Vitru Educação S.A. (VTRU3) Earnings Call Transcript & Summary

Good morning, and thank you for waiting. Welcome to Vitru's conference call to present the synergies of our business combination with UniCesumar. Pedro Graca, Vitru's CEO; and Carlos Freitas, Vitru's CFO, are here with us today. This event is being recorded. [Operator Instructions] This conference is also being broadcast simultaneously on the Internet via webcast and can be accessed at a choruscall.com.br/vitru/may22.htm, where you can also find a relevant presentation. We will also be in charge of selecting the slides. The replay of this conference will be available shortly after it closes. And participants will be able to register questions for Vitru on the website, and these will be answered by the IR department after the conference is closed. Before proceeding, we'd like to clarify that any statements that may be made during this conference call regarding the prospects of the business combination between Vitru and UniCesumar projections, operating and financial goals are based on beliefs and assumptions of the company's management as well as information currently available to both companies. Forward-looking statements are not a guarantee of performance and involve risks, uncertainties and assumptions as they refer to future events and, therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that general conditions, industry conditions and other operating factors may affect virtuous future outcomes and may lead to outcomes that differ materially from those expressed in such future conditions. I'll now turn it over to Mr. Carlos Freitas, CFO, who will start the presentation. Please, Mr. Freitas, you may proceed.

