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

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Cruzeiro do Sul's Conference Call to discuss the Second Quarter of 2022 Results. Today with us, we have Mr. Fabio Fossen, CEO; Mr. Luis Felipe Bresaola, Investor Relations Officer. [Operator Instructions] We would like to inform you that the presentation will be made in Portuguese by the management of Cruzeiro do Sul and there will be simultaneous translation into English. This event is also being broadcast simultaneously on the Internet via webcast. Before proceeding, let me mention that forward-looking statements that might be made during this call in relation to the company's business perspectives as well as 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 we would like to turn the conference over to Mr. Fabio Fossen, who will start the presentation. Mr. Fossen, you may proceed.

Good afternoon, everybody. This is Fabio Fossen, CEO of the company, and thank you for participating in Cruzeiro do Sul Educacional earnings call. Before getting into the quarter's highlights, I would like to mention important initiatives for the current year and for the future of Cruzeiro do Sul Educacional. In September, we will be completing 1 year of the company's management transition when the families decided to lead the business in a more strategic way to the Board and committees and I was hired as a CFO -- as CEO. It was an intense year in which we took care of the transition with the end of the pandemic and the financial and operational health of our core business, we devoted ourselves to defining the evolution of our corporate strategy, reinforcing the alignment of actions and of the organization to focus on student success, which is our reason to be. We discussed and decided to expand the education of business line to broaden our revenue generating possibilities, generating value for our shareholders. We have been working in this direction since the beginning of the year, adjusting the internal processes, governance, reinforcing some back office functions. At this moment, we are realigning our organization by creating business units for the development of our learning verticals. This change aims at ensuring a sharper focus of the senior management or the identification of trends and opportunities as well as our competitors' moves, ensuring speed in the execution of projects to tap into opportunities in each one of the learning verticals. Thus, we created 2 business units On-Campus VP and Digital Learning VP as well as the academic and Innovation Executive Board. And these will be important components in the rollout of the strategy. Now talking about our teams. We've made some important changes in the responsibility of our [ intel ] talent, and we hired professionals with a long-standing experience, whose characteristics add to ours so that we may have a winning senior team. [indiscernible] as the Head of Marketing. Sales was invaluable with the growth of DL. And is now Digital Learning VP with the mission of speeding up the development of this our Digital business in undergraduate, graduate and nonregulated educational business lines. Eduardo Senise joins Cruzeiro do Sul as the graduate and nonregulated Learning Program Director with the mission of accelerating the development of these business lines in the Digital Learning VP. Eduardo has over 12 years' experience in the segment. Luiz Gonzaga Foureaux joins Cruzeiro, the Marketing and Sale Director and brings us his wide-ranging experience in the sector and the record of relevant achievements in Digital Learning. [indiscernible] is now our On-Campus VP with focus on the evolution of On-Campus learning, on operating efficiency and on the management of our brands, which are so important for the success of our business. [indiscernible] heads the Academic and Innovation Executive Board and will be the strategic pillar for the development of Cruzeiro do Sul Educacional renovation program in a market in which the different teaching methods are interconnecting and new technologies are enabling different teaching solutions. Besides these changes, we have announced the coming on board of Felipe Negrao as CFO, bringing us his long-standing experience in the area with publicly traded groups and in the education sector. Felipe, will continue the transformation of our financial area to support the strategic evolution of the group, further developing the work started by Bresaola. And now I would like to thank Bresaola for the passion and dedication shown in these 4 months in which he was the interim head of our Financial Department. He was my right and my left arms in this period, and he delivered above and beyond our expectations. And in this new phase, Bresaola now focuses specifically on fees related to Investor Relations and M&A, this guaranteeing speed and senior focus on the company's inorganic strategic themes. With these moves, we believe that we have the right organization model and the necessary talent for the challenges of this new phase of the company. And to finalize, I would like to mention some highlights that reflect the important initiatives that we put in place over this first year. We closed the 1Q '22 cycle with about 15% intake growth in On-Campus and [indiscernible] growth in our student base of 2.4% and 10.8%, respectively. In addition to growing our base, the improved commercial planning and focus on pricing led the ticket defined as net revenue of the quarter over the final student base to grow about 9% in On-Campus, 8% DL maintaining the trend of the 1Q '22 intake and ticket initiatives drove the expansion of 186 bps in the gross margin in the second quarter and BRL 135 million in the first half of '22. Adjusted EBITDA went up 17%, expanding 129 in the margin in 2Q, closing the half year with about BRL 302 million EBITDA with a 15% growth vis-a-vis the first half of '21 with an expansion of 72 bps in the margin. Now I end my remarks and give the floor to Luis Felipe Bresaola, who will get into details of the results of the second quarter of '22. Thank you very much.

