Participants

Carlos Henrique Boquimpani de Freitas; Chief Financial & IR Officer; Vitru Limited

Frederico P. Mendes; Director and Head of the LatAm TMT & Healthcare Sectors; BofA Securities, Research Division

Lucas Dai Nagano; Research Associate; Morgan Stanley, Research Division

Pedro Caravina; Research Analyst; Crédit Suisse AG, Research Division

Presentation

Operator

Believe in everyone. Thank you for waiting and welcome to Vitru Second Quarter 2023 Earnings Conference Call. We advise you that the video conference is being recorded and will be available on Vitru's Investors Relations website, where the complete material of our earning call can be found. You can also download the presentation from the chat icon. (Operator Instructions) We emphasize that the information contained in this presentation in any statements that may be made during the earning call regarding view to this business, prospects, projections and operation and financial goals constitute the beliefs and assumptions of the company's management, as well as information currently available.
Forward considerations are not performance guarantees. They involve risks, uncertainties and assumptions and they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operating factors may affect Vitru's future performance and lead to results that differ materially and those expressed in such forward looking statements. Today we have the presence of the company's executives, William Matos, Vitru's Co-CEO; Carlos Freitas, Vitru's CFO and IRO and Maria Carolina, Investor Relations.
I will give the floor to Mr. Carlos Freitas, you may begin.

