Q1 2024 Vitru Ltd Earnings Call
Operator: Bom dia a todos e obrigado por aguardar. Sejam muito bem-vindos a a videoconferencia de divulgaço dos resultados do primeiro trimestre de 2024 da Vipro Brasil. I would like to point out to those who need simultaneous translation that we have this tool available on the platform. To access it, simply click on the Interpretation button by the globe icon at the bottom of the screen and choose your preferred language, Portuguese or English. For those listening to the video conference in English, there is the option to edit the original audio in Portuguese by clicking on Mute Original Audio.
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Operator: We inform you that this videoconference is being recorded and will be available on the company's R.I. website, investor.vitro.com.br, where you can find complete material for our results publication. It is possible to download the presentation also on the chat icon, in English. During the company's presentation, all participants will have their microphones turned off. We will then begin the Q&A session. To ask questions, click on the Q&A icon at the bottom of your screen and write your question to enter the line. When your question is announced, a request to activate your microphone will appear on the screen, and then you must activate your microphone to ask questions. We recommend that all questions be asked at once.
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Operator: We highlight that the information contained in this presentation and any clarifications that may be made during the videoconference regarding the business perspectives, projections, and operational and financial goals of Vitro Brasil are beliefs and premises of the company's administration, as well as information currently available. Future considerations are not performance guarantees. They involve risks, uncertainties, and assumptions, as they refer to future events, and therefore depend on circumstances that may or may not occur.
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Operator: Investors must understand that general economic conditions, market conditions, and other operational factors can affect the future performance of Vitro Brasil and lead to results that differ materially from those expressed in such future considerations. Today we have the presence of the executives of the company, William Matos, CEO of Vitru, and Maria Carolina, head of RI and its team. I will give the floor to Mr. William Matos.
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William Matos: Good morning, everyone. Welcome. I hope you are all well.
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William Matos: It is a pleasure to be gathered here today to present the results of the first quarter of 2024 of VITA. I am William Matos, CEO of Vitru, and I am also the CEO of Cefol. Here with me is Maria Carolina, our R&D Head, as well as R&D Analysts Luiz Felipe and Vitor Augusto, and with us on this call today is our Vice-President of Market, Leandro Claro. The presentations of the results that you will see are also available on our website, along with the release of the results of this trial.
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William Matos: We will start, on slide 4, with the highlights of this quarter, which was another quarter of hard work and solid delivery of vitroeducation. We would like to start with great pride by highlighting that Vitru was recently recognized by two of the most credible vehicles in the United States as one of the five main distributors in the world. The magazine Timing, in partnership with Estaticista, which is an international leader in data supply on the market, released the ranking considering the largest editors in the world, and Vitru was in fifth place.
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William Matos: And without a doubt, this recognition reinforces the brilliant work that this company has done in focusing on quality digital education. It is also important to mention that we ended our first quarter with almost 940,000 students, a number that is historic for our company, which certainly shows the strength of the brands and that justifies our expectation of an excellent year ahead. This number was driven by the strong growth in our continued education operations, an important movement that we have made to build... and even more, a fidelity at the base of our students.
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William Matos: I still need to stress that this growth was not only greater because Vitru, in line with the process of integration and exchange of best practices between Unia-Selva and Sesumar, harmonised some criteria for the activation of students, and I will talk more about that later. And finally, on this slide, another important highlight is the progress in the migration process of our Nasdaq listing for B3. On April 19, the shareholders approved the incorporation of Vitru Limits by Vitru Brasil.
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William Matos: With this, the period in which shareholders will have to manifest their choice to receive shares in B3 or temporary ADRs from Vitru Brasil through the Election Form began, and the delivery period of the forms ends on May 21. Then, on the next slide, we can see that our strategy and differentiated positioning led to a new expansion of the EAD graduation average in this trimester. This time... of 3.4% in relation to the first quarter of 2023, a percentage quite close to that of the inflation variation during the period.
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William Matos: This is a number that certainly validates our strategy, which is always to have competitive prices but with products of superior quality. On the right, in relation to financial highlights, we can highlight an increase of 3.5% in consolidated liquid revenue. This increase is based on the strong expansion of our continued education and medicine business and almost 10% of the liquid revenue from the EAD graduation in the third quarter. Remembering that all this growth in relation to the first quarter of 2023 is purely organic.
