side of the slide, we can see the historical growth of this EAD market in Vitru long distance education in Brazil and the continuous expansion of our market share within this market according to INEP Western Institute. And we strongly believe that the long distance graduation sector in Brazil has a long period of growth, room for growth in the coming years and quality EAD is the solution for the penetration gap and higher education in Brazil, college education in Brazil. So moving on to the Slide number 17. We demonstrate the evolution of net revenue from the medicine course in Q1 '24 compared to Q1 '23, showing a 30% increase. It's important to remember that this increment in increase is a combination of the maturation of meds in vacancies and the evolution of the average ticket price. And it's worth noting that our medicine college is the largest in the southern region of the country located in a city that often ranks among the best cities to live in, in Brazil. And this is like, combined with the high quality of our institutions and the service provided to our student have the best investments in quarters among private institutions in Brazil. That's how you can -- we can explain our average ticket price that is above the national average. Besides that, in recent months, institution Maringa has improved the filling of those vacant spots as it contributed to the great result for this big performance of the segment. So moving on to Slide 18, graph on the left here shows a slight recovery in the potential education face-to-face segment. It was explained by the historic context of the end of pandemic. But this shows a consistent evolution of long distance compared to the face-to-face segment. And we believe that this is the reality of the education sector. And of course, in the digital economy, students will seek quality long distance education more accessible magnitude, a reality might be for financial cultural or logistic reasons. But the slight recovery of the face-to-face segment does not make us believe that it's going to be strong in the future. And on the right side, we demonstrated a strong expansion of revenue from the continuing education segment. As I mentioned before, it grew by 46%. The performance is directly associated with our strategy of diversification and the complementarity throughout the journey of our students. Moving on to the next Slide number 19. We show you some more data regarding this potential room for growth that Vitru believes so much. As you can see, there is a very interesting opportunity in this segment and that is still not so well explored by high scale players. And this is the continuing education segments. And we consider technical courses, vocational courses in postgraduate programs. And as you can see on the left, according to the latest census data in Brazil, 1.2 million students graduate per year potential target for postgraduate course. And in addition to, of course, the job of professionals that, were already graduated and are looking for new training. And when we look at the high school, the numbers are also significant with 7.7 million students per year, young students over 16 years old. Considering the socioeconomic characteristics of our country, these young individuals are about to enter the job market and finding technical and location of course, a gateway to their first job. Besides that, in addition, the new regulation of technical education institutions applied to have new vacancies authorized by the federal government. A few listed players, meaning, those with national presence, a few players looked into this market. And it is through the brands Unicesumar and Uniasselvi, almost 43% of the regulated vacancies. On Slide number 20, we show the evolution of EBITDA between periods and from Slide 21 onwards. We'll begin explaining the costs and expenses. So as you can see on Slide 21, left chart illustrates the 3.2-point reduction in service costs proportionally to a percentage of net revenue. As you know, this gain in gross margin reflects both gains in scale and the recent impacts of integrating Unicesumar into Vitru. However I'd like to tell you in advance that throughout 2024, we will see an increase, a slight increase in Vitru's direct costs. That is a natural consequence of implementing many health care courses over the past few years. In this process of maturation of those courses elevated some certain costs, such as like a greater need for receptors and internship fields for hospitals. And in relation to general and administrative expenses, Vitru has been -- has maintained a very lean structure with G&A representing only 64% of net revenue this quarter compared to what was in the sector. Moving to Slide number 22. On the left, you see the expenses in marketing and sales increased approximately 5 percentage points on net revenue this quarter. This increase was due to the company's strategies of anticipating enrollment with a healthy average ticket along with the positioning strategy in various with greater demand, complexity and greater competition. As we've said before, the state of Sao Paulo in which we are focusing our efforts now. It's important to say that for the year, we anticipate that the marketing and sales expenses as a percentage of net revenue will remain very close or maybe slightly higher than the expenses that were reported in 2023. On the right side, in the right chart, we can show that the PCLD AD in English is slightly higher in Q1 '24, reflecting the strong enrollment of 2023. However, it's worth noting that there is downward trend expected throughout 2024 and 2025 due to the harmonization of student activation criteria as we explained at the beginning of this presentation. On Slide 23, we have 2 important messages to highlight. The first one is the strong cash integration of the company. So the cash conversion reached 104.6% this quarter compared to 103%. It is the exchange of best practices and implementation of credit evaluation system in the first quarter. Second message reading the green right is that in addition to the evolution of results that insofar, net profit is an update of the cost expectation of its venture is in line with the tenets with an effect of approximately BRL 25 million on financial expenses, ordinary this quarter. And it's worth mentioning that we expect financial expenses to start increasing from the third quarter if the economic scenario remains stable. And it also reflects a lower recognition of deferred tax in this period. It's important to state that our CapEx is relatively low and reached only 4.3% of revenue this quarter. It's an increase of 0.2 percentage points versus what we had in Q1 '23. On Slide 24, we have perspective of our debt and leverage. This quarter, we had a strong operating cash generation. The net debt was slightly stable. And it is explained in the update of the expectation of the effective cost of debentures, as I mentioned on the slide. And in relation to the comment of that debt over adjusted EBITDA, our leverage is way below the covenant. And during this year, we are going to over this leverage. Now I give the floor back to William.

