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 fourth 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. We would like to inform you that all attendees will only be watching the video conference during the presentation. And then we'll start the question-and-answer section where 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 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 the 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, 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, [indiscernible] Thank you all for attending this English version of our conference. Just so many new names here attending and just to clarify why we do this. We got a lot of feedback from foreign investors that not only it's hard to follow, but sometimes translation is not the best. So they prefer to hear directly from us. I think this is a good practice. This is -- this will be recorded on our website as well. So if you want to refer to it later. It's going to be over there. It's exactly the same presentation we do in Portuguese. I think the only difference that we get a ton of questions from mostly sell-side analysts on the Portuguese version. They were actually good questions today, which we -- generally in English question, we don't get many or any questions at all, okay? So having said that, I hope you all well. Thank you very much for attending. 2022 was a year that we are pretty satisfied with. Of course, we wanted more. But considering the tough macro environment we had in our country, I think you got to pretty good numbers. I think we chose on this page, we have 4 highlights to show you I'm going to go through each one of them. But summarizing the ad number one is a discipline in prices and costs. We are well known for our disciplining costs. I think prices is something that we done a lot of work for the past 15 months on this and results are showing a lot with this presentation. Number 2 is the portfolio that we have. That generated an important growth in terms of absolute margins, but in terms of our percentage margins as well in EBITDA. And the reason we mentioned the portfolio here is because we have 2 businesses that are very much related to Classes C and D. These businesses had year that did not show growth. And we, on the other hand, have a business, as Rossano will show you in a little while that we have a business on premium size, service Classes A and B, that has been growing very fast in the past 5, 6 years. And in these dire moments of economy, that represent good balanced portfolio. I think that hopefully, 1 or 2 years' time, we're going to be talking a lot about this in [indiscernible] and on site because these are the businesses that grow when economies grow in Brazil. It grows very fast. So we have a portfolio that in this comment is able to generate growth and margins. And in a moment, with better economy shall generate much more growth than we see recently, okay? The third point is our cash generation. And I think that we have a free cash flow after CapEx of BRL 0.5 billion at almost a share. It's an important growth of twofold versus last year. And the fourth highlight here is the fact that we did not have any that expire in 2023 anymore, which with this whole Americanas thing last generally market is very tough for people who need debt, and we will only be having this discussion towards 2024. So this is a need for us. So going step by step here on the -- no, no, no. On the upper-hand side, left-hand side of this page, we talk about tickets over 1 year of the veterans, I would say, that the non-freshmen. The reason for that is that that's the real show of trend. When you look into the average ticket itself, there's a lot of discounts in the first semester that we give. There's some financial products that we give in the first semester as well and the higher intakes and smaller intakes and materials to these products that tends to give us a very distorted view of pricing when you look into 1 semester to -- when it includes the freshmen the upcoming class in the analysis of pricing, okay? When we look into the average ticket of people that have been with us after all these discounts, which 100% of people are more than 1 year have, that is a much better indicator of trend. And then these indicators, we are here 8% above last year in medicine, 10% above digital and on-campus 5% and Ibmec could have been here as well, 7% above last year. So these numbers are at or above our last 12 months' inflation and we're satisfied with the direction this is going. And this is a huge effort that we've been making because 2022 -- 2021 -- 2020 and 2021 were years on the pandemic that we were very concerned about our operational leverage. We give a lot of discounts those years. And that's, of course, hitting our base. When we come back the last 15 months or so into looking not only to the entrance prices of the first semester to discounts, but also the medium