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 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. Please, Mr. Eduardo, you may proceed.

Good morning, everyone. I hope you're all doing well. Welcome to the presentation of Yduqs' Q3 results for the first 9 months of 2024. I would like to start with the key highlights of the presentation. The year is progressing in line with our expectations, showing single-digit growth in both revenue and EBITDA, but with a significant increase in net income. So far, we have achieved a 26% increase in the first 9 months compared to the same period last year. In Q3, we saw a significant increase of BRL 60 million in net income, the highest adjusted net income we have seen since the pre-pandemic era. This has been accompanied by a notable improvement in cash flow for shareholders, reaching nearly BRL 300 million for the quarter, almost 3x the amount from the same period last year. There are several highlights to discuss, and Rossano will elaborate on them. But the evolution of our debt cost is a significant aspect contributing to both net income and cash flow. Another key highlight is our premium unit, which reinforces the strength of our portfolio. For those of you who joined us last year, you might recall that the major highlight was the evolution of our distance learning, EAD programs and a recovery in on-campus. This year, the portfolio, along with the premium segment has evolved significantly, showing over 20% growth in the student base compared to last year with substantial increases in tuition, both at IBMEC and our medicine courses as well as an improvement in our EBITDA margin. People are starting to ask us about capital allocation. And I believe that when we look at the opportunities available to us, it is challenging to find an opportunity as clear as investing in our own shares. We have made significant progress in our share buyback program, having repurchased 13 million shares and cancelled 20 million shares, some from this program and others from previous initiatives, bringing us to 279 million shares currently in circulation. You will see why we are delivering such strong results. We are focused on managing what we can control internally and reinforcing, the reaction we expect is that it becomes more evident that we will reach and how we will reach the EPS guidance between BRL 1.6 and BRL 1.9 for the year 2024. It's important to note that this EPS range is based on the number of shares we had at the time of the guidance, not the current 279 million shares, which could actually result in a higher EPS than 1.6 by year-end. Let's start with the premium unit, which, as I mentioned, is our highlight for this quarter and the year. It has shown significant growth in net revenue, up 16% compared to the same period last year. There has been a notable increase in both the medicine and IBMEC sectors with EBITDA rising 24% compared to last year. We put in this green balloon a highlight from IBMEC, which is part of the premium unit and has made a significant contribution. Many people primarily think of premium and medicine. However, IBMEC contributed nearly 1/5 of our EBITDA this year and has experienced 120% growth over the last 3 years. We have seen a significant recovery in margins with the margin for the year increasing from 48% to 50%, which represents an increase of 2.5 percentage points. There is also a substantial increase in student base with total base growing by 22%. The number of undergraduate students in medicine has surpassed 9,000, while IMEC has reached 6,000 students, driven largely by the success of our IBMEC Faria Lima campus. Additionally, we highlight the increase in residency positions in Castenhall, one of our Mais Medicos 2 units. We have been very disciplined in choosing locations with the highest potential for expansion, fulfilling the government's requirements for creating residency positions. Today, Idomed has almost the same number of residency slots as UFRJ. We are contributing to society by supporting the local health care system and collaborating with municipalities to ensure adequate bed availability, thereby providing our students with a solid learning experience. All of this has led us to achieve success that far exceeds the market average, practically double that of the market average in expanding positions within Mais Medicos I and Mais Medicos II. This gives us great optimism for the upcoming Mis Medical's authority process for which we have already submitted all required documents and expect results early next year. In terms of ticket pricing and renewals, we are closely aligned with our previous practices, demonstrating significant growth at both IBMEC and IDOMED with stable renewal rates consistently in the range of 95% to 97% as we have seen. Moving to digital. On the left side of the slide, we see both revenue and student base moving in tandem with a decline in the undergraduate student base. On the right side, we observe a reduction in ticket prices, which we had already communicated. The year 2023 has been characterized by strong market elasticity, and we have implemented medium-term ticket prices lower than those from the previous year. And these 2 things combined lead us to a loss of EBITDA, both in terms of operating leverage, which we talked about last year, when you are growing, you have an increase in margin. This happened the other way around this year. I think there was a very difficult market year. Added to this, the ticket decline that we have due to offers that we consciously made in 2023, which gave us an important base but brings up this issue of the medium-term ticket. Moreover, the decline in ticket prices is a result of conscious offers made in 2023, which attracted a significant base of new enrolments, but also raised questions about medium-term ticket pricing. When we look to the right corner, we see renewal rates similar to last year, but a far weaker intake performance. Many of you who communicate with us regularly know that we measure market elasticity weekly. During periods of high elasticity, we tend to be more aggressive with pricing. In contrast, in the current market conditions, which are worse than before, we