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

Good afternoon, and thank you for holding. Welcome to Cruzeiro do Sul Educacional's conference call today discussing the earnings release of the first quarter of 2025. [Operator Instructions] We inform that this conference is being recorded and will be available on the company's IR website at ri.cruzeirodosuleducacional.com.br, where you will also find a complete set of materials for our earnings release. You can also download the presentation on the chat icon also available in English. [Operator Instructions] Note that the information in this presentation and statements that may be made during this conference call relating to Cruzeiro do Sul Educacional business prospects, projections and operational and financial targets are based on the company's management's beliefs and assumptions as well as on currently available information. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and hence 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 performance of Cruzeiro do Sul Educacional and results that differ materially from those expressed in such forward-looking statements. Here with us today, we have Mr. Renato Padovese, CEO; Felipe Negrao, CFO; and Luis Felipe Bresaola, Investor Relations Officer. I would now like to turn the floor to Mr. Renato Padovese, who will begin the presentation. Please, Mr. Renato, you may proceed.

Good afternoon, everyone, and thank you for attending our Earnings Conference Call for the First Quarter of '25. The year 2024 marks the 60th anniversary of Cruzeiro do Sul Educacional. Today, one of the largest educational groups in Brazil, we began our activities as an admission school preparatory for entry into the public school, junior high school and 2 rooms behind the main church of San Miguel Paulista, a neighborhood located on the outskirts of Sao Paulo. It is very significant, therefore, that we begin the year of the celebration, posting the highest adjusted net earnings for the period in the amount of BRL 87 million, double that presented last year, reflecting the discipline and assertiveness in conducting our business. This financial performance reflects our largest student base in the company's history in which we've reached by 180,000 students from basic education, graduate and lifelong learning programs. In recent years, we made strong progress in the automation and simplification of internal processes that contribute significantly to better execution at the end. Investment in technology not only provided scalability and synergy, but have also impacted our products and students. Duda, our application that completed 20 months today has more than 550,000 active users and is our main means of communicating with our students and faculty. With Duda, we started to participate more actively in student life, both on the academic and on the financial side. In addition, this tool has supported us in a relevant way in the intake and maintenance of the base. In April, the Ministry of Education released the another [ CPC ] and [ IDD ] data for the 2023 cycle. We continue to perform well compared to the main players. However, we knew the challenges of the cycle. Another point I'd like to comment on is medical courses. We currently have 1,019 seats in 8 of our institutions and ended the quarter with 5,459 students, which represents a growth of 25% compared to the first quarter of 2024. In April 2025, the medical course at Universidade Positivo and Unipay received the maximum score of 5 in the renewal of recognition of the course by the Ministry of Education, with Unipay receiving of 4.97% and Positivo reaching the in all dimensions of the evaluation. This achievement reaffirms the excellence of the courses, which strictly combined with all of the criteria set forth by the evaluation committee demonstrating our commitment to providing high-quality education in line with the contemporary demands of the health area. In the lifelong learning pillar, we advanced with the launch of 9 graduate courses in the medical area, 51 campus and 4 distance learning courses in addition to 11 on-campus courses in the industry. The first classes have already been formed with a special note for the course in Sports Medicine, in partnership with the Brazilian Society of Exercise and Sports Medicine and improvement in dermatology. These initiatives reinforce our dedicated and strategic portfolio for the continued education of health care professionals. I conclude my comments here and turn the floor to Filipe Negrao who will talk a little bit more about the company's financial indicators.