term price is what we call the M7, 7 is month and we're not so creative with the number, but the names. But when we look into M7, those numbers are coming up as well, which will generate and we have all these analysis by cohort will generate a very positive effect of the upcoming years with the people from the pandemic graduating with lower tickets, and these incoming classes coming in with much higher tickets for the future. Okay. So this is somewhat new. We've been very vocal about it since the third quarter. We much rather talk about things when they have already happened than be generating fireworks or promises here. On the other side of this box here, we talk about the cost, this is not new. We are well known for disciplined costs, having had the same cost base 2 years in a row with the inflation and all the salary increases and so forth is something we take pride in. And of course, when we look into a percentage of net operating revenues, that number has gone down. Going to the top right-hand side of this page, what we see is a growth in terms of EBITDA in the year of 9%, BRL 122 million increase, 2 percentage points increase in the margin. That can be a lot of credited to the change in mix that we have in our portfolio. So we have premium in digital with higher margins than our average and on compasses with lower margins than our average. So the higher -- the high-growth business are also the higher-margin business, which tends to push the average upwards, okay? On the right-hand side of this, we talked about the fourth quarter. We mentioned on the -- in the second quarter, we mentioned -- the results we mentioned that the third quarter results will be a little bit below the previous year. They came a little bit above. Now we mentioned that the fourth quarter result will be double digits versus fourth quarter '21, and we had a 19% so we're delivering on the guidance that we gave here. And you're going to see a lot of that throughout the presentation of talking about guidance that we've been giving. And I'd like to take credit that things are bad or in perspective are better, we take things in perspective for that. And now we're going to tell you throughout the hopes perspective, it's good. And I hope that in 3 months down the road, you call beyond that, okay? On the bottom the page, you already mentioned this, BRL 1 billion in cash generation pre-CapEx which is a 12 percentage point increase in conversion versus last year. And I think -- probably the most important number in all this presentation is the free cash flow conversion. The free cash flow after CapEx, generating, as I said before, almost 2 [indiscernible] per share on the year. Okay. On the left-hand side, the highlight of the year, of course, operations-wise was medicine and looking to medicine, we started the year saying that we would be above 7,200 students. We narrowed this guidance towards the end of the year and then we fulfill both guidances on 7,500 students in 2022. We are telling you now that we're going to be above 8,000 students and by the end of the year. One thing that's very important, especially for the people that are new to us, we have a young student base of 4.9 students per seat. What does that mean? Is that medicine in 6 years, we have some extra students on the government financing program. So a mature -- fully mature course has 7 students per seat. We have some of those, but we have courses that have 2 students per seat because that basically means that they are in the second year, right? So between 4.9 and 7 is a 40% growth that depends only on people showing up at our door. So people coming into the class and nobody is graduating. So that does not depend on any additional seats on any authorization from the government. So that growth is already contracted in the base. On top of that, we expect 100 to 160 new medical seats based on the Mais Médicos Program that we had, and these programs are maturing and the natural path for those already foreseen in the regulation should fulfill your targets with the government, and we are fulfilling our targets with the government. You get additional seats, and this is the number that we expect for this year, okay. Moving on to Page 4. What we see is a premium. Premium is now extremely important for us in the year. A lot of resilience in classes A and B. We are talking tickets here of roughly BRL 10,000 per month. In Medicine, above 3,000 businesses and so forth, which is a completely different reality of everything else that we do. We had a growth of 26% on revenue of the year. Important thing Ibmec we are having an important advancement in the mix, meaning that we are growing a lot in Sao Paulo and not so much in the other places in Sao Paulo. We charge tickets around BRL 5,000 and that's pulling our average up that results in an increase of revenues above the increase that we have on student base. In terms of EBITDA, what we see here, the