Q2 2022 Vasta Platform Ltd Earnings Call

product initiatives and their related benefits and our expectations regarding the market. Forward-looking statements are based on our management's beliefs and assumptions and non-information currently available to our management.

These risks include those set forth in the press release that we issued today, as well as those more fully described in our filings with the Securities and Exchange Commission.

The forward-looking statements in this presentation are based on the information available to us. I've lost the date, here we are.

You should not rely on them as predictions of the future events and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, management may refer to non-IFRS financial measures on this call. The non-IFRS financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with the IFRS.

Let me now give the call over to Gu to make his opening statements.

Thank you Bruno, thank you all for participating in our earnings release. Please let's jump to the highlights of the quarter on slide number four.

As the main highlight, we can see that Vasta not only consolidated the recovery of profitability, but also delivered a strong cash flow generation, a testing that the business is back to normal, growing a 2021 cycle severely hit by the pandemic.

Net revenue grew 35% year on year and 27% in the cycle today, driven by an acceleration in growth of subscription revenue that grew 33% in the 2022 cycle today and is representing almost 90% of the total revenue of the company.

And that shows that Vasta is a true platform with predictable and recurrent revenues.

Adjustment at EBITDA was 11 million reais in the second quarter recovering from a loss of 17 million in the same quarter.

In the 2022 cycle to date, the adjusted EBD-A margin expanded 6.6 percentage points to over than 30 percent, the highest for disputes in our recent history.

We attribute this increase not only to the normalization of the business and sales mix of superior quality, but also to be fought such as the workforce optimization and our financial discipline.

Operating cash flow totaled 103 million REI in the second quarter, a significant improvement from a consumption of over 60 million in the second quarter last year, driven by the recovery of operating results and better working capital dynamics.

As we approach the end of 2022 cycle, subscription-led revenue growth converts to the 35% growth implied by our 2022 ACV of 1 billion REIs. Therefore, we rate the rate that in 2022 we will collect 100% of the ACV by the end of this commercial year or by the end of the third quarter of this year.

With that being said, I pass the word to our COO Guilherme Elegance.

Thank you Gil. Now moving to slide number five, we detailed the ACV growth composition. In 2022's cycle to date, more than 85% of 2022 ACV was already captured. The differences in the knowledge of our brands, mainly Eleva and McKenzie, has led to a less concentrated distribution of subscription revenue along the 2022 cycle when compared to previous cycles.

For the following quarter, we expect ACV recognition to be 14.5%, which guides for a full recognition of ACV within 2022 cycle, as you mentioned.

Now I'll turn the floor to our CFO Bruno Giardino who will talk about the financial results of the part.

Thank you, Malaga.

In slide 5, we present the composition of last-to-next revenue in the second quarter of 2022.

As you can see in the left side, TotalNet revenue increases 34% year-to-year to $192 million.

Moving to the right side, we see the components of revenue growth. In total, subscription revenue jumped 48%, driven by an acceleration in the recognition of ACB when compared to the previous year, plus the contribution of 11. Subscription revenue was mostly composed of revenue from learning systems as the delivery of power and complementary solutions occurred mostly in the first two quarters of the cycle.

Moving to slide 6, we analyzed the net revenue for the 2022 cycle to date from fourth quarter 21 to second quarter 22.

Net revenue grew 27% in this period, driven by a 33% growth in subscription revenue.

As we approach the end of the cycle, we see the growth in subscription revenue convergent to the ATV growth of 35%.

Non-subscription revenue fell 6%, in line with our initial expectation of stability for small decline in this line.

In the following slide, adjusted the BDA to total 11 million, a relevant increase from the minus 17 million of the same quarter in the last year. This improvement was driven mainly by operating leverage gains, cost savings, and better sales mix with the growth of subscription products and the contribution of 11.

In proportion of net revenue, gross margin grew 580 bps while adjusted cash G&E expenses and commercial expenses were down 270 bps and 50 bps respectively.

