Vitru Limited (NASDAQ:VTRU) Q2 2023 Earnings Call Transcript

Vitru Limited (NASDAQ:VTRU) Q2 2023 Earnings Call Transcript August 10, 2023

Vitru Limited beats earnings expectations. Reported EPS is $0.7, expectations were $0.24.

Operator: Good evening, everyone. Thank you for waiting. And welcome to Vitru’s Second Quarter 2023 Earnings Conference Call. We advise you that the video conference is being recorded and will be available on Vitru’s Investor Relations Web site, 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 operational 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 and those expressed in such forward-looking statements. Today, we have the presence of the company’s executives, William Matos, Vitru’s Co-CEO; Carlos Freitas, Vitru’s CFO and IRO; and Maria Carolina, Investor Relations. I will give the floor to Mr. Carlos Freitas. You may begin.

Carlos Freitas: Thank you, operator. Good afternoon, everyone. Thanks for joining us again. It’s a real pleasure to be here with you all again for the release of our second quarter ‘23 results. As said here with me, I have William Matos, our Co-CEO; Maria Carolina Goncalves, the Head of our Investor Relations Department. And also [Raquel Suzaki, Daniel D’souza] and [Indiscernible] from our IR Team. The slide presentation in front of you will be part of today’s webcast and this is also available in our IR site at investors.vitru.com.br. Before we begin, as usual, I’d like to make sure that as detailed in Slide 2 that you know that Safe Harbor is in place for this call. So now I’d like you to go to Page 4, which is here. So here we show a few key operational highlights of the quarter.

The first is that this is the first anniversary of closing of our business combination with UniCesumar that we closed in May of last year. And as we know, as we have been following the company, we have been advancing a lot in the integration process of both Vitru and UniCesumar. We reached in June of this year 920,000 students, 97% of them in digital location with a 17% increase in the first intake cycle of this year, in the first half of this year. The average ticket increased about 3%, 3.2% in the first half of this year, which is more better indicator for the full academic cycle, the semester number, confirming our approach to pricing, our price discipline, and our product differentiation. On Slide 5, we have the main financial indicators for this quarter.

Net revenue from our core business, which is, as you know, digital education undergraduate was up 58% in the quarter with the overall net revenue increasing almost 70% in the second quarter of this year. The adjusted EBITDA increased by 73% for more than the increase in revenue, which means that our margins increased this time to 38.8% in the second quarter compared to 38% in the second quarter of last year. Adjusted cash flow from operations also increasing even further, 119% increase quarter-on-quarter, with a solid cash flow conversion from operations of 86.7%. And finally, the adjusted net income was up almost 100% as well, reaching R$123 million in the quarter despite our current debt. So on Page 6, this is a new slide that summarizes how we position ourselves and what we have achieved since the 2020 IPO.

We have always said to you that we are the only player, only little player, in Brazil with true focus on digital education. We are now the largest player in digital education in Brazil. So with not only our focus on what is growing the most in the high education sector in Brazil, but also the largest player in this sector. And here are some indicators that show our performers of the Virtu, now compared to the Virtu pre IPO. I know that most of you know the numbers, but it’s also interesting to highlight what we have been able to grow in the last three years, both in terms of revenue or financial indicators and also operational indicators. So revenue up by 290%. EBITDA, we were a company with R$117 million EBITDA before the IPO. Now we reached R$650 million in the last 12 months.

The number of students also increased a lot. Hubs, cash flow from operations, 500% increase over the last two years. So this is just to illustrate what we have been able to grow in the last years. On Page 7, the numbers of our digital education undergraduate segment students reaching 837,000 students. So a 13% growth on year-on-year and almost 900,000 in digital education as a whole including our graduate segment. So this is an important growth. We are reaching the number of 1 million students, which we probably going to reach next year. And we had this 13% growth in student base in June of ’23 compared to June of ’22, which we believe is a remarkable achievement. And knowing that we had a very high comparable basis of last year and the fact that the first full year [the first year-over-year] after the pandemic.

I mean, it is no surprise that the digital education segment grew a lot in the last three years, and we grew even more. So we gained market share within this growing sector. And just to illustrate, just to remember that last year our intake growth was particularly strong. We grew the intake of 26% of Uniasselvi and 54% in the case of CESUMAR. So that’s why here in the bottom right part of this slide we show here as well the CAGR, the annual growth in the last two years. So 21% CAGR between June 2021 and June 2023. On Page 8 some indicators of our growth. For our maturation index around 48%, so we have the capacity of more than doubling the size of student base with our current hub base. So the cohorts of hubs keep growing over time as we have always said, this is a important growth driver for revenues with limited execution risk.

