Yduqs Participações S.A. (YDUQ3) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for waiting. Welcome to the earnings call from YDUQS for the results presentation for the first quarter of 2021. [Operator Instructions] And we would like to tell you as a disclaimer that anything that might be said during the teleconference regarding the business perspectives, projections and operational goals are premises and -- based on premises and beliefs of the Board of Directors based on information that is currently available. These are not guarantees of performance. And we have premises and uncertainties. And it depends on circumstances that might or might not take place. Investors must understand that industry conditions and other operational factors might affect the future results of the company and might lead to results that are materially different. Now I would like to give the floor to Mr. Eduardo Parente. Please, the floor is yours.

Thank you very much. Good morning. I hope all of you are feeling well, healthy. So we have another quarterly presentation. I'm going to go over the numbers with Eduardo Haiama. And then we have -- we are available to answer your questions. Let's see how we see this first quarter. It's a quarter that after -- actually, it's our fourth quarter at the time of the pandemic. So when we compare this quarter with the previous 3, there is a very big difference in the adjustments -- in the necessary adjustments. Everything that was -- well, that was mandatory that we do with the pandemic. So we had a very positive advancement. Second thing about this quarter. This is a quarter that when you see facing the other quarter, which was the pre-pandemic quarter, these are numbers that are similar regardless of the time that we had a drop here in the -- well, in the intake, and we had -- regardless of that, we can see the solidity of everything that we're saying. We fixed everything in terms of costs, and we are working with the growth levers. We have M&A and Medicine. And very efficiently, we could fight against the problems, and then we have results that are similar to the pre-pandemic times. So we understand that this is a strategy, and these are the adjustments that we have and always looking for new things in these 3 segments for digital and on-campus learning. Well, as we say in Brazil, we have to sometimes forget about the brakes and just move on. And if you remember the FIES 3, 6 months and even the pandemic, we understand that our future perspective is very positive. And so down the road, we expect great results. So when we look at the intake, once again, this is fully aligned with what we have discussed. And we have an organic growth that is very strong in premium and Digital Learning. You can see here, 44% and 27%, respectively. And when we see the M&As, these numbers are even more impressive. On the on-campus, we have, obviously, the drop in 30% in the delta. And remember that a year ago, we had the biggest intake in our history. However, there is no surprises from what we've seen from specialized consulting companies. So the sectors, analysts, they are seeing the behavior of the students looking for a delay. And this is a very important number to highlight, we have 40% of our students when they get into our courses, our universities, our -- well, they have 2 years already that have worked with -- that have studied in the higher education and many of our students also come from the public sector. And we understand that there is a bureaucratic delays -- well, we see that we have ways, we have 2 -- usually 1 good intake, 1 poor intake. The trend now is that it's going to be a positive intake. And then at one point, you will see the numbers. Let's go to Page 4. What do we have is quarterly highlights. Within premium, as we commented, we expected to get to 7,500 students. We already got to 6,000 students, undergraduate medical students. So 6.2, 6.6 -- well, 6,200, 6,600 students, medicine students. The average ticket increased 5%; EBITDA margin, 53%; renewal rate higher than the experience and a very strong movement. If you've seen it, there was a good report in Valor Econômico, which is a specialized publication, we're taking medicine to a higher level brand that is differentiated, that speaks about medicine, to medicine, for those that do medicine. IDOMED. When we look at Digital Learning, we have -- the -- well, it looks like premium. We have the doubling of the net revenue. We have the undergraduate student base that is still good, and we are still accelerating in the centers. We are going to the interior of the states. It shows our intake. We are having new centers. We grew, therefore, 58% comparing to first quarter 2020, regardless of the period of the pandemic itself and therefore, we should get to 2,000 centers expected for 2021 year. And now on-campus, it's a big issue. The average ticket increased by 4%. If you compare it to first