YDUQS Participacoes SA

BOVESPA:YDUQ3

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to Yduqs' video conference to discuss the results for the second quarter of 2023. This video conference is being recorded, and the replay will be available at the company's website at www.yduqs.com.br. The presentation will also be available for download.

We would like to inform you that all attendees will only be watching the video conference during the presentation. [Operator Instructions] Before proceeding, we would like to clarify that any statements that may be made during this conference call regarding the company's business prospects, operational and financial projections and goals are the beliefs and assumptions of Yduqs' Executive Board and the current information available to the company.

These statements may involve risks and uncertainties as they relate to future events and, therefore, depends on circumstances that may or may not occur. Investors, analysts and journalists should be aware of events related to the macroeconomic scenario, the industry and other factors that could cause results to differ materially from those expressed in the respective forward-looking statements.

Present at this conference, we have Mr. Eduardo Parente, CEO of Yduqs; and Mr. Rossano Marques Leandro, CFO and Investor Relations Officer. I would like to hand the floor over to Mr. Eduardo Parente, who will begin the presentation. Please, Mr. Eduardo, may proceed.

[Eduardo Menezes, executive]

Thank you very much. I hope you're all well and as excited as we are with the perspectives of our country and of our company. What you'll see through this presentation is the results of what we've been talking about for the past few quarters or the quality of the portfolio that we have that has helped us so much during this tough year that, globally and in Brazil, we have lived through.

And now with the slight improvement of economy, it's showing such impressive results as a direct result of the operational leverage that we have and the quality of our service, especially the less favorite, the classes C and D in Brazil, okay?

So moving here to Page 3 on the highlights of our presentation. On the left-hand side, it's the first glimpse of the operational leverage that I mentioned. Net revenue growing 15%, EBITDA growing 24%. And I highlight that this is a sequence of extremely good numbers. We have grown in the fourth quarter last year, 18%. The first quarter this year, 21% and now 21% in EBITDA. Almost as important as that, our EBITDA margin is growing, very much in line with what we've been talking about.

Our fast-growing businesses are the ones with the highest margin, which tends to push the mix and the average up. Net income, coming back, almost BRL 100 million higher versus the second quarter of last year. So a number that we take a lot of pride in cash conversion, and that added cash generation plus net income plus the substantial reduction that we had in the leverage, the financial leverage.

That makes us comfortable to resume, as you know, or maintain a tradition that we have since 2017 in our IPO to pay dividends, which we'll talk more about it throughout the presentation and will be, in the second half of 2023, the amount of BRL 80 million.

Moving to the right-hand side of the page. Again, the strong operating leverage leading us to exceed the guidance of EBITDA that we gave. The guidance for the last 3 quarters were 10% to 20%. Again, in the fourth quarter last year, we had on the higher top range of the guidance. Last quarter, we surpassed and exceeded again. On this quarter, the 24%, that will bring you towards [ new cash ]. We have good news in all the businesses that we have in other services lines. On Premium, growth of 11% on our student base, an increase in tickets for medicine on 10%. And net revenue is growing 20% (sic) [ 12% ].

On digital, we grew our intake for the second quarter on 45% versus last year. The guidance that we gave was here between 10% and 20%. This is something that we have somewhat of a surprise. We've been planning for this. This is a reinforcement of our strategy of flattening, in 4 quarters, the intakes for digital. The numbers that we had are above 18,000 students coming in the second half -- in the second quarter. These numbers that we have usually on -- are only odd quarters. The even quarters were much lower numbers than that, which is very good for the business, for the students and for the results, as you see.

Again, tickets increasing. And as I mentioned, the operational leverage are being very, very impressive on 43% increase in adjusted EBITDA versus the second quarter of 2022. And we're very excited with these results. We think that On-campus will deliver lots of important results in the upcoming years.

We had an increase for the first time in a long time in revenues, a lot based on the pricing strategies that we have been practicing and talking to you about it since the first half of 2022. And as a result, and again, operational leverage and pricing coming in, a very important evolution in our EBITDA.

