Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Arco platform Ltd fourth quarter 2019 earnings Conference call.

This time, all participants are no listen only mode. After speaker presentation, there will be a question answer session.

A question during this session do you want these are press star one on your telephone if you require any further assistance. Please press star Zero I would now like to turn the conference over to your speaker today for personal Altera Investor Relations Director. Please go ahead Sir.

Thank you I'm pleased to welcome to our fourth quarter two years Golden Monkey Conference calls.

He'll be called today, we have our CEO, how did you talk a little concern that.

A full WP should.

Today's presentation, our executive to make 40 to 50.

Forward looking statements, Germany relate to future events for future financial operating performance equal known and unknown that burden and other factors that may cause actual results could differ materially from Bose contemplated, but these forward looking thing.

The forward looking statements in this presentation are based on information available to us as opposed to beat here.

Maybe like from them as predicted that's prediction of future events, we disclaim any obligation to update any forward looking statements, except as required by law.

In addition, manage gives me referees none of your for Us and make sure measures going to school.

No I apologize furnish a merger and what do you tend to be computer isolation or as a substitute for results prepared in accordance with.

We have provided a reconciliation of these.

Our next from merger.

Directly comparable financial measures Miller President.

I'm not trying to covert did you talk a little concerned that are could feel.

Thank you all that and thank you everyone for joining articles fourth quarter and pool Your 2019 conference call.

2019 wasn't exciting year for us and we're very pleased with the milestones we achieved in the here.

March to celebrate call since that 2020 will be even more successful.

Once again, we were able to deliver high quality solutions to our schools get a rating I would think trades in a very strong organic growth.

He continues to use an amazing management team.

New members and strengthening our existing college.

They chose to pursue our long term mission of being the bad education platform for schools in Brazil.

Regarding old two calls him 20 sales cycle you weak in the making more all wasn't really a 360000 students being $5 and for longer school.

That's mostly into April <unk> contract values, all 1.006 billion realities.

Artco exposure that you hope boasts a 35% ATP grow.

A ball over 32% to 34% for leaving that read guidance provided.

Despite goes into transactions by end of year, well could you go was able to both the 9% growth only ATP.

She is an acceleration from the regions you risk and already in that this healthy growth was thinking Oh good business.

In terms of financials, the food you're all 2020, we achieved 37.9% of adjusted EBIDA market, which was a Boca Haiyan CCAR 2019 guidance at 37.5%.

This number excludes dollar recent M&A and is that confirmation that article was able to pose some very strong organic growth and keep our margin level.

During today's call will discuss our Standalone results. So we can properly compared to the numbers from last year.

And we'll go over our reported results in order to call them 20 guidance.

Finally, we'll give you more details about People's integration as we have been working really hard to implement Balkan changes and accelerate its growth.

Before turning the call because I see I like to discuss the situation regarding the put on the Beatles and what we as a company are doing to protect our employee our Barton schools in our business.

As of today no before he has been diagnosed with the D.

However, we have already approved implemented Brevard measures like Cold gene gets you blend in case the disease probably correct.

Regarding the all important schools, we are ready to deliver albeit Colin can two hours to the east.

Schools, I guess you'd be hockey thanks.

Students to be able to access all the solution in our platform in the open online support from the teachers.

We believe the our diesel solutions will be important to mitigate any backlog partner schools and that your students.

Finally, I would like to reinforce the resiliency of our business model and remind investors that we operate under annual calling correct.

We expect the school content to be delivered to students through all the school year.

Meaning that once again, our revenue recognition should be inline with our come from age.

We are actively monitoring the situation to guarantee.

Reaction keys, LTX collation off their problem.

Now I'll turn to called stuff he will discuss some of these topics in more detail.

Duffy. Please go ahead.

Thank you I'd.

I would start with Arco results without the recent acquisitions well is achievable not the vela and scalable to me.

Please note that except for revenue gross margin selling expenses, Jenny and cash flow all financial measures I, just good tier or no I FRS.

And growth rates or compared to the prior year comparable period, unless otherwise stated.

So let me start revealing our numbers.

Net revenue reported fourth quarter of 2019 was 158.8 million we I.

Which we presented a growth of 31% compared to the same quarter over the last year.