Thank you, Renato. In the next slide, I will talk about the operational performance of On-Campus we recorded a growth of 6.3% in the student base, reaching a total of 180,000 students. This result is due to the increase of 2.4% in intake combined with the advance of 0.9 percentage points in the retention index, more targeted marketing initiatives and actions to anticipate reenrollment were decisive factors for the success in expanding the On-Campus space. We also bring the ticket data, which grew 6.1% in Q1 '25 compared to the same period of the previous year. This performance mainly reflects the increase in the share of students in the health area on the base, especially on the medicine and dentistry courses combined to the advance in reenrollments. In addition, the strategic management of monthly payments by type of product based on the analysis of the competition and the performance of the sales funnel enabled a more efficient control of discount levels. On the next slide, we bring the operational data of digital, which ended the period with 401,000 students, representing a growth of 16% compared to the same period of the previous year. This growth is the result of the 13.9% increase in intake, reaching a record of 135,000 students in the advance of the enrollment KPIs up 0.4 percentage points versus the same period of the previous year. The more targeted marketing initiatives, the actions to anticipate re-enrollments and the commercial actions carried out with the hubs were important factors for the expansion of the base in this period. Starting the average ticket, we ended the quarter with a drop of 11.2% compared to the same period of the previous year. This reduction is mainly related to the greater presence of students with below average tickets in the mix with intake in the second half of '24 during a more aggressive promotional campaigns. Hybrid courses continue to expand and already represent 25% of the digital base, a growth of 2.2 percentage points compared to the first quarter of $24 million. Going into the financial details, I will comment on net revenue in the quarter, which reached BRL 693 million, up 10% versus the first quarter of 2024, as a result of the higher consolidated student base. In the On-Campus segment, revenue grew 13% reaching the amount of BRL 480.3 million as a reflection of the larger student base and ticket. Revenue from courses in the health area expanded 19.5% in 1Q '25, driven by the revenue from medicine as a result of the acquisition of PAPI and the new seats authorized in 2024. These courses represent approximately 71% of the On-Campus revenue. In digital, we had a 5% revenue expansion, reaching BRL 213 million as a result of the larger student base. On the next slide, we demonstrate gross margin in the quarter, up 2.7 percentage points, reaching 52.6% in the first quarter of '25. This margin expansion mainly reflects the adjustments made in the personnel and the contribution of the growth of the base of medical courses. On the next page, we present the adjusted EBITDA for the first quarter of '25, which was BRL 252 million, an expansion of 29% compared to the first quarter of '24. The adjusted EBITDA margin reached 37.5%, an increase of 5.4 percentage points compared to the same period of the previous year. This result reflects the 2.3 percentage points for increase in gross cash margin combined with efficiency gains of 1.3 percentage points in the lines of administrative and personnel expenses. In addition, the PDA had a positive impact of BRL 9.2 million in the first quarter of '25 in contrast with a negative impact of BRL 16.6 million recorded in the first quarter of '24, reflecting the improvement in credit and collection actions as well as a result of the update of delinquency estimates implemented in the fourth quarter of '24. Marketing expenses accounted for 10.3% of net revenue in the first quarter of '25 compared to 8.9% in the first Q '24, reflecting the efforts aimed at intake in [ 2025 ] cycle. Moving on to the next slide. We demonstrate the update in the delinquency estimates made in the first quarter of '25. As disclosed in the fourth quarter of '24 over the past year, in addition to reviewing processes, the company updated its receivables portfolio provision model by performing an analysis that considers a 24-month horizon from January '23 to December '24. The work was carried out with the aim of establishing greater adherence to the profile of the portfolio in the post-pandemic period. when there was a faster expansion of the digital student base, which went from 62% in 2020 to 69% in 2024 compared to the total student base. In addition, the company revisited the policy of writing off overdue notes in accounts receivables, reducing the time from 720 days to 360 days. In the chart, we present form 2 between the pre-update and post-update PDA in the delinquency estimates and the pro forma table illustrating the effect of the PDA on EBITDA. Due to the update of the PDAs throughout 2025, we will have temporal differences in relation to the PDA presented throughout 2024 with more pronounced variations during the quarters. Moving on with the presentation, we show the company's costs and expenses as a percentage of revenue excluding nonrecurring effects. Since the third quarter of '23, the company has focused on the execution of projects focused on technology in order to provide a better experience to students and bring more speed and efficiency to the operation. These projects have allowed us to advance in the automatization and automation of collection and back office processes, reducing operational risks bring an improvement in governance and important progress in the academic and administrative journey of students. In the first quarter of '25, costs and expenses totaled 63.4% of the company's net revenue, representing a reduction of 5.5 percentage points compared to the first quarter of '24. The gains observed in the period were mainly due to the improvement in the line of personnel with a reduction of 2.9 percentage points and the positive impact of the PDA reflecting the update of the delinquency estimates implemented in the fourth quarter of '24 and new processes of credit and collections, as detailed in the previous slide. Moving on to the next slide. We demonstrate the evolution of the company's adjusted net earnings, which reached BRL 87 million, 98% above the first quarter of '24, a new record in the first quarter. The increase in adjusted net earnings is a result of the expansion of EBITDA in the period. On the next slide, we demonstrate the average days of receivables in the first quarter of '25, which was 32 days, a reduction vis-a-vis the same period of the previous year as a result of several factors, including better management of payment methods, increased share of picks and of our financing, among others, improvement of the collection rule, better remuneration of collection offices, greater effort in the recovery of credits from inactive students, new technology platform and change in the PDA criterion. It is important to note that the reduction in gross accounts receivables and PDA is due to the write-off of notes from 360 days instead of 720 days as practiced until the third quarter of '24. On the next page, we present the investments made by the company in the first quarter of '25, which reached approximately BRL 12.2 million, down 68% versus the same period of the previous year. It should be noted that the company continues with its annual investment budget, and that in 2025, we should see a greater concentration of disbursements between the second and the fourth quarters of '25. Moving on to the next slide, we demonstrate the advance in cash flow to shareholders, which was BRL 191.3 million, representing an expansion of 121%, a reflection of the expansion of EBITDA better management of working capital and the reduction of CapEx. On the last slide, represent BRL 574 million of net debt, excluding lease liabilities, with a financial leverage of 1x. The decrease of 14.8% was due to the payment of BRL 60 million as dividends and the disbursement of BRL 158 million for the acquisition of PAPI, whose EBITDA contribute little to the company's EBITDA considering the acquisition date in June 12, 2024. As informed in the previous release, February 5, we concluded the second issuance of debentures of Cruzeiro do Sul Educacional in the amount of BRL 300 million to reinforce cash within the scope of the ordinary management of the business. The conditions of charges were 100% of the CDI plus 1.35% per year with a term of 60 months with the first installment due in February 2028. Also in the first quarter of '25, we paid BRL 206 million for the last installment of the acquisition of Universidade Positivo. In order to illustrate the company's debt profile, we present below the amortization schedule broken down by type of debt. highlighting that the -- with the current level of cash allows us to honor all that until the end in order to illustrate the company's debt profile, we present the amortization schedule by type of debt in March of 2025. I conclude here my comments and turn the floor to the operator to start the question-and-answer session.