There was also a significant decrease in the provision for DOUBTQ accounts, as there was a hike in the provision in 2nd quarter 21 to accommodate the impacts of the pandemic on our receivables. In some cases it was heavier, fewer and more people wanted to exit the awarding list from

As a result, adjusted EBITDA margin reached 5.9% in the second quarter this year versus a negative margin of 12.2 in second quarter 2021.

In the 2022 cycle to date, adjusted EBDH grew 59%, reaching 313 million, with margin increase of 660% basis points.

This is evidence that VASO's profitability is now standing at a much higher level than last year and closer to the company's potential.

In terms of adjusted net profit in the second quarter, despite the growth in operating profit, we posted an adjusted net loss of $42 million, worse than the same quarter last year, mostly driven by the higher financial leverage of the company and the higher interest rates in the country.

In the 2022 cycle to date, adjusted net profit of $62 million, slightly down compared to the 2021 cycle.

into slide number nine.

We show the operating cash flow solution, and this is the main highlight of the quarter in our view.

In this quarter, operating cash flow totaled 103 million, a significant improvement when it comes to the second quarter, 21. When we normalized, even when we normalized the operating cash flow of that quarter by the early receipt of accounts receivable amounting to 52 million.

In the cycle to date, the operating cash flow stalled 31 million or 58 million when excluded the early payment of ROYALS to content providers in the amount of 20 million.

This is also an improvement compared to the previous cycle which had consumption of $113 in eliminates the rent, it also maintains the money.

Next, I'll give more details.

on the provisions in our accounts receivables.

As you know, over the last four years, we have recognized higher provision for doppel accounts due to the challenging business environment for our school partners, as well as our decision to support them by extending payment terms.

In the cycle to date, we have seen a gradual normalization in the payments aligned with the restoration of school partners regular activities.

But this restoration is not yet completed.

That's why the average of days of accounts receivables was 140 days in this quarter, till 2022 days above the same quarter of the previous year. By adjusting this metric by 11 last 12 months net revenue, the average term was lower at 133 days.

Moving to the next slide.

Vasta ended the second quarter with a net debt position of 865 million.

From the first quarter, the decrease was related to the operating cash flow generated in the quarter, as mentioned before, partly offset by the interest accrual over our net debt position.

In the right chart, we see that our leverage measured at net debt to last 12 months, so the BDA has started to decline since the first quarter.

reaching 3.04 in the second quarter 2022, or 2.98 times including 11 the last 12 months in full.

We expect this dam are trying to continue over the coming quarters as our adjusted BDA base increases.

Next, let's talk about Duke Bank. This was our last acquisition, recently announced in July .

So we acquired minority interest in Yeduki Bank, the first financial ecosystem dedicated to K-12 schools.

For those that are not familiar with this business, EducBank provides educational institutions payment guarantee to schools' tuition, making the usual uncertain flow of tuition over the school year.

A regular monthly flow of cash discounted by a take-rate earned by a duke bank.

In the bottom of this slide, there is an illustration of how the business works.

This is a market that we estimate to have a total payment value of 70 billion.

7-0.

The investment will total 158 million for a 47% stake to be paid in two ways. First, 88 million in cash over the next two years according to the growth of the Duke Bank's student portfolio. And two, the growth of the Duke Bank's student portfolio.

$70 million in capitalization of credits arising from the sale of Vasta, a tribute bank, the right to access our base, our client base.

Last, I will have the right to appoint two members out of six to the board of directors of a good bank, which will continue to be independently managed by the founders.

As VASTA will not consolidate EDUC Bank in its balance sheet, EDUC Bank results will be recognized via equity income.

With that being said I pass the word back to Gil.

Thank you Bruno. Moving to the next slide, I will give you more details of the reason why we invested in DuqueBank and why it is important for VASTA's platform.

To access new revenue pockets and build products that complete our portfolio to K-12 schools, we had several developments in our platform.

such as reinforcing our core content with the lab acquisition, the creation of the Bonacci learning system, and the distribution agreement with McKenzie.