So all in all, what you see on the left-hand side, important numbers for the business as a whole. On the right-hand side, every single business make important contributions to these important results. Okay.

So moving on to Premium on Page 4. There is an important growth keeping on. Medicine, the traditional 18%, that roughly what we've been presenting quarter after quarter. The important number is this turnaround in Ibmec. We took over Ibmec in 2020. We had to make an important turnaround at Rio operations, the São Paulo operations. We just hit the gas and grew. We built a second building in the city of São Paulo near the financial district in Faria-Lima because we could not fit in the first building anymore. So now we see Ibmec with a tailwind moving forward, an important manner.

On the adjusted EBITDA, we had a 5% increase on the semester. It's important to note that we had two important facts on the second quarter that affected this number. One is that last year, we did not have any bonus for executives. And this year, we're providing bonus in line with the excellent results that we're having. We're provisioning bonus in line with the results that we're having.

And the second is that the government took an extraordinary amount of retention on the FIES part of the medicine business. That affected these results downwards. But otherwise, the numbers that you'd be seeing here, instead of the plus 5%, you'll be seeing plus 17%. And then instead of the minus 11%, you'll see plus 7%. These numbers that I mentioned, the bonus is the bonus, but when we're talking about the FIES retention, we're still discussing with the government. We chose not to put it as revenues or EBITDA in any way. There is a chance that we can get this money back. If so, if and when, this will come as extraordinary revenues when it happens. But we choose not to count on it for the moment, okay?

On the bottom left-hand side, an increase of 11% on total student base. Medicine growing, as we've been growing traditionally. Ibmec was an important growth here. Important that in medicine, that we have already reached the guidance that we gave for the full year. So we're very excited with these numbers as well. On tickets, both IDOMED and Ibmec with important growth versus last year, and the renewal in line with the tradition that we have on the Premium side.

So moving on to Page 5 and talking about distance learning . I think this is the absolute star of these results of this quarter. Many, many important messages on this chart. I'll start with the title. This 45% increase in intake versus second quarter 2022 is the result of us being very precise on understanding the dynamics of the market, understanding the elasticity of prices. So when you -- when we had very little [ assisting ] last year, we talked about it with you, we chose to increase prices and sacrifice a little bit the intake.

So you see on the bottom right-hand side of the page, the 13% increase on average ticket, which is the result of this policy last year. And we measured and we saw the comeback of the confidence, the comeback of the sensitivity to price adjustments. And we had a little bit more aggressive intake this year that resulted on this very, very important volume increase.

Data on the left-hand side of the page shows you a 20% increase -- 27% increase in revenues. That result, as I mentioned before, on the operational leverage, this very impressive 42% increase on the adjusted EBITDA.

Another very important point on this page, this increase in this 5 percentage points in the EBITDA adjusted margin is something that we look as maybe not a new normal, but we were around 38%, 39%. And because of this operational level I'm talking about, we see a growth on the "normal" rate of EBITDA margin for 2, 3, 4 percentage points more. On this first half, it was 5 percentage points. And again, the business that grows the most, growing more than our average margin.

On the bottom left is the increase in total student base, 11%. 14% for undergraduate, reflecting the fantastic intakes of these first 2 quarters. Don't get overexcited. This 5 percentage point renewal rate, 73% is roughly what we're used to. We had last year renewal because of a campaign that we did the year before that was below normal, so we said that this is not normal. It's going to come back, that this is us coming back to a normal rate for Digital Learning.

So moving on to Page 6, also a page of good news. I will start with the bottom left-hand side of the page. We had a decrease of 7% in the total student base. This is what's happening since 2014 at the end-of-years. We are used to seeing double digits number here. Sometimes, even on the high teens. So we had "only" 7% reduction on the student base. But when you see the top left-hand side of the page, you see an increase of 1% on net revenue, which is direct result of the pricing policies and the pricing strategy that I mentioned that we've been talking to you for the past 1.5 years, that you see on the bottom right-hand side of this page is an increase of 9% on pricing versus the year before. I think, even the year before.

