Q1 2020 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to our.
Q1, 2020 earnings call at this time, all participants are in the listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone. Please be advised of today's conference is being recorded if you require any further assistance. Please press star.
Well I would not only to hand, the conference over to your speaker Mr. Roberto or Taro.
Arcos IR director. Please go ahead Sir.
Thank you I'm pleased to welcome <unk> Foods 42020 conference calls.
The call today.
We'll see how did you saw several crunch Matt.
Oh, that's for sure.
During today's presentation I wouldn't that will make forward.
Okay.
The only relates country right, the future financial or operating performance people no.
Yes.
Sorry.
Factors that may cause actual results to differ materially from those compensated by before.
Oh agency this legislation.
They're not easy to statements related.
And finish.
Like station in guidance for future People's expectations. We've always said you probably shouldn't there be related benefits.
<unk> expectations regarding tomorrow.
This is feature sets foresee the tragedy savvy issued earlier today, it's other towards more fully described no somebody TD Securities and Exchange Commission.
Oh looking statements you said he thinks you are based on information available to us Adelphi Big.
You should I be long and then that's predictions of future. Even you disclaims any obligation to let's see any public in Sydney.
That's required by law.
Management the lessons no I guess a financial measures on these calls they know how your first financial measures and send it to be could you give my village well, it's a substitute for b cells for sales in accordance with.
We have provided a reconciliation of non isolates financial measures. The most directly comparable I saw that financial measures that were present me.
Let me know through the coal over to I'd, just thoughts on thinking about local field.
Thank you how best to and thank you everyone for joining arcos first border.
2020 conference call.
Given the embraced this moment, we are right now I'd like just talk just called my thinking India for Oh, the from mine workers.
I'd also like you think the Brazilian teachers have been equally break.
Adapting to an impressive goals that you find alternatives to keep the students 30.
Finally, I would like to recognize his tireless work our 1900 inflow.
Have been dedicated an enormous amount of energy.
Further strengthening our platform to once again.
Last year, our mission of being the best mission critical partner to the schools.
During today's call, we'd like to discuss reporting topics.
First how could be 90 hasn't I could also for Andy actions, we took to overcome the challenges and help more flights.
Second I would like to do a shore recapping, our strategic pillars and grilled plants.
Lastly, our financial results, which have been once again in line with already.
Actions.
This quarter proves the result was our business model and the fact that we operate under annual contracts.
That's he will go over our results in more details.
Moving to slide number four and you go over the first topic on todays agenda I like to start with a recap Arco history in its mission.
I think you will help us understand why how article was able to react so faster to challenge the bulls because we.
And with incredibly positive feedback from our clients so far.
And yet it's all about focus focus in the long term focus on quality and focus on our people.
When we started business 13 years ago.
Our mission obstacles for me the lives of voters chewed through education was already alive.
This means that seems arcos inception, or energy resources have been allocated in a way to create the best education slotted for in Brazil.
And being the best possible boardroom torque flights.
He's goes beyond our product developed process for our I keep platform.
It's about the quality of our people our customer focused culture and values based on a weekly run this company make the decisions and plan for the future.
As a result of these focus is what we see.
On this slide number five.
We have been investing or product nor team and create integrate a lot of foreign car flights.
We were able to offer a comprehensive set of products features and servers to be schools. It's features in their students.
His brother radio aureus under a one stop shop concept creates a powerful solution to the schools.
Frequent pedagogical support services to online assessments digital books and featured dream programs.
So as we've shown this light six when they could be 19th and dedicated.
Affect many important part of the school environment the classroom, we're ready to support our flight school.
We had everything to partners, who need in order to keep teachers students.
Stuart He guides video glasses online assessment digital books and teacher training and they were all integrated with our content.
Really important.
We decided to move one step forward and help or partner schools, even more so we created a virtual school offering daily lives glasses to all students across all grades.
You know her last earnings release calls Weve nation, we had decided in approves the contingent split.
The disease start to proliferate.
We start executed.
We acted fast.
Able to change in it that or product operations consultancy services and go to market strategy.
Well, I wonder and breast conditions.
