Cruzeiro do Sul Educacional SA
BOVESPA:CSED3
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Cruzeiro do Sul Educacional SA
Earnings Call Analysis
Summary
Q2-2024
Cruzeiro do Sul Educacional reported a 13% rise in net revenue for the first half of 2024, driven by a 10% increase in the student base. The adjusted EBITDA showed a stable growth of 10% with a margin of 30.3%. The company's free operating cash generation surged by 77%, reaching BRL 208 million. A significant acquisition was made, adding 154 medical school seats. Despite a competitive market, the company's on-campus enrollment hit a record 62,000 new students. Digital transformation efforts paid off with the Duda app seeing substantial student engagement and higher ratings.
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Good afternoon, and thank you for holding. Welcome to Cruzeiro do Sul Educacional's conference call today discussing the earnings release of the second quarter of 2024. If you need simultaneous translation, this tool is available on the platform. Simply click the Interpretation button at the bottom of the screen and select the language you prefer, Portuguese or English. For those listening to the conference call in English, there is also the option of muting the original audio. There's a button Mute Original Audio.
We inform that this conference is being recorded and will be available on the company's IR website at ri.cruzeirodosuleducacional.com.br where you will also find a complete set of materials for our earnings release. You can also download the presentation on the chat icon. [Operator Instructions] Note that the information in this presentation and statements that may be made during this conference call relating to Cruzeiro do Sul Educacional's business prospects, projections and operational and financial targets are based on the company management's beliefs and assumptions as well as on currently available information.
Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and hence, depend on circumstances that may or may not occur.
Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future performance of Cruzeiro do Sul Educacional and lead to results that differ materially from those expressed in such forward-looking statements.
Here with us today, we have Mr. Fabio Fossen, CEO; Felipe Negrao, CFO; and Luis Felipe Bresaola, Investor Relations Officer.
I would like to turn the floor to Mr. Fabio Fossen, who will begin the presentation. Please, Mr. Fossen, you may proceed.
Hello. Good afternoon. This is Fabio Fossen, CEO of Cruzeiro do Sul Educacional. Welcome to our 2Q '24 earnings conference call. We closed the first half of the year with a 13% increase in net revenue, driven by the 10% growth in the total student base and an increase in the average ticket in on-campus and digital businesses.
Adjusted EBITDA grew 10% with a margin of 30.3%, close to stability when compared to the previous year. As for adjusted net earnings, we delivered an expansion of 68% with an adjusted net margin of 8.3%, 2.7 percentage points more compared to the first half of '23.
Free operating cash generation in the first half of '24 was BRL 208 million, an increase of 77% compared to the same period of last year. Regarding the capital structure, aiming to achieve a healthy cash position for the company. In the second quarter of '24, we concluded all the renegotiations and raising of the debentures with the amount of BRL 473 million ending the period with a financial leverage of 1.7x compared to 1.5x last year.
The increase in leverage is a result of the cash disbursement for the acquisition of FAPI in the amount of BRL 158 million with a significant portion in cash. This quarter, we announced the acquisition of Centro de Ensino de Pinhais FAPI located in the metropolitan area of Curitiba, Paraná for the amount of BRL 181 million for 154 medical school seats at a multiple of 1.2 million per seat. This is the first post-IPO acquisition. The transaction represents an important step for Cruzeiro do Sul Educacional in the metropolitan region of Curitiba allowing it to expand its operations to the eastern side of the region and adding 154 medical school seats to our portfolio.
In addition to the 169 seats already at the Ecoville campus of Universidade Positivo. In addition to strengthening its presence in one of the main capitals in the country, Cruzeiro do Sul Educacional will expand the opportunity for medical school intake in its competitive entrance exam in the region.
With this, Cruzeiro now has 839 authorized medical school seats in its portfolio, 38% in the metropolitan region of Curitiba and 33% in the city of São Paulo. In the operational sphere, we ended the first half of 2024 with a 7.7% growth in the student base in on-campus undergrad and 16.5% in digital. We continue to break records in on-campus intake with 62,000 new students and more than 155,000 students in the digital undergrad courses. In the 2024.1 cycle, the on-campus reenrollment KPI remained at high levels at 89% of the eligible base. In digital undergrad the investment initiatives in technology and automation contributed to a 1.1 percentage point increase in reenrollment, being an important component in the expansion of student base in the face of a more competitive intake environment.