The following page on Page 9, we have the breakdown of our student base per region in Brazil. So 13% overall in the last 12 months with a important growth in the southeast of 21% and also in the northeast and the center west of the country. So now we have almost 200,000 students in the southeast of the country, which represent already more the biggest region in terms of hubs for us. So around almost 800 hubs that we have only in the southeast, which by the way is highlighted on the next slide just to summarize, growth of hubs 18% year-on-year, growth in student base 21% year-on-year and this is a important growth driver. This was something that was asked about a lot during the IPO, our capacity to grow, to execute growth in the southeast and we are showing that we can do it.

Page 11, the breakdown of our hub footprint, which I don’t know, is quite complementary between CESUMAR and Uniasselvi. We keep opening hubs throughout the country, not opening hubs for the sake of opening hubs. The size of a company is not measured by the size of hubs or the amount of hubs, but it is — we open hubs when we do feel that there is a demand in that given area or city. But we keep opening hubs, because we do believe that there is space to be occupied in the country. And why do we grow more, because of our focus on technology and a differentiated customer experience. Again, this is a slide that we show every quarter just to highlight that — which is public information, which is comparable. We have our X rated 4.8 out of 5. So a very nice rating.

And this is very important because the cell phone is the most used means to reach our students. Our students, they are — everybody has a cell phone or more than one, not everybody has a computer. And in our case, people commute, people study with a cell phone, people listen to videos, et cetera. And having a very nice and tech oriented app is a way to reach the students and a indicator that of our focus on technology. So on Page 13, in this slide, we show details of the intake and average ticket for each of our brands in the digital education undergrad segments during the first semester of this year, which as I said, better reflect the academic cycles. So regarding intake, the intake growth in the first half of this year was around 17%, which is very close to the intake growth that we showed already in the first quarter of this year.

Again, a strong performance, especially considering our quite high comparison basis of last year. Regarding the current intake cycle that we are still going through, we are halfway in the process. But what we are seeing so far and what we expect for the rest of the cycle is a similar intake growth throughout the second semester of this year. Regarding tickets, in the case of Uniasselvi, a strong growth in every ticket growing above inflation 8.5% year-on-year. This is mostly due to our pricing discipline, our marketing sales intelligence and the tools and procedures that we have been developing over the last years, as we have showed to you since our IPO. In the case of UniCesumar, there was a slight decrease in ticket, especially given the carrying effect that I think in the last quarter, the carrying effect of the substantial volume of new students that were enrolled throughout last year and now are seniors, and they have replaced seniors in the last year, which had higher tickets.

So those new students they entered last year at lower tickets, so there is carrying effect. But what is important to highlight is that anyway, we are seeing — we saw already the first signs of the new pricing approach that started to be implemented in UniCesumar in the first tick cycle of this year. And we are seeing that intake tickets for UniCesumar are growing or grew in fact in the first half, a little bit above inflation. So in a nutshell, the consolidated average ticket grew a little bit below inflation, so 3.2%. And going forward for the year, we’re probably going to see a similar growth either equals to inflation or slightly below inflation on average. On Page 14, some key financial indicators comparing the quarter and the semester.

So strong growth in net revenue, in gross profit, in margins, in adjusted EBITDA, so very strong performance this quarter and this semester. And by the way, it is important to bear in mind that this is a cyclical business, and that traditionally in the second quarter of the year is our strongest quarter in the year, both in terms of revenue and in terms of EBITDA margin. So this is because, in the second quarter of each year, we have the full impact of the intake cycle of the first quarter, which is the strongest intakes quarter in the year as you know. But we don’t have the marketing expenses for this growth. So the marketing expenses are spent mostly in the first quarter of each year. And also we still don’t have most of the dropouts of new students, so it’s usually the strongest quarter every year, the second quarter.

