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

Good morning, everyone, and thank you for waiting. Welcome to Vitru's Education Conference Call regarding the investment agreement with Crescera. With us here today, we have Carlos Freitas, Vitru's CFO. This event is being recorded [Operator Instructions]. This event is also being broadcast live via webcast and may be accessed through Vitru's website at https://investors.vitru.com.br, where the presentation is also available. Participants may view the slides in order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via the webcast may post their questions on our website. They will be answered by the IR team after the conference is finished. Before proceeding, let me mention that forward statements are based on the beliefs and assumptions of Vitru's management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that macroeconomic conditions, industry conditions and other factors could also cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Carlos Freitas. Mr. Carlos, you may begin your presentation.

Thank you, [indiscernible], and good morning, everyone. Thanks for joining us again. It's a real pleasure to be here with you all for -- to discuss about the transactions we announced last night, especially the capital increase by Crescera Capital. Here with me, I have Maria Carolina Goncalves, the Head of our IR department; [ Raquel Suzaki ], [indiscernible] from our Investor Relations team. As said, [indiscernible] report of today's webcast, which is available in our IR site at investors.vitru.com.br. So I trust you all have the presentation in front of you. And before we begin, I'd like to make note again that as stated in slide 2 of the presentation, safe harbor is [indiscernible] impact of the call. Now I invite you all to go to Page 3 of the presentation. So here, a snapshot, just as a reminder, we closed in May of this year, the deal, the acquisition of UniCesumar, a landscape transaction here in Brazil for an equity value of BRL 3.15 billion. It was [ exciting ] at the time with a debt issuance, and we issued debentures local [indiscernible] and others for a total amount of almost BRL 2 billion, but we paid cash at closing to the selling shareholders. So 63% more or less paid in cash, around BRL 550 million were financed with the seller to be paid in May of next year, so 1 year after closing, and remaining around BRL 600 million paid in shares. So I do hope the previous shareholders of Unicesumar are now shareholders of Vitru. And part of the debt financing, the BRL 1.95 billion debenture issuance, part was up and designed as a bridge to equity. So there were two series, the first series for a 2-year maturity designed as a bridge to equity. So there's no, for example, prepayment fee, et cetera, of our [ spot ] to be a bridge to a cap increase. And BRL 1.5 billion with a 5-year maturity, a longer series. So since then, since the closing, we have been working on this predefined plan, which was to raise equity, ideally for experience and education [ studying ] investors that understand the equity story of Vitru. And with that, to accelerate the deleverage. We do generate cash, we do grow a lot. But of course, we were already working, as you know, on a plan to accelerate this deleverage process. And now we signed yesterday and we're thrilled to annouce that we have entered into this buying agreement with Crescera Capital for a BRL 300 million primary investment primary [ secondary ]. I think it's also important to highlight that on -- more of it in the next slide. But this is a program for that have a long track record in education and technology here in Brazil for a help of the investors in the past in several companies from the education sector here in the country, which are differentiated companies and reference players in their respective fields, such as Afya, for example, and Anima, Alura and Vitru is not only the largest player in this [ location, ] but also a referenced player and a differentiated player in the digital space for education in Brazil. So we are very happy to [indiscernible] with them and our shareholders. Now moving to Page 4. Here, we describe in more details on the transaction with Crescera. But before we do so, this is important to highlight that we are announcing here four deals. First, this BRL 300 million cap increase with Crescera. Second, a rights offering that we will launch in the following weeks to which our minority shareholders will have the opportunity to subscribe to -- in the same price agreed with Brazil, and with that avoid dilution to more or less maintain their respective equity stake. The third is the deferral the postponement of the payment of the sales financing with the families who are the former