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William Matos: And right there on the bottom left, EBITDA adjusted for this quarter had a small growth, more modest, of 1%, and a margin drop to 33.9%, which is still a margin that has far surpassed the sector average. And as we will see later on, this drop in margin was part of a strategy to anticipate the enrollment of our students, and the 2024 margin should be slightly higher than the 2023 margin. It is important to make it clear that we have already expected this number; do not worry.
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William Matos: It is a specific issue of this year's strategy, and we know that it is likely to decrease over the next few quarters, and it will not repeat itself in this amount. Finally, on the right, based on our model, already known to you, light, our scale, and also the quality of our operations, we had a high conversion of cash with a strong growth in cash flow this quarter. These numbers, without a doubt, are tangible proof of the efficiency of our business model and the efficiency of our management model. Now, let's go to slide 6.
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William Matos: I would like to start by passing on more details about this harmonization of criteria for the activation of these students this year. As mentioned in our last publication, and as part of the process of the exchange of best practices between the two brands, we made some adjustments at the beginning of 2024 at Unicef to align the activation criteria of the student for recognition purposes at the student base with the standards that are used at Unicesumar.
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William Matos: And in the short term, this, as you can see, means a smaller nominal growth in 2024 versus 2023, both in the student base and in the liquid revenue. But we know, we understand that this harmonization is fundamental for us to have an even more strategic vision of the business and that from it, we will be able to have an even more accurate sustainable growth planning. And this movement is also a proof of the confidence that investors can have in our management. So, as you can see in the slides...
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William Matos: The impacts of this harmonization are approximately 94,000 students less in 31 of the 3 of 2024, which is about 11% of the EAD graduation students, and approximately 18 million less in the liquid revenue of the first trimester of 2024, about 3.5% of the total. In addition, it is important to emphasize that this harmonization has no impact on our cash flow. I will repeat this to make it clear: it has no impact on our cash flow. This is because these invoices generated for the unemployed students were not paid, and in the end, they became PCLDs over the 12 months after the issuance of this invoice. That is, this new recognition will have a much more positive effect on Vitru, which will be the reduction Another aspect of this harmonization, the last bullet there, is that we will also have a positive tax effect, a slight reduction in the payment of S&S for those unemployed student bills that were not paid.
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William Matos: Moving on to the next slide, we show that our EAD graduation rate has increased by 10% this quarter, coming, and it is important to say this, from a graduation rate that had already grown very strongly in the years of 1923 and 1922. In addition, we can see that the growth of the consolidated capture of Vitru's EAD graduation in the last three years has been 21% per year, and these numbers reflect all our competence and leadership in EAD graduation.
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William Matos: And in the graph on the right, we also show the opening of the capture in this quarter between enrolled students, who are recognized in the capture and in the student base, and non-engaged students, who are no longer from this quarter. As you can see, we see that approximately 25% of this capture in this quarter was from non-engaged students. Moving on to the next slide.
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William Matos: We show the continuous growth of the VITAM student base. As you can see, in this quarter, the total increased by 6%. When we look only at EAD graduations, the growth was 5.6%.
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William Matos: Remember that we are the largest EAD company in the country, so we have a super high base of comparison and with strong historical growth. And this growth is now supported by much more engaged students, and we have a lot of confidence in the advantages of the path we have taken. Remembering what we explained a little while ago, that from this first quarter of 2024, the non-engaged students of UNICEF, that is, those students who did not sign a contract with UNICEF, and those students who signed a contract with Nacel but did not take any exam and did not make any monthly payment, they are no longer included in the student base.
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William Matos: This clearly, as you saw, has an effect on the total size of the base, but, as I said, it now reflects much more commitment. In fact, again, for you to have an even better notion of the solidity of our result, know that under the previous criterion, our student base would have 94,000 more students, which would mean an increase of approximately 17% in the photo of the student body at the EAD graduation on March 24 versus March 23, that is, 11 more points. And to explain a little better about our feelings in relation to these numbers, I can tell everyone that my feeling is of relief and encouragement. And I have used a metaphor.
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William Matos: I have said that it is as if I were a Formula 1 driver, from the best team in recent years, and was in the lead, but even though he invested a lot in the best mechanics, he felt that Carlos was not performing at his best, and now he discovers that he was there with a small angle wrong in the front wing, something that is simple to solve and that brings a lot of results. In the same way, we, as Vitru, are going to win.