The expansion in the student base with attractive reenrollment rates culminated in a 0.8% increase in the ticket in on-campus and 6.2% in digital undergrad compared to the 2023.1 cycle. It is worth noting that we continue to expand the penetration of students enrolled in hybrid courses of 3.1 percentage points vis-a-vis the second quarter of '23. We think 23% of the distance learning base -- student base indicating our capacity to grow in higher value-added products.
Finally, in the second quarter of '24, we achieved net revenue of BRL 670 million with a gross margin of 49.2%, 17 bps more than the second quarter of '23. Adjusted EBITDA in the quarter reached BRL 191.4 million, 1.7% higher than in the second quarter of '23, with a margin of 28.6% down 2.7 percentage points versus the second quarter of '23, impacted specifically by the progress of technology projects with an impact of 1.5 percentage points in the net revenue more than in '23 and legal expenses and provisions, 1.4 percentage points of net revenue more than in 2023.
And these expenses were partially mitigated by a reduction in labor expenses or personnel expenses, where we saved 2.1 percentage points of net revenue than compared to 2023 as a result of perennial efficiencies and process automations.
Adjusted net earnings in the quarter was BRL 61.9 million, an expansion of 21.1% with a margin of 9.2%, up 0.7 percentage points compared to the second quarter of '23. We continue to advance in digital transformation, positively impacting the lives of our students and partners.
In the first half of '24, we made progress on several initiatives that benefit our students and their journeys at Cruzeiro do Sul Educacional. The success of this evolution is reflected in our Duda app launched in September '23, which has already become the main media for interaction between students and institutions. We already have more than 310,000 active students on the app maintaining a high rating of 4.9% in the App Store and Google Play Store compared to 4.3 stars last year.
Additionally, this half year, our partners at our hubs worked with a new online platform, which offers real-time data on intake, active students, reenrollment and other relevant indicators positively contributing to the management of our results in the Digital BU. In terms of business generation after the successful launch of e-commerce in the [ grad ] school, we accelerated the implementation for undergrad courses, significantly reducing the number of steps required for student to enroll. This process is of great value to Cruzeiro do Sul as it not only speeds up the entry of students into our institutions but also reduces the friction generated by unnecessary interactions in a nonautomated process.
The improvement in the company's internal productivity has already proven to be significant in terms of both student satisfaction and result optimization. We will continue to invest in this direction. We thank you all for your presence and turn the floor to Felipe Negrao, our CFO.
Thank you, Fossen. Going into the financial details on Slide 8. I will comment on net revenue in the quarter, which reached BRL 670 million, up 11% versus the second quarter of '23 as a result of the higher consolidated student base. In the on-campus segment, revenue grew 8%. While courses focused on the health area had a 2% increase. In digital, we had a revenue expansion of around 20%, reaching BRL 224 million as a result of the larger student base. In the first half of the year, revenue reached BRL 1.3 billion, 13% higher than in the first half of '23.
On Slide 9, we show the gross margin in the quarter, which reached 49.2%, practically stable versus the second quarter of '23. Even in the face of the increase in the technical and preceptorship staff, given the progression of classes and health purpose and the increase in the pass-through 2 hubs as a result of the expansion of Digital's revenue and student base in third-party hubs.
In the half year, we had a margin increase of 1.6 percentage points. The increase in margin in the period reflects operating leverage as a result of having maximization revenue maximization initiatives as well as a frequency gains.
Moving on to Slide 11, we see the adjusted EBITDA for the second quarter of '24, which was BRL 191 million, an increase of 2% versus the same period of the previous year. Second quarter of '24 was marked by the progress in digital evolution projects in both the front and back office areas with the digitalization and automation of the company's processes that started in the second half of 2023.
It is important to highlight that these projects have a one-off impact on the company's margin as part of the model transition process. Despite the impact, efficiency gains are already perceived in personnel and PDA lines which together add up to a reduction of 1.3 percentage points as a percentage of net revenue versus the second quarter of '23.
It is also worth mentioning that the second quarter of '24 demanded higher marketing expenses given a more competitive intake scenario. In the first half of the year, we achieved an EBITDA of BRL 388 million with a margin of 30.3%.