Thank you, operator. Good morning, everyone, and thank you for attending Vitru's conference call. It's good to have everyone in this meeting in which we will provide details of our integration with UniCesumar that we got approval by the CADE. And we have Pedro Graca, our CEO and as of tomorrow, Co-CEO. As the operator said, we have material on the website that's vitru.com.br. And you have -- can then see material -- these slides on your screen. And all the safe harbor details are also on for this call. Let's move on. I now invite everyone to go to Page 4. Let me remind you of the rationale of this synergy between Vitru and UniCesumar. We want a different player that is different in the sector. And also, with a very interesting line in medicine. This business is creating a lot of value. We're uniting 2 leading companies with a lot of synergy, and I'll provide more details later on. So it's the union of 2 players that are very distinct, very distinguished by their academic quality and also delivery and execution, and I will also provide more details about each company. We are bringing together 2 companies that are clearly distinguished. That set out in the market. We also have a governance structure that makes sense for us to speed up integration and we'll have 2 members and we can count on the difference and what Vitru provides. So we are continuing this legacy of quality and impact on our students who are our clients that UniCesumar has created. Now a quick reminder of UniCesumar on Page 6. It has 33 years of history with strong growth over time, especially in distance education. It is one of the major distance education players in Brazil, as we can see here, we have 340,000 this is over 16, sorry, the students in face-to-face education, we have over 1,000 hubs, 700 so to date -- we have at the end of '21, 2021, we have become a quality benchmark in this sector. On Page 7, we can see a history of Unicesumar's growth. So we have over 1,000 hubs today that are found all over Brazil as with UNIASSELVI. It's started in the south of Brazil. But with a very -- a geographic footprint that's complementary to ours. In December '21, they had 400 hubs in the Southeast. So it is -- it has this great footprint on this region. And before they were more timid, but they're now growing with this union, we have a huge synergy potential with this geographic expansion. So UniCesumar, we have 340,000 students in Distance Learning and 348 in medicine that are in maturation in December '21 would have 1,700, and we are expected to get over 1,500. On Page 8, we have quality indicators. We have the Ministry of Education, IGC 4 for over 10 years. We have a CI 5 for the Ministry of Education and one indicator that is the one that better measures the impact on the lives of students as IDD. So when you compare the grades the student get in the national examination and this really adds value to our clients. Our students and this is measured by the IDD Index, which is 43% above market average in Distance Learning. Now on Page 9, we have our academic models, Unicesumar's model is leveraged in technology. And we have some examples not only the Studeo or Studeo Web & App for UniCesumar, which is also a benchmark in this sector. We have the best grade in all academic institutions in Brazil 4.7. That's the grade that we got in the App Store and Google Play as provided by our clients, our students. And we also have synergies for UNIASSELVI and also the management of students increasing permanence and retention of students. So we have this intelligence technology that is generated. It is preventive, reactive and we have these studies in this sector. In Vitru today, we will benefit from this intelligence, managing the permanence of students in our institutions. On Page 10, we have a clear, more detailed snapshot where they focus on medicine. So at the beginning of last year, we have -- in a few years, we'll have about 2,400 students. It's the fifth largest private institution in Brazil. We have the history of quality, a 9 seats that were recently approved and most of them in the city of Maringá, where I am today and there was significant skill gains. So we have a 300 of the total in medicine seats here in Maringá, and we have a great tradition of integration. Even the average ticket in medicine of UniCesumar is higher than the market's average ticket. Now on Page 12, we'll be seeing how these 2 businesses will be now combined between Vitru and UniCesumar. So the big numbers here. In December 21, 721 students and then we have 96% in digital education, almost 2,000 hubs. And last year, BRL 1.4 billion and the EBITDA margin BRL 473 growing over 20% yearly. So with this union of the 2 schools. Now on Page 13, we now have an outstanding position in terms of growth. So the union of UniCesumar and UNIASSELVI. We are now -- this is the picture of December 21, the third largest education player -- a higher education player in Brazil. With the distance graduation also greater than both graduate. And on the right-hand side, just for digital education, we have undergraduate enrollments. So we are the largest player in digital education in Brazil. This was not a goal in itself. We never had the intention of growing for the sake of growing. Growing was not the ultimate purpose of this -- of our company, but this is just a consequence of special execution work. And of course, digital education is all about scale, so to work properly and to add value, you need scale. So this scale increase was the result of this concern of quality and a special dedication in these 21 years. So today, over December 21, we are the largest player in digital education in Brazil. And this is what we can see in higher education in Brazil. Now on Page 14, we see what led us to the situation. All the grades, for example, the app grade scores, the at low UNIASSELVI. So this is public validation by our clients. So UNIASSELVI and UniCesumar are the highest. So on the right-hand side, we have market growth in distance burning, with a CAGR in the last 5, 6 years. So we are gaining market share in a growing market, 10% to 20% of the market in a growing market. And this is the result of our -- how we can -- we have stand -- stood out. Now here before we move on to the questions on Page 16, in the last 6, 8 months, we have been preparing for this integration process. So we have a world leader in the topic. And we prepared this based on a value creation thesis. Looking at the best in each company and also we understood processes, systems, areas, apartments infrastructure. So in this September, we started in preparing for this integration process. And after we got the approval by the CADE app. So tomorrow, we will start the integration of UNIASSELVI and UniCesumar. In the integration, we will start as of the seventh, where the two Co-CEOs Pedro Graca, Vitru's CEO and William Matos had a distance education at UniCesumar. So they will share the lead in this new Vitru, and this was no imposition neither from Vitru or UniCesumar. This was a common decision. It just appeared, emerged spontaneously to speed up this integration to help us to increase our focus on our clients. We have 2 leading companies with great cultures and we want this integration to be as smooth as possible and as fast as possible so that we can keep our focus on our clients with better quality education. So with Pedro and William, we will achieve this. Now our consolidated financials. The slides 18 and 19. There's not no news, but we'd like to remind you that Vitru and UniCesumar, we have Vitru starts from 631 last year to 4,400 this year. In Digital Education Undergrad which is the core business of these companies, that's 532 last year, 940 last year and then growing about 27% -- 67% a year. And then when we look at EBITDA and cash flow, there's a greater lead. So the EBITDA is almost BRL 