Cruzeiro do Sul Educacional SA
BOVESPA:CSED3
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Cruzeiro do Sul Educacional SA
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Good afternoon, and thank you for waiting. Welcome to the video conference on the results of the second quarter of 2023 of Cruzeiro do Sul Educacional. [Operator Instructions] We would also like to inform you that this video conference is being recorded, and it is also available at the company's IR website at ir.cruzeirodosuleducacional.com.pr where the entire material of this earnings release call is also available. [Operator Instructions]
We would also like to inform you that the information posted in this presentation and any forward-looking statements that might be made during this conference call related to Cruzeiro do Sul Educacional's business outlook, projections and financial and operating goals are based on beliefs and assumptions of the company's management as well as on information currently available. Forward-looking statements are no guarantee of performance as they involve risks, uncertainties and assumptions as they refer to future events and, therefore, depend on circumstances that may or may not occur. Investors must understand that such general economic and industry conditions and other operating factors may lead to results that differ substantially from those expressed in such forward-looking statements.
Here with us today are Mr. Fabio Fossen, Director, President; Felipe Coragem Negrao, CFO; and Luis Felipe Bresaola, Investor Relations Officer.
Now I would like to turn the floor to Mr. Fabio Fossen to begin the presentation. Mr. Fossen, you may proceed.
Hello, and good afternoon, everyone. This is Fabio Fossen, the company's CEO. Welcome to our second quarter results presentation.
We have completed our first year since the implementation of the organizational realignment, resulting from the evolution of the group strategy with the creation of the On-Campus and Digital verticals. Since then, we have teams dedicated to growing the business, seeking for more speed and assertiveness in decision-making, always with the ultimate goal of delivering the best experience to our students.
The initiative to segment by BU has brought important gains to the business. In Digital, we accelerated the growth of our student base in hubs, focusing on courses with higher added value in the hybrid and on-campus formats, which also allowed us to grow on the 100% online courses. In On-Campus, we restructured the teaching curriculum as a way to deliver a better student experience, delivering higher quality and differentiated products.
Additionally, in June of 2023, we entered into a partnership with Google Cloud, aiming to bring more innovation and quality to our products. These initiatives used our reference brand in distance learning, Cruzeiro do Sul Virtual, to launch the first 2 undergraduate courses in our portfolio, targeting an area that is in need of technology and cloud infrastructure professionals. This goal is to increase the employability of our students in the field, offering updated and hands-on training, which includes Google Cloud Platform computing resources and also in preparation for certifications.
In Digital, we aim to improve our understanding of the current profile of young audiences who are digital natives and always connected to a broad virtual ecosystem. And then we team up with FURIA, one of the most important organizations in the world in the electronic, sports and gamer spaces. At first, the partnership intends to understand the behavior and also connect with an ecosystem, organizing communities that include both youth and adults. We will get even closer to recent high school graduates and start developing engagement methodologies and courses focus on the gamer world.
On the academic side, we made important progress in the international recognition of our institutions. UNIFRAN was again included in the Times Higher Education 2022 ranking. And for the first time, CEUNSP and BRAZ CUBAS entered this prestigious ranking with more than 1,800 institutions and only 47 Brazilian ones, mostly public organizations, recognizing that our efforts to provide quality education are appreciated by our national and international peers.
Additionally, the Research.com ranking, which ranks the best researchers in the world, placed Cruzeiro do Sul University among the best research institutions in the country in the areas of medicine, biology and biochemistry. In medicine, out of the 12 Brazilian institutions listed, we ranked 10th. In biology and biochemistry, we ranked 13th out of 24 institutions, and #1 among private institutions. Prof./Dr. Rui Curi represents the university through the Interdisciplinary Master's and PhD programs in Health Sciences.