Carlos Henrique Boquimpani de Freitas

Thank you, operator. Good afternoon everyone and thanks for joining us again. It's a real pleasure to be here with you all again for the release of our second quarter '23 results. As said here with me I have William Matos, our Co-CEO; Maria Carolina Goncalves, the Head of our IR department and also Raquel Suzaki, [Daniel D' Souza] and Felipe Da Silva from our IR team.
The slide presentation in front of you will be part of today's webcast and this is also available in our IR site at investors.vitru.com.br. Before we begin as usual, I'd like to make sure that as detailed in Slide 2 that you know that Safe Harbor is in place for this call. Now invite you to go to Page 4, which is here.
So here we show a few key operational highlights of the quarter. The first is that this is the first anniversary of our -- of the closing of our business combination with UniCesumar that closed in May of last year and as we know, we have been following the company, we have been advancing a lot in the integration process of both Vitru and UniCesumar. We reached in June of this year nearly 920,000 students, 97% of them in digital education, with a 17% increase in the first intake cycle of this year -- in first half of this year. The average ticket increased about 3%, 3.2% in the first half of this year, which is more a better indicator for the full academic cycle that semester number confirming our approach to pricing, our price discipline and our product differentiation.
On Slide 5, we have the main financial indicators for this quarter. Net revenue from our core business, which is, as you know, Digital Education Undergraduate was up 58% in the quarter, with the overall net revenue increasing almost 70% in the second quarter of this year. The adjusted EBITDA increased by 73% more than the increase in revenue, which means that our margins increased and this time to 38.8% in the second quarter, compared to 38% in the second quarter of last year.
Adjusted cash flow from operations also increasing even further 119% increase quarter-on-quarter with a solid cash flow conversion from operations of 86.7%. And finally, the adjusted net income was up almost 100% as well, reaching BRL 123 million in the quarter despite our current debt.
So on Page 6, this is a new slide that summarizes how we position ourselves and what we have achieved since the 2020 IPO.
We have always said to you that we are the only player, only listed player in Brazil with true focus on digital education. We are now the largest player in digital education in Brazil, so with not only our focus on what is growing the most in the high education sector in Brazil, but also the largest player in this sector. And here are some indicators that show our performance of the Vitru now compared to the Vitru pre IPO.
I know that most of you know the numbers, but it's also interesting to highlight what we have been able to grow in the last 3 years, both in terms of revenues, our financial indicators and also operational indicators. So revenue up by 290%, EBITDA -- we were a company with BRL 117 million EBITDA before the IPO. Now we -- we reached BRL 650 million in the last 12 months, the number of students also include the large hubs, cash flow from operations, 500% increase over the last 3 years. So this is just to illustrate what we have been able to grow in the last years.
On Page 7, the numbers of our digital education undergraduate segment students reaching 837,000 students, so a 13% growth year-on-year and almost 900,000 in digital education enrolled including our graduate segment. So this is an important growth, we are reaching the number of 1 billion students, which we probably are going to reach next year. And we had this 13% growth in student base in June of '23 compared to June of '22, which we believe is a remarkable achievement, knowing that we had a very high comparable basis of last year and the fact that this is the first full year of the fortunate real year after the pandemic.
I mean it is no surprise that the digital education segment grew a lot in the last 3 years and we grew even more, so we gained market share within this growing sector. And just to illustrate, just to remember that last year our intake growth was particularly strong, we grew the intake of 26% of UNIASSELVI and 54% in the case of Cesumar. So that's why here in the bottom right part of the Slide we show here as well the CAGR, the annual growth in the last two years, so 21% CAGR between June 2021 and June 2023.
On Page 8 some indicators of our growth, for our maturation index around 48%. So we have the capacity of more than doubling the size of student base with our current hub base of the cohorts of hubs keep growing over time. As we have always said, this is important growth driver for revenues with limited execution risk.
Following Page on Page 9, we have the breakdown of our student base per region in Brazil. So 13% overall in the last 12 months, with a important growth in the Southeast of 21% and also in the Northeast and the center west of the country. So now we have almost 200,000 students in the Southeast of the country, which represent already more the biggest region in terms of hubs for us, so around almost 800 hubs that we have only in the Southeast, which by the way is highlighted on the next slide, just to summarize, growth of hubs 18% year-on-year, growth in student base 21% year-on-year and this is a important growth driver. This was something that was asked about a lot during the IPO, our capacity to grow, to execute growth in the Southeast and we are showing that we can do it.
Page 11, the breakdown of our hub footprint, which as you know is quite complementary between Cesumar and UNIASSELVI. We keep growing -- we keep opening hubs throughout the country not opening hubs for the sake of opening hubs, the size of the Company is not measured by the size of hubs or other amount of hubs, but it is -- we open hubs when we do feel that there is a demand in that given area or city. But we keep opening hubs, because we do believe that there is space to be occupied in the country. And why do we grow more because of our focus on technology and a differentiated customer experience. Again this is a Slide that we show every quarter, just to highlight that which is public information, which is comparable. We have our apps rated 4.8 out of 5, so a very nice rating. And this is very important because the cell phone is the most used means to reach our students.
Our students, they are -- everybody has a cell phone or more than one, not everybody has computer. And in our case, people commute, people study with a cell phone, people listen to videos, et cetera and having a very nice and tech-oriented app is a way to reach the students and a indicator that our focus on technology.
So on Page 13, in this Slide, we show details of the intake and average ticket for each of our brands in the digital education undergrad segments during the first semester of this year, which as I said, better reflect the academic cycles. So regarding intakes, the intake growth in the first half of this year was around 17%, which is very close to the intake growth that we showed already in the first quarter of this year. Again, a strong performance, especially considering our quite high comparison basis of last year.
Regarding the current intake cycle that we are still going through, we are halfway in the process, but what we are seeing so far and what we expect for the rest of the cycle is a similar intake growth throughout the second semester of this year. Regarding tickets, in the case of UNIASSELVI, a strong growth in every ticket, growing above inflation, 8.5% year-on-year. This is mostly due to our pricing discipline, our marketing intelligence and the tools and procedures that we have been developing over the last years, as we have showed to you since our IPO.
