Q2 2023 Vitru Limited Earnings Call
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Statements today, we have the presence of the company's executives really modest via to the school CEO Carlos latest views sort of CFO and I are old and idea Cardona Investor Relations I will give the floor to Mr. Carlos Freitas you may begin.
Thank you operator.
Good afternoon, everyone and thanks for joining US again is a real pleasure to be here with you all again.
The release of our second quarter 'twenty three remotes.
Here with me I have to read them out of our of course, you might occur in a consult with the head of our IR Department.
And also are careful vacuum then yogurt frozen and we slipped a few of them from our IR team.
The slide presentation in front of you will be part of today's webcast and is also available in our IR site at investors that vitro dot com Dot BR.
Before we begin as usual I'd like to make sure that.
At the table.
I'd like to that's in order to Safe Harbor is in place for this call.
I'll now invite you to go to page four.
Which is here.
So here we show a few key operational highlights of the quarter. The first is that this is the first anniversary of our of the closing of our basic combination with one sale tomorrow.
Closed in May of last year, and as we know whether we have been following the company.
We have been advancing a lot.
Integration process of both vitro and only seven months.
We reached in June of this year nearly nine.
920000 students.
97% of them in these application with a 17% increase in the first intake cycle of these here in the first half of this year.
The average ticket increase about 3% three 2% in the first half of this year, which is more.
Better indicator for the full cycle semester number confirming our approach to pricing our price discipline and our product differentiation.
On slide five we have the main financial indicators afford this quarter.
And that the revenue from our core business, which is as you know digital education on deck read rate.
What's up at 58% in the quarter.
The overall net revenue increasing almost 70% in the second quarter of this year.
The adjusted EBITDA increased by 73%.
For more down the increase in revenue, which means that our margins increased.
And this time to 38, 8% in the second quarter compared to 38 in the second quarter of last year.
Our cash flow from operation was also increasing even further.
119% increase quarter on quarter.
With a solid cash flow conversion from operations of eight 6.7%.
And finally, the net income.
It's up almost 100% as well, reaching 123 million reais in the quarter. Despite our current debt.
So on page six this is a new flights that.
Summarizes how we position ourselves and what we have achieved since digital than 'twenty IPO.
We have Oh man.
To you that we are the only player only little player in Brazil with a true focus on digital application that we are now the largest player in decent location, Brazil, so with not only our focus on what is growing the most in the higher education sector in Brazil, but also the harvest player in this sector.
And here are some indicators.
That show our performance.
Of the vitro now compared to the vitro pre IPO.
I know that most of you.
No the numbers, but it's also interesting to highlight what we have been able to grow in the last three years.
Both in terms of.
Revenue of our financial indicators and also operationally the gears so revenue.
Up by 290% of EBITDA, we were a company with 117 million Reais EBITDA before the IPO now we we reached 650 million Reais in the last 12 months.
The number of students also linked with the Lotte hubs cash flow from operation of 500% increase.
Over the last three years. So this is just to illustrate.
What we have been able to grow in the last years.
Yeah.
On page seven.
The the numbers of our digital education undergrad rate.
Segment students.
Reaching 837000 students.
So a 13% growth year on year.
And almost 900000 in dislocation as a whole, including our graduate segment.
So this is an important growth that we are reaching the number of students.
Students, which we probably going to reach next year.
And we had this 13% growth in student base in Juneau of 23 compared to June of 'twenty, two which we believe is a remarkable achievement.
And knowing that we had a very high comparable base of last year and the fact that this is the first full year of the fortunate real we're after the pandemic I mean, it's no surprise that the digital education segment.
<unk> grew a lot in the last three years and we agree and we grew even.
Even more so.
We gained market share within this growing sector.
And just illustrate just to remember that last year.
Our intake growth was particularly strong.
We grew.
The take up 26% of only yourselves and 54% and it gave us the money.
That's why here in the bottom right part of the slide we show here as well.
The.
The the CAGR of the annual growth in the last two years, there was 21% CAGR.
