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

Good morning, ladies and gentlemen. Welcome to Yduqs video conference to discuss the results for the second quarter of 2022. This video conference is being recorded, and the replay will be available at the company's website at www.yduqs.com.br. The presentation will also be available for download. [Operator Instructions] Before proceeding, we would like to clarify that any statement that may be made during this conference call regarding the company's business prospects, operational and financial projections and goals are the beliefs and assumptions of Yduqs Executive Board and the current information available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore, depends on circumstances that may or may not occur. Investors, analysts and journalists should be aware of events related to macroeconomic scenario, the industry and other factors that could cause results to differ materially from those expressed in the respective forward-looking statements. Present at this video conference, we have Mr. Eduardo Parente, CEO of Yduqs; and Mr. Rossano Marques Leandro, CFO and Investor Relations Officer. I would like now to hand the floor over to Mr. Eduardo Parente, who will begin the presentation. Please, Mr. Eduardo, you may proceed.

Thank you. I hope everyone is well. Thank you for being with us today. The results that Rossano and I will be showing you in the next hour or so, I think are a result of what we've been doing for the past 5 years. When our group took off this year what we were asked is what the strategy is. And the strategy, we always said this is new medicine and M&A. And this is what took us where we are today. When we see back 5 years ago, we're a company fully dependent on on-site and almost fully dependent on the government's loans. We were not dependent on the government anymore and on-site became one of our important businesses. We built a very solid premium business that is able to sustain the results when times are bad like they are now. We built distance-learning and on-site businesses that are very lean and are not only able to maintain costs despite the inflationary environment, but also really well prepare for the comeback that we see coming potentially after the elections. Moreover, we also built a group that has a solid financials that allow us to make our own decisions, either be acquiring someone like we almost did a few times in the last 12 months or buying back our own stock, which what we did intensely on the first semester, adding up to BRL 200 million in buybacks, believing that that's the best business in the market is to buy all shares on the current valuation as they are. Yes. So moving on to the presentation, it's important that -- we see this as a semester. We had a fantastic result in the first quarter. And not only in the English call, but in the Portuguese call and any call we made out thereafter, we mentioned that that was not real results. That was results on a very low comparison basis that we had in the first quarter of the last year. That what we saw coming in the second quarter was the results somewhat similar to what it was in the previous year, a little bit lower, which was what happened. And therefore, given this variation due to time, we'd much rather talk about the semester, which we think is a more precise vision on the business that we have, okay. So moving left to right on this page, what we see as main highlights. We have a dire financial crisis in Brazil. We see a lot of people being affected by inflation, which are much greater than the average. Inflation hits harder on low-income people. We see people with inflations that go up above 20%, people selling assets to go to the supermarket. And despite this very challenging environment, we were able to grow both in revenue, EBITDA, EBITDA margins, more important of all in terms of cash flow and cash flow conversion. We see that's a lot, thanks to the performance of our premium business, business that generated about BRL 100 million in revenues 5 years ago. And today, we're able to build a star in our portfolio here, and it's solid growth. Completely in line with our expectations, with our plan, actually, even a little bit better, but keep on growing fastest with unattended demand, looking for more supply, and we see us growing. There's no prices for the students on the premium business, both for IDOMED and Ibmec. Digital, it's also an important growth despite the fact that even the digital students, they are suffering or especially the digital students are suffering from the current crisis. We charge an average of about BRL 200. These people, they have the salaries, around BRL 800, BRL 1,000. So it's a lot of their income. And we ask people weekly on a weekly basis why they haven't joined. We're used to hearing, we haven't joined because I found a better price or I want more discounts or what we see now is primarily I have no money, okay, which is unprecedented. So despite this environment, we see an important growth. We expect that we still have a lot of inventory of people that have high school diploma and not higher education diploma. This inventory is not growing because the graduation in high school is still much higher than the graduation in higher education. And we expect these numbers to come back to what they were above 20% as market resumes despite the fact that we have a much larger pace. And on campus for the first time, since I can remember, we have semester, which the base is not shrinking. It's actually steady. Margins are stable. We have a perspective of a very good class that we had in the first semester, very good class [indiscernible] class that pays much higher recurring tickets, a class that's renewing renewal numbers that I haven't seen yet, haven't seen yet here. So coming in very strong, okay? And we expect this business due to this operational leverage to give us a lot of positive surprises. As soon as the market comes back, which