Anima Holding SA

BOVESPA:ANIM3

Earnings Call Transcript 2023-Q1

[Marcus Vinicius Cuiabano Peixoto, executive]

Good morning, everyone. Thank you for attending our webinar. We're going to wait for a few minutes. We know various analysts, investors are following other presentations, and we're going to wait a couple of minutes to start. But I'd like to share our welcome to all of you who are joining our webinar.

Good morning, everyone. Well, let us start. It is a pleasure to make the presentation of our earnings results, first quarter 2023. I'd like to introduce you, Marcelo Bueno, one of our founders, our Chief Executive Officer, in this 20-year journey. We have Andre Tavares, our CFO.

[André Tavares, executive]

Good morning, everyone.

[Marcus Vinicius Cuiabano Peixoto, executive]

Guilherme Soarez is the CEO of Inspirali, you know him quite well, and we're very proud of our vertical.

[Guilherme Soarez, executive]

Good morning, everyone. Thank you for the invitation.

[Marcus Vinicius Cuiabano Peixoto, executive]

It is a pleasure to be with us. I'm Marcus Peixoto, Botafogo, I'm the IR Officer of the company. It's a pleasure to have all of you with us today.

We can start with the slides. So we'd like to turn over to our founder, Marcelo.

[Marcelo Bueno, executive]

Good morning, everyone. It's a pleasure to be with you here, such an important month and we had just completed 20 years. On the morning of 6th of May 2023, we were getting to the airport of Pampulha to start this history, and it's an important moment. And considering this aspect, I'd like to greet all of you who trust and as our partners [indiscernible] all the founders, all of you, shareholders, analysts following us and such a crowded room and such important day.

To start with our presentation. First message, I'd like to share. It's an important moment for the company. It is a moment that shows that our value proposal is very welcomed by our students. I think this is the most important point. This is the most difficult task hybrid education, the choice we've made, the adjustments we made last year for hybrid education to be used. We see students like hybrid education, IT, engineering management, they want to use more technology and also in medical students, they want to be more present on campus.

And with that, we have good results in terms of intake. We have a record 105,000 students, a growth of 13%. Net revenue has grown 6% in a challenging moment in Brazil. I have insisted here that we use the old-fashioned EBITDA ex-IFRS 16, so we have to add leasing, an EBITDA of BRL 280 million. I think this is important. Free cash flow or actually net profit of BRL 15 million, it's a turning point for the company. It's important to mention average ticket growing in all segments with the highlight Inspirali and Distance Learning.

And with that, we're exceed the number of 400,000 students, a great cornerstone for us and reducing leverage, and this will be more intense from now onwards. And thus, we consolidate our leadership in the general course index, the IGC. I'd like to talk about this important reality for the company, but especially for our seriousness and sobriety in the past interactions we had. We said that the focus is actually optimizing physical spaces. So if we had students using more technology, others using more in-person education then we would be certain that we have extra physical space.

We analyze unit by unit, and we made important streamlining movements. And we have leasing from Laureate and we have situations that are different from our benchmark that was pre-COVID or pandemic, 12%. We managed to bring this cost below 8%, and this is a great accomplishment for the results.

As you can see now for the CEO agenda, we have a very specific focus in simplifying our structure, reducing our G&A and general expenses and also administrative expenses. This is a focus in our agenda, and it is underway. It's being implemented. It's important to make it very clear in this message. It's an important message so that we can actually end this year, generating enough cash to pay our debt to deleverage the company. We haven't managed to do this yet in this quarter.

So free cash flow. We had BRL 40 million, increasing a bit our debt, but I'm sure this is a turning point. This is the main message I'd like to share with you. We have a robust implementation plan that is underway. We have 359 people that have been dismissed, I'd like to thank all of them to have dedicated their time to the company. This is not a pleasant thing to do. So measures are necessary. So we had a reduction in salaries so that for the CEO has been reduced so that we can walk the talk and put the company in addition to the evolution of our profitability, our margins and significant reduction of our leverage organically.

In addition, we also have a clear agenda, recommended by the CEO of the company of inorganic deleveraging. We're going to bring up alternatives and [indiscernible] so that we can have faster deleveraging.