500 million. That's an important increase in for Vitru with a larger margin for good reasons, not only because of our medicine business, which accounts to 23% of our revenue of the current UniCesumar with a higher margin. And also, as I said before, with student management, so UniCesumar was a little lower. And then on the right-hand side, we had cash flow operations -- from operations that's before CapEx, which was not that relevant. So we generated BRL 211 million last year with cash flow from operations. So there's an important increase for Vitru. So we're bringing together 2 companies that have great revenue and EBITDA numbers, but also companies that generate cash. This synergy now on Page 20. This synergy has an important lever in addition to expenditure and cost. We have synergy levers that are first commercial. It may have the major, the first is a complementary geographical profile of our hubs, as I said earlier, over 400 hubs in Sao Paulo, UNIASSELVI has a little over 200 in 2021. And then UniCesumar is very strong in Paraná, UNIASSELVI in the states of Rio Grande do Sul and Santa Catarina. In the South, Vitru is stronger and in the Northeast -- North and Northeast. So there's a huge growth acceleration potential as we offer both brands. We want to keep both brands because they attract different target audiences. So we want to -- where we have just one hub, we can offer both brands because the profile of students in 2 companies are different, UNIASSELVI is students, they prefer a hybrid model with a tutor at the end and with colleagues that meet every week and UniCesumar's student profile is more technological, more independent, and they're both complementary. Now on Page 21, we have our synergies, OpEx, commercial and CapEx. So OpEx, we have 4 major levers and the most relevant is payroll. As we have our staff on C-level, mid-managers, back office, the internal part of the company. For instance, we have content factories and also cost management and these are 2 companies that grow significantly. We are really growing every day and this leads to margin gains over time that are a result of our growth, at a special scale then contracts. We're using the best rates for contracts and also commercial leads. This will also be explored and also improvement in collection and commercial synergies now. We have improved retention and student permanence in other ways and also opening hubs faster. And also the course portfolio is complement currently UNIASSELVI has a broader course portfolio for undergraduate and graduate courses, UniCesumar's graduate size is lower. UNIASSELVI also provides vocational education, technical education. This has a huge potential to growth. So there's this major cross-selling potential. And then CapEx, of course, which includes intangibles, content and IT. Now on Page 22, we have our figures. So we have many details there. A lot of figures to show you where the synergies come from the OpEx synergies, commercial synergies. So these 4 OpEx levers show a potential of BRL 81 million that we see here on the bottom -- in the bottom left corner. In synergies, they have a curve over time, and the company has been growing, of course, over time. So our 2021 snapshot shows that this synergy of OpEx, when it's totally captured, it means BRL 81 million. So as I said earlier, the company's EBITDA -- consolidated EBITDA in 2021 was BRL 473 with a margin of 34% of the EBITDA and the potential is to increase from BRL 473 in addition of BRL 81 million. So a 6-point increase in our margin from 34% to 40%. And this is our potential today just looking at OpEx. And as I said earlier that's the synergy of 40%. So about half really in the present or current value is between BRL 1 billion and BRL 1.4 billion -- BRL 1.4 million. So we had 13% and 16%. We usually use 12%, 14%, 16%, 40%. So we have this range. So when you deduct current value, we have 16%. So we also show how relevant each of these levers are. Payroll, for instance, the potential is BRL 37 million. Today, the 2021 snapshot, and this accounts for 8% of the current cost -- payroll costs at the company, 8%. So let me not just doing great optimization here. Now even when you exclude the part of the business that's not optimizeable like with tutors in academic models, it won't change. So even if I exclude those that are at the end, like teachers, professors and tutors, these number accounts for 12%, 13% of the entire payroll after it's totally captured. So it's not a synergy of 40%. It's 8% to 10% of the payroll and so on and so forth. When we look at the contracts and selling expenses, these numbers are achievable. Of course, if you work properly, and that's what we've been doing. Now on Page 23, the commercial line. Again, the leverage -- first penetration of both brands. We have over 700 cities with at least 1 of the hubs. So the number we have opening up honestly over time. So we have an incremental EBITDA. Also student retention rate. So we have another value of BRL 1 billion -- BRL 1.3 billion. So the market gives more credibility to OpEx synergies. But anyway, we have the -- growing these other credible indicators that have a reason for being. And of course, we have this major potential of our synergies. And then CapEx, BRL 60 million to BRL 90 million. Now on Page 24, when we look at everything. We have the current value potential between BRL 2 billion and -- or BRL 2 billion -- BRL 2.8 billion, BRL 2.9 billion. Now on Page 26, the deal. To have -- it was BRL 3.2 billion. Equity value is BRL 3.15 billion, which was very low. The data base was March 21. So the base date, and we will have a slight adjustment tomorrow when the deal is closed. And when we look at 2021 data. The EBITDA 11x. And today, the LTM, the EBITDA in the last 2 months is lower because the company is growing over 20% a year in terms of EBITDA. Now when you look at synergies, just OpEx expenses and costs, this means multiple at '23, 6.5 and 5.24 because the synergies are captured fast. And in 2, 3 years, we have all this in-house. In terms of structure, 63% in cash at closing tomorrow; 18% in financing; and 20% in equity in shares. So the current shareholders of UniCesumar will get 23.5% of Vitru. Financing is also secured. We have firm credit lines with 4 Brazilian banks, major banks, of BRL 1.95 billion, 5-year financing and the company generates a lot of cash and the cash flow profile that was negotiated with banks and amortization. This will be delevered over time. And in practice, we won't be standing still. We're working hard to speed up this process with maybe future offers or other processes. So we are working hard to speed this process of deleveraging. Now on Page 27, on the right-hand side of the new Vitru and the families that currently control UniCesumar will have 23% of the new Vitru. So there are many individuals, many family members. And we -- tomorrow, we'll issue 7 million shares. So it will move out to 21%. William Matos, who will be the Co-CEO of our company and 2 people from the Matos family, including the University President, Mr. William Matos, who will be the Co-Chairman of the new Vitru -- Vice Chairman. All right, everyone. So my final remarks and then we'll open -- start the Q&A session. So we have this game-changing acceleration rate, not only in Brazil, but worldwide, it's very significant. We have companies focusing on quality with a nice culture with a very important scale, and we'll be generating a lot of value over time. Medicine business that's really interesting to us. We'll be evaluating this in more detail with the board, but we have a great potential. And with the deal and governance structure generates a lot of value. And we will now open the Q&A session, and this is being -- of course, delivered in Portuguese, we'll be speaking in Portuguese and Pedro will have -- is here with me for questions.

