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

Good morning, ladies and gentlemen. Welcome to Yduqs' video conference to discuss the results of the third 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 the load. We would like to inform that all attendees will only be watching the video conference during the presentation, and then we will start the questions-and-answer section when the further instructions will be provided. Before proceeding, we would like to clarify that any statements 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 current information available to the company. These statements may involve risks and uncertainties and as they relate to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should be aware of events related to the macroeconomic scenario. The industry and other factors that could cause results to differ materially from those expressed in the respected forward-looking statements. Present at this video conference, we have Mr. Eduardo Parente, CEO of Yduqs and Mr. Rossano Marques, CFO and Investor Relations Officer. I would like to hand the floor over to Mr. Eduardo Parente, who will begin the presentation. Please, Mr. Eduardo, you may proceed.

Thank you very much. Good morning to everyone. I hope everyone is healthy and fine. We are here to present our results from the third quarter. We believe that was a very interesting quarter with very positive results. Truth be told, results on third quarter were better than our expectations. We had the best EBITDA from our history and both CapEx cash flow generation accumulated in the year of BRL 461 million, which implies a growth of more than 30% versus the same period last year. We left the pandemic with our business well put with the student base, guaranteeing our economy scale and competitiveness and operation, which we right sized for our current reality, making sure that we have space for strong growth at the sighted sign of recovery of the Brazilian economy. Having the -- our homes organized, we have a lot of comfort to work on pricing, especially in all the BUs, especially Distance Learning and On-site. Piece of this result, you will see already here today. But on the third quarter intake now we had recurring tickets increasing on the order of magnitude of 20% both Distance Learning and On-site, Which you shall see improving results -- upcoming results in the next quarters. All in all, what we see on left hand side here is our operating revenue increased 3%, net operating revenue increased 3%. EBITDA also increasing 3%. Our costs increasing way below inflation, together generating a stable EBITDA margins and a substantial growth in operating cash flow before CapEx and after CapEx on the quarter, increasing 10 percentage points of cash conversion, 14% above what it was last year and post CapEx on the quarter increasing 40% of what it was last year. When we see business-by-business, we're going to enter each one of them in a little while. But summarizing everything what we see on Premium, it was an impeccable execution and on Medicine that evolves like a clock. I've been always seeing this and the growth is contracted and the execution of the team is great. We had projected a total graduate student base of 7,200 to 7,400 students in the year. We have to date 7,500. Ibmec is evolving well, what it had been evolving before [indiscernible]. And there was a great turnaround happening in Rio as well. When we look at the Distance Learning the picture of the quarter perhaps doesn't look so good. But there's a series of seasonality effect and of intake strategies that affected that. As I will show you in a little while, the evolution of pricing and the composition of the seasonality effect will generate an evolution of our fourth quarter EBITDA on the high teens that will make up for the current quarter. And we'll go into details in a little while. When we see the on-site, for the first time since [indiscernible] was gone, we show an EBITDA that's equivalent to the EBITDA in the past in the comparable period for the year before. So Q3 EBITDA in '22 is the same as last year with a little slight evolution in the margins, a lot due to the cost discipline that we have. I think that the high point here is the evolution that we had on the freshmen class that took us to the best renewal and cash flow generation on the freshmen class that we ever had. Similar to Distance Learning, the evolution of the returning price on this intake season, like I mentioned before, will bring relevant benefits on the next semesters, especially when the economy returns back to growth, okay. I think what you'll see here at the end of the day that we -- in the past 4 years, 5 years, we created a portfolio that allows us to grow and generate cash even in deep crisis moments like the one we're living. And we'll keep on being so even if the price is less [ firmer ] than we expect. But at the moment that we have some kind of economic release, we believe we have a very large expectation from the business. Talking about Premium. Again, like I said, it's like a clock, we grew revenues in the 9 months, the first 3 quarters, 26%, a little bit more than Medicine than Ibmec. EBITDA growing as well. Margins growing on the comparison