shareholders of Unicesumar, the performance in 12 months. And fourth, the extension for more 12 months of the current lockup by the former shareholders of Unicesumar. In just gives you the pace in each of these four transactions. So now I will focus on in Slide 4 on the details of the deal with Crescera. So as I said, it's a BRL 300 million primary capital increase. So the number of shares is here around 3.6 million new shares to be issued by Vitru at closing. Closing is expected for November. This is a product that we had to submit to the credit and it was a [ part ] in Brazil, but we do believe that it to be a quick process. So we hope to close this by November. The investment price grade was BRL 82.60 per common share, which is an 11% discount to the 30-day [indiscernible] volume weighted price in reais. So why in reais because, as you know, the FX rate and our share price has increased a lot in the last days and so FX rate in Brazil increased by around 4% in 1 week. Our share price increased by almost 15% in 1 week. So in reais, our share price increased by more or less 20% in 1 week. So here we are focusing on the view up, especially the view up in reais. So view up in reais, as of Monday was BRL 93, so 11% more or less discount to the group. And in this number, we converted to dollars before the launch of the rights offering, which by definition, was in dollars. So the effect conversion rate and that will be defined in the following days. The Crescera will be part of a lockup agreement until November 2023. So matching the new lockup with the former shareholders of Unicesumar. They will be entitled to Board members. So they -- first, they would be -- have the right to appoint two directors to our Board member until our 2024 shareholder meeting, which shall happen probably in May of '24. And so they start with two Board members. And then after May or after AGM, they have to appoint Board members in function of their shareholding stake. So for example, if they have more than 15%, they have two Board members, they have between 5% and 15%, they have one Board member and less than 5%, no Board member. This is the same right that we have today in our bylaws of [indiscernible] shareholders. And as I said, there are some CPs for closing, including the depositors approval and also the approval of the new article of association of Vitru. So we are going to call an AGM meeting to approve the change in our article association, including the two new Board members from Crescera. On Page 5, details on the other three transactions, the right offering that we are structuring and we intend to launch in the following weeks in October, a rights offering. So the shareholders will be entitled to subscribe to one new share that they will receive one certificate in the right subscriber to one new share for each six shares owned as of a record date to be defined also in the following days. So for every six shares owned by the shareholders, the total has the right to buy one new share of Vitru in the same price in dollars of Crescera. So this conversion rate of 61% was calculated more less to avoid dilution of the minority shareholders. Minority defined here as the free float and the former Unicesumar families because it is already known that the firm [indiscernible] they will not participate, they are [indiscernible] firms that are already investing in Vitru for several years. So we are now opening the possibility or the minority holders and the families to maintain their current stake at Vitru at the same price offered to Crescera in dollars. But Crescera may acquire additional shares if the right offering amount is below BRL 100 million. So for example, let's assume that the right offering amount is BRL 70 million. So Crescera will have the right to buy another BRL 30 million in shares of Vitru. It's the rights offering is more than BRL 100 million, Crescera has no right to increase their stake. And we do believe that the rights offering amount, so between BRL 100 billion to BRL 125 million in dollars. If every minority holder, including families and free float subscribe, the total number will be around BRL 162 million. But we realize, we do expect this to be slightly tomorrow. On the right, the agreement with the former families that control Unicesumar -- postponement of the sales financing. This was supposed to be paid in May of next year. The cost was IPCA that was agreed at the time of the acquisition. So we postponed this payment up to May 2024, prepayable. We can prepay before that if we want. And the cost will be changed to CDI plus 3% after May interest until major entry, it remains IPCA after debt at CDI plus 3%, but we do have the possibility to prepay that after May 23. If you remember, we raised more equity