quarter 2020, we would think that there is a higher intake. There is more competition. This isn't what actually happened in the market. And you will see this up ahead after the competition announce the results. We actually have stability in price. It doesn't come from this quarter, but the first quarter of 2020. This is a good news. And when we look at the on-campus average ticket, with or without the FIES financing, it's a marginal influence, like you say, it doesn't really affect us. And we have an intake level that is very good. There is a great increase. We've got a small loss in -- well, last year, but remember that we also invested. And we now have a renewal that is normal. The students are working with that. And we think that Aura has a great influence in that. And we finish with 43% of the students. Well, and we already mentioned the scholarships. And this renews is reflected in the NPS, the renewals. And therefore, we have this very good renewal rate, even in the context of the pandemic and, still on-campus, we're really always working and seeking, as you can see, an increase in productivity, profitability, having a more sustainable business. We have worked for many years in health care, of course, and the result, which was 1/3 of our base. We got to 42%, rising from 30%. We're doing very well in those health care focus -- courses. They are more profitable, this is a market trend, and it's very resilient, even in the context of the pandemic. This is very special in the context of the pandemic and the post-FIES world. And remember, we had a lot of mandatory discounts. This really affected the accounting results. We had the adjustments of cash flow. But what we see is a residual really of these mandatory discounts. In the fourth quarter, we had orders of magnitude of BRL 80 million. Now it's less than BRL 10 million. It really shows that the world is going to a post-pandemic world. Well, about that BTD in Portuguese, we are at 11% comparing to the first quarter of last year, which was 12%. It's a great advancement. Number that was lower than what we had in the pre-pandemic, the NPS, advancing very well. The Digital Learning, we are growing in the Digital Learning. We are increasing, well, the payment renewals. And when we work with a digital world in the core business, this really is -- well, we see the reflection in the NPS. And here, we can see 17 points, even though 80% are still having classes via Teams, only 20% -- well, on-campus plus 17 points and Digital Learning 21 points less. You can see that we have a capital structure that is solid. I think that we should highlight this point. This is generating cash, low leverage. Every quarter, we tell you. There has never been actually a quarter where we say that the cash flow hasn't been solid. Every quarter is solid. Acquisitions and integrations. We have more than BRL 95 million captured in synergies -- BRL 95 million. Once you implement the M&A, it starts running. And then the results are down the line -- the total results 12 months down the line. It's a long-term investment. BRL 95 million is the 12 months that was already captured. One thing that is important to highlight is that we have the premium and digital, totaling 46% of the net revenue. We should get to 50% in the first quarter. And, well, as I told you 46%. Now let's talk about EnsineMe, the new backbone of Digital Learning, and how we are using technology to get to our students. We have a great NPS. The experience of the student, this number is reflected in NPS, but also in the result of the tests that we're doing. The increase of the base, the student base. We had a 17-point increase in NPS and 21% in on-campus, so 17% is for the Digital Learning. And we do 1 statistics for statisticians and 1 statistics for those people that we optimize the base that we use and everything, that's white label. So we acquired cantinas and a series of others. And immediately, we have the content of EnsineMe. This really helps us capture the synergies. Today, we have 100% of the first year students are digital and now we are taking order to several courses. 100% digital, you can see the investment here. And we are going to the postgraduate courses that we believe that there is still a lot of things that we can do. And this has been great, successful, a lot of success. So let's talk about premium. And here, the big message that you can see on premium is the revenue and based on the student base, growing strongly in regards to last year. So the revenue in comparison to the first quarter of '19, we came from -- well, it was from BRL 86 million to BRL 110 million. I don't know if it really showed the organic growth. That was really good. There is just a dark green, which is Medicina Estácio. We went to, well, first quarter '21, BRL 144 million, so almost 2x the first quarter of '19, 2 years. The student base growing 50%. So there is a growth. There is a little