Q3 2022 Arco Platform Ltd Earnings Call
Good afternoon, everyone. Thank you first in and buy is welcome to Arco platform as third quarter 2022 earnings call.
Good afternoon everyone. Thank you for standing by and welcome to ARCO Platforms 3rd Quarter 2020.
Event is being recorded and all participants will be in a listen only mode. During the companys presentation.
2022 earnings call. This event is being recorded and all participants will be in a listen-only mode during the company's presentation.
After our call remarks, there will be a question and answer session. At this time for a destructions will be given.
After our call remarks, there will be a question and answer session. At that time, further instructions will be given.
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Now I'll turn the conference over to Kathy America Hater articles IR director you may begin your presentation.
Now I'll turn the conference over to Karina Cajeda, RCO's IR Director. Karina, you may begin your presentation.
Thank you I'm glad to welcome you to Arco's third quarter 2022 conference call with me on the call today, we have Arco's CEO , Eddie just a couple of Internet and arcos here for a bit of that.
Thank you. I'm pleased to welcome you to ARCO's third quarter 2022 conference call. With me on the call today, we have ARCO's CEO , Aririzaka Votancienetu, and ARCO's CFO Roberto Teru. 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 involve known and unknown risks.
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 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.
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 strategic product initiatives and their related benefits and our expectations regarding the market.
Four working 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.
These risks include those set forth in the documents that we issued earlier today, as well as those more fully described in our findings with the Securities and Exchange Commission.
The forward looking statements in this presentation are based on information available to us as of the 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.
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 an isolation or as a substitute for results prepared in according to air France we.
In addition, management may reference non-IFRS financial measures on this call. The non-IFRS financial measures are not intended to be considered an isolation or as a substitute for results preparing in accordance to IFRS.
We have provided a reconciliation of these non <unk> financial measures to the most directly comparable <unk> financial measure in our press release.
We have provided a reconciliation of these non-IFRS financial measures to the most directly comparable IFRS financial measure in our press release.
Please note that except for revenues gross margin selling expenses G&A and cash flow from operations all other financial measures with the clubs. We disclosed here are non <unk> and growth rates are compared to the prior year comparable period, unless otherwise stated.
Please note that except for revenues, gross margin, selling expense, G&A and cash flow from operations, all other financial measures we disclose here are non-IFRS 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 included in our 2001 financials. Let me now turn the call over to Ari Arco's CEO .
We also note that year-over-year comparisons are affected by acquisitions that were not included in our 2001 financials.
Thank you Karina.
Let me now turn the call over to Ari Arcosio.
And I would like to present three main topics today.
Thank you, Karina.
First the conclusion of the 2022 cycle with 100% of HCV recognition to a top line of 1.561 billion reais, representing a 48% year over year growth.
Otero and I would like to present three main topics today.
First, the conclusion of the 2022 cycle with 100% of HCV recognition to a top line of 1.561 billion REI representing a 48% year-over-year growth.
Stability improved in 2022 cycle with a two three percentage point increase in adjusted EBITDA margin.
Profitability improved in 2022 cycle with a 2.3 percentage point increase in adjusted EBITDA margin.
Second the significant improvement in the free cash flow to FERC in the first nine months of 2022, mainly driven by a more efficient operation.
Second, the significant improvement in the free cash flow to firms in the first nine months of 2022, mainly driven by a more efficient operation, healthier working capital dynamic, lower effective tax rate, and lower capex as a percentage of revenues.
As to your working capital dynamic lower effective tax rate and lower capex as a percentage of revenues.
We are reaffirming our adjusted EBITDA margin guidance for 2022 and expect to be closer to the bottom of the range.
We are reaffirming the adjusted EVDA margin guidance for 2022 and expect to be closer to the bottom of the range.
And third the outlook for 2023 with commercial cycle for our <unk> solutions, indicating a strong 24% organic growth for the 2020 through cycle and integration and efficiency initiatives, leading to a better cash generation profile.
And third, the outlook for 2023 with commercial cycle for our pedagogical solutions indicating a strong 24% organic growth for the 2023 cycle and integration and efficiency initiatives leading to a better cash generation profile.
We are maintaining the adjusted EBITDA margin guidance for fiscal year 2023 at 36, five to 38, 5% and reducing the capex guidance to 8% to 10% of net revenue.
We are maintaining the adjusted EDV margin guidance for fiscal year 2023 at 36.5 to 38.5% and reducing the capex guidance.
This implies an EBITDA minus capex margin above pre IPO levels.
to 8 to 10 percent of net revenue.
This implies an EBITDA-minus capex margin above pre-IPO levels.
Finally, the conclusion of <unk> acquisition is progressing well the Brazilian antitrust agency approved the acquisition of November 716th and we expect the closing to take place on January 2nd 2023.
Finally, the conclusion of ISAC acquisition is progressing well. The Brazilian antitrust agency approved the acquisition of November 7th-16th and we expect the closing to take place on January 2nd, 2023.
