Vitru Limited (NASDAQ:VTRU) Q1 2024 Earnings Call Transcript

Vitru Limited (NASDAQ:VTRU) Q1 2024 Earnings Call Transcript May 13, 2024

Operator: Good morning everyone. Thank you for standing by. Welcome to the Vitru Brazil’s Q1 2024 Earnings Conference Call. I’d like to highlight that for those who need simultaneous translation, 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. Choose your preferred language, either Portuguese or English. For those listening to the video conference in English, there is an option to mute the original audio in Portuguese by clicking on Mute Original Audio. We would like to inform you that this video conference is being recorded and will be made available on the company’s IR website, investors.vitru.com.br, where the complete material of our results disclosure is available.

It’s also possible to download the presentation through the chat icon, including the English version. During the company’s presentation, all participants will have their microphones muted. Following that, we will start the Q&A session. [Operator Instructions] To emphasize that information contained in this presentation and any statements that may be made during this video conference regarding the business outlook, projections and operations and financial goals of Vitru Brazil constitute beliefs and assumptions of the company’s management, as well as information currently available. Future considerations are not guarantee of performance. They involve risks, uncertainties, and assumptions as they relate to future events, and therefore they depend on circumstances that may or may not occur.

Investors should understand that general economic conditions, market conditions, and other operational factors may affect the future performance of Vitru Brazil and lead to results that materially differ from those expressed in such future considerations. Today we have the presence of the company’s executives, William Matos, CEO of Vitru, and Maria Carolina, Head of Investor Relations, and her team. I’ll now give the floor to Mr. William Matos.

William Matos : Good morning, everyone. Welcome. — I hope everyone is okay. It’s a pleasure to be here together to present Vitru’s first quarter results for 2024. I am William Matos, CEO of Vitru, temporarily I’m also serving as CFO. I’m joined by Maria Carolina, our head of Investor Relations and [Luis Felipe and Vitor Augusto] (ph), IR analysts, and we also have here at [indiscernible] our VP of [indiscernible]. The results presentations that you’re also going to see here are available on our IR website along with the quarterly results released. So we’re going to begin on Slide 4 with the highlights of this quarter. That was a very important quarter. We delivered solid results. And proudly like to begin by highlighting that recently Vitru was recognized by two of the most important outlets in the US as one of the top five EdTechs in the world.

Time Magazine, in partnership with Statista, that’s leader of data markets, valuations, they disclosed the ranking considering all the top EdTechs in the world and Vitru was on the fifth place and this recognition no doubt reinforces our focus on delivering quality digital education. Another important to highlight that we finished our first quarter with almost 940,000 students, a record for our company, which shows the strength of our brands and justifies our expectation for a very good year ahead. This number was brought by the strong growth of our continuing education area. It’s a great movement that we’ve been waiting to build loyalty in our students’ [meet] (ph). And I have to highlight, emphasize, that this growth was not only greater than that, because Vitru, alongside with this integration, and best practices between Uniasselvi and UniCesumar has unified some criteria for student activation.

And I’m going to talk a little about that shortlist. Another highlight that’s very important here is the advance in this de-listing process from NASDAQ to B3 on April 19. Shareholders approved in the general meeting the merger of Vitru Limited by Vitru Brazil and then initiated the period where shareholders must express their choice to receive shares free or some temporary ADRs of Vitru Brazil through the election form and we have to remind you that the period for submitting the form ends on May 21st. So following this slide we can see that our differentiated strategy and positioning have led to a new expansion of the average ticket of the distance learning graduation in this quarter, and this time by 3.4% compared to the first quarter of 2023.

Percentage was very close to the inflation variation in the period and this number is for sure a validation of our strategy that is to have like always have competitive prices but keeping the quality — the superior quality of the products. Regarding the financial highlights, we can mention 13.5% increase in consolidated net revenue. This increase was based on the strong expansion of our continuing education and medicine and nearly a 10% increase in revenue for graduation in the quarter. So it’s important to notice that all this growth in the first quarter of 2023 was purely organic. And [down below] (ph) you can see the adjusted EBITDA for this quarter that has a modest growth of 1% and a margin decrease to 33.9% which is still higher than the average in the sector.

As you will see shortly, this margin decrease was part of a strategy to advance the enrollment of students for the year. The EBITDA margin for 2024 is expected to be slightly higher than the margin for the year 2023. It’s important to highlight that we expected this number. It doesn’t worry us. It’s a part of our strategy this year, and it’s likely that it’s going to decrease along the following quarters, and it’s not going to repeat with the same amount. Finally, based on our model called asset-light and our scale, now all the quality of our operations, we’ve had a high cash conversion with a strong growth in cash flow this quarter. Those numbers are proof, solid proof of the efficiency of our business model and the efficiency of our management model.