again, we expect to be after the elections here. On the bottom of the page, in the middle, we have us. We are recognized as a group that has a lot of discipline, and we were able to maintain costs stable despite the inflationary environment. That's a lot of use of technology, and you will see later on this presentation, Rossano will show you that we have reduced our CapEx estimates from BRL 600 million to BRL 532 million and now to BRL 500 million. But we stick to the BRL 500 million. We know we have the experience in the past of not spending CapEx accordingly. And now you have a few years to fix that. And we don't want to be fixing that when the market comes back. So we're still investing. More than 80% of our students nowadays interact with us digitally. And that's 80% of all students, including on-site, including premium. So it's important that we keep them on top of technology. And also, what you see here is a lot due to discipline. There's a lot due to good renegotiations on rent and optimizing our campuses, but also of our heavy use of technology to reduce costs. On the right-hand side, what we see is, once again, a premium digital grow in importance in terms of EBITDA, but also in terms of revenues. It's already more than 50% of revenues, which helps us bring average EBITDA margins up since these 2 businesses have margins that are above our average business as a whole, okay. Moving on to premium on Page 4. We have an important increase in revenues and EBITDA. What we see here, medicine coming in very strong, ahead of our expectations, slightly ahead of our expectations. So it's a business that you get additional seats, you get additional class and that most of our schools haven't had the first graduation yet. So it's students coming in without students coming out. This is a dynamic for a few years still. So it's an important growth coming from here. Margins still very high at the 48% level. And so growth and EBITDA growth coming in line with revenue growth. On the bottom left-hand side, we talk here all students, that includes postgrad. Post-grad in all our businesses are suffering a lot. We haven't recovered the pre-pandemic levels. So what you see here is a total student base, an increase of 8%. When you see that in grad students, that's a number much higher than that. On the right-hand side of the page, we are showing prices in a slightly different manner, the manner that you use. And all the information that you used to have are on the release. And this is a new way of showing price, which I personally believe it took me a lot of work here personally to make sure that people understand trends, okay? What happens on our traditional pricing number, which again are in the release is that you have a lot of influence on DIS. There was DIS, that's a big intake, this is a smaller intake, what kind of offer that we meet in the first semester. So what happened this year is that we had a very low DIS adherence. So that brings average prices down when you see we divide the total revenue by the number of students. On the other hand, when we see what will happen in 2023, that certainly will go the other way around. So people kind of get very confused saying our price is going down, our price is going up. And even for me, when I see the price or the average price of the quarter or in the semester, see what's going on, we're working hard and increasing prices here and there, what's going on. And then we take ages reconciling DIS and so forth. So what we did here was presented to you in this presentation, the price of the students that are here for more than a year. Why more than a year? Because in the first year, they have been impacted by all the offers that we make, the aggressive offers we make in the first semester, sometimes in the first year for the people to come, that has already gone. So we're talking here apples-to-apples, okay? When you see here in IDOMED and Ibmec, we had roughly 6%, 7% increase versus the first half of last year. When we see versus the second half of last year, we see a slightly better number. But this is people following us for quite some time. You will notice that we have had increases in IDOMED way above inflation. And we've seen in the post-crisis that was not a wise thing to do to get our students close to us. We really have a very high ticket on the big towns, the highest in the market. On the smaller towns, we also have a very high ticket. So we thought it was pushing too hard, making increases above inflation like we did in the past few years. What we see moving forward is increases at inflation or above and we see a lot of room for that, okay? So all in all, in premium, what we see is growth as expected in medicine even a little better than we thought. Again, like the clock, supply -- demand bigger than supply. We're really well positioned, and we see growth. There's an annex of this presentation, you can see all the schools that we have, the seats that we have, the amount of students that we have, and you can project yourself growth based on that, and that's how we do. Very steady business. Not that people are not working very hard, much in the country, people are working very hard here, but delivering as expected, due to serving Classes A and somewhat B, which haven't seen any crisis ever in our country, not only COVID or inflation. They are immune to these crises, okay? So moving on to digital learning. What we see is a growth, important growth as well, 11% of revenues, 10% in EBITDA, 15% undergraduate student base. Margin is stable, 39% last year, 38% this year. When we see the bottom right-hand side, tickets are growing in nominal terms, not growing in real terms because inflation was, as you know, above this 2%. Depending on the number you see, you'll see 7% or 10% or 12%, but certainly way above the 2% and in those numbers, we're above the 9% as well. So we see the growth, not the growth that you used to see. We credit this to the dire financial crisis that our