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William Matos: We have been investing a lot and doing a lot of work on our products and the quality of our products, and it didn't make sense to have a smaller engagement and a higher PSLD. And with these adjustments made, and seeing that the drop of some numbers this trimester does not take us away from the leadership of this race, I can say that we are very excited about the results that we will have. And to continue, I want to give the floor to Carol, our R&D manager, who will talk about the next steps.
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Maria Carolina: Good morning, everyone. Moving on to slide 9, we have the growth of our graduation student base in each region of Brazil, already considering this criterion of activation of students that William has just explained to everyone. Looking at the map of Brazil and also at this graph on the right of the slide, pole by region, it is very evident the continuous advance of Vitru here in the southeast region of the country.
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Maria Carolina: We have been present in all states for a long time, but more recently, we have seen a lot of penetration of the two brands in the state of So Paulo. And besides that, it is worth remembering that the southeast region has a much denser demographic concentration and many opportunities for the expansion of the two brands. The number of poles in this region will continue to gain a lot of relevance.
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Maria Carolina: When we go to slide 10.., we have a better view of Vitru's national presence. On the left table, it is visible how the brands have complemented each other in this geographical distribution. Vitru currently has almost 2,500 poles.
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Maria Carolina: They are distributed in more than 1,400 municipalities. This quarter, following our synergy program, what we call cross-expansion, we reached the mark of more than 717 cities that already offer the two brands. There are 70 more cities than in the first quarter of the previous year.
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Maria Carolina: And going to slide 11, we show a little bit of... quality metrics in the vision of our students. Our focus is on the delivery of quality digital education, and it is always highlighted by the note that users attribute to our applications that today we have the best applications in front of the players listed in our country. It is worth remembering that they are proprietary applications; they play a very important part in the learning path of our students, and we will not give up this commitment to deliver an excellent experience to our students.
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Maria Carolina: On the right side, we also highlight the evaluations in the complaint here. We seek to solve in the best possible way the possible difficulties reported by the students, and with that, the reputation of the two brands for our services remains well above the average of the other players. I now give the floor to William to follow up on the presentation.
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William Matos: Thank you, Carol. Let's go to slide 12. Let's move on to the average TICT data, where it reflected a growth of 3.4% in the last 12 months and an average growth of 4% in the last 3 years, considering Vitru as a whole, that is, Unia Selva and Unicesumar together. Therefore, this variation, which is quite close to inflation, confirms the differentiation of our products and our positioning as a quality player in digital education.
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William Matos: It is important to emphasize that the average ticket has grown, even with a slight change in total collection this quarter and with a drop in the representativeness of premium courses, which are health and engineering, which, as you know, have a higher ticket, and we had an increase in the weight of the technology courses, which, in this case, have a slightly lower ticket, as we demonstrated on the right side of the slide. And on the next slide, number 13, we will continue with the outstanding financial indicators.
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William Matos: As you can see, we had, as we have seen before, an expansion of approximately 14% in liquid revenue and 1% in the adjusted EBITDA. It is important to highlight the increase of 2.8 points in this quarter in the gross margin, reflecting the benefits of the integration and the scale gains we have in the company. No próximo slide.
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William Matos: It is interesting to see that in this trimester, the main avenues of growth of the recipe were the business of medicine and continued education. The continued education business unit increased its revenue there by 46%, which was quite impressive and shows the great potential of digital lifelong learning in Brazil. We believe it was a very assertive move that we made this year, based on the growth gaps that we had observed and mainly on the premise of acting ahead and moving forward in this great market.
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William Matos: And we can also look at our medicine operations, where we had an increase of 30% in the recipe in the first quarter of 2024, due to an increase in the number of vacancies and also an increase in the average ticket. We will address the recipe of these segments in a little more detail in the next section.
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William Matos: And in this sense..., no, slide 15, we see that the proportion of these two businesses within Vitru's overall portfolio increased in the first quarter of 2024 versus the first quarter of 2023. Or, in other words, you can see there that the continued education business increased its representativeness from 5% to 6% in Vitru's total, while our medical operations went up from 13% to 15%. On the other hand, after the EAD graduation, which dropped from 72 to 70 in the total of the scholarship, and especially because we are already considering, and this is important to emphasize, the new criteria for the students' satisfaction, as I mentioned earlier.
