Vitru Ltd (VTRU) 2021 Q1 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to Vitru's First Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this call will be recorded. I would now like to introduce your host for today's conference call, Carlos Freitas, Vitru's CFO. You may begin.

Thank you, operator, and good afternoon, everyone. Thanks for joining us. It's a real pleasure to be here with you all for the release of our results for the first quarter of this year. I hope all of you are doing well and healthy.

Here with me is Maria Carolina Gonçalves, the Head of our Investor Relations department. And a slide presentation will be part of today's webcast, which is also available in our Investor Relations website at investors.vitru.com.br. So I trust you all have this presentation in front of you. And of course, before we begin, I'd like just to make note that as detailed in the second slide of this presentation, safe harbor is in effect for this call.

So I now invite you to go to Page 4 of the presentation. So this page briefly summarize what we believe are the main highlights of the first quarter of this year. First, we have launched a new academic model that we called the Flex Courses, which for us represents a huge opportunity to enter into hundreds of smaller cities in Brazil. And I'll get back to this a bit later. Second, the intake numbers were very strong in this current cycle, with a growth of around 32% versus what we had in the intake of last year. And this, again, purely on an organic basis. With the delay of the ENEM, as you all know, the shape of this first intake in cycle of 2021 was more, I would say, back-ended than what we had last year. But at the end, it was a great accomplishment that confirms our resilience of our hybrid model.

With that, we reached more than 320,000 students in digital education with an important growth in the Southeastern region of 85% growth in the Southeastern Brazil versus what we had in the first quarter of last year.

Regarding the financials, we had, again, very solid numbers. The net revenue in our core digital education Undergrad segment increased by 20% when compared to the first semester -- first quarter, sorry, of last year. The consolidated adjusted EBITDA grew by 40%, which means a substantial increase in our margins. EBITDA margin grew to 26.7% this quarter versus 22.4% last year. And last but not least, our adjusted cash flow from operations was up 55% this quarter. And we reached an adjusted cash flow conversion from operations of around 107% this quarter. So very solid numbers as well on the financial perspective. All of this will be discussed in more detail throughout my presentation for you today, starting the next page with the Flex Courses.

So now on Page 5, please. As I mentioned, we launched this new model, Flex Courses. We did last year, some final projects regarding this subject, which were quite successful. And we decided with that to deploy the Flex Course concept throughout Brazil. So what is that? It is basically the same class-based and tutor-centric approach that we offer in our traditional hybrid model, but instead of meeting weekly in a hub with your classmates and your dedicated tutor, you meet virtually with your classmates in weekly live classes with your tutor. So in the model, the hub is smaller and used as a place for exams. So why did we do it? Why are we doing that? This model is very suited and is better for smaller cities. I mean, these students would not be served by us in our traditional hybrid model because as you can imagine, there is a minimum size, a minimum scale for us to open a new hub in a given city.

So we were until now focusing our efforts in midsized and large cities because of the pure nature of our hybrid model with a night hub with a weekly meeting in a hub. So this, for us, represents a huge opportunity to accelerate the growth of our student base by offering our high-quality model throughout Brazil with a faster expansion of hubs, with scale and being present in every corner of Brazil with our vision, which is to offer education with high quality and, again, tutor-based and class-based. We still have the classes, we still have the sense of belonging, sense of the nice experience that you have when you go to university. You have a dedicated tutor from your region. And instead of going to a hub physically to meet because you live in a small city, you basically go to hubs to take an exam and you have your weekly live classes with your tutor. So this is different from what is offered from the competition when you think about distant learning.

Now moving to Page 6. Here in the Slide 6, we have a snapshot of the growth in our base. We had, as of end of March, almost 330,000 students, being 97.5% of them engaged in digital education courses. And we focus on the students base of our digital education Undergrad segment, which is our main business. You can see that we had a CAGR of 33% in the last 5 years. And when we look at numbers for this quarter, growth is a bit smaller, it is 17%, and a lot of that because as I mentioned before, this was due to the different shapes and intaking curve in the first quarter of this year versus the first quarter of last year. And later on, I will show you some numbers about it. So this shape was more back-ended than last year and this is mainly, as I said, due to the delay in the ENEM, which -- the ENEM is an important, I'd say, catalyst for enrollment in a post-secondary segment in Brazil, as you know.

It brings a lot of momentum to the sector. And the results this year were released in late March instead of beginning of January as done last year. So -- and you remember that when I said in late March, when we were releasing the numbers of last year, I told you that our intake up to that date was growing in high teens. High-teens meant 18%, in fact. And now with the full numbers for the intake cycle, we had important growth of 32% when we take the whole intaking cycle. So a very nice growth in the intake for this quarter and for the semester, especially now in this pandemic, especially now in this current situation. We are confirming the strength and the resilience of our model.

