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

Good afternoon, ladies and gentlemen. Thank you for waiting, and welcome to Cruzeiro do Sul's conference call to discuss the first quarter of 2022 results. Today with us, we have Mr. Fabio Fossen, CEO; Luis Felipe Bresaola, CFO and Investor Relations Officer; and other members of the Executive Board. [Operator Instructions] And afterwards, we will have the Q&A session when further instructions will be given. [Operator Instructions] We would like to inform that this call will be presented in Portuguese by the company's management, and for the English conference, there will be simultaneous translation. This event is being broadcast simultaneously on the Internet via webcast. Before proceeding, we would like to mention that forward-looking statements that might be made during this call in relation to the company's business perspectives, operating and financial projections and targets, our beliefs and assumptions of Cruzeiro do Sul's management as well as information currently available to the company. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions, and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future results of the company and may lead to results that differ materially from those expressed in such forward-looking statements. Now I would like to turn the conference over to Mr. Fabio Fossen, who will start the presentation. Mr. Fossen, you may proceed.

Good afternoon, everyone. Here is Fabio Fossen, CEO of the company, and thank you for participating in Cruzeiro do Sul Educacional call. Before getting to the details of the quarter, I would like to start by highlighting important actions for '22 and for the future of the company. On-campus intake [ ex ] medical courses in 1Q '22 was about 26% higher year-on-year, and we should close the first half with an intake of about 15% higher year-on-year. This intake cycle led us to a growth of 6.5% in our base, 132,000 students, representing 4.7% growth vis-a-vis the end of 2019 before the pandemic and in line with 1Q '20 already including Braz Cubas and Positivo pro forma. The student base growth was higher in our higher education institution in the Sao Paulo Metropolitan area, Braz Cubas is growing 25%, 61% higher than the acquisition base in 2020. NCEs and [indiscernible] about 11% in the same period. The student base increase was accompanied by a higher average ticket in the quarter, 6.6% higher year-on-year due to the better efficiency in the price discount management and more important, with an intake with higher ticket than 21 pointed to a reversal in the downward trend of the last few years. Another quarter that confirmed the quality of our education, the resilience of our brands and our capacity to attract students. And by the way, UniFran was again ranked by Times Higher Education as the best private HEI in Brazil. We went up 4 positions in the Latin American ranking going to the 151st including public schools and foundations. In medical courses, we grew the student base by 6.8% a year due to the progress in the number of seats, improving about 9% of the ticket is already adjusted for the injunctions that impacted 2021. In DL, we grew intake by 20%, and we expect to win with about 15% growth year-on-year, which lead us to a growth of 16% in the number of students. The average DL ticket in the quarter dropped slightly 3% year-on-year and due in part to the higher share of tuition from students onboarded to in the pandemic, partially mitigated by a freshman intake with a slightly higher monthly tuition fee than in 1Q '21. The change in the ticket trend for the on-campus and DL in this intake show that the changes made in our commercial strategies start to bear fruit to balance the price value ratio of our education. Our ADI levels and the percentage of the finance base are stable at the 2021 levels. And with these measures, our net revenue went up 12.3% year-on-year, BRL 473 million. Our margin went up 80 bps year-on-year, thanks to the revenue increase and the academic reorganization carried out last December, which partially mitigated the cost increase driven by the return to the campus and the bigger on-campus student base. Adjusted EBITDA grew 12.6%, with a 30.2% margin, 10 bps more year-on-year, impacted by the timing of marketing expenses intake higher at the beginning of the year vis-a-vis 21 plus inflation. I would like to end with a remark about our governance that we mentioned in previous calls and that consolidated in 1Q '22. We finalized the reorganization of committees that support the Board with effective implementation of 3 new commitments: people, academic and innovation and strategy committees. And we hired 3 external members to coordinate the people, finance, M&A and academic committees. These 3 professionals have a wide-ranging experience in their respective areas, helping us challenge the status quo and build new growth alternatives. With these initiatives, we believe that we have the right model of governance for the challenges of this new phase. I end my remarks here and turn the floor over to Luis Felipe Bresaola, who will talk in detail about the results of the first quarter. Thank you.

