Vitru Limited (NASDAQ:VTRU) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good evening, everyone. Thank you for waiting, and welcome to Vitru’s First Quarter 2023 Earnings Conference Call. We advise you that the videoconference is being recorded, and will be available on Vitru’s IR website, where the complete material of our earnings call can be found. You can also download the presentation from the chat icon. During the company’s presentation, all participants will have their microphones disabled, then we will start the Q&A session and at this point, you’ll be able to use your microphone. [Operator Instructions]. We emphasize that the information contained in this presentation and any statements that may be made during the earnings calls regarding Vitru’s business prospects, projections, and operation, and financial goals constitute the beliefs and assumptions of the company’s management as well as information currently available.

Forward considerations are not performance guarantees. They involve risks, uncertainties, and assumptions, and they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions, and other operating factors may affect Vitru’s future performance and lead to results that differ materially from those expressed in such forward-looking statements. Today, we have the presence of the company’s executives, Pedro Graça, William Matos, Vitru’s Co-CEOs; Carlos Freitas, Vitru’s CFO and IRO; and Maria Carolina, Investor Relations. We will give the floor to Mr. Carlos Freitas. You may begin.

Carlos Freitas: Thank you, operator, and good evening, everyone. Thanks for joining us again. It’s a real pleasure to be here with you all again for the release of our first quarter 2023 numbers. Here with me, I have Pedro Graça and William Matos, our two Co-CEOs; Maria Carolina Goncalves, the Head of our IR Department; and Raquel Suzaki, Daniel [indiscernible] and Felipe Da Silva from our IR Department. Slide presentation will be part of today’s webcast which is also available in our website at investors.vitru.com.br. Before we begin, as usual, I’d like to highlight and make note that as detailed on Slide 2 of the presentation Safe Harbor is in effect for this call. So now I invite you all to go to Page 4, which is here on the screen.

So here we have some important highlights for this last month, including some news regarding our leadership. The first one is that we are launching the transition period for our Co-CEO structure in which Pedro Graça in up to six months from now, will leave his position as CEO or Co-CEO of Vitru. And we’ll take a seat at the Board of Directors. And at that time William Matos who will take over the sole CEO position of the company. As you remember in August of 2021 when we announced the agreement for the business combination with UniCesumar, we mentioned at that time that Vitru would have these two CEO structure, once we closed the transaction, which took place in May of last year. At that moment, the company started to be led not only by Pedro, but also by William, Pedro was the CEO of Uniasselvi had been since 2016, the CEO of Uniasselvi and Vitru, and William was at the time the Head of the Digital Education Business of UniCesumar, which was created by him and his team back there in 2006.

So this Co-CEO structure accelerated this integration process, which has advanced quite well as you know, and already produced some nice numbers, nice synergies, and margin gains as you all saw when we announced the results of last year in March of this year. With that in mind, we are confident to take one step further and move to the next phase. So we’re now starting this position — this transition position that I just announced. So this process was, structure was designed in a way to ensure continuity, a very smooth transition period, and to maintain the core values and the competitive advantages of both brands. At the end, I will ask Pedro and William to have some words here with you. Here on a different note, the Board approved today a share buyback program for up to 500,000 shares to be potentially acquired over a period of up to 12 months.

At the current share price, it makes total sense to launch such program, which confirms our confidence in the business model of the company and the prospects of the company. It is important to highlight that this 500,000 shares represent today around 6.4% of our reporting, and at the current share price and the current FX ratio the total amount of the program would amount to roughly R$37 million so which is around 18% only of the adjusted net income of last year. On the right part of this slide, another important highlight we reached 886,000 students as of March of this year, an increase of 128% versus what Uniasselvi had one year before. And nearly 97% of them in digital education, mostly, the digital education undergraduate business, which is our core business, which had as of March 800,000 students, which makes us the largest player in Brazil.

