Q1 2022 Arco Platform Ltd Earnings Call
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Good afternoon, everyone. Thank you for standing by and welcome to Oracle platform first quarter 2022 earnings call.
This event is being recorded and all participants will be in a listen only mode. During the companys presentation.
After Arco remarks, there will be a question and answer session at that time further instructions will be given.
Should any participant need assistance during this call. Please press star zero to reach the operator.
This event is also being broadcast live via webcast and may be accessed through <unk> website at Investor Dot Arco platform Dot com, where the presentation is also available.
Now I will turn the call for silver to Cortina OCA Heder Arcos IR director cutting you may begin your presentation.
Thank you I'm pleased to welcome you to Arco's first quarter 2022 conference call with me on the call today, we have Arco's CEO , Eddie just a couple of Internet Arco's CFO of <unk> during today's.
<unk>, our executives will make forward looking statements forward looking statements generally relate to future events or future financial or operating performance and involve 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.
Forward 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 our 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 the filings with the Securities and Exchange Commission. The forward looking statements. In this presentation are based on the information available to US as of the day 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 <unk> financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IRS. We have provided a reconciliation of these non <unk> financial measures to the most directly comparable.
<unk> financial measure in our press release.
Please note that except from revenue gross margin selling expenses G&A and cash flow from operations. All other financial measures. We discuss here are non <unk> and growth rates are compared to the prior year comparable period, unless otherwise stated. We also note that year over year comparisons are affected by acquisitions that were not.
Not included in our 2021 financials, let me now turn the call over to Eddie Arco's CEO .
Thank you Dana and thanks, everyone for joining today's call for scope.
Hope that you and your families are all healthy and safe.
I would like to start with the highlights for the quarter on slide three.
First as mentioned in our fourth quarter results the year start at a very strong base favored by the resumption of classes in the Brazilian and private K 12 schools and the return of students who dropped out from school during the pandemic, creating really positive momentum in this sector.
This movement lands.
A significant number of additional orders placed in the first quarter.
Second as a result of this high level of late orders being placed in the first quarter.
Part of these orders were delivered in April , causing an unusual effect of revenues that are traditionally recognized in the first quarter slipped into the second quarter.
When analyzing figures cycle to date from October 2021 through April 2022, which will neutralize does effect, we showed that the ACB recognition was 66%.
Highest level at this stage over the best years, confirming our expectation of 100% conversion of our HCV into revenues this year.
Third our adjusted EBITDA margin increased 300 basis points.
Over year for the first four months of 'twenty to 'twenty two.
Evidencing, our commitment to improve processes and improve efficiency.
We are reaffirming our margin guidance for 2022 fiscal year of 36, 5% to 38, 5%.
Finally on cash generation this quarter, we already had.
Capex as a percentage of revenues returning to historical levels and a healthier receivable profile, indicating strong cash generation ahead.
Also in May we concluded the incorporation of CLC into both school, leading to important tax savings going forward does.
This is a key priority for us this year.
I will now turn the call to Ted who will continue the presentation. Please with that.
Thank you Wendy and good evening, everyone. Thank you for your time.
On slide four we illustrated the effect of higher enrollments and consequent high volume of late orders placed by partner schools in the first quarter.
Part of those orders had to be delivered in April results.
70, <unk> to realize incremental revenue.
That is usually recorded in the first quarter slipping to the second quarter of 2022 to.
To better show the effect of those additional awards are slower results, who also present today the results for the accumulated four months of 2022 between January and April as we think this will be a better proxy of how the business profitability is performing.
Moving to slide number five.
Net revenues for the first quarter of 2022 were 430 million Reais.
Strong, 30% topline growth year over year, and representing 27, 6% revenue recognition of the 2020 to HCV.
When excluding the acquisitions concluded recently organic top line growth was 19%.
As mentioned by our typical high level of late orders placed by partner schools in the first quarter led to part of this content is being delivered.
Yeah.
To neutralize these unusual seasonal effect, we are present any top line growth for the first four months of 2022, which increased by 47% year over year or 32% excluding the acquisitions.
As a result, we have reached the highest ACD recognition cycle to date over the past several years of approximately 66%, which makes us confident of the 100% ACB recognition for the 2022 cycles.
Moving to slide six selling expenses, excluding M&A that were not consolidated last year grew in line with top line as we strategically decided to anticipate some of our commercial initiatives to the first quarter.
Including Harvey, but it's moving cross selling to take advantage of the positive environment in schools across Brazil.
This return to the classroom.
On the other hand, G&A expenses continued to show important improvement growing below top line at 7% year over year, and actually contracting 6% when excluding the acquisitions.
On slide seven we detail the gains obtained from the efficiency initiatives with corporate personnel and third party services and software real estate and other expenses, representing 10 million Reais and savings this quarter.
Moving to slide eight adjusted EBITDA for the first quarter reached $146 6 million Reais.