Between June 2021 in June 2023.
Yeah.
Okay.
On page eight.
That some so many of the theaters of our Roes for our maturation of index around 48%. So we have the capacity of a.
More than doubling the size of oxygen the base with our current hub base.
So the cohorts of hubs keep growing over time.
And we have always said this is important growth driver for revenues with limited execution risk.
Okay.
The following page on page nine we have the breakdown of our student base per region in Brazil.
13% overall in the last 12 months with a important growth in the southeast.
Of 21% and also in the northeast and the center west of the country.
So now we have.
Almost 200000 students in the South East.
All of the country, which represent already more that the biggest region in terms of hubs for pharma for us. So around almost 800 hubs that we have are only in the southeast.
Which by the way is highlighted on the next slide.
Just to summarize growth of hubs, 18% year on year growth, we took on a base of 21% year on year.
And this is a important growth driver. This was something that was asked about a lot during the IPO our capacity.
To grow which is a huge growth in the southeast and we are showing that we can do it.
Okay.
Page 11.
The breakdown of our hubs footprint, which as you know is quite complementary between Furthermore, and when yourselves.
Are we are.
We keep growing we keep opening hubs or throw out.
The country not opening hubs for the sake of opening hubs.
The size of our company is not measure, but the size of hubs or the amount of hubs.
But it is a we opened hub for when we do feel that there is a demand in a given area are our theory.
But we'll keep we'll be opening hubs because we do believe that there is space to be <unk> in the country.
Yeah.
And why do we grow more.
Because of our focus on technology, and a differentiated customer experience.
Again this is a slide that we show every quarter just to highlight that.
And which is public information, which is comparable.
We have our apps rated four eight.
Out of five so a very nice a rating.
And it is very important because the cell phone.
Is the the most used amines.
To reach our students our students they are everybody had a cell phone or a modern one.
Not everybody has computer.
And in our case people commute view people study, where the cell phone people listen to you to video with et cetera.
And they're having a very nice and tech oriented App is a way to reach the students an indicator that our focus on technology.
So on page 13 are in this slide we show details of the intake and average tickets or each of our rents in the digital education undergrad segments. During the first semester of this year.
As I said better reflect the academic cycles, so regarding intake.
The growth in the first half of this year was around 17%.
Which is very close to then the growth that we showed already in the fourth quarter of this year.
Again, a strong performance, especially considering our quite high comparison base of last year.
Regarding the current intake cycle that we are still going through.
We are halfway in the process, but what we are seeing so far and what we expect for the rest of the cycle. It is similar in state growth throughout the second semester of this year.
Regarding your tickets.
In the case of only ourselves.
A strong growth in every ticket.
Growing above inflation, our eight 5%.
Year on year, and this is mostly due to our pricing discipline, our marketing intelligence.
And the tools and procedures that we have been developing over the last year.
We have showed to you since our IPO.
And the answer Tomorrow, there was a slight decrease in ticket.
Especially given the carrying effect.
That I think in the last quarter, the carrying effect of the substantial volume of new students that were enrolled.
Throughout last year and now are seniors.
They have replaced.
Our senior thinking in the last year, which had higher tickets. So those new students as they entered last year at the lower tickets for this hearing effect, but what is important to highlight is that anyway.
Where we are seeing with far already the first signs of the new pricing approach that started to be implemented.
In the month in the fourth and fifth cycle this year.
And we're seeing that intake tickets for them tomorrow are growing or grew effect in the first half a little bit above inflation.
So in a nutshell the consolidator to average ticket.
It grew a little bit below inflation or three 2% and.
And going forward for the year, we're probably going to see it similar growth either.
With inflation or slightly below inflation.
On average.
On page 14, some key financial indicators, comparing the quarter and the semester.
So strong growth in net revenue in gross profit margins and adjusted EBITDA.
So a very strong performance.
This quarter in the semester and by the way.
It is important to bear in mind that this is a cyclical business.