And finally, from a liability management perspective, we announced last week the execution of our — of indenture for our second debentures issuance for an amount of R$190 million at an interest rate of CDI +2.6%. So the local interest rate in Brazil +2.6% for a five-year maturity, which is a quite comparative interest rate given the current contest. On Page 5, we have the main financial indicators for this quarter, very solid numbers. And by the way, as you see throughout this presentation, we’re now showing most of the numbers only on a consolidated basis. I mean, given that the integration is well advanced, doesn’t make sense anymore to show organic or inorganic numbers. Now, we are on all Vitru. So these lines of cost and expenses separately we are not going to show only now given that the integration is quite advanced and several areas are already working and serving both brands from a single unit for example.

So here, the highlights in terms of net revenue, in the digital education undergraduate business 105% up this quarter, 150%, the total revenue growth on a fully consolidated basis especially because of the medicine business of UniCesumar. The adjusted EBITDA increased by 255% this quarter while the margin increased 11 points reaching 38% this quarter. So an important increase in margins coming from several sites. You’ll see later on this presentation that we advance in basically every line in our P&L. The adjusted cash flow from operations increased 173% as well, very solid growth with a solid cash conversion of around 80%. And the net income — adjusted net income was up 206% this quarter reaching R$81 million in three months. So, on Page 6 a quick reminder of what we promised that we are going to do and what we did, I won’t spend much more — much time on this slide.

But here is important just to quickly refresh everybody that we said that we are going to increase the penetration, the ramp up of hubs, the entrance into the Southeast, the opening of several hubs, and all of that is being delivered according to the plan that we disclosed back there in the IPO. Which includes, on Page 7, the ramp up of our hubs. So basically, as you know, we have most of our hubs still ramping up. The old hubs, the bait hubs that, as you call them are more or less stable. But all the other hubs and all the other groups of hubs are advancing quite well from the 17 cohorts up to 10 recent cohorts. And this is an important growth driver with quite lower risk of execution. So this translates in Page 8 in a very strong presence throughout Brazil.

So when we compare our overall student base as of March of last year compared to March this year, we increase as you can see here around 100% on average in our areas of Brazil. But in the Southeast, we increase by 340%. This is coming from Uniasselvi, UniCesumar. This is clearly our new growth frontier. Our growth avenue is a Southeast, so we are — we have today the second largest region for our signal-based perspective is the Southeast. It is the region in which we have most the biggest chunk of our hubs. And in a few quarters, will be our most important region. And why is this important here on a quick snapshot on the Southeast of Page 9. As you know, 53% of the Brazilian GDP, 46% of the total enrollment in the market, 42% of the population.

So this is where we are growing the most. We grew 210% the number of hubs between December 2021 and March 2023 and 420% in terms of student base. So an outstanding growth in a region in which we were not as present in the recent years as we are throughout Brazil. On Page 10, the complementarity of our hubs footprint throughout the country. For Uniasselvi for example, as you know, as you probably remember in the last year — in the third and fourth quarters of last year, we had around 25% of the hubs of Uniasselvi in the Southeast. Now it’s already 30% and around 40% in the case of UniCesumar, so that’s why we are growing the most there. And still with a lot of potential to expand a second brand in a lot of cities in which we have only one of our both brands, because just as a reminder, we had two different profiles of clients, of students, because we do deliver two types of products.

It is not the same distant learning product. Uniasselvi has a hybrid — fully hybrid and only hybrid model with a local tutor, while UniCesumar has a fully online model hub-based, but fully online model with the highest standard of quality. And finally, before we jump into the financial numbers, another important slide on Page 11, the rates that we have — they are still the best in the industry UniCesumar with 4.8 just as a confirmation, as a public knowledge information, credible piece of information regarding the quality and technology that we dedicate to our product. So now, as I said on Page 12, we have some important indicators regards student base for our core business, especially 800,000 students. As I said, 19% of a total student base in digital education, growing a lot throughout the last years, especially now with the transaction with UniCesumar.