With that, I turn it over to Botafogo, Andre and Guilherme so that we can move on with our presentation.

[Marcus Vinicius Cuiabano Peixoto, executive]

Thank you, Marcelo. It is important to look this slide, the concept of quality because everything we're talking about numbers is the snapshot of today. Looking back, the results of the past quarter, the past 12 months, but for us to look into the future, the base of everything is the quality that will attract best students, they will get a degree, will be an excellent professional, will set a good example, will make a new student in 10, 15 years to join our school. So quality is key to our business model.

When we were looking at the IGC, the general course index in 2019, pre-pandemic, we had some players that had high IGC with a high percentage between [ 4% and 5% ] to over the pandemic, where respect to everything that happened to our peers. There was a deterioration that was quite significant in IGC. And we kept from 60% or to 62% being a leader in this index that to us is the most important published by the Ministry of Education and Culture this year -- early published this early in March this year.

Moving on, we're going to talk about intake. Intake it reached a record level of 105,000 students, a growth of 13% last year, and we look at the segment. As if Anima was a manager of 3 businesses that have quite different basis, different construction times. And you know the core where we have this sort of [indiscernible] macro is a greater challenge for us, both Distance Learning and it's been early with very strong growth. So even core reached 68,000 student, 6% growth, with quite important and good scenario. Distance Learning with superlative numbers growing by 38% (sic) [ 28% ] and Inspirali, Guilherme will mention, very strong results.

On the next slide, we are able to see more clearly in more detail, each one of the segments, the intake of core has contributed. But if we look at the data that were already known by you of the initial base of 1st of January, 31st of December already published. The initial base dropped 8% year-over-year. We had a trend of reducing numbers. This base had dropped 8% going through a quarter of positive intake growing by 6% and better dropout 1% point. This shows that the final base only dropped 4%, started by 8% and then dropped only 4%. The result that over the quarter was positive for core. And the ticket grew a bit, 2% of nominal book value. It's slightly reduced because we have the hybrid that has lower ticket, but we have an effort of keeping the students that would not have sort of full in-person, and we've tried to have part of on-campus and also online.

We try to -- well, there are students that want a [ synchronous ] distance, but they seek this online type of education. We try to increase the hybrid. The operational performance is much below what we wanted to deliver in the core, the numbers speaks for themselves, and we have great focus now. As you will see in this presentation, addressing expenses just as we've tackled these things.

As to Distance Learning, numbers are quite impressive, superlative numbers. And many of you must have seen other peers that are listed have lower numbers. They've closed more or less what they could in terms of the map of Brazil. Well, we have a lot of black spot in Brazil, and we show growth that is much above average. So you could say that the final base grew little, but they are strong numbers. So we have 34%, intake 28% above last year and dropout that is high in Distance Learning, 3% point drop, but interesting, the ticket has grown almost 10% and the ticket has grown for some reasons.

One that the market, where we see there's a bit of less war of -- price war and people can slow down in terms of the price war. This is positive for the industry as a whole. On our side, we were very clear about growing in places where our brands are well known. As we grow with a known brand, we can have better pricing in terms of Distance Learning delivery and we see a better ticket as a result. For Inspirali just briefly going over the numbers, Guilherme will go into details. Guilherme, would you like to take over?

[Guilherme Soarez, executive]

Thank you, Botafogo. Once again, good morning, everyone. Thank you for the invitation, a privilege to be with you at the moment. Also Anima has completed 20 years this month and early this month, we've also completed 1 year of the arrival of DNA and DNA is part of the equity and as a partner or the breakdown of Inspirali. And this has been a transformational movement, 2022 was a year of a lot of structuring -- construction of the Inspirali project on 3 pillars.

The first of them setting up the team from a very sound basis, in terms of faculty and operations. We set up a team with all the roles that were necessary for the growth of Inspirali. And secondly, governance, not only setting up our Board of Directors, the assistance committees and maturing the relationship between Inspirali and Anima, reminding you that Inspirali has 2 ways of relating with Anima. One as controlling party of Inspirali, but also as a partner in which we see a competitive differential for Inspirali. We are benefited by the know-hows and expertise and also the scale this reflected on Inspirali's numbers.