I'd like you go in more details about these.
He just device informing categories, that's shown on slide number seven.
First the changes to the product.
An important part of the schooling firemen was critically effects in the classroom.
To replace it we created a virtual school by offering daily lives glasses.
Given the inadequate quality of the public education in Brazil, we understood that we had to step forward to support our community. So we beat the life glass is available to any student in Brazil free of charge.
In terms of our operations that's guarantee the safety of our employees and the stability of the operations while working from home.
Well, that's taken care off weve focused on maintaining the physical and mental health of our team by providing psychological support and telemedicine service.
The third pillar is pretty God go consultancy compete 19 brought changes to the school.
Oh stake holders were ready for help school owners and teachers navigate through these new technology environment.
We have been promoting webinars relevant subjects, so just communicating with Barrington engaging students in managing cash flows.
Let's move those changes is the go to market strategy.
School that used textbooks or less digital learning system are struggling to maintain classes.
We are.
Part of our solution to enable potential customers to use it.
This helps Dan to better serve their students during this difficult time, well, having the chance to sense or technology in high quality content and methodology.
We have also hired a consulting firm to help us boosted 2021 growth will teach him.
Given the new opportunities arising from this environment.
The back all those changes farwell displayed on the video provided <unk> earnings release presentation I.
I suggest that you take the time to watch it because it's also greatly to learn a little bit more about our solutions.
We know what are we in fact, the lives of 1.3 million students, but also the lives of students all over Brazil from both public and private schools.
As shown on slide eight today, we have accumulated more than 24 million fields.
About 6400 life glasses, and the number of subscribers from our you two channels multiplied by five since January.
This exposure brings benefits to the business and our strategic pillars.
Before I turn the call to that like say that get given the uncertainties around because you'd 19 situation.
Also maps several its efficiency libraries and cost cutting initiatives, which together with the synergies from post acute should protect our profitability in our cash flow generation in case of the patient negative impacts to our business.
I'll turn to call knowledge about feet to go through our strategic goals and discuss our what can be financial into tails.
Please go ahead.
Thank you I'd.
We can now go to slide.
And here, we would like to reinforce where we have been focused in order to coach image generate badly drones shareholders.
Our first dealer, it's true strained our quality leadership in Brazil, and cold chain reach you bring sustainable organic growth.
He going she did you see you strong academic results from our glide schools, and we sense increased client satisfaction coming from they'd be suppose we provided do need big Cobiz 90 crisis.
We also expect increase.
<unk> vision of schools.
Even clearer value proposition advantage of learning system against taxable.
They should.
Celebrate the structural shift we have weaknesses in the industry over the last years.
Our secondly strategy, it's true value creation through the integration.
The integration continues to move despite did removed operation.
We took important steps in terms of product development.
Marketing strategy and shared services integration and people.
As mentioned in previous calls we aren't coal fit with our plan generally between 15 meat and cheese 17 million <unk>, <unk> and well it'd be dots users.
By the for Europe integration.
Lastly, we continue to look for M&A opportunities with three different workflows.
The first to increase our dad work of schools and gain for scale.
Second to expand our portfolio programs.
Oh supplement.
And finally, what you back features to our black before in Florida, and Hayes, our client experience.
Those three pillars remain intact and pulled Junichi drive our for brokers and resource allocation.
We can outdoor just like that.
Where we are pleased to discuss our first quarter performance.
And before we dig into the numbers. Please note that except for revenues.
Marketing selling expenses.
Let me and cash flow for operation.
Oh financial measures I just got here.
Yes.
And the growth rates for compared to prior year comparable period.
Unless otherwise stated.
We also note that year over year comparisons are affected by acquisition that we are not included you did your top 19 financials.
So let's start.
That's why we reported first quarter of 2020.
Was 261.6 million realize.
Which we presented 26%.
The 2020 HCV.
Versus 26.5%.
Same quarter last year.
Gross margin was 74.3%.
Got it for water.
81 point people were saying why do you see here in 2019.
Like a cheaper right you recognition seasonality amongst our brands as compared to the previous year.