94% above the first quarter of 2021, leading to a margin of 34, 1% or 35, nine when excluding the acquisitions flat year over year.
Looking at the four months figures adjusted EBITDA jumped 64% year over year with a margin expansion of 300 basis points, which we think is a better proxy for how the business profitability is reflecting the strong top line growth expected for the year and internal efficiency initiatives.
Adjusted net income contracted 42% year over year in the quarter represented a higher financial costs and higher depreciation and amortization on top of continuous investments in product and the refund of recently acquired businesses.
On slide number nine with similar year over year performance for the quarter for the accumulated four months of 2022 and cycle to date, showing the evolution of our product cycle profitability.
Moving to cash generation drivers on slide 10 represents the Capex performance.
In the first quarter Capex was 47 million reais, roughly 11% of net revenues.
We're looking at figures for the accumulated four months of 2022 Capex went down to 10, 1% of revenues. This reduction reflects a much higher level of integration across the business units driving higher corporation, and lower redundancy and projects being executed.
On the next slide we detail the profile of our receivables, which increased as a result of the strong organic revenue growth.
Incremental revenue from the acquired businesses and extended payment terms to partner schools at eight offered during the COVID-19 pandemic years.
Nevertheless, lower delinquency and a better collection process led to a lower portion of past due receivables now only 12% of total receivables.
We'd like to highlight that from the approximately 780 million reais of neither past due nor impaired receivables of $112 million was already collected in April an additional 291 million is expected to be collected already in the months of May and June .
Finally on slide 12, we completed the incorporation of C&C and on both in May which will lead to lower effective tax rate from the second quarter onwards.
As per the Brazilian law amortization of goodwill from the acquired businesses are tax deductible. Once the business is incorporated therefore, we will be able to net the taxes at <unk> going forward moving arcos consolidated effective tax rate.
As a reference these solutions combined paid 12 million Reais in Texas in 2021.
We expect to incorporate other acquired business in the future quarters, including Geeky SCE digital let's call it introduce Asia and Plano, leading to important tax savings for several years ahead.
I will turn the call back to <unk> for his closing remarks.
Please go ahead.
Thank you Adam.
I would like to finish this call by emphasizing our optimism with a year ahead of US schools were among the sectors that suffered the most during the pandemic as schools in Brazil were closed for the longest period globally.
With the resumption of in personal classes, we see and that beat momentum for our clients and prospects schools as a version of the students who dropped out over the last couple of years has started to return to the schools the.
The combination of higher enrollments and a much lower level of operation stress is a low in schools owners and managers to start making decisions for the future, including the adoption of core supplemental and services solutions.
More than ever have strengthened our partnership with our clients with higher NPS scores being achieved across all our brands and we are confident we will convert this relationship gains into cohort growth through the cross sell of other solutions up selling to different rates, increasing prices and reduced.
<unk> sure.
We have also decided to anticipate our go to market strategy. This year to capitalize on these improved industry momentum and the early results are already quite encouraging at this point.
Finally, I wanted to emphasize the financial disciplined capital allocation strategy and cash flow generations have become key priority in our company not only through the creation of processes, but also to the alignment of incentives for management team. Our main goal is to translate this strong top line.
Growth, we expect for the years to come into earnings quality cash flow generation and value creation to equity shareholders. We thank you for your trust and support operator, we can now open for questions.
Ladies and gentlemen, we will now begin the question and answer session if.
If you have a question please press the star key.
Followed by the one key on your Touchtone phone now.
If at any time, you would like to remove yourself from the questioning queue. Please press star two.
Yeah.
Okay.
The first question comes from Luca <unk> with it though.
Please proceed sir.
Good evening, everyone and thanks for taking our questions.
Our first question is regarding the higher volume of late orders and the partial recognition to the April could you. Please comment on why that has appeared on the same magnitude across legacy brands acquired brands and also if this was one James.
<unk> solution.
Second question is related to the back office and corporate.
In addition, the company has announced expected savings of $40 million for 2022.
This would be the total savings or should we expect additional efficiencies to be extracted and 23. Thank you.
Hi, Luca until title here. Thanks for the questions. So regarding the first one I would say it was more concentrated in the core segment, okay, and but its fleet split equally across all the brands. So we saw very similar movement across.
The core brands Okay.
And the second one regarding the savings I would say, it's more like a two to three year.
Process.
I would say in some areas.
<unk> of delivering most of the results in the first year such as the cost is for example.
Supply chain.
Areas such as technology.
It takes longer so I would say that this guidance that we provided for this year is not limited.
For 2022.
Longer process.
Okay.
Thank you.
Okay.
The next question comes from Peter.
Vitor Tomita with Goldman Sachs. Please proceed sir.
Thank you and.
Hey, good evening, all and thanks for taking our questions.
Two questions from our side.
First one is on the also on the lead to enrollment given that enrollment has been higher than expected and that schools may have underestimated the nomura dropouts to them, that's where the return to postpone the pandemic do you see potential for revenue in the full cycle to actually surpass the ACC agree.
