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 third quarter of 2023. This 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 that all attendees will only be watching the video conference during the presentation. [Operator Instructions] 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 the current information available to the company. These statements may involve risks and uncertainties 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 respective forward-looking statements. Present at this conference, we have Mr. Eduardo Parente, CEO of Yduqs; Mr. Rossano Marques Leandro, CFO and Investor Relations Officer. I would like to hand the floor back to Mr. Eduardo Parente, who will begin the presentation. Please, Mr. Eduardo, you may proceed.

Thank you very much. Good morning, everyone. Welcome to Yduqs' Third Quarter Results Presentation. Along these next few minutes, what you're going to see is a lot of consistency. Consistency on the new level of margins, on the new level of cash flow generation, on the new level of net income. And the growth that you've been seeing for recurring -- we are entering the fourth consecutive quarter with double-digit increase in our EBITDA and all the other numbers I mentioned. So moving on to Page 3, highlights of the period. I think, again, you'll see consistency all over this page under the presentation, we have a new EBITDA margin level favored a lot by the higher growth in the business that we have the highest margin, but also a lot of discipline in prices, a lot of operational leverage and resulting in this new EBITDA level and a strong cash generation. When we look to the left-hand side of this page, we see net income above BRL 330 million in the first 9 months of this year. Operating cash flow reaching almost BRL 1 billion in the period. Our EBITDA ex IFRS, growing by 35% versus the previous period. And very important for us, this leverage ratio reduction, which is a result both of this EBITDA level increase and also of the cash flow generation that allows us to reduce the debt level as well. On the right-hand side of the page, what you'll see is numbers for the quarter, again, a double-digit increase on the EBITDA in line with the guidance that we gave last quarter. Important here, all the businesses growing their EBITDA, including the on-campus, which is showing the early signs of recovery, and we take a lot of pride of that. I'll talk about it in a few pages. On the middle of the page, what we have here is important numbers, an increase for intake. Digital growing 26%, above the higher range of the guidance that we gave. Remember that Digital, we have already had very good results, very important growth, both in first quarter and second quarter. And on-campus on the high end of the guidance that we gave as well, an increase of 32% versus last year, which is a number that we're very happy with as well. When looked at the average ticket, all businesses growing above inflation, and Medicine and Digital even more than double the inflation around the period, which also have -- and I'll show you in a minute, an important impact on the results as well. So consistency all over, let me go on the details here. Moving on to Page 4 and talking about Premium. Premium is a business that serves classes A and B, are much less affected by whatever type of prices. This business was very important for us in the pandemic to sustain the margins above 30% of the overall business to sustain the growth that we had every year. So it's a clear example of the strength of our portfolio that I'll talk a little bit more in a few minutes. When we look at the revenue, this is what we're used to. This is the growth that we have contracted. When you look into medical schools, most of them have not yet graduated the first class. So there are people -- freshmen coming in without people graduating, so this growth is fully contracted. There are other sources of growth as well, like additional seats that the government can give you, et cetera. But talking only about the contracted growth, this is the kind of numbers that we are used to seeing quarter after quarter, okay? When you look at the right-hand side of the page, and we talk about EBITDA, this 8% is not the number we used to see. We used to see numbers similar to the revenues, which you'll see in the green box over there, it's 18% to 20%. We have 2 specific effects on this quarter and the last quarter as well, which are increased retention rates on federal government programs that Rossano will explain to you in a few minutes as well and the additional bonus that we have, and this affects all the businesses for our executives. Last year, we had zero bonus, considering the tough moment that we're living, and this year, considering the results that we're having, we are provisioning more than the target bonus for these [ executives ]. Not considering these 2 effects, which are one shot here, we would have growth similar to what we saw in the previous quarters. And this is how we see the future coming as well. As well as when we see the margins for the first 9 months, they will be in the levels that we used to, between 47% and 49% if it weren't for these effects. Bottom left-hand side of the page, we're still growing again. And again, these are numbers that you see, medical students and IBMEC students, which is high-end business schools, reaching almost 16,000 students, that includes undergrad and grad students. When we look only to undergrad students, we have already reached our guidance on medicine with 8,400 students now. Right-hand side of the page and at the bottom of the page, we see important increases in prices, both in the IDOMED and IBMEC. And the renewal rates, the traditional. We varied this somewhere between 95 and 96-ish, [ average method ] is what we're presenting here, okay? So a very important business. Slight bump on this issue of the government withholding more than what we used to. This is not something we see for the future. We might not come back to previous numbers of retention. But certainly, the current numbers will not be sustained for the future. So everything going well, very happy with this business, important for moments of crisis. Important for moments like we're living now because it keeps on growing, delivering additional margins for us, okay? So moving on to Page 5, talking about Digital Learning. I think this is the cherry on the top