Moving now to the operating issues. We ended the first half of '23 with a 10% growth in the On-Campus student base and 26.7% in Digital. We concluded the intake in the Digital segment of the 2023.1 cycle with an expansion of 31.1% versus the 2022.1 cycle. And the acceleration of the intake in the period, combined with the expansion of 283 new partner hubs, contributed to the growth of the share of newcomers in our total Digital base, generating a small impact on the average ticket, freshmen plus veterans, with a decrease of 1.7%. However, if we look at veterans ticket, we only grew 5% only, 5% above the inflation. It is also worth mentioning that we managed to increase the penetration of students enrolled in hybrid courses with plus 3.9 percentage points vis-a-vis the second quarter of '22, indicating our ability to grow in higher ticket products.
In On-Campus, we ended the intake with an 8.1% growth versus the 2022.1 cycle with a slight decrease in the average ticket of around 1% due to the greater adherence to the Prouni program and the students who enrolled during the pandemic period. In re-enrollments, we maintained our improvement trend over the past 3 years. In On-Campus, we had 2.9 percentage points in addition in terms of enrollments and 1.9 percentage points in distance learning over the previous cycle, surpassing pre-pandemic levels. Considering that there is a natural pressure that could generate a deterioration in re-enrollments due to the increase in the freshmen students, this continuous progress and improvement is a clear demonstration of the solidity of our academic model and the high quality of the experience we deliver to our students.
Moving on to the financial results in the second quarter. Net revenue reached BRL 602 million, up 12.1% when compared to the previous year. Gross profit for the quarter was BRL 295 million, up 15.1%, with a gross margin of 49%, meaning 125 basis points versus the second quarter of '22 and as a result of efficiency initiatives as well as the termination of union agreements.
Adjusted EBITDA totaled BRL 188 million with a margin of 31.3%, an improvement of 159 basis points when compared to the second quarter of '22, reflecting management's initiatives to seek efficiency in G&A expenses, which mitigated the impacts of higher PDA, 8.9% of revenue versus 7.9% in Q2 '22.
Net income stood at BRL 48 million, 3.3x higher than the BRL 15 million of the second quarter '22. Operating cash generation was BRL 58.2 million, 151.1% higher than the second quarter '22 and amounted to 44.4% of EBITDA ex IFRS.
Now I would like to thank you all for joining us during this call. And I will turn the floor over to Felipe Negrao who will comment about our financial performance.
Thank you, Fabio.
Moving on to Slide 5, we bring you the operating performance of the On-Campus undergraduate program who ended the first half with 146,000 students, up 11% year-on-year as a result of an 8% increase in intake over the 2022.1 cycle and a 3 percentage points improvement in the re-enrollment KPI. Health courses with a great appeal to On-Campus and higher ticket remained relevant within our student base, representing 51% of On-Campus undergraduate students.
We also present the global ticket data, which includes freshmen and veterans, based on net revenue divided by the number of students at the end of the period, which showed a decrease of 0.3% year-on-year impacted by the increased participation in Prouni, which grew 1 percentage point versus Q2 '22 and also by the mix of courses and units.
On Slide 7, we bring the operating figures for Digital undergraduate programs, which posted a 21% year-on-year growth, reflecting an increase in intake of 31% and an improvement of 2 percentage points in the re-enrollment KPI. The global average ticket, which includes freshmen and veterans in Digital undergraduate programs, fell 4% versus second quarter '22, mainly reflecting the mix of freshmen in the base and the challenging scenario of ticket pass-through in the hybrid courses. The increase in the penetration of students in the hybrid modality was not enough to mitigate the increase in the base of fully online courses.
Now going to Slide 8, we bring you the performance of the consolidated Digital student base, which grew 27% year-on-year. In addition to the stronger intake in the undergraduate courses in the period, we had the impact from the recovery in the postgraduate courses.
Now going into the financial details of the quarter, now on Slide 10. Our net revenue in the quarter stood at BRL 602 million, up 12% versus the second quarter of '22, also as a result of a larger consolidated student base. In On-Campus, courses focused on the health area grew by 12%, and the penetration of these courses was up 1 percentage point, reaching 68% of On-Campus revenue. In Digital, revenue grew by 15.2%, reaching BRL 186.7 million as a result of the larger student base and the continued expansion of the hub base. In the first half, revenue reached BRL 1.1 billion, 12.2% higher than in the first half of '22.