Now moving on to Slide number 6, I’d like to start by providing some more details about the harmonization of criteria for student activation this year. As we announced previously in our latest disclosure, and as a part of the process of exchanging best practices between our two brands, we made some adjustments in Uniasselvi in early 2024 to align the criteria for student activation for the purpose of recognition in the student base with the standards that we used at UniCesumar. In the short-term, as we can observe, it means a lower nominal growth in 2024 compared to 2023, both in the student base and also the net revenue. But we understand that this harmonization is paramount, essential for us to have a strategic deal of the business and from that on we are going to be able to plan our growth in a sustainable way, in a very precise way.

And this movement is also proof of the trust and the confidence that investors can have in our management. Therefore, as you can observe on the slide, the impacts of this harmonization are approximately 94,000 fewer students in March 31, 2024, about 11% of the graduation from this [situation] (ph). And approximately R$18 million less in net revenue for the first quarter of 2024. It totals about 3.5%. Besides that, it’s important to highlight that this harmonization has no impact on our cash flow. Repeat that just to be clear, it has no impact on our cash flow. And it’s because this invoice is generated for non-engaged students, we’re not paid. And later they turn into allowance for doubtful accounts, PDA, which is [PCLD] (ph), over the 12 months following the invoice issuance.

So it’s going to have positive effects for Vitru, which will be the reduction of this provision for doubtful accounts throughout ‘24 and ‘25, as well as better retention rates for students. Of course, this is something that cheers us up. And another aspect of this harmonization, the last bullet’s point, is that we’re going to have a positive tax effect, a slight reduction in the payment of ISS, that is, tax on services, or this invoices for unengaged students which were not paid. So moving on to Slide 7. We show that our enrollment in long-distance graduations grew by 10% this quarter. It’s important to highlight that, because we had already grown very strongly in the years of 2023 and 2022. Additionally, we can also see that the growth of the consolidated enrollment in long distance graduation of Vitru’s over the last three years was 21% per year.

Those numbers reflect our competence of leadership in long distance graduation. In the graph on the right, we also show the breakdown of the enrollment this quarter between an engaged students who are recognizing enrollment and in this phase and non-engaged who are no longer starting this quarter recognized. So you can see that approximately 25% of the enrollment this quarter was from non-engaged students. Moving on to the next slide, we show the continuous growth of Vitru student base. As you can observe in this quarter, it increased by 6%. When we look only to long distance graduation, the growth was 5.6%, remembering that we are the largest distance learning company in the country. Therefore, we have a very high comparison base and a strong historical growth.

This growth is now supported by much more engaged students and we are confident on the advantages of the way we have walked the path we have [threaded] (ph). So from the first quarter of ‘24 the non-engaged students at Uniasselvi, meaning those students who signed a contract with UniCesumar but did not take any exams and did not paid any monthly payment, they are no longer included in the student base. As you could see, it clearly has an effect on the total size of the base. It now reflects much more engagement. Again for you to have a good perspective on the solid results, in our previous criteria we would have 94,000 more students, which would mean a growth of approximately 17% in the snapshot of the long distance graduation student base in March 2024 compared to 2023.

In other words, it would be like 11 points more. To explain that a little bit better, I can tell you that I am very, very excited about that. And I’ve been using a metaphor, just like a racing driver at Formula 1, the best squad in the late years that is ahead has been investing a lot in the best mechanics, but it feels that the car is not delivering the best performance. Now we could see that the right wing in front had a different angulation. It was simple to solve, to fix, and it brought a great result. So as Vitru, we have been investing a lot and we’ve been putting all the effort on the quality of our products and courses and that low engagement was not making sense and the ADA was not making [sense] (ph). With all those adjustments and observing the trees of some numbers it doesn’t take us from the first place, out of the first place, and we are very excited with the results that we are seeing ahead.

So now to move on, I’d like to give the floor to Carolina, our Head of Investor Relations that’s going to report following information.

Maria Carolina : Moving on to slide 9, we showed the growth of the long distance graduation [days] (ph) in every region of Brazil, considering the new criteria of student activation. Looking at the map of Brazil in the graph of sentence by region on the right side of this line, the continuous progress in the southeast region of the country is very evident. So we are already present in all states for a long time, but more recently we have accelerated the penetration of our brands in the state of São Paulo. And besides that it’s important to remember that the southeast region has a denser population concentration and many opportunities for expansion of both brands. Therefore, the number of centers in this region is going to continue to gain relevance.