That results in an adjusted EBITDA, an increase of 17%, which is something we celebrated a lot internally here and also an effect of an additional 3 percentage points in margin that we see as an evolution towards a new reality. Renewal, flat at this 84%, which is the way we've been seeing recent years and probably this year as well for the future. I'll hand over to Rossano, who will talk to you about our financial numbers.

[Rossano Marques, executive]

Well, thanks, Eduardo. Good morning, everybody. So moving on to the revenue slide. We see significant growth in revenues by 15% quarter-over-quarter and 13% on the semester. That once again is driven by the strong performance both in our Premium and digital businesses. Notably, this time, the On-campus segment is returning to growth, as highlighted by Eduardo, which is a very positive news for us.

The revenue contribution for those two most profitable businesses continue to rise, demonstrating the potential for margin expansion and the resilience for the company's portfolio. Both business units together now represent over 57% of our revenues, right? When looking at the evolution since 2018, a very relevant transformation. There's been a 35 percentage points expansion. That illustrates the transformative journey the company has gone through.

Moving on to the next slide. On the expenses front, represent yet another quarter where we're reaping the benefits of our accelerated cost efficiency efforts since they've been there. Collectively, these expense categories positively impact our margin by 4 percentage points. This occurs even considering a negative impact on our year-over-year comparison due to the company's variable compensation program that's over 1 percentage point impact.

Adjusted by that, you see that even that line has a positive contribution on the margin expansion. But that maintains a positive trend, the result of strong renewal numbers over the past quarters and improvements in our collection processes. These improvements more than offset the increased participation of this in our revenue, which leads to higher provision as a long-term accounts receivable profile.

It's worth recalling that enhanced retention and collection outcomes reflect the success of our technology investments in recent years. Those investments have created very user-friendly interfaces, stable platforms, easy flows of information and processes for our students, and that makes a big difference on their collective experience.

Sales and marketing remains at a highly positive efficiency level, operating at a percentage of revenues lower than the previous year, while maintaining a very strong intake for the businesses through a very effective strategy and also leveraging the strength of our brand. Our cost block continues to deliver efficiencies, showcasing the operational leverage of the business and setting a market benchmark for us.

The rental expenses, despite accumulated inflation, continues to reflect our meticulous space optimization and the process of contract renegotiation. Once again, closing below the previous year, both as a percentage of revenue and in line in absolute values. We continue to dedicate significant effort to that, the optimization of our spaces, aligning them as best as possible with the market scenario.

Moving on to the next one. The combination of positive revenue performance and the disciplined cost management has led us to exceed the upper range of our EBITDA guidance for the quarter. We achieved a 24% growth compared to the same period last year against the guidance of 10% to 20%. This resulted in a 2 percentage point increase in margin for the semester with consistent growth across the business units. It's important to note that the Premium margin was impacted by the effects of FIES retention and bonus accounting, as highlighted by Eduardo. Excluding these effects, we would be discussing a 47% margin, very close to what it was last year.

Another observation, the reported EBITDA grows by 35%. The accelerated IFRS figures, also the accounting one, reaches an impressive 51% increase year-over-year. That reflects the strong management of our property costs, which is reflected on that index. Moreover, it's worth highlighting the increasing contribution of the Premium digital business. In the revenue, we saw the relevant increase on its participation, but it's even more impressive on EBITDA, now reaching 73% of it.

Moving on to Slide 10. We see net profits with very strong growth of 158% year-over-year in the semester. But it's reaching over BRL 200 million in net income, with BRL 52 million in the quarter. Even in a quarter of lower seasonality, we managed to achieve a very positive and significant level of income. Important to notice that this is happening with still very elevated interest rates that impact our final results.

So moving on, we are pleased to announce, once again, robust quarterly cash generation. Our free cash flow grew by BRL 156 million compared to previous quarter, and the shareholder cash flow achieved another positive quarter. In addition to the operational result, cash is driven by efficient management of our working capital, demonstrated by the stability of our DSO even in a semester with significant growth in acquisition revenue -- in intake revenue, as I stated before.