public is suffering. Again, the inventory of people that have a high school diploma and doesn't have a higher degree diploma is only increasing in Brazil. We see no reason that this market would not resume growth as of the day after the election or the next semester. Yes. Moving on to onsite. We see a reduction in -- on-campus, we see a reduction in revenues. We see a reduction in EBITDA. When we look into the total student base, I think this is really good news. I don't think that we have showed number on student base that was not a reduction from the previous comparison period. I think that this is since 2015. So 7 years reduction is for the first time, we have a stable base. When we look at the right-hand side on the bottom, we see a reduction in price versus the same period next year on the students. Again, on the students that have been here for more than a year, which I think is apples-to-apples, the way we see, good news here is that when we see the intake season, it's not fantastic in terms of volumes. But we see a lot of competitors of ours and ourselves included, increasing prices, if not on the first semester, but certainly as of the 7th month or the 13th month, which means that after 1 semester or 2 semesters prices going up, which means that we are building a base that’s way more solid than the current base. So we're resuming the quality of the base that we have in terms of pricing, okay? What we see today is that in the first semester last year, we were very aggressive on the first semester offers and also the full course offers as well. This space like you're seeing here renewal being smaller than what it was 1 year ago, this space renewed way less, so we had the renewal base low. We had given some tickets so that we give discounts for the people to renew. The base that we're seeing now that came in in the first semester is a base that's coming in on the first semester paying 10-fold, dispersed in 10-fold what was necessary to disperse. So 1 year ago, people had to disburse for a minimum of BRL 150 on the semester to study with us. On the first semester of this year, people had to disburse about BRL 1,100 at least to be here with us in the first semester. So the minimum they had to disperse was 1,100. So it's a very different class. We're seeing renewal numbers on the on-site, the best ever since I've been here. I haven't seen numbers as good as they are now, both in terms of renewal percentage, renewal volumes and also renewal tickets. So what we see here for us, second semester will still be tough on the on-site, but we see that the light at the end of the tunnel, and we see the bottom of the well, more or less where we are today, and we're seeing -- resuming certainly on the first semester next year, we'll be in a much more comfortable situation than we are now, specifically because long-term prices are coming up, and we see a lot of operational leverage on the campus that will help us be in a different situation. To give you a little bit more color on the on-site, moving on to Page 7. This is the number of campuses that we have on the left-hand side on the top. We had in 2019, 82 campuses, which was already a reduction from what we had in 2018 and '17. We bought Adtalem. So a lot of campuses were added to our portfolio. We've been optimizing those. Last quarter, we reached 90 campuses. We're already at 87 currently. The number below that is the number of students per campus. So we -- before the pandemic, we had 3,600 student campus. Today, we're at 3,400, depending on how well renewal intake comes. We expect next year or so to be back to pre-pandemic levels. And at some point in time, in the next 12, 18 months, we hope that this is not a promise, but we hope to be back to previous numbers, which were nearly 4,000 students per campus. On the right-hand side, optimizing the number of campus, [ Campi ], I don't know how to say in English, but optimizing the number of campuses is one lever, but other lever is optimizing the campuses. We have already returned 55,000 square meters in the campuses that we have maintained as optimizing the structure that we have on each campus. We expect by the end of the year to have 140,000 square meters optimizes in our structure, which means we are improving occupation, which doesn't mean that we are fully occupied, much in the contrary. As I said, there is room for us to include new students, which will be additional revenue without the same proportion of additional costs, which we expect next year to be the case. Okay. On the bottom of the page, the semi on-campus was a great product that we launched in the second semester of 2020. To be precise, we did not launch, we relaunched. We also revamped the product. The product was seen as an appendix of the online, and we transform it being managed by the coordinator -- by the on-site people, which gave a greater sense of potentiality to the people. We started slow with management and engineering, which are playing vanilla courses, which we know how to handle really well. It evolved a lot on the health side. Semi on-campus scores on health costs, certainly more than on-campus scores on teaching or so forth. So it's a portfolio view that we have. Some people ask us if this cannibalizes the on-site. We believe much on the contrary, cannibalizes distance learning because when people lost their ability to pay on-site, they went straight to distance learning. And now we provided them with an alternative midway, which a lot of people are adhering, and it's been a lot of success and some people are even trading up from distance learning to the semi on-campus product. Good news is that 75% of the student base will not graduate before 2025. So a little bit like the effect on medicine, we see a positive perspective on the growth of the semi on-campus based on the cost that we already have, okay? So I'll hand it over to Rossano, who will talk a little bit about the financial numbers to you, and I'll come back in a little while.