When we talk about slide number 10, we see the Vitru national presence. In the table on the left, it’s visible how the brands complement each other directly. The Vitru has nearly 2,500 centers distributed across more than 1,400 municipalities. In-line with our synergy plan, what we call cross-expansion, we reached the milestone of 717 cities, offering both brands, which is almost 70 cities more than the [previous] (ph). On slide 11, we demonstrate Some of the quality metrics from our students’ perspective are focused on delivering quality data [management solutions] (ph), and it’s evidenced by the ratings that users give to our apps. We have the highest rating apps among the listed players. It’s worth remembering that our apps are appropriate to the criteria and constitute an important part of our learning journey.

So we are committed to deliver an excellent experience to our students. On the right side, we also highlight the evaluations from the Brazilian website, Reclame Aqui, strive to resolve all the issues reported by our students in the best possible way, therefore our reputation is above the average for the other listed players. So now I give the floor back to my colleague William to move on the presentation.

William Matos : So moving on slide number 12, we move on the average ticket data. You can see that there was an evolution, an average growth in the house of 4% in the last three years, already considering Vitru as a whole, that is Uniasselvi and UniCesumar. Therefore, this variation, very close to inflation, confirms how different our products are and our positioning as a quality player in digital education. It’s important to note that the average ticket increased even with a slight change in total enrollment this quarter, the decrease in representation of premium courses that are like healthcare courses and engineering courses, which as you know have a higher ticket price. And we had an increase in the weight of the technology courses, which have a lower ticket price, as we demonstrate on the right side of the slide.

We’re going to slide number 13. We follow with the main financial indicators for the quarter highlight. As you can see, as we saw earlier, we had an expansion of approximately 14% in net revenue and 1% in adjusted EBITDA. It’s important to highlight the increase of 2.8 percentage points in this quarter for the gross margin, collecting the benefits of integration and the savings in scale we have in the company. On the following slide, it’s interesting to see that this quarter, the main paths for growth in revenue were medicine and continuing education. The business of continuing education increased its net revenue by 46%, which was quite impressive and demonstrates the great potential for digital lifelong learning in Brazil. We believe it was a very assertive movement that we have made this year based on the breaches of growth that we could observe, especially with the assumption of being like the [Vanguard] (ph) in this big market.

And we can look at our medicine operations, which we could see a 30% increase in revenue for Q1 2024, due to a combination of maturation of vacancies and an increase in the average ticket. The revenue of those segments will be discussed in more detail shortly. In this regard, on slide 15, we see that the proportion of these businesses within Vitru’s overall portfolio, increasing the first quarter of 2024 compared to the first quarter of 2023. In other words, you can observe that the continuing education business has increased its representation from 5% to 6% of Vitru’s total, while our operations in medicine have risen from 13% to 15%. On the other hand, the share of long distance graduation decreased from 72% to 70% of total revenue, especially as we are already considering, it’s important to say that, the new criteria for student activation, as I explained before.

And moving on to slide 16, we see the 10% growth in that revenue long distance graduation, EAD. Additionally, in the graphs on the right side of this slide, we can see the historical growth of this EAD market in Brazil, long distance education in Brazil, and the continuous expansion of our market share within this market, according to INAB, the Brazilian Institute. We strongly believe that the long-distance graduation sector in Brazil has a long period of growth, a lot of room for growth in the coming years and quality EAD is the solution for the penetration gap in higher education in Brazil, college education in Brazil. So moving on to the slide number 17, we demonstrate the evolution of net revenue from the medicine course in Q1 2024 compared to Q1 2023, showing a 30% increase.

Important to remember that this increment — this increase is a combination of the maturation of medicine vacancies and the evolution of the average ticket price. And it’s worth noting that our medicine college is the largest in the southern region of the country, located in a city that often ranks among the best cities to live in Brazil. And this is like combined with the high-quality of our institution and the service provided to our students have the fifth best medicine course among private institutions in Brazil. That’s how we can explain our average ticket price that is above the national average. Besides that, in recent months, the institution, [SISMANA] (ph), has improved the filling of those vacant spots. It contributed to the great result for this great performance of the segment.

So moving on to slide 18, the graph on the left shows a slight recovery in the [present show] (ph) education face-to-face segment. It was explained by the context of the end of the pandemic, but it shows a consistent evolution of long distance compared to the face-to-face segment. And we believe that this is the reality of the education sector. And of course, in the digital economy, students will see quality long-distance education more accessible and connected to a reality that might be for financial, cultural, or logistical reasons, but this slight recovery of the face-to-face segment does not make us believe that it’s going to be strong in the future. And on the right side, we demonstrate a strong expansion of revenue from the continuing education segment, as I mentioned before.