And we are part of the Anima ecosystem, also in controls, reports, and we feel today Inspirali, [ unquestionably ] being an owner of its business and ready to capture this growth potential it has. And this shows great focus on execution. This first quarter reflects our plan. It reflects this growth project that is long term. And it also reflects the Inspirali strategy that we have coined as a tool and one pillar to leverage and strengthen our positioning of our schools, anchored in quality. And on the other hand, building a lifelong learning platform, positioning ourselves as a major player for the new medical demographics that comes up in Brazil.

In terms of results for the in Q1, I'd like to highlight some points. So first and foremost, ticket, we had sound growth of the ticket. And this is comparable since 2019, where we started analyzing and looking into medical schools in a more vertical way. This has been consistent in terms of our being able to position the ticket according to our positioning in a real way above inflation.

Second is the full classrooms. Medical schools, they are more regulated than other courses. It's important to look at the basis. Sometimes we speed up in terms of intake, transfers, but this will depend -- and we're very proud to be working at maximum capacity. This is the -- reflects of our schools, the brands we have, the location of those spreads in major capital cities that are thriving in terms of the health care.

Now I would like to stress another point that reflects this positioning and the quality. That is the reduction of PDA, provision for doubtful accounts and dropout. There are 2 levels that are quite good regarding other courses. So we've been able to reinforce our project, position our science, and we had internal processes so that we can follow up students more closely. We were able to have a better performance. This shows our positioning quite clearly.

And lastly, before we move into Lifelong Learning, we see our very careful look that as we build the Inspirali project, we look at it in terms of building it and focusing on G&A. We have to focus on it, and we have to have focus on scale gains and benefit from the scale of Anima and also the shared services. This has been very important. To offset a slight reduction in gross margin due to maturation of course, and also investment in quality, in the faculty, compatible with our strategy.

And lastly, I'd like to mention the growth in Lifelong Learning, a project that we started. We are, obviously, met with the managing costs. We have several organic projects coming up with innovative educational styles with great health care providers that have become our -- within our MVPs, they have good indicators showing that we are on the right track.

I'd like to thank for the opportunity of sharing here saying that our project is at the service of doctors and future doctors that we believe we must inspire the love for life in those doctors and professionals will be able to contribute to more just health system in Brazil and more sustainable in the long term. Thank you for the opportunity.

[André Tavares, executive]

Thank you, Guilherme. We thank you. On the next slide, it is important for us to stress as Marcelo mentioned in the opening, our serious and sobriety attitude of what we have to do, but we have important -- where do we have a lot to do in topics that depend on the management of the company, so it's in-house. If we look at results, the results of the business sales, so if we talk intake volume management, everything is quite healthy. So outwards the business is doing well. The great challenge we have is indoors, in-house expenses in the result of the first quarter, it is very clear that a great part of the work in these front has been done. It's being delivered.

There's a lot to be done, and we have an improvement of 2.2% points of revenue in terms of lease disbursements, 9.8% from -- 7.6% of revenue. Now it is time to put all the energy and deliver the improvement in those expenses Marcelo mentioned. It depends on us. You can see, well, various analysts and even journalists have been talking about turning point, the first blossoms. Anima is turning the game, Anima is able to improve. Yes, this is the path that we believe that we have this turning point. The good news here depends on us addressing general expenses, commercial expenses, digital transformation, optimizing our expense structure so that we can do with the rest of our income statement.

What we have already shown with the lease. We have yet another point before I'd like to stress that we've been talking about -- always about the gains, especially post integration, post integration, post the acquisition of the Laureate units in Brazil. This point of leases is quite important because Anima has gotten used to operating. It was used to operating at a level of leases between 8% of its net revenue. When we acquired Laureate units, they had a higher level of lease, it's 12% approximately with a simple arithmetic average, we led to a level of 10% in net income for leases.

In the first quarter, for the first time, we get back to the level that Anima used to operate even slightly below the 8% of net income. And I think this is a great point to be stressed here. As Marcelo and Botafogo mentioned, we have the same challenge addressing SG&A, especially in Anima core. As Marcelo has already mentioned, this one has not only been drafted -- a robust plan that has been drafted and submitted to our Board, and it's also being implemented in the second quarter, and we certainly will see in the near future the outcomes of the implementation of this plan.