EBITDA in the quarter you should not hang too much on that, neither on the negative or in the positive, like I'll show on the next page. This is pretty much when you shrink -- when you're analyzing a business that's smaller than the total -- some bills show up a little later in the quarter or you have some particular effects. So what I invite you to look at is the average margin for the year which is the 46 to 47 that we see here, 1 percentage point increase versus 2021, which is, of course, great news. We don't expect much changes in that. We've got a pressure on the in the previous session about operational leverage as we mature the courses. Should we expect higher margins here? We don't. We expect for 2023, this 47%, plus or minus 1 here depending on how the year goes, okay? So this is fast for all our business. We don't expect margin changes for 2023 on any one of our business or '23 or '24. Just on the on-site, and I'll talk to you a little bit about this, if we have some good news coming from all 3 levers that I mentioned to you, then we can have an increase there, but we don't see that. We don't forecast those, at least in our forecast, we're looking to margins roughly the same as this year for all the businesses we have. Just a little picture of that. Some of you might have a branch in Faria Lima. We just opened a second unit of Ibmec, in Faria Lima. It's going really, really well. We fulfill all the seats that we had for the first classes, which is about a little less than 200 students. And this is working really well for us because we could not fit more people in the building that we had in the Paulista. So we have this new unit is going really well, and we have this growth of 16% of revenues in the bag, it's very good news, and we expect more good news to come in 2003 and so on. Okay. Moving on to Page 5, talking about Digital Learning. This was -- some of you who follow us closely. We mentioned in the third quarter the fact that we had some seasonality effects here because we had some changes in the reference base of the previous year. The previous year, we had a very small intake in the first quarter and a huge intake in the second quarter. That affects the comparison basis for 2022. So we've mentioned that as one thing. And the other thing, we had a year in which we did not see a lot of price elasticity. We do every day here test of trying different prices here. And of course, all we care about is lifetime value. So when we see that the amount of discount that you have to give in order to attract new people, is not good for lifetime value. We just canceled that off. And pretty much, that was the situation last year, right? So we much rather give price increases. And you see in the bottom right-hand side of this page, the price increase is way above inflation. This is not how we see long-term playing. We see long term -- medium term, I've been always wrong. Prices have been falling at or above inflation because the market is still growing, and we see this market growing for quite some time. But of course, in the long run, we have the amount of margins that we have, the pressure on leverage that we have, it's not what we see. But the long run is long run, 3 years, 4 years. So what we see short run is and that will be seen with us and the competition in the past years, these prices be at least following inflation here. So the way we see here important when we had in the third quarter because of this comparison basis, a number that was shrinking versus last year. I mentioned the way fourth quarter is going to be high teens versus fourth quarter last year and because of the pricing system that we pushed so hard, we had actually better than high teens. We had 23% increase on the EBITDA for the fourth quarter. Again, like I said on the previous chart, we have an increase of 32% to 37% here, it means nothing. What we need to look is the 39% to 39% that we have on the bottom of the page. Again, it's bad comps fluctuation and how we account bad debt over the year. So things change between one quarter to the other. But it important that when we see last 12 months, we see is 39%, and we don't see important changes for the upcoming years on this, right? On one hand, when we look into this slide -- on the one hand, we have great operational leverage. On the other hand, we have more growth coming from outsourced partners instead of our own units, which increases the amount of commission that we have to pay. On the other hand, we see prices in the long term going down. So we don't see many changes in 39% margins anywhere that we can see in our spreadsheets, not short, not medium, not long term. Of course, that can change, but that's what we see today. On this renewal on the right-hand side of the page, I also don't get excited when we said in the third quarter, that number was much worse. That's because the comps of the low intake on the first quarter of '21 and the high