[Operator Instructions] Beginning with our first question, Mirela Oliveira, Bank of America.

I have 2 questions. It caught my attention the CapEx level a little bit leaner this quarter. So can you talk a little bit about what you expect for the year in detail whether there was any one-off effects that justify this lower level? And my second question is about cost in this first quarter. We saw a cost with an increase with personnel expenses very much under control even with the steeper growth of On-Campus. If you can talk a little bit more whether you see a need to recompose costs looking forward? Or if there was a level of gross margin for the company from now on?

Mirela, this is Felipe. In terms of CapEx, we can't give you a guidance, but what we can say is from 2022 to '24, in infrastructure, we spent more in CapEx, especially due to COVID campuses were closed for some time, and we had to spend more in the monitoring until it should resume a little bit, but it will not go back to previous levels. On the technology side, especially, we are also investing a lot, but I think it's natural looking forward. For the CapEx to go down and OpEx and technology to go up because as the projects are ready, we don't have as much CapEx anymore, and we start having more expenses with licenses. So I think that's basically it. For cost, I'm sorry. First quarter, it's seasonal. There's a lot of days of vacation. So there's no expenses with faculty, but we are constantly revisiting the course, supply and offers, the profitability of each course that's something that's our core. We're always looking at quality and seeing, maintaining or improving quality. We look at what opportunities exist in terms of gains of efficiency and costs. And I think we're very efficient this quarter compared to the past. But again, it's natural to see seasonality during the year, and this resumes and goes up a little bit more later.

With our second question, Lucca Marquezini, Itau.

We have 2 here. First, about the ticket on the DL courses. You talked about the drop being impacted by the mix with a bigger share of students that would intake in the second half of last year. But we wanted to understand whether in addition to this impact, you saw a more difficult environment in terms of competition. If you can talk a little bit about the competitive dynamics of DL, it would be helpful. And the second point about marketing expenses. If you look year-on-year, the share compared to the percentage of net revenue increased compared to the first quarter of last year. So if you can talk a little bit whether this is a one-off or if there's a new level aligned to maybe any change in the company's commercial strategy, that would be helpful as well.

