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

Good morning, ladies and gentlemen. Welcome to Yduq's video conference to discuss the results for the first quarter of 2024. This video conference is being recorded, and the replay will be available at the company's website at www.yduqs.com.br. The presentation will also be available for download. [Operator Instructions] Before proceeding, we would like to clarify that any 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. It's important to note that for better viewing of the presentation, it's recommended to enable full-screen mode. Present at this video conference, we have Mr. Eduardo Parente, CEO of Yduqs; and Mr. Rossano Marques Leandro, CFO and Investor Relations Officer. I would like to hand the floor over to Mr. Eduardo Parente, who will begin the presentation. Please, Mr. Eduardo, you may proceed.

Thank you very much. Welcome to Yduqs' First Quarter 2024 Presentation. I hope everyone is well. Thank you very much for your time and your trust. I'd like to start this presentation showing the highlights of the quarter. Yet another quarter that we have expanded our net income. It's fifth in a row. Also the third -- first quarter in a row that we have important increases versus the previous year. Talking about net revenue, we increased it 11% and EBITDA was 7%. In net income, we increased also 11% versus the same quarter last year. Very important is the trajectory that we have towards the deleverage of the company. We have reduced deleverage ratio to 156% versus 174% last year. We also have many important deals that allowed us to have the lowest debt cost in the industry at CDI plus 1.32%. Right hand side of the page, very important this evolution here. Last year, we had a jump in net income from BRL 96 million to BRL 156 million, a very high number compared to the previous years. And we have -- we were able this year to have yet another growth versus the very good number that we had last year. But more impressive than that is the green box on the right-hand side, that last year, we had BRL 199 million LTM as net income. This time of the year, we jumped from BRL 199 million to BRL 360 million in this positive evolution that we've been talking about. Looking at each business here. On Premium, we had an 18% growth versus previous year. We had important growth in terms of pricing, both in Ibmec and in our Medicine business, that we told on this 15% EBITDA growth that we had. On Digital, we achieved the guidance that we gave, 186,000 new students, which is very close to what we had, the fantastic intake from 2023. We had an 11% in growth, also a positive evolution in terms of pricing. On On-campus, we're excited with the quarter that we had. We've been talking about the evolution of this business for a while, should be no surprises to people who follow us closely. There's an important increase of 2 percentage points in terms of EBITDA margin, a 20% increase in overall EBITDA. The first increase in student base since 2014, a 2% increase, 15% intake guidance achieved again versus the same period last year and an 11% increase in terms of net revenue. Let's talk about Premium. Premium, we -- it is for the first time that we separate Ibmec from IDOMED, so Ibmec, mainly business school, high-end business school and IDOMED, our high-end medical school. It's the first time that we show it separate. There's a lot of requests, mostly from Brazilian buy-side, asking for this, and we show it for the first time. Net revenue, an important increase overall with 13%, very important number coming from Ibmec at 22%. You can see that bottom left-hand side of the page as well. In terms of student base, this is overall student base that we see here. On the green box, you see undergraduates only, very important increase in terms of medicine, 8,900 students already, also important evolution in the Ibmec. Both business having price increases above inflation always. And it was such last year, and it is once again here, generating, yet again, a very important increase in terms of EBITDA, 49%; 9% in medicine. In medicine, the governance retention increased on the second part of last year. So we're kind of comparing apples to oranges here. This time would be little bit higher if it wasn't for this, but again, a very healthy business. Margin is just fluctuating slightly here. Renewal, again, very stable. Numbers vary between 95%, 96%, again, very stable business, always demonstrating growth, very solid margin. We're very excited with having this in our portfolio. So moving on to Digital Learning. What we have here, just a small recap for the recent past 2022 election year in Brazil. We measure elasticity here every week on the Digital business. What we saw was very little elasticity. We rose prices. When we came to 2023, you saw elasticity coming back. We're way more aggressive in terms of pricing. And we had a fantastic intake, both first quarter and second quarter 2023, which we were able to repeat very closely on the first quarter this year. So this chart is a reflection of the recent past that I just mentioned to you. So starting from the upper left-hand side, we see an evolution in terms of net revenue, 11% versus the previous year, 13% in undergrad. When we see total student base, an increase of 6% versus last year. When we see average ticket, again, an evolution above inflation. This is a reflect of the things I mentioned about 2022. So we have our non-freshmen, our veteran, our upper class having prices above our average. So this is pulling our average ticket up. As we've been telling you for a while, this will not -- this is not sustainable. We will see next quarter, the quarter after, this number coming very close to 0 or even slightly negative, okay? So moving to the upper right-hand side of this page, what you see is an important decrease of 7.5 percentage points in margin. We're not concerned about this. We've broken down this on a table for you to see that we don't see this being replicated at all on the upcoming quarters. So