This further demonstrates the health of our accounts receivable as a result of improved student retention and enhancement of our renewing collection process. As we've been emphasizing, we believe the strong cash generation capability is fundamental to set us apart in the market. Supported by that, we are proposing an extraordinary dividend, as announced by Eduardo, in the previous slides.

In terms of CapEx, we continue to execute according to our annual plan with the reduction in the CapEx to our ratio compared to the previous year. For the remainder of the year, we bring a revision of our guidance, increasing the number by 4%, following identification of growth opportunities in the semi On-campus segment, AI initiatives and medicine.

Going on to Slide 12, another very positive highlight, the expressive reduction in our leverage ratio. We reached now 1.66x our adjusted EBITDA. This significant decrease is due to robust cash generation and also the expansion of our EBITDA. This is becoming increasingly comfortable when we see the projections from now on. As I said before, this gives us the confidence to announce the extraordinary dividends for this semester.

For the short term, we reiterate that we have no more debt maturities in '23. This provides us the comfort to continue monitoring the market opportunistically, aligning our debt duration with our future cash flow generation perspective. And this will also reduce our cost of capital. Having said that, I hand it back to Eduardo.

[Eduardo Menezes, executive]

Thank you, Rossano. We included 3 charts that we generally don't show in our quarterly presentations. We use them sometimes in our institutional presentation that you can find on our site. But we believe that they are very good to explain the moment that we're living in and the strength of our portfolio. So bear with me for a second here.

The top part of this chart, we see on the bars the evolution of our LTM EBITDA for the business, so BRL 1.3 billion in Q4 2020. That's the total for 2020, and we chose to start in Q4 2020 because that's when we started splitting the EBITDA per business.

So what you see on the dark blue here is the LTM EBITDA for the on-site business. What you see on the darker green is the LTM EBITDA for digital, and what you see in the light green is the LTM EBITDA for Premium. And what you'll see here is that 2021 was a very tough year for us. We had the last FIES graduates graduating. We had the pandemic. We had a very bad intake season. We had low prices.

So it was a big hit on the on-site business. That came from BRL 600 million EBITDA to nearly BRL 400 million 1 year after. That was very well compensated by a substantial growth on the Premium business that went from BRL 310 million to BRL 400 million and an important growth on the on-site as well. So what you see here is the strength of the portfolio on a very critical year for us, maintaining the business flat.

What you see in 2022 is a little bit different. You'll see another drop on the on-site, but not as big as it was before. What you see on the online was a growth but a tiny growth, and an important growth on the medicine. That went from BRL 398 million to BRL 506 million. It was a year that we were not excited with the perspectives of the economy. We had a lot of measurements on the elasticity of the market.

And we mentioned this to you. We said since the market is not coming, we prefer to improve price -- decrease prices and bear with a smaller intake number. But still, we had a growth from BRL 1.34 billion to BRL 1.46 billion, a lot based on the Premium growth. What we see now in 2023 and that started as early as in the fourth quarter of last year is the comeback of the less favorites, the comeback of classes C and D, the confidence in the market.

And as I mentioned to you throughout these tough years, we are very good at serving classes A and B, who suffer much less on these critical moments that we've been living. And when classes C and D comes back, you'll see an important operational leverage, like we mentioned many times on this presentation. So you see a very sharp increase if you compare quarter-to-quarter now from BRL 442 million EBITDA to BRL 656 million on the online.

The comeback of the EBITDA on the on-site and Premium coming in again. And again, an extraordinary factor that both Rossano and I have mentioned on this presentation. You'll see a flattish 1Q to 2Q 2023, but it's not what we're going to see moving on. So you'll see the strength of the portfolio, robust to hold for bad years. Impressive to grow on good years that we expect them to come, that you can see on EBITDA, that you can see on net income. Net income, coming back to resuming growth despite the fact that we're paying way more interest than in the past. And again, this is before the recent movements by the Central Bank of Brazil to reduce interest rates and our operational cash flow surpassing BRL 1.1 billion for the last 12 months.