Thanks, Eduardo. So on that next slide, we see our revenue expansion driven by our main levers, the premium sector and the digital business. When we see them both together, they're ready representing over 50% of our total revenue. So that obviously leads us to an increasingly diversified revenue mix with high exposure to the highest growth and margin business units we have. Can we go to the next one? Okay. So cost and expenses, obviously, a very important focus of our businesses in this challenging environment. We have managed to keep marketing, sales expenses below 2021 levels. And we believe this is a new operating efficiency level that we plan to keep going forward. Also, G&A 5% below last year, is a reflection of our expenditure management programs. They're already bringing very good short-term results, and we hope to keep those results going forward and also hopefully increasing our margins. That's guarantee higher protection for our results and also strengthen our competitive position, right? Costs growing way below inflation, even facing the relevant pressures we get from the supply market and also the return to wholly on-site activities that happened this year. We should highlight the professor costs with increasing efficiency, our operational planning activities are achieving better and better results each year. We still count on that improvement to improve our margins. Our leasing costs also under a lot of pressure from the supply market. But after particularly the space optimization and contract renegotiation, we have been able to keep those under control and on the same level we have operated until last year and before the pandemics. Our only line that is growing this year is the bad debt line. And as we have mentioned in the previous quarter, that is impacted by one-off effects that should get back to regular levels in 2023. So that higher level should not be beyond 2022. On the next slide, so on this slide, we can see our EBITDA growing 9% year-over-year. That improves our margin on 2 percentage points. Obviously, highlights for premium with strong resilience, expanding its margin, given this challenging environment. But very important to highlight the performance of both distance learning and on-campus business. Campus keeping the margin even facing reduced operational leverage and after the whole impact of the on-site return. The same thing for digital business. That also maintains the margin even with short-term ticket pressure and one-offs from the bad debt, as I explained before. Going forward, on adjusted net income, we see a decrease on those figures, mainly caused by an increase on our base interest rate that is directly affecting our cost of debt, of course. But besides that, we have a one-off impact on our financial results of about BRL 32 million. There is an effect of a mark-to-market of our dollar swap instrument that supports one of our debt instruments. This effect has no cash impact at all, intends to 0 along debt maturity of the instrument that occurs in 2023 and 2024. So looking at that in cash, we're closing the semester with a comfortable cash position of BRL 1.5 billion and the net debt leads to 1.9x EBITDA, which is a very comfortable position for us. Going to Slide #12. So the semester brings a solid cash generation, operating cash generation that represents 21% conversion of our EBITDA. We believe this cash generation capacity is key to face this challenging macro scenario with lower income availability and high interest rate. In that scenario, we have kept our stock buyback program, which we believe is a very good investment at the moment. That reached BRL 200 million in the end of July. It also allowed us to maintain our investment program. We estimate our total 2022 CapEx at around BRL 500 million, which is below our previous quarter estimate. And our long-term view keeps at around 7% and 8% on the long-term. Once again, important to highlight the share of digital transformation and IT already above 50% of that investment. That places us as a clear technological leader, not only in the education market, but also as a general services landscape that brings higher student satisfaction, improved service quality, improved education excellence and also operational efficiency. I get back to Eduardo to highlight some of the benefits we have already captured from our investments.