Now if we move to Page 7, we show the trends and increase in our digital education student base. We have expanded substantially throughout Brazil well above the markets. And this is a market that has been expanding a lot overall. And in our opinion, it will expand even further after COVID. And within this growing and appealing market, we have been growing faster than the competition. So our growth was, as I said, particularly strong in the Southeast region of Brazil. Our base there grew by 85% in the first quarter of this year compared to what we had in March of last year.

Here on the right part of the slide, you can see as well the evolution of the number of hubs in the last 5 years. We have been opening around or slightly more than 150 hubs per year, mostly with partners, as you know. And now we have more than 740 hubs throughout Brazil. With the Flex Courses, we are going to open even more hubs throughout Brazil. As I said, this new concept will help us to accelerate growth throughout this year and in the future. So for this year, we are going to open 250 hubs throughout Brazil.

Now if we move to Page 8, just to focus again on the Southeast, the growth, as I said, was very strong in the Southeast where we have been historically shy, but where we have been expanding a lot in the last 2 years -- 2, 3 years. As you know, I always tell this example, we were very, very, very shy in the Southeast until 2018. And then we entered into the market of Minas Gerais with a number of hubs that were very successful and then we expanded the partners. And then we entered in Rio in '19, especially last year, we opened a lot of hubs in Rio last year and in '19.

By the way, the city of Rio de Janeiro in this current intaking cycle, is already our second-largest capital in Brazil in intake. And the first one is [Porto Alegre]; the second one is the city of Rio de Janeiro. So this is just to confirm that our model has also proven itself in the Southeast. And it's very strong in Minas Gerais, Espirito Santo, and in Rio now. And now we are growing a lot in São Paulo. We opened a lot of new hubs there in São Paulo. So you can see here in the chart that we have 177 hubs in the Southeast now, of which already 1/3 in the state of São Paulo, and we are going to grow even further there in São Paulo. So São Paulo is our next frontier for important growth in the Southeast.

Now on Page 9, we focus here on the most important driver for our organic growth over time, which is the maturation of our expansion hubs. We have now almost 9% of our hubs that we call expansion hubs that were opened after the change in regulation in 2017 and are, therefore, not yet mature. That's what we call the expansion hubs. And we shall maintain a substantial growth over time as those around 660 hubs that are expansion hubs mature over time. They are picked by cohort here in the chart on the right. They are still ramping up, as I said. And to illustrate this growth potential, we calculated this theoretical maturation index, which is basically the number of students we have now divided by the potential number on the average in the hubs.

Once they reach maturity, which is for this case here after 7 or 8 years. So we have now a maturation index of around 32%, which means that those expansion hubs have the capacity to increase their student base threefold. And again, this is growth with limited execution risk. The hub there, the UNIASSELVI brand is there. The tutors are [hired]. The partner is there. So it is a growth with limited risk of execution. One remark here as well, just to highlight that the numbers that we show here are the picture as of end of March, of course, that as I said, were affected by this more back-ended profile in the intake in the first quarter of the year. So in a more normalized scenario, I'll say, for example the number of students in the base hubs, the ones that are mature already, they should have been flat at the normal trend and the growth in the expansion hubs would have been even stronger. That's what we expect to see now in the second quarter, for example.

Now moving to Page 10. To focus here a bit more on the net revenue and the average tickets and the intaking cycle result for the digital education undergrad segment. So net revenue in the quarter increased by 20% in the segment. And again, it was purely on organic basis and despite this back-ended profile. So as you know, we have this modular approach, in which we only have a revenue contribution from new students once he or she join us. So it's different from the typical model that is used by the competition and which is based on the on-campus model. In our purely digital model, it is a stickiness of subjects. So you can join us in March or in April, and then you contribute with revenues once you join us. So because we have this, as you can see here on the right, a more back-ended profile for the intake, we had -- or say, lower revenue contribution in the first quarter of this year.

So again, here on the right, if you see the purple or the light purple, I'd say, curve -- it's a curve for 2020, 63% of the intake, the newcomers were already here by February. While this year, it was only 52% of the total intake in this in-taking cycle. So here, you see clearly that last year, we had very strong January and February months. And then it was much slower after the pandemic. Now it is more spread over time. But this means what? This means that we have a decrease in the average ticket this quarter, which is here in the middle, a 4% decrease in every ticket, which was -- the main cause for that was clearly this delay in the entrance of new students.

They are here in our picture of March. So they are in our, say, denominator in our every ticket, but they brought not much revenue in the first quarter of this year. So this is, as I always say, our tickets will increase a little bit in some quarters, will decrease in some quarters. Last semester, as you remember, our ticket increased by 3.5% compared to the first half -- second half, sorry, of 2019. And this reduction that we see -- that we saw in the first quarter of this year, the trend for that ticket will reverse now already in the second quarter and the second half, I'd say, of this year. The trend is for ticket to be stable over time, given our model.