And that traditionally we are in the second quarter of the year is our strongest quarter in the year both in terms of revenue.
And in terms of EBITDA margin.
Because in.
And the second in the second.
Quarter of each year, we have the full impact.
The intake cycle.
The fourth quarter, which is the strongest intake quarter ending the year as you know.
But we don't have.
The marketing expenses for the user growth.
The marketing Smith.
Mostly in the fourth quarter of each year.
And also we still don't have most of the drop outs of new students. So it's usually the strongest.
A quarter every year in the second quarter.
The go into more detail on page 15.
The net revenue composition in.
In the in the quarter growing almost 70% as I said before led by the growth AME digital education undergraduate but also in the medical business.
And here in the right part and we see the breakdown of this revenue. So today in the second quarter of this year.
We have around almost 80% of our net revenue coming.
From digital education.
Either under graduate or are the continued the kitchen business.
Plus 13% coming from eight a M.
Very resilient medical business.
So it is another way to illustrate our competitive advantages and our differentiation.
Okay.
Okay.
On page 16.
The digital education under graduates revenue growing 58, and 76% in the semester.
Growing a lot and with a very important opportunity regarding the mix of students.
You can see here.
In the in the right part of slide the breakdown today and it break it out in June of last year of Altria and wave.
And we grew.
But whether we are growing.
The the weight of premium courses, namely health courses.
And the engineering, Cordis, which went from 25% to 28%.
And so this is important because those are health quarters, especially they are mostly new.
For example in another.
In the case of both brands.
A thumb some of health course of that award not offered in the onto the more Brent are now being offered so going forward. We do believe that there is important potential.
Of increasing the relative weight of premium Cortez.
And to sustain tickets overtime, as well, especially because as I said health quarters.
Some of them have just started to be offered in also.
In the medium term not this year, but in the medium term, but we do expect other quarters to be allowed to be offered in dislocation such as psychology and block.
But 2014, our medical business just to remember to highlight that's a very high quality business. The fifth best private medical school in Brazil with high scale money got being the largest medical campus in the south of Brazil, which which means high margins and high leverage operational leverage.
So I'm that's revenue into the business are offered only through their own is no more Brent reached six 7 million reais in the quarter tickets today are around 11000 head per month in <unk>.
Raising above inflation.
And in the seats are still maturing so we expect promising votes from our medical segment.
This year.
Page 18.
On the left part of the Liza one camp was ex the medical business.
There are.
There are important contribution for the money.
Towards the overall numbers.
Given the resilience and the high quality of special health related on campus quarters. After the war.
Just as a refresh.
Dose cortez represent more than half.
Of the overall on campus business of X medicine at the medical.
So it means the high ticket it's amazing resilience.
And again, we are growing.
Intake and and tickets in this segment as well.
You can take for example, growing around 20%.
In the winter compared to last year.
Before continuing location on the right part of the light also a strong growth in this segment.
Which comprised so not only are our graduate courses, but also a growing business of technical courses and preparatory quarters for the first job.
This is a promising area and we do believe that we can offer complementary products to our students.
We have the tools and the and the intelligence that you do so.
In a lifelong learning approach.
Okay.
So again, our margins growing 19 from 38 to 38, 8% in the quarter only see masturbators growing from 33.8 to 38.4 in the fourth half of this year.
And on page 21, you can see that.
The biggest contributor of this increase in margins.
<unk> is our operational leverage.
So cost of service as a percentage of net revenue going down both on a on a quarter or a half year basis.
This is due to synergies do just due to operational leverage and economies of scale as we grow the business.
Our G&A.
Expenses are in the right part of slide and now represented 5% only of net revenue in the second quarter of this year.
Which just to show to illustrate that we are a.
Quite lean company, and which means more agility, which means more flexibility.
And also as a consequence of the integration process with the matter.
Yeah.
Basically the truth and expenses MPD before tax expenses, a slight increase in the quarterly expenses as a percentage of net revenue, but an important reduction in the semester numbers.