see limited elasticity and prefer to maintain higher prices that will harvest results in the upcoming year, although this might mean experiencing slightly more difficulty than the market in terms of intake. Consequently, intake numbers were nearly 20% lower than last year. We have implemented the seventh month pricing, which we will not see the effects of until mid-next year, reflecting a 17% increase over the previous year. The good news is that as we enter the fourth quarter, we are seeing figures that are very similar to the same period of last year, maintaining these higher prices compared to those in the third quarter. As for our on-campus segment, we see revenue stabilizing compared to the same period last year with a 2% increase in student base, which is significant. We have experienced several quarters of decline. But in 2024, we are showing growth in student base compared to the same period last year, primarily due to our semi strategy. The semi strategy helps us not only to reduce the fixed cost of our campuses, but also to better price our on-campus offerings. We have slightly increased on-campus prices while providing alternatives for those unable to afford the full cost, and this approach has been successful. Currently, we still have a market share well below our fair share in the semi on-campus segment, yet we are optimistic about future developments. When we look at the ticket to the right and below, you'll remember that last quarter, this figure was negative. We prefer to present here the veteran tickets those people who have been with us for more than a year, who have been through the whole process of offers, which change a lot from semester to semester. So it ends up making a fair comparison, apples-to-apples here. And what has been happening, we have been graduating students from the pre-pandemic period who have seen a history of ticket increases. As this pre-pandemic cohort graduates, we expect incoming students to have higher ticket prices than prior cohorts, though still lower than pre-pandemic. This creates a counteracting effect. Pre-pandemic students graduate with high ticket prices, while new students enter with higher prices than average during the pandemic and post-pandemic periods, yet this overall effect remains neutral. This number was negative last quarter, but is positive now. Our projections also indicate similar numbers moving forward until this pre-pandemic class graduates, at which point we expect a significant increase in average ticket prices. Overall, this has resulted in EBITDA being flat compared to last year, but we are maintaining a margin of 23%, significantly higher than the 19% we observed earlier. When examining our on-campus segment, this unit has idle capacity and significant operational leverage. We are gradually improving margins while optimizing our units, enabling us to achieve this margin in line with the first 9 months of last year, but significantly better than it was until recently. Renewals and intake are closely aligned with last year. Renewals consistently remain between 81%, 82% and 83%, fluctuating with the economic environment. The intake is 1.6% below last year, again, maintaining higher pricing, which aligns well with our expectations for this moment. Now I'll hand it over to Rossano, who will discuss the financial indicators with you.

Thank you, Eduardo. Good morning, everyone. Moving to the revenue slide, we again highlight the strength of our portfolio with all business segments experiencing growth. Notably, the premium segment continues to perform strongly, increasing its share in our overall mix, which is very positive, not only for profitability, but also demonstrating the resilience of our overall portfolio. Let's move to the next slide. Throughout the year, we have emphasized our efforts to reduce overall expenses, which is clearly reflected in this slide. When we analyze G&A costs, we see a significant reduction dropping nearly 1 percentage point from revenue, a result of the ongoing efforts made throughout the year. But when we look at M&S and bad debt, we observed similar trends to what we discussed previously, particularly the points highlighted in the second quarter. We will present a slide detailing what we anticipated would occur with this expense structure in the second half of the year and what we are seeing aligns well with our previous statements, reinforcing our outlook for achieving our guidance for 2024. M&S, everything we discussed regarding costs, leads us to the next slide, where we will talk about EBITDA. You can see here the year-over-year expansion of our EBITDA. A significant highlight is the premium segment, which already has the highest margin, increasing further by 3 percentage points year-over-year. This increased participation of the premium segment is increasingly enhancing our mix. The overall profitability of the business is rising as a result of the greater share of our most profitable segment within the total EBITDA. I must also mention the resilience of our on-campus segment, which maintained stable margins year-over-year, positioning themselves as the market leader. And as Eduardo mentioned in the specific slide regarding on-campus segment, the drivers we have ahead with ticket prices set to increase further allow us to capture more market share, reduce idle capacity and lower fixed costs. Therefore, for on-campus in this moment, looking ahead, we are very confident about the future of this business. Moving on to the next slide. Here is a very important slide that we have been highlighting significantly. Our guidance has been focused on the expected profit results for the year as a whole. We remain very confident, and I believe the third quarter brings substantial strength, increasing overall market confidence in our ability to deliver. We are experiencing a robust increase in net income of 53% year-over-year, supported by the growth in EBITDA and significantly driven by improvements in financial results. As Eduardo stated, our guidance has been for moderate growth in operational results and significant expansion in profit, which is reflected in this slide. Regarding financial results, there are some specific