Our analysis and our second question would be on leverage if you could give us some more color on your strategy of foreign expanding upcoming debt maturities.
Considering the current capital markets environment. Thank you.
Hi, Peter.
It's out of here thanks for the for your questions.
On the first one I would say that given what we're seeing on the ground as already mentioned during his opening remarks the momentum for the schools is quite strong okay. So we see.
Decoupled from the overall.
Gnomic mood.
OC schools are in general on the inflow of cash not only following the return of those students who dropped out but a very successful.
This increase to <unk> that was implemented after almost a couple of years without increasing prices. So I would say that the environment is.
It's quite encouraging okay.
In terms of the enrollment I would say that at this point, we can't guarantee a 100% of the Acu recognition.
Revenues, Okay, but yes, eventually there could be some.
Upside.
The figures okay.
With regards to.
The deleveraging and the rollover.
<unk> I will say that a deleveraging generally is a key priority for us.
This year and he's already happening NK. So we finished the quarter at three eight times net debt to EBITDA and we plan, we expect to finish finished the year.
One three times.
As we continue to expand EBITDA and also catch mutation accelerates from April or so you've already seen.
The receivables come in you have collected a very significant portion of those in April and May.
So far.
With regards to to the debenture omni we cannot of course provide any any.
Our guidance at this point, okay until the accretion is closed.
But we are working to extend the maturity of those debentures two more three to five years of case, so thats the expectation.
I mean, despite the equity markets is of course, not very patent momentum, but it's not this input that market.
Because of the of course, where interest rates are so in general there is more demand.
Apply.
For that in the market in general NK, So youre seeing a good environment.
<unk>.
To move our indebtedness a little bit further in time okay.
Very clear thank you very much.
Thank you.
Question comes from Javier Martinez.
With Morgan Stanley . Please go ahead Sir.
Hi, Thank you. Thank you guys.
I would just ask you a couple of questions on the on the on those additional orders just to make sure that I understood. It.
Are we talking about.
The fees that move.
One month to the other or additional orders so as ECS.
The timing of being it's always about the moral of the latest then.
Or do you expect it and if that's the case is that included in the guidance and the bookings guidance with no snow and also.
If I understood correctly on the slide number nine.
My understanding of that is slightly is that those additional move all this the margin shall we lowered its like 21% in April is that correct.
Or I'm missing something thank you.
Hi, Javier.
Thanks, Thanks for the question.
So I would say on your first question. It's a combination of coal. So it is additional orders and yet they came later than the usual NK. So.
Basically the content that has caused us in the fluids in the second semester is usually delivered in the fourth quarter of the previous year and the first quarter of the current is coal year. Okay.
But the truth is those schools saw the actual number of students are higher than what we expected when this whole year actually started.
And then this demand came to us and we need time to produce and deliver this content as it were.
What's really widespread.
All the brands and across Brazil, as a consequence the case. So there is some supply chain complexity.
To deliver that so thats why those additional orders actually is linked to the first weeks of April okay.
Part of that is already reflected in the ECB guidance, Okay part of that is already reflected.
<unk> guidance.
With regards to the margin I mean, if you see this is o'malley.
Margins in Q2, and Q3, usually you have lower margins. Okay. So it is typical I mean, given the profile or the mix of brands with highest accumulation of revenues.
In those periods. Okay. So traditionally you would see.
Margins lower in second quarter or in the six months versus the first three months. The thing is that when we compare the first four months versus the first four months of last year, we see a very important.
The margin increase okay, and I mean, we don't think we will surpass the EBITDA margin guidance, Okay. Ami, we're still committing to be.
EBITDA margin guidance that we provided by then.
All of last year, but we're very confident they were going to be on track to deliver that guidance.
Thank you very much now that I have you in line.
So everything okay in terms of passing through the cost of the incremental cost of paper.
This year because of the of the incremental pricing power that you have noted entellus case that you have with the printing company sees everything.
Everything under control.
Sure that's a great question.
Yes, I would say that last year, one of the first areas that we integrated was supply chain. So we made it pretty much a national.
With printing companies for all of the brands, Okay altogether, excluding fuel sample both because of timing.
But literally all the joint those those negotiations so in general.
Rice for paper this year is already fixed okay and.
We were able to increase the price per page printed at three percentage points below inflation, okay for 2022.
We are already starting the negotiation for the next.
Cycle and now we have the <unk>.
Higher volume right. So we think that we will be able to use this is bargaining power.
Benefit okay, but for 2020 to 80 safeguarded, we are running three percentage points below inflation.
Comparable basis for the price per page printed.
Thank you very much.
Thank you Javier.
Ladies and gentlemen, as a reminder, if you would like to pose a question. Please press the star key followed by the one key on your attached town phone now.
It appears we have no further questions for today, so that concludes the Arco at Newcastle audio conference for today.
Thank you very much for your participation.
And have a good day.
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