one by one here. Bad debt, there's a minus 5.3 percentage points here. That's split in 2 halves. One of them is about DIS. We increased the provisions on the spot from 15% to 20% on the second quarter last year. So this is the last quarter that we have apples to oranges, 15% last year, 20% this year. This number multiplied by the DIS levels that we have is roughly half of the impact. The other half is a fantastic intake that we had on the first and second quarters last year. The dropout levels, 3, 4 quarters thereafter, increased substantially. So this is what we're seeing. Now the major increase that we have from '22 to '23 on first and second quarter last year, making a uncomparison base. We don't see this replicating moving forward as well. The second line there, 1.9%, this is commissions, commissions paid to the distance learning centers. They are all partners. The commissions are proportional. They have targets. When they reach that target, the percentage that they get in commissions made increases, and the collection levels that we're having right now are very high. So the higher percentage point that they have based on last year's intake, multiplied by high collection level lead this to 1.9% above what we had last year in terms of revenue percentage. We don't see this replicated moving forward. Market experiences, this is something that we planned. We're becoming way more efficient year after year in terms of market. This year, we purposefully in the first quarter, we decided to spend more in terms of marketing, building brand image moving forward. This is a conscious choice. We don't see this replicating at this level moving forward as well. And the plus 0.8 percentage points there is the effect of our operational leverage, of volumes increasing, compensating a little bit for this negative impact. So again, let me repeat this. We're not concerned with this number. This is not something that will be replicated in this magnitude moving forward. So finish up the -- this plan here, renewal at 73%. This is stable. This is -- it varies between 73% to 75%. I'd like to take credit. When this time increases, we do not celebrate. This is directly proportional to the number of freshmen that you had on the previous class, and we had, again, a very important intake. So it's natural that this number varies. And again, we achieved the guidance that we gave you on the 186,000 students, roughly replicating the fantastic impact that we had last year. So moving on to On-campus. This is a chart full of good news. We start with the increase in net revenue of 11%. Moving on to the base, this 2% increase doesn't sound like a lot, but it's the first time since 2014 that this -- we see this as a positive number. So I've been, for the last 10 years, show you numbers started with a minus in front of there. Of course, there's a lot from the Semi On-campus growing. Semi On-campus is a very important evolution for us. It helps us with the operational leverage in the campus. It helps us with the profitability of the campus. The number of the 100% on-campus student is still a negative number there. But we had, for the first time this quarter as well, an intake for the purely on-campus student, greater than we had on the previous year. So very important evolution here. That, together with the increase in tickets above inflation, we've been showing this increase in tickets above inflation since 2021, all this together allowed us to have this important decrease of 20% in EBITDA for the -- on the On-campus and, more important than that, a 2 percentage point increase in terms of margin. So renewal, again, this number varies between 80, 81 to 83. So it's a margin evolution here. This number of 15% increase in terms of intake versus the first half last year, this is a number that we celebrated a lot here. So lots of good news here and lots more to come as well, okay? Pass it on to Rossano, who'll run you through revenues and other financial numbers.

Thank you, Eduardo. So moving forward to the financial part of our presentation. Here, we can see an 11.5% increase in revenues year-over-year and a very positive sign of our -- the strength of our portfolio, all of our business units growing double digits this year. So Premium is leading the way with 13.5%. But it's very important to highlight what is happening on On-campus, growing 11% year-over-year, as an effect of both ticket increasing and, as Eduardo highlighted in the previous slides, student raise increasing after 10 years of pressure on this segment. You can see on the observation on the bottom right-hand side that we've gone from 22% to 58% of participation of Digital and Premium segments in the overall revenue of the company, once again showing the strength of our portfolio. Moving on to cost and expenses. We can see a 14% increase in cost and expenses overall, but important to see that it is very concentrated in bad debt and marketing and sale expenses. When you look into all the other lines, you can see the efficiency of our cost management initiatives: G&A and leasing, basically in line with previous year; and costs, we're having a very positive effect of 1.3 percentage points improvement on this line, again, the result of our continuous focus on cost reduction and efficiency generation across the businesses. The negative lines are bad debt and marketing and sales. As previously discussed in the Digital slide, Eduardo mentioned that expanding marketing and sales expenses were previously planned by us. We believe that investing on our brands, investing in marketing was very important for the future of the organization. And this is going to generate lots of very positive results medium term. On bad debt, also explained by Eduardo, half of this effect is basically just the difference in provision year-over-year. So last year, we were provisioning 15% of our DIS revenue. This quarter, we're provisioning 20%. This is the last quarter where we're having this difference in provisions. We have made the change on second quarter last year. So