Q1 2021 Arco Platform Ltd Earnings Call
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Good evening, everyone. Thank you first thing you buy and the welcome tracker platform for first quarter of 2021 earnings call.
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Today's event is also being broadcast live via webcast and maybe accessed through <unk> website investors thought Arco platform Dot com.
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Now I'll turn the conference over to Ekati knock on Heder Arco IR director. Please Scotty you Ma'am you may begin your presentation.
Thank you I'm pleased to welcome you to Arco's first quarter 2021 conference call with me on the call today, we have barcode CEO I need to talk about Internet and Arco CFO for better during today's presentation, our executives will make forward looking statements.
Forward looking statements generally relate to future events or future financial or operating performance and ease of known and unknown risks uncertainties and other factors that may cause our actual results to differ materially from those contemplated by these forward looking statements for.
Looking statements in this presentation include but are not limited to statements related to our business and financial performance, our expectations and guidance for future periods, our expectations regarding strategic product initiatives and their related benefits and our expectations regarding the market.
These risks include those set forth in the documents that we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission before looking statements. In this presentation are based in the information available to us as up to date hereof, you should not rely on them as predictions of future events and we disclaim.
Any obligation to update any forward looking statements, except as required by law.
In addition management may reference non <unk> financial measures on this call the non or your current financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with all your friends. We have provided a reconciliation of these non <unk> financial measures for the most directly comparable <unk>.
Financial measure in our press release, please note that except from revenues gross margin selling expenses G&A and cash flow from operations. All other financial measures, we disclose here our normal year for us and growth rates are compared to the prior year comparable period, unless otherwise stated we also know debt year over year.
Barrington are affected by acquisitions that were not included in our 2020 financials. Let me now turn the call over to Eddie Arco's CEO. Thank you Christina and thanks, everyone for joining today's conference call. We hope that you and your families are all healthy and safe.
You'd like to present 3 topics to date as shown on slide 3 for.
First our healthy operating results for the quarter. Despite a challenging scenario with a strong 28, 5% revenue recognition and an adjusted EBITDA margin of 35, 7%.
We are maintaining our margin guidance of 35, 5% to 37.5 per cent and expect our free cash flow to improve along the year as we collect the receivables reduced capex and benefit from a lower effective tax rate.
As we now have better visibility on the actual numbers of students who wrote revenue recognition for 2021 is leading to slightly lower vs. HEV impact by the second wave of COVID-19 in Brazil.
Second the commercial cycle for 2022 school year continues to show encouraging results and we are excited about our recent movements for.
Growth in the years to come we have strengthened our core segment with the acquisition of CEOC and on both Scoop.
We are achieving great results for more cross sell initiatives and continue to leverage on all of our superior value proposition and consistent improvement in our offering and the interest in B to C will allow us to explore this huge and promising market and finally, we will present an update on our ESG.
And we conclude are materially assessment.
I will now turn the call to apparel to discuss the results for the quarter.
Please go ahead.
Thank you Heidi and good evening everyone.
Thank you for your time and I also hope that you and your relative are all safe and healthy.
Moving to slide for net revenue for the first quarter of 2021 were $331.7 million, representing a 27% growth year over year revenue per car solutions increased 20% versus the first quarter of 2020, and supplemental solutions delivered a 6% to 4% growth.
Impacted by the addition of let's call. It in today's you've set for the portfolio cost of sales increased 30% year over year, leading to a gross margin of 73, 7% in line with the same period last year.
When excluding depreciation and amortization related to our educational platform cash gross margin actually expanded 160 basis points to 78, 7%.
<unk> expenses, excluding depreciation and amortization increased 35% year over year, representing 36% of revenues versus 34% last year.
This increase reflects the additional sales personnel, resulting from the restructuring of the commercial teams for our recently acquired solutions such as positive Gen.
General and administrative expenses, excluding depreciation and amortization on the other hand increased only 7% to 22% of revenues from 26% in the first quarter last year as a result of a reduction on travel expenses and gains on scale.
As a result, adjusted EBITDA reached $118.4 million Reais, 22% above the first quarter last year with 35, 7% EBITDA margin.
Finally, adjusted net income was $61.1 million per day quarter from $56.2 million in the first quarter 2020, with adjusted net margin of 18, 4%.
