Q3 2019 Earnings Call

Ladies and gentlemen, please continue to hold your conference call will begin momentarily.

Ladies and gentlemen, thank you for standing by and welcome to the Arcos third quarter 2019 conference call.

At this time all participants are in listen only mode. After the speaker presentation, there will be a question and answer session.

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Now I'd like to hand, the conference over to your speaker today Mr. Robert terrible.

Investor Relations director. Thank you. Please go ahead Sir.

Thank you.

Welcome you to articles that third quarter 2019 come from school younger call today, we have spark as CEO I need you saw a couple couldn't should that.

Sure so that the fish.

Forward looking statements journey relate to future events.

But your financial or operating performance.

No I know risks uncertainties and other factors that may cause actual results to be so that's really some of those contemplated by these forward looking statements.

Forward looking statements. In this presentation include but are not limited to statements related fees and financial performance expectations and guided for future periods or expectations regarding our strategic project initiatives and their related benefits and all the expectations regarding didnt.

That's right.

Those set forth gradually <unk> third yesterday actually I wish there was nothing you described no filings you be securing an exchange Commission.

Okay statement. It just doesn't patient base, all the information available to us hats off to beat here.

You should not aligned then that's predictions of future events and we disclaim any obligation to see any forward looking statements, except as required by law.

<unk> management, you referenced one I guess, that's fun nature managers and it's called.

Well I guess, a red financial measures are not intended to be considered in isolation as a substitute for the jobs prepared in accordance with I guess.

We have to why Didnt you come to me issue hobbies normally I forgot the major measures the most directly comparable.

Financial measures no surprise to me.

I'm not trying to pull over two or did you talk about concerned that Arco CEO .

Thanks for that and thanks, everyone for joining articles third quarter 2019 conference call.

We're now approaching the end up to school year, and I'd like to kick the chance to do a short recap.

Efforts to deliver our guidance build or next year's HCT and integrate our recent acquisition is that you.

I will talk about them briefly and does he will go over Dan in detail later.

Oh sure.

Her presentation I will share with you some of the results from a broad research conducted by the wide thoughts are known with over 1200 principles school owners and Barents I'm sure you know gold in K 12 schools.

So starting in 2019, we have reached our guidance with 446 million in revenues in the last 12 months, what confirms the resilience in high visibility on more business model.

Regarding its full year olds 2019, EBITDA margin guidance, we are on track to achieve delaying the range of 35.5% and 37.5%.

Now I will talk at all are successful.

2020 single cycle.

Before I comment on that guidance for HCV bookings I wanted to provide a more probably could you update on what we sell through all the sales process.

There are three important aspects to share with you all.

The first is that once again give majority of our growth came from the addition of all new schools to our network, which significant contributions from both schools migrating from textbooks to learning systems and from schools changing their learning.

System to one of articles brands.

As a result did here we had the largest intake of new students in our history.

This come for our fees is that as a pure play we offer the best alternative for schools and that the industrys structural shift from textbooks to high quality learning systems will continue to support our dominance in those markets.

The second point is that once again, you're able to maintain very high retention rates, which is a confirmation of the satisfaction of our partner schools.

The superior content and services we provide.

This is one of the most important goals for the sales team and also for the management of the company and you're very proud to once again deliver industry, leading retention of clients.

The chart and final point is that we continued to increase our share of wallet into schools we serve.

Upsells and the offering of a more diverse portfolio of products.

Those three factors like consequence is also being a pure play and have you know our customers and the quality of our products at the center of every business decision we make.

In this sense, we're glad to announced that our guidance for HCV bookings for 2020.

It was achievable likely surpassed 1 billion realities.

The growth of article exclude the Bulls achievable.

We will be between 32% and 34% year over year.

As most of you know HCV is the most important naturally.

Dictating the growth of the company for the next 12 months.

Such growth reflects our tireless focus on product.

Our two brands were going up the first movers to implement national curriculum guideline.