Slide 13 shows the company's costs and expenses as a percentage of revenue, excluding nonrecurring effects, which grew 2.1 percentage point in the second quarter of '24 and 0.4 percentage points in the first half of '24.
As mentioned in Fossen's speech, since the third quarter of '23, the company has been focusing on technology products on 2 main fronts: one, providing a better experience for our students and two, seeking operational efficiency gains with the automation of processes. And although they are still maturing, it is already possible to identify efficiency gains on several fronts, such as personnel and PDA. Moving on to Slide 14, which is the evolution of the company's adjusted net earnings, which reached BRL 62 million, 21% above the second quarter of '23.
The increase in net income is the result of the expansion of revenue and improvement in the financial results in the period. In the first half of '24, adjusted net earnings amounted to BRL 106 million, 67.8% increase versus the same period of the previous year with an adjusted margin of 8.3%, up 2.7 percentage points versus the first half of '23.
The next slide, which show the evolution in the accounts receivable, which in the last 12 months stood at 42 days an improvement of 2 days versus the same period of the previous year. Moving on to Slide 15, we see the investments made by the company in the second quarter of '24, which reached approximately BRL 30 million, a reduction of 45% versus the second quarter of '23.
In the half year, investments were BRL 68 million, down 18%. On Slide 17, we demonstrate the evolution of free cash generation, which reached BRL 73 million versus BRL 4 million last year. The strong free cash generation is mainly a result of EBITDA, the improved working capital and reduced CapEx in the period. In the half year, we reached BRL 208 million of free cash generation, a 77% growth versus last year.
Finally, on Slide 18, we present BRL 852 million of net debt, excluding lease liabilities, with a financial leverage of 1.7x versus 1.5x in the second quarter of '23. Net debt was mainly impacted by the cash disbursement to pay for the acquisition of FAPI in the amount of BRL 158 million and distribution of BRL 60 million in dividends at the end of '23.
In order to achieve a healthy cash position for the company, in the second quarter of '24, we concluded the renegotiations and funding of debentures from SECID and ACEF in the amount of BRL 173 million and BRL 300 million. It is important to note that for the benefit of our solid financial position, the average cost of debt, financial and acquisitions was CDI plus 1.04% per year.
Note that approximately 58% of the debt mature as of 2026 and that our current cash position is capable of meeting all of the scheduled amortizations until the end of 2025. I conclude my comments here and turn the floor to the operator to start the question-and-answer session. Thank you.
[Operator Instructions] Our first question, Yan Cesquim BTG Pactual.
I have 2 questions here. First, about intake. I'd like to understand or if you can even share with us you're first impression for the next cycle of intake. We saw in the speech of some of your peers that there's a very high competitive scenario for distance learning. So how do you assess the industry's performance until this point? And if you can talk about the point of the cycle where you find yourselves at.
And in this intake cycle, can we already -- are we going to start seeing intake for FAPI's medical school? Second question about the perspectives, we saw an increase in marketing and administrative expenses in the second quarter a little bit stronger. And you said it should be a one-off increase, but do you see these lines already normalized in coming quarters. These are my questions.
Good afternoon. This is Fabio Fossen. First, intake is coming strongly for DL? That was the specific question. We don't provide a guidance or anything. But if I look at numbers from last week, it's growing, intake growing at around 17% and for distance learning. So we're 40% of the intake cycle already unfolded, and it's been going well.
Our on-campus intake net is pretty much tied compared to last year, which is good. We've been growing our own campus relevantly over time. And this student base, I think first, there's an important dynamics that reenrollment. This student base is at healthier levels of growth than what we saw in the first half if we look at the information we had until last week. So these are the main important indicators that we have the growth in student base to date, again, 40%, 45% of intake is according to what we projected and expected. About FAPI we took on the business in the last 10 days of June.
So the admissions exam had already been announced. We worked hard to try and speed it up ahead -- a lot of Positivo students that were not served who wanted to go to Positivo. So there's a 100 to 110 new enrollments at FAPI this half year. And we're also seeing good middle of the year intake at the other medical schools that we have. Something around an additional 70 to 80 students in the 4 other medical schools we have. So there's very interesting intake for us in medical courses, and you're going to see that in the next 2 quarters.