The main reason for that is that where we closed the business combination.
In mid May of last year, when the first intake cycle. After the model was already over.
And in the second quarter of this year, we had the full consolidation of the overall of the whole quarter.
So on a normalized basis, the quarterly expenses as a percentage of net revenue would have been more or less flat.
And at around 12% of.
Net revenue.
Four P D or the right T D whether divorce I ticked higher in the second quarter of this year compared to second quarter of last year, but flat honestly master basis and anyway. This is reflects our growth profile and a strong wave of new students in our overall students beef.
And.
As I said going forward, we do expect.
The early <unk> of these year to be more or less close to the number that we had last year.
Okay.
Finally on page 23.
Our net income and cash flow for a very.
Strong growth in net income driven of course by the political initial tomorrow.
With a with higher margin.
Reaching 22% this year the adjusted net income margin of the company.
And this despite our our leverage.
And for cash flow on the right part of lights.
We have eight important inquiries as well and in cash flow from operations.
Reaching 106 community ice in this second quarter with 86% cash conversion.
Newport to highlight that this cash flow from operations, which means that if before capex.
Our capex in the first half of this year was a five 6% of net revenue our 54 million Reais.
Which means that if you take it out from the first half of this year, we had more or less 230 million reais in.
Cash flow from operations after Capex.
And this strong cash flow generation also reflected in the reduction in our net debt.
Our net debt in June of 'twenty, three I was a bit lower than <unk> 2 billion reais.
On a ex ire for F 16 basis, I mean without leaving the liability.
Our adjusted EBITDA and <unk>.
So in the in the fifth flight I guess.
In the last 12 months was 654 million Reais.
And around 600 million Reais, when we have a X ifr 16 basis. So having included the living expenses. So 2 billion Reais net debt preliminary eyes adjust EBITDA for $3 three.
The ratio of net debt over adjusted the B M D.
Ex <unk> 16, which is way below our covenants are all covenant was 445 for the June of this year.
This number of tripling three.
<unk> was much higher and to begin to zero because we didn't have the full impact of tomorrow and this number we believe that its show rich three around three by the end of the year as we generate more cash flow.
We do generate more cash flow than we accrue interest so our net debt decreases over time.
And as we grow our EBITDA as well.
Yeah.
Yeah.
So that was it.
And now I'd like to open for questions.
Thank you.
We will now begin the Q&A session remember that dress question, you must click onto Q&A icon at the bottom of your screen to join the queue. If you prefer to write your question. Please follow the same steps and he will be joining the queue as well.
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Yeah.
Let's go to our first question it will come from be it the Caribbean.
Sell side analysts from credit Suisse. They didn't leave you open your microphone. So that you can ask a question. Please proceed.
Hello Carlos.
For taking my question. So I've got two on my side.
First I would like to hear your thoughts on the recent CLO the resident Supreme Court on.
Prioritizing Youll medicine courses through my is magical.
We believe this may represent an opportunity for a larger groups.
And.
I would like to hear you on vitreous.
What is the strategy for beaches thinking that units as Omar as solid medical business performing very well is there an opportunity for trying to expand it.
It's sits.
Its base or should we expect a prioritization on distance learning and maybe thinking on selling the medical business.
So if you could comment a comment on that.
And also.
Going through the release, you mentioned that there is a challenging macro scenario.
Even so.
<unk> has been able to.
To best through tickets on a sustainable level above inflation in <unk>.
Pretty well now that the semester is over.
I would like to understand better where did the demand for new students came from our larger groups gaining share from the smaller ones is it.
The sector is expanding because.
Looking at other.
Are there are there indications group's results we saw a very strong first semester in terms of student base, which wasn't expected.
By the end of 2022, so if you could provide more color on that be grateful. Thank you.
Hi, Pedro Thanks for your questions so regarding the.
The medical business and then mathematically we do believe that this decision.
<unk> helps too.
To minimize uncertainty and risks in a sector, which is always good.
And we do believe as well that that the opening of new medical costs should follow them with medicals.