intake on the second quarter of '21. So the "bad students" that tend to drop out a lot, they are in the comparison base that we have in the fourth quarter unlike a normal year. So why it matters that our average numbers are going up, not by much, but the average numbers are going up. The way we see 2023 on digital learning is a year much more similar what we had in '19 and '20 base growing a lot, double digits here. Prices, not so much, okay? So 2022, maybe because of elections, 2018 was a bad year as well, maybe because it's a lot of growth coming in during the pandemic and this [indiscernible] but 2022 was a nontypical year. And I think that we're very fortunate that we were able to see that and not yield on price versus a base that would not compensate for the losses that we would have. The way we see 2023 is an important evolution in terms of pace. First of all, we have today, intake and base. Okay. Moving on to Page 6. What we see on Page 6, if you take the quarters here and you show this side to side, on the third quarter, they look very similar. We see this page, of course, is negative because there's a lot of minuses here. But there's an overall positive message that people who've been following us see that our base has been dropping since the end of the government financing on double digits always. And we had always prices dropping. What we see here is a base falling by low single digit and prices going up. So we see this, I'm not so sure if this is over in English, but we see this as an asset built. Anybody knows this in English? What people believe so here a curve that's flattening out and stop shrinking, even preparing for some time to resume growth. We are ready for that. We had reduced a lot of our base -- [indiscernible] base. So we had 120 comp base. We have 87 now. So we're not so much concerned the operational leverage is the base now that allows us to be more courageous in terms of pricing. And of course, this 1 percentage point here of '19 to '20, this is something, of course, we celebrated inside a lot. We see this as part of this asset at not. And the renewal of 84% is also a great number because we had an amazing intake season for the on-site in 22.1% 1 year ago. So we have a lot of freshmen in our base and freshman tend to drop out much more than what we saw that the veterans and on freshmen. And then remaining with the same renewal rate, this is very important for us. And again, I think this speaks a lot to the quality of the people that we're bringing in when we charge higher prices. So [indiscernible] this is a word in English? No. Well, my team is slow here.

[indiscernible]

Okay, great. So Rossano, handing over to you.

Thanks, Eduardo. Good morning, everybody. So guys, 2022 brings us -- shows us that the revenue share of our most profitable businesses is still increasing. That asserts our margin expansion potential and also the strength of our portfolio once again. On this quarter, we highlight the expansion of our premium business that keeps showing strong results and continuous growth with 26% growth year-over-year. But also premium digital already accounting for 55% of our total revenue and in the quarter, 52% full year. In addition, in the [ July ], we bring a new respective with a longer-term view of our revenues. We demonstrated 104% growth from 2017 when we isolate the government-backed financing. That runs through COVID outbreak, negative macro in the country and several challenges we have had to surpass along the years, right? You can see that the old FIES now represents a [ new relevant ] part of our business with digital and premium businesses compensating the lost revenue of that segment, right? Going on to the next slide. So in a challenging macro, as previously said, with increasing pressure on our cost base with high inflation and on-campus full operations taking place now. Once again, we demonstrate our focus and discipline with expenditure growing well below inflation. So excluding bad debt, our costs were really -- were stable against an inflation that was above 6%. Over an already very stressed cost base after years of hard negotiations. As expected, the bad debt has been negatively impacted in 2022 by the quarterly intake of digital that began the previous year. But it's impact of revenue has been compensated by a few factors. One, the higher renewal rate, the lower the delinquency rates and better collection performance along the year. And also the positive effect of the collection negotiations that we have pursued on the medicine students that had previously been benefited by the COVID regulation. Marketing and sales operate at a more efficient level. We have reached our guidance of staying below previous year level of expenditure. We were that was supported by high investments that we have made in the technology platforms and also by our very strong brands. The leasing costs this year -- I still want to control