Conference Call Transcript 1Q14 Results Abril Educação (ABRE11 BZ) May 13 th, 2014

Transcription

1 Operator: Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Abril Educação earnings conference call. The presentation of the results for the 1Q14 was recorded by the CEO Manoel Amorim, and CFO and IRO Guilherme Mélega. For the session of questions and answers will be present by the Vice-President of Pedagogical Products and Services Mario Ghio, CFO and IRO Guilherme Mélega, and Sandra Matsumoto, Investor Relations. We would like to inform you that this call and the slides are being broadcast simultaneously through the Internet, at the Company s website: and the presentation is available for download at the Investor Information section. Also, this event is being recorded and all participants will be in listen-only mode during the Company s presentation. After the Company s remarks are completed, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during this call, please press *0 to reach the operator. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Abril Educação management and on information currently available to the Company. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Abril Educação and could cause results to differ materially from those expressed in such forwardlooking statements. Now, I will turn the conference over to Mr. Manoel Amorim, CEO. Mr. Amorim, you may begin your conference. Manoel Amorim: Thank you very much for participating in this results conference of Abril Educação for the 1Q14. During the presentation we will be making reference to the material that is available in our website, and making references to the respective pages. Now jumping to the highlights of the quarter, I am glad to report an increase in revenues of 49%, reaching R$333.7 million this quarter, an increase in our EBITDA of 59%, reaching R$135.1 million, and a very strong operating cash flow with an increase of 24%, reaching R$120.8 million. With a very strong quarter, we are very proud to report the results. This growth across the Board comes both from organic growth, as well as from the growth coming from the acquisitions we made after the end of the 1Q13, and as a result it was not part of the base that we are comparing. The organic growth was responsible for 12% of our revenues growth and 27% of our EBITDA. So, even without the acquisitions, we saw a very significant growth in our businesses. We ended this 1Q with the best campaign for new enrollments of learning systems. The total number of our learning systems students has grown significantly, achieving 689,000 students served by our brands, both in our traditional learning systems as well as in the new learning systems that we have launched over the past two years. We have technical 1

2 learning system ETB and the brand The Leader in Me that we have licensed from Franklin Covey in the United States. The traditional learning systems grew both in public as well as in private schools, reaching 656,000 students. The partner institutions of ETB have obtained 116,000 positions approved under the Federal education program PRONATEC, which gives scholarship for students aiming to get a technical degree, and this represents about 50% of the total program in the Country. We have not built any of our partner schools yet in the 1Q, because classes start in April. So, we are going to see a very strong growth as of April. The Leader in Me system ended March with a total of 28,400 students enrolled in 112 schools, with a very important growth versus the program that we ran in 2013, a pilot program with 15 schools. This has surpassed our expectations for 2014, when we were planning to attend, to serve 100 schools. We had to serve, because of the strong demand, 112 schools, and the turnover was basically zero for this program. As a subsequent event, on May 5 th of this year, we announced the divestment of the 51% interest in the capital of the Satellite School, which was acquired in February After three years, we have concluded that the business is not going to reach the size that we had expected, so we sold back our shares to our core partners for the same price that we have acquired. The Satellite School will continue to make businesses with those partners but on a commercial fashion; not as partners anymore. Now turning to page four for the operating performance of each one of our businesses. On learning systems, as I have mentioned before, we grew both in private and in public. Our consolidated growth for the traditional students was 13%, we moved from 580,000 last year in the 1Q, to 655,000 this quarter. If we add the growth that we experienced in the technical learning systems, as well as in The Leader in Me program, the total number of students grew from 587,000 to 689,000, a very strong growth of 17%, to which we are going to add the price increases for each one of these three segments, reaching a total revenue growth that will surpass 20%, as will be seen later by our CFO. Turning to page five, now we are going to cover the operating performance of our publishing business. We sold 2.5 million books this quarter during the traditionally weak quarter. This compares to the 3 million books that we sold last year in the same period. However, if we look at the total commercial campaign, where the private schools that we start in July of each year and end in March of each year, the school year starts in March in Brazil, the increase was from 5.4 million books last year during that commercial campaign to 6.5 million this year. So, we see a positive trend overall in our publishing business. Turning to page six now, we are going to see the operating performance of our schools and prep courses. The total number of students grew 54%, reaching 22,600 students in our private schools. This growth is primarily derived from the acquisitions that we made in the 2H13, which were not, therefore, present in the 1Q13. Now, if we put the numbers of students comprised in these schools that we acquired in the 1Q13, the growth was 3%. However, we had very significant price increases in all of the four brands of schools that we run, above double-digit growth, which will, together with the growth in the enrollments, represent a very important revenue growth for this 1Q in this business. This is a business that is limited at this point in time by capacity of our classrooms; we continue to grow as we open new schools for the brands that we run. We have contracted 2