So another interesting chart that we want to show you is why many of our shareholders classify us as a clear compounder. We had a few very, very tough years, and we grew on every single one of them an average of 8% per year. We always had margins above 30%. And as we mentioned before, we've been paying dividends every year for the past 16 years, and this year is going to be no different. So this shows the robustness of our portfolio. We are looking forward to even better numbers in the near future, but remaining as a trustworthy clear compounder of the business.

This shows us, not only us, as an interesting option, a very interesting option in the education sector, but also very interesting options when you think about Brazil. It's a portfolio that delivers growth greater than what the country is growing on good moments and has a very strong resilience on bad moments, as we were able to prove to you in the past recent years.

The other chart that's interesting to show you is on Page 15. It's an interesting moment for us. Our share price today is roughly the same as it was. When our team joined the company in 2018, roughly BRL 22, but it's a completely different company than it was 5 years ago.

We're very consistent to our strategy. When we took office here, people asked us what the strategy was. And we mentioned it was M&A, distance learning and medicine. And we, like we just showed you, delivered big time on all 3 levers, aided by digital transformation. And we -- modesty aside, we are the pioneers in the educational sector of reference for Brazilian companies, for many foreigners, including the U.S. and Europe. You should take a look at our products, take a look at our app and understand how sophisticated the technology that we have on teaching, especially the ones less favored but also at all ends of society.

And it's a company that went from BRL 3.6 billion and grew 6% a year to BRL 4.9 billion in the last 12 months, and EBITDA that was BRL 1.2 billion and grew 7% a year to BRL 1.6 billion on the last 12 months. We were a company that had 30% almost of our revenues depending on the government. Today, this number is very close to 0 in a company that had the high-growth business representing only 22% of our revenues. And today, at 57% share in our net revenues. These are completely different companies being traded at roughly the same valuation. Of course, a very different multiple and a multiple that is also very different from some of our competitors in the market.

So moving on to a different topic, a topic that we take a lot of pride, on Page 16. We enjoy a lot talking about ESG. ESG is something that we've been doing for the past 52 years. It's part of our -- it's more than our values. It's who we are. It's a part of our ADN. We just changed a lot the way we communicate about ESG in the past 2 years. We created an institute, Instituto Yduqs, that has not only all the social programs that you already saw. If you haven't, I invite you to take a look at our ESG form. We had 2. They are on our website. It's something we take a lot of pride in, and I think we have reference for companies not only in Brazil, but globally. Not only the education sector, for any sector.

Just briefly touching the 3 main initiatives that Instituto Yduqs added for the last -- for the past year, a little more than a year old. We are teaching adults and youngsters how to read, people who have already passed their age of regular schools and still can't read, and we use our students on the social programs to teach these people to read.

But the second program is our underprivileged students from medicine. We started with medicine. This is a program that started an initiative from our employees, that understood that the first 3 years of the medical students, they cannot work because it's a fully -- it's a full-day program. After year 4, they started mentoring the new students in being TAs so they can make some money. But these students are students selected by the government as people who have very little income and very good results on their SATs equivalent. We call it ENEM. So we added some scholarship, again, funded by our employees, and the company decided to match the employees' donation. Now we're getting donations from people outside the company to help these people have a good life and buy their books and then be the best they can in the first 3 years of their schools. And of course, we expanded this program, started only in the Rio de Janeiro students. We're taking to other states of Brazil. And our dream and I hope we are not very far from this dream is taking this to other careers, especially on the teaching for kids, pedagogy and so forth.

The third program is something that also was started by initiatives of our employees at grupoQ and [ Qconcursos ]. They made on the -- very much in line with the mode of our distance learning courses, the whole subjects or the whole content for the ENEM or the SAT equivalent examination, and it's totally free. We don't capture leads from this. Our goal here is to get better students get into our system that we can deliver better professionals to society. We have already 138,000 students enrolled in this program and using this platform to study. So a very important tool of support for teachers in class or parents who want to help their kids or even people who are self-taught and wants a different life.