In the meantime, we have a multi functional team working in the backstage to make sure we are ready to integrate Isaac and start extracting synergies gains from day one.
In the meantime, we have a multifunctional team working in the backstage to make sure we are ready to integrate ISAC and start extracting synergies gained from day one.
Moving to slide five after two years delivering net revenue below the C V. As COVID-19 led to students dropping out of the school due to the healthy and economic reasons, we delivered 100% of the 2022 cyclists UV for both core and supplemental.
Moving to slide 5, after two years delivering net revenue below the ACV as COVID-19 led to students dropping out of the school due to the healthy and economic reasons, we delivered 100% of the 2022 cycle ACV for both core and supplemental segments.
Segments.
This outcome translates into a 48% year over year top line growth or 34% organic growth when excluding solutions acquired in the cycle.
This outcome translates into a 48% year-over-year top-line growth or a 34% organic growth when excluding solutions acquired in the cycle.
On slide six we show that the strong year over year topline growth was followed by an increase in profitability as we integrate our operations and start to benefit from the scale, we created overtime.
On slide 6, we show that the strong year-over-year top line growth was followed by an increase in profitability as we integrate our operations and start to benefit from the scale we created over time.
As a result cash gross margin increased 70 basis points to 80% and adjusted EBITDA margin increased 230 basis points to 33, 7% for the 2022 cycle.
As a result, cash gross margin increased 70 basis points to 80% and adjusted EBITDA margin increased 230 basis points to 33.7% for the 2022 cycle.
I will now turn the call taught that who will continue the presentation with <unk>. Please go ahead.
I will now turn the call to Otero who will continue the presentation. Otero, please go ahead.
Thank you Eddie and good evening, everyone. Thank you for your time as we concluded our M&A agenda. This year, resulting in a complete a high quality portfolio of biological solutions. The focus turned 100% to integration and efficiency. So we can benefit from a risk scale and generate more value to our stakeholders.
Thank you, Adi, and good evening everyone. Thank you for your time. As we concluded our M&A agenda this year, resulting in a complete and high-quality portfolio of pedagogical solutions, the focus turned 100% to integration and efficiency, so we can benefit from our scale and generate more value to our stakeholders.
Several initiatives, we are putting place six 2021 and the results for the first nine months of 2020 to reflect our strong commitment to deliver a higher cash generation with important improvement in four main areas adjusted EBITDA working capital taxes and Capex.
Several initiatives were put in place since 2021, and the results for the first nine months of 2022 reflect our strong commitment to delivering higher cash generation with important improvements in four main areas I just did EBITDA, working capital, taxes and capex.
Moving to slide nine we managed to deliver flat cash gross margin and flat adjusted EBITDA margin in the first nine months of 2022, despite the nonrecurring impact in the second quarter from stronger than usual additional late orders.
Moving to slide 9, we managed to deliver flat cash growth margin and flat adjusted EBITDA margin in the first nine months of 2022, despite the non-recurring impact in the second quarter from stronger than usual additional aid orders.
That was only possible as we already generated over 90 million realizing savings among cost and G&A initiatives in the period or 14% above the 80 million Reais in savings expected for the full year as we disclosed in our 2021 are called day last December .
That was only possible as we already generated over 90 million REI's in savings among cost and G&A initiatives in the period, or 14% above the 80 million REI's in savings expected for the full year as we disclosed in our 2021 R-Code Day last December .
Those initiatives include integrated preening, and unified supply chain and tech teams on the cost side and reassessment of corporate processes on the G&A side, leading to reduction in third party services optimization of ITI, <unk> and resizing of corporate personnel.
Those initiatives include integrated printing and unified supply chain and tech teams on the cost side, and reassessment of corporate processes on the GNA side, leading to reduction in third-party services, optimization of IT tools, and resizing of corporate personnel.
On slide 10, working capital became an important driver of cash generation as payment terms returned to normality once the school's resumed in person classes as we revisited our collection process implementing better practices that aligned commercial and collection airports as we added collection metrics to the sales force scorecards.
On slide 10, working capital became an important driver of cash generation as payment terms returned to normality once schools resumed in-person classes. As we revisited our collection process, implementing better practices that aligned commercial and collection efforts as we added collection metrics to the Salesforce scorecards.
As a result, we saw days of sales outstanding reducing to 98 days, 6% below third quarter 2021 level and much closer to pre pandemic levels and we also saw delinquencies down two 4% this quarter from 6% in third quarter 2021, and 10% in the war.
As a result, we saw days of sales outstanding, reducing to 98 days, 6% below Q3 2021 level and much closer to pre-pandemic levels. And we also saw delinquency down to 4% this quarter from 6% in Q3 2021 and 10% in the war period of the COVID-19 pandemic.
Spirit of the COVID-19 pandemic.
Moving to slide 11, Heiko has been incorporated in acquiring businesses since 2019, unlocking tax benefits and significantly reducing its effective tax rate over time.
Moving to slide 11, ARCO has been incorporating acquiring businesses since 2019, unlocking tax benefits and significantly reducing its effective tax rate over time.