Now on Page 11, we show a bit more about the several lines of our income statement. You can see growth in net revenue, led by the expansion of Digital Education Undergraduate, as I said before, as well as important increases in gross profit, adjusted EBITDA and margins.

So let's now move to the next slide to dig a bit deeper about the drivers of these numbers. On Page 12, we're focused on the net revenue between these 2 quarters. As you can see, the growth in the consolidated net revenue of 17% was driven by -- not only by the growth in Digital Education Undergrad that we just discussed, but also by the growth in continuing education, mainly with our digital education graduate courses. There was a substantial growth in net revenue in this segment, led by a better mix of courses and by, I'd say, a more intense and focused news of digital marketing this quarter compared to last quarter. So the run rate here is extremely positive. And we shall continue to see an important growth in our Continuing-Education segment throughout this year as well. This consolidated growth was diluted by the reduction in our On-Campus segment, which has been declining over time, in line with our view for the post-secondary sector in Brazil.

This segment is much more concentrated now on courses not offered in digital education, such as law, nursing, psychology, et cetera. And we do believe that the relative contribution of the segment for our consolidated figures over time, will reduce even further, which means that our consolidated net revenue growth will be more and more closer by -- close to the growth in our 2 digital education segments, which are growing a lot.

Now on Page 13, the drivers, the pieces of the adjusted EBITDA bridge. So again, a growth in our margins of 4.3 points reaching 26.7% in the first quarter. And usually, in the first quarter of the month, it is usually the smaller margin for the whole year. We had a reduction in cost of service and an increase in selling and PDA expenses, which is here on the following slides.

On Page 14, you can see an important reduction in the cost and in the margins, in the cost of service and in the, I'll say, leading to increase in the gross profit. This was due to a number of things. First, naturally gain of scale. As we grow further, we can dilute more our fixed costs. We had also an important reduction in personnel costs. And this was driven by a better ratio of students per tutor. As we grow further, as we optimize on a daily basis our business, we are improving steadily, slowly but steadily, this ratio as well. The Flex Courses also helped to maximize this situation. And we have as well -- we had as well, an important reduction in the cost of academic material sent to students.

Our model is still based on sending some books to students. They like it to have as well besides the app and besides the computer-based learning systems. They also like to have books, and there were reductions in the cost with books (technical difficulty) that there was important increase in margins here as well.

Regarding G&A, G&A on the right, G&A increased roughly 20%, in line with increase in our net revenue. And such increase was part due to our growth but also due to our new reality as a listed company. Anyway, the G&A at 8.6% of net revenue is, in my opinion, a nice number and way below what we see in the ratio of our peers.

On Page 15, to focus on selling expenses, selling expenses increased a little bit this quarter. And this was due, let's say, to first to the pandemic. Last year, a big chunk of our intake was, as I said, in January and February, before the pandemic. Now with the pandemic, our hubs are closed and hubs play an important role in our enrollment, in our intaking process, and the delay in the ENEM, so -- which was also seen in the whole sector. With the delay in the ENEM, we have to spend a bit more money to attract the attention of students. So with -- going forward, we shall see a possible reduction as well here in this line.

Regarding PDA, on the right, PDA increased a little bit compared to the first quarter of last year. It is more or less aligned to what we have seen in the last quarters but is higher than what we saw in the first quarter of last year. And this was due to 3 reasons: The first one was the very strong intake we had last -- in the last -- in the second half of last year. Last year, in the second intaking cycle, we grew 40% versus the second semester of 2019. So as you know, the -- most of the PDA is concentrated around newcomers. So there's newcomers. They are part of explanation for this increase in PDA. Second one is, of course, our current economic crisis. We cannot avoid it, which is true, which is different from what we saw last year. Last year, the pandemic and the crisis hit us harder in the second and the third quarter, not in the first one.

And also, third one, the fact that our hubs are closed. Our model is a hybrid one. Our typical traditional model relies on this weekly meeting with a tutor in hub. It helps us to keep the students more engaged over time. It brings the sense of community that I mentioned before and enhance engagement. So as we move out of the pandemic and with the return of the weekly meetings at the hub, our numbers here as well show a return to normal numbers as we go out of this pandemic.

On Page 16, net income and cash flow. Net income, there was a reduction in net income, basically because of a one-off we had last year. We -- last year, we recognized for the first time deferred tax assets of around BRL 18 million. So if we see the cash earnings that we had, it is virtually doubling. So if you take out this BRL 18 million last year, the net earnings would have grown from BRL 8 million to BRL 16 million, more or less. So an important growth as well in net earnings on a cash basis.