base for last year, but there is a little bit of seasonality here as well. We don't expect to finish the year with a substantial gain over the last years in terms of margin; yes, in terms of absolute EBITDA, in terms of absolute revenue, but not in terms of margins. On the bottom left-hand side of the page, what we see, like I mentioned before, the Ibmec resuming growth and Medicine a little bit above the guidance that we've given before. The right-hand side at the bottom of the page, we talk about prices, we introduced this last semester -- last quarter because there's a lot of price variations that are a result of us giving different types of discounts or having greater base of freshmen or not, that at the end of the day, has any comparison base that we want to have, okay? So in order to take that noise out of this we're bringing for all business units, this average ticket of people that have been with us for more than a year. And the reason for more than a year is that after a year, for sure, they're not impacted by any kind of special offer that we will make. In IDOMED and Ibmec, that's not all that relevant, especially because you're not providing any offers for people to join us. But still, to be parallel to the others, we prefer to show it this way, they don't very much improve the overall numbers. But what we see here are numbers that are at or above inflation as the period goes for Ibmec and IDOMED. Talking about Distance Learning. The result of Distance Learning was severely affected by seasonality and by a decision that we made on this intake season, or since -- especially in the second semester, but also in the first -- in the second quarter to look more carefully about intake pricing what we saw. We do tests every day here. We test everything since offer for semester long-term pricing, how we communicate, how much we're spending on marketing and so forth. And what we identified since [ May ] approximately, is that there was very little elasticity when we drop the prices. So we had this experience in 2018 where we saw that the volume was not coming, and we chose to bring prices down. And at the end of the day, we ended up with a small class paying very little to us. And what we did here was the contrary. We instead of dropping prices, we raised prices, especially the seventh month's price, which is the price after the offer period. So we had a smaller intake than we had last year, but much better prices. So the seasonality and this decision to look stronger in prices had 2 impacts on us; the first one being revenues and EBITDA smaller than the comparison that we had against the third quarter in 2021, which will be compensated in the fourth quarter where EBITDA will again be in the high teens versus the same period over the last year, and the second impact is that you see the base moving sideways, but price coming different from the trends that we saw before. And so I've been always saying that this is [ no new ] prices. We will not follow inflation, where we saw except for this semester and perhaps a little bit more moving forward, we cannot be sure of that, but it's a different trend because at the end of the day, we had classes that we charged way more, and this is bringing our expenses up. This applies both for the people that we're showing here on this chart, people that have been with us for more than a year, but also to people that we just brought in on this third quarter. And then we talk long-term pricing, we will see this -- the effect of these people, the increase in price in these people just as of their seventh month, which is January onwards. What -- the way we see Distance Learning projections here, we will have a growth both in revenues and EBITDA, with an average margin very similar to what we had last year, which was around 39%. The seasonality effect comes from us introducing the intake by quarter. Until 1.5 years ago, we had intakes only on the semesters. And we have now students joining us every quarter. And the second effect is that last year, we had a big campaign called [indiscernible] that we postponed a lot of people from the first quarter to the second quarter. So the intake on the even semester and even quarters helps us a lot on the onboarding experience, then it reduces the variation on bad debt between quarters, increase in the bad debt in the odd quarters and reducing on the even quarters. So that's what we see now. So you will see the odd quarters, the even quarter is coming down, and this is an odd quarter that bad debt is increasing. Besides that, it punishes the first year that we have the full per-quarter intake season for Distance Learning. Hudson has been talking about this. We're going to have this year bad debt 1 percentage point above what we call "normal" because of that, okay. So what we had, the fact of the quarterly intake on this quarter specifically is that we increased bad debt on the third quarter reducing both second and fourth. The second effect that I mentioned is the transfer from intakes last year from first quarter to second quarter. That was very important for us because by then, our competitors were offering exemptions of payment for the first 3 months. And we realized that it would be much better for us to postpone