We also expanded our complementary solutions and entered the B2B2C segment through the launch of Pluromide Teacher and Pluromide Doctor.

In the bottom, in the digital services, we completed the acquisition of CEL, AMI and FIDELIS, aiming to build a portfolio with administrative services that will address the needs of our partner schools.

Clean up time for them to focus on what they know best to educate. With the Duque Bank transaction, Vesta gains exposure to the K-12 payment needs. I give you an explored segment for us.

adding another arm in the development of its digital services platform.

Moving to the next slide, ESG reports. From this quarter on, VASTA will report updates about ESG standards, including a quarterly panel of key indicators in line with the topics identified in the maturity process, reinforcing our commitment with the highest ESG standards.

Committed to accountability and transparency, Vasta launched the first greenhouse gas emissions for its operation.

The purchase of renewable energy reduces vast total emissions by 14 percent.

Another highlight in the quarter was the Afro Internship Program, which will create exclusive interfacancies for black people in the organization.

In the environmental fields, 97% of the energy consumed in this quarter comes from renewable sources, being 100% in our largest distribution center in São José, Zagros Campo.

100% of our suppliers are FSC certified. In the social fields, 47% of all of our leadership is women. Permanent spacing props, and we also provide the permanent spacing props to give visibility to the pedagogical actions for black teachers.

A program of mentoring from Instituto Somos accelerates 371 young talents from public schools.

And we know that for everyone, we always invested in Instituto Somos.

More than 11 VIs are generated in benefits to society.

In the governance field, we have a diverse board of directors with 42% independent members and a relevant female participation that granted us the Women on Board seal.

Important to mention that VASTA received no complaints in this quarter related to leaks or loss of VASTA.

Having said that, I finish our presentation and now I open the Q&A section. Thank you.

As a reminder, if you would like to ask a question, press star followed by the number one on your telephone keypad.

Your first question today comes from the line of Lutka Markanzini with ITayu. Your line is now open.

Good evening, everyone, and thanks for taking our questions. The first one would be, with the acquisition of a bank, VASA now should offer partner school services that go beyond learning systems and academic solutions. That said, what should we expect in terms of the relevance of financial solutions in the consolidated net revenue in the long term? And then secondly, regarding PGA, there was a significant decrease year over year as provisions went up last year.

which is the higher delinquency caused by the pandemic.

Should we consider the number reported in this quarter as the normalized lab from now on?

in this quarter as the normalized level from now on. Thank you.

Thank you very much Luca. Regarding your question on the projections for financial services, it's still too early to tell because HEDL Bank is a new business. It's a nice business, let's put it this way.

It's an accelerated ramp up of revenue, but it's still small. So we cannot predict how important it will be when compared to our traditional businesses.

However, we see a huge potential total addressable market that may surpass more than 70 billion REI. This is more than the addressable markets we have for other products we have here in the company. So it's definitely a great potential. You think that a bank will be relevant in the future, financial services will be relevant in the future. That's why we wanted to be in this business. However, it's too early to give any kind of prediction of how representative this will be. So it's not too late to give any kind of prediction of how representative this will be. However, it's too early to give any kind of prediction of how representative this will

within our revenue pie.

Regarding PDA, I think we are on our way to a normalized level. We are not there yet, I would say. We think that when the situation normalizes, we will be able to move forward.

We should have a PEA over revenue less than 2%, perhaps approaching 1%, which is the historical level of the company. So we are not there yet.

We are getting there. Eventually, in 2023, we can be around the level below 2%.

or closer to 1% as I mentioned, okay?

And Luca, if I may add, this is Gil speaking, if I may add something in the, regarding the first question. It's important to understand that VASTAs, VASTAs serving today, more than 5,300 schools, and we know that the total amount of tuition, tuitions in those schools are around 17 billion REI per year, right? So that's the,

That's the same for DuqueBank in our base of clients.