[Operator Instructions] Questions can be posted through our website choruscall.com.br/vitru/ri22.htm. Please wait as we gather your questions. We have a webcast question by Vinicius Figueiredo. Can you explore the structure of both CEOs. Will each be responsible -- will have different responsibilities in each vertical is structured -- will the structure be maintained during the integration? Or is this something more long term? Can I also ask about PDV, how will the PDV policies of these companies, how different are they? Can you give us details about these gains that will be really helpful?

Okay. This is Pedro. Thank you, Vinicius, for your question. I'll start discussing, the CEO. We want to work together. So the whole company will be structured in full integration. It is clear that with the gains that we have in this part. Yet we won't lose knowledge, the people and processes, and we need to give time to our students. And both me and William, we know our students and we know that this is very important in this process of integration. It's a huge challenge for both companies, of course, but we're working on. We've been working on planning this and we have -- we're obviously very competent professionally. Really very careful and humble. Has been really working well in our planning phase. But of course, we need to consider the challenges of working with 2 Co-CEOs and this, the idea is to really add value and to learn from each other. It's better than having 1 single CEO. And we have some time to understand how much we are making a difference. As for the PDV question, I'll move it on to Carlos.

Okay. Vinicius, yes, PDV is different, of course, our policy in our models. And as mentioned, processes, it's all about permanence of students and retention. So we'll need this, but we consider PDV percentage. It will be always larger with UNIASSELVI because of the model. There are 2 major differences. One is that UNIASSELVI, we have provision for PDV looking at -- it's semester-based. And UniCesumar is quarterly-based -- quarter-based. So we've been cleaning up this base. And there's an important point or academic model is hybrid, right? And we want our students to try things out. And part of our capturing means that we let students we want them to experiment or -- and to show them the model is really interesting, and that's what we do. So activating students is different in both companies, we have faster activation of students, but we also get students that leave or abandoned. And then they can pay at the end of the month. Anyway, the academic model was different and UNIASSELVI, we want students to try this hybrid model. And we end up attracting students on impulse. They think they can do the course, but they cannot. They think they have time. And this has been for just 1 weekly meeting, but they don't. So there's this major academic difference that is important, and it's higher than UniCesumar, but then there will be gains because of the management process that UNIASSELVI will benefit from this experience or -- students will benefit from this experience.

[Operator Instructions] We have a question from Ian Ziskin.

Could you please share what are the main point of the debt that you are raising.