Our most recent incorporation was geeky completed in October with expected future annual Opex savings of at least 16 million Reais.
Our most recent incorporation was geeky, concluded in October , with expected future annual tax savings of at least 16 million REI's.
As a result, the nine months 2022 effective tax rate was eight 7% and we expect 222022 fiscal year with effective tax rate around 10% versus almost 18% in 2021.
As a result, the 9-month 2022 effective tax rate was 8.7%, and we expect to end 2022 fiscal year with effective tax rate around 10% versus almost 18% in 2021.
Finally on slide 12, we ended the first nine months of the year with Capex amounting to <unk> hundred 21 million reais or 11% of net revenues versus 15% in the nine months of 2021.
Finally, on slide 12, we ended the first nine months of the year with CAPEX amounting to 121 million REIs or 11% of net revenues versus 15% in the nine months of 2021. This almost 400 basis points reduction reflects a higher level of cooperation across business units.
<unk> almost 400 basis point reduction reflects a higher level of cooperation across business units.
We're disciplined in the content development process as well as it projects focused on a centralized backbone.
and higher discipline in the content development process as well as IT projects focused on a centralized backbone.
<unk> showcases the result of an all initiatives combined 130% increase year over year in the free cash flow for the first nine months of this year.
Slide 13 showcases the result of all initiatives combined. 130% increase year over year in the free cash flow to firms in the first nine months of this year.
To conclude this section of the presentation on slide 14, we present, our cash position and financial investments position and obligations. This schedule as of September 30th.
To conclude this section of the presentation, on slide 14, we present our cash position and financial investments position and obligations schedule as of September 30.
We ended the period with $1 billion, and 15 million Reais in cash and $1 2 billion Reais enrollments in financing and $1 5 billion reais in accounts payable to selling shareholders translating into three four times net debt to adjusted EBITDA multiple down 50 basis points from the third quarter of 2021 were <unk>.
We ended the period with 1 billion and 15 million REI's in cash, and 1.2 billion REI's in loans and financing, and 1.5 billion REI's in accounts payable to selling shareholders, translating into 3.4 times net debt to adjusted dividend multiple, down 50 basis points from the third quarter of 2021.
Often our cash position combined with future cash generation from operations is enough to cover for our short term observations.
We are confident our cash position combined with future cash generation from operations is enough to call for our short-term observations.
I'll now turn the call back 'twenty I'd eat. Please go ahead.
Thank you what that is.
I'll now turn the call back to Adi. Adi, please go ahead.
As I mentioned in our second quarter in 2022, earning call.
Thank you Otero.
As I mentioned in our second quarter in 2022, earning call.
We have already seen the results from our initiatives on several fronts. In addition to the achievements mentioned both at the work we are conducting with the consulting firm is progressing well and we have already made real progress to make arco, a leaner and more agile company metrics, such as operating cash flow generation and collection from Delinked.
We have already seen the results from our initiatives on several fronts. In addition to the achievements mentioned by Otero, the work we are conducting with the consulting firm is progressing well and we have already made real progress to make the results.
Arco, a linear and more agile company. Metrics such as operating cash flow generation and collection from delinquent schools we were added to our leadership KPIs.
<unk> schools, we were added to our leadership Kpis.
And all of that with growth.
We had a successful commercial cycle for 2023 school year as schools had their operations normalized.
And all of that with growth.
We had a successful commercial cycle for 2023 school year as schools had their operations normalized.
We have resumed our in person interactions within the schools and hosting in person events key elements to create and sustain a tourist working relationship with our clients.
We resumed our in-person interactions visiting the schools and hosting in-person events.
key elements to create and sustain a trustworthy relationship with our clients.
Moving to slide 16, we present, our HCV guidance for the 2023 cycle of approximately 1.9 30 billion reais, representing a 24% organic growth versus 2022 cycle.
Moving to slide 16, we present our ACV guidance for the 2023 cycle of approximately 1.930 billion reais representing 24% organic growth versus 2022 cycle.
We were able to achieve historical levels of retention of partner schools, while increasing prices on average two to three percentage points above expected inflation.
We were able to achieve historical levels of retention of partner schools while increasing prices on average 2 to 3 percentage points above expected inflation.
New student intake and up sell for both core and supplemental solutions showed strong organic growth year over ear and successful cross sell initiatives led to an increase in the number of schools in the our core base that uses at least one supplemental solutions to a 17% penetration.
New student intake and upsell for both core and supplemental solutions showed strong organic growth year over year, and successful cross-sell initiatives led to an increase in the number of schools in our core base that uses at least one supplemental solution to a 17% penetration.
I'd like to highlight the performance of CLC a solution we acquired at the end of last year and already delivered results.
I would like to highlight the performance of COC, a solution we acquired at the end of last year and already delivered results after its first commercial cycle inside ARCO with relevant improvement on all fronts.
Its first commercial site coal inside Oracle.
With relevant improvement on all fronts.