On the next slide, we see nonrecurring items in this quarter, basically linked to leases. Nonrecurring items extremely positive, BRL 56 million that we had. We had BRL 52 million for fines and lease. In the first quarter, we had the reduction, not only Q1 but ahead, we observed improvements in the recurring items.

On the next slide, we talk about financial results. We had net financial results negative at BRL 200 million, no doubt. This is the item today that I would say that is -- annoys us most, that most motivates us to follow on this line of deleveraging the company. However, if what we have on this front under our control, I believe we've been doing a good job. And here, we can highlight in the liability management, the funding we had in late last year, the fourth debenture which of BRL 600 million plus BRL 200 million, 2 series with an average cost of CDI plus 1.75%. The liability management allowed us to pay the first series of the third debenture that matured in April.

It was CDI plus 3.75%. We paid for that. And there was also the payment of the second debenture now, and we should -- actually, we've mentioned to the debenture holders. We should pay beforehand with BRL 65 million of series 2 that costs us today CDI plus 4.75%. So we have a weighted total of BRL 600 million at a cost of CDI plus 3.86% plus CDI plus 1.75% we obviously expect as all Brazilians to have a reduction when -- timely of the interest rates so that we can have a boost to Brazilian economy.

And no doubt, our financial results will be directly benefited with a possible interest rate reduction in Brazil, but this is not under our control. What we have under our control is liability management, which is what we have been doing quite well.

Moving to the end of our question so that we can start our Q&A session. We have in terms of CapEx. A change that has been happening over time, significant change, the nature of CapEx with greater investments in digital transformation, and in this specific quarter, higher CapEx in furniture and equipment as a direct consequence of that is significant gain in terms of real estate.

The reduction in leases has demanded from us to adapt the property that remain more [ RIFed ] and administer them more efficiently. And this required higher CapEx in absolute terms, even though in terms of revenue, we have no great changes here.

On the next slide, we see the growth of our leverage, of our net debt. We managed to get a slight reduction Q1 from 4x to 3.9x, as Marcelo mentioned, when we put the operating cash generation, payment of interest, amortization of those, our net debt had a slight increase of BRL 38.6 million, which was more than offset by the improvement in terms of the EBITDA results ex-IFRS.

I would say that this is our main focus in terms of deleveraging the company organically. And looking at this chart that in 2022 was around 4x and to see the strength of this turning point as the term that Marcelo has used and the others have also used it, that this first quarter 2023 be this turning point in this trend of reducing our leverage.

And last, I'd like to turn back to Marcelo so that he can wrap up the presentation, and he will talk a bit about, well, though we acknowledge the challenges of reducing SG&A turnaround of Anima -- or organic deleveraging. We cannot shut our eyes to the results we've been attaining over the past quarters. So I turn over back to Marcelo so that he can wrap up the presentation.

[Marcelo Bueno, executive]

Thank you, Andre, Botafogo, Guilherme, we should not leave aside what we said if we analyze the first quarter last year, the interest rate was 10.59%, 10.60% I guess the first quarter. Compared to this first quarter, that was 3.75% (sic) [ 13.75% ] as Brazilians, we hope the scenario changes.

So as CEO of the team, we say we have to consider a company in Brazil with high interest rates. So we had a focus in reduction of leases. So everybody in education, they know it's not easy to deliver 10 buildings to rescue all conversations with the families, especially for Laureate not having an impact in dropout rates. And more than that, I just got from -- group results that came back a recertification of the Anhembi Morumbi University with great scores.

We look at the importance of that. We acquired a company that we respect very much. And under our management, university -- Anhembi Morumbi school or university has maximum score, and there are our management. So we have to have focus. And we know what -- as Botafogo mentioned, what is being done and will be delivered. So we cannot have a level of net debt, we have to lower that. And this is a commitment we check. And the good news is that we ended the year or the quarter with the EBITDA ex-IFRS 16 that has a record of 28% (sic) [ 21% ]. This motivates us to move ahead.