Lisa.
History.
Literally since two.
Two to maintain and into interest into Q2 to have a minimum standards and hutton of quality as well.
In the in the industry. So for when you say the market.
I mean, we have a very strong medical business with two camps specially in the one of mining a very nice brand in the area in the state of apparel nervous, especially in India.
In the area of Meidinger.
So we will analyze them and maybe there is an opportunity to try to increase some medical seats here and theyre using the strengths.
Of the one of them our brand.
In the surrounding area of mining out for example in an over a state of panic.
So this will be analyzed on a case by key debates.
Did it if not our core business, but is it is irrelevant.
Of the company, but we will analyze in due time.
Regarding your second point for demand where demand coming from.
It was always our belief.
Our speech by the way that's diesel allocation was not a temporary fashion.
That these medications is here to stay.
And that the there is a clear trend in the preference of the clients of our students.
Of going more and more.
It to this way of studying to a decertification approach, especially are indicative of the Martin yourself that we have a a nice quality so a.
It's worth it is no surprise that the second with its growing.
And he is growing even I mean overall the segment is growing less than.
On the water grew during the pandemic of course, because it is it was a different environment different approach a different context.
But it is growing and we said that it was going to grow with debt that we believed that the sector would grow.
Overall.
And these are left and what we grew industrial reason, but it was still going to be a double digit growth.
In our sector and in our case as well.
So we are.
And delivering what we said.
It is a important.
Our segment for growth and we today, we don't have a very.
It's a clear picture of our whether the big groups are gaining market share from the small one but it's probably it is the case.
What we saw in the last census are front of Mr application, the new won't be released in a few weeks, we hope so and.
And we're probably going to be are going to see the same that's the strong players the stronger players.
We will probably gain market share because it is a business of scale.
For you what you offer.
A high quality education and <unk>.
Make money you do have to have scale.
Either you don't have it you don't provide a good quality education or you don't make money.
So it is a bit of scale and we do believe that demand is coming are.
From the overall growth of the sector, but also the big groups are probably going to a gain in market share as well from small groups.
Okay.
That's very clear Carlos Thank you and congratulations on the results. Thanks Pedro.
We remind you that dredged questions Youre my screen conduct Q&A icon at the bottom of the screen and write a question John Mchugh.
Yeah.
We now have a question coming from Fred majors sell side analyst.
Uh huh.
Rama <unk>.
Deals that they see.
So we're going to open your microphone. So that you can ask a question. Please proceed to Fred.
Hello.
Everyone I have I have basically one question here.
Just wondering I mean, one of the players also are logically on distance learning H B.
Very aggressive in terms of increasing prices rise for the segment you are seeing are above 15% increase.
For him and then I think that's kind of setting the pace should the to the sector as well. So just wondering if you're already seeing the zinc bag kind of benefiting the competitive landscape.
There is some fee you can also take advantage of fate, if something that you believe it is sustainable anyway. So these let's say more aggressive on the positive side move towards the ticket on the distance learning how this how this is evolving the competition in this segment. Thank you very much.
Thank you Fred for a question and I mean this.
This was and this remains a very competitive environment.
But it is true that in the last I'd say.
12 months.
We perceive a.
More.
Rational approach of for lack of a better word.
Jude pricings.
I mean, I don't believe that is sustainable to grow ticket 15% per year.
Hum.
Forever.
We do believe and that's what we always said that going forward are we.
We shall have a growth in tickets more or less in line with inflation and some periods above inflation as we have these ear for example for them yourself and.
In some periods below inflation as we have now for foreign to them, but growing slightly above inflation in the intake cycle.
So it depends but.
I think it's reasonable to assume that in the next in the medium term.
Tickets in the sector.
<unk> grow in line with inflation, we don't see any more a very irrational competition as we saw in some peers.
But it is still a very competitive environment.
So yeah. So each player has two to differentiate itself.
From the others and try two two to offer a better product for Atlanta.
Okay.
Yeah.