In the case of Unicesumar, there was a slight decrease in ticket, especially given the carrying effect that I explained in the last quarter, the carrying effect of the substantial volume of new students that were enrolled throughout last year and now are seniors and they have replaced seniors in the last year which had higher tickets. So those new students, they entered last year at lower tickets. So there is this carrying effect, but what is important to highlight is that anyway, we are seeing -- we saw already the first signs of the new pricing approach that started to be implemented in Unicesumar in the first intake cycle of this year. And we're seeing that intake tickets for Unicesumar are growing or grew in fact in the first half, a little bit above inflation. So in a nutshell, the consolidated average ticket grew a little bit below inflation, so 3.2%. And going forward for the year, we're probably going to see a similar growth either equal to inflation or slightly below inflation on average.
On Page 14, some key financial indicators comparing the quarter and the semester. So strong growth in net revenue, in gross profit, in margins, in adjusted EBITDA. So very strong performance this quarter and this semester. And by the way, it is important to bear in mind that this is a cyclical business and that traditionally in the second quarter of the year is our strongest quarter in the year, both in terms of revenue and in terms of EBITDA margin. So this is because in the second quarter of each year, we have the full impact of the intake cycle of the fourth quarter, which is the strongest intake quarter in the year, as you know, but we don't have the marketing expenses for this growth. So the marketing expenses are spent mostly in the fourth quarter of each year. And also we still don't have most of the dropouts of new students. So it's usually the strongest quarter every year, the second quarter.
So going into more details on Page 15, the net revenue composition in the quarter growing almost 70%, as I said before, led by the growth in digital education undergraduate, but also in the medical business. And here in the right part, you'll see the breakdown of this revenue. So today in the second quarter of this year, we have around almost 80% of our net revenue coming from digital education, either undergraduate or the continuing education business, plus 13% coming from a very resilient medical business. So it is another way to illustrate our competitive advantage and our differentiation.
On Page 16, the digital education undergraduate revenue growing 58% and 76% in the semester, growing a lot and with a very important opportunity regarding the mix of students. You can see here in the right part of the slide, the breakdown today and a breakdown in June of last year of our student base. And we grew a little bit, but we are growing the weight of premium courses, namely health courses and the engineering courses, which went from 25% to 28%. And so this is important because those health courses, especially, they are mostly new.
For example, in nursing, in the case of both brands, some health courses that were not offered in the Unicesumar brand are now being offered. So going forward, we do believe that there is important potential of increasing the relative weight of premium courses and to sustain tickets over time as well, especially because, as I said, health courses, some of them have just started to be offered. And also in the medium term, not this year, but in the medium term, we do expect other courses to be allowed -- to be offered in digital education such as psychology and law.
Page 17, our medical business, just to remember, to highlight that a very high quality business, the fifth best private medical school in Brazil with high scale, Maringa being the largest medical campus in the south of Brazil, which means high margins and high leverage, operational leverage. So net revenue in this business offered only through the Unicesumar brand reached BRL 600 million in the quarter. Tickets today are around BRL 11,000 per month, increasing above inflation and the seats are still maturing. So we expect promising results from our medical segment this year.
Page 18, on the left part of the slide, on-campus, ex-medical business, there are important contribution of Unicesumar to the overall numbers, given the resilience and the high quality of, especially the health related on-campus courses of Unicesumar, which just as a refresh, those courses represent more than half of the overall on-campus business of Unicesumar ex-medical. So it means high ticket, it means resilience and again we are growing intake and tickets in this segment as well, intake for example growing around 20% in the Unicesumar compared to last year.
For continuing education on the right part of the slide, also a strong growth in this segment, which comprises not only our graduate courses, but also a growing business of technical courses and preparatory courses for the first job. This is a promising area and we do believe that we can offer complimentary products to our students. We have the tools and the intelligence to do so in a lifelong learning approach.
So again, margins growing -- Page 19 from 38% to 38.8% in the quarter, on a semester basis growing from 33.8% to 38.4% in the first half of this year. And on Page 21, you can see that the biggest contributor of this increase in margins is our operational leverage. So cost of service as a percentage of net revenue going down both on a quarter or a half year basis. This is due to synergies, this is due to operational leverage in the terms of scale as we grow the business.
G&A expenses in the right part of the Slide now represented 5% only of net revenue in the second quarter of this year, which just to show, to illustrate that we are a quite lean company and which means more agility, which means more flexibility. And also as a consequence of the integration process with Cesumar.
Page 22, selling expenses and PDA, so for selling expenses, a slight increase in the quarterly expenses as a percentage of net revenue, but a important reduction in the semester numbers. The main reason for that is that we closed, as I said, the business combination in mid-May of last year when the first intake cycle of Cesumar was already over. And in the second quarter of this year, we had the full consolidation of the overall -- of the whole quarter. So on a normalized basis, the quarterly expenses as a percentage of net revenue would have been more or less flat at around 12% of net revenue.
For PDA, on the right, PDA was a reverse. It was higher in the second quarter of this year compared to second quarter of last year, but flat on a semester basis. And anyway, this reflects our growth profile and the strong weight of new students in our overall student base. And as I said, going forward, we do expect the yearly PDA of this year to be more or less close to the number that we had last year.
Finally, on page 23, net income and cash flow. So a very strong growth in net income, driven, of course, by the business combination with Cesumar with higher margin, reaching 23% this year, the adjusted net income margin of the company. And this despite our leverage and for cash flow on the right part of the slide, we have a important increase as well in cash flow from operations, reaching BRL 160 million in this second quarter, with 86% cash conversion.
Important to highlight that this is cash flow from operations, which means that it's before CapEx. Our CapEx in the first half of this year was 5.6% of net revenue or BRL 54 million which means that if you take it out from the first half of this year, we had more or less BRL 230 million in cash flow from operation after CapEx. And this strong cash flow generation also reflected in the reduction in our net debt. Net debt in June of '23 was a bit lower than BRL 2 billion.
On a exIFRS 16 basis, I mean, without leasing as a liability, our adjusted EBITDA as I showed in the fifth slide, I guess, in the last 12 months was BRL 654 million and around BRL 600 million when we have a exIFRS 16 basis, so having included the leasing expenses. So BRL 2 billion net debt, BRL 600 million adjusted EBITDA, for 3.3, the ratio of net debt over adjusted EBITDA exIFRS 16, which is way below our covenants. Our covenant was 4.5 for the June of this year. This number of 3.3 was much higher in the beginning of this year because we didn't have the full impact of Cesumar. And this number, we believe that it shall reach 3, around 3 by the end of the year as we generate more cash flow and we do generate more cash flow than we accrue interest, so our net debt decreases over time and as we grow EBITDA as well. So that was it.
And now I'd like to open for questions. Thank you.