So Page 14 here, 13 here, I ask for this page for Rossano. Rossano is making fun of me because we thought that this was the most boring page of all times. I wanted to have a huge laundry list of things that have impact on -- have an impact from our digital transformation. But I thought it was important. On the Portuguese version of the call, I cover each one of them, but just go over a few here. Because at the end of the day, it's important that you understand that more than 80% of the content, very -- all business units and all students that we have, more than 80% of the content that we have either delivered in the digital form. 80% of the time that students are with us are through a digital device, either being a cell phone, an iPad or a computer and so forth, okay? So this is the future. Even the other 20%, when they are face-to-face with us, they prepare themselves for that experience through some kind of device. So it's key for us and it's key for the future. It's key for us to keep on delivering what we showed you on the first page, costs in line with what they were a year ago despite the inflationary period. And it's key also for us to keep on being competitive, and we see a lot of our competitors tighten the belt what we believe is too much. So we have tightened our belt, original CapEx forecast for the year was BRL 600 million. We lowered it to BRL 532, now to BRL 500. And we postponed things that we thought they were important, like watching classes offline, like the experience that you have on a streaming platform. We think this is very important, but this can go for next year. But there are other many things that we believe are key for the experience, are key for the comeback that when we see the resuming of the market, we'll be there and ready. We see -- and competitors were not. We see some of them spending 5% of the revenues in CapEx. We've done this in the past. That didn't work well for us. And we've had a few bad years because of those. And we don't believe that next year is a year that you should be recovering and think we need to be ready for the comeback of the market, and that's what we're working on. So just a few things. NPS going up. We already spoke to you about, but increasing 86% conversion rates and 27% drop in checkout abandonment. So that's a 15% -- 15 minutes to complete the full enrollment process. Already more than half of our enrollments are completely internally on the website. There's no human contact on the enrollment. Now 93% renewal rate for students that renew on the app with a 7% increase in those ticket of those students. This is a lot of cash that's coming in. 100% of our students are using our own LMS, which we believe is a strategic component for us to design the future reduction of dropouts from the people that are using EnsineMe. We have the highest ranking and rated app on both App and Google Store comparable to Spotify and iFood, and not in a completely different league from the student market, the education market. So it's a lot and it has -- the results that you see, it has a big impact of the whole technology that we've been investing on. It's not something that we are building for the future and not so sure, and we're creating things that students don't really use. No, it's heavily used and heavily impacting our cost structure as well, the amount of CapEx that we've been investing, okay. Moving on to talk about ESG on Page 14. ESG is -- for us, it's an interesting discussion because we are 51 years old. We grew on the outskirts of the cities. We grew in downtowns. We grew in night courses. We were built to serve Classes C and D and to include people. When you see our student base, 56% black, 75% of our family have an income of less than BRL 4,000 a month. 75% of our families have an income less than $800 per month, okay. So this is the family, family income, not the individual income. So this is what we are. And this is what we always have been. So we've been serving people in the outskirts of the cities or in poorer parts of the towns, being very conscious about the environment around us, which means employing people from around us, which means serving people with legal support, health support, dental support given by our students and professors, the communities around us. So this is how we grew. And when we saw the whole ESG discussion coming up, we thought that was great, and we recognized about what we do. But we clearly failed on communicating it. And we -- since the beginning of the year, we're investing more time on this and making sure that people understand what we do. We're not changing what we do. We're not doing more. We're just communicating in a way that people understand and can compare. I myself did not know MSCI rates until like 2 months ago, and I found out that’s an A, that we've got an A without ever interacting with them just by being here and being 97th percentile the governance in the whole market, being global best practice in accounting practices. So there's a lot that we're going to be talking more about because I think that it's not only a way to communicate well with our current shareholders, but also a way to track very different investors that are concerned and understand what we do and the important that we do not only to our stakeholders, traditional stakeholders, being students, parents, professors, investors, but also to society as a