Thank you, Fabio. Going to Slide 15, I will talk about the quarter net revenue. We reached BRL 473 million, a 12.4% increase year-on-year. Net of the effect of the mandatory discount injunctions of Unipe, 9.9 million in 1Q '21, revenue would have been 9.8% due to the higher set base in on-campus, increase in the medical course of number of seats and consistent expansion in distant learning student base. I should mention the progress of our health courses in our revenue, reaching 67% in 1Q '22 vis-a-vis 63 last year. On Slide 16, we show the adjusted gross margin in the quarter, 50.1%, 30 bps higher year-on-year. Management initiatives to boost efficiency help mitigate the impact of the 4% salary adjustment in the 21 agreement in effect in January '22 and the increase in the technical and teaching teams with the progress of the health forces. Besides the cost line was impacted by the higher amortization of the right of use, which is affected by the monetary restatement of the IGPM applied on rent and the increase in third-party services given the return to 100% campus classes. Adjusted EBITDA in the quarter was BRL 142.9 million, 12.8% high year-on-year, driven by a 30.2% margin, 10 bps higher year-on-year. The margin expansion reflects the expansion of the company's gross profit and the lower ADA, which was mitigated by the higher marketing costs and the higher intake in the period and the 4% salary adjustment from the agreement signed in '22, impacting January '22. On Slide 18, we show the evolution of the adjusted net income and account receivable. Adjusted net income went from BRL 31.5 million in 1Q '21 to BRL 19 million this year, impacted mainly by the higher interest rates and rents. On the right, we show the accounts receivable reiterating our position of keeping a low number of codes in financing programs, which in 1Q '22 was approximately 6.2% of the base. Our average account receivables was 41 days, in line with the half year ended in December '21. On the next slide, we show investments made by the company in 1Q '22, about BRL 21 million vis-a-vis BRL 13 million last year, driven by the return of maintenance investment project that had come to a halt due to the pandemic and the return of on-campus classes. On the right, we break down our operating cash generation of BRL 126 million vis-a-vis BRL 184 million last year. The adjusted operating cash generation was 92% of the adjusted EBITDA vis-a-vis 149% last year, impacted partially by the higher accounts receivable. And lastly, on Slide 20, we talk about our net debt of the lease liability that reached BRL 460 million, 5% below the BRL 487 million in December, reflecting the operating improvement. Now I end my remarks, and I would like to give the floor to the operator to open the Q&A session.

[Operator Instructions] Our first question comes from Yan Cesquim from BTG Pactual.

I would like to ask 3 questions. The first is about the ticket dynamics. I would like to understand if the dynamic we saw in Q1 '22 makes sense for the rest of the year. When I get a sense if you're thinking about the consolidated Freshman plus matured students. So if that applies to the rest of the year. I want to understand about on-campus and Distance Learning. My second question has to do with volumes. With a good resumption in the student intake for on-campus we can see particularly on campus better. So I would like to know if you keep this perception for the rest of the year, in the second half of the year, this will continue. That's for on-campus, and I would like to learn about the strategy for distance learning. Do you want to continue to increase the number of hubs has to have a greater student intake for DL? And my third question is about M&A. I would like to understand how your pipeline is, if there is any conversations ongoing? And if you are confident that there will be more organic growth this year. Those are my questions.

Well, the first question was about the ticket dynamics. Well, we saw that in the first student intake in Q1, that's kind of in keeping with what we expect for the rest of the year. It will really depend on macroeconomic conditions, of course. But in terms of visibility, the visibility that we have, our brands can attract a lot of students on campus mainly. The strength of our brands can take advantage of the initiatives we adopted to reorganize to have a greater efficiency of prices and discounts. I think the same applies for the volume of students and campus. We have shown over time, particularly in our on-campus brands. We always had a characteristic of making acquisitions and being regional leaders in on-campus. This has shown to be very important during the pandemic and last year with everything that happened, we dropped our student base by only 1%. I don't know about the census data of 2021, but with public data you have the reported results in the stock exchange. Compared to our peers, our performance last year was very relevant. This year, we are growing the on-campus student intake with a higher ticket. So that's an important point. And we also have to take into account cohorts of students that impacts the dynamic. So we have those cohorts students that were captured during the pandemic, and those that were captured before the pandemic graduating. So there's this dynamic of inflow and outflow of tickets and cohorts of students and then normally put some pressure on tickets, but we were able to show this quarter that we were able to increase student intake over last year, and we have plans to continue with that very same pace. As for your last question regarding M&As. This is one of the reasons why we went public. We continue to evaluate a number of themes. And there's something more tangible, we'll communicate to the market. But we continue to be very aware and very thorough regarding the investments we make in terms of mergers and acquisitions. That's as far as I can tell you now at this point.

The next question is by Lucca Marquezini with Itau BBA.

I have 3 questions as well. First, regarding health care courses, the company has been showing a greater share of that modality in the on-campus now at 50%. So I want to understand in the long term, how relevant is this segment? My second question is about DL. The company reported a 1 percentage point reduction in dropout, which is justified as the reflex of competition in the end of the student intake cycle. Could you comment on the competitive landscape? Have you seen any difference in different cities? Or is this a generalized practice? And thirdly, a quick question regarding governance. Could you talk about the main initiatives of the company, such as the creation of committees? That could be very helpful.