Question and Answer Session

Operator

(Operator Instructions) Let's go to our first question, it will come from Pedro Caravina, sell-side analyst from Credit Suisse.

Pedro Caravina

So I got 2 on my side. First, I would like to hear your thoughts on the recent decision of the Brazilian Supreme Court on prioritizing new medicine courses through [mass] medicals. We believe this may represent an opportunity for larger groups. And I would like to hear on Vitru's, what is the strategy for Vitru's thinking that Unicesumar's solid medical business is performing very well. Is there an opportunity for trying to expand its seats base or should we expect a prioritization on distance learning and maybe thinking on selling the medical business? So if you could comment on that. And also, going through the release, you mentioned that there is a challenging macro scenario and even so, UNIASSELVI has been able to pass through tickets on sustainable level above inflation and doing it pretty well. Now that the semester is over, I would like to understand better where did the demand for new students came from? Are larger groups gaining share from smaller ones? Is it the sector is expanding because looking at other educational group's results, we saw a very strong first semester in terms of student base, which wasn't expected by the end of 2022. So if you could provide us more color on that, that would be grateful.

Carlos Henrique Boquimpani de Freitas

So regarding the medical business and mass medicals, we do believe that this decision helps to minimize uncertainty and risks in a sector which is always good. And we do believe as well that the opening of new medical courts should follow the mass medicals legislation and the ministry legislations to maintain and to have a minimum standard of quality as well in the industry. So for Unicesumar, I mean, we have a very strong medical business with 2 campus especially the one in -- of Maringa, a very nice brand in the area in the State of Parana, especially in the area of Maringa. So we will analyze maybe there is an opportunity to increase some medical seats here and there, using the strength of the Unicesumar brand in the surrounding area of Maringa, for example, in the overall State of Parana. So this will be analyzed on a case-by-case basis. This is not our core business, but it is a relevant business of the company. So we will analyze in due time.
Regarding your second point for demand, where is demand coming from? I mean it was always our belief in our speech, by the way, that digital education was not a temporary session that digital education is here to stay and that there is a clear trend in the preference of the clients, of the students of going more and more to this way of studying to a digital education approach, especially in the case of Unicesumar and our self that we have a nice quality. So to us, it is no surprise that the segment is growing and it's growing even -- I mean, overall, the segment is growing less than what we grew during the pandemic of course, because it was a different environment, different approach, a different context, but it is growing, as we said that it was going to grow. We said that we believe that the sector would grow overall this year less than what we grew in the 3 years, but it was still going to be a double-digit growth in the sector and in our case as well.
So we are delivering what we said. It is a important segment for growth and we -- today, we don't have a very I'd say clear picture of whether the big groups are gaining market share from the small ones. But it probably -- it is the case that what we saw in the last senses from [misallocation], the new one will be released in a few weeks, we hope so. And we're probably going to be going to see the same that the strong players, stronger players will probably gain market share because it is a business of scale for you to offer high-quality education and make money, you do have to have scale. Otherwise, either you don't have -- you don't provide good quality education or you don't make money. So it is a bit of scale and we do believe that demand is coming from the overall growth of the sector, but also the big groups are probably going -- gaining market share as well from small groups.