Selling expenses for the first quarter sequentially was 87.9 billion Reais.
Oh from 36.1.
The first quarter of 2019.
In 76.7 billion Reais.
The fourth quarter 2019.
The sequential.
Quarter over quarter increased salary expenses reflect a higher number of hunters and farmers.
And higher travel expenses.
Those investments are reflected.
When JCB grow.
And given our value our very high lifetime value cock ratio.
Those are investments with a very high retards sarcoma.
Ginnie expenses was 66.8 million react.
Compared to 20.8 needed for the first quarter 2019.
Both numbers include non recurring expenses.
Adjusting for share based compensation 2019.
In 2020.
Emanate.
Went off expenses in 2020.
Good day would have been decreasing as a person that they are wrapping gifts.
Due to economic stuff skill.
As a result of all those factors combined.
Adjusted EBITDA was 96.9 billion we.
For the first quarter of 2020.
Bear to 49 billion realize the same period last year.
Adjusted net income was.
56.2 billion re <unk> four to force water oftentimes Randy.
Compared to 40.8 billion realize that first quarter of 2019.
In terms of cash position, we ended the fourth quarter with 833 million <unk> cash and equivalents.
And roughly 300 meter Riyadh.
Oh bank loans were very comfortable with liquidity situation, even considering the future emanate payables.
Moving now to the guidance for the SEC cooling water.
When he we expect you recognize around 20% off that you don't do any HCV.
Also we expect our adjusted EBITDA margin for years deleverage waiting to be the range. All 35.5 for said June 37.5%.
And with that I would like you did call back to body.
His closing remarks.
Thank you Debbie.
I'd like to once again express my gratitude to all our team who once again have demonstrated the or fashion for indication and act to serve our clients with excellence.
We'd like to share our results on a net promoter scores review with the schools, who use our platform declaring team. The NPS was 89, we chose to highlight customer satisfaction.
Our digital transformation accelerated years.
We believe our consistent intense investments in technology over last years as well as the evolution of our flatter for <unk>.
As you know strong competitive position as our value proposition becomes stronger to all schools.
We are here for all schools for our community and for the long run.
With that.
To conclude this call and can move to Q in a recession.
Thank you as a reminder to ask a question you want me to press Star one on your telephone we ask that you. Please limit yourself to one question and one follow up question. You May then returned to the Q to withdraw your question press the pound. Please standby, while we compile the Q any roster.
My first question comes from Pedro Mariani from Bank of America. Please go ahead.
Hey, guys and good evening, everyone. Thanks for taking my question Grand Congrats for doing so.
And so my question is more on the quantitative side here.
Wanted to understand actually what do you see S. Max for the industry. Most all of this situation or long Dick will be 19, normalizes and what sort of structural changes to the industry. Overall do you anticipate Walt if things go back to normal.
In terms of both problems and also offer a goal for patients. So this is my question pretty good.
Thank you. Thank you Pedro pretty a question I hope you are doing fine.
As you said you're correct the base digitalization into schools really increased 80, not in a very intense wait for the last two or three months.
The schools are much less resistant actually the are eager to use technology and I think that fact that put us in a very strong position because our solutions we're already.
Very strong in terms of to lead recalled tend to technology.
What we've done in there is less pure it was really a to accelerate the probably develop pipeline. We anticipated a lot of features that we're supposed to be develop over the years and we could.
Could do that eat into last weeks and yes, we see a a structural shift, especially for a don't schools, who still used textbooks they used textbooks.
Turning to textbooks with no technology, and I think I will definitely accelerate in the medium term or the fact that the schools recognized that technology is really a sanction on it education process and we also see a us structural shift even.
I'm learning systems.
A little or no technology for solutions that carry a strong technology integrated with content. So Oh of course, we do see challenge in the short term, but into long term or views that hour you get called on the value proposition.
Solutions for clients and optimistic in terms of the future.
That's it I think sort of color here I hope you're seeing some older too. Thank you.
Thank you know our next question will come from Diego I'd go with Goldman Sachs. Please go ahead.
[noise], Yes, hi came to you all for taking my question I guess I was wondering if you can comment occurring.