Turning to slide 6 we'd like to make a quick recap on the dynamics for Atg bookings revenue recognition and cash collection for our business, we can coffee commercial cycle for the ACB bookings on a year prior to the beginning of the school year and you start to recognize revenue as we deliver day material to partner schools for the car segment, we have on <unk>.
Average for deliveries per year, usually 1 month prior to the usage in the classroom for the supplemental solutions, we usually deliver demonstrable twice a year the cash collection matches. This fiscal year, our disclosure in our model. We have the vast majority of our partner schools pays for our solutions in up to 8 installments with only.
Small portion.
12 installments, however, due to the COVID-19, pandemic and the challenging environment for the institutional segment, we opted to support our schools and protect our price and retention through its slightly more flexible payment terms. Therefore receivables for 1021 school year are more concentrated between.
The second and fourth quarters, with only 2% having slipped to 2022.
On slide 7 we present, the breakdown for our receivables and that year over year increase mainly relates to the neither past due nor impaired portion reflecting day more flexible payment terms.
The profile of our receivables improve and evolve our return processes, we see the allowance for doubtful accounts returning to pre pandemic levels.
Moving now to slide 8 we intensified investments in content development and technology in the first quarter to further its weight and power solutions ahead of the commercial cycle for the table was the brand with the largest investment part of our goal to improve acquired solutions to increase customer satisfaction and retention rates as well as accelerate organic growth.
Investments should reduce as a percentage of revenues in the upcoming quarters and finished the year below the historical 10% level.
On slide 9 we did see other corporate restriction the company's undergoing and the potential for additional tax benefits to date only for the Tivo and part of source both incorporated under CBE Our company, but every day that you do cut salaries just imaging.
And Si benefited from realization of intangible assets and goodwill from business combinations, representing around 6.2 million per year. This year, we should conclude the incorporation of the for remaining subsidiaries of sauce into CBD and save additional estimated 30 million and taxes starting.
1022.
As we incorporate other businesses into CBE will it'll be able to capture additional tax benefits and therefore for the reduced our effective tax rate currently at 23% from 32% in the first quarter of last year.
As a result of the improvement in the upcoming months in this free lines receivables Capex and taxes, we expect for free cash flow generation to increase in fact results from April already show, our free cash flow 2 times higher versus April in 2020, which means collection accelerated in line with our <unk>.
Expectation and cash flow generation should be concentrated between Q2 and Q4.
Finally on slide 10, we present day scheduled for the payment of our debt and sellers note. Our cash position is enough to cover for the short term and mid term obligations and we already have firm proposals from banks for a credit line between 600 to 700 million reais to strengthen the balance sheet and attractive condition.
I will now turn the call back to Avi. Please go ahead.
With debt.
We are very excited about our recent initiatives and the prospects for the future.
First on slide 12, the acquisition of POC and the low SKU was very important in a strategic standpoint for Arco. It was financially accretive as price paid is equivalent to $14..4 times 2020, EBITDA and is expected to do the right tax benefit of net present value of 214.
Million Reais was the business are incorporated.
See in the most who are very complimentary to articles current portfolio, both on price and geographic presence. They are top of mind brands in the southeast region, where 50% of their student basis, concentrating being 36 per cent into some volume state.
According to a study concluded by E Y bottler known in 2019 COC as the top 3 brands in the high price tier with best awareness among parents and the top 5 brands with the best awareness among principals.
T O seemed on Bulls, who have a proven track record on students admissions with 48% of COC schools, and 28% of don't book SKU schools being among the top 3 in their national exam ranking on.
The bigger cities.
Article has an extensive and it made a track record of acquiring and improving and we will accelerate growth of the acquired solution by applying it swinging factors of high quality content relevant technology reliable customer service and effective distribution.
Additionally, in Nishu assessments from integration team already shows approximately 15 million realizing cost synergies leading to a both synergy mood to poll of 11.6 times 2020 EBITDA.
Finally, the deal includes a commercial agreement to distribute selected supplemental solutions from Pearson, we tried as complementary to our current offer boosting cross sell opportunities.
On slide 13, we share the promising results from the strategy designed to capture cross sell opportunities.
We have invested in more incentives bundled benefits and training and as a result, 72% up 222 year to date, New school intake for supplemental solutions comes from cross sell initiatives.
On slide 14, we are proud to present the results of our continued product evolution by putting investments in digitalization and innovation in first place, we deliver differentiated technology content and psychological services, leading to high customer satisfaction and.
