Cruzeiro do Sul Educacional S.A. (CSED3.SA) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for waiting. Welcome to the video conference on the results for the third quarter of 2025 for Cruzeiro do Sul Educacional. [Operator Instructions]. Please note that this video conference is being recorded and will be available on the company's IR website ri.creuzeirodosuleducacional.com.br, where you can find the complete material from our results announcement. You can also download the presentation from the chat icon including in English. [Operator Instructions] We emphasize that the information contained in this presentation and any statements that may be made during the video conference regarding the business prospects, projections and operating and financial goals of Cruzeiro do Sul Educacional constitute the beliefs and assumptions of the company's management as well as information currently available. Forward-looking statements are no guarantee of performance as they involve risks, uncertainties and assumptions as they refer to future events, and therefore, depend on circumstances that may or may not occur. Investors should understand the general economic conditions, market conditions and other operating factors may affect Cruzeiro do Sul Educacional's future performance and lead to results that differ materially from those expressed in such forward-looking statements. With us today are Renato Padovese, CEO; Felipe Negrao, CFO; and Luis Felipe Bresaola, IR Officer. I would now like to turn the floor to Mr. Renato Padovese, who will begin the presentation. Mr. Renato, you may proceed, please.

Good morning, everyone. This is Renato Padovese, CEO of the company. Thank you for participating in our call to discuss the results for the third quarter of 2025 and the results for the last 9 months. Before getting into the numbers, I would like to emphasize that this quarter was marked by important advances, both financial and operational, and also by a very special moment in our history. On September 27, Cruzeiro do Sul Educacional celebrated its 60th anniversary, that 6 decades of fulfilling our purpose of transforming student lives, always with sound, sustainable and disciplined management. Since our inception in Miguel Paulista, we have evolved to become one of the largest educational groups in Brazil preserving the essence of the founding families and ensuring consistent results for our stakeholders. This combination of purpose and responsible management reinforces our ability to generate long-term value. Now turning to the financial results and shareholder value creation. In the third quarter, net income was BRL 113 million, up 82% over the same period last year. For the 9 months, net income grew 70%, reaching BRL 262 million. Another relevant point is cash flow to shareholders, which demonstrates our discipline in management and focus on value creation. In the quarter, we reached BRL 221 million, 35% above the third quarter of 2024. Year-to-date, it totaled BRL 428 million, a 66% increase year-on-year. Our leverage decreased by 51% to 0.7x net debt-to-EBITDA ratio. The consistency of our strategy, long-term vision and focus on quality are important components in face of yet another regulatory challenge with a new framework announced for distance learning education. Although we are still in the early stages of this process of transformation in the way we educate, we understand that the financially sound purposeful company tends to reap benefits in times of changes as we have seen throughout our 60 years of existence, reinforcing our commitment to quality. During the third quarter of '25, we received visits from members of the Ministry of Education at 2 of our 8 medical courses the UNICID and UNIFRAN, both of which received the highest rating. As a result, we now have 7 Grade 5 medical courses highlighting the academic excellence that underpins our trajectory. With this, we remain confident in our ability to deliver sustainable growth, robust cash generation and value creation for all of our stakeholders. Well, thank you very much. And now I I'll give the floor to Felipe Negrao, who will provide more details on the results.