I would not revenue.

We are was 482.6 million <unk>, representing a growth of 27%.

In 2018.

Gross margin was 82.2% 44th quarter versus 80 point, you put said well just they viewed in 2018.

The improvement is there will be so.

One economies will economies of scale and you gained from negotiation with suppliers.

For the full year, our gross margin was 81.6%.

277 basis points year over year.

44th quarter.

The adjusted EBITDA was 77.4 billion we I.

Compared to 46.1 billion, we I did say geared last year.

As I mentioned earlier, we surpassed the adjusted EBITDA margin guidance of 35.5% to 37.5% for 2019, the labor in a marginal but 7.9% for the full year 2019.

I had seen Arco then along has the boosting extremely healthy financial figures just an active.

Now, let's move to be though.

Reported on our financial statements.

Which means that includes two mobs, Oh Gee Bill and now we're all their recent acquisition.

Net revenue reported fourth quarter of 2019 was 247.6 <unk>.

Which represented 25% of the 2028 be versus 27, the same quarter of than last year.

Our net revenue for the year was 572.8 million we are.

An increase of 50% versus 2018.

Gross margin was 77.6% for the fourth quarter versus 80.2% for do you see pure in 2018.

And our acquisition has lower gross margins than ours.

For the full year, our gross margin was seven 9.5%.

72 basis points year over year.

Selling expenses 44th quarter of 2019 was 76.7 billion we I.

Oh from 35 point you meet in the fourth quarter of 2018.

And 47.6 million you just pure water of 2019.

Even these regarding being backed up their money.

The sequential increase in selling expenses with black a higher number of hunters and farmers in a higher level expenses.

Exactly all reflected no 2028 TV growth.

And given our very high lifetime Bad you back ratio.

Those investments or very high regard slower Coleman.

Do you have a expenses was 56.2 billion we.

Compared to 22 need and we are for the fourth quarter of 2018.

In both numbers include known recording expenses.

Adjusting for share based compensation.

2018 and 2019.

And M&A and order one off expenses in 2019.

Yeah. They wouldn't have been 24.4 billion, we I get for water of 2019.

Ingredient.

Oh person versus the same good last year.

As a result, all those factors combined.

Adjusted EBITDA was 106.3 billion <unk> 44 water of 2019.

Compared to 46.1 billion Leon.

They appeared less yes.

For the year adjusted EBITDA was 209.4 million Levi.

We presented the a margin of 36.5% and they drove off 47% compare to 2018.

Moving now to the guidance.

For the next year, we expect our consolidated ATP bookings to be.

One beat it and say you didn't really I.

We present, the funny Queens, all 130% compared to the last year.

Bids, we flagged arcos in alone excluding food Jubilee growing at 35%.

Page as that he said.

As another confirmation of the superior quality of our solution.

As a reminder, that APV is recognized as revenue between October 2019 in September 2000 journey.

<unk> for your 2020 adjusted EBITDA margin.

We've made to say vary between 35.5% to 37.5%.

It's important you mentioned that bids range, it's consistent with our strategy.

Gross Wyoming basking be gain probably condoms upscale Jean Hu salesforce.

Ladies and technology.

And also reflects the fact from the recent M&A, which have lower margin if compared to the arcos mature product.

Now I'd like to explain the components of our ACB growth.

The core solution.

Which includes four brand.

Grew by 136% year over year.

Utilizing 803.6 <unk>.

A TV.

And one need and 132000 students.

We were able to readjust the average ticket for student on average by 6.2%.

Nearly 2% above inflation.

They did that cleared we presentation of our high quality and strong brand equity.

You've been big goals, the investment gaudy innovation with the objective to bolster our competitive advantage.

Our supplemental solutions grew by 101 person achieving 202 point, you need them, <unk>, HPV, and 200 and city thousands to them.

As we have nation that supplement those are an important pillar to our future growth and we will continue to look for M&A that can either expand our product offering or AD technology features to our partner schools.

Moving to our consolidated breakdown.

Hey, CV growth is the meek off our ability to we think our customers.

The price increase.

Yep sell of our solution.

And finally attract new partner schools.

We think 93% of our customer base.