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William Matos: And now moving on to slide 16, we can see a 10% increase in the EAD graduation rate. In addition, in the graphs on the right of the slide, we can also see the historical growth of the EAD market in Brazil and the continuous expansion of our market share within this growing market, according to the numbers from INEP. We are here to reinforce what we strongly believe, that the EAD graduation sector in Brazil still has a long period of growth in the coming years, and quality EAD is the solution to the gap in the penetration of Brazilian higher education.
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William Matos: And continuing... On the 17th slide, here we demonstrate the evolution of the liquid recipe of the medical course in the first TRI of 24, against the first trio of 23, of 30%. I'm reinforcing for all of you that this increase... It is a combination of the maturation of medical vacancies and the evolution of the average ticket. And all this is important to emphasize that our medical college is the largest in the region, in the south of the country, located in a city that is often present in the ranking of the best cities to live, which is associated with the high quality of our institution and the service provided to our students.
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William Matos: After all, we have the fifth best medical college in Brazil among private institutions. We can explain that our average ticket will be higher than the national average. In addition, in recent months, the institution, Unicesumar, has improved the occupancy of vacancies, which has also contributed to the good result of this segment. In the next slide, slide 18, the graph on the left, as you can see, shows a slight recovery of the face-to-face segment, very much explained by the subjunctural theme of the recovery of the segment after the end of the pandemic, but the long-term aspects show the constant evolution of the EAD towards face-to-face, and we are convinced that this is, in fact, the reality of the education sector.
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William Matos: It is clear that in the economy and in the digital world that we live in, students will seek an EAD of quality, an EAD that is more accessible to their reality, whether by financial themes, cultural themes, and, obviously, even logistics. So, the slight recovery of face-to-face does not justify any expectation of an important recovery of the sector in the medium and long term.
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William Matos: And on the right side, we show here the strong expansion of the recipe in the continued education segment, as we have already mentioned, 46%, and this good performance is directly associated with our diversification strategy, our complementarity strategy throughout the journey of our students. And going to the next slide, number 19, we are going to show you some more data on this potential avenue of growth that Vitru believes so much in. As you can see, it is clear that there is an interesting opportunity in this segment, which is still little explored by high-scale productions.
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William Matos: In the continued education segment, it is important to make it clear that we consider technical courses, professional courses, and post-graduation. And as you can see on the slide on the left, according to data from the last census, Brazil trains 1.2 million university students per year, a potential audience to enroll in post-graduation courses. In addition, of course, to all the stock of professionals already trained throughout life who recycle and seek new training from time to time.
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William Matos: And when we look on the right side, at high school, the numbers are also expressive; there are 7.7 million students in high school, young people above 16 years old, and considering the socioeconomic characteristics of our country, this young man is about to enter the labor market, and he finds, at technical and professional costs, a gateway to the search for his first job. So, in addition to that, the new regulation of technical education, the institutions have allowed new vacancies to be created by the federal government.
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William Matos: Few players listed, that is, with a national presence, ended up looking at this market, and as you can see on the graph on the left, Vitru, through the Unicesumar and Unicef brands, obtained almost 43% of the regulated vacancies. And on slide 20, we show the evolution of EDIT within the periods, and from 2021 we will start the implications of costs and expenses. As you can see on slide 21, the graph on the left illustrates a reduction of 2.2 points in the costs of services proportionally to the percentage of liquid revenue.
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William Matos: And, as you know, this gross image gain reflects both the scale gains and the final impacts of the integration of Unicesum within Vitre. However, at this point, I would like to anticipate that, throughout this year of 2024, we will have a slight increase in the direct courses of Vitre, which is a totally natural consequence of the implementation of several health courses over the last 2, 3 years. This process of maturing these courses ends up raising some costs, such as, for example, in the third and fourth year, a greater need for preceptors, and a greater need for internship fields.
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William Matos: In relation to general and administrative expenses, Vitru has been keeping its structure quite lean, with a GA representing only 6.4% of the liquid revenue in this TRI, one of the lowest in the category. Moving on to slide 22, we see on the left the market expenses seen in this tree, which showed an increase of about 5% of the percentage of liquid revenue. This increase is due to the company's strategy of anticipating and capturing, making it clear that it is always a healthy average ticket, in addition to the strategy of positioning in squares with greater demand complexity and competition, as we said, in the state of So Paulo, where the company is focusing a lot.