everybody to April so they had the same feeling that they were having in the competition of not being in January, February, March. But the effect that had is that the moment of truth for the freshmen all renewed was postponed to October. So the normal that we have is a bigger intake on the old semester. So the moment of truth being July. What happened last year is that because we post a lot of people from the even semester, which was the second -- the even quarter, which was the second quarter, the moment of truth became October. So what we saw here is a much bigger reference in terms of base for last year than would be "normal" had the intake all done in the first quarter and the moment of truth being July, August here. Okay. That increase of 10% Obviously, we're going to see the opposite effect on the fourth quarter now, we're going to have -- in our even base seasons, we are going to have a much smaller freshmen on that base than we had in the past season. So we will have a renewal that will be much higher than the reference that we had in the fourth quarter last year. Okay. So neither this drop in renewal now is a concern nor the substantial increase that we're going to have on the renewal in the fourth quarter is going to be great news. So this is just a matter of a temporary effect on the seasonality because the comparison last year was a lot different than what it is now, okay? This 10 percentage point increase on the more than 1 year add to the high teens on long-term ticket contracted on the last intake season that we had in the third quarter now will bring us very good comfort on [ returning base ] for the next period. Moving forward to talk about on-site. Here, what we had despite the drop in revenues, we have a few positive points, very positive points I would like to mention. The first one is the EBITDA moving sideways versus last year will be exactly the same number, which we find it very positive. The slight increase in margin that we had is totally related to the discipline in costs that you all know. Rossano will talk a little bit more about it ahead. Here the other positive effect that we see here is a renewal rate very close to what we had last year despite the amount of freshmen representing way more than it was last year on the comparison that we had. We showed this on the bottom right-hand side of the page, so the intake first half last year, 72,000 students versus 101 on this. So that effect on the base is very large. And we had a class that's completely different from the pandemic standards that we have -- that we had, both in terms of pandemic performance, delinquency and the recurring tickets. So what we see is our all-time record here in freshman renewal. We had never had that before, and that's due to [indiscernible] that we brought in including on higher tickets than the average that we have been practicing on the recent semesters. There's still a bit to go for us to see the space, resuming its growth in a more substantial manner. But the financial health is evolving. And we believe that the intake on the third quarter of '22 will give an important contribution for that. Moving forward and talking about the ENADE results. ENADE is a standard test on the [indiscernible] class of all universities in Brazil. We had -- our on-campus result was very positive, a direct result of all the investments that we've been making in technology, engaging way more the students, they've been spending way more time with us off class than they had in the past that all this investment technology has an impact on cost, but also on engagement and the time that student spend with us and the result is clear on the left-hand side here on the on-campus. On the right-hand side, bear in mind here, this is a shorter course. Most of the people here did more than half of the course fully during the pandemic. Traditionally, we've been #1 and #2 in the Distance Learning, which is a huge source of pride for us. We -- Bear in mind that we are the only ones that are fully online, fully self-served whereas our competitors, most of them have much smaller margins than we have because they have a much heavier cost structure with tutors, with big buildings and classes and so forth, so forth, whereas we are in the people's cell phones, okay? So that not only generates a better experience that NPS translates that we have NPS on the high 40s here comparable to the previous on-site experiences in the world, but also on the results that we have on the comparison basis versus our competitors here. There's a lot of people in the financial market that want to give an opinion about this. They're short staffed and sometimes a little bit in a hurry and deliver reports that perhaps are not the best reflection of reality. We have here a QR code that's a link to webinar, the Hoper education, which is the greatest consulting company that focus on education and on quality of education they give a webinar about this. We can put a camera here and be directed there. And they talk a lot about the results of ENADE, about us and our competitors, that's very interesting if you have the time and interest to go there. Moving on to now Rossano who will now going to now talk about our revenues and financial numbers.