3 three new buildings now in the beginning of 2014 that will start operation in the 2H14 and mainly in the 1Q15. Turning to page seven now, the operating performance of our language business. We finished the 1Q14 serving 82,500 students in our language schools, 14,500 from Red Balloon and 68,000 from the Ometz Group, the brands WiseUp and UMove. And the number of franchises reached 420 this quarter, 45 in Red Balloon, representing a very significant growth from the total of 28 that we had last year, and 375 franchises in the Ometz Group. This number is down from the 1Q13, we are stimulating our franchisees that have operations in places where there is not a market according to our geomarketing study, in order to have a stronger base of franchisees. However, despite this decline in the total number of franchisees, which again has been stimulated by ourselves, the number of kits sold, the educational materials sold to our students, has grown 1% and the number enrollments has grown 2%, this despite, again, the lower number of franchisees, which is what we were aiming for. We increased the number of students per franchisee in this first moment. Total number of students per franchisee has grown above 6% this quarter versus last quarter, as we continue to reverse the downward trend for the third consecutive quarter. This ends the conference of our operation performance across all of our business. I will turn now the presentation to our CFO, Guilherme Mélega. Thank you very much. Let us start from slide number nine, showing the breakdown of consolidated revenue and the improvement in the mix of our business. The highlight in the quarter was the revenue contributions from the language course, from the Sigma and Motivo schools, in the combined amount of R$73.7 million. This led the revenue contribution of this business increase from 14% to 18% in the case of schools and prep courses, and from 3% to 17% in the case of language courses. As a result of the contribution from the newly acquired companies, the revenue contribution from the learning systems business was diluted and decreased by 4 p.p. However, after excluding the effects from the acquisitions, the contribution from the learning systems business in the quarter jumped from 34% to 41%. Now moving to slide number ten, where we have the individual contributions of each business to the Company s growth. On an accounting basis, our revenue grew by 48% in the 1Q, including revenue from the acquisitions of Ometz Group and of Motivo and Sigma schools. The learning systems business continued its growth trend and contributed significantly to revenue growth in the quarter, adding R$102.2 million to the consolidated net revenue. This amount includes the anticipation of revenue of R$9.3 million from orders related to the 2Q, but made in the 1Q because of the World Cup to be held in June and July, anticipating the beginning of the classes. On a comparable basis, which excludes the effects from acquisition and the anticipation of revenue in learning systems, revenue grew by 12%. The lowest contribution came from the publishing business, which, as mentioned earlier, despite the cost increase in the public segment of approximately 7%, did not register volume growth, leading to a revenue decline of 2%. 3