Cycle.
Which oh.
It was or training at this time, even though you know what would you imagine multiple choice.
Oh insulin one it's a fairly well because you can make jobs there.
You know to the potential clients so probably.
Situation.
More difficult to present itself.
Works almost in Houston. So you can just called the top games have been progressing so for example degree.
Hi, Hi, Diego Uh Huh.
Starting to be bodies have had to go ahead.
I can't became <unk> sorry.
Right. So I think another too much in scratching the ticket deported or to explain though to recap.
How our HCV built throughout the year, so we basically field or the next years HCV by of course, we knew we contract or with existing clients cool and also by adding new school.
Hello network.
So those two blocks they happen at different stages of the you're the first one the renewal of the contract I don't usually starts a year on year, which allows us to make better comparison versus previous cycles right. Now so what we can say at this point.
In the cycle into a mile an hour renewal rate and the average tickets so very healthy patterns or so we don't see any negative impact a 12 a renewal they are for both men 21. So when you look at the churn or the renewal of contract.
Alter and actually they look very healthy ER as like that.
Moving on to the second block, which the addition of new schools.
Moving starts to gain traction from the move from July onwards.
So it's early early to to to make conclusions.
But I think the party and David They can also add their or their thoughts here.
Sure I do anything different question [noise].
[music].
Yeah, So I can comment and he can complement me so.
I really Kentucky, new go to market strategy.
The difficult those cool lounge generated many many leads and we have a bundle our solution. So that schools that are still not our appliance can use some of the solution that is included in the platform. So we'd have a significant number of schools and students already using this trial.
<unk> version.
And of course that could translate into contracts in 2021. The first time that we have a schools and and students that are not a steel clients use nor solutions and as we discussed before de MPS has been credible and of course, we are optimistic in terms of.
Conversion of these leads but it's still too early to conclude and to forecast or any kind of.
Signed contracts and has a better explained very well the peak of the sales campaign is just like them semester.
That's a that's very helpful. I guess, just maybe a follow up when you talk about like that we can you give a lot of stuff and stuff.
Schools Warner schools are considering all arcos pretty much the same inline with.
The contract and higher here or are you seeing some changes to each I'm just asking because on adopted speaking you know I guess you know some of the patients who seem to balance right now it's ER.
<unk> remarks, they would be before.
Well private schools so.
I think it will be helpful. You took them.
You know probably like or thoughts on volumes and I'll think something freedom. So for thank you.
Yeah, So oh, good in terms of the economics.
And be the profile of the contracts with the school.
We're not seeing any any change in behavior in terms of a request for discounts or any sort of.
Trade down or within the project I didn't know I mean, we have product across different pricing segmentation, but they're not seen a book the renewal of the contracts and also the near one or any any change in terms of upside for lower or higher price.
Is it or requests for discount.
Including for those contracts, which are being renewed.
For next year Diego.
Perfect. Thank you and I guess, the second question equally to can comment, though music regional 40 people I get more.
Curious evolve.
Oh, it could be able to let's say she served.
Internal pro so I'll, probably people to your platform you know there Brad.
Pizza them on before.
<unk>. After you had been up the I mean are you able to shoot somewhat person to quickly should we be.
Expecting something to be proud of them people Brendan problems for Nike or Oh, sorry.
Let's see so for.
Hi, Jay go he is going to be.
ER, so he timothy deterioration or our main concern.
For this year.
It was focused on that you think so the first one is organizational design. So we implemented some changes.
In the management level cheap.
We redesigned the teams more in line with the strategy that we believe is the best one.
And attack on.
It was they go to marketing strategy. So we we had a challenge to adapt their go to market is very as opposed to achieve would you be goods marketing strategy that Arcos order brand adopt we expand the 2019 year seasoned signed me.
ER, we spend a six month only blending this transition.
And then when they closing date Kane Oh, we had a chance you are rapidly execute.
Those made changes.
And that's actually what usually happens.
Or once a year, so considering that the nature of the business that all operate minimal terms.
With annual cycle, we usually do days, so we plan to the year and we execute the main changes or in December in January.