after a meticulous space negotiation, reducing our -- the area we have previously occupied. We have reduced 20,000 square meters in the previous year. And even with high inflation pressures, we have been able to negotiate -- renegotiate contracts, reducing our leasing costs. Going on that leads us to an EBITDA growth of 19% on the quarter. That reached our guidance of expanding over 2 digits compared to fourth quarter 2021 with a relevant margin expansion of 4 percentage points in the quarter. With that, we highlighted the digital and on-site margin expansion even without the operational leverage of a potential growth that we were that we could have. Both businesses are benefiting from a conservative price policy and also an efficient expense management. When we look into the year, the full year EBITDA is growing 9% year-over-year, representing a margin expansion of 2 percentage points. We're now reaching 32% of revenues in the year. As previously highlighted on a year that presents a very challenging macroeconomic scenario, we showcased the strength of our portfolio and also of our strategy. On campus and premium presenting margin expansion year-over-year, which is a result of our consistent price strategy and also the cost management initiatives that we have highlighted before. When you look into net profits, of course, they have been heavily impacted during the year by deterioration of the financial results that is due to the increase of the base interest rates of the country and that brings an additional impact of BRL 237 million in the year. That reduces our adjusted net income to BRL 139 million in the year, which is, once again, as we said, basically impacted by the financial results despite the very positive operational results along the year. Going on, talking about free cash flow, we bring another quarter of a robust free cash flow generation. That's bringing the year to a result of BRL 500 million operating cash flow generation, a strong conversion from EBITDA. We believe that cash generation capacity is key and a very key differentiation for our business and a year that probably brings an uncertainty in the macro scenario and also a tightening in the credit scenario. We would like to also highlight our DSO that is reducing in the quarter to 95 days at the end of the period, demonstrating the half of our accounts receivable and also our collection process. We delivered CapEx below our guidance that was being below BRL 500 million. That represents the 10% year-over-year decrease. We believe that movement validates our consistent reduction curve from the peak of we have made in 2021 but we do that maintaining a high concentration in digital transformation in IT, preserving our long-term strategy. For 2023 we give a guidance of BRL 450 million, an additional reduction of about 8% of the CapEx we have delivered in 2022 and we maintained the long-term guidance of 7% to 8% of revenues. As we mentioned in the last call, the success of our investment strategy in the previous years can be verified by the strength of our portfolio, the robust growth in NPS and also the excellent results we have had in [indiscernible] and keeping a very high the renewal process to renew performance. Having said that, I get back to Eduardo, who will guide us through the ESG -- our ESG strategy and also the ESG results in 2020 -- I'm sorry, I'm sorry, we still have 2 slides discussing very important ones indeed. Showing the -- our cash position and net debt and net debt position. In 2023, you have no more debt maturities along the year, giving us the serenity to navigate a potentially very tight credit market throughout the year. In February, we made only -- our only data amortization instrument that was during the year in the amount of BRL 175 million. In 2022, we closed the year with a very comfortable cash position of BRL 1.2 billion and a net debt of BRL 2.9 billion. Considering our year's results, we reached a leverage ratio of 1.96x adjusted EBITDA, which is well below any of our equivalent limits. Going on during 2022, we carried out some maturity extension operations with the additional reduction of our spread. We does ended the year with the maintenance of an average maturity of 30 months and a spread of 1.91% above CDI. That was against the 2.17% mark the end of 2021. We highlight 2 subsequent events. One is the issue of a [indiscernible] instrument of BRL 420 million at the cost of CDI plus 1.25%. That in practice is an extension of the operation we set in December that was due this year. And with this new operation, we extended that 2 additional years, completing a 3-year period of the debt. February, as we mentioned before, we had the amortization of BRL 170 million referring to the first installment of our debenture 5. That leaves the year 2023 without any further maturity to, as previously mentioned. Now we really get back to Eduardo, who will talk about our ESG strategy.