of the cake for this quarter, the past 2 quarters as well. I think there are 2 effects going on here. One is the delayed effect of the pricing policies that we had last year. We were very transparent about this. We understood last year that the way to maximize LTV was to increase prices, understanding that this would imply lower intakes. And this year, the coin has reversed, okay? Right after the election last year, we saw a lot of elasticity coming back to the market. So we were more aggressive on prices. That allowed us to have very, very good intakes for the all 3 quarters of this year. So there's a combination of a couple of classes from last year paying more than what we would have expected, had we not followed this policy, with very important intakes happening this year. The result is a very strong growth and margin expansion, with a very strong operational leverage based on technology and being the lowest cost producer with a lot of quality here. What you'll see is an increase in net revenue of 25%. EBITDA growing more than that revenue despite the bonus effect that I mentioned on the previous page. And very important here is this 39% to 42% adjusted EBITDA margin, which is something that we see as coming to stay. We have operated between 38% and 40% in the past, and we thought this was how we projected including this year. And this increase here is a direct result of the operational leverage that we are facing. And we see this as a new platform, a new base for us to operate. Left-hand side on the bottom, an important increase of 15% in the base of students. Right-hand side, this increase of 8% is not sustainable. We don't see these numbers going way above inflation like it is right now. We see next year as an effect of what we're doing now in our numbers around inflation as such. For right-hand side, renewals has been stable around the 72%, 73%, 74%. Important here is that the even quarters that are new for us since 2020, they had renewal rates much lower than this, but they are catching up. So we're having a very stable renewal rate in all the quarters that we are operating here, okay? Again, third quarter intake was fantastic, 26% above last year. We exceeded even the top range of the guidance of what we expected, in line with what we had in the first 2 quarters of this year as well. Moving on to Page 6, and talking about on-site. This is very important news as well. We had important changes in the government financing program in 2014. Since then, what we've been seeing is double-digit decrease on the student base. Last quarter, what we saw was minus 8. What we see now, minus 2 or flattish, let's call it. It's important news for us. This growth on the semi on-campus is a very important news. We took longer than our competitors. Our competitors, they hit the gas on the semi on-campus in 2020. We just revised our products and made them way more competitive on the first semester of this year. So I think that the screen 50 here is going to give us a lot of joy in the future. And this is an important part of our result here as well. So net revenue growth, which is good news, even better news when we see in the top right-hand side of the page, this -- the important growth in EBITDA of 13% in the first 9 months. And also very important to this growth, we've been operating at 20%, 19% margins for on-site. This 21% to 23% is a direct effect of the pricing policies that we have changed last year. This -- unlike the previous page where I saw the minor -- the plus 8 was unlikely to stay. This plus 6, we are making big and cautious efforts, and I think it's not only us. I think that the whole market is operating below the healthy margins that you'll see here. And we see this as a trend that people try to resume to -- for more healthy pricing levels that will deliver better margins and a more sustainable business in the upcoming future, okay? Renewal, again, very stable. We've been varying between 81% and 83% for as long as I can remember. And the intake for the third quarter, very good intake, a 30 -- more than 30% increase versus the same period last year. So all in all, on the on-campus, we are happy with the numbers that we're showing. This margin increase is very important. This adjusted EBITDA growing is very important. And the student base being flattish and the results that we're getting from the semi on-campus is very important. The intake that we just had, very important. And the movement that we're seeing not only from us, but from the market as a whole of resuming prices at a reasonable level, also very important. We're looking forward to good news coming from the on-campus in the upcoming years. Moving on to Page 7. We had the Enade results. Enade are tests that are made by our students -- all students when they graduate. Now every year is a specific class. So this year, we had many classes, but law, business, psychology. So there are cohorts that take the exams together. So the last time this cohort had its exam was 2018, so it's pointless to compare 2022 to 2021, what you have to understand is what happened between '18 and '22. Very important piece here, '22 was classes that had at least 2 years during the pandemic and 2 very important years towards the end of their courses. So when we see overall results in the market, what we see is a deterioration of these results. In absolute terms, we think we could have done better. In relative terms, we think we did pretty well compared to the rest of the market. So the left-hand side of this page, what you see is an important evolution from us despite the pandemic facts that I mentioned. What we had is 62.2 with the courses Level 3 and above. So we went from 62.2 to 63.6, which is an important evolution to consider what I mentioned. But not only that, but we were ranked #5 amongst the publicly traded companies, and we are now ranked #3, very, very close to #2 and #1. So this is, in relative terms, a very important evolution for Yduqs on the on-site. All in all, we had an important evolution on the on-site despite the tough moments of the pandemic. We were worse in terms of distance learning, a lot related to the pandemic, and we are expecting important improvements in the future. Still, we had a relative evolution. On the on-site, it was very important, and we're still #1 in distance learning. So guys, moving on to Rossano, he will talk about the financial parts of the results here.