whole, okay. So when we look into the environment side, we're not an industry. So the way we have impact on environment is by educating people, by using renewable sources of energy, by understanding our emissions, and we have finished that diagnosis on Scopes 1 and 2, really advanced on Scope 3. On the social part, I don't have to -- I think this is what we work on, we are famous for. I already mentioned about the student base, but 85% of our employees of corporate offices are former students from Yduqs. We have 33% women and 31% black high-level managers, which is probably sevenfold or eightfold what you see in a normal Brazilian company. On the governance side, we are a True Corporation. The shareholders have more here, it's about 14%. We have 100% independent Board members. Almost half of our high-level managers have ESG goals. And their goals next year is going to be 100% of us. We have established our goals, are available on site to reach some short-term, some medium-term. And I strongly invite you, those who haven't had the opportunity to go over to YouTube and take a look at our ESG Day, a forum that we made. It's a little bit more than an hour long, and I think it's worth it. I think you get to know us a lot better and feel same excitement that we feel about helping Brazilian society evolve as a whole, okay. My final remarks here on Page 15, as I mentioned, we built a business that is very resilient for the rough days that we're living. We see some competitors that focus solely on the business, on the high-end business, Classes A and B, having results similar to ours, which I think is remarkable in our side because at the end of the day, if we had only that, business results will be much better. But that business is pulling us up. And while the other businesses are really well to profit from the growth that we see coming at some point in time, most likely after the elections, okay? We still believe in the future and investing in the future, investing in long-term sustainability of the company, spending CapEx, most digital transformation and IT in the future. We are, again, as always, a very disciplined management team. And again, the results of this digitalization and our discipline and our negotiation capacity brought us into a flat cost base compared to the same semester last year. We see very aggressive intake offers, not affecting tickets for the veterans, what we call them the [indiscernible]. And again, I see 0 Brazilian companies -- and I mean, in all sectors that are ahead of us in the ESG side, certainly not in education, but when we see other companies that talk a lot about it or we've invested a lot of money on this. We see no one that's ahead of us in terms of ESG, okay? What we've seen in the rest of the year, we like to be very transparent. I think we think that in the medium-term that pays off. We see a challenging intake coming from the second semester. We have no growth expectation, both in distance learning and on-site. Premium, yes; but our on-site and distance learning, no, versus last year. But we see a very positive trend, especially on-site in terms of tickets that somewhat little bit of you'll see in the second semester, but you'll see a lot for 2023. We think of building on the first class of this year and the second class of this year, a very solid base that will give us a lot of comfort for 2023 on. As for the results on the second semester, we expect them to be very similar to what the second semester of last year was. Unlike the first semester of this year, we had a first quarter that was a very low comparison base than the second quarter, which was a strong comparison base. But we see for the second half, the third quarter, that's a very strong comparison base and the fourth quarter that's a low comparison base. So we see third quarter being in line or a little bit worse than what it was last year and the fourth quarter being better than what it was last year, resulting in the second semester that's going to be somewhat similar, probably a little bit better perhaps on the same reference base that we had in the first semester versus the first semester last year, we could have a projection that yields similar business between the second semester this year and second semester last year. This number, I think you're all familiar with already, 7,200 to 7,400 undergraduate students in medicine, probably delivering the high end of that guidance, business line incentives reaching 2,500 by the end of this year. So different campus depends on intake and on the renewal, again, renewal coming really well. It can be on the upper range of this guidance as well. And CapEx, we're bringing it down from BRL 532 million to BRL 500 million as a guidance, maintaining the long-term at 7% to 8% of net revenues. With all that said, I thank you guys very much for your trust and your patience to be with us. Looking forward to better days. But again, very proud of the result that we had in the first semester, having the premium help us a lot survive through these days and even delivering a growth despite the challenges of the market, and we're very excited that we are ready for the resuming of the market and more ready than anybody else in our market. Thank you very much, guys.

This concludes today's presentation. Yduqs videoconference is now closed. We thank you for your participation, and wish you a very good day.