Secondly, important to mention that we have minority stakes. So we are not consolidating the Duque Bank in our P&L, right? So you are not going to see the Duque Bank revenues in our P&L, right? And third, it's super important to understand that for us, it's super powerful, the combination of Fidelity, which is our financial and academic ERP.

plus a Dukie Bank. So we are aiming to provide the partner schools

everything they need to be a better school in terms of knowing data, to be more efficient, and also to help the schools to have this working capital through a Dookie bank. So more important than having a Dookie bank, it's having the combination of a Dookie bank and NCDELIS embedded in our digital platform.

Thank you and that was very clear.

Your next question comes from the line of Vitor Tamita with Goldman Sachs. Your line is now open.

Hello, good evening everyone and thanks for taking our questions. A couple of questions from our side. The first one is if you could share any initial views regarding the earlier commercial trends in the sell cycle for 2023. And our second question would be how do you see the likelihood of revenues for this cycle actually surpassing 100% of ACV?

given the strong revenue performance of complementary solutions so far. Thank you.

Vito, just to clarify regarding your second question is if we are expecting to have more revenues than the ACG of this cycle, right?

Yeah, of the cycle if you think that's possible. Thank you.

Okay.

Okay, so I'll start here. Victor is speaking. So initial view of the commercial cycle was very good, very positive. We had a very good first half of the year, as we all know. The first half is not the peak of the season, the peak is yet to come. But so far, so very good. We had a sound campaign till July 31st.

both in core content and complementary. We have new products in complementary, special in bilingual, that are leading us to a very good campaign. So we are very positive about the campaign. We are keeping the trend the same we did last year, so we expect to reach our goals.

And regarding ACV, we do not expect any increase in ACV recognition from the previous 1 billion that we already guided the market. We are seeing the contracts are forming as expected. We have a different seasonality this year. That's why Q2 is more concentrated in ACV.

mainstream brands, right? And that's very, very important, not only because premium brands, they have a higher average ticket, but also because the churn in the medium and long term, the churn of a premium brand is lower than a mainstream brand. So we saw, I don't know if you remember, but we saw the same phenomenon happening in the last...

cycle as well. So it's important to mention that not only because the angle is performing very well, pH is also performing very well, but we have this new third premium brand, which is Fibonacci, right? We have created Fibonacci exactly to address these needs for more premium brands in some places where angle and pH were.

already installed.

This is the trend that we are seeing so far as Malaga said we are in the middle of a marketing campaign but so far so very good.

Thank you very much.

Your next question comes from the line of Marcelo Santos with JP Morgan. Your line is now open.

Hi, good evening. Thanks for the opportunity to ask questions. I have two. The first, if you could provide an update on the B2C2B initiative. Hope I got this right this time. And the second one, if you could give us an idea on how your leverage should progress. So you got to around three times and that would be done now. Obviously that going forward and what would be a comfortable level.

Thank you. Great. So Marcelo, thank you, thank you, thank you, thank you for the questions. I'm taking the first one. We are, we are.

in the fully deploying our Plurao, my teacher and Plurao doctor, we are seeing hundreds of new private classes given every month. All the KPIs that we are seeing in our reports are very good, so we can really say that we have an excellent new ed tech for the yours predecessor, you can see our gradient mirror highlighted on this card that's Large. That's why I wouldn't China creditThursday

as part of our platform, right?

especially in plural my teacher.

PluralAdapta is going fine as well. We are launching, we started the first product of PluralAdapta was focusing on the secondary school. Right now we are launching products for the high school as well and that opens more opportunities for us.