And then things are sad and then we can have the same season are working on.
ER, so having said that we had.
The benefit you implement the major changes in January this year.
Which was before a they go to knock rises dark.
So that that's the force I did the first thing Dan I would like to see a Bobby divisional holds true. So the major it's happening already and we were not expecting significant changes.
Happen throughout the year.
However, what actually benefited us.
Wave worked its way Shannon.
A big clients.
So we we were not expecting to implement significant changes brought it this year. So even though we have got knowledge to be blog, the placebo solution de stress the strategy approach that will be [noise].
Slide four larger M&A transactions on the call. Good wants to do that was in phases. So the course, you're more focus on go to market requires them to follow your Scott.
When you blend and the deployment of the technology and doesn't change is the problem. So [noise].
Weber well and to me.
And mainly we do that because declines need time to really get.
I've been in water solution.
So weve reports is not a we sell our attrition this relationship or implementing changes that bush right. So usually were way.
People and it later, having said that you had to go this opportunity.
Actually in some of those changes in broader are already this year because big clients. They have been push to use technology into pulls that you've looked like they were with note that knowledge and the abroad or so when they will look like and Oh, sorry, they had a chance.
She really you keep black performed that'd be could deploy stronger brands to book to Bill Oh and by doing that they have a good experience and then like walking basement and their lab walks out the section increased a lot. So what do we have.
I have heard crudely that'd be Blanco pool of people are very happy that our cold a acquired the business and they are they are they are very happy how we embrace the whole situation and they they have the filling that if the war with this former solution.
No no no no worse.
Right now so.
They find a relationship actually the.
The crisis I gave as an opportunity to really work will look to grind analytical people too it's not like that you bring them some technology and we hope that there would increase on black box that section.
That's very helpful.
For that.
Thank you. Our next question will come from Susana Salaru with I tell.
Hi, guys. Thanks for taking our questions. The first questions related to the NPS.
Could you just celebrate Oh participated in the NPS Ah Yes. It's teachers also participated that would be the first question regarding then P. S and the second one wants is a good schools that are using this emotional.
But it's not clients.
Oh I point, they if they if they did participate dark knowledge in the NPS that'd be our first question [noise].
And then our second crashing village reduces costs that are using different moshi, let's see if they are not yet a client <unk>. If you could just give a best friend cellphone.
How many on how are those schemes how did you reach them and you should expect a what kind of a commercial rights. Thank you.
Thank you. So those are three question hope you're doing well.
So.
The net promoter score is 100% from prospective customers.
In terms of evaluation, although recurring customers, we do a clearance.
Assessment throughout the year, but that's Ki bin gets is.
100% taken from prospective customers and usually the school older or the person who is responsible to do relationship with our brands.
Or the.
The person who is responsible as possible from the pedagogical area up the school.
The way we are reaching these schools is through many events and lives. So we are.
Conduct teams real events online.
Keynote speakers with experts from education technology and as we attract.
D schools are they turn to leads and we are conducting different events a ingot funnel. So that we can evolve. These clients in terms of the funnel and we are creating different ways to present, the product and the solution. So bad.
They start to use the trial product as they used to try product. We are offering support services console team. So that they can understand for instance, the performance of their kids as they do tests into platter for a they can't understand how.
Many times the students are using the platform per day and they are using only platform at the same time that they are using for instance, textbooks Oh, we have a significant number a into lead but as I said before it's really hard to predict what the conversion will be.
What we would have seen so far is that the level six section is very high and it's really the first time that we have been able that prospective students and teachers are using the flooded for more than a year before do you think we signed a contract with us.
So are we expect.
Into in the following bombs or we can convert many of these leads.
And build up a strong rates would be for next year.
Perfect very clear thank you very much.
And speakers I'm showing no further questions in the queue I would like to turn the call back over to you for any further remarks.
So thank you all four for Spain, you know recall or we are.
Working hard to deliver the high quality education that we have developed over the years throughout schools hope, everyone is fine and well and hope to see you soon.
In the next.
Mumps or show and hope that you all see say thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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