or with debt at a lower rate. And finally, the extension of the lock up with the families. We also discussing with the families. And today, they have a lockup, which was part of the view in the acquisition. There was a cap increase, as I said before. So it is part of the relation that they are locked up for 6 months between May '22 and May '22 -- sorry, in May '22 and November '22. So now they will have another period of 12 months after November '22. So up to November '23, the same lockup of Crescera. The families will also have been up for more 12 months. Now on Page 6, some more details about career, Crescera at a glance. They have a nice list of accomplishments in the education sector in Brazil, as I said before. And so here on the right, some milestone transactions. The entry and then the exit with Afya, Anima, Abril Educacao, the entry in Alura 2 years ago, Passeidireto and now Vitru further. So we have a nice platform of consumer theology, health care and education companies. So it's a very -- a nice player. So we are very happy to welcome them to our new activity. On Page 7, more details about our indebtedness. So on the left, the picture as of June 2022, and the pro forma changes will discuss increase, assuming BRL 400 million. So here for simplification, we are assuming BRL 300 million from Casera and BRL 100 million from minority shareholders. So our net debt was around BRL 2.5 billion in June. So with that increase, it will reduce to BRL 2.1 billion. Our short-term debt in June was around BRL 800 million. So it will decrease to BRL 216 million, a pro forma with the cap increase and the -- sorry, this postponement of the sales financing. And on the right, the sales financing increases the part in the long term. So this whole package, the cap increase with Crescera, the right offering, expecting high governing standards, the furrow of the payment and backup and the total package strengthens the balance sheet of Vitru and puts us in a very nice position. Because at the end, this whole package was also part of our [indiscernible] deal to reduce risk. We are in a very volatile environment. Interest rates are quite high, as you know. So this package, including the cap increase from Crescera will help to strengthen our balance sheet, and therefore more growth in the future. So to finish on Page 8, here, the shareholding structure before and after the transaction -- so before the transaction here, we have the stakes of every player. And here, when we mentioned the stakes and the UniCesumar families' stake, we are already take into account here all the shares that they have the right to receive. As some of you know, part of the deal with Unicesumar -- part of the share component of the deal was retained as guaranteed for proficient -- possible proficiency, et cetera, as any M&A transactions, there are guarantees. But instead of having a guarantee in cash, we have a guarantee in shares. So there are 2 million shares more or less of Vitru that are reserved to be issued, but have not yet been issued. But here for simplification purpose, we are considering all shares have been issued. So before the deal, we have this shareholding structure. After the deal, assuming BRL 300 million from Crescera, assuming for this administration, 84% from the free float and BRL 16 million for the families. We will have the stakes here in the bottom part of the slide. So the free float would maintain the 21.5% stake more or less that they have and the other shareholders will be diluted slightly and Crescera will have 10% more or less of Vitru if they do not -- they cannot participate in the rights offering. The other extreme, for example, if nobody participates in the right offering, nobody meaning no family and no minority shareholders. And Crescera takes BRL 100 million. So they will have 13.7% of Vitru. But here for illustration, we are assuming that the market and families will take the rights offering for the amount of BRL 100 million. To wrap up on Page 9, some closing remarks. So this is, I guess, one more nice transaction of Vitru in the last months and years. This -- we are bringing to the cap table another experienced shareholder, a referenced shareholder with a nice track record in education and technology sectors. We are reinforcing our capital structure aligned with the plan, aligned with the financing arrangement in the plan designed back there in the acquisition of UniCesumar. And we are executing a liability management transaction with the deferral of the payment with the former shareholders of Unicesumar. And maintaining high governance standards, by providing to the market the opportunity to subscribe in the same price offer to Crescera. That was it from my side. So now I'd like to open for questions.