items from the third quarter, but the majority will extend beyond this year into 2025 as well. This reinforces our confidence in the guidance for 2024 and the following years. This is our historical overview slide. It is always beneficial to broaden our time perspective. From 2019 to now, we have achieved an 8% CAGR in revenue. Eduardo frequently mentions the various crises we have navigated during this time, yet the consistency of revenue growth remains impressive. We have maintained our margin above 33% again this year, supported by the diversity of our portfolio and resilience demonstrated during different market conditions. We continue to provide returns to shareholders as we have committed to since our IPO in 2007, paying dividends every year. This year, as in several others, we are executing a buyback program, ensuring that we consistently return value to shareholders generated by our business. Let's move on. We have now reached another super important slide in this presentation, the very strong cash flow generation for shareholders of BRL 300 million, marking a very important turning point for this business. Since the pandemic, this is a business that has reduced its final cash generation, and we have been pointing out that this turning point was approaching and that the second half of the year would be an important semester to demonstrate acceleration. By structure, this is a business that should be a strong cash generator as is clear in our long-term guidance, where we will reduce our leverage and subsequently become a significant dividend payer. Therefore, this shift we are experiencing in this quarter with cash generation close to BRL 300 million is a very positive signal for us and strengthens our strategic vision. Interestingly, this comes from 2 very relevant lines. One is from receivables. Despite continuing to use DIS as a strong tool for our intake, we recognize that DIS is a long-term revenue tool. Even while heavily utilizing DIS, we have reduced our average days sales outstanding period from 103 to 96 days. All of this improvement stems from our increased collection capacity, including various actions from our collection structures to the management of our receivables and the manner in which we engage with our students, prioritizing our ability to retain and renew students. This has greatly enhanced our conversion rates, which will be reflected in our business. Another super important line is the financial result line because of all the results I've already mentioned, also benefiting from these actions to improve our collection capacity. When we look at the right-hand side, we see our Capex for the year, heading towards our guidance of BRL 470 million for the year. It's still a Capex that's super focused on digital transformation in IT. We've already completed our big Capex cycle, reaching 12% in the middle of our transformation. But now we are getting closer to our medium-term guidance, even though we continue to dedicate a large part of our investment, and this will be the case from now on to investments in technology and digital transformation. Let's proceed to the next slide. Next, we examine our debt structure. First, discussing our average long-term debt cost, we have significantly reduced this cost, demonstrating the strength of our company, market recognition, our cash generation capacity and our ability to create long-term value. We are recognized as an AAA-rated company by the market, and we have been generating opportunities to capitalize on this favorable market situation. Again, we see our average cost of debt decreasing sequentially. We have reduced our leverage to 1.56 even while executing a buyback program and anticipating dividend payments made in the second quarter. So this is a super important subject. We reduced our leverage to 1.56 even with this buyback process. If it hadn't happened, we would have reached 1.5 1x, once again moving towards our long-term guidance, our long-term vision, which is to reach 1x net debt to EBITDA, as we said at Yduqs in the second quarter. On the right side, we have a robust cash position of BRL 875 million, a balanced net debt structure and our amortization schedule, which enables us to capitalize on the best market opportunities. Our amortization schedule is well diluted with few short-term maturities and very low amounts due in 2025. Our spread, as mentioned, continues to decrease sequentially, and our leverage is progressing towards our long-term guidance. This was the slide I referenced earlier. Here, I bring you the exact phrases we used in our second quarter disclosure. We aim to clarify the key drivers we would use to generate the necessary value to meet our profit guidance for the year. Let's see how each of these performed. First, regarding the transfer to centers, we mentioned that the reduction in intake in the first half of 2024 would lead to a decrease in the weight of the transfer to centers in the overall results for the second half. You may recall that in the first half, this was one of the factors negatively impacting our results, but we stated that this would reverse in the second half. Our expectation was that it would be below last year's percentage of revenue. It remained the same, which is already a substantial reduction from last year. The fact that it did not decrease is excellent news because this was due to the strong collections we experienced throughout the year. Part of the transfer that the centers receive is based on amounts collected rather than billed amounts. Since we had a very strong collection, you increased the transfer to centers as a percentage of revenue, which is excellent news for our business, the reason this happened. Regarding bad debt, as we said, it was also an offender in the first half given the intake profile in the second half of last year, seeing this percentage moving towards a percentage similar to last year. So in this quarter, already approaching the percentage of last year, we see this result improving even more in the fourth quarter to arrive at the final result of the second half with a percentage of sales very similar to the previous year. MSAs for M&S, we provided clear guidance to the market