clock that has been working very close to our plan. Here, when we get to the quarter, BRL 112 million. We have a better number than last year for the EBITDA when we are locating the cost per business unit. We have something that when you have a slide from 1 quarter to the other, we have to see there year-on-year. And here, we had the late intake. We prepared for the first time and only time because of the time, we had a guidance for the quarter. So you can see the math. And of course, we look at the semester here. The premium is not going to have a margin of 53%, it will be a number close to 50%, maybe a little bit below that. What do we have for news? We launched the IDOMED brand, Instituto de Educação Médica. And we already have the undergraduates from 6,200 to 6,600 students, that's what we expect for the second semester base. And the adjusted average ticket growing year-on-year, adjustment 5%. This quarter, we had BRL 8 million in losses of the mandatory discounts by court orders, but this quarter, this discount will not be enforced anymore. And then, therefore, the -- we will have new numbers and new trends. Ibmec, we really launched a new logo and we had good numbers for intake, Ibmec as well as IDOMED. The intakes closing much earlier and we had late intake. And on premium, we closed very early -- much earlier than the premium -- well, on the premium, we closed much earlier than the regular. So today, its -- premium is 1/3 of our EBITDA of YDUQS. And we have a renewal rate that is very strong, but now it will be very strong. You can see the 96.5%. Now Digital, Page 7. What do we have? It looks like medicine, the student base is doubling, if you look at the first quarter '19 to first quarter '21, as well as revenue. Here, we have an effect on EBITDA of this late intake. So you can see the numbers of intake in the first box are referring to October -- from October to April. And we got students getting into the system in April. The numbers would have been higher should we have connect -- well, taken into consideration the numbers of late April. But we decided just to show you this reference, this guidance for the quarter. And here, the effect that is on the contrary to medicine, you can see drop, what we can see, not like medicine, we had 40% EBITDA, last year it's 45%. As we close the semester, it will be closer to 45% on the EBITDA, as I just commented. Also EBITDA -- this EBITDA is 1/3, Digital Learning -- 1/3 of the total adjusted EBITDA. We can see the number of centers growing. We had 1,500. And now at the first of this quarter, we had 1,600 centers, and we are strong to finish this year with 2,500 centers. Once again, this is a great number of centers. We still -- many of them haven't gotten to their fourth year. They're still maturing average ticket, as I have told you very -- several times. They have -- there was a slight decrease of 1.8% year-on-year decrease. It's expected. It's BRL 240 a month on average for the first quarter of 2021 on Digital Learning, and we're very satisfied. It's still a strength and a good bet that was done many years on the cellphone in the cheapest model of teaching centers and I believe that this has been expanding. If you get the margin, the corporate and salaries, it's above 50%. And this has manifested itself many times. Let's talk about Page 8, on-campus. We have a drop in the revenue, 2%, in comparison to last year. Nonetheless, in this number, we have all the M&As, all the acquisitions that we've done on-campus. And this year is Wyden plus Athenas. So this number, if we just got the universe -- universe that we had, Estácio UniToledo, from the first quarter of last year, this drop would have been 19%, which is this orange number on the left, ex acquisitions. So the numbers without FIES, the number is stable. You can see. There's a little bit of FIES right there. And then adjusted EBITDA of 17%. For the quarter for the adjusted margin of EBITDA, you can remember that last year it was 24%. And now we're very impressed with the resilience of this operation when we see that we had the end of FIES. We have the financial crisis regarding the COVID-19 pandemic, but we still got the 17% EBITDA margin down below. Undergraduate average ticket, there is an increase of 4%. If we remove FIES, it's 6%. It's the last time that we're going to talk about the loss of FIES. It's not making sense anymore. If you look at the student base, we have the variation for the first quarter of '19, '20, '21, a variation of 2% from last year, but we can see the base of what we had and what we have. The drop is higher than the 2% that we can see. It's important that we show you on the next page, 9, what we are building on-campus and why we are so positive with the future. At the top at the left is the distribution of -- well, the structural evolution of the YDUQS. And we have the courses that have the mix of courses on campus. We have an evolution