Thank you, Renato. On the next slide, I will talk about the operating performance of our on-campus programs. We posted a 2% growth in our student base, reaching a total of 169,000 students. This mark is the result of a 1% point increase in retention rate. The reenrollment rate reached a record 92% of the eligible base. We also present the data for the ticket of the third quarter of '25, which showed a 6% increase over the same period last year, driven by the mix of courses with a greater concentration of courses in the health care area. In the first 9 months of '25, the average ticket was up by 6% compared to the first 9 months of '24, reflecting the increase in the participation of students in the health care area, especially in medical and industry courses. In the next slide, we show the operating data from digital, which ended the period with a base of 406,000 students, representing a 13% increase when compared to the same period last year. This growth is the result of an 11% increase in intake due to the early enrollment that occurred as a result of the regulatory change that occurred in mid-September. In addition, the reenrollment KPI reached 80% of the eligible base. As for the average ticket for the quarter, there was an increase of 4% when compared to the same period last year. The growth in the period is mainly related to the greater presence of students enrolled in higher value-added courses offered in hybrid and on-campus modalities. Hybrid courses continue to expand and now account for 26% of the digital base, an increase of 1.3 percentage points when compared to the third quarter of 2024. In the first 9 months of 2025, the average ticket was down 2% compared to the same period last year. Moving on to the financial details. I will comment on net revenue for the quarter, which totaled BRL 694 million, up 11% compared to the third quarter of '24, as a result of the larger consolidated student base. The first 9 months of 2025, net revenues stood at BRL 2 billion, 12% higher than in the first 9 months of 2024. The On-Campus segment, net revenue for the quarter grew 9%, reaching BRL 478 million, reflecting the evolution of the average ticket and the larger student base. In the first 9 months of '25, growth was 9% when compared to the same period last year, reaching BRL 1.5 billion. Revenue from health care courses in the quarter grew 10%, driven by revenue from medical courses as a result of the acquisition of FAPI and the 180 new seats authorized in 2024. In the first 9 months of '25, we grew 15%, reaching BRL 1 billion. These courses already represent approximately 71% of the on-campus revenue. In the Digital segment, we saw a 17% increase in revenue for the quarter, reaching BRL 238 million as a result of a larger student base and higher average ticket. In the first 9 months of '25, revenue grew 11%, reaching BRL 702 million. The next slide shows the gross margin for the quarter, which was up 3.9 percentage points compared to the third quarter of 2024. This margin growth mainly reflects operating efficiency initiatives without impacting quality added to the contribution of growth in the medical and digital courses. In the first 9 months of '25, the gross margin was up by 2.7 percentage points. Next, we present the adjusted EBITDA for the quarter, which totaled BRL 278 million, up 29% compared to the third quarter of 2024. The chart shows the composition of the adjusted EBITDA margin which was 40.1% versus 34.6% in the previous year. The margin increase in the period reflects the 3.8 percentage point increase in PDA, provision for doubtful accounts, with 3 percentage points related to the seasonal intra-quarter effect of the new provision curve implemented in the fourth quarter of '24 and 0.8 percentage points of efficiency gains added to the 3.6 percentage points increase in gross cash margin versus the -- when compared to the third quarter of '24. Marketing expenses in the period were 17% higher in third quarter of '24 as a result of a higher volume of campaigns aimed at midyear customer acquisitions. The increase in investments in people represents the strengthening of corporate teams in line with the company's sustainable growth plan and the creation of long-term value for shareholders. In the first 9 months of '24, adjusted EBITDA totaled BRL 731 million, a 21% increase over the same period last year. The adjusted EBITDA margin was 35%, an increase of 3.3 percentage points in the adjusted EBITDA margin for the period, reflecting a 2.5 percentage point increase in gross cash margin and a 1.9 percentage point expansion in the provision for doubtful account with a 1.1 percentage point improvement in credit and collection actions implemented over the last few quarters and 0.8 percentage points related to the intra-quarter seasonal effect of the new provision curve implemented in the fourth quarter of '24. Moreover, marketing expenses showed a 0.4 percentage point gain in efficiency. Now moving on to the next slide, we show the update in delinquency estimates made in the third quarter of '25. As disclosed in the fourth quarter of 2024, throughout the year of 2024, in addition to reviewing its processes, the company updated its receivables portfolio provision model by conducting an analysis that considers a 24-month horizon from January 2023 to December '24. The work was carried out with a view to establishing greater match to the portfolio profile in the post-pandemic period when there was a more accelerated expansion of the digital student base, which went from 62% in 2020 to 69% in 2024 in relation to the total student base. In addition, the company revisited its policy for writing off past due accounts receivable, reducing the term from 720 to 360 days. On the right, we present a chart comparing the predate and post update PDA and delinquency estimates and a pro forma table illustrating the effect of the PDA on EBITDA. Due to the PDA updates throughout 2025, we will see time differences in relation to the PDA presented in 2024 with more pronounced variations between even and odd quarters. Continuing with the presentation, we show the company's costs and expenses as a percentage of revenue, excluding nonrecurring effects. In the quarter, costs and expenses, cash effect totaled 61.2% of the company's net revenue, 5.3 percentage points below the third quarter of '24 with emphasis on efficiency gains in personnel and other adjusted costs, which show a reduction of 3.7 percentage points versus the third quarter of '24. It is also worth mentioning that the PDA line was impacted by the update of delinquency estimates implemented in the fourth quarter of 2024. The next slide shows the evolution of the company's adjusted net income, which was BRL 130 million, representing an increase of 78.3% year-on-year. In the first 9 months of '25, adjusted net income was BRL 263 million, 55.3% higher than in the first 9 months of '24, with a margin of 12.6%, which was 3.7 percentage points higher than last year as a result of EBITDA growth in the period. The next slide shows the average collection period for the third quarter of '25 which stood at 29 days, representing a reduction of 6 days compared to the same period last year as a result of several factors, including better management of payment means, the elimination of proprietary financing, the increased share of fixed among others, implementation of credit analysis for financing operated by third parties, but with risks borne by Cruzeiro do Sul, improved collection, updating of NPL estimates. Next, represent investments made by the company, which in the third quarter of '25 were approximately BRL 33 million, 15% lower than in the third quarter of '24. In the 9 months, investments totaled BRL 72 million versus BRL 107 million in the same period last year. Moving forward, we show the cash flow to shareholders in the third quarter of '25, which was 221 million versus BRL 164 million in the same period last year, impacted mainly by the positive variation in EBITDA. Year-to-date, cash flow to shareholders was BRL 428 million, which is a 66% increase versus the first 9 months of '24. In the last slide, we present the company's net debt, which stood at BRL 472 million compared to BRL 781 million in the previous year, representing a 40% reduction compared to the third quarter of '24. Cash generation in the period added to the reduction in debt from acquisitions were the main factors influencing this reduction. To better illustrate the company's debt profile, we present below the amortization schedule segregated by type of debt and also highlighting that the current cash level allows us to honor all debts until the end of 2027. With that, I conclude my comments and turn the floor to the operator to begin the Q&A session. Thank you very much.