So go into more details on Page 15, the net revenue composition in the quarter, growing almost 70%, as I said before, led by the growth in digital education undergraduate, but also in the medical business. And here in the right part you’ll see the breakdown of this revenue. So today, in the second quarter of this year, we have around almost 80% of our net revenue coming from digital education, either undergraduate or the continued education business plus 13% coming from a very resilient medical business. So it is another way to illustrate our competitive advantage and our differentiation. On Page 16, the digital education undergraduate revenue growing 58% and 76% in the semester growing a lot, and with a very important opportunity regarding the mix of students.

You can see here in the right part of the slide, the breakdown today and the breakdown in June of last year of our student base. And we grew a little bit but what we are growing the weight of premium courses, namely health courses and the engineering courses, which went from 25% to 28%. And so this is important, because those health courses, especially, they are mostly new for example nursing in the case of both brands, some health courses that were not offered in the UniCesumar brand are now being offered. So going forward, we do believe that there is important potential of increasing the relative weight of premium courses and to sustain tickets over time as well, especially because, as I said, health courses, some of them have just started to be offered and also in the middle term, not this year, but in the middle term, we do expect other courses to be allowed to be offered in digital education, such as Psychology and Law.

Page 17, our medical business, just to remember, to highlight that a very high quality business, the fifth best private medical school in Brazil with high scale Maringá being the largest medical campus in the south of Brazil, which means high margins and high leverage, operational leverage. So net revenue in this business offered only through the UniCesumar brand, reached [R$67 million] in the quarter. Tickets today are around R$11,000 per month, increasing above inflation and the seats are still maturing. So we expect promising results from our medical segment this year. Page 18, on the left part of slide, on campus ex-medical business. There are important contributions of UniCesumar to the overall numbers, given the resilience and the high quality of — the health related on campus courses of CESUMAR, which just as a refresh, those courses represent more than half of the overall on campus business of UniCesumar ex-medicine — ex-medical.

So it means high ticket, it means resilience. And again, we are growing intake and tickets in this segment as well. Intake, for example, growing around 20% in UniCesumar compared to last year. For continuing education on the right part of the slide, also is strong growth in this segment, which comprise not only our graduate courses but also a growing business of technical courses and preparatory courses for the first job. This is a promising area and we do believe that we can offer complementary products to our students. We have the tools and the intelligence to do so in a lifelong learning approach. So again, margins growing, Page 19, from 38% to 38.8% in the quarter, only semester basis growing from 33.8% to 38.4% in the first half of this year.

And on Page 21, you can see that the biggest contributor of this increase in margins is our operational leverage. So cost of service as a percentage of net revenue going down both on a quarter or a half year basis. This is due to synergies. This is due to operational leverage and the terms of scale as we grow the business. G&A expenses in the right part of slide, now represented 5% only of net revenue in the second quarter of this year, which just to show, to illustrate that we are a quite lean company and which means more agility, which means more flexibility and also as a consequence of the integration process with CESUMAR. Page 22, selling expenses and PDA. So for sale expenses, a slight increase in the quarterly expenses as a percentage of net revenue, but a important reduction in the semester numbers.

The main reason for that is that we closed, as I said, the business combination in mid-May of last year when the first intake cycle of CESUMAR was already over. And in the second quarter of this year, we had the full consolidation of the overall — of the whole quarter. So on a normalized basis, the quarterly expenses as a percentage of net revenue would have been more or less flat at around 12% of net revenue. For PDA, on the right, PDA was the reverse. It was higher in the second quarter of this year compared to second quarter of last year, but flat on a semester basis. And anyway, this reflects our growth profile and the strong weight of new students in our overall students base. And as I said, going forward, we do expect the yearly PDA of this year to be more or less close to the number that we had last year.

Finally, on Page 23, net income and cash flow. So a very strong growth in net income, driven, of course, by the business combination with CESUMAR with higher margin reaching 23% this year, the adjusted net income margin of the company, and this despite our leverage. And for cash flow on the right part of of slide, we have a important increase as well in cash flow from operations reaching R$160 million in this second quarter with 86% cash conversion. Important highlight that this is cash flow from operations, which means that it’s before CapEx. Our CapEx in the first half of this year was 5.6% of net revenue or R$54 million, which means that if we take it out from the first half of this year, we had more or less R$230 million in cash flow from operations after CapEx. And this strong cash flow generation also reflected in the reduction in our net debt.