While adjusting prices on average by 6%.

The lower retention it compared to previous years reflect the corporation on both achievable.

What do we expect to gravelly brute force Jugos retention rate.

As I said the results of 2020 sales cycle.

It's a remarkable achievement.

Our company and we are very proud of it.

We once again were consistent with our commercial discipline and grew the right away.

Leveraging our track record as the best solution for schools to prove their academic results.

And before I turn the call back to I'd like to share exciting.

How about People's integration.

After five months since the closing of the transaction.

Well, we're able to be upside and we buy our synergy numbers.

We now expect that by the end up with Gord year of integration.

We'll be able to capture it between <unk> and 7 million re I've.

Synergies.

Our animal Didnt, though.

A significant part of the FX comes from corporate reorganization, which include the redesign and consolidation of that called Crs.

Oh, they're important feelers, I'll, probably glacial blend or.

Changes to the go to marketing strategies to increase we patiently.

And ability to attract new student I celebrate the organic growth and bodes well Gee whiz ability to increase prices.

It also be strategic sourcing and operations optimization, both benefiting from the old games.

Finally, as it now no would start water 2019 earnings call. We'd have finally, we have penalized the purchase price allocation 40 foot Jugos acquisition.

Totaling 1.5, Venus <unk> goodwill.

Todd.

Which should generate significant stack if beaches it's.

For the company.

With that I would like to turn back the called back to I'd for closing remarks.

Thank you thought.

She was the most transformational projects for the company and we are extremely excited and encouraged by what we found out since the closing off the deal in November 2019.

I'd be careful not to make abrupt changes as you must protect our operations and make sure our schools, who continued to be wells or.

We truly believe as move Francis will ensure that our people and partner schools remain as our priority.

Having said that there are three pillars that we are focusing right now.

Fourth to find most and motivating the most people's team in culture.

The strengthening and redesigning salesforce and integrating the shared service centers and operation.

The first two pillars focus and combining arcos DNA before the Q.

Through a clearance was parents communication process.

More but it's a credit compensation structure and trading progress, we hope to retain the talented people and create the H.T.D. growth mindset.

The third feeler be integration of shared service center and operations should help us optimize process.

Capture synergies and be a more productive and accretion companies.

Finally, we like to report that it is part of our culture and one of the most important value for us to good quality and people into first place.

So we'll be always our priorities as we are here to build a great company in the long run.

With that we'd like to conclude this presentation and this target Q when a session.

Operator please.

Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound key.

And our first question comes from.

Susanna Solari with I.T. you your line is open.

Hi, guys. Thank you for taking my questions actually we have two questions first regarding the I see the root for <unk> for next year, you're saying that that you expect 9% growth, which was the same that we had to previous year I was just want to me.

Figures and little bit Conservatives, given that you guys are going to reformulate Oh, the whole commercially strategy.

So should we expect.

That number to be beating that's would be our first question and the second question. If you can elaborate what the Vicki points that do change into selling strategy that should improve the for myself positive. Thank you.

So.

Thank you Susan I hear they'll be thank you for your question.

So regarding to the 9% Blue Buffalo's achievable.

Just to be sure.

That that we said that clears the message, but that's the growth.

From 2020 HCV.

Versus 2019 HCV.

And this number.

Is it a little bit higher than been numbers. They started told numbers off will be cheaper so.

You go before they have been growing or close to five 6%.

And and you did last season watch sales.

They see beach seldom do you any is nine person a higher than 2019 pay TV.

And we present I mean, we eat 3% of the historical growth the pointed even though we we we we closed the transaction only moving before so we have only.

A couple of weeks of war.

And it before it's very hard to really give some some any meaningful you back into sales season themselves into any.

However, exactly signed a deal.

Sorry.

No that's exactly my point. So you don't have any youre influencing <unk>. It was very limited and gives you a yard.

Yep.

Yes.

Sorry go ahead now you are right. However, when we signed the transaction.

The beginning of the your divorce how did your stuff 19.

We included you'd be agreement some some incentives do they have theres gene in order to increase the retention rate off the call body and also incentives to the sales team.

Just to make sure that they will keep a full groups on their goals.

And so even though we were not able to really operated the business.