NPS scores improved 17 points to 66 and retention rate increased 15 percentage points to 95%.
NPS scores improved 17 points to 66.
retention rate increased 15 percentage points to 95%.
Additionally, the average price increase was approximately four percentage points above expected inflation in total year over ear ACB growth of CEOC was over 30%.
Additionally, the average price increase was approximately 4 percentage points above expected inflation and total year-over-year ACV growth of COC was over 30%.
Moving to slide 17, we expect <unk> to continue improve profitability.
Moving to slide 17, we expect R-Code to continue to improve profitability as we maintain the adjusted EBDOT margin flat at 36.5 and 38.5 percent, but we reduced the range for CAPEX as a percentage of revenue to 8 to 10 percent.
As we maintain the adjusted EBITDA margin flat at $36, five and 38, 5%, but we reduced our range for Capex as a percentage of revenue to 8% to 10% we will potentially take our.
Adjusted EBITDA minus capex metric to the highest historical level.
we will potentially take our adjusted EBITDA minus CAPEX metric to the highest historical level.
With that we conclude our presentation.
We will turn over now to <unk> for final remarks.
With that, we conclude our presentations.
We will turn over now to Atero for final remarks.
Thank you.
Thank you Eddie I'd like to conclude this call presenting recent developments as set forth in last night's press release, and our SEC filings Oracles Board of Directors received last night are preliminary nonbinding proposal from general Atlantic and drug are needed to acquire all of the outstanding class a common shares of the company that are not held by them or the.
Thank you.
Thank you Adi. I would like to conclude this call presenting recent developments as set forth in last night's press release and SEC filing. ARCO's board of directors received last night a preliminary non-binding proposal from General Atlantic and Dragonair to acquire all of the outstanding Class A common shares of the company that are not held by them or the founding shareholders.
Only shareholders their proposal states that the founder supported transaction, then we will roll over 100% of their class a and class B common shares and the proposed transaction and the event a transaction is consummated we will maintain the same economic and voting interest in the company as they currently have.
The proposal states that the founder support the transaction and will roll over 100% of their Class A and Class B common shares in the proposed transaction. In the event a transaction is consummated, they will maintain the same economic and voting interests in the company as they currently have.
The purchase price for each club Z can we share the proposal is $11 in cash the purchase price was proposed by general Atlantic and record year with no involvement from the founders and the decisions related to the purchase price being offered.
The purchase price for each class A comm we share in the proposal is $11 in cash.
The purchase price was proposed by General Atlantic and Dragonair with no involvement from the founders in the decisions related to the purchase price being offered. This price represents an approximately 22% premium over yesterday's closing price of $9.04 per Class A common share.
This price represents an approximately 22% premium over yesterday's closing price of the.
Of $9.04 per class a common share.
Please note that there can be no assurance that any definite <unk> offer will be made that any agreement will be executed or that this or any other transaction will be approved or consummated.
Please note that there can be no assurance that any definitive offer will be made, that any agreement will be executed, or that this or any other transaction will be approved or consummated.
At this point, we have no additional information other than that was disclosed in the filings and cannot comment on the transaction.
At this point, we have no additional information other than that was disclosed in the filings and cannot comment on the transaction. Therefore, we dedicate today's Q&A session to comments related to Q3 earnings. The company will keep investors and the markets informed as new information is available. Operator, we can now open for questions. Thank you.
Four we dedicate today's Q&A session to comments related to Q3 earnings the company will keep the investors and the market's informed as new information is available operator, we can now open for questions. Thank you.
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Please hold while we poll for questions.
Our first question comes from Vitor Tomita with Goldman Sachs. Please go ahead.
Our first question comes from Vitor Tomita with Goldman Sachs. Please go ahead.
Good evening, everyone and thank you for taking my questions two questions from our side. The first one is that we had some provisions that we had another quarter of bad debts provision reversals due to political actions or thinking about working capital dynamics going forward, how much longer maybe.
Good evening everyone and thank you for taking our questions. Two questions from our side. The first one is that we, it's on provisions, we had another quarter of bad debt provision reversals due to good collections. Thinking about working capital dynamics going forward, how much longer may we expect to see that effect? The second question is, how much longer may we expect to see that effect?
We expect to see that your facts and could we still see a provision reversals in the fourth quarter or even into 2023 that would be our first question and then our second question would be on <unk> could you give us some color on how <unk> performance since the acquisition of <unk>.
and could we still see provision reversals in the fourth quarter or even into 2023? That would be our first question. And our second question would be on Isaac. Could you give us some color on how Isaac has performed since the acquisition announcement in early October and on whether you reiterate the guidance for Isaac?
Announcements in early October and on whether you reiterate the guidance for <unk> that was provided thats. The acquisition announcement in October but thank you very much.
that was provided at the acquisition announcement in October . Thank you very much.
Hi, Peter.
I think there's so much for the questions. So looking at our working capital dynamics I mean, if we decompose our working capital I would say that on accounts receivable, we are pretty much back to what we consider to be a more normalized level.