Good morning, everyone. So on this slide, once again, we demonstrate the strength of our portfolio with our most profitable businesses, the Premium and the Distance Learning one accounting to a total of 55% of the total revenue. The main highlight here, of course, the big expansion of the Premium business that even facing those challenging macro conditions in the scenario has a very strong expansion growing 29% year-over-year. Following to the next slide. So as I mentioned, with this challenging macro scenario, the increasing pressure on our cost base surely was a big challenge for us in 2022. But once again, we demonstrate our focus and discipline with expenditure growing well below inflation. If I exclude bad debt, the expenditure was only about 0.5% against an inflation of 7% to 8% of an already stressed cost base, as you know, we have negotiated lots of contracts last year. So we once again have to face the distressed supplier base that you have to renegotiate everything again. So a very challenging scenario, but we once again showed very good results on that. The bad debt, as I have explained before, is impacted by the new seasonality of the digital business intake that started to occur every quarter starting last year. So that cost in 2022 to operate at around 1 percentage point above what would be the usual rate that should be fully reverted in 2023 when we should get back to our normal bad debt rate. But even including the bad debt, the cost progression still sits well below inflation. One highlight is the marketing and sales cost that is operating on a much more efficient level, setting up a revised long-term trend that is due to a more efficient use of the overall media expenditure, but also an adjustment in strategy based on our perception of a lower elasticity on the education demand, that is obviously supported by a lower income availability of our target. So based on that, we have been much more efficient on the marketing and sales expenditure. Also, very important to highlight the leasing cost that is probably one of the more stressed by inflation and barring our previous negotiations. So the reduction in 3% in that cost shows the meticulous work we have been doing, reducing space, but also renegotiating the increase on our contracts. So very good results so far. With all of that, we're showing, once again, very positive results on our strategy of cost control. Going to the next slide. So all of that leads us to an EBITDA growth of 3% with stable margins, once again, even facing a very challenging intake cycle, which is very remarkable. So once again, the premium business demonstrates strong resilience, expanding margins while growing simultaneously very strict control even when it's expanding its business and showing very good results, renegotiating the debts we have assumed along the pandemic period. As you know, we have faced very difficult conditions having to negotiate debts along the pandemics. We have been forced by specific local laws that enforced us to make renewals even when the student had these debts. But now we are facing, we're getting -- being benefited by very good results, renegotiating those debts, getting paid by the students. But also very important to highlight is the on-campus margin stabilization. So even without the benefit of the operational leverage -- leveraging with the full impact of the on-site return that occurred in 2022, the on-campus business is able to maintain its margin, which shows the strength of this business that is very well prepared to be a good beneficiary of the future expansion of the business. We can move to the next one. So still facing a very high impact on our financial results due to the much higher base interest rate, even though we present a very solid net income of BRL 67 million. Important to highlight our strong cash position of BRL 1.6 billion, which brings us a comfortable net debt situation that leads to a leverage of 1.9x EBITDA, which makes us very comfortable with our overall financial and cash position situation. Moving on to the next one. So the quarter once again shows a very solid operating cash generation with high EBITDA conversion. We believe that this capacity of our business to generate cash is key to face the very volatile scenario that we might face ahead of us. The BRL 461 million cash generation along the year demonstrate the success of our strategy with very strict cost management, as explained in the slides -- the previous slides, a strict control on receivables and efficient receivables management and a very good capital allocation. You can see that we're reducing CapEx 18% year-over-year, but very important to highlight that we keep the focus of our investments on IT and digital transformation. And that already is fruitful for us. We think we are placed as a clear technological leader, not only in the education market, but on the general services landscape. That brings a very high student satisfaction, reflecting on our NPS levels that further reflect on the renewal rates. That's a very high service quality, the educational excellence demonstrated on the ENADE results that Eduardo talked about. One highlight also the accounts receivable days decreasing to 100 days. At the same time as our students are facing very diverse economic conditions, which shows once again, the quality of our business, the quality of our education and our very well-managed cash position and receivable structure. So having said that, I get back to Eduardo that will guide you through the next slides.