It grew by 46%. The performance is directly associated with our strategy of diversification and complementarity throughout the journey of our students. Moving on to the next slide, number 19, will show you some more data regarding this potential room for growth that Vitru believes so much. As you can see there is a very interesting opportunity in this segment that is still not so well explored by high-scale players. And this is the continuing education segments. And we consider technical courses, vocational courses, and post-graduate programs. And as you can see on the left, according to the latest census data in Brazil, 1.2 million students graduate per year has the potential target for post-graduate courses. And in addition to, of course, [lots] (ph) of professionals that were already graduated and are looking for new training.

And when we look at high school, the numbers are also significant. With 7.7 million students per year, young students over 16 years old, considering the socio-economic characteristics of our country, these young individuals are about to enter the job market and find in technical and vocational courses, a gateway to their first job. Besides that, in addition, the new regulation of technical education, institutions apply to have new vacancies authorized by the federal government. Few listed players, meaning those with national presence, and a few players looked into this market in Vitru through the brands UniCesumar and Uniasselvi, obtained almost 43% of the regulated vacancies. On slide number 20, we show the evolution of EBITDA between periods and from Slide 21 onwards, we’ll begin explaining the costs and expenses.

So as you can see on slide 21, left chart illustrates the 2.2 point reduction in service costs proportionally to a percentage of net revenue. As you know, this gaining gross margin reflects both gains in scale and the recent impacts of integrating UniCesumar into [Uniasselvi] (ph). However, I’d like to tell you in advance that throughout 2024, we’ll see an increase, a slight increase in Vitru’s direct costs. That is a natural consequence of implementing many health care courses over the past few years. And this process of maturation of those courses elevates some certain costs, such as like a greater need for receptors and internship fields for hospitals and stuff. In relation to general and administrative expenses, Vitru has maintained a very lean structure with G&A representing only 6.4% of net revenue this quarter, one of the lowest in the sector.

Moving to slide number 22, on the left you see the expenses in marketing and sales that increase approximately 5 percentage points on net revenue this quarter. This increase was due to the company’s strategies of anticipating enrollment with a healthy average ticket along with the positioning strategy in areas with greater demand, complexity and greater competition, as we said before, the state of São Paulo in which we are focusing our efforts now. It’s important to say that for the year we anticipate that the marketing and sales expenses as a percentage of net revenue will remain very close or maybe slightly higher than the expenses that we’ve reported in [2020] (ph). On the right side, the right chart, we can show that the [BCLD] (ph) ADA in English is slightly higher in Q1 2024, reflecting the strong enrollment of 2023.

However, it’s worth noting that – there is a downward trend expected throughout 2024 and 2025 due to the harmonization of student activation criteria as we explained at the beginning of this presentation. So let me have some water here, Carol, please.

Maria Carolina: On slide 23, we have two important messages to highlight. The first one is the strong cash generation of the company. So the cash conversion reached 104.6% this quarter compared to the first quarter of 2023, which is an exchange of best practice and implementation of the credit evaluation system in the third quarter of 2023. The second message is a quite significant [indiscernible] in addition to the evolutions of results that we have explained so far, net profit is an update of the cost expectation of the cost of debentures in-line with the [accounting] (ph) with an effect of approximately 25 million on financial expenses [toward the end] (ph) of this quarter. And it’s worth mentioning that we expect financial expenses to start increasing from the third quarter if the economic scenario remains stable.

And this also reflects a lower recognition of the deferred tax in this period. It’s important to state that our CapEx is relatively low and reached only 4.3% of revenue this quarter. It’s a decrease of 0.2% points versus what we spent in Q1 2023. On slide 24, we have perspective our debt and leverage. This quarter we had a strong operating cash generation. The net debt was slightly stable, and it is explained — the update of the expectation of the effective cost of debentures, as I mentioned on the slide. And In relation to the covenant of that over adjusted EBITDA, our leverage is way below the covenants and during this year we’re going to lower this leverage. And now I give the floor back to William.

William Matos : Thank you, Carol. Finally, on slide 25, [like to tell] (ph) the market our guidance for net revenue and adjusted margin. For 2024, we estimate net revenue between [R$2.150 billion and R$2.250 billion] (ph). It will lead us to a growth between 10% and 15% regarding 2023. Besides that, our EBITDA margin in 2024 shall be between 36.5% and 37.5%. At this moment it’s important to highlight that this result considers our great growth that has been fantastic in the last three years. So our strategy moves on with focus on the student in on the quality of our services but keeping the financial discipline that’s very important. In other words, this guidance reflects what we have already expected that in percentage terms our results will grow in some more reasonable rates since we achieved that size, a relevant size.