Net debt in June of ‘23 was a bit lower than R$2 billion on a ex-IFRS 16 basis, I mean, without leases as a liability. Our adjusted EBITDA, as I showed in the fifth slide, I guess, in the last 12 months was R$654 million and around R$600 million when we have ex-IFRS 16 basis. So having included the leasing expenses. So R$2 billion net debt, R$600 million adjusted EBITDA, so 3.3 the ratio of net debt over adjusted EBITDA ex-IFRS 16, which is way below our covenants. Our covenant was 4.5 for the June of this year. This number of 3.3 was much higher in the beginning of this year because we didn’t have the full impact of CESUMAR. And this number, we believe that it shall reach around 3 by the end of the year, as we generate more cash flow and we do generate more cash flow then we accrue interest.

So our net debt decreases over time and as we grow EBITDA as well. So that was it. And now I’d like to open for questions. Thank you.

Q&A Session

Operator: [Operator Instructions]. Let’s go to our first question. It’ll come from Pedro Caravina, sell side analyst from Credit Suisse.

Pedro Caravina: So I got you on my side. First, I would like to hear your thoughts on the recent decision of the Brazilian Supreme Court on prioritizing new medicine courses through [Indiscernible], we believe this may represent an opportunity for our larger groups. And I would like to hear on Vitru’s — what is the strategy for Vitru’s thinking that UniCesumar’s solid medical business is performing very well. Is there an opportunity for trying to expand its seats base or should we expect a prioritization on distance learning and maybe thinking on selling the medical business? So if you could comment on that. And also, going through the release, you mentioned that there is a challenging macro scenario. And even so Uniasselvi has been able to pass through tickets on a sustainable level above inflation and doing it pretty well.

Now that the semester is over, I would like to understand better where did the demand for new students came from, are larger groups gaining share from smaller ones, is it — the sector is expanding, because looking at other educational groups’ results, we saw a very strong first semester in terms of student base, which wasn’t expected by the end of 2022? So if you could provide us more call on that, I’d be grateful.

Carlos Freitas: So regarding the medical business and [Indiscernible] [medicals], we do believe that the decision helps to minimize uncertainty and risks in the sector, which is always good. And we do believe as well that the opening of new medical courses should follow the mathematical legislation and the ministry legislations to maintain and to have a minimum standards of quality as well in the industry. So for UniCesumar, I mean, we have a very strong medical business with two camps, especially in the one in Maringá, a very nice brand in the area, in the state of Paraná, especially in the area of Maringá. So we will analyze. Maybe there is an opportunity to increase some medical seats here and there, using the strength of the UniCesumar brand in the surrounding area of Maringá, for example, or in the overall state of Paraná.

So this will be analyzed on a case by case basis. This is not our core business but it is a relevant business of the company. So we will analyze in due time. Regarding your second point for demand, where’s demand coming from? I mean, it was always our belief and our speech, by the way, that digital education was not a temporary session that digital education is here to stay. And that there is a clear trend in the preference of the clients, of the students, of going more and more to this way of studying to a digital education approach, especially in the case of UniCesumar and ourselves that we have a nice quality. So to us, it’s no surprise that the segment is growing and it’s growing even — I mean, overall, the segment is growing less than what we grew during the pandemic, of course, because it was different environment, different approach, a different context, but it’s growing as we said that it was going to grow.

We said that, we believed that the sector would grow overall this year less than what we grew in the three weeks, but it was still going to be a double digit growth in the sector and in our case as well. So we are delivering what we said. It is a important segment for growth. And today, we don’t have a very, I’d say, clear picture of whether the big groups are gaining market share from the small ones, but it — probably it is the case that what we saw in the last census from the Ministry of Education. The new one will be released in a few weeks, we hope so. And we’re probably going to be — going to see the same, that the stronger players will probably gain market share, because it is a business of scale for you to offer high quality education and make money.

You do have to have scale, otherwise, either you don’t have — you don’t provide good quality education or you don’t make money. So it is a business scale and we do believe that demand is coming from the overall growth of the sector, but also the big groups are probably gaining market share as well from small groups.

Operator: [Operator Instructions] We now have a question coming from Fred Mendes, sell side analyst from BofA.

Fred Mendes: I have basically one question here. I’m just wondering, I mean, one of the players, also a large player on distance learning, is being very aggressive in terms of increasing prices for the segment? You’re seeing above 15% increase for him. And then I think that’s kind of setting the pace to the sector as well. So just wondering if you are already seeing this impact kind of benefiting the competitive landscape. If there is something, you can also take advantage of it, if something that you believe it is sustainable? Anyways, how this, let’s say, more aggressive on the positive side, move towards the ticket on the distance learning, how this is evolving the competition in this segment?