And now in this slide this is a new slide that we produce just to have a deeper discussion about intake and average ticket for each of the brands in the digital education undergraduate segment. So this is the exception to the rule that I mentioned before. We are still informing the average ticket, the intake student base of Uniasselvi and UniCesumar in a separate way, because of the different dynamics of these two brands. So in the case of intake, as we said already in March when we disclosed the numbers of last year, we grew around 18% in total, the intake in the first quarter of this year being around 21%, Uniasselvi around 14% in the case of UniCesumar and this despite the very high comparable basis of last year and despite the current crisis and the fact that this is really the first year after the pandemic I mean 2023 — 2022, sorry we still had Omicron.

So it’s no surprise that the digital education sector increased a lot in 2020, 2021, 2022. And in our case, we grew even further down the market so gained market share in this growing segment. So — and this intake growth was particularly strong last year. Just as a reminder, the total intake of Uniasselvi last year was 26% compared to 2021. And in the case of UniCesumar, the total intake of last year was 54% higher than the intake of 2021. So even in this very, very high comparable basis, we are still growing a lot. The intake are 18%, and with rising tickets, which here on the bottom part of the slide. So in the case of Uniasselvi, every ticket growing more or less in line with inflation as we have been doing in the last years. So this is mostly due to our pricing discipline, our marketing approach and the tools and procedures that we have here for pricing that we have been applying for now for some years and discussing with you and shown to you since the IPO in 2020.

In the case of UniCesumar, ticket was up 2.4%. So we are seeing here in this first quarter, the first signs of the new pricing approach that started to be implemented in the current cycle. As you remember the average ticket of the digital education undergraduate business of UniCesumar decreased throughout last year. And the most important reason for that was this higher weight of new students of freshmen in the overall student base at lower tickets, which contributed to this increase of intake of 54% last year. So it was a very, very strong growth but at lower tickets. So this is a clear example of the synergies that we promised to you from a commercial perspective arising from this exchange of best practice between the two companies. In the case of UniCesumar going forward, the average ticket show increase even further going forward for two reasons.

First, because the average intake ticket of the UniCesumar is growing slightly in line with inflation as well, or even slightly more inflation, more or less, versus the same period of last year. And because today with we have another important effect, which is the carrying effect of this huge amount of new students that started with us last year at lower tickets, and now they are carried to 2023 at lower tickets. So this is also an important effect. So going forward, as this effect is diluted, and as we have as well time passing by, we shall have over time a more similar pattern of tickets between the two brands. On Page 14, the main financial numbers, net revenue again 150% gross profit also increasing a lot and especially EBITDA with 255% growth, as I said before.

So deep dive about net revenue. We have the composition of net revenue here on the left part of the slide with most important part-on-part impact being the digital education undergraduate segment, but also as I said the on-campus business of UniCesumar special medicine. And here on the right we can see clearly in the breakdown, especially on the right part of the slide, the right picture, that we have 77% of our business coming from digital education segments being undergraduate, or continuing education, which is basically our graduate business, a digital graduate business, which represents in total 77% of revenues, plus 13% of medical education. So the — so which are the two, let’s say most segments that would the best prospects in Brazil digital education and medicine.

So today have 90% of our revenues in these two segments. Sorry. So now on Page 17, just as a refresh, we have the medical business of UniCesumar as the fifth best medical school in Brazil, very high quality institution with high scale Maringa — the Maringa campus being the largest medical campus in the South of Brazil, which brings higher margins. So net revenue of our medical business reached R$57 million this quarter. Tickets today are at around R$11,000 per month increasing above inflation, and the seats are still maturing. So we expect promising results from our medical business this year. On Page 18, the on-campus business at medical a very important growth here. Basically coming from the contribution of UniCesumar to our consolidated numbers given the resilience and the high quality of the health related on-campus courses of UniCesumar.