Thank you very much, Fabio. Now on Slide 15, I talk about the net revenue in the quarter. We reached BRL 537 million, 12.2% up year-on-year due to the higher consolidated student base and the higher ticket besides the increase in Unicid, Unipe Positivo number of medical seats. Another highlight for the higher participation of health courses and revenue, 67% into Q '22 vis-a-vis 63% last year. Slide 16 shows the adjusted gross margin in the quarter, 47.6%, 1.4 percentage point increase year-on-year. Due to our management initiative that mitigated the impact of the 4% salary adjustment of 2021 impacting January this year, besides the collective marketing agreements for K-12 and in Brasília for higher education. Besides the cost line was impacted by the increase in the right-of-use amortization, which is affected by the monetary restatement of IGP-M over-rent by the increase in the transfer of hubs given the expansion of hubs and [indiscernible] and the increase in services and utilities, given the resumption of 100% of on-campus classes [indiscernible] by the lockdown. Adjusted EBITDA in the quarter was BRL 159.2 million, 17.3% higher year-on-year with a 29.7% margin, a 1.3 percentage point increase. The expansion of the adjusted EBITDA in Q2 came mainly from the increase in gross profit that mitigated higher marketing costs and the seasonal impact of ADA, which was 7.9% of revenue in 2Q '22. Also the higher penetration of DL, which has a higher ADA. And in spite of the challenging macro scenario in the half year, our ADA was 1 percentage point higher year-on-year, reaching 6.6%. I reiterate that the company's practice is writing off 100% of all 180 days past dues. Now on Slide 18, we show the evolution of the adjusted net income, which went from BRL 43.8 million in 2Q '21 to BRL 32.3 million in 2Q '22, mainly driven by the higher interest rates and rents. On the next slide, we show the evolution of our accounts receivable, 41 days in the quarter, 1 day more than 2Q '21 and in line with 4Q '21, both periods are seasonally the same in the sense that they are at the end of the school semester. Slide 20 shows investments made by the company in 2Q '22, about BRL 39 million vis-a-vis BRL 23 million last year, driven by the resumption of investments in maintenance that had come to a halt besides IT investments. On the next slide, we see the operating cash generation, BRL 34 million vis-a-vis BRL 70 million last year. Looking at the adjusted opening -- operating cash generation, it was 27% of the adjusted EBITDA vis-a-vis 57% last year, mainly due to the reduction in accounts payable, which benefited 2021 with the adoption of MP 139/2020, as to the postponement of the collection of the INSS and FGTS taxes and the resumption of the maintenance CapEx due to the return of on-campus classes. Lastly, on Slide 22, we talk about the net debt. Net of lease liabilities, reaching BRL 572 million vis-a-vis BRL 488 million last year, impacted by the payment of BRL 50 million in dividends and the inflationary indices and the issues on indexed contracts. Here, I end my remarks and turn the floor over to the operator to start the Q&A session. Thank you.

[Operator Instructions] The first question comes from Vinicius Figueiredo with Itaú BBA.

I would like to go deeper on competition and distance learning. You mentioned that you've just noticed a slightly worse and strong dropout rate in the digital segment owing to stronger competition. I'd like to understand, considering the second half of the year, if this should be translated in a more challenging scenario in intake for the second half or maybe a slightly more challenging ticket for freshman?

Fabio speaking. What we see looking ahead, particularly in the second half of the year and also considering not the environment that has been ongoing and challenging in what DL is all about in terms of pricing. Competition among the top 5 or 6 biggest players online has been stronger at the end of the day, price is an issue. However, to date, we haven't seen any problems as far as intake is concerned. We weekly and daily control the dynamics in terms of quantity prices, and we make decisions on how to adjust and maximize our revenues in these 2 variables. And the competitive dynamics in DL, Distance Learning should not give room in the second half of the year, considering that the economic condition or the economic environment is challenging for everyone. On-campus, we have a positive trend, both in the number and also price. And we saw in the first -- in this first half of the year, very positive results on our end. Dropout was slightly stronger. The mix of DL in the total of our mix also increased. Typically, DL students have a slightly higher dropout rate compared to on-campus. So a number of factors took place, therefore, increasing dropout in the numbers that are reported.