Carlos Freitas: I mean, this was and this remains a very competitive environment. But it is true that in the last, I would say, 12 months we perceived a more, I’d say, rational approach, for the lack of a better word, to pricing. I don’t believe that it is sustainable to grow tickets 15% per year forever. We do believe and that’s what we always said that going forward we shall have a growth in tickets more or less in line with inflation in some periods above inflation. As we have this year, for example, for Uniasselvi and some periods below inflation as we have now for UniCesumar, but growing slightly above inflation in the intake cycle. So it depends. But I think it’s reasonable to assume that in the next — in the middle term tickets in the sector shall grow in line with inflation.

We don’t see anymore a very irrational competition as we saw in some period, but it’s still a very competitive environment. So each player has to differentiate itself from the others and try to offer a better product for a client.

Fred Mendes: And if I may — if I may do a follow-up, on the provisions front. When should we expect some type of normalization on this line? Anyways, if there is — if 2024 or we can see even earlier?

Carlos Freitas: I mean, for this year, we — to be frank, as I said, we do expect that the PDA for this year shall be more or less the same level of last year. And this is linked to our growth profile. So the fact that we grow a lot, the fact that we are — we’re increasing tickets as well in both brands in the intake cycle. At the end, it leads to higher PDA because of the — as you know, most of the PDA and most of the dropout, by the way, is concentrated in freshmen and new students. So I mean, for this year, I don’t expect a improvement on that. It should be more at the same level as we had so far in the last year or so. But going forward, for 2024, we’ll have two effects, one effect, which is that we will see clearly a reduction in the overall weight of new students in our overall student base.

So I would say the weighted average PDA will go down naturally for next year. And also, which is also important, as said by Pedro before, the macroeconomic environment, as we start to see now interest rates going down, let’s see to which number, but it is effect that we serve the low to middle class in Brazil, which have been affected by the current economic environment. So as interest rates go down and activity picks up, we show — we feel a improvement in this line next year.

Operator: The next question received comes from Lucas Nagano, sell side analyst from Morgan Stanley.

Lucas Nagano: We have two questions, the first one is related to margins and synergies. It has been improving significantly last year, partly because of the consolidation, partly because of the synergies as well. But now the comparable basis is getting tougher and the expansion is accelerating. Do you still see room to keep expanding margins through the rest of the year, is there any further efficiency to capture on the cost savings front? And then second question is related to AI, we know that education’s one of the sectors that could be mostly disrupted by generative AI. And can you comment on what opportunities and risks you see on the current business model, and how you plan to position the company?

Carlos Freitas: So regarding margins, you’re fully right. Part of the margins is due to the incorporation of UniCesumar, which had already higher margin before, but also partly it’s due to synergies. So we increased the margins, so reaching 38.8% now this quarter. We still have a higher margin this year than what we had last year. But as we consolidate UniCesumar and as we advance more in the integration, we had a smaller impact of synergies. So in a nutshell, we can still increase margin a little bit but not as much as we increased so far in the last quarters. And anyway, I think it is with this level of margin that we have today, I think, it is quite good shape. So we are quite happy with this margin to go. And for AI, this is a very important — I’d say, it will be a very important thing for us.

We do believe that we being the largest digital education provider in Brazil with 900,000 students and they only little player focus on that. We will be a leading actor in the AI use for education in Brazil, that’s for sure. For example, we are already working with two proof-of-concepts with [jukebox], one with Microsoft and one with Google, for example. I cannot comment much more than that. And we do believe that AI can help, for example, our tools, the tools of only a server which provide the human touch for the student experience, for the learning experience, the tools can be helped with AI in their approach. But anyway, it is going to be a much more an opportunity in our case than a threat.

Operator: The Q&A session is closed. And now we would like to turn the floor over to the company’s closing remark.

Carlos Freitas: So thank you all for your continued trust and by following up on Vitru. And anyway, if you have more doubts or questions our IR team remains open for questions. Thank you, and good night.

Operator: The digital conference of results for [Indiscernible] to second quarter 2023 is closed. The investor relations department is available to answer rother questions and concerns. Thanks so much to all the participants, and have a good evening.