here. Of course, dark blue is health care. We are working with that. We really like to work and show you the results. We can see up ahead the expectations, and we can see the direction that we are undergoing. We've been doing this with many -- for many years with a lot of success. When we look at the renewal rate on the right, it went up in regards to 2020 -- year-on-year -- this year -- year-to-date. Once again, a very difficult moment here, a very difficult year. And without big courses, big costs. In the middle, we had the cost of Estácio com você, but that's it. Down below, at the left, we can see a very important number, very impressive when we see the student per class ratio and occupancy rate, we can see from 35 to 46 on semester in comparison to 2018 and 2021. So there is a growth up to 73%. A lot of spreadsheets, a lot of science to get to this number and a lot of logical analysis. We need to -- well, of course, this is very important for business, and we have [indiscernible] understanding that. And we have from -- really, during the pandemic, we can see how the teachers are committed and the numbers during the pandemic, well, actually showing that there is a growth. This is very good. There's a lot of work for people to understand, and now they understand clearly the beauty and the importance of having done our homework in 2018, 2019, with a lot of effort in health and this number on the left that we dropped from -- that we came from 35 to 46. When you look at the number of -- which is the NPS, you get more people in the classroom and then the evolution of the NPS variation. And here, you can see the options for semester. It's more flexible, and we can increase the NPS year-on-year in the on-campus. And especially in this year of the pandemic. As I told you on the right, we finished the -- well, with 37% of the students with Aura, the expectations to close 2021 with 61%. We are doing a great work with technology that engages the student. So we have a content, a short video or podcast and it's a content that before we needed to get the info, and it's already strong with Fortnite and the digital content has been very didactic. And the students are coming much prepared to the classroom. And I will have the statistics of -- well, 65% of the students are ready to watch, for example, my class, and that transforms completely the dynamic. It helps with the preparation. And it really helps us to have that standardization, the guarantee of quality with all the campuses that we have. Page 10, Eduardo Haiama will talk about the revenue boosted by Digital Learning, premium and M&A.

Thank you, Parente. Let's talk about the numbers. Our total net revenue grew year-on-year, almost 20%. And as you can see, as Parente has said, this is the last quarter that we're going to show you the delta FIES. As we have seen and have been telling you for a few quarters, the FIES impact will be minimum. It would be BRL 100 million, BRL 150 million maybe on this year, and this quarter really shows just a reduction of BRL 28 million. The intake really had an impact on the -- well, on the on-campus. The -- we can see the 3 levers of growth that we have commented. Digital, BRL 44 million; premium with a delta of BRL 20 million; and the acquisitions, BRL 200 million. So we can see the revenue year-on-year. We have 17%. And then you have that adjustment by court orders we can see the numbers. Now consolidating the guidance for the quarter. And remember, the issue of the quarter because, in fact, the late intake has generated a distortion of seasonality. We'd rather show you the number as we are expecting for the quarter, the adjusted revenue, given that the intake and renewal basically are done. So we are expecting a growth of 16% adjusted numbers. If you compare it to the reported numbers, it's higher. Now last but not least, in the graph below, we can see how these levers of growth are per segment, Digital and premium. We can get the space that they're gaining throughout the year, 18%, they represented 21%, 7% plus 14%, and now they finished this Digital Learning and premium with 46% and of our revenue. Now Slide 11, adjusted costs and expenses. I'm going to do the breakdown and just highlighting 3 items. We have bad debt, BTD in Portuguese, advertising and G&A, depreciation. Actually, this is when we do an acquisition, we -- well, we acquired Adtalem, but all the other 3, what is the important thing? Bad debt. In the graph on the low on the left, even though we are growing year-on-year, 12%, when we look at percentage-wise, of the net revenue, the bad debt plus just kind of drops from 12% to 11% of the percentage of net revenue. Remember that the first quarter of last year, we didn't have the pandemic. Pandemic really started to impact us on March -- around March of 2020. And this is something that we have commented that since June, July, the numbers have been improving. Second item, in