starting next quarter, we're going to see the same representation. So we do not see this one percentage point going forward along the year. Regarding bad debt. So half of that difference is coming from the difference in provision. So starting second quarter last year, we changed the DIS provision from 15% to 20%. So when you compare first quarter over first quarter last year, we see a difference from 15% to 20% provision on all the DIS revenue. So this is the last quarter where you're going to see this difference, and that explains half of that 2.1 percentage points. The other half is caused by the increase in the freshmen in our base. So last year, we had a very strong enrollment. As you know, the freshmen has a higher drop-off rate. So it has a higher revision that is going to cause negative impacts in the third and fourth quarter following that strong intake cycle. So this is generating the other half of that impact. So all in all, we -- it's very important to highlight, all the costs are under control, is being very strictly controlled. And most of the negative impact, we do not see happening on the future quarters. So moving on to the next one, we see a 7% growth in EBITDA. And as I said, the very positive news here, On-campus expanding 2 percentage points on margin as an effect of the operational leverage that we have been talking quarter-over-quarter. Premium, once again, increasing its margin with very positive results even with some negative impact coming from the retention of FIES, which is the government incentive program. So even with this negative scenario, Premium growing 0.6 percentage points in its margin. The Digital has a negative impact of 7.5 percentage points, and Eduardo has explained that very well in the previous slides. So moving on to the net income slide. We can see here that we achieved our guidance, growing 11.2% year-over-year. This is mostly driven by the increase in EBITDA, but also being helped by financial results. As you can -- as you know, the interest rates in the country are going down, and we're also working the cost of our debt. So we see positive results in this quarter, and this is going to keep improving quarter-over-quarter in the future. Depreciation, amortization, we still see a negative result year-over-year, but this curve is going the other way round because we have decreased our CapEx starting 2023. We have -- we are giving guidances that we're decreasing that as a percentage of revenue. So we're going to start to see this negative trend moving the other way around in the next few quarters. So as we can see, we're very happy to have achieved our net income. This is a very positive result, but we expect this to accelerate in the future even further. So moving on, talking about cash generation, another very, very strong quarter in operational cash generation. The only negative impact we have here is on accounts payable because we have a higher concentration of payments in this quarter compared to the previous ones. This is an effect that is going to dilute along the year. So we're not going to see this in the full year results. So once again, the overall operational cash flow is very positive. So moving on to the bottom left side of the slide. You see the -- we see the days of sales outstanding fairly stable year-over-year even with the increase in DIS in total revenues. This is a very positive sign. And going to the right-hand side, we can see CapEx. As we have been indicating and given the guidance, very stable and as a percentage of revenue, this is coming close to what we have given of guidance in the midterm, from 7% to 8%. So we're getting closer and closer to that level. So discussing leverage, we have reduced our leverage this quarter to 1.56x EBITDA. We have also reduced our cost of debt to CDI plus 1.32% and increased our average term to over 3 years. This has been generated by a very positive emission we have had in April of BRL 1.1 billion in very positive conditions, 5-year emission, 1.25% on top of CDI, generating a very positive. That amortization is scheduled, as you can see on the right-hand side of this slide. So I now hand it back to Eduardo that will discuss the long-term perspectives of the business.

Thank you, Rossano. Guys, this next chart, I like it very much because it's a very good way to understand the business. The bottom of it is the evolution of LTM EBITDA from the quarter in 2020 that we first started splitting the financials of each business. So you see the dark blue line is the on-site LTM EBITDA. There was almost BRL 600 million in 2020 and went all the way down to BRL 400 million in second quarter 2022. And it's coming back steady and slowly, coming back like we told you many times, it [ was ] to BRL 490 million today. When we started sharing with you the results of the Premium unit, it was roughly half of what it is today. So like a little bit above 3 years ago, it was BRL 300 million, and it's almost -- we're almost reaching BRL 600 million now, so important evolution of the business. You can see also the steady growth there. And the online business is the same. It was roughly BRL 400 million. Last 3 quarters, slightly stable, like for all the reasons that we mentioned to you. But I think this illustrates really well the strength of our portfolio, right? The combination of this is what we see in the bottom left-hand side, the evolution of net income. Like I mentioned when I was talking about the highlights, we did BRL 360 million in terms of net income LTM. One year ago, I was talking about BRL 199 million front of you. So there is an important evolution. We see and we're going to talk in a little while an important evolution moving forward as well. Operating cash flow. We maintained this was important when we surpassed the BRL 1 billion. It showed a slight decrease here, is a lot what Rossano mentioned to you,on the accounts payable, the unfortunate events that a lot of big bills ended up here in the end of March. This will be compensated throughout the year and reverted. So you