By the way, just as a reminder, the health-related courses, which are obviously more resilient than the others. The health course of UniCesumar other than medicine represent today more than half around 60% of the on-campus revenues of UniCesumar. And by the way, on that front, just like to highlight as well that in the current intake cycle, we are seeing an increase in intake of slightly more than 20% in the on-campus business of UniCesumar with higher tickets. On the right part of the slide the continuing education segment here is a very important segment from a complementary offering perspective. So this is probably our next wave of M&A and further growth going forward is no surprise that we intend to grow with other complementary products such as technical courses, courses as a preparation for the first job, et cetera and of course, more in the graduate segment.

So this is a segment that have a lot of potential going forward in this lifelong journey approach. On Page 19, the composition of EBITDA, I’m not going to go through this, next slides. So Page 20, the cost of service today 29% of net revenue slightly higher in fact than the number of last year, basically because of the higher weight of the on-campus business of Cesumar, which is a business with lower margins. On the right parts of the slide G&A keeps going down, which is a confirmation of our lean structured approach and the advancements in the integration. So the G&A in the first quarter of this year was only 6.6% of our net revenue. Turn slide, Page 21, selling expenses, an important decrease of 9.7 points year-on-year for two reasons. First one was of course, this lower intake increase because most of the selling expenses is aimed at attracting new students.

But also and even more importantly, the contribution of Cesumar approach to intake is much more lean, much more supported by the hub partners than in the case of Uniasselvi. So the hub partners, they have a slightly higher share in the tuition. So the revenue share with them is slightly higher than the case of Uniasselvi. And as a consequence, they are in charge of a higher stake in the cost and expenses to attract new students. So an important reduction here in expenses going forward. And for PDA, on the right part, also an important reduction going down from 14.5% to around 10.7%, lower than what we had in the fourth quarter of last year, more or less in line with what we had in the third quarter of last year already with Cesumar which I think it’s a quite important achievement as well in this quarter.

And of course, the most important contribution here was Cesumar not only because of the intrinsic lower PDA levels, for example, with medicine, but also because of superior retention and onboarding practice at Cesumar that are now starting to be implemented at Uniasselvi and that will be an important source of synergies in the medium-term. To finish on Page 22, adjusted net income and cash flow from operations for net income going up 200%, so margins going up even knowing that we have a higher leverage — a much higher leverage this quarter. So 81% — R$81 million, sorry, of adjusted net income and an important cash flow from operations of R$128 million, 80% cash conversion and also this important to highlight that this cash flow from operations is before CapEx. So — and our CapEx is also going down.

Our CapEx in this quarter amounted to only 4.5% of net revenue down from 5.7% in the first quarter of last year. That was it for now. So now, I’d like to open for questions.

Q&A Session

Operator: We’ll now begin the Q&A session. [Operator Instructions]. Let’s now go to the first question. First question today comes from Lucca Marquezini sell-side analyst IBBA. We will open your audio, so you can ask your question. Please proceed.

Operator: The next question comes from Mirela Oliveira sell-side analyst Bank of America. We will open your audio so that you can ask your question, so please proceed.

Operator: The next question now comes from Pedro Caravina, sell-side analyst Credit Suisse. We will open your audio so that you can ask your question. Please proceed.

Operator: The next question is from Lucas Nagano, sell-side analyst from Morgan Stanley. We will open your audio so that you can ask your question. Please proceed.

Operator: Moving on to the next question will come from Marcio Osako sell-side analyst at Bradesco. We will open your audio so that you can ask your question. Please proceed.

Operator: [Operator Instructions]. All right. If there are no further questions, so I’d like to excuse myself. I’m going to turn to Portuguese now. [Foreign Language].

Pedro Graça: [Foreign Language].

Operator: [Foreign Language].

Carlos Freitas: Well, just to come back to English. With that, we close our presentation. Thank you all for your trust. Thank you all for the questions. And in case of any further doubt, we are available here at Vitru. Thank you, and good night.

Operator: The video conference of results referring to Vitru’s first quarter 2023 is closed. The Investor Relations Department is available to answer other questions and concerns. Thanks so much to the participants and have a good evening.