So good morning, everyone. Thanks, Eduardo. So moving to the revenue slide. So you can see here a very relevant growth in net operating revenue of 14% quarter-over-quarter and 13% year-to-date. Once again, our on-campus business is contributing to this growth, as emphasized by Eduardo previously, and it's complementing the robust performance of both our Premium and Digital segments. This consistent revenue growth is a result of building a winning portfolio that has undergone significant transformation in the recent years. The representation of the Premium and Digital business unit has surged from 22% in '18 to 58% of our net revenue now in '23. This performance underscores a company that has evolved, increasingly focused on its highest profitability ventures. So moving on to Slide 9. Talking about general expenses. So once again, we see the excellent cost and expense efficiency reflected in our numbers. This is the work we have been doing for the past several quarters. And once again, we are happy to see the results coming. The only line showing growth this quarter are the G&A and the bad debt ones. For G&A, the increase primarily stems from variable compensation that is tied to our operational performance this year. Excluding this effect, the line will remain stable. Regarding bad debt provision, the expected increase in the provision for DIS students is due to initial provision hike that we do at the enrollment -- at the moment of the enrollment. And it jumps from 15% to 20%. This is a conservative approach we take that improves even more our accounts receivable health profile. And this is coupled with a significant rise in enrollment revenue relative to the total. As we had a very good intake season, the amount of revenue coming from enrollment in relation to overall revenue is higher this year. And this brings forth the increased participation of this, of course, which has a longer-term accounts receivable profile. Year-to-date, our bad debt to revenue remains stable compared to the previous year, and we do not anticipate the significant yearly variation despite the high contribution of enrollments to our revenue, as I have previously talked about. This outcome is only possible due to a strong renewal process in recent quarters and improvements in our collection operations. It's worth noting that the enhancements in retention and renewal also in the collection process reflects the success of our technology investments that has been done in the recent years. That has created user-friendly experiences. They're very effective and also provided stable platforms for our students, and that most certainly makes a lot of difference for them. Overall, once again, a very positive impact on our margin across all lines. For the positive side, I want to highlight both the marketing and also the leasing cost. Marketing is a result of the effectiveness also of the technology investments and also the strength of our brand here in Brazil. On leasing, this is something that we have been working hard on the previous quarters and the previous years, indeed, reducing our overall real estate area and also negotiating the cost of our campuses, of course. Moving on to Slide 10. We come to EBITDA, where the combination of both the positive revenue and the work on cost and expenses has led us to achieve the EBITDA guidance for the quarter. We have reached 14% growth. If we look at it ex IFRS, the growth was even stronger at 27%. This has resulted in a 2 percentage point margin expansion year-to-date with consistent growth across all business units. It's noteworthy that the Premium margins was affected by retention, as mentioned by Eduardo from the government financing program. That has been -- a unilateral measure has been taken, and it has impacted the business this quarter. We have recently noticed that we have new regulation coming from the Congress that we once again adjust that impact for the future, so we do not expect that same impact coming on the future months. Also regarding another observation, the EBITDA is growing by 23% this quarter, reaching $453 million when we're not taking into account any adjustments even this year compared to last year. That shows a significant reduction in the nonrecurring items. Now we can move on to the next slide, #11. We come to net profit that shows very strong growth, growing 124% year-over-year, year-to-date and 83% comparing quarters. It's reaching BRL 331 million in the 9 months of 2023 and BRL 123 million in the quarter. This is occurring even in a scenario of high interest rates because we see the expansion in adjusted EBITDA. We start seeing the positive results of financial results, but still living with very high base rates in the country. So we can see even better net income results in the future following the path of the base interest rates curve. Going on to Slide #12. So we're pleased to once again present a robust quarterly cash flow generation. So with very positive operational results, combined with our cash management discipline, this led us to achieve very healthy levels, closing the quarter with a shareholder cash flow of BRL 108 million. That's