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William Matos: And it is important to say that for the year, we expect that the market expenses and sales, proportional to the percentage of liquid revenue, will remain very close or, we can say, slightly exceed the expenses reported in the year 2023. And on the right graph, we have shown that PCLD, as a percentage of the liquid recipe, is slightly higher in this first 24 trio, which is a reflection of the strong capture that we had in 2023.
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William Matos: However, it is worth remembering again that there is a strong tendency to drop along 24 and 25, due to the harmonization of criteria that we have already explained, and the activation of the students that we talked about at the beginning of this presentation. I'm going to drink some water here. Carol, please follow the slides, please.
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Maria Carolina: Moving on to the year 2023, we have two important messages to highlight. The first message is the company's strong cash flow. Cash conversion reached 104.6% this quarter, an important increase compared to the first quarter of 2023, which shows the company's capital return improvement, the exchange of good practices between brands, and the implementation we made in the third quarter of last year of the new credit rating system for our students. The second message, which is illustrated in the graph on the right, is that, in addition to all the evolution of results that has been explained so far by William, the cash flow this quarter is also reflecting an update of the expectation of the effective cost of the Vitru debentures, in line with the accounting rules that are applied to these emissions, which have an effect of approximately R$ 25 million in financial expenses this quarter.
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Maria Carolina: We expect, and it is worth mentioning this to you, that from the third quarter, these financial expenses will begin to show a reduction if the macroeconomic scenario does not exist. And it also reflects, still in this liquid profit, less recognition of deferred tax in this period. It is also worth emphasizing that our capex is relatively low, and it was in this quarter with the percentage of revenue only at 4.3%, which is 0.2% below what we spent last year.
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Maria Carolina: No slide 24. We have a vision of our debt and leverage. In this quarter, we had a strong generation of operational cash, the liquid debt presented a small drop, and this small drop is explained mainly because of the update of the effective cost expectation of debentures that I just mentioned. In addition, it is worth noting that for the liquid debt covenant on adjusted equity, our leverage is well below the level of the company's covenant, and during this year, we will continue to lower this leverage. I return once again to William for him to give the presentation segment.
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William Matos: Obrigado, Carol. And finally, on slide 25, we would like to share with the market our guidance for liquid and EBITDA revenue. For 2024, we are estimating liquid revenue between R$ 2.1 billion and R$ 2.2 billion, which will lead to a growth of between 10% and 15% in relation to 2024. In addition, our 2024 EBIT margin should be between 36.5% and 37.5%.
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William Matos: At this moment, it is worth mentioning that this result takes into account our growth, which has been dizzying in the last three years. Therefore, our strategy continues with a focus on the student, on the quality of the service, and always observing the financial discipline that is so important. In other words, this guidance reflects what was already expected, and in percentage terms, our results will grow, and will continue to grow, obviously at more reasonable rates, given the size that Vitru has already reached.
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William Matos: With that, we conclude our presentation, and before I give the floor, I want to thank you all for your support and trust. To say that we have worked very hard to deliver the best results and we are very confident that we will have an excellent year for Vitru and that all the adjustments are to further enhance this company. All strategies are based on the premise of continuing to surpass our own records and, obviously, our own quality. Now, I give the floor to the host to open the session to questions and answers. Thank you very much.
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Operator: Now, we will start the Q&A session. Remember that to ask questions, you must click on the Q&A icon at the bottom of the screen and write your question to enter the line. When announced, a request to activate your microphone will appear on the screen, and then you must activate your microphone to ask questions. We kindly ask that all questions be asked at once. Let's go to our first question. It's from Lucas Dainagano, a Celsoide analyst at Morgan Stanley. Lucas, we will enable your audio so that you can ask your question. Lucas, you can go ahead, please.
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Speaker Change: Good morning, Joe.
Lucas Dai Nagano: Good morning, William, and Carol. Thank you for the space here.
Speaker Change: God I hope you got a little faster and actually those critical winter.