Luca, this is [ Wilson Denise ] speaking. I'm going to answer your first 2 questions, and then I'll turn the floor to Fossen to talk about governance. You mentioned something important. Our on-campus student base has a good volume of health care courses and growing accounting for 50% of our base. These more resilient courses to churn, higher ticket, greater predictability of revenues. This is always important to us. It's always been in our strategy. And this was reinforced in the new student intake. And looking forward, the penetration of health courses will gain relevance in the total mass of students and courses on campus. To answer your question, we will move forward with this in the coming years, most likely at the same pace that we had comparing 2022 with 2021. Your second question about the dynamic of Distance Learning, the scenario is more competitive, more fierce. There are regional particularities. But we see intense competition, particularly for 100% DL courses, also with hybrid courses DL with some on-campus activities. And a small effect on dropout that has to do with the natural dynamic of competition in this segment. We see this dynamic applying looking forward, but we understand that we are very well positioned. We could get a good volume of students, 16%, almost 15% intake growing 16% our base. In the hybrid courses today, 17% of our DL base that we started escalating strongly last year, will move forward. This will give us more predictability of revenues, lower churn, and that is important. And we're looking at a competitive landscape, just like in the first intake, we see that the whole year should follow that same dynamic. And I'll turn the floor to Fossen to answer your third question about governance.

Look, regarding governance, we took a stride forward. Last year, we had 2 big moves. First, the IPO, which of course brings up the need to make adjustments and changes to any company regarding governance. And in our case, there was another fact -- effect that the members of the family left, they were the founders of the company, and they moved to the Board of Directors. So last year, in the 9 months since I've been with the company, we reorganized the committees of the Board. We created 3 new committees, which I believe is very important because the people who handle the business for a long time, they're focusing on the strategy, and we have committees focused on dealing with people, academic excellence and innovation and strategy. We maintain our DNA alive in the strategy, that brought Cruzeiro do Sul this far. So that this will help us in the next 50-odd years ahead of us. And also important are 3 specific themes, people, M&A and academic excellence, we decided to bring external coordinators, who are not Board members who are not in the company, but these people were called to help us -- help challenge us in these 3 points. Our people asset is an important asset to us. We look at that very carefully because this is what makes this company. As for M&A, we brought in a professional very seasoned in investment banking and for the academic area and another professional, very experienced in the academic world with a different background to help us challenge the academia piece in the future. So with that, we complete a cycle of reorganization of the Board and the management. We're also working at the management level with the separation. With the transformation of managers into a director. We now have a manager focused on human resources, again, that focus on people. So we have an area, a technology area. We still have just an IT manager. Now this has a status of an officer, and they have a voice in the decisions. Again, helping us decide where to invest, where we can derive competitive advantages. And another officer, Legal and Compliance Officer for crisis management and restructuring that we are -- we will bring on board a professional in the beginning of June. So with that, we are restructuring the management our internal organization, improving and fine tuning the company to the new moment. We are a listed company. So we have to implement good market practices that will help us unlock the growth of the organization.

[Operator Instructions] We have a question coming from the webcast. I turn the floor to the management.

The webcast. We have a question by [ Gabriel Gatan ] with [indiscernible]. He has to comment on the impact of the adjustment of rentals on the impact and the financial impact of that. We're talking about rentals. This adjusted in the second quarter, first quarter over first quarter last year does not have this impact. So we have a mismatch of dates when the contracts are adjusted. Most of the contracts are backed to IGPM. There's only backed to IPCA, and we should have a discussion in the second quarter regarding the rent. And the financial result is basically linked to the select rate, everything regarding the operation of students. We had an amount of value that was stable. We have debentures all linked to the select interest rate while our cash remuneration is below what we pay to the interest rates. So there is a mismatch of indices and ratios considering cash and debt. This is how we can explain it.

Our next question will be live by Artur Alves with Santander.

I have one question regarding the dynamic of hybrid courses. How should we think about hybrid tickets, hybrid course tickets if the on-campus student intake continues to follow the trend of growth, there might be an improvement in ticket since competition in DL is quite strong.

This is [ Will San Denise ] speaking again. Well, we have a distance learning dynamic, which is more competitive. There is greater competition in the 100% digital courses. But in hybrid courses, we see the possibility of a healthier ticket. Coupled with that, there's the strength of our local brands, and we can connect the national brand with strong local brands, and this is an avenue of opportunities where we are capturing additional value in the tickets of hybrid courses. This has helped us in the first student intake in volume, 17% of the base is for hybrid courses. In the intake of students, more than 23%. In other words, we are going to grow this half year after half year as we allocate these courses in the right markets and hubs, and these have all been mapped. And yes, there is room looking forward. We are looking at this dynamic of 100% digital very competitive at this level in hybrid courses as an opportunity to mitigate losses of 100% DL courses. We see this stronger in our company, given the connection that we have 10 strong regional brands connected with an umbrella national brand that is also strong in offering DL, hybrid with a more dynamic approach and capturing higher tickets. This is how we will be working and we hope to continue in this dynamic in the next student intakes so that will leave the red sea of DL.

We are now ending the question-and-answer session. I would like to turn the floor back to Mr. Fabio Fossen for his final statements. Mr. Fossen, please proceed.

Well, I just would like to thank all of you for joining this earnings conference call. We started the year with a good pace, making the necessary changes in the organization. We've been successful in student intake. I always like to reinforce the strength of our on-campus courses and the strength of our brands, are academic quality and reputation has yield results during the pandemic. Now with the resumption, it has become even more relevant for us. In all of our results. We are confident in our results from now to year-end. I will basically depend on the external scenario, given the strong basis we were able to build and have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]