On Slide 11, we show the gross margin for the quarter, which was 49%, 1.2 percentage points higher than the second quarter '22. The increase in gross margin in the period reflects the efficiency initiatives in addition to the conclusion of negotiations with the union. Moreover, the costs line was impacted by the increase in the pass-through of hubs as a result of the expansion of revenue from Digital and the student base in third-party hubs. The other costs line was mainly impacted by the increase in third-party services focused on the technology area. In the first half, gross profit was up by 10.3%, reaching BRL 543.1 million.
Moving to the next page. Here, we present the adjusted EBITDA which, in the quarter, totaled BRL 188.2 million, 18% higher than the second quarter of '22 with a margin of 31.3%, which is an improvement of 1.6 percentage points. The expansion of adjusted EBITDA in the second quarter '23 is mainly a result of management's initiatives in the pursuit of efficiency in general and admin expenses, which mitigated the impacts of the higher PDA as a function of the more challenging macroeconomic scenario in the period, coupled with the expansion of Digital, which has higher PDA. Adjusted EBITDA reached BRL 351.5 million in the first half, 16.3% above the first half of '22 with a margin of 31%, an improvement of 1.1 percentage points.
Now turning to Slide 15, we show the evolution of net income. Net income in the quarter was BRL 48.2 million, 3.3x higher than the second quarter of '22, reflecting the improvement in EBITDA, coupled with initiatives in search for efficiency in financial management, such as bank fee renegotiations, discount control, shorter duration of accounts receivable and reduction of the gross debt. In the first half, net income totaled BRL 60.3 million, 3.3x higher than the first half of '22.
In the next slide, we show the evolution in accounts receivable which, in the last 12 months, stood at 44 days, an improvement of 1 day versus last year.
Now on Slide 17, we show the investments made by the company in the second quarter of '23, which amounted to approximately BRL 55 million, an increase of 40% when compared to the second quarter '22, reflecting the resumption of investment projects in infrastructure and technology, focused mainly on improving the student experience. Investments in the first half of '23 amounted to approximately BRL 83 million, an increase of 38% when compared to the first half of '22.
On the next slide, we detail our operating cash generation in the quarter, which totaled BRL 58.2 million, up 151.1% when compared to the second quarter '22, and amounted to 44% of EBITDA after rentals. In the semester, operating cash generation was BRL 200.4 million, 63.8% above the first half of '22, accounting for 82.6% of EBITDA after rentals.
And finally, on Slide 19, we bring the net debt, excluding lease liabilities, which reached BRL 634.4 million when compared to BRL 572.4 million last year, mainly impacted by the execution of the buyback plan in the amount of BRL 58 million and the payment of dividends in the amount of BRL 25 million.
With this, I conclude my remarks, and I turn the floor over to the operator to start the Q&A session. Thank you very much.
[Operator Instructions] Our first question comes from Fred Mendes, a sell-side analyst from Bank of America.
I have two questions. My first question, it's more sectorial, I would say. I mean we understand that you had a very strong first half. And how much of that is related to a strong carryover of intake into the second quarter? How much -- I mean how much of that positive carry will be spilled over to the second half? And you explained it quite well when you talked about the distance learning ticket and the mix, and that's why there was a decline. But I would also like to understand whether there was any variation, meaning, in the past quarters if you saw other players be more aggressive.
Fred, this is Fossen. In terms of that carry, we are very pleased with all of the re-enrollment issues in all of the areas where we operate. We also have the continued effect as part of our internal productivity program. So to that end, this carry is interesting going forward.