So we had a very low influence e. The operations are just because we had some some incentives and signing process.

We could see some eastside already EBIT numbers for 400000 to any so the point is we are excited because even though we woke up or 80, we could see that the boss TV that off only small changes they seem to have the sales team and be hunters seem so full GE vote.

2019, 2000, Germany, Oh, we had a higher retention rate. Dan then we have in the last slide five years or will that you and basically that's a that's in our view of the force a before me back off.

Incentives changes that we expect you implement a better.

Now we can operate the business.

And then moving to your second question you asked about what what we are planning to himself the go to market he strategy and and when we expect you see some me back so.

We expect to see some me back in 2000 to anyone.

HCV.

And mainly we are adapting the go to market eastern shelf Blue gene.

Two they strategy that'd be use they ordered Brent or too. So we are separating hunters and farmers team.

We are increasing the trainee program of skills.

Hunters and farmers are also we have ad.

Hunters and farmers today, she did team off was achievable either being off the year.

And also we increased the the variable incentive fees. So these organ main changes that we implemented a and through the here. We expect all seem to change gets roddick itself and implement any bulls dissolution ah, but by regarding come to market. He sweaters. She those are the Ti me.

And changes that we implement that unless you are two this year and that team is going to war Oh throughout 2021, New me tend to this new training program and they ended in the sales team SAP right and we expect most people results. Once you don't do anyone and there's 9% growth actually.

It's also Oh, we are.

As optimistic.

Uh huh.

[laughter] can impact plus easily because the business for some do anyway.

Perfect. Thank you very clear.

Thank you and as a reminder, she would like to ask a question press Star one.

We have a question from July to try with Goldman Sachs. Your line is open.

Yes.

Thank you he was actually even have gone from Goldman Sachs enjoy either.

My question for says you know it hopes for you and Sally our dog today, So I guess some point since going to woke us.

Energy's people, who travel I mean on the operational so what exactly are you pulled to drink and watch the extracted in coming into calling for years and also to kind of Coleman quickly.

I mean, I don't be surprised you can see difficult sounds because that's when they talk learning I'm not thinking two numbers.

Ill effects Seanergy, that's not backing.

She brings your tax rate downstream from working with.

These people are so next year right. So I am I missing something or do you think we should expect some book War region. So alcohol testing going forward. Thank you.

So to the Q4 for your question I can start a with the first question and then I turned to titled shoot you should help you with the second one.

So in terms of synergies, where do we signed a transaction we have low visibility about the business itself and Dan we share with the market a conservative I see made about the synergy off the business base. It all the information that we had at the gym wasn't.

Process. So now that we could work with the Anderson in bad or the business and go into more detailed analysis or we are confident you review this number and increase the synergy is.

Almost doubled the dissynergies that'd be ex back and that's you know she's also include sales. So it's already contemplating some somewhat mutation rate and pricing Oh, and increasing pricing that added we believe we can capture even following years, but even though that it's too tight.

The synergies that we had a share with the market every side.

And that's basically.

Gave of skilled and mainly in the back office area.

But also changes and be the procurement and supply chain and also somebody saying deep sea equaled to provide.

As we used to say everything that is behind the curtain, we try to extract synergies and integrate bills errors and ended numbers contemplate the Musharraf did number contemplate those synergies. The idea. It's you aren't really I get the full benefit of the synergies you did indeed the toward.

Sure.

So after three years now.

Ah that this was actually close but we you should we start you should see.

Clearly the benefits of the synergies or eat attack on the for the fourth year.

It is not affected because we had some investments to pursue a so you'll be buttons that I. Just mentioned you just sales team a and also you probably get solution they offset the synergies in the first year. So we use a this is the gains of skills dedicated threats won't get back office area.

To that and sales and hunters and he probably be evolution, however, dolby baseness or the or not the replicable either in the years go buy so you this equity or a this and if you should be more clear and need to tell you where they are that we shoot at you'd be mature.

And the in regard to tax synergies.

So but did you help us then I can complement.

Sure I'll come to the V.. So yes on previous earnings call I know what the preliminary.

Pp 40 goodwill amortization.

Reach at that time, U.S. submitted 1.5 billion real nice.