And here on the right, a very important growth in cash flow from operations and adjusted cash flow conversion from operations. We have here an important increase in the cash generation and the cash flow conversion of more than 100%, 107%. This is very important for us. We attract students, we retain students, and we collect from them as well. We are very focused about receivable management. We -- for example, we could have a higher student base, for example, if we simply provided discounts for people to renew with us without paying their tuition. It would have been very easy for us. But it would have not been an nice indication from a cash flow perspective. So that the balance between ticket, student base, retention and cash flow is very important for us as always.

Now regarding expansion on Page 17. On top of the growth in the student base in our digital education segment that I mentioned already, we -- as I said before, we are -- we launched the new technical courses in the fourth -- in the beginning of this year. And with the success that we saw, still in very few hubs, we decided now to expand this new offering of technical courses throughout Brazil in the second half of this year. Now we are going to offer this in around 145 hubs throughout Brazil.

This is a new growth avenue. This has a huge potential in a very, very fundamental market. And the public -- the typical client is the same person that later on will enroll and engage with us in our critical undergrad courses. So for us, here is a very important way to enlarge the life-long dealing with the students over time, minimizing the cost to attract this client.

And last but not least, on Page 18, M&A. M&A, we are going through the funnel. We are advancing in our process. We have been discussing with a number of players and we -- with a few of them, we are, I'd say, advancing strongly and quickly in the M&A process. Nothing yet to be announced, but we trust to be able to announce them to you quite soon.

So to wrap up on Page 19, key takeaways. Again, we are the leading pure player in digital education in Brazil, delivering above growth, above expectation of [Bofa]. We promised during the IPO last year, delivering an important growth in average ticket -- sorry, in the base with a healthy ticket with improvement in margins and an important focus as well in the Southeast with cash flow generation. So all of that, that you know of as well to capture future growth.

So with that, I would like to open for questions.

(Operator Instructions)

And our first question comes from Vitor Tomita with Goldman Sachs.

So we have 2 questions on our side. The first one is if you could elaborate a bit more on competition dynamics during this kind of stretch of intake process? And our second question is if you -- is how relevant do you believe Flex Courses could be in the long term, say in 5 years from now, as a percentage of your revenue or student base?

Thank you, Vitor, for your questions. The competition dynamics in the first quarter. I guess that with the delay in the ENEM, everybody had to compete a bit further -- a bit stronger this quarter than in a normal quarter, I would say. And then it's a very important piece in the overall enrollment calendar. So this quarter, there was in the, I'd say, in the first half of the intaking cycle, I would say, a more competitive environment, especially in January and February. Then in March, April and May, I'd say it was more normal. So with that, we had a very competitive scenario. We were able to deliver a nice growth. But I guess it was slightly stronger in the first months of this intaking cycle because of the delay of the ENEM. Everybody had to, obviously, to fight a bit stronger.

And for the second question, the Flex Courses potential, I mean, we -- I don't have you the percentage that we can have in Flex Courses in the future. We have in Brazil around 800 cities, for example, that are between 20,000, 40,000 people that we could enter with our Flex Course format. So they would typically focus on series that are bigger than 40,000 people in total population. So Flex Course has an important potential to expand this growth and facility growth. I don't have a number to see what will be the target for Flex Courses. But this is clearly an important driver as well for our growth potential going forward. And with that, we can -- now we can see that we can reach every corner of Vitru.

(Operator Instructions) I would now like to turn the call back over to Carlos Freitas.

Yes, we have here a question from Pedro from BTG. He was -- he's making 2 questions.

First one, what is the ideal level of PDA looking forward?

The PDA, as I said, is very higher around -- within the newcomers, the intake, and much lower with seniors. So the ideal level of PDA is something very tricky, very, very dangerous. I mean if we stopped growing next quarter, for example, if we don't have any intake, our PDA will be very smaller in the second half of this year. So it will depend on the growth that we have. What we expect to see is that given the nature of our growth, this number here that we had of 16%, that last year was around 14% show slowly decline over time as we have more seniors in our student base compared to newcomers. So this will -- that I'd say, overall, in the medium term, we shall have a PDA level of around, I'd say, 9% to 10% within, let's say, 4, 5 years, because we are going to keep growing a lot our student base. If we stopped growing, PDA would have been smaller than that.

The second one -- the second question of Pedro is what is our expectation for the next intake cycle? It is, I'd say, very strong. We have been preparing ourselves for the next intaking cycle. It will, of course, depend on how the pandemic evolves in Brazil because we -- it is a fact that the hubs closed affect our intake cycle. But even with that, we had 32% growth this quarter -- this semester and 40% growth in the second semester of last year, which was within the middle of the pandemic. So we have a very strong, say, prospect for the second half of this year as well.

(Operator Instructions) I'm not showing any questions at this time. I would now like to turn the call back over to Carlos Freitas for closing remarks.

Thank you, operator. So I guess we were able, again, to deliver nice numbers. And myself, Carolina and whole IR team, we are at your disposal to -- for any other questions. Thank you very much.

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