Now in terms of pricing and price competitiveness in the market, we've seen some ups and downs, some large players in some particular moments. And in some courses, particularly distance learning, they spend some time adjusting their prices. And we react or sometimes do not react depending on our strategy in terms of the way we build up our revenue as a whole. But it hasn't been too different when you look at the other half years and other intakes in terms of deal. And we both said that we've been working and putting a lot of focus on added value courses in terms of DL because we want to escape the difficult part of the market in terms of prices. I mean this is just a bit of our strategy because we want to escape direct competition when it comes to price against price.
Our next question is from Lucas Nagano, a sell-side analyst from Morgan Stanley.
I have two questions. My first question is about the On-Campus ticket. I just want to understand what were the main things that led it to be stable. You're saying that you had an increased number of students. But when you look at that decline and then you compare it with the ticket delivery that you had last year, 5% to 7%, I would just want to understand the reason behind it; and also the impact of the pass-through, especially in the medical courses.
My second question relates to costs. I just want to understand what are the initiatives that led to the better performance of the gross margin and how structural this improvement should be going forward, and if you can also talk about the collective bargaining agreements.
Lucas, this is Fossen. In relation to On-Campus pricing, I think we already indicated in the first quarter that we have the issue of the mix of the units. We have 25 buildings where we do the intake of the students. And each one of those have a different reality and they face different demands in the different markets. And that's why we operate very localized when it comes to providing different offers. And there was an increase intake in units that had a lower average price when compared to others with a higher price. So in terms of the mix, we are increasing the student base, not necessarily in our large units. I mean we had increases in all of them. But some of them, in particular, had a more significant increase in intake.
So this is not a topic that concerns us in this regard. But going forward, I think that the fact that we have quality institutions, well recognized, it means that you can really differentiate our brands in the minds of the future students when it comes to the intake process. But it's always a point of attention, but it's not a focus of greater attention in our everyday work.
So now I'll turn the floor to Felipe to talk about margins and costs.
Lucas, this is Felipe. Okay, first of all, about FIES. I will just list a few important aspects. Well, first of all, we do the reconciliation on individual student basis. And the second point is we do it not only for FIES, the write-off is after 80 days of nonpayment, regardless of the fact if I would have or not a return. So we always focus on a more conservative scenario. That's why the impact is very minor to us.
Just to give you an idea, I mean, we are an organization that have always made very little use of FIES. We only have slightly over a 1,000 students with FIES. And the difference with what we have in terms of revenue and how much you -- we collect, it's very immaterial. We are talking about BRL 2 million or BRL 2.5 million per quarter. So the impact is very, very small. And so when we have any good news of return, we will probably indicate that.
But in terms of costs, we should look at the first half of the year. Our margins are very sustainable. Of course, the market is very competitive. Things may change, but we do not give any guidance. But I think this also shows that our gross margin is very sustainable. We've had a lot of efficiency gains. As I said before, we made some very relevant renegotiations in all of the lines of the company, not only in terms of financial expenses, like tariffs or energy and the purchase of textbooks and academic products and also in terms of telecommunications.
Looking ahead, we see some opportunities, especially in terms of rental renegotiation. We are renegotiating the leases with all of the owners, and this is also a very important point. And also, the carry of all of these negotiations, not all of them find themselves in a running rate because some renegotiations are being concluded and are not yet reflected in our results. So we should see some further impact of the negotiations going forward. I think that's it.
Our next question is from Yan Cesquim, a sell-side analyst at BTG Pactual.
I have two questions. The first one is probably a follow-up from previous questions. And I would just like to understand how you see your next intake cycle. We noticed that in this first cycle, this was a very strong cycle in terms of volume, both for On-Campus and distance learning -- and DL. So how do you anticipate intake in the second cycle, considering the fact that you're still growing your volumes, and whether it would make sense for me to have a reading that give the answer or the competitive scenario that the pricing dynamic should still remain as such? This is my first question.
The second question is about CapEx. CapEx is accelerating in terms of infrastructure investments, et cetera. So what do you expect in terms of your CapEx level for the end of the year and also going forward in 2024 given the pipeline of infrastructure that you have? So that's it.