that we would return to last year's revenue percentage. We performed approximately 1 percentage point above last year's figure in the first half. And this quarter, we are getting very close to the previous one, in terms of our market positioning, understanding how market conditions are, the elasticity of the intake, and we have strategically decided to position ourselves once again close to what was the percentage of revenue last year. G&A, as we have noted, continues to drive the outcomes of our expense management initiatives, achieving a reduction of nearly 1 percentage point as previously indicated on the last slide. Additionally, the financial results remain one of the key drivers for achieving our overall performance for the year. What's left? We see that we have already achieved 1.44 of the 1.6 we promised to deliver to the market. Eduardo highlighted in the first slide that I am still using the share count used for guidance, which was 291 million shares. Despite the ongoing buyback program, which will effectively increase this result, I will always use the same base for comparison against our guidance. Therefore, we only need to achieve an additional 0.1 in the fourth quarter, a number we are very comfortable with regarding our capacity to deliver. The drivers in the fourth quarter are not very different from what we had already pointed out in the second quarter. We continue to see transfer to centers as in the downward trend compared to the previous year, the bad debt intensifying the movement towards improvement, which we already began to see in the third quarter. M&S/M&S is following the same model as before, aligning closely with last year's figures. G&A continues to show the benefits of our spending reduction efforts. Financial results are again positively influenced by the reduction in the SELIC rate as well as the narrowing spread and our decreasing leverage, all of which we've highlighted in previous slides. Now I will hand it back to Eduardo, who will discuss our ESG results from the last quarter.

Thank you, Rossano. Now talking about ESG, a topic that is very -- means a lot to me. In the previous quarter, we shared a photo from the Olympics, highlighting our significant participation in both the Olympics and the Paralympics. Today, we are sharing photos of several of our leaders. We were included in TEVA, which is the index of companies that have many women in their leadership. We are a company recognized for its diversity, which is no coincidence. We are a mirror of our students. 80% of our employees were our students at some point. And we have a bit of that, come with us. I've been there, that commitment, that environment, that sense of purpose and belonging that is very strong here. What are the recent updates? We completed the CDP report on environmental matters and received the gold seal in GHG reporting, as you can see here. The renewal of our AA rating in the MSCI is also significant. Very few companies globally, especially in the education sector, hold such recognition as leaders in ESG thinking and Yduqs is one of them. Our Black trainee program is currently in its fourth edition with 11,000 applicants, a remarkable number for any trainee program and even more so for an exclusive initiative, marking a significant success. Participants from all 4 editions are now spread throughout the company. We have impacted over 600,000 individuals through our community services and social projects across our units. And then there's something I'm particularly proud of. We were recognized by exam with the People Management Award, a very difficult award to be a part of. There's no consultancy, no support, no help. It's a very difficult measure between what you say and what people perceive. So our employees, many are interviewed, many questionnaires filled in. And the main theme here is the legitimacy and coherence between what we do and what we say every day here at the company. So we're very proud to have been recognized with this award. Final thoughts. Much of what Rossano said, we are at a clear moment of recovery. I think that -- in 2023, we had a very evident operational upturn in the evolution we saw in EBITDA, the portfolio showing its strength. We saw a lot of people saying that premium is resilient and then the moment of an improvement in the economy, distance learning and on-campus came together, and we had fantastic growth in 2023 in revenue and EBITDA. And now the resumption of both net income and cash flow for shareholders, returning to that business that has always been, as Rossano said, structurally, a strong cash generator and with a strong net income. So our highlights here are revenue growing in all businesses, EBITDA evolving, the EBITDA margin also evolving. As Rossano pointed out, our main growth engine is the one with the highest margin. This helps us to be pushing and looking forward as well. And the growth of net income, which I've already mentioned. The cost of debt, an important driver, is just one of those we have in the growth we have below the EBITDA line, but an important increase. Capex, as Rossano said, is getting close to that guidance that we had back when we were at 12% when we said we were going to reach a figure of 7% or 8%, and we're here at 8.1% in the first 9 months of the year. Cash flow, I've already mentioned it to you, and the concern, especially from foreign investors about capital allocation. So we're going to be a great generator of dividends, as we pointed out in the guidance we gave you on Yduqs Day in the first semester. We look ahead and see this guidance with great optimism that we will get there. And the question that always remains is the foreign investor asking, what about capital allocation? Today, we don't see any better way of allocating capital than in our own shares. We announced a BRL 300 million buyback, and we're standing on our own 2 feet, doing that, and there's still a lot to come over the course of the year. And the cancellation that Rossano mentioned is coming in line with that. So thank you very much for your attention. I really appreciate your trust. And let's move on to the questions.

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