Hi Vitor, Otero here. Thank you so much for the questions. So looking at working capital dynamics, I mean if we decompose working capital, I would say that on accounts receivable, we are pretty much back to what we consider to be a more normalized level, even if you compare to pre-pandemic days of receivables.
Even if you compare to pre pandemic.
These are the receivables.
Our debt level and we have to also factories that are core versus supplemental purse.
we're very close to that level. And we have to also factor in that CORE versus supplemental has a different profile, okay, in terms of diesel receivables. Supplemental a bit longer than CORE, and as supplemental grew in terms of size versus what it was in the past, it also changes a little bit of the, let's say, steady state level of diesel receivables. So there's still some-
A different profile in terms of these of receivables the supplemental a bit longer than core.
Our supplemental are growing through the size versus what it was.
But it also changes.
A little bit of the let's say steady state.
Level of diesel receivables. So there is still some room to improve and to normalize the case, especially with.
This 2023 sales cycle, where we saw let's say the duration of the new contracts pretty much in line.
With normal levels, so that in 2023, we fully normalized but the size of the rule of 40 improvement.
Is more limited, where we will focus and where we expect to extract.
A further improvement in cash cycle.
focus and where we expect to extract a further improvement in cash cycle is in suppliers and inventory. So those inventories suffered, especially during the pandemic where we saw a demand below what we had been producing and expecting to deliver to our clients.
Suppliers in any country, okay. So those inventories suffered.
I see.
The pandemic, where we saw a.
Demand below what we had been producing in.
Unexpected today.
Oliver.
To our clients and with the late orders in the beginning of this year. We also saw an.
An increase in inventory days. So this is a line that we expect a more important contribution to cash cycle normalization over the next two years and suppliers as well and in the case of supply or is this mostly because of the.
and with the late orders in the beginning of this year, we also saw an increase in inventory days. So this is a line that we expect a more important contribution to cash type normalization over the next two years and suppliers as well. And in the case of suppliers, it's mostly because of the centralization in our supply chain area and the negotiation with the printing companies.
Centralization in our supply chain area and the negotiation with the printing companies as Oracle ultimately data right. So those will be I would say, if we think from a contribution to cash cycle to the suppliers and the eventual thrown out one will be more important than our receivables.
as article consolidated. So those will be, I would say, if we think from a contribution to cash cycle, to the suppliers and the inventory from now on, will be more important than receivables.
In terms of our.
Isaac.
It's limited what we can comment, but what we can say is that performance. So far has been quite strong.
In terms of ISAC, it's limited what we can comment, but what we can say is that performance so far has been quite strong. They have actually exceeded their internal goals for new school addition for this year. Okay, so they have surpassed what they expected to achieve.
They have actually exceeded their internal goals.
<unk>, new SKU additions for this year, okay. So they have surpassed.
Are they expected to.
To achieve.
The team is super excited.
I think the more we know the more we learn about their operations.
The team is super excited. I think the more we know, the more we learn about their operations, the higher our conviction that value creation will be enormous with this combination. So again, performance has been very strong. They have fit their goals for this year already.
The higher our conviction that value creation will be enormous with this with this.
Combination alright, so again performance has been very strong.
They have bid there.
Their goals are for this year already and we expect the closing.
In the first week of January Okay. So we will have a full year of consolidated results with Isaac.
and we expect the closing to occur in the first week of January . So we'll have a full year of consolidated results with ISAC in 2023 and no impact to our close results in 2022.
Three and no impact to <unk> results in 2022.
Very clear thank you very much.
Thank you very much.
Our next question comes from Luca <unk> with <unk> BBA. Please go ahead.
Our next question comes from Luca Marchessini with ItaubBA. Please go ahead.
Good evening everyone.
Two questions from our side the first one will be regarding the ICD.
Good morning everyone. Adi, Otero, thank you for taking our questions. We've got two questions from our side. The first one will be regarding the SUV guidance. So considering the price increase above inflation, can you please provide more detail on what has enabled such increase? Was there an improvement in the sales mix or the company was able to increase prices above inflation on a same school basis?
So considering the price increase above inflation can you. Please provide more detail on what has enabled such increase was there an improvement in the sales mix of the company was able to increase prices above inflation on a same school basis and then the second one would be regarding the guidance for margin. So they come to expect.
The margin should be flattish next year, even though the capture of cost and SG&A savings was faster than I expected. So could you. Please comment on what would be the detract you referred to the margin in this scenario. Thank you.
The second one would be regarding the guidance for margin. The company expects the margin to be flattish next year, even though the capture of cost and SG&A savings was faster than expected. Could you please comment on what would be the tractor for the margin in this scenario? Thank you. DAX Strong Good evening.
Hey, Luca.
Here. So thanks for the question so on the HCV guidance, Yes, Thats correct. So this was.
Hey Luca, Otero here, thanks for the question. So on the ACV guidance, yes, that's correct. So this was a cycle where we were back to the real price increase toward base of clients. Back to a more normalized profile of cohort and net dollar retention rate in our base.