[Operator Instructions] Our first question comes from Lucas Nagano with Morgan Stanley.

Good morning, since we have two questions on the side. The first one is since the share performed very well during the last weeks. The deal's coming at a large discount of 28%. So how do you perceive this? And wouldn't it be a better option to sell the [ medicals ] through this leverage? And the second one is if you could give us an update on the integration with UniCesumar, if possible? Comment both on cost savings and commercial initiatives.

Regarding the price, as I said, we have -- our share price increased by 20%, almost in [indiscernible] So this is a very volatile environment. This is a structured transaction. It's not a follow-on transaction that we execute and launch in one day. So we are very happy with the terms of the deal. That is 11% discount to the view up price in reais. It is a matter of risk management as well in a very volatile environment with higher interest rate. It is not a very large capital increase. It's around BRL 400 million. So we do believe that we've taken this all into consideration. It was a nice deal, especially knowing that Crescera brings to the table, I guess, a very nice track record in education and also [ health ] and together with our current shareholders of each SPX and the other Board members, experience and insight into the market. And for medicine. Medicine, the potential sale of medicine, it is a possibility, but this is I guess, on separate transaction. So here, we are bringing to our cap table one experienced shareholder. We are doing now the debt level. We are cutting now the risk of the company. And -- but we may still sell the medical business in the future, nothing serious on that now. But we can take this step in the future to be analyzed and discussed in the Board. For now, what we have is this cap increase. Regarding the integration, it is advancing as expected, in fact, even slightly better than expected. We have been working quite hard, and it is a top priority for everybody here in the company to advance in a smooth integration. So we have some areas of the companies that are fully operational as one single area. Some other areas are being combined now. For example, in terms of shared service center, back office, we are now changing systems to have savings. We have already some savings and margin gains in terms of personnel costs, as we announced in June. So things are advancing as expected.

Our next question via webcast comes from Miguel Oliveira with Bank of America. Just a clarification on our side. From what we understood, there is going to be a deletion from the controller shareholders. Is that right?

Yes. Yes, that's right. The controlling shareholders will be diluted, and the rights offering if the minority holders are subscribe, they will be able to maintain their current state.

Our next question comes from Vitor Tomita with Goldman Sachs.

There are two questions from our side. The first one is a bit of sort of related to the last question as well, which is in the summary of the transaction terms, you did mention that Crescera will be entitled to appoint two directors to the Board if it maintains a shareholding of over 15%. But given the terms of the transaction, it seems that they would end up with shareholding below 15%. So just to clarify that, this means that in order to actually appoint two directors and reach that shareholding over 15%, that would be a scenario in which Casera acquires further shares from the existing shareholders either the free float or controlling shareholders, just confirming if that is the scenario that's implied by them having more than 15%. Second question from our side, a bit of a follow-up on the M&A discussion and medical program discussion. Given that you are planning to deleverage to some extent as well by generating cash and that a potential sale of medical businesses is in the table, given this and given the capital increase, what would be the leverage level that you are targeting for the medium term or that you would be more comfortable with as on a steady-state basis?

Vitor, starting with the second question. Indeed, our steady-state leverage ratio. I mean, it shall fluctuate between 2 and 2.5 net debt adjusted EBITDA. So today, we're above that, and we are delivering. So -- but our target in a steady-state is to saturate between 2 and 2.5 net debt to debt EBITDA. And we are going to reach this level with our cash generation with growth as we discussed, and we have been growing by more than 20% organically year-on-year. And -- but we are not on hold. We keep working on that as one possibility can be that the sale of the medical business. Another possibility can be a follow-on once we have more, let's say, appropriate conditions in the market. So we keep working on that. For your first question about the directors, the general rule is that will be reflected in the article of association of Vitru, which is there already for SPX [indiscernible], which is this that I described, 15%, you have two Board members, between 5% and 15%, one Board member. That's the general rule that will also be applied to Crescera Capital. The exception to that rule is that between the closing and our shareholder meeting of 2024, why '24 because we define our Board -- the mandate of the Board members, it started in May of this year. May '22. So assuming 2 years 3, May '24, we have our new AGM to elect the new Board members. So between the closing date and, let's say, May '24, Crescera, by exception, will have the right to appoint two Board members.

[Operator Instructions]. This concludes today's question-and-answer session. I would like to invite Mr. Carlos Freitas to proceed with his closing statements. Please go ahead, sir.

Thank you, all. We remain available for -- to clarify any further questions that you may have. Thank you.

That does conclude Vitru's audio conference for today. Thank you very much for your participation. Have a good day, and thank you for using Chorus Call.