the graph above, which is advertising, marketing. Advertising basically in this quarter, we had an expectation, which was the market expectation. We did market research in November, December last year that it seemed that we would have a normal year or a normal scenario for the on-campus, when it was in January we saw that actually the scenario was more difficult than what was projected. But we had spent money with that. February, we realized that the trend was changing. And we might have more digital -- well, that's why we had the campaign "Estácio Tá Pago." It was a success. We had an education that our intake year-on-year digital might have been 10%, 15%, but it was 31%. Our strategy, in fact, we changed very quickly. This is a market that is changing and it's paying for itself. And the last cost item that I wanted to mention, D&A, depreciation and amortization. There is a delta of BRL 29 million, as you can see on the graph, but half of that delta is related to the amortizations of acquisitions. These are noncash effects. We will see this in the revenue up ahead that impacted here. The rest is just regarding the assets that we acquired. Slide 12. If you take a look at the EBITDA, now let's look at the adjusted. Year-on-year, adjusted, it's dropping about 7%. And as it was mentioned before in the previous presentation, on-campus suffered a lot because of the intake, the pandemic. But our levers of growth and the acquisitions that we've made have, in fact, kept us at a level -- at the same level of last year. The highlight -- the real highlight, besides the one on the right, well, it's basically -- well, when we see the revenue, comparing the Qs, it's 0 and 0. But the nonrecurring, it's BRL 160 million that was last year, nonrecurring items. And now the nonrecurring effects, we are at BRL 13 million. And BRL 8 million of these nonrecurring effects aren't just individual causes that, well, impacted the court orders, BRL 8 million. If you remember, so if you look at a very clean number. We haven't shown them for a few quarters. But anyway, the next slide, talking about the adjusted net income. The income that -- well, that impacted the EBITDA, we are doing an adjustment for the cash profits. Well, basically, the amortization here of the acquisitions. And here, the adjusted net income was BRL 73 million, almost 60% in comparison to last year. And remember that last year -- now with the acquisition is the financial result that was impacted in BRL 30 million. And here, the impact on income. And if you have EBITDA and the D&A, we are amortizing the assets that have come from the depreciation and the reported income, you can see it reported. But in cash generation, next slide, we can see that the cash flow and generation, first, we have to -- well, we would have been a drop. If you look at the CapEx, we had an operational cash of BRL 409 million against the operating cash flow, which is BRL 189 million, which is on the table on the left. But this doesn't really reflect the reality of the recurring cash flow. Why? Because on the first quarter of last year, which is a last line in the table, we've had a delay in the FIES receivables. It should have -- we only got it in January of 2020. It should have -- we should have received it by December '19. So BRL 136 million, that would really get a good approximation through the reported year -- well, quarter-on-quarter revenue. By the IFRS 16, I have to show the interest rates as an operational expense. And I didn't have that, but now I have that, that delta impacted another BRL 30 million. Last but not least, the big item that was completely launched on the liabilities was the contract termination fee. It was an old discussion for rent. And now we have the payment of BRL 45 million, but this is one-off. There will be no further payments. Looking at the adjusted cash, we are aligned with last year and still keeping cash conversion that is very high. The cash position, BRL 2 billion, while that's the accounting, the high liquidity cash generation and ability to raise funding, BRL 1.3 billion in cash position. We can see the next quarter, we will have everything together. For CapEx, the graph on the right, there is a reduction of 20%. Nonetheless, we need to highlight that we have documented for the previous quarter, the expectation for CapEx for this year is a similar level to the standard of CapEx that we had throughout 2020. And the opening of this CapEx still will be based and everything that we've called digital transformation plus IT. That's the important part that will keep the company updated for the changes that we believe will improve on the quality even more. In terms of indebtedness, we finished here with the EBITDA, that was very healthy, low debt. Net debt over the adjusted EBITDA at 1.3x. And this is one of the strong basis for growth in the future. With that, I will give the floor back to Parente. Thank you.