The so called be he needs to see.

After one year would didn't do much or you'll be used by the students and it was a feedbacks collected from our partner schools. We have further improve our content, which strengthens our brand equity with our clients.

We tend to keep investing in product evolution innovation would be objective to bolster our competitive advantage.

In addition to the quality of all our solutions.

That's not part of our growth derives from the glass that you know are salesforce.

We came to keep investing both beats key factors quality in our sales team in order to continue our growth through efficient makes up adding new partner schools, absolutely with our existing clients cross selling older solutions and maintaining high retention rates.

Finally, I'd also like to talk about a very important achievements for us. This year, that's published in the beginning of the month, we officially welcome book that you into articles family.

The more we learn about the since you bought the more excited we get about the future.

People has a very solid brand reputation and we are convinced that we'd be able to accelerate its growth by combining our forces vaccine technology and benefiting from a wider product portfolio and geographic exposure.

With that I'll turn the call today, he will discuss all this topic can you failed PW go ahead.

Thank you I'd.

I will go over our financial highlights and then give more details about our margins and free cash flow and provide guidance for 2020, HCV and HIV recognition for the fourth quarter of 2019.

And finally I talk about that did she was acquisition.

Also please note that except for rather than girls marching selling expenses.

Gionee and cash flow from operations.

Oh financial measures I discussed here or no I, FRS and growth rates or compared to the prior year comparable period, unless otherwise stated.

Force, revealing our numbers.

Net revenue for the third quarter of 2019 was 70.6 million we ice.

Which represented 16% of the 2019 HCV.

First of 20%.

Say water off the last year.

In 2019.

A higher portion of our HCV walk delever between before water 2018, and the second quarter 2019.

Mainly because of internationally school growth.

At most of their MCU delever between December and Marsh.

And also booked two ships in the Lieberman from some sort of schools.

This trend is expected to come to me and we will likely see higher portion of face even being recognized in the fourth quarter.

As previously mentioned BYOD he.

We should our 2019 ACB guidance.

I would not having the last 12 months was 446 point you we didn't we ice.

Compared to the guidance of 441.

This confirms the predictability of our business model.

He loves margins was 79.9%.

For the door water versus 78.2% for to say pure you 2018.

And it's in line with our historical trend of increasing gross margins.

As a result of gains of scale from our business.

The first nine months of the here our gross margin was 81%.

Up to 280 basis points year over year.

Selling expenses for the third quarter of 2019 was 47.6 million.

Up from 29.7 million, we eyes that third quarter of 2018.

And.

9.3 million, we I think the second quarter.

The year.

Basically shouldn't increasing selling expenses reflect.

Higher number of hunters and farmers.

Which is directly related to our ability to expense and then I would not work of Cline.

And also higher travel expenses.

Divestments are reflected in our expected 2020 CV growth.

Given our very high LTV to CAC ratio builds or investments very high returns for our company.

And in fact in selling expenses for the water walk the accounting changes in allowance for doubtful that this year you recall, many analysts and investors to look at this bigger when a nine month accumulated basis and we don't expect is lunch decreased for the next year.

Genie expenses was 69.5 million compared to 77.0 million for the third quarter of 2018.

Both numbers include nobody Corey expenses.

Adjusting for share based compensation future tells me team.

In 2019, and M&A and another one off expenses in 2019, Jenny would have been 23.7 million, we eyes the door water of 2019.

Increasing 35%.

Versus the same period last year.

The increase is mainly explained by our investment in attracting talented people to our team, especially those who will be Jack will enable the integration of what did you.

On top of that we think it's worth mentioning that we are currently developing new products in house that replay GE Louche C.

And be airforce bench ingredients genie before contributing to revenues.

There will be Rasmus bar aligned with our commitment admission to continue to be at the industry for thrown in terms of new products launching and sustain this strong growth be even longer run.