And I'd like -- as Guilherme put it quite well. I'd like to thank you all very much, my partners, our partners here that has been in this journey for 20 years. Everybody in the Anima system, those that have left recently -- the Anima system recently. Thank you very much, DNA, [indiscernible], all the team, we have completed another year together, a long-term partnership that is going to be quite successful. And with that, I'll open for the Q&A.

[Unknown Executive]

[Operator Instructions] Our first question is from Marcelo Santos, JPMorgan.

[Marcelo Santos, analyst]

I have 2. The first is the hybrid education. I'd like to hear the management opinion as to how much space hybrid has in Anima. And if this could help to revert the trend for the core business, supposing that we have no [indiscernible], no strong economic improvements that would have students back to campus, first question.

Second question, future growth of Distance Learning. So you had the growth based on the Anima brands. where brands are influential that increased ticket. And you talked about going to other spaces in Brazil and you say competition is occupying on this business. How do you see the areas of influence, areas of no influence? What should be the balance from now onwards? What should be the ticket considering this factor specifically?

[Marcelo Bueno, executive]

Two excellent questions. What we have seen, and I mentioned sometimes in our earnings and results calls is that Laureate had a project called go digital with the thesis in which there is a market that is new to be -- a new market to be served by Distance Learning, synchronous and the lower ticket.

I as CEO was actually asked by the Board to run this business, understand how within business grow and see if the strategy is truthful and if it is true for us to move strongly in a market that Anima would not be serving and our mission in transforming the country through education. We should do that.

We have specialized consulting services, carrying out services internally to approve this decision. In the meantime, we have been moving forward. What we have seen is that actually, there is a market to be served with the power of our brands. We are presently in 75% of the national territory with the main private higher education brands. And we have a great possibility and advantages for Anima to fill in those gaps in terms of Distance Learning.

So far we had something we call -- a project called Live with the same price positioning on campus. And we noticed post-pandemic, we mentioned this sometimes even in this call, we are choosing the use of more less technology to improve the relationship of learning, teaching according to areas of knowledge. And there would be a bridge between this proposal of go digital, Laureate and our digital to be filled to the on-campus to be seen by another student. As Botafogo put it quite well, they don't want an experience that is mostly totally synchronous.

They want to use technology. They want to use what we call hybrid but at higher ticket. So we adapted this line and the results have been quite good. And actually, we've seen that there is no cannibalization, but an adaptation so that we can better serve the market within the concept of various experiences that meet the needs of the -- fits of our students.

[Unknown Executive]

Our next question is from Lucas Nagano from Morgan Stanley.

[Lucas Nagano, analyst]

We have 2 on our side. The first is regarding Anima core could you give some more color in terms of quantity, quality in terms of student base and ticket comparing traditional, on campus and hybrid. And regarding corporate expenses since the Q4, it's been reflecting gain in terms of streamlining, layoffs. Do you think this level is normalized? Do you capture fully the gains in this structuring or do you still have incremental gains that you expect through the year?

[Unknown Executive]

Sure. Andre would you like to start?

[Unknown Executive]

I'll start with the first question now and then you answer the first. Thank you, Lucas, for the question. Well, we're more than looking at corporate expenses in an isolated fashion. We are paying attention to SG&A overall in a consolidated way. We have an evolution of 1 point where we still have some homework to do in terms of SG&A. I would tell you that we don't see this level as a normalized level. We still view space for improvement on SG&A, corporate expenses, but SG&A in a consolidated fashion, we are implementing that. We see this space for improvement, no doubt. And I believe that we should deliver better results, especially in this front.

[Unknown Executive]

Lucas, they are not incremental improvements. They are significant improvement in a clear agenda that has been brought to the CEO agenda of simplifying the structure and actually having reductions that are major in this area, that are being implemented. It's important to follow that very closely. With regards to the question on the student base, we see that hybrid education has gained importance but it's -- it does not significantly change the numbers that we've seen. We've seen in hybrid -- overall intake growing by over 6%. No doubt, more than half of this growth comes from hybrid education and we're seeing the base reducing.