So if you look at the recent acquisitions, we did 3 over the last 2 years. UniToledo is concluded. The integration was a landmark for the first time in our history that we kept the brand of teaching of the acquired higher education company. This has been very differentiated in the region, and it was the first time that we launched the brand. We did that in 90 days. Adtalem. Still hasn't been 1 year since we had the inception of the integration. It should be 1 year soon, and the process is doing very well. We have a great deal of the synergies captured. And we can see the integration of this system, and we concluded the integration of over 60 systems. This gives us a great relief that most of the problems are gone and knowing 21.1 that we have teaching matrix implemented in the first post-closing intake cycle of '21. And these are synergies that will appear all throughout 12 months. It's not the 88 that appears in the first quarter that was captured. Athenas is a very nice case. We acquired. We are looking at regions that we are less present. This has a very big impact in our remote learning. Well, Athenas, we did all the analysis at Wyden, Adtalem, we have a lot of brands, and we wanted to keep the local brands, except UniToledo, we kept -- now we have Estácio. But just with that, we opened 46 centers, 46 Estácio centers in this region, Mato Grosso, Acre, that are doing very well. We had 50 medicine seats anticipated, and there are good things happening. And there is a record intake, historic, 2020 -- 2020.2, 2021.2, 2x the all-time high of pre-closing intake and you can see the great success in the acquisition on NPS, very high, teachers, very satisfied. And this capture of synergies is a little bit slower. There is the maturing of the medicine seats. Therefore, from the standpoint of integration, we're doing very well. And now we're going to go to Page 16. I thought it was very interesting to show you. On the left, we have what was discussed briefly, well, 3 months ago, what do we expect for the future. I believe we have a really precise expectation. In premium, we were talking about the base of medicine, the expansion is happening, the capturing is working. When we look at digital, we're saying, look, there will be a strong base increase. This is what's happening. The intake would be relevant growth and that took place. We're moving along to the 2,000 centers and 2,500 in 2022. This is taking place. On-campus, where you're saying the loss of FIES will be a fraction of what it was last year. We are talking about a challenging H1 intake. H2 is going to be a better perspective. Stable prices. The perspective of the margin recomposition starting in 2022. Synergies of recent acquisitions impacting the results of '21, '22. In general, marginal effect of the laws and court decisions, orders for Q1, good M&A perspectives with robust financial situation. This is what we have. And M&As might have good interesting things up ahead. Positive re-enrollment, digital transformation impacting the NPS, digital and premium reaching 50% of NOR in '21 and lifelong gaining traction in all BUs. Everything is -- people were asking about 2021. Well, the first quarter, many of you remember, is the one that is the most uncertain. But even in this world of uncertainties, we are doing well, and we have the conviction that in the future, life will be better. And as for this quarter, we can go to the next slide. On the side of what we see in the world of the pandemic, if we look at this quarter comparing to the previous ones, this one is much better in the side of the results. The adjustments that we were -- that was mandatory to do, well, bad debt was dropping in this quarter, when we compare it to this world in pandemic, and it's a different reality. Second point, look at our strategy, medicine, M&A, it's paying for itself. From 3 years, we're building on a very strong base, very efficient base. And we have been building that in '18, '19. When you look at that, all the cash generation, the margin of EBITDA. We are a reference in the market. And this shows resilience, very strong one, and this is very important. Today, we are doing -- we have a very difficult transition moment. And when we look -- we can deliver the EBITDA, of course. And when we look up ahead, we can see in the third point, all the growth that we have in digital and premium. The growth, well, it's stable and financial situation with a generation of cash and EBITDA and a cash position of -- we can see the assets that are -- well, the BRL 1.3 billion net debt over the adjusted EBITDA and the cash position, BRL 1.3 billion. This is strategies that are paying for itself. Good perspective. Thank you for your trust, for your attention. And of all the messages that we've received this morning. We know about the on site. But thank you for your solidity, your resilience and everything that is up ahead. Thank you. And now let's go to the questions.