William Kendrick de Matos Silva: Thank you, Carols. Finally, on Slide 25, I'd like to tell the market our guidance for net revenue and adjusted EBITDA. For 2024, we estimate net revenue between BRL 2.15 billion and BRL 2.25 billion. It will lead us to a growth between 10% and 15% regarding 2023. Besides that, our EBITDA margin in 2024 shall be between 36.5% and 37.5%. At this moment, it's important to highlight that this result considers our or great growth that has been fantastic in the last 3 years. So our strategy moves on with focus on the student on the quality of our services, but keeping the financial discipline that's very important. In other words, this guidance reflects what we have already expected that in percentage terms. Our results will grow in somewhat reasonable rates since we achieved that side a relevant side. So with that, we finish our presentation. And now, before I give the floor back to the host. I'd like to thank you all for all the trust and confidence. And we have been putting all the efforts to deliver the best results. And we are very confident that we're going to have a great year for Vitru and that all the adjustments are for making this company better and all the strategies are based on this premise of like surpassing our own records and improving our own quality. Now, I give the floor back to the host for us to open the Q&A session. Thank you very much.

Operator: [Operator Instructions] Our first question comes from Lucas from Morgan Stanley.

Lucas Nagano: We have a few questions. The first is regarding the margin on the first quarter, so that the year is going to better. And you said that there is probably a cost pressure. My question is about the drivers that you're seeing to compensate that Vitru think that pay attention is the increase in marketing is like is an advancement in the cost for a new level or when PDD is going to be flat on this harmonization practice. Second question is about regulation. Do you have any update on the changes the rules in some courses that have some different discussions as nursing for instance?

William Kendrick de Matos Silva: Thank you, Lucas, for your questions. So regarding the first question, in reality, we are very, very calm as we seek to drive to talk about our expectation for the full year. Despite we have mentioned a slight reduction in gross margin due to the some costs at health care courses, as I said. But the market investment, as I said, was across an advance that we have predicted for our strategy. So some costs are going to be reduced on the year throughout the year to guarantee this deliver of the margin guidance. And this new model of harmonization, as we said, might cause some increase in the PDD for 2024. And that' going to help our margin to be aligned with the guidance that we gave. And regarding regulation, our new regulations for education, Vitru is very, very [indiscernible] to some hybrid models that we have in our courses as the nature of the courses. We have been paying attention to all those movements. And as we have said before, everything that is related to quality, we understand that it's something that's going to be positive. It's going to have a positive impact on the segment. And regarding new courses and changes in [indiscernible] for new areas, we have not seen any issues in the national education, we are very close to them. And we are also looking to looking for understanding all the necessary movements. But it's important to remember that every and any change in this year's regulations, the institutions have 2 years to implement the changes proposed. So we are going to study them very carefully to understand. But as I said, we have a hybrid model as a nature at Uniasselvi and in Unicesumar. And we are very relaxed about these new regulations, because the exclusive for the teaching course is the potential to. And we have a good percentage of face-to-face segment in our methodologies. But we're going to study this market to adjust for the future changes.

Operator: Our next question comes from [ Pedro Oliveira ], buy-side analyst.

Unknown Analyst: We'd like to have an update, regarding the Vitrus' listing process and how it's going to impact the liquidity of the company. Do you have any initiatives to indicate the liquidity of the shares?

William Kendrick de Matos Silva: Thanks for your question, Pedro about the listing process itself. We're one of the latest '19 the reversing corporation that justifies there's a [indiscernible] B3. So this arrival at B3 is likely to happen in the week of June 10. So documents that we released, we explained how the election works. The investors will choose if they're going to achieve the shares or the ADRs. So we have brokers and this process is going to end on June 12. You're right at the increase going to take let's enter the radar a large array of large number of investors like pension funds and individuals that not necessarily invest abroad. But a big liquidity movement has to be talking high management and the investors have analyzed in market timing. Then we move or point to level. But my schedule as a Relation Head of the company is like busy with local investors. So we really believe in this migration.

Operator: [Operator Instructions] We have no questions.

William Kendrick de Matos Silva: I'd like to thank the presence of everyone. And I have to emphasize that our starting point each decision is excellent and our biggest target is on being the leader at this market and in fact positively the life of students. So again, thank you for your trust and we can see that we are on the right path and I wish a great day to everybody.

Operator: The Vitru Brasil's Q1 2021 earnings call is now concluded. The Investor Relations department is available to address any further doubts or inquiries. Thank you very much to all participants and have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]