The cycle, where we were.
We're back to the real price increase toward base of clients.
Back to a more normalized profile of cohort and net.
Dollar retention rate in our base.
Clients. So it was an important contribution.
Also when we look at the number of new Skus being added.
So it was an important contribution, but also when we look at the number of new schools being added to our base, it was also quite relevant. I would say that even though we're not breaking down, the number core grew above 20% and supplemental pedagogical solutions grew above 30%.
What would base it was also.
Quite relevant.
I would say that even though we're not breaking down the number of core grew above 20% and supplemental pedagogical solutions grew above 30%.
Which was let's say a profile of growth in terms of the difference between core and supplemental debt were used to see before the pandemic alright, so more or less is what the profile of growth when we break down between quarters supplemental outfitted the key highlight of this cycle was CLC.
which was, I would say, a profile of growth in terms of the difference between Quorum supplemental that you were used to seeing before the pandemic. So more or less this was the profile of growth when we break down between Quorum supplemental. I would say that the key highlight of this cycle was CoC, which is the brand that belongs to Quorum.
Which is a brand that belongs to belong to Pearson.
First sales cycle with this brand and the ACD grew over 30% and it's pretty much the core solution right. So it's a core solution growing over 30.
to Pearson. It's our first sales cycle with this brand and the ACV grew over 30% and it's pretty much a core solution, right? So it's a core solution growing over 30%. So it's remarkable. I mean, when we see, when we decompose this growth, I would say that we consider to be a very high quality.
30%, so it's remarkable.
When do we see when we decompose this growth I would say that we consider to be a very high quality.
Way of growing brand because we saw NPS, improving we saw retention increasing substantially to 95%.
a way of growing the brand because we saw NPS improving, we saw retention increasing substantially to 95%, a price increase around 12, 13% ended up generating this 30% ACV growth for a brand that had been shrinking in size for the past two years. So I think it shows the rationale, it confers with the rationale.
Price increase around 12, 13%.
Ended up generating these 30% ACB growth, we're a brand that had been shrinking in size for the.
Two years, so I think it shows the rationale is confirmed the rationale of the acquisition the strength of the brand and how fast we can turn a row an operation like that so we're super proud of Ceoc's performance this year.
of the acquisition, the strength of the brand, and how fast we can turn around an operation like that. So we are super proud of COC's performance this year. In terms of the margin guidance, you're right, I mean, the range remains the same, but the expected margin for the year of 2023.
Terms of the margin guidance, you're right I mean, the range remains the same but the expected margin for the year of 2023 imply an expansion versus 2022, okay. So.
imply an expansion versus 2022. So we don't expect 2023 margin to be at the bottom of the range. We are playing safe here in terms of the range we are bringing. We still, I would say that EBITDA margin expansion could be stronger than that. We are seeing, actually we saw in the industry, open...
We don't expect 2023 margin to be at the bottom.
The range really safe here in terms of the range of our green.
We still I would say that EBITDA margin expansion could be stronger than that okay.
We're seeing actually we saw in the industry pulp and paper prices increasing in the markets sold this partially offsets the expected cost efficiency gains that we initially expected to collect.
Next year.
Next year, we'll see another round of G&A dilution and for the first time, a more efficient go to market strategy. Okay. So this is something that we expect to show in our P&L next year is a go.
This is something that we expect to show in our P&L next year is go-to-market or the CAQ becoming more efficient. As we showed on the guidance presentation, we are reducing the capex range for next year to between 8 to 10 percent.
Go to market or the CAC.
Tell me more.
Efficient and as we showed on the guidance a presentation, we're reducing the capex range for next year to between 8% to 10%, which is getting closer to the levels of <unk>.
which is getting really closer to the levels before COVID. And when we look at the EBITDA minus CAPEX, a metric which we consider to be a very fair metric to analyze the business, given the profile of the investments that we make in content and technology, we see a very important expansion getting involved.
Before COVID-19 and when we look at EBITDA minus Capex, a metric, which we consider to be a very a fair metrics on our lives.
The business given the profile of divestments that were making content and technology, we see a very important expansion.
Getting above.
Getting to our expected highest level here.
Historically, okay.
actually getting to our expected highest level historically.
That's very clear thank you.
That's very clear. Thank you.
Our next question comes from Sam <unk> with Bank of America. Please go ahead.
Our next question comes from Fredi Mendez with Bank of America. Please go ahead. Thank you.
Hello, Good evening, everyone and thanks for the call I have two questions I know, there's a lot of limitations from a wider you can say.
Hello, good evening everyone and thanks for the call. I have two questions. I know there is a lot of limitation from what you can say, but it's just more towards the process itself about the biting offer.
But it's just more towards the process itself about the binding offer.
The first question is I mean, you are incorporating in the Cayman Islands. So just wondering if there is some kind of specifics that you should know that will be different fronts. When accompanies incorporate in the U S. A Brazil from this process being opposite there'll be my first one and then my second one just to make sure.