Ian, thank you for the question. Yes, Ian, this bank negotiation line, there are duties -- the main covenant is the one of net debt. The EBITDA is regular and the covenants are 4.5 of net debt of the adjusted EBITDA in June '23. So that's -- will be just in a year, the measure. And then 4.0 in December 2023 and then 3.5 in June '24, and then 3.0 as of December '24. So 4.5 in June next year, and then it drops all the way to reach 3. So it's a comment that is quite interesting, where we feel very comfortable that over time, it will generate cash and the company, obviously, in the beginning, will be more leveraged, but this is something that as we consolidate results of the company, we generate cash, and this will just drop. And we will just keep having this much under the level over time. And it is a debt. So you know there's a cost that is a cost average of CDI plus 2.7.

The next question is from Caio Moscardini.

I'd like to understand the adjustments that you did with the revenue of UniCesumar for the year 2020. In the presentation of the deal, you released that the revenue of UniCesumar was of BRL 731 million. And now in the presentation of synergies, the revenue drops to BRL 610 million.

Caio, thank you for your question. Yes, when we released the deal in -- back in August, we used the accounting criteria at the time of UniCesumar. And this difference is what we had to understand where UniCesumar had as an expense line, some players did in the past, don't even doing that anymore. This would be the idea that this part of passing, the amount of the sharing with the partner. So we don't bring that into the revenue. So it is just really the sharing basically in the figures of UniCesumar in '19, '20, '21 now are fully comparable to Vitru's and are integrated.

[Operator Instructions] Our next question is of Lucas Nagano from Morgan Stanley.

Two questions on our side. The first is about the commercial line. If you could talk a bit more about the assumptions, and how is the time line to have the hubs launched and the courses? And what are the criteria for the journey? And the second, if there's any type of fiscal synergy.

Okay. Let's start with the second one. The fiscal synergy there can be a few synergies there, but not for now. And I would say nothing that would be relevant at this point. Why? Because with the structure we have and we will remain with, we have a Vitru Brazil SA, which is the holding that will be tomorrow, the owner of UniCesumar as it is with UNIASSELVI. And this is where the debt will be. So the tax yield of the interest. And I should say that the holding is one that operates. So the graduates on this holding and the -- we're talking about the regular type of tax, 4.5. And since there will be really much in terms of -- any additional premium wouldn't be used at this point in the short term. So there might be something into the future to look into, but nothing for the present, I would say. So we decided not even to have any fiscal observation there may be mid long term, but for the short term, there wouldn't really be a value there. When it comes to the commercial side, I mean we looked into each of these topics very carefully. So a detail of the penetration of hubs. We did the ramp-up opening because we consider that we would open 400 hubs. So we have some cities where we just have one or another. So conservatively, we said we would just open 400 hubs in the next 3 years. Already considering maybe there is may be a cannibalization here. There is a potential here that is not 100% explored. So let's have a conservative number of 400 cities in this case. And then we back that over time in 2023. It's less than '22 but mostly '23, '24, '25 reaching 400. And then each of these hubs will have their own ramp-up. So it's not only the hubs launched over the next 3.5 years, but each hub will have their own ramp up. So they will reach maturity only after a few years. So we'll start with less students and then you have the ramp up. So when you consider how much you have of revenue generated and a margin of contribution, I mean, the gross margin less PDV. So the marginal margin, I would say of the hub of 2% and we have here on the foot note on Page 23, this would bring us an EBITDA of BRL 84 million in 2024 and BRL 120 million in 2025. And the present value is BRL 400 million to BRL 500 million. So yes, pillars are all there to be the foundation as a conservative way, but realistic, so we can have an estimate of how much we can have there.

We now conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Pedro Graca and Carlos Freitas for their closing remarks. Please, you may proceed.

Well, everyone, thank you, once again, for your interest, your attention and we carry on here with our day-to-day work. Tomorrow, we will have the closing of the deal, and we're very excited with our next phase, a new Vitru here with the merger of UniCesumar with UNIASSELVI, bringing something new to this industry. Anyway, our team, myself, Carlos, I mean the whole team are available for any question you might have. So thank you, and good morning.

Vitru's audio conference concludes here. Thank you, everyone, for attending, and have a nice day, and thank you for using Chorus Call Services. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]