As a result of all these factors combined and also due to a lower revenue recognition. This quarter. The adjusted EBITDA was negative 7.3 million, we ice for the third water disappear.

Very cheap 10.8 million, we I can be seen appeared last year.

And that he sat in the beginning of the call. We are on track to achieve the adjusted EBITDA margin of 35.5% June 37.5% in 2019 full year, excluding both the chief.

Adjusted net income was 0.8 million, we eyes for to third quarter of 2019 compared to 6.1 billion, we are either third quarter 2018.

The first nine months of 2019, adjusted net income was 92.4 billion re eyes.

Increase of 34% when comparing to the same period of 2018.

While the net margins increased 180 bips between these goods.

Free cash flow for the third quarter of 2019 won 22.3 billion we eyes.

Increasing 24% compared to the third quarter after 2018.

The first nine months of 2019, we generated.

103.8 million, we ice free cash flow or 101%.

Our adjusted EBITDA.

Moving now to the guidance.

For the next year.

Our consolidated.

Booking to be one began we eyes.

With our coal stand alone excluding people go between June and 34%.

The vehicle for that number back already really more together was due to college ready adjusted EBITDA margin range expectation.

As a reminder, database TV will be recognized as ravin between October 2019, and September 2020.

Now talking about 2019.

For the fourth work this year, we expect to recognize.

Between 26% to 29%.

Of the HCV 2000 train.

Already taking into consideration that GE will be consolidated in November and December this year.

We maintain our guidance for adjusted EBITDA margin to be in that range of 35.5% to 37.5% for our coal excluding both achieving.

Finally, I'd like to talk about our most exciting news this year, which is the acquisition of achievement.

So carty approved the view on October .

23, and we called it the transaction on November 1st.

At the time of the closing we have made that forced statement, we're presenting 50% of the deal.

And the remaining amount due to.

The other two any future thousand 24.

Everybody mentioned before we started the integration process with our team.

26 days ago.

We will soon shared more details with the market, but what do we can't anticipate is that the more we learn about pulled that you do that cleared we see the enormous value to be capture ahead.

Well that she will bring a very strong brand and motivated team.

And the combined companies you have a very swung.

Fundamentals continue to consolidate this market organically and inorganically.

An important news we wanted to share with the market is the preliminary results from both Jugos purchase price allocation.

For reach estimated a preliminary some of it didn't viable intangible assets and.

Off approximately 1.5 billion realize.

That number may be updated ended fourth quarter earnings release.

As you know review those two items can be amortized for tax purposes over a period of at least five years.

Provided that certain conditions or complied with.

One of these conditions they territories book consolidation between buyer.

Acquired company.

Which we tended to do either first quarter of 2020.

Given the timing we might see the tax benefit of the amortization in the second semester of next year.

Experts our initial activates the amortization of goodwill and the added value would generate around 70 million we ice.

And no income tax savings for our coal.

EBIT for five years.

Significantly contributing to the company's cash net earnings.

After that the tax benefit.

You start to decrease.

Goals over the next 15 years.

With that I'd like to turn the call back to I'd for his closing remarks.

Thank you Debbie.

Before we conclude this presentation.

Turning to share with you some of the key conclusions from our research conducted like you life pattern with nearly 1200 principles and parents of students in privately to 12 schools in Brazil.

No clear some dessert survey confirmed the messages we have been sharing with the market in general and provide support to our strategy in long term goals.

The first output is regarding the superior value perception from both principles of bearings to learning systems versus textbooks.

According to the research 76% of the parents of children in schools adopting textbooks.

Leave that learning systems had higher quality and provide better academic results.

Out of those parents almost 50% are willing to move their children to schools using learning systems.

From the parents perspective, 85% of the parents, who moved their children from school textbooks to schools with learning systems No did hire study engagement from their children.

The second conclusion from to service that we wanted to share is regarding back from our platform to the schools ranking on the national exam, the so called in Maine exam.