This is Felipe Negrao talking a little bit about SG&A. Very briefly, SG&A is a combination of a lot of things. For the first thing, marketing. The first point when we calculate the tax CST, that's when we invest for acquired students, that's one of the highest efficiency rate. In this sense, and we've worked a lot in terms of drop up. So LTV is still very good. But it really does depend on the competitors, right?
If they invest more, we end up having to invest more as well. Even though we're very efficient. So I expect us to be able to bring down the marketing accounts. We see an improvement compared to last year in terms of the investment we already made in IT and systems and processes that we implemented in policies. That's the first step. But I think there's still a lot of opportunity to work. Our delinquency rate is very low so that makes me content because it's going to improve greatly.
When we compare to the others, it's very low. But in operational terms, when we look at it, there's still opportunity to improve and get even better figure. We already see a slight decrease compared to last year. So we are at a higher level than last year. But compared to the recent months, we see a slight decrease. This is an expense that does not tend to grow. We leveraged it greatly with revenue growth.
So with the growth of revenue, net revenue may bring efficiency gains. Legal consulting and these are really one-off. We have FAPI and the payment of the fees. So we usually have very low nonrecurring expenses. This quarter, it grew a little bit because of the cost of the FAPI M&A. And personnel, we see gains as well.
As a percentage of net revenue and SG&A, there was a reduction. We have still a series of processes that are being concluded, and we'll be able to see more reductions for coming months. I think that's pretty much it.
Next question Mirela Oliveira, Bank of America.
I have 2 questions. The first about these processes that were automated, if you can talk a little bit more, what processes were there and the magnitude of this investment and what you expect in terms of efficiency looking forward -- and then a little bit about PDA. If you can talk a little bit more of what we can expect for long-term PDA the stabilized level of that line.
Mirela, this is Fossen. IT investments are focused on improving service to students. At the end of the day, it all gets into the -- our app interface. But behind that, there's a series of processes that used to be done in a semi-automated manual way that we started to automate and connecting legacy systems, replacing legacy systems for that.
So there are gains in efficiency that are being captured along the way. Looking forward, we have some other projects that will be put into motion this half year as well. We're working hard in improving our intake intelligence. We have a very interesting pricing team, and we're improving the automation of that so that we can start making better decisions in terms of pricing.
In my view, pricing is maybe the most delicate item that requires the most intelligence in order to be able to affect results of the industry as a whole, not only just for us. So our investments are focusing towards that to gain efficiency and also efficiency in headcounts as well with the automations.
Our PDA, we've been working on it. Felipe has been running a very interesting review process, reviewing all the processes and format and how we used to work on a billing and all of the other finance processes, we're already seeing results for quite some time actually. And normally, this is very low compared to the rest of the industry, our PDA if you count that our mix of on-campus and DL, DL always has a higher level of PDA due to the nature of the customer on distance learning. And we're very well positioned on DL.
And actually, there is a macroeconomic component there that's something unfavorable. I mean we'd love to know the future, but it's not something we can tell. From the viewpoint of internal processes, we've been improving and learning, and we have a series of investments behind that improvement. They're maturing and we're gaining intelligence in all of that.
Next question Caio Moscardini, Santander.
I have a question about the use of capacity at the campi. I mean what level are you running today -- we imagine it's a high level, but I would like to understand a little bit more about this use of capacity of the different campuses to have a better visibility of how much room there is still to grow on on-campus courses.
Caio. In terms of capacity, we are comfortable in all of the campi and if we look at the future growth project. So we've been coming from some time using a series of mechanisms in terms of use of faith. We did a movement last year that was to remove corporate from [indiscernible] to be able to turn that into classrooms. When you see this student magnet given its quality and the brand of the school, how strong that brand is in the eastern area of the city.
So we removed the corporate, and we have a new floor now for classes -- we have the space we need to be able to grow without requiring any major investment. What we find in smaller campuses. We end up making a call of judgment, which courses to open and which not to aiming at gains of margin.
So actually, we are now starting to think about how do we expand the greenfield to other places. It's still too soon for us to be able to provide a position, but we're starting to see that our strength on the on-campus courses, give us room to look forward.
Next question, Lucas Nagano at Morgan Stanley.