Lucas Dai Nagano: We have two questions. The first one is related to the margin, which is a little more pressured in the first trimester, but you say that there is an improvement over the year. The question is about, and besides that, you commented on possible cost pressure. The question is about the drivers that you are seeing to compensate for this, right? I think two things that deserve attention are the increase in marketing, so knowing if it is more an anticipation of these expenses or an elevation of the level, and also the PDD, which we are in doubt about when it should start to reflect this...
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Lucas Dai Nagano: The second question is about regulation, if you have any updates about the changes in the licensure scene and also what to expect for other courses that have a proposal in progress, such as nursing, for example. Thank you.
Speaker Change: Thank you gentlemen vessel as a.
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William Matos: Thank you, Lucas, for the question. Let's go, then, in relation to the first one.
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William Matos: We really have peace of mind when we look at some drivers to be able to say our expectations for the full year. Although we have talked about a small reduction in gross margin due to some costs, especially health costs, as I said, the question of market investment was really an anticipation within a strategy that was already foreseen and proposed here. So, these costs must be reduced throughout this year to ensure the delivery of the margin guidance. And, as we also said, this new harmonization model should lead to an improvement in 2024 GDP. This should also help to align this margin with the guidance that was put in place.
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William Matos: And in relation to the regulation on the new DCNs, I think the whole market has followed. Vipre Educaço is calm in this process, mainly because of the hybrid model that we have in our courses, a hybrid of nature when we look at Marco Niesel. We are attentive to all these movements, but as we have said, everything that is related to quality, we understand that it will be positive for the sector, positive for the segment.
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William Matos: In relation to new courses and DCN changes in other areas, we have not seen or heard any point in this regard from the National Council of Education. We are very close to the Council, and we are also looking to understand the movements that will be necessary, but it is important to remember that for all and any change in this DCN regulation, the institutions have up to two years to make the changes that are proposed.
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William Matos: So, without a doubt, we will study very carefully to understand, but as I said, we have a hybrid model of nature in Marco Niesel and we also have hybrid courses in Marco Niesel-Zumar and we have a lot of tranquility in relation to this new regulation of this exclusive DCN for now in the licensure courses, remembering that the licensure courses themselves, we already have a good percentage of presence in our methodologies and that we must continue studying this market to be able to adapt to future changes.
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Operator: Prefeito Williams, Ricardo. Obrigado. Let's go to our next question. It's from Pedro Oliveira, from the ByFide list, from Risa. Pedro, will we enable...
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Operator: Let's go to our next question. It's from Pedro Oliveira on the BySide list. He says, Pedro, we will enable your audio so that you can ask your question. Pedro, you can continue, please. Carlos Freitas, Lucas Nagano, Bruno Stephano, Edson Peli, Bruno Stephano, Lucas Nagano, Bruno, [inaudible]
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William Matos: Pedro, good morning. Thank you for your question. Regarding the process of listing itself, we approved on the last day, the 19th, in the Assembly, the reverse incorporation, which is what justifies this exchange of shares, will debut at B3. This arrival at B3 is scheduled to happen on the 10th of June. I think that in the last documents we published, we explain the period of the election form, where the investors will choose to receive the shares directly or temporarily. So this is a process. We have to comply with the deadlines for the broker, the liquidation of paper and positions, so we will finish this process on the 10th of June.
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William Matos: And then arriving at B3 will make us enter the radar of a larger number of investors, of smaller funds, pension funds, physical people who do not necessarily invest in stocks that are outside the Brazilian border. But a large liquidity movement, this would have to be thought of in the future, a combination of the company's self-management with its shareholders and market timing. It is what would actually move our liquidity leader to another level.
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William Matos: But the arrival is already increasing. My schedule here, while I go to the company, is already much busier with the interest of several local funds. So we believe in the benefits of this migration. Thank you.
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Carlos: And I remember you got it.
Operator: We remind you that to ask questions, you must click on the Q&A icon at the bottom of the screen and write your question to enter the line.
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Operator: With no further questions, I would like to once again thank you all for being here. I would like to make it clear that our starting point for any decision will remain the same, excellence, and our biggest goal will always be to continue leading this market, impacting the lives of our students, always in a very positive way. Once again, thank you for your trust. We believe we are on the right path. A hug to all of you.
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Operator: The video conference on the results of the first quarter of 2024 of Vida do Brasil is now closed. The Department of Relations with Investors is available to answer any further questions. Thank you to all the participants, and have a good day.
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