So with that, we finish our presentation. And now before I give the floor back to the host, I’d like to thank you all for all the trust and confidence and we have been putting all the effort to deliver the best results and we are very confident that we’re going to have a great year for Vitru and that all the adjustments are for making this company better and all the strategies are based on this premise of like surpassing our own records and improving our own quality. Now I give the floor back to the host for us to open the Q&A session. Thank you very much.

Q&A Session

Operator: Now, we begin the Q&A session. [Operator Instructions] Our first question comes from Lucas from Morgan Stanley. Lucas, we’re going to open your audio so that you can ask your question live. Please, go ahead.

Lucas Dai Nagano : Good morning, William, Carolina, thanks for the opportunity. We have two questions. The first is regarding the margin on the first quarter. You said that the year is going to be better. And you said that there is probably a cost pressure. My question is about drivers that you’re seeing to compensate that. Do you think that [intention] (ph) is the increase in marketing, is an advancement in the cost for a new level, or when [PDD] (ph) is going to reflect on this new harmonization practice. Second question is about regulation. Do you have any update on the changes the rules in some courses that have some different discussions as nursing, for instance.

William Matos: Thank you. Thank you, Lucas, for your question. So regarding the first question, yeah, in reality, we are very, very calm as we see the [drives] (ph) to talk about our expectation for the full year. Despite we have mentioned the slight reduction in gross margin due to some costs as health care courses, as I said. But the marketing investment, as I said was of course in advance that we have predicted for our strategy. So some costs are going to be reduced throughout the year to guarantee the delivery of the margin guidance and this new model of harmonization, as we said might cause some increase in the [IDD] (ph) for 2024. It’s going to help our margin to be aligned with the guidance that we. And regarding regulation, our new regulations for education, Vitru is very, very calm due to some hybrid models that we have in our courses as a nature of the courses.

We have been paying attention to all those movements and as we have said before everything that is related to quality we understand that it’s something that’s going to be positive, it’s going to have a positive impact on the segment and regarding new courses and changes in this year for new areas we have not seen any issues in the National Education Council, we are very close to them and we are also looking for understanding all the necessary movements, but it’s important to remember that every and any change in [DCN] (ph) regulations. The institutions have two years to implement the changes proposed. So we are going to study them very carefully to understand. But as I said, we have a hybrid model as a nature at Uniasselvi and UniCesumar and we are very relaxed about the regulations because they are exclusive for the teaching courses, the [essential courses] (ph), and we have a good percentage of face-to-face segment in our methodologies but we’re going to study this market to adjust for the future changes.

Lucas Dai Nagano : Thank you William, That was very, very clear. Thank you.

Operator: Our next question comes from [Pedro Oliveira] (ph), buy-side analyst. Pedro, we are now opening your audio so that you can ask your question live. Please go ahead.

Unidentified Analyst: Can you hear me? Yes. I would like to have an update regarding the B3 listing process and how it’s going to impact the liquidity of the company. Do you have any initiative to increase the liquidity of the share?

Maria Carolina: Thanks for your question Pedro, about the listing process itself. We approved on the latest [19th] (ph) the [reverse incorporation] (ph) that justifies these exchange shares at P3. So this arrival at B3 is predicted to happen in the week of June 10th, so in the documents that we release, we explain how the election form works, that investors will choose if they’re going to receive the shares or the ADRs. So we have talked to the brokers, and this process is going to end on June [3] (ph). To arrive at the 3, it’s going to be — let’s enter the radar of a larger number of investors like pension funds and individuals that not necessarily invest abroad. But a big liquidity movement has to be thought in the future, talking time management and the investors have to talk and analyze the market timing, then we move our point competitive to a new level.

But my schedule as the relation head of the company is like busy with local investors. So we really believe in this migration.

Unidentified Analyst: Thank you a lot.

Operator: [Operator Instructions]

William Matos: Without further questions, I’d like to thank the presence of everyone and I have to emphasize that our starting point, each decision is excellence and our biggest target is on being the leader at this market and in fact positively the life of our students. So again, thank you for your trust And we can see that we are on the right path. And I wish a great day to everybody.

Operator: The Q&A session, the Vitru Brazil’s Q1 2024 earnings call is now concluded. The Investor Relations Department is available to address any further doubts and [enquires] (ph). Thank you very much to all participants and have a good day.