Lucca, this is Felipe again. Okay. So I think both questions are connected, actually. Marketing, I think that's part of it that we have a lot of new seats in medical school and other locations. So we need to build the awareness about these schools of medicine. So we spent a little bit more, and that's part of the explanation is due to the new units. And the other about Distance Learning, we see a more competitive scenario. We were a lot more aggressive in terms of price. We've worked more on the hubs, but we also had to spend more in marketing for DL, considering our competitors. We're spending. We still have entering students that's very significant compared to our competitors, is the best one in the industry. We're working on increasing efficiency, but the point is that we spent more in marketing. We were more aggressive in terms of ticket, but it was an assertive strategy, and we saw an expressive volume. We see students coming to our base. And that doesn't always happen. Sometimes you lower the price, increasing marketing and don't get students, and we did have that side on our case. So we're very pleased with the results for the quarter.

Next question, Lucas Nagano with Morgan Stanley.

We have 2 questions as well. The first a little bit about the DL ticket, but focusing on On-Campus, what we saw is that the share continues to increase. But this quarter, has had a bigger impact on the average ticket. So how did this happen? I mean the pricing of the on-campus courses, do they also -- are they also more aggressive or -- are they partially offsetting the other courses? And the second question is about PDA. So trying to isolate the effect here with this new seasonality. Can we consider this 1.7 gain as structural and the rest was more seasonal impact?

Lucas, this is Felipe. Okay, so about the On-Campus ticket, I think it was a little bit more aggressive. We have a strategy here. In intake, we are always a little bit more aggressive, but we recompose it as the number of students increase and they develop as well going to the next terms. And this is the strategy that we've been practicing for some time, and it has been quite successful. So that's the first point here. About PDA, we have a gap comparing as a percentage of net revenue, 40% of the gap is due to the initiatives that we've adopted since 2022. There's a lot of things we've been doing, and I'll talk to you about it. And 60% is a timely or temporal issue that during the year, especially around the third quarter, we have a delinquency level a lot better than the second and the fourth quarter. That's due to the seasonality of the business. So as I said, since early 2023, we approved the plan with the Board to work strongly in the collection side. We have previous experience with collection. I think we had a lot of things that we could do to be able to bring this improvement both in terms of credit and collection. So I think today, we have a series of collection firms, and we have a very effective management with -- of these offices. There's meritocracy involved. We adjusted all of the fees, there's a negotiation policy. We work as much as we can so that the student is not delinquent. And in credit as well, we had our own credit initiatives that we don't have anymore today because what we have is there's still some of our risk sales, we have credit analysis to bring the student in. So there's a series of initiatives that were implemented in recent years, not to mention automation. I think today in the industry, we are very well positioned. And I think that would already bring effective structural gains and our objective, and it would be recurring gains that we have due to those initiatives, but we did not stop, right? We're in the industry, we're very satisfied, but there is other industries that collect better, banks collect better, and we're looking at it. So what else we can do to be able to get an even better performance. There's still a lot of aspects we're working on for coming months. And our expectation is to have even more gains looking forward in terms of collection.

[Operator Instructions] This questions-and-answer session is concluded. I will turn the floor back to Mr. Renato Padovese for his closing remarks. Please, Mr. Renato, you may go ahead.

My closing remarks is about optimism in 2025, due to the results of the first quarter, but also with the actions that are being developed in order for us to improve and increase efficiency, increase the ticket, improve efficiency and costs. And I would also like to highlight that we're celebrating the 60th anniversary of Cruzeiro do Sul Educacional was founded in 1965 by Professor Gilberto Padovese. And to see that this company releasing record earnings results today have never once stopped growing since the year its foundation. And this is due, first of all, to everyone who have and does currently work in the company, but also the value of the founders were strongly present in the organization. I wish you all a good afternoon and a great weekend.

Cruzeiro do Sul Educacional's earnings conference call for the first quarter of 2025 is now concluded. The Investor Relations department remains available to answer any questions. Thank you, all participants, and have a great afternoon.