Perfect. Thank you Carlos a very clear and if I may Tim if I may do a follow up sure.
On the provision is France.
When should we expect some type of normalization on this line.
Anyway, if there is a if 2020 photo you can see even earlier thank you.
Yeah.
For this year are we.
To be frankly, as I said, we do expect that.
The BDA for yourself being more or less the same level of last year.
And this is linked to our growth profile. So the fact that we grew a lot. The fact that we are.
I'm sorry.
We're increasing tickets as well in both brands in the intake cycle.
AR at the end it if it leads to two or to higher PD because of the because as you know most.
Most of the PGA and most of them drop off by the way is concentrated in our freshman and new students.
So I mean for this year I don't expect a improvement on that is it will be more of the same level as we had.
So far in the last year, though.
But but going forward Fortunately 24.
We will have two effects.
One effect, which is that we will see clearly.
A reduction in the overall weight of new students in our overall student base.
So the I'd say the the weighted average <unk> will go down naturally.
For next year and also what's also important.
Pedro before the macroeconomic environment.
As we start to see now interest rates going down.
Let's see to it too.
To which number.
But it is effect that we serve the low to middle class a in Brazil, which have been affected by the current economic environment. So as interest rates go down.
And activity picks up.
We show the we show a few a improvement in this line next year.
Perfect very very clear Carlos Thank you. Thank you Fred.
Okay.
The next question received comes from Lukas Nagana sell side analyst from Morgan Stanley .
We will bring a microphone. So that you can ask your question Lucas you May proceed.
Hi, good evening, Carlos Thanks for taking our questions.
Oh, we have two questions. The first one is related to our margins and there is a it has been improving significantly last year, partly because of the deconsolidation of awareness of <unk>, partly because of the synergies as well.
But nowadays the comparable basis is getting tougher and the expansion is accelerating.
Do you still see room to to keep expanding margins through the rest of the year.
Is there any further.
You can see to capture on the cost savings front.
And the second question is related to AI, we know that education is one of the sectors that could be mostly disrupted by a generative AI and.
Can you comment on what opportunities and risks you see on the current business model and how you plan to position.
The company.
Thanks.
Okay.
Great. Thanks, Lucas so regarding margins.
You're right on that part of the margins is due to the incorporation of phone to the monitor which had already higher marketing before.
But also partly due to synergies.
So we.
We increased the loss of the margins are so rich and 38, 8% now.
This quarter.
We shall have a a higher margin these yard than what we had last year.
But I mean as.
As we consolidate for the month and as we advance more in the in the A&D integration, we had a smaller impact of synergies as so so.
In a nutshell.
We can still create tomorrow is a little bit.
But not as much as we increased so far are in the last quarters.
And anyway, I think it would have.
This level of market that we have today I think it is a.
Quite.
Quite a good shape.
So we were quite happy with the margins to go.
And for AI.
I mean this is a very important ah.
Say it will be a very important.
A theme for us.
We do believe that we being the.
Largest digital education provider in Brazil, with 900000 students and.
And they only little player folks on that we will be a leading actor.
In the AI use for education in Brazil, that's for sure.
For example, we are already working with two proof of concepts, which are box.
One with Microsoft and one with Google for example, I cannot comment much more on that.
And we do believe that AI can help for hip our tourists.
The tourists of only a silver which provides the.
The human touch for.
For the human for the student experience for the learning experience.
The tourist Kim can can be helped with AI.
In their approach to <unk>, but anyway, it is going to be a much more of an opportunity in our case than a threat.
Very clear Carlos Thank you.
Thank you Lucas.
The Q&A session is closed and now we would like to turn the floor over to the Companys closing remark.
So thank you all for your continued.
Chris.
And by following up on vitro and anyway, you can have more doubts or questions. Our IR team remain remains open for questions. Thank you and Goodnight.
The video conference of results with French of interest second quarter 2020, juries closed Investor Relations Department is available to answer other questions and concerns. Thanks, so much to all the participants and have a good evening.