Moving on to the bottom of the page. On the left-hand side, we have a new ESG center, where you can find a whole bunch of new information about what we do and how we do. You can follow my targets. Not only I, but all the top executives that the company have ESG in their variable compensation. We are today at 68% of our targets, and we hope to get to 100% or even more towards the end of the year. MSCI and other institutes keep on reaffirming their confidence and the trust in the ESG practice.

The right-hand side, we evolved a lot on our greenhouse gas identification and inventory. We were nominated on this important local institute and magazine as an example in diversity, the only company in the education sector. We opened the third class of Black-only trainees. The first 2 classes were major success. And we have also the Carbon Disclosure Project and also the documents that you can find on our site.

So guys, moving towards the end here, 2 pages more. On Page 17, we have a summary of what we saw here. Lots of cost discipline, a lot of pricing discipline and a portfolio that took us a few years to assemble. And that's a winning portfolio that allowed us to see a significant growth in EBITDA and EBITDA margins. And again, it's the third quarter in a row that we do this, last quarter last year, 18%. First quarter this year, 21%, and now, 24%, which was above the guidance that we gave between 10% to 20%. Price evolving in all the service lines. Intake for digital in the second quarter, again, very good. The first quarter was excellent, and the second quarter came in excellent, and even for us exceeded not only the guidance but expectations and the targets that we have internally.

The net revenue of the quarter growing in all business units, including in the On-campus. EBITDA, as I mentioned before, grew 24%. When you see EBITDA ex IFRS, like Rossano said, growing above 50%, which has given us a lot of confidence what's coming next. Net income, almost BRL 100 million more than last year. Free cash flow, BRL 170 million almost more than the same period last year. We have BRL 1.2 billion in cash and cash equivalents right now. And there was a very sharp drop in our leverage. It was above 2 at some point in time last year. And today, we have 1.66.

So how we see us moving forward, again, the cash flow coming in, net income growing, interest rates coming down. Leverage -- financial leverage coming down allow us -- and the perspective that we have for the upcoming quarters allow us, in of course a discussion with our Board that saw our numbers and showed the confidence that they have, now we are presenting it as the nearby future, allow us to maintain this tradition of 16 year consecutives -- 16 consecutive years of paying dividends, and we're announcing here second half of 2023 an BRL 80 million dividends.

When we see third quarter, again, for the fourth time in a row, we have given you a guidance of an increase in EBITDA versus the same period the previous year of between 10% and 20%. Intake for campus, we're very excited what's going on for the second half of this year. We are looking into now between 25% and 35% increase versus last year, maintaining our pricing policies, maintaining the increase in prices that we've been practicing for the past year or so.

On Digital Learning, a little bit of shift. Those are students coming in earlier in the second quarter, but we can -- we're very confident on this growth again between 10% and 20%. Very important, when people ask us, you had fantastic intakes, what's happening with your renewal rates? We are not seeing any differences versus what we've been practicing in the past, plus 1 percentage point or minus 1 percentage point versus our historical numbers.

One more thing that we mentioned before, we see a minor change in our guidance for CapEx this year. Totally in line with our excitement of the moment that we live in, in the market that we see short-term opportunities, like Rossano mentioned before. Both the medical seats and the student base, we are maintaining the guidance that we gave you before. I'm very confident that we are delivering on those.

So guys, thank you very much for your attention. Thank you very much for your trust. We are excited with the quarters to come. This time last year, I was in front of you saying that we are concerned with the third quarter, and we had reasons to be like the results showed despite the growth that we showed. But that -- better times would come and we see them coming and we see it now. And then I'm going back in front of you saying, we're excited with what is to come. We're excited in the third quarter. We're excited how we're going to close this year. We're excited what's coming up for 2024, not only for our institution but for our country. Thank you very much. Have a nice day. Have a nice weekend.

[Operator]

Yduqs' video conference is now closed. We thank you for your participation, and wish you a very good day.