I'd like to ask about 2 things. First, about the on-campus ticket, if you can talk a little bit, give more clarity on what led to the stability and you're readjusting monthly fees for new students and other students. So is it an effect of the mix or there's a discount and should be -- should this remain in the second half? The second question is about 2 lines. First, the comment you made about the legal provisions, we'd like to understand what drove that and if it's a one-off in the second quarter? And the second is the technology expenses. Felipe said you expect smaller lower levels. So the 3% of revenue should be reduced, should that come already in the third quarter?
Lucas, this is Fabio Fossen, I'll talk about the ticket and Felipe will answer the other question. About the ticket, it's a natural movement. There's drop off half way through that happened, this happened. There's no specific cause. It's a macro movement of the student base, how it unfolds.
We don't provide guidance on the ticket going forward, but the efforts are being able to maintain the healthy base growth and ticket growth. And we've been able to do that at healthy levels and significantly in DL. That's something we've been working on for quite some time, and we're working hard on pricing.
I think this is work that we go, it's like looking at a chessboard with sit down, the main players and the directors we look at the board and make decisions. We have a series of blackboards open and try to balance and decide between volume and price. We see revenue growth in the second half. If you talk about revenue as a whole, it's a better indicator than ticket. Revenue overall, we've been showing healthy growth in the first half, and I see the second half of the year, maintaining healthy growth. I'll turn to Felipe for the other 2 questions.
Good afternoon, Lucas. About IT, in nominal terms, we see a slight reduction for IT expenses this coming month. It will not grow proportionally to revenue. It's about BRL 3.5 million, BRL 4 million per month that will remain more or less on this level. Especially that's already reduction especially compared to the third -- first quarter of the year that was close to BRL 5 million.
And that, again, is without growth. So that's a very good operating leverage. And for the legal aspects, we have to break it down to 2 lines there's legal services, the firms that we hire and there's the provision as well. What happened that it took a lead for legal provisions this year. Legal expenses for some one-off specific issues of the M&A went up. So it's not something that will remain in our expenses with lawyers. We are already going to see a reduction on that line. And legal provisions. If we compare it to the budget into previous years, except for last year, it remained stable, relatively stable.
Last year, we had a credit within our provision, we had a reverse and that ended up helping us there. So when we compare it to last year, it looks worse, but it was actually a one-off effect we had last year. So we should due to the reduction in lawyer fees, expenses, there will be a reduction on legal expenses in coming months.
[Operator Instructions] We have a question from [ Wagner ] in terms of the injunctions that are being evaluated at the Ministry of Education, if the company can give us an overview of the current situation?
Well, good afternoon, [ Wagner ] this is Fossen. We have 6 procedures moving along as the Ministry of Education. And we heard back on one of them that was in Londrina. There was a negative at this time. So we already filed the procedures for -- to apply for reviews of their decisions. And we have saw a solid base to be able to work on that from all the indicators, our rating was higher than 4.9 in max devaluation. And we met all of the requirements.
The only requirement that was not met in our understanding, reading their response was that the ratio between doctors and inhabitants, and we have good arguments to defend it. And the others, we are waiting, and we need to see what the Ministry of Education may release in coming weeks. There should be news in the next few weeks, but we are still on standby.
We remain optimistic in that sense both in the ones to come and in terms of our appeal to the decision that they made.
[Operator Instructions] We'd like to inform you that the question-and-answer session is now closed. And I will turn the floor to Mr. Fabio Fossen for his closing remarks. Mr. Fossen, please go ahead.
Thank you, everyone, for attending. It's an important moment for us to have this contact with you for us to be able to communicate and clarify our results and our viewpoint looking forward. We are optimistic with the company's results it's still the beginning of all the movements that we foresee in the strategic plan to do the necessary change to our format, our organization, the business unit that we created in the past, as I mentioned in other calls, are starting to bring results.
It doesn't appear as clearly in the earnings yet, but we are beginning to see people getting excited. We started to see students being more engaged with us. So the drop-off rates and -- actually, the reenrollment rates start to grow significantly, both for distance learning and on-campus courses. So for us it's a difficult market, as everyone heard of, but we've been able to cruise it in a positive way in the midst of any external difficulties. And here, we have a lot of energy to be used, and there's a lot to be done for us to improve our results in the coming quarters. Thank you. Have a great day.
Cruzeiro do Sul second quarter of '24 earnings conference call is now closed. The Investor Relations department will remain available to any further questions and doubts. Thank you to all participants. Have a great day.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]