Academic results.
In 2020, our NPS has increased 15% for our legacy brands sauce inside 288, and 13% for positive book to 75, making us leaders in the industry.
We are also leaders in academic results related to admissions in public universities through the National exam and then far ahead. After second player on the students admitted in first place students admitted in second and third blades and students admitted in for 210th place.
On slide 15, our beat to seed the boot through the acquisition of MS. Salver in March it's showing promising early results. We have already started investing team and marketing while focusing on increasing the share of premium offerings, such as medicine test prep courses.
To accelerate and resolve as growth.
As a result and solve the sales is expected to nearly double in 2021.
By leveraging on the solvers outstanding test prep offering we expect to launch a book to be best prep solution to partner schools already in the second half of this year.
Moving to slide 16, our ESG agenda evolves as we conclude our materiality assessment.
We have engaged many stakeholders in the process and I would like to take the opportunity to thank all of you who took the time to contribute to such an important piece.
Our materiality map confirms the relevance of topics related to impact in education and team as unless it in line with our strategy.
Next steps include the definitions of main indicators and disclosure of results in upcoming months.
Thank you very much for your time and operator, we can now open for questions.
Thank you.
Florida is now opened for questions. If you have a question. Please press star 1 on your Touchtone phone at this time or anytime if at any point. Your question is answered you may remove yourself from the queue by pressing star is true.
<unk> will be taken in the order day I received we do ask debt. When you post your question, though you pickup for headsets to provide optimal sound quality. Please hold while we poll for questions.
Our first question comes from Pedro <unk> with.
Bank of America. Please go ahead.
Okay.
Good evening, all and thanks.
Thanks for the opportunity.
Here.
I have 2 questions for me on my first of all interest related to the impact to your revenue per location.
If you could please begin.
Do you expect any impact coming from the smaller recognition of revenues due to the COVID-19, secondly, and.
And also I mean, what is it.
Changes in the environment compared to 2 people per quarter.
The first question and my second question goes slowly regarding the Juicy product.
Sure.
The commercial initiatives.
Ready methods in order to expand these pieces lodging Reits.
If possible on the call.
Much of your total revenue.
This represents.
For now.
2 questions on as well.
Thanks, Andrew I hope you're doing fine. Thank.
For the question so as.
You mentioned in the presentation.
The revenue recognition for this year to be slightly below GAAP, you cant Allison on maybe a low to mid single digits.
These reflect depends on annual reports and lower enrollment for 2021, then you should expect it by the schools.
As you know we delivered the content too.
Would it be for unbelievers, along the year Youre now concluding the tack on delivery, which allows us to have a much clear bill.
On revenue for the year and decide on the enrollment and this is the reason why you're not providing guidance to the market.
This time.
This position with low revenue recognition doesn't include any potential upside on it so.
It could come from essentially re enrollments in prepay and <unk>.
Key to gardening worst implemented project B zone in the second half of the year.
But we prefer to be conservative here for the benefit of transparency.
On the 34 already for me to comment on <unk>.
Hello, Andrew Thank you for your question. So regarding your question on the sulfur.
We really expect you saw book to be.
Net.
Sizable portion of our business in 5 years, I think there's a big opportunity there.
To remind you.
70% of this deal.
It's coming from public school. So it's a large tam that we don't address yet and we already started to.
On.
Strengthen the team, especially on the commercial and digital marketing area.
Where we are investing to capture more customers.
<unk> an opportunity to expand the products that arent offered there. So for instance, right now.
Of course to Med school that it's going very well.
Very interesting ticket. So we are starting to work together with the debt.
No.
And we are very optimistic that in the long run this book.
For very strong and flexible business for Arco.
Correct.
And so on.
Our next question comes from we put on <unk> with Goldman Sachs. Please Mr. <unk> go ahead.
Hello.
Hi, Randy.
Okay.
So part of our channel.
If you would keep on any.
Yeah.
To provide more flexible.
For many years ago.
Okay cool.
On your contract book.
Okay.
In closing volume.
Sure.
And Walter Reed.
Sure.
Awesome.
On our second question would be also albeit small.
Net.
Thinking about our overall market.
Alright.
Non-GAAP schools closing down on getting through partners.
And can.
Yes.
Our Tommy.
Correct.
And the other truck.
Very helpful.
Thank you.
Thank you.
Thanks for the question.
So as you know.