The next question comes from Pedro Lima with BTG Pactual.

Just one question related to CapEx. We've noticed that in the quarter, the volume was slightly higher, something close to 7% of revenues. And you said that a lot of it comes from investments with a pent-up demand in the pandemic, particularly 2021. I wonder if you give us more color on this. Do you believe this to be recurring for the year or for the coming years? How do we envisage CapEx as a percentage of revenues?

Thank you, Pedro. Bresa speaking. We accept to maintain the run rate for 2022. For the CapEx of the first half of the year, we speak of maintenance, but we also have labs that eventually will build owing to the progression of classes that we launched in the latest year. So there is a mix of maintenance, labs and also investments in IT. Our idea for the year is to maintain the run rate that you saw in the first half of the year.

The next question comes from Fred Mendes with Bank of America.

[indiscernible]

The question was not very clear, but it will be understood now. This is Bresa. We had a seasonal increase in the first quarter, we had an improvement but we started to have dropout, and it was only 1 percentage point higher in DL. We have more -- shouldn't so the ADA is higher on campus. We had an increase as well because of the macro scenario that impacted our students. We have been looking in detail to understand the curve and we have elections now with some incentives in the macro scenario, we do not see this deteriorating. We see this more stable. But there is a part of that, that has to do with the mix. In costs, we talk -- we did some career planning putting the student in the center, and this is our moto from now on. We have been advancing in some themes that could bring us some more efficiencies, but nothing that will impact the student. We continue with this agenda. And it is very important to talk about efficiency, and we have been looking at the revenue side, additional revenue streams, and we offer under graduation. And besides the graduation, we already have a structure set up. We already have the hub. We already have the infrastructure. And we have to see how we can leverage the current infrastructure that we already have in place. So this is a very important part of Cruzeiro looking ahead, increasing our revenue streams and looking for new opportunities as well.

Just a follow-up question so that we may model. Regarding the initial plan for cost reduction, you will have more opportunities now on the revenue side because you have already tapped into the cost reductions?

No, we still have opportunities for cost reduction. We are working on both fronts, cost and revenue. We should continue to advance in cost and expenses. -- but we cannot quantify this right now. We are not going to give any guidance in this regard.

The next question comes from the webcast platform by [ Carlos Herrera], [ Condor Insider].

How do you see competitive dynamics? Do you believe you keep on managing to increase the average ticket in the second half of 2022?

Like Bresa said, we don't give a guidance for our future. However, naturally, we've seen that price dynamics have their limits, but we have a very positive outlook and we had some remodeling of our full commercial process. The team reacted very well. The team is very focused on intake growth and also on a more healthy ticket to the company. All the efforts since late last year and early this year have generated results and we found a point of operations that we believe that right now, considering this more challenging scenario and considering we're getting to the second half with elections, et cetera. There is some encouragement, but a lot of uncertainty for 2023. So we are still checking how prospects and occupancy rates will react. But when it comes to our in-house efforts, [ Wilson's ] team performance is very good, and we're very confident on what we've seen so far.

[Operator Instructions] I would like to give the floor back to Mr. Fabio Fossen for the final remarks. Over to you, sir.

We'd like to thank you all for joining us today. I hope it was fruitful to all of you. And I hope you managed to get the right message in terms of the restructural alignment, so we can keep on working on the strategic development that has been decided and that has been ongoing since early this year. These are important drivers for us, making us very confident not only for the next quarter and next half of the year, but we're moving into a direction towards very consistent growth at the company level, a point of no return, changing the basis of the organization so we can really get ready to face a lot of scenarios in the future. Maybe this is one -- or maybe this is the take-home message. We are effectively evolving in our strategic process with all the necessary conversations with the Board, the family members and the guidance with the new management as a whole. Teamwork is very intense. We're all sitting down together, looking at the company, and this gives a lot of trust in the senior team that we're working on in order to grab all the opportunities that we envisage in our strategic discussions with the Board. We're very confident about the future of the company and the next path along our journey. We thank you all, all the best.

Thank you. This concludes [Audio Gap] [Statements in English on this transcript were spoken by an interpreter present on the live call.]