Thank you. Yes, we -- last time we -- was the first time that we brought into the quarterly results, the sustainability issue. We invite you all to take a look in our website on our ESG Day forum that we made. Talk about everything we do, it's about 1 hour on YouTube. We got very positive feedback on what we put together there and how much clarity we brought to the fact -- to the reason that make us being the only A rating by MSCI education company in Brazil. On the left-hand side, it's pretty much what we showed last semester, but more summarized. What are we doing in terms of environment? I think besides what you can read here, having our energy coming from the renewable sources and then making our diagnosis on our emissions. We are a big educators of people towards environmental issues and concerns. This is one of our targets over there. And on the social side, that's where we shine the most. This is pretty much our core business is educating people. A lot of people with a challenging socioeconomic background, reflects of that in our student base. We have 56% of the people, black people, 75% of the people have family incomes below 4 minimum wages, which in dollar terms, should be about $800 in family income. 84% of our employees have been our students, and in our high-level, top level management, we have 33% women and 31% black employees. Governance, we are True Corporation, 100% of our Board is independent, and we have almost half of our top level management through the ESG goals, moving to 100% next year. We brought here on right hand side of the page, what we've evolved in the past months here. One is our inventory emissions are most concluded. The second one is one thing that I take a lot of pride in this and as the entire company, we had a very successful trainee work for blacks last year that we are now replicating. We had almost 6,000 applicants, which is a very, very impressive. We are comparable to the top banks. And the reason here is not that we are perhaps the best option in terms of finance, et cetera. But this is mouth-to-mouth, people talking about how important this is for us and the environment that people get once they get here; a lot of the companies that promote these kind of programs are way behind us in terms of diversity and inclusion. And of course, this is an advantage for us, and we capitalize on this by attracting the greatest diversity talent for us. We have a number of black teachers, above 30%. The national average is a little bit above 20%. But we are not satisfied with this. We wanted to get closer to what our student numbers are. And we had a target of hiring black professors on this semester that we went 56% above increasing our diversity here. And we have also a major literacy program for adults that we do in our units. We opened 14 classes this semester with 300 students just now. One thing that we'd like to share with you, I believe [indiscernible] Portuguese, I'm sorry about this. But we -- the employees of Yduqs have joined forces to help support students that are -- that have scholarships in the medical courses, scholarships from the government, okay? So these people, they have very low-income households and they're extremely well performing at the [ SAT ] equivalents here. But they have to study full time and they don't have -- of course, supporting themselves throughout medical school is challenging. So we started with the employees here and that moved on to the Board that move on to the company that's making a match to everything that the employees donate and now outside our borders, a lot of people are using [ Institute to look ] for instance as birthday gifts. Let say instead of give me a gift you don't need for this institute, and we have today, 120 students in Medicines. We started in Rio, now we're expanding to another 6 units that have been benefited by these programs. So a good part of their cost of living is being sponsored by the employees of the Yduqs [ and friends ] okay? So if you're interested in knowing more about this and donating, please access this QR code here. Moving on towards the end. We will have our final remarks here. I think that what you see here is that in a very challenging macroeconomic scenario, we grew. We grew, we generated cash based on a very strong portfolio. When you see what we've created, we've been for the past 4 or 5 years, working on what stance of the new Yduqs should be after the end of year. And we moved from a company that had [indiscernible] revenues of BRL 2 billion to almost BRL 4.5 million in the last 12 months, all [indiscernible] very light platform that is being able to present growth a lot now due to the Premium segment that serves classes A and and it's very resilient to any crisis scenario that we will live in. And we've created also a very tech-related business of both Distance Learning and On-site a lot of tech on the On-site as well that is very ready to grow on this slighter sign of economic recovery. We're going to see premium moving on to this contracted growth that it has, keep on delivering