Thank you, Rossano. Yes, we've been always a reference in terms of social work and governance. But I think in 2022, we had a major step to adjusting the way we communicate and some practice in the market. We had our risk management metrics, EST Risk Management matrix validated. We included ESG targets for all the leadership. We had our second exclusive class for Black trainees. The first was a major success. One of our trainees in the first class was elected the best trainee of our advent portfolio in Brazil in the competition that it's very fun and very interesting but very tough. We took a lot of pride in the results that [indiscernible] had there. And the second class is coming even better. We had 6,000 applicants, and unfortunately, we could hire only 11. But it's is pretty much a success and reference in Brazil, this program. I think when you look at the numbers, you've had the curiosity to follow, we have lots of diversity in all the levels that -- of our company and of our student base. But speaking about it and talking about it and having a huge diversity inclusion program, it's been great for us, okay. On top of that, on the bottom left side here on the page, we advanced on the carbon ratings, which is an important step to get into ISE. And we were reviewed by MSCI again, and the breaking of a was maintained, which has resulted very few companies in Brazil have and certainly none in the education setting with the education sector, we take a lot of pride in that. Our sustainability report is on the GRI standards for some time now, but now we advanced an integrated report. We're bringing PwC as the external assurance. We've included also the SASB indicators on that. And we had -- in the beginning of the year in April, this ESG forum that was -- we had a very, very positive feedback on it. We had more than 1,400 people attending. And we invite you to the second one that will happen on April 28. It takes 1.5 hours, it's going to be over the Internet, so you can follow on your home. It's late. And I think it's very inspiring for people who invest in us. It's very inspiring for people who work with us. It's very inspiring for our competitors. It is a reference in the market. So I strongly invite you to be there with us on April 28 at 3:00 p.m. I believe this is our time. So moving on to the final remarks. We had a good year of EBITDA and cash generation growth despite a tough macroeconomic scenario and the challenging intake that we had because of the scenario. We had important ticket for the nonfreshment involvement. So all of them at or above inflation. Our costs and expenses stable versus the last year and of course, falling versus as a percentage of the total revenues. EBITDA growing versus last year, not only in absolute terms, but also in the margins that we have. I think this is very important. I think that we would reach a new level that it's closer to where we should have been in the study that we had before. BRL 1 billion in cash before CapEx of BRL 500 million after CapEx, more than twice what we had last year and a major advancement in ESG things. The way we're seeing this year, as I mentioned before, some of these new medical seats growing medicine student base were above 8,000 students. The intake coming really, really strong for premium digital increased by 2 digits versus last year. On-Campus, we have a very strong reference last year. We had a very big intake compared to ourselves and to the market. So the reference base is challenging. So we don't expect to reach last year, but we are sure to be better than the year before that. Average ticket and then we're talking about the whole ticket, the net revenue of a student base, then all units growing by 1 digit versus last year. And as a result of that, we expect a double-digit growth in terms of adjusted EBITDA. I remind you that last year, we had a BRL 400 million EBITDA, which was -- is a great number, second best that we had over had and the year before, we had BRL 324 million, if I'm not mistaking. So we're growing over a base that's already very strong coming to what will certainly be the best EBITDA in the quarter for us in our history. In terms of CapEx, we came from 12-plus to 10-ish 1.5 percentage point reduction. We had a few years that we had a recovery on years that we had not spent plus a major effort of digital transformation. They had a lot of things that you see softer and absence and so forth, but a lot of things you don't see in the back on hardware, then making sure that we have all the systems and equipment that supports the very technological business that we became. And then we've been saying for quite a while that we're going to reach 7% to 8% of net revenue in the future. We had last year a 10-ish we are pointing here a number that's 8% below last year with a revenue increase that we will likely have this year. We are one step further to get into the long-term guidance that we'll be giving you. That was what we had for today. I thank you very much for your attendance and your patience today and also for your trust on the business for those who our shareholders will become shareholders soon. And again, I'd like to take some credit for telling you next quarter is going to be so great or we're going to have some improvements. That's what we've been seeing in the past. We're looking into a very good first quarter in 2023. Of course, it's March 16. So I have a lot of confidence to say that a lot of numbers have been already accounted for. And this is it. So great year, good year last year and a great quarter coming, and we're looking for -- to better times and having an optimistic view of the near and medium-term future. Thank you very much, guys.

Thank you. Now I would like to hand the floor back over to Mr. Eduardo Parente for the company final remarks. Please, Mr. Parente, you may proceed.

I think I read to my final remarks. But all in all, guys, thank you. Looking forward to a great year ahead.

This does conclude Yduqs' conference call for the fourth quarter of 2022. We thank you for your participation and wish you a very good day.