No we are bringing the final number so it's pretty much a 1557 I'm you know where I said, we'd see I just said I mean, so very rather than a mouse.

Actually.

When we relate it to the full acquisition price I'm not paid by our coal for propose achievable. So almost the part amount being considered a as alone to be amortized for tax benefits I'm not for the for the company. So basically what we'd have to didn't how are you seeing corporation.

Who is achievable, but yeah I assume you can sell a this is a proof says oh, we will allow us to do these stuttered book consolidation between the buyer NCR quite a company and these deferrals is that look or allows them to start I'm, we're tightening big can do for export business.

Oh since these corporate organization should happen to first half of these years he's already taken place actually school. This means that we might start benefiting from the sex benefit in the second huh.

Oh the or.

We estimate I.

Actually we released the benefit it's kinda do these like nine of the presentation, but the first five years Oh, Yes to me 70, new realize Oh, it's easy for years right. So probably this year, we're gonna have hassle do benefit and then chrome makes your own words or we're going to have this who benefit.

These are good work organization again, it's a cash or savings right. So its a rather than a mono and ER. So yeah. You can have this will benefit is gradually these london lined up to a presentation.

[noise] book, So that's a great teams that that'd be a picture for just a follow up question I mean, I feel like I mean.

Thank you.

Oh I'm all cash.

Right now.

Thank you all you know free cash flow shoot.

Not only like a greater operational seem to just people ball games Oh, great benefits that can be a you know for cobalt.

How should we be inching up all your plan.

Teach for years from now I mean are used to focus going on.

Looking at all we're seeing in market by adding new.

Yeah.

To your platform it sounds to me you know buying something before.

More tactical missile or it might be.

If you do not going abroad.

Looking into new regions. Thank you.

So thank you for 40 question and so regarding the M&A strategy or we plan to keep our our strategy that we share with the Bachelor scenes since the IPO and that'd be have been very disciplined way.

Yes. So the idea is to put all the three categories of requisitions a divorce one at its core solutions.

So regional players.

That they believe are learning system, but we've been outdated fraud.

And we see them and <unk> as an opportunity to grow faster.

Anyway.

And the second Kathy bar you'd have to supplement, though mainly increase that forced far too often Rodney said, we have and really dominate the did did distribution channel and the channel and the school or and if there is new capabilities through mainly technology business that said, we looked York.

<unk>.

As a quick recap we would be all the three kind of acquisition.

And we see a rule for Luke for more opportunities. He all this week ethic Wars now would you that Oh, we are we have a priority to look for supplement, though because we see a very stronger portion of each you consolidate does business in.

In Brazil in our portfolio of fraud, it's it's not yet hopefully so in all day, Kathy bars that inside supplement, though oh, we sleep <unk> four categories.

Which is like language, you stem or 21st century skills and come to you and in all those get the bars or you can have one or two brands are targeting mainly due for in a client profile.

And separate by price.

And currently we have only three out of a put the show a broad it's now with portfolio supplemental business. So there are five products to book for and of course, we can develop internally, but Ah ah depending on the pricing negotiation, but he did may idea is to use.

Our cash.

In the balance sheet and based on cash generation of the business to acquire a dose for all this if we find products with the qualities that seats with both portfolio, yeah, but but also you have a very actually pipeline I'll start drops off that knowledge in Brazil.

Usually those companies they create yard beautiful products, but.

They have a heart attack.

Hi, Bill solutions.

Because the cost of liquid finishing up the clients. So the idea is to acquire Ddos technology companies and then we plugging the platform and enhance the value proposition my phone clients.

So I would say that we keep looking for all this we mainly Brazil. So the idea and always choose the shocked or yeah. It's you really consolidated Brazilian market out there was a huge rule to can you explore and we are very well positioned.

To capture in dominate.

Business in Brazil, So to me ideas to consolidate Brazil Force and then at some points. We can look forward, we can look choose or something or outside the counter but now enables us to consolidate becomes roots and looking for M&A industry categories.

That's super helpful things, because it's always.

Thank you.

Thank you in or no other questions I.

I would like to thank the ladies and gentlemen for.

Participating in today's conference call you May now disconnect everyone have a great day.

Thank you.

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