The first question is, you are incorporating the Cayman Islands, so just wondering if there is some kind of specifics that we should know that will be different from when a company is incorporating the U.S. or Brazil from this process, from the building officer. That will be my first one. And then my second one, just to make sure the controlling group will not be participating, either GA or the special committee. So we have it.
The controlling group will not be participating either GE on this special committee. So we have eight people on your board so you're talking about four people.
To be composing at this community if I if I'm correct.
And do you need a consensus decision.
The board or how is that.
Work in order to close the deal. Thank you very much.
Hey, Brad Thanks for the question so with regards to specifics about.
Paperhead Otero here, thanks for the questions. So with regards to specifics about being a Cayman a domicile company, unfortunately I cannot comment, I cannot provide any more details other than those that were disclosed in the letter and in the drug beating agreement. So both documents were disclosed and they describe.
The Cayman Domicile company.
Company. Unfortunately, I cannot I cannot comment I cannot provide any more detail.
Those that were disclosed in the ladder and the judge beating agreement so both documents.
We'll disclose that and they described.
A little bit of the math.
And next year.
So Fortunately I cannot comment on anything that is not there.
a little bit of the mechanics here. So unfortunately I cannot comment on anything that is not there, unfortunately. With regards to the committee, so as you said, an independent committee will be formed by the independent board members with the exclusion of those representing General Planet.
Unfortunately.
With regards to the committee so as you said an independent committee.
Will be formed.
By the independent Board members.
The exclusion of the those representing a general Atlantic.
So basically the independent committee will be composed by independent Board members.
So basically the independent committee would be composed by independent board members except Martinez-Cobari. Okay, so that's pretty much it.
Except a matisse full body okay.
That's pretty much it.
Okay. Thank you very much.
Okay, thank you very much, Otero. Thank you.
Our next question comes from Javier Martinez with Morgan Stanley . Please go ahead.
Our next question comes from Javier Martinez with Morgan Stanley . Please go ahead.
Hi, yes. Thank you.
I know that you said that you didn't want to coming up with the offer.
Hi, yes, thank you. Otero, I know that you said that you don't want to comment about the offer, so let me ask it in a different question, not about the offer but about the controlling family. Ari, what are the strategic reasons for the family to support the offer? Is there any transaction in the pipeline that justify going that way? That will be my first question, please.
So let me ask it.
Different question not about the offered about about the controlling family.
What are the strategic reasons for the family to support the offer is there any anytime.
Any transactions in the pipeline that justify going that way that would be my first question. Please.
Yes.
Hey Javier, Otero here. I am really sorry, I mean it's really limited what we can comment or provide in terms of opinion or disclosure here. So we have to be really limited to what has been disclosed yesterday and the letter sent to...
Hotel here I am sorry.
Are you limited what we can comment or provide in terms of.
Opinion or.
Disclosure here, so we have to be really limited to what has been disclosed.
Yesterday in the later a sense too.
And the content that was in the other sense to the board is pretty much where we can discuss impairment and the strategic rationale was not disclosed in the other reason why you cannot comment or discuss here Im sorry.
And the content that was in the latter sense to the board is pretty much what we can discuss and comment. And the strategic rationale was not disclosed in the latter reason why I cannot comment or discuss here. I'm sorry.
Okay.
And my second question will be on bookings.
Okay.
I Wonder if you can give us some color quantitative or qualitative color on the evolution of Super mental Mr score.
My second question will be on bookings. I wonder if you can give us some qualitative color on the evolution of supplemental versus core.
Yes.
Javier.
For the question so.
Yes, absolutely Javier, thanks for the question. So supplemental, as I said, when you look at the pedagogical solutions, and I say pedagogical solutions because we have technology features that are also grouped under supplemental, right? So just not to mess things up here, so when you look at the pedagogical subscription.
<unk> as I said when you look at the pedagogical solutions and I say pedagogical solutions, because we have techs.
Knowledge features that are also booked under supplemental right. So just not to mess things up here. So when you look at the pedagogical subscription supplemental products we saw.
Above 30% mid <unk> percent.
supplemental products, we saw above 30%, mid 30s, percent growth for 2023. And when we exclude International School from this number, the number was above 40% for 2023. So we saw very important growth.
Growth for 2023.
And when we exclude international schools from from this number the number was above 40%.
For 2023, Okay. So we saw a very important growth.
I'd say that at the beginning of the year, we had been calling attention that this year will be a year with social emotional early.
I would say that in the beginning of the year, we had been calling attention that this year would be a year where social-emotional learning would see an important growth. We saw that, so it was confirmed. And also in the other two bilingual products as well. So I would say from a quality perspective, because there has been a very out of the blue quality.
C N important growth.
We saw that so it was confirmed and also in the other two <unk> products.
As well right, so I would say.
From a quality perspective.
B has been a very good quality cycle.