a 30% growth compared to the same period last year. Our average receivable period also remained stable compared to historical levels, closing now at 103 days. That's a consequence of a healthy receivables base that we have been building over the last cycle even in a period with significant enrollment revenue growth, which brings a long-term aspect tied to these students. This is another demonstration of the health of our accounts receivable, which is a result of advancements in the student retention and also the improvement of our renewal and collection process. We also demonstrate efficiency and controlling the CapEx line, closing the quarter at 8.6% of operating revenue. That's a reduction of approximately 1 percentage point compared to the same period last year. With a focus on the representation of investments in digital transformation and IT, there is totaling already 56% of our total investments. So we believe that our business cash flow generation ability is a fundamental and distinctive drive that leaves us in a very well-positioned state. Remember that we will pay BRL 800 million (sic) [ BRL 80 million ] in dividends in December now. So moving on to Slide #13, where we see our strong cash position and also our net debt reduction. So it's another positive highlight for the quarter, a significant reduction in our leverage ratios that is now reaching 1.5x our adjusted EBITDA. That is due to a significant reduction in net debt with a robust cash generation and also the expansion of our EBITDA that is bringing us to this position. And this is becoming increasingly comfortable for us, making us very well positioned and the flexibility we need to run the business in the future. In the short term, we emphasize once again that we have no more debt maturities in 2023. And this gives us the peace of mind continuing to monitor the market opportunistically and aligning the duration of our debt with the future cash flow generation outlook and also reducing the cost of capital constantly, right? In this context, this quarter, we have approved the ninth bond offer that is totaling BRL 700 million and that will mature in 5 and 7 years. So as discussed, we are constantly monitoring opportunities to work on our liability management, strengthening the force of our portfolio and also leaving us more comfortable with the future cash flow. So I'll now pass it back to Eduardo, who will talk about our consistency over the previous few years.

Thank you, Rossano. Moving on here to Page 14. I think this is a very insightful way to understand our company and our business. All the numbers on this page are last 12 months. The bars are the company's EBITDA. You'll see this somewhat flattish over '21 and a slight growth in '22, and then we start resuming growth in an important way in '23. The lines are each business. We started dividing the results per business unit in the fourth quarter of '20. And you'll see that -- if we had a longer period, you'll see even a larger decline on the on-site business, which is the dark blue line here. But on the series, it starts at BRL 600 million, and it sees the bottom of the well in the second quarter of '22 when we reached BRL 401 million. And you see now the resume of the growth of this business. On the other side, what you see -- you'll see Premium, BRL 310 million, starting -- the light green line there, starting at BRL 310 million reaching now BRL 538 million. You'll see during the tough years here, an important additional growth to the portfolio. And the middle one, the blue line, which is the Digital Business that comes on the fourth quarter of 2020 on BRL 400 million, reaching BRL 700 million. So you see an important change of the contribution to the EBITDA. You'll see that in the tough years, the growth in premium there from BRL 310 million to BRL 454 million, right, in 1.5 years. This was very important to sustain our results, again, showing the strength of the portfolio. And towards '23, what you see is a slight resume in the Brazilian economy that affects classes C and D, which are the ones that we serve with Distance Learning and with on-site that gives a different breadth, a different momentum to these 2 businesses, right? And again, so if we shut our eyes and look into '24 and '25, years that we expect important impact from the moment that commodities and the fiscal resolution in Brazil to have an effect, the effect that you have on classes C and D is likely to be multiplied in the business that we have, okay? Bottom left-hand side, you'll see on the bars, the net income of the business. On the line, you see the interest expense. A big impact on our net income was the sharp increase in interest rates that we had in 2022. So you see it coming from BRL 260 million, our interest expense LTM to BRL 600 million. And this number starts going down in this quarter by both a reduction in the interest rates in Brazil, but also on our deleverage. And you can see, on the bars, the impact that it has on our net income, that's evolving in a very positive way. Right-hand side, LTM operating cash flow surpassing BRL 1.1 billion in the last 12 months, which we see as very