The survey showed that after five years off implementation of our products school start to adult as yes has that he back on the inane scores five times higher than the impact shown by schools that adopt our competitor learning systems.

Indicates off as C E. Our second brand the impact was almost four times higher.

The turret conclusion from the sort of he is regard equals it useful.

She who had the highest brand awareness among midyear learning systems by far.

This confirms our.

Off the power of course cheaper brand and how much value wouldn't grow we may be able to extract as we continue to integrate disaster.

We're very excited with the opportunities ahead and continue to work hard to back to life of more than one between students through high quality education.

We are here for the long run.

With that we'd like to conclude this presentation and started to accumulate fashion operator. Please go ahead.

Thank you Sir as a reminder to ask your questions you would need to press star one on your telephone.

Gary a question press the pound key.

Please standby, while we compile documenting roster.

I show. Our first question comes from Bruno care or do you know from Bank of America. Please go ahead.

Hello, Good evening, everyone. Congratulations on the H E systems as well.

Particularly people that's more breakdown on dates.

And we'll thinks in terms of geography.

Brand and also could agree that he's worked some color on call has been the competitive landscape for this new locations for 2020 . Thank you.

So hi, hi.

Thank you for your question.

So.

See now into third quarter, we all we are only provided the guidance.

Today, CV and usually you watch what do we do was before water.

We confirmed as number and Ben we provide all the is this breakdown that you asking for.

So for now one.

Why do we can say is.

And that he mentioned before.

We haven't C.

Changes.

The way that we have been growing the last years. So we have been attracting new high schools.

Also upselling cross selling.

And repaying our schools.

Inline with what we have seen.

Historical trends.

However.

And that he said also this year.

Our own threat to the LIBOR the largest you paid of new student no history.

And there is no specific concentration.

Okay. Thank you Rebecca thank you.

Thank you.

Your next question comes from Joel churn from Goldman Sachs. Please go ahead.

Hi.

You can get all good evening I read with using interviews with the good evening apparel and congrats on the if you could result.

So do we.

We have two questions on our side one would be.

All you have seen.

You will have any updated view on which would be the key drivers far floater acceleration when they see the roof athletic people.

What changes and watch what changes in go to market and other.

Factors could drive further improvements there.

And our other question would be.

What is our view right now on our their potential new equity issuance and being our acquisition strategy in general now that you ARINC integrating surcharge acquisition as positive. Thank you.

Okay.

So, but even in thinking for your question.

So as they said before.

To the TV Hadnt show.

Differences.

Between this year and previous one so it's in line before sick patients. So we have been adding new schools.

Upselling price increase and cross sell and retention.

So there's no significant changes and we expect she should give you more more color any information about others.

Breakdown the fourth quarter.

Regarding the strategy and they go to market. He why do we did this year is.

As as we as we said at the beginning of the we foresee.

In order to cover all of the addressable schools or more schools that board no addressable market and and and also we invested broadly the same way that we have been doing the last years. So despite all this effect will result, so far.

We did change any any sales.

Policies or significant changes now or strategy.

So we are to be the thing that we believe or to best one full for the business and as we said that even if the year, we reinforced the sales team and now we can feed that actually the threat of he.

Has been very successful.

There is you pick up in east you Didnt have been great.

Hey.

So this is I'd here. Thank you for a question just to comment on.

The acquisition strategy, we're really focused here right now in integrating the acquisition of political and we want to do that and the best way possible, but yes. We are you looking for opportunities. We do have a pipeline of new acquisitions, especially in the supplement.

Oh, Yes, we believe we can have a broader portfolio in order to better covers our current schools and new schools.

Thank you very clear and just to be could you talk to me to speaking for traditional that thank you.

Okay. Thank you sorry.

Thank you.

Sure no further questions in the queue at this time I like to turn the call over to the host for closing remarks.

So if there's no there's no question we Jess.

Thank you everyone for joining us and look forward for in Mexico.

Thank you.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.