We have a lot of discipline.
Carolyn on both the brand reputation and we don't use price.
These homes were creating value.
On a contract to renew or add on to schools to TD for the fall.
For the schools are day.
Market or the school they are going through a very difficult unusual.
You've all women.
Our growth to provide support.
And to help them.
And to help them navigate this period of course without causing any damage to the business model not causing any damage to our operations in total with financials.
So I mean, depending on little bit more detail on what we brought in the presentation basically.
Statistic day the various.
Specific day that we renegotiated.
Lynn.
On the contract so we prolonged the 30 day 40 day right.
Commentary so along these crews to hang on 1 month.
Right and then returned to payment to us on.
Right. So this is exactly what with debt and not providing any sort of discount.
Total financial EBIT.
On expanding a little bit.
The contract right.
That's pretty much what you see.
On the AG on the receivables.
We are not concerned we believe you should see the provision for bad debt actually came down.
Turning to pre pandemic levels.
Not changing at all day policy.
Exactly the same provisioning policy, we had we have had over the last.
Right, but do you have improved the collection process alright. So.
The pandemic.
To improve the collection on proof with internally.
As a result.
Sure.
For bad debt also coming down.
So what we did.
Equal right so did for.
Colombia, a little bit dependent for Sun.
Paul.
Right.
You also.
About the pud on closure.
I mean.
It could be very omni, it's not something that has impact on work now.
Very much.
Actually what we saw school reports.
Hi, Ashley.
How should we prepay in the garden.
And for those who have on the platform.
On University evolution plan right.
Alright.
Both extreme on.
Keith Hi pool, we saw on the highest on too.
Right, but its cool.
Loans or given the volume of our client he won't minimum.
And as a consequence, you've seen our financial debt.
Provision for bad debt and even be receivables past due or you can actually have come down for you or not.
Net.
The business.
Perfect. Thank you very much.
Our next question comes from Kai you're most credit junior with Morgan Stanley. Please Mr. Moskow Junior go ahead.
Hi, Good morning, Andrew on that was wondering 2 guys can give some more color regarding the $648 million.
Related to accounts payable sandy shareholders, how much internationally SKU, we presents from.
These are mild and when do you guys expect to close the deal.
Hey, Kyle.
Total peer can for the question.
Internships, who is almost half of that amount right.
This amount is not changing there'll be no.
Upbeat to debt amount.
As you know Amit the arbitration process.
If we have any update on debt, we will ultimately lead to market now right, but so far we are keeping the immediate short term.
Our non payables and as I said on behalf of debt amount.
2 international school for Ya.
Oh that's.
Good color. Thank you.
Good day.
Thank you.
Yes.
Our next question comes from Lucas bring June with Bradesco BPI. Please Mr. Bidding on June go ahead.
Yes.
A question for Mike.
On update on power.
And then the market going forward.
Sure.
Good morning.
For the acquisition of Hawken Dumbo.
Thank you.
Hi, Luca thanks for.
For the question so on.
On the M&A side, I would say debt.
When we look back we'd have made transformational.
Acquisitions.
Do you have the opportunity to buy what we wanted to buy.
And people who are very successful move for.
The company in terms of both kept on location and discipline that you reported.
We're still waiting for them to interest approval for POC.
On the growth on Bloomberg School. So looking ahead I would say that you should expect.
Position to be more income.
To some sort of on a diversification of revenue pool of course inside our core business OLED type book of business, but leveraging on the.
We'll be scale that we have.
Over the years. So when you look at the scale we have today on the core segment, we can explore debt <unk> right. The first 1 is efficiency of course right and they take the 1 growth. So we will book at this scale, we will have on the core business to generate incremental growth and for that we need to use for <unk>.
Rental and new products that will benefit from debt and.
It is not a claim that the cross sell initiative has been put in place where on a timely.
Something that we've been talking about for the market for a while and this is the reason why we have.
No.
Cross sell initiative now for <unk>.
Andy wants to take advantage of day, nearly 1.4 million moving out.
On the core segment and M&A will be included in that as a way to expand on the product offering and leverage on the <unk>.
More and more.
Eventually you are talking about on non pool.
Our revenue metric.
And growth.
Growth growing RMB.
Okay. Thank you.
Thank you.
Seeing.
Seeing no further questions that concludes our question and answer session for today.
This video conference has concluded. Thank you very much for your participation have a great night and a good week.
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