And as you may remember, we also said a little bit in the last call about Plural Maitira Pilka, right? So we are piloting all the tech framework to deliver a good experience in providing students and families the connection with a good therapist. And as soon as we see that the product is okay.

of the end of this year. This could go down in a faster speed, but we are now committed to.

to invest the money on a Duke Bank, right? So this may be our leverage do not fall as fast as expected, but for sure we expect to end the year below three times, and I think next year even lower as we project to be growing in a BDA next year, right? So we probably, we should pursue an average of.

anywhere between two and three times I think would be a good leverage level for the company considering our current structure of capital. We are also improving the DA2 cash. Given that you mentioned the margins you can...

give more colors on that. Marcelo, we reiterate our perception and our belief that margins will expand in 2022 when compared to 2020, right? So anywhere or anywhere higher than the 26 point something level we had in 2020, okay?

Perfect, I would ask that as a follow up. It takes a lot. I knew he would do that. Thank you.

As a reminder, if you would like to ask a question, press star followed by the number one on your telephone keypad. We will pause for just a moment to compile any final questions.

We have one more question here from Marcelo Santos, again with JP Morgan. Your line is open. Your line is open.

So instead of the margin question, I'll ask about M&L's look. How is your pipeline doing now? How is your appetite? And are the prices of non-listed companies in sync with listed have they gone down? Any perceptions there will be great. Thank you.

Yes, we have a strong pipeline of not acquisitions but companies that we are studying. We are focusing more on the side of complementary solutions and ed techs. At this moment we are talking to, in the core content I mean, we are talking to two small players in the market.

Because, as you know, we and the other listed players have around 50% of market share in the learning system market.

And that means that 50% of the market is still in the hands of medium and small guys.

We are seeing these small guys initiating talks in terms of M&A's and acquisitions and so on. But we are, as always, we are focusing more on how can we complete our platform. EdukiBank was a very, very important investment. Now we are connecting EdukiBank with Fidelis and that will generate...

not only more revenues, more cash, more ABDA and so on, but also we will increase the stickiness of our platform.

Let's have in mind that after a school adopting our ERP and having all the services regarding the working capital will be tough to leave our platform. There are opportunities. We are looking for not listed companies. If I understood the other part of our question, now currently we are not.

aiming any other listed company, but if we had an opportunity to complete or to bring more services, more enabling examples of having aGERMAN assistance fund for many families.

more time, especially more time to our platform, we will be always open to understand.

Actually, I was not so ambitious to ask if you would buy ARK or anything like this. I was just asking if the price that the non-listed are asking, if it makes sense or because we usually hear that non-listed companies are still with an old mindset and trying to ask too high of a price, it didn't decline. So I just wanted to, like in your conversations, have the pricing environment become more rational on this M&A market or no?...

That was the actual question. No, I got it. I can tell you that if it's irrational, we don't talk. All the opportunities we are studying now are pretty rational.

Especially the guys that are suffering a lot with the kind of players that we and I could represent to the market. We are not seeing some irrationality in the market. I guess this year is better than last year compared to the last year. I guess this year is better.

Perfect. Very clear. Thank you, Guiou.

at least with the kind of assets we are talking to.

This concludes today's Q&A. I now turn the call back over to Bruno Giardino.

Thank you, Emma. Guys, I would like to take the opportunity to make an important announcement here after a cycle of nearly two years and a half within BLAST, first year helping in the preparation for the IPO and later as the CFO of the company. I will begin a transition period with the new CFO of BLAST, Mr. Cesar Silva.

After that, I will be dedicated to personal projects. I will be here today until September 15.

I'll be transferring my activities to him. And for your information, Cesar Silva is currently Cogner's controllership director. He has more than 15 years, more than 25 years of experience in the financial management and controllership. And I'm sure that he'll be a great addition to Vasto's team, right? And as for the part of IR.

matters, Mario D. will succeed myself as the investor relation officer.

So I would like to thank all of the audience for the presence here, and I would like also to thank my colleagues here at Vasta for the opportunity of being together and sharing that with you as such a nice and talented people, particularly this guy sharing the room with me today, Glen and especially Mario. So thank you very much, and this concludes our second Q22 conference call. Thank you.

This concludes today's conference call. Thank you for attending. You may now disconnect.