high, high growth and a lot of growth coming again from Distance Learning especially on the on-site. Now bear in mind, there has been a lot of talks by the elected President Lula about [indiscernible] mentioned this at least 5 or 6 times on the video, and his Twitter and so forth and the speech too yesterday. [indiscernible] could be very beneficial for the sector, especially for the on-site. Bear in mind that when we talk about on-site, 1 on-site student generates the margins of about 7 Distance Learning students. So depending on how fast the economy resumes its growth and how much President Lula expresses the [indiscernible], we can have very positive surprises, especially from the on-site business coming pretty soon, okay? So the numbers here, I already mentioned all of them, but to keep them on your mind, we generated BRL 461 million in free cash flow after CapEx in the first 9 months, have it not being in the situation that we are on the interest rates that we will be currently paying, we expect sometime in the future to be a very different situation, both from our repayment of debt and from the interest rate situation in the country, but this is almost BRL 0.5 billion that in past times, generated a lot of dividends and in future times, surely, we are assuming the strong dividend payments that we had in the past. Net debt -- net revenue and adjusted EBITDA growing. Premium and Digital becoming more important in our portfolio. Bear in mind that these 2 units are the ones that have the highest margins and the fact they become more important portfolios helps us sustain the same margins despite deflationary environment that we have and that ends our cost reduction efforts here. We had our adjusted cost and expenses moving sideways as a percentage of net revenues, and the margins are still flat. CapEx dropping. And again, 2022, we have already -- on the bottom right-hand side here, given a guidance of what's going to be at the end? Is it going to be a reduction of about 18% versus last year as a percentage of revenues will still be smaller, as we expect next year to be smaller than this year as well. And we remain very strong in ESG. If you've been following us, you know we're very transparent about how we see the macro, the impact on us. When we are seeing winter days ahead, we talk about them, and we see happy days ahead, we talk about them as well. On the bottom left hand side here is what we said on the end of the first half that what we expected towards the end of the year and this trapezoid here or whatever the figure is. It's quadrilateral here in the middle. The dark regulator is talking about how we see it now and how it evolved since the first half. So what we said in the first half, there will be a challenging intake with certainly no growth expectation versus last year, but we expected a positive evolution on recurring freshmen tickets. And what we saw was exactly that, a drop in intakes. Again, as I mentioned, Hudson mentioned as well, we saw very little elasticity in prices. So we went forward actually, on the other hand, on the opposite direction instead of dropping prices, we got more volume, we didn't see the volumes coming, we decided to increase prices. And what we see is high teens increase in prices versus the recurring prices of the seventh month ticket, like I mentioned, versus last year. So it's pretty much in line with what we said. Intake a little bit more challenging than we expected. But on the other hand, pricing coming much better than we expected, which allowed us to have the over-delivery on the bottom that is. We mentioned that results in the second half were expected to be similar to last year with the third quarter slightly above -- slightly below and the fourth quarter above. And what we're seeing in the third quarter, we're actually above last year's. And we are comfortable enough to give you a guidance that the fourth quarter have a double-digit growth on EBITDA versus last year, okay? So again, strong portfolio. We will resume -- close the year with a growth in the second half versus what we had last year and the portfolio and our cost efficiency allows us to keep on growing and delivering cash despite the scenario that we will keep on doing even if the scenario stays as challenging as it is and expect from us a strong acceleration at the moment the economy recovers. Thank you very much. Thank you very much for your trust. I hope to see you again pretty soon with those even better than this one. Thank you.

We are going to start the Questions and Answer section for investors and analysts. [Operator Instructions] Since there are no questions at this time, we would like to hand the floor back to Mr. Eduardo Parente for the company's final remarks.

I think I had done my final remarks. I want to thank you very much for your trust. Looking forward to see you in 3 months with even better results than we have today. Thank you.

Thanks, everybody. Have a good day.

Yduqs' video conference is now closed. We thank you for your participation and wish you a very good day.