Operator

(Operator Instructions) We now have a question coming from Fred Mendes, sell-side analyst from BofA.

Frederico P. Mendes

I have basically one question here. I'm just wondering, I mean one of the players also a large player on distance learning, it's being very aggressive in terms of increasing prices, right, for the segment. You're seeing above 50% increase for him and then I think that's kind of setting the pace to the sector as well. So just wondering if you're already seeing this impact kind of benefiting the competitive landscape, if there is something you can also take advantage of it, if something that you believe it is sustainable when -- how -- this, let's say, more aggressive on the positive side move towards the ticket on the distance learning, how this is evolving the competition in this segment?

Carlos Henrique Boquimpani de Freitas

And I mean, this -- this was and this remains a very competitive environment. But it is true that in the last, I would say, 12 months, we perceive a more, say, rational approach for the lack of a better word due to pricings. I mean, I don't believe that it is sustainable to grow tickets 15% per year forever. We do believe and that's what we always said that going forward, we shall have a growth in tickets more or less in line with inflation in some periods above inflation as we have this year, for example, for (inaudible) and some periods below inflation as we have now for Cesumar, but growing slightly above inflation in the intake cycle, so it depends. But I think it's reasonable to assume that in the next -- in the medium-term, tickets in the sector shall grow in line with inflation. We don't see any more a very irrational competition as we saw in some periods, but it is still a very competitive environment. So each player has to differentiate itself from the others and try to offer a better for a client.

Frederico P. Mendes

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

Carlos Henrique Boquimpani de Freitas

Yes, I mean, for this year, we -- to be frank, as I said, we do expect that the PDA for this year should be more or less the same level of last year and this is linked to our growth profile. So the fact that we grow a lot, the fact that we are -- we're increasing tickets as well in both brands in the intake cycle. At the end, it leads to high because of the -- as you know, most of the PDA and most of the dropout by the way is concentrated in fresh and new students. So I mean, for this year, I don't expect a improvement on that, it should be more at the same level as we had so far in the last year ago. But going forward, for 2024, we will have two effects, one effect, which is that we will see clearly a reduction in the overall weight of new students in our overall student base. So the -- I would say the weighted average PDA will go down naturally for next year. And also, which is also important, as said by Pedro before, the macroeconomic environment as we start to see now interest rates going down let's see to which number, but it is a fact that we serve the low to middle classes in Brazil, which have been affected by the current economic environment. So as interest rates go down and activity picks up, we shall see -- we show a few improvement in this line next year.

Operator

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

Lucas Dai Nagano

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

Carlos Henrique Boquimpani de Freitas

So regarding margins, you're fully right, part of the margin is due to the incorporation of Unicesumar, which had already higher margin before, but also partly is due to synergies. So we increased the loss with the margins, so reaching 38.8% now this quarter. We shall have a higher margin this year than what we had last year. But I mean, as we consolidate Cesumar more and as we advance more in the integration, we had a smaller impact of synergies. So in a nutshell, we can still increase more a little bit, but not as much as we increased so far in the last quarter. And anyway, I think with this level of margin that we have today, I think it is quite a good shape. So we are quite happy with this margin as well.
And for AI, I mean, this is a very important, I'd say, this will be a very important theme for us. We do believe that we being the largest digital education provider in Brazil with 900,000 students and the only little focus on that, we will be a leading actor in the AI use for education in Brazil, that's for sure. For example, we are already working with 2 proof-of-concepts [switch box] one with Microsoft and one with Google, for example, I cannot comment much more than that. And we do believe that AI can help our tutors, the tutors of UNIASSELVI which provide the human touch for the student experience, for the learning experience that the tutors can be helped with AI in their approach. But anyway, it is going to be a much more an opportunity in our case than a threat.

Operator

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

Carlos Henrique Boquimpani de Freitas

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

Operator

The video conference of results referring to Vitru's second quarter 2023 is closed. The Investor Relations Department is available to answer other questions and concerns. Thanks so much to all the participants and have a good evening.