Yan, this is Fossen. We do not give guidance for future funding as a whole. But I think what I can tell you is that the constructed base of early this year is very good, so it's bringing a good carryover for the entire period -- entire year. And we are within our expectations in terms of what we see from now until the end of the year in terms of intake and re-enrollments, both regarding prices and volumes. We remain quite optimistic with the fulfillment of our internal budget.
This is Felipe. About CapEx, again, we do not provide any guidance. But what is important to highlight is that all of our CapEx is mostly earmarked to improve student experience, and this should reflect prices further on and the differentiation of our product because then we can also apply better prices and productivity as well. I think we are very diligent in all of the projects that we operate in, has to -- all the projects have to bring adequate returns to all the partners.
Our next question comes from Caio Moscardini, a sell-side analyst from Santander.
I would just like to get some color on the potential M&A. What about your M&A pipeline, whether you see that this is a topic that is improving or is moving along or progressing well?
This is Fossen. I will repeat what I said in the past quarter and previous quarters, we are constantly looking at new opportunities. We have some available cash to look for opportunities and then grow the organization. We are always looking at several opportunities. But -- the moment is yet to arrive, but we are constantly looking because we want to grow. And we are also very keen of the educational industry, and this is a very important segment as we have cash at the moment. If a good deal appears, we have to look at the opportunities as they come.
I just have a quick follow-up. What is the leverage level that, in your view, is comfortable for the company?
We do not comment on that. We cannot give you any guidance about that, Caio. Sorry, I'm sorry.
And our next question is from Lucca Marquezini, a sell-side analyst from Itaú BBA.
My question relates to your medical courses. There was a decision by Judge Gilmar Mendes. I would like to hear your opinion about that decision and what is the outlook for your medical courses and how could that impact the company's business.
Lucca, this is Fossen again. In terms of the recent decision by the Supreme Court Judge Gilmar Mendes, we're still waiting to see the final opinion from the Supreme Court and what will be the response from the Secretary of Education. But regardless, we are getting prepared to face any possible scenario and also try to take advantage of all the opportunities regarding the medical courses. We have some injunctions, but -- and we do not comment on them. But everything depends on this Superior Court decision so that we can have a more clear view of what will happen. There is a new bidding document and nobody knows what that will entitle so, so far, it's just a speculation, and it's too soon to say anything about that.
[Operator Instructions] The Q&A session is now concluded. And now I would like to turn the floor to Mr. Fabio Fossen for his final remarks. Please, sir, you may proceed.
Thank you all for joining us today. I would like to reinstate what I said at the beginning of my remarks related to all of the fruits that we are getting from our new strategy, and this is becoming more visible to everyone in the market. Also, I would like to emphasize that much of that comes from long-time topics in the company, and that relates to our care with the quality of education.
This is part of our DNA. We are native educators, and that has led us to be recognized by our peers, both domestically and abroad, and mainly this acknowledge comes from our students. Our re-enrollment is increasing. Since the end of the pandemic, our intake ratings are increasing. And this fruits that we have the approval from students and the quality of our faculty members is extremely good and also this proves the quality of our education methodology.
This has been a constant revolution on the part of the company since we started this reorganization work some 1.5 years ago. We are focused on our continuous growth, building the blocks that will lead us to further evolution. And at the same time, we are getting ready to grow in different scenarios and taking all of the opportunities that may arise.
And most importantly, I've been dedicating a lot of my time -- in addition to the M&A and the strategic topics, I've been dedicating part of my time to putting together a group of executives, managers, faculty members of great professionalism. We grew the company. And in the past quarters, I've been referring to all the work we are doing to build up a winning team inside Cruzeiro do Sul Educacional. And now the team is playing ball without even looking, and they are working as a team and that is really cool. And this is a very positive moment for us right now. And we are very excited to grow going forward no matter the landscape.
So thank you all very much, and have a very good day.
Cruzeiro do Sul Educacional earnings release call for the second quarter '23 is now concluded. The IR department is available to answer any other questions that you may have. Thank you all for those who joined us today, and have a very good afternoon.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]