robust. Page 15, what we have here is our recent history. We had growth in every single year despite of the pandemic on revenues. We always had margins above 30%, and we have paid dividends every single year since 2007, so 16 years in a row, even in the tough years that we had. That shows the confidence that our Board have, that the management has and how sustainable financially our business is for the upcoming years, okay? So Page 16, it's a big source of pride for us. We've been for 53 years very much focused on the social. We are widely recognized in Brazilian society for that. We were born as Estácio serving the underprivileged, usually in the outskirts and downtown, night courses for people who work. Always very concerned and aware of the surroundings that we had, and we built a social practice that was very, very solid, very, very recognized even when people did not speak about ESG in our country. Since 3 years, we evolved a lot in the way we communicate ESG. That was communication, that was putting into targets all top management, myself included. We have targets on ESG. We're doing really well on those. And the recognition came. On the bottom of the page, there's important institutions that we are dear or we're a partner or we follow their protocols. But I think that the key that we would like to give focus on this specific presentation is us being promoted from A to AA on MSCI. MSCI recognized as leaders, all companies rated AA and AAA. There are 9 companies in the world, 9 education companies in the world that are AA and AAA. We are one of those, the only one in Latin America, the only higher education company among these 9 companies who are recognized on MSCI as global leaders on ESG. So a big job for the whole team here, not only on the content side, but also on the communications side, also on the transparency side and bringing a lot of stakeholders to give their opinion to participate on this journey with us, and this upgrade was very widely celebrated by us here. Moving on to Page 17, a big summary. I hope you saw consistency all over this presentation, and it's not only on the EBITDA growth. We were always seen as a very disciplined company on the cost side. I think that the pricing side, we have been in the past as well. But after the pandemic, it took us big efforts to resume discipline and make sure that we bring prices back to reasonable levels. This portfolio that we built, like Rossano showed you recently, this portfolio was built in the past 5, 6 years. On-site was the key element of our business. Online and Premium prove a lot, a lot based on technology, a lot based on brand name, people recognizing us as a leader in the educational sector. And this was key for us in tough times. It's going to be key for us to take the opportunity to use the strong operational leverage that you're already seeing with us, okay? So we have had important tickets for upper classmen evolving on all of our business, including the on-campus. Digital and on-campus had important increase in our intakes versus the previous year. Our core revenue was -- increased on every single business that we have. EBITDA for the fourth quarter in a row was a double-digit increase. Net income, again, an important increase versus last year, free cash flow to equity also as well as our cash position. And again, there's one number that summarizes this journey is the reduction in the leverage ratio because this is not only us increasing our EBITDA, but also us increasing cash generation, which reduces our debt leverage -- our debt ratio, which are both, of course, levers for this number. Moving forward, and looking at Page 18. We will pay our dividends in the fourth quarter. Digital intake on fourth quarter is coming really well. So we feel comfortable to give you the same guidance that we had for the third quarter for the fourth quarter. Fourth quarter EBITDA, we see an increase between 5% and 15% over the fourth quarter of 2022. Bear in mind, the fourth quarter 2022 was a 19% increase versus fourth quarter '19, '20. So we're yet delivering another imported growth over a number that had already an important evolution versus the previous year. CapEx, we're always talking to you about medium-term reaching 7% to 8% of revenues. Again, another important step. We give a guidance of BRL 470 million, which is a reduction of 4% versus the previous year. Obviously, with revenues increasing is an important step towards the 7% to 8% that we mentioned, okay? Last but not least, we are still confident in the 130 to 160 new medical seats that we approved this year. 53, we have already approved. Still a lot of activity on the government side on the last few months of this year. We're very confident we're going to fulfill this guidance again. So I hope you saw consistency all over this presentation, and I hope that you share the pride that we had in the results so far this year and the excitement that we have with still yet another quarter in 2023 and what's coming up in 2024. I thank you very much for your trust and support. And I wish you all a very nice day. Thank you.

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