Cycle with supplemental again mid thirties, and when you exclude a brand that we don't have fully.
cycle with supplemental again mid-30s and when you exclude a brand that we don't have fully control right it was above 40% for next year. Cross-style continued to be a very important source of growth. We expanded a few basis points.
Our control right.
It was above 40%.
For next year cross sell continue to be a very important source.
Growth.
We expanded a few basis points.
We're sandwich point, sorry in terms of supplemental penetration in the core base.
percentage point, sorry, in terms of supplemental penetration in the core base, so it continues. But the addition of schools in what we consider, in what we named Blue Ocean, right, which are the schools that do not use core solutions yet, is also quite strong. So I think we saw probably a more normalized profile of news co-addition with both.
So it continues.
But the addition of schools in what we consider in while we named Blue Ocean, right, which are the schools that do not use.
Core solutions, yet is also quite strong. So I think we saw probably a more normalized profile of new school edition.
With both non core schools in core SKU is contributing to the overall growth in.
In Q4 O needs, we plan to disclose.
In more detail, but from a more broad perspective.
While we can't share that at this point have yet.
Understood.
And my final question will be on margins.
Yes, too early deeper on the on the question that we have before so I was wondering if you can give us the financial once once we have normalized pulp and paper it on.
on margins just to go a little bit deeper on the question that we had before. So I was wondering if you can give us some reference on once we have normalized pulp and paper on.
Full integration of the platforms and acquisitions, how far are we from maturity. So how what level of margins do you see.
and full integration of all the platforms and acquisitions, how far are we from maturity? So what level of margins do you see as reasonable once we are in that situation?
Reasonable once we're in that situation.
Sure Yes.
Say that we have we still have a few brands, which we consider to be sub scale.
Sure, yeah, I would say that we still have a few brands which we consider to be sub-scale and this is a business of scale. Of course, it depends on how you operate the business and I think that this is something that we are changing in a way that we can better collect the gains of scale. But we still have some brands which are sub-scale. So as they grow, they come.
And this is a business of scale of course it depends on how you operate the business and I think that this is something that we are changing that.
Can better collect the gains of scale.
We still have some brands, which are subscale, so as they grow they contribute to the overall.
Margins.
Of the company.
I mean, it's it's.
Easy to see the business.
In the medium term with margins above 40% I mean, we have as you know.
We have several brands.
With margins above 40% and it's less about the average ticket it's much more about the business.
Scale and the way you operate.
more about the scale and the way you operate the business. As we've been centralizing what we consider to be centralizable without punishing the quality, without adding risk to growth, we can accelerate the collection of that scale. We accelerate the curve.
The business I mean as we've been.
Centralizing will be considered to be centralized level without a punishing the quality without adding risks.
To grow we can accelerate the collection of that scale right. So we accelerate the curve.
Optical ability of the brands and this is the idea.
of scalability of the brands and this is the idea. As we mentioned in the Q2 in previous earnings call, we have now pretty much two consulting firms working with us in those projects, which we consider to be extremely important. I think over the last years, we just have reminisced that we did.
As we mentioned in the Q2 in the previous earnings call we haven't.
Now pretty much two consulting firms are working with us.
Those projects.
Which we consider to be extremely important.
Over the last years with.
Several M&A that we did.
Becomes really important took through this integration.
Agenda item <unk>.
it becomes really important to accelerate this integration agenda, right? It's something that lags and now becomes a very important focus for us, right? So this will accelerate the absorption of this profitability coming from scale. Okay, so it's pretty realistic to imagine the business crossing 40% with the margin in a few years.
And that lag and now becomes a very important focus for us right. So this will accelerate.
The absorption of this profitability coming from from scale, Okay. Javier So it's pretty realistic.
Imagine the business crossing 40%.
EBITDA margin.
In a few years.
Thank you Robert if I may ask a final question, Tim I was wondering.
Thank you Roberto. If I may ask a final question, I was wondering if SAC shareholders, so once the deal gets approved obviously because they will be
Jack.
Shareholders. So once the deal gets approved obviously because.
They will be.
As part of American shareholders getting either in dollars or they will roll over like the comment from me.
as part of the minority shareholders getting $11, or they will roll over like the family, the controlling family? I don't think you have mentioned that.
I hope that you have mentioned that home.
Again, I cannot speak for them.
I cannot speak for them. At that point in a theoretical transaction they are part of the shareholder base. They will be treated as other minority shareholders. I cannot comment on that. It is all theoretical at this point.
At that point in a theoretical transaction, they're a part of the shareholder base that will be treated as other minority shareholders right, so, but I mean it cannot.
Ill comment on that it's all theoretical at this point.
Okay understood. Thank you.
Pretty much.
Okay, thank you very much.
Once again, if you have a question. Please press star one on your touch them.
Once again, if you have a question, please press star 1 on your touch-down phone.
At this time, we will have no further questions in the queue that concludes Arco's third quarter 2022 earnings call. Thank you very much for your participation and have a nice day.
At this time, we have no further questions in the queue. That concludes Oracle's third quarter 2022 earnings call. Thank you very much for your participation and have a nice day.
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