would not see this number going down if it wasn't for this effect. Another important -- very important chart to understand the business, especially if you're new to education, new to Yduqs, next chart here shows, upper left-hand side, the evolution of our revenue. Bear in mind that: we had the end of the government financing programs of FIES, we had 2 sections of COVID, we had a never-ending economic crisis in Brazil and we were able to grow 8% a year. So we grew on every year despite the prices; bottom left-hand side, always above 30% margin; and we always paid dividends since 2007 on our IPO days. Also, we did a few acquisitions, all highly recognized acquisitions. We ran our business that were not as attractive, and this was widely talked about. So there's also not only a very solid operation like I showed in the previous chart, that's generating good financial results here, but also a team that's very disciplined and knowledgeable in capital allocation, okay. Moving on, let me speak to you a little bit about ESG. We are -- maybe a year now, AA in MSCI. This is a major recognition of our efforts here. There are very few companies in Brazil that are AA or AAA in MSCI with very few companies globally in education, there are AA or AAA in MSCI. We are getting more and more recognition here, United Nation, other companies visiting us every week. There's another Brazilian company visiting us, trying to understand how do we do ESG, how do we do -- I think that is a big deal for us. We've been working, not shutting our eyes to society around us for 54 years now. And since 4 or 5 years, we've been organizing this communication in global ESG standards, and this has just grown on our side. What we brought here today is just what we did this quarter, okay? This is just the news this quarter. So we became, for the first time, a part of the B3 Corporate Sustainability Index. We've released our Integrated Report. We're assured by Pricewaterhouse according to market standards. I mentioned already the AA in MSCI. Our institutes not only have increased a lot the class of illiterate -- literate adult, but we expanded the financial support program for less privileged people that study medicine with us. It was just restricted to Rio. We went to our units in the northeast as well. And for the first time, we have attracted Santander, Zurich and Instituto Phi to donate money through people. They found our institute as a valuable tool for them to allocate their ESG funds. And I think this is, I mean, a great recognition that we got. Movimento Raça é Prioridade gave us some prices on 50% of black indigenous people in leadership positions for promoting of education, qualification and development of black and indigenous people within the organization. So again, these are the news for the quarter. Rossano mention to you, YDUQS Day, that we're going to have an Investor Day next Tuesday on the 21st. The day after is our ESG Forum, which I also invite you to watch or be present as you see fit. There's a lot of interesting stuff. We're preparing both days with a lot of care and a lot of interesting stuff. If you don't -- if you're not that familiar with Brazil, we're going to be talking a lot about doing business in Brazil, especially with classes, C&D. I think this is going to be a very insightful day for people wanting to understand better our country. Moving on to our closing remarks, final remarks. We had yet another quarter of expansion of net income, achieved our guidance, leveraging our winning portfolio strategy, a very strong operational leverage. Going item by item here. Our average ticket of upper classmen grew in all the businesses. Our intake, we achieved the guidances, yet another fantastic intake for Digital and an important growth around campus. Net revenue, like Rossano mentioned, grew double digit for the business as a whole, but each business grew double digit as well. And EBITDA increasing 7% despite everything that I explained to you of a quarter that had a lot of negative impact on the Digital, again, reinforcing the power of the portfolio. Moving to the right-hand side. Net income -- and I invite you to look at our business as a net income business, that free cash flow business, this is very important. I think this is what will make a big difference and the big evolution that we're going to be seeing in the coming years. We're going to talk a lot about it next week, an increase of 11% versus last year, within the guidance that we gave you; an important LTM, just net income evolution, like I mentioned from BRL 199 million 1 year ago to BRL 360 million now and more to come; an important reduction on the cost of debt and on the leverage of the company, so the deleveraging process that we've been talking about; and whenever we're asked, I'll talk about capital allocation. This is an important priority for us. We're making a big evolution there. So all in all, what we showed you here on the past half hour or So is an important evolution of the business. Net income growing once again. The beauty of the portfolio we've assembled, Rossano showed you, that we have roughly 70-ish percent of our EBITDA coming from business that hardly existed 5 or 6 years ago. So this power of the portfolio that we put together with a lot of discipline on our capital allocation. What we see moving forward, we're going to be talking next week on YDUQS Day, on our Investor Day, a lot about how excited we are with the perspective of the evolution of net income and free cash flow to equity. What we address to you right now, that we don't see many differences in the net income that we're going to be presenting on the second quarter this year to what we presented last year. And we're very excited with the perspective coming on the second semester. We thank you very much for your attention. We thank you very much for your time. We thank you very much for your trust. See you next week, both on the YDUQS Day and our ESG Forum. Thank you very much, guys.

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