[Operator Instructions] Our first question comes from Samuel Alves with BTG Pactual.

I have 2 questions. My first question is about dividends. The company generated a lot of cash, and you are deleveraging. There is also this new legislation that may tax dividends to residents in Brazil and foreign funds. The company is -- whether the company is thinking about an extraordinary payout by the end of the year or at least an announcement or whether the company could run with slightly higher leverage because of that opportunity. And my second question is about your gross margin. Gross margin is quite strong, probably one of the last levels since the company's IPO. I would just like to understand whether this should be a new standard going forward or you have more initiatives on the people side that are yet to be captured. I would just like to get a feeling of your recurrent level of gross margin.

Samuel, this is Felipe speaking. On dividends, we will discuss that topic in the coming days. And as you said, our cash position is very sound. We have our own policy where we look at our leverage level. And I think we are in a very comfortable position. But we also look at the outlook for the coming years. So this is something that we will discuss in the next coming days and possible acquisitions could be in the horizon. If the SELIC rate is down a bit next year, maybe it will be easier for us to make acquisitions. We are always looking at M&A. But we are also very disciplined because we have to find somebody -- something that generates results. But with a low SELIC rate, we see a possibility of having enough cash and having cash in the bank is always good. I mean there may be a dividend payout, but this is still being discussed. The second point, it was gross margin. It's important that we say that since the beginning of this year, we've been paying closer attention to efficiency. And one important aspect is that we never tempered with our faculty staff. I mean, faculty is something very important to us. So we look at the admin aspect, all of the campuses, how we pay for inputs, how do we control lease, power or energy. We still have more things happening next year. But unfortunately, we cannot give any guidance because there are changes in the mix that could happen, maybe distance learning can grow more. So we don't give any guidance in that regard.

Next question comes from Mirela Oliveira with Bank of America.

I have 2 questions. The first question is about the competitive landscape. This quarter, we noticed the growth on the average ticket of the company, both for long distance learning and on-campus. You also mentioned the importance of the mix. Could you comment on the ticket of the same courses and same products for each BU? And how do you see competition performing? And my second question is about capital allocation. And as previously mentioned, you -- I think your leverage was way below your peers. And this is drawing attention. The company has been posting positive intake cycles in the On-Campus segment. So what are your allocation plans going forward? And whether you see the need to invest in some organic expansion of your units to support the growth going forward? So this is what I have now.

So let me talk about the competitive landscape. In general terms, if you compare courses for ongoing students and newcomers, there was an increase on your average ticket. The major impact comes from change in the mix. I mean hybrid courses, on-campus, health care courses, but there was a ticket increase in all segments. In terms of our strategy, I mean, this is a change that I've been referring to for quite some time. And this is something that I would say that we want to change the value proposition of the courses. I mean, charge a little bit more rather than engaging in a price competition. So next, in the future, we will focus on our value proposition, brand image. We will also focus on technology investments to add more value, to create value and to increase the ticket. This is a different strategy when compared to what we've been doing in the past, where in the past, we were maximizing revenue. And at the end, ticket was deteriorated. But since Renato arrived, we are pursuing a new strategy. Now as for capital allocation we have a lot of cash, as you know. And as we posted in our results, we have to bring investments. I think we want to pay out dividends. But at the same time, the priority is to invest as long as there is good return. There might be some excellent acquisitions, but we will do them if there is good return. We are always pursuing new acquisitions, but they have to bring value to the business. Even on the IT front, we are making changes to the way we operate in technology, and we are constantly looking at the value because we have to set up priorities and what we can wait and do later.

[Operator Instructions] Our next question comes from Lucca Marquezini with Itau BBA.

We have 2 questions. The first question is on marketing expenses. There was a slight increase as a percentage of revenue. So I just want to understand what's in the company's mind in terms of your marketing strategy and advertising and whether you view the need to invest more in marketing, given the competitive scenario. Also thinking about the new regulatory framework. This was my first question. Second question is a follow-up related to capital allocation. I know you already mentioned that, but I would just like to understand the acquisition front, whether you have any specific focus, whether it still makes sense to acquire medical courses or what is your focus now? What are the assets that you have in mind for possible M&A?