As Botafogo mentioned, we had a reduction of 8% and then it was a drop of 4%. No doubt, most of this reduction is from hybrid and not semi on-campus. As Marcelo mentioned, those are initiatives that we've been experimenting and over the semesters, it's been proving more important, but I'd say that still does not change the point of the numbers that we've seen in the Anima core student base.

[Lucas Nagano, analyst]

Perfect. If I could just well -- if you could comment on the ticket in the traditional on-campus.

[Unknown Executive]

Lucas and everyone here on the call. Our on-campus ex medicine for various -- the matter we've been saying that the company has an intent of being close to -- internal inflation of cost is smaller than Brazil inflation. We try to transfer that or carryover that our on-campus had an improvement, a bit higher than 2% of average close to inflation with these semi on-campus, this value is reduced to 2%, which is minimal, but on-campus is transferring close to inflation as usual, a metaphor that Marcelo always uses is your driving a plane, if you do not get a height, so at some point, you hit the hill. So our quality education should not deteriorate, its purchasing power. You have to charge fair price for it, which is transfer slightly above inflation.

So ticket is a daily fight. So we talk about revenue, we take and ticket. So we have to go a minimum above inflation. This is a basic rule. We have a challenge of talking about the old-fashioned EBITDA ex-IFRS, I'll keep repeating that, that we have to look at the business with leases and a bit of a ticket.

And to remind you, also, Lucas that things a bit distance -- and we forget that we have to remember that this point has been a point perhaps one of the most sensitive points that we have observed when we acquired Laureate as well. Last year, we had the strong reversal project of the average ticket of Anima core, the units that came from Laureate, but we know that this year, when we look at the average ticket, we're still living a bit of the effect of the carryover of the lower ticket that we inherited on the integrated units. The effort is quite great.

I believe in the next year, the effect will be minimal. We live this last year and we're living a bit of this effect this year as well.

[Unknown Executive]

Next question is from Mirela Oliveira, Bank of America.

[Mirela Rodrigues de Oliveira, analyst]

We have 2 on our side. As a follow-up from the previous question, if you could comment on how you see cash generation for the year? Consequently, reduction of net debt. We know that you still have this impact and Andre mentioned regarding lease contracts. If you could talk a bit about the magnitude of such expenses, what are you expecting?

And also a question on the same topic, if you could talk about the debt amortization timeline, if you need to renegotiation for 2023 payment. If you could address something in this sense as well.

[Marcelo Bueno, executive]

Well, I'm going to start about the turning point and your report is praising us. As founder of company and CEO, we cannot close the year with this level of EBITDA. This is not acceptable. We have -- this effect depends on us. Everything will be done if the company had revenue problems, people were different with each way. This is another conversation. This is not it. We have to close, where we have to have organic cash generation, amortization, debt service and generate cash to be able to lower net debt. This is our goal for this year and this is our trend. And I turn it over to Andre to talk about amortizations, et cetera.

[André Tavares, executive]

Well, actually, we've had last year -- end of last year, we had relevant intake as we've mentioned our fundraising of BRL 800 million that address directly the maturities of this year. So in the second quarter. So we're talking about the Q1 results, some things have already happened. So we had most of the maturities of our debentures, BRL 600 million, and we've already paid for them or settled them and payments especially benefited by the fundraising we had late last year. So we have some needs for refinancing something that is totally addressed and something that is very little relevant.

Regarding our net debt. I think the great goal here is the following: We have no major issues in the short term in 2024, the greatest percentage, greatest volume or payments that will mature are of Inspirali that has a leverage level. If we look at our business, it has a much lower leverage level and very strong cash generation. So we see no big issue on this topic. We are always looking at additional liability management opportunities, even though we know the credit market is very much pressured for all the reasons we are all aware of.

But as Marcelo said, our great goal here is to end the year with a net debt reduction and this Q1 should be marking this turning point and this clearer trend of reducing our net debt.

[Unknown Executive]

[Operator Instructions] And if we have no further questions, we can move on to the closing remarks. Marcelo?

[Marcelo Bueno, executive]

Thank you very much. It's very good to see a full house with a lot of prestigious treatment so we complete 20 years of history. And I thank you all very much let's work, let's be disciplined and focused to deliver great results. Thank you all very much for your presence and let's work. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]