4 Slide 11 shows the breakdown of business at consolidated cost. Compared to the 1Q on an accounting basis, COGS increased by 18%, which was due to the recognition of the newly acquired assets, which did not exist in the 1Q13, namely Ometz Group and Sigma and Motivo schools, and also due to the anticipation of orders in the learning systems business. These effects, combined, accounted for an increase of R$16.4 million in costs. After excluding these effects, in other words, on a comparable basis, COGS decreased by 8%. It is important to note that COGS increased at a slower pace than revenue, which led to margin expansion of 5 p.p., from 73% in the 1Q13 to 78% this quarter, equally on a comparable basis, having margin expanded from 73% to 78%. Moving on, slide 12 shows selling, general, and administrative expenses, which increased by 60% in the period. Of this, R$57.5 million increase in expense was due to the R$38.1 million from the recognition of expenses of the newly acquired companies, which were not included in the comparison base last year; R$8.1 million was from amortization of the fair value adjustment of the acquired assets; R$10.5 million was from organic growth driven by the learning systems and the school business, which has variable expenses linked to revenue such as copyright, commissions, royalties, and the reinforcement of sales team; and R$0.8 billion was from corporate expenses with consulting services, the structuring areas at the holding company, and stock option plan. Slide 13 shows the evolution in the Company s EBITDA, which grew by 59% in the 1Q, already including the contributions from the language course business, Ometz Group, and from Sigma and Motivo schools, which did not occur in the 1Q13 comparison base, and with the anticipation of the orders in the learning system business. This effect combined contributed with R$27.4 million to the adjusted EBITDA in the period. On a comparable basis, excluding these effects, EBITDA grew by 27% in the quarter, which the highest contribution of R$13.3 million from the learning system business. Slide 14 presents a reconciliation of the Company s net income in the quarter. We returned to our net income on a cash basis, the amortization of the fair value adjustment of intangible assets, as the newly acquired companies of R$14.6 million, and the tax credit arising from the goodwill of this acquisition of R$19.8 million. By excluding these two effects, we eliminated a benefit of R$34.4 million in net income that is reflected in our accounting net income. Adding back these two effects, there is an additional R$34.4 million to the accounting net income, increasing the accounting figure from R$53.6 million to R$91 million in the 1Q13. Slide 15 represents the Company s capital structure evolution in net debt. The net debt increased from R$161 million in the 1Q13 to R$844 million in this quarter, due to the acquisitions made over the course of last year. Compared to the 1Q13, net debt fell by R$48 million due to the operational cash generation in the period. As a result, we reduced our leverage ratio to 2.4x EBITDA. Slides 16 through 20 show the performance of individual businesses. I am going to go quickly over these slides, so that we will have more time for the question and answer session. On slide 16, starting with the learning system business, which registered the best students catchment campaign ever, which supported revenue growth of 23% and EBITDA margin expansion of 5 p.p., from 60% to 65% this quarter. 4

5 Slide 17 shows the performance of the publishing business. Compared to the same quarter last year, revenue fell by 2% due to lower recognition of sales to the public segment, which means no revenue in the 1Q, while revenue in the private segment remained stable, benefiting from the 7% increase in price, which partially offset the drop of 10% in book sales volume. Due to the lower revenue in volumes, both costs and expenses fell by 9% and 2%, respectively. Gross margin increased by 2 p.p., from 77% to 79%. Slide 18 shows the complementary products and services business, which registered strong growth. The highlight was Alfacon, our business web-based courses for civil service examinations, which contributed R$6 million in revenue in the quarter. On slide 19, the schools and prep courses business registered robust revenue growth. In the 1Q, we have the revenue contributions of Sigma and Motivo schools of R$20.9 million and R$7.8 million, respectively. Excluding these acquisitions, net revenue growth was 11%. Next is our language course business, which we present in slide 20. Revenue from this business line was R$57.4 million, and EBITDA was R$17.1 million, with EBITDA margin of 30%. Net revenue of Red Balloon grew by R$4.9 million in the quarter, driven by growth in the student base, higher average prices for materials, and the change in the distribution process for teaching materials, which are now distributed directly to franchisees without the intermediation of the distributor. Ometz Group contributed with R$45 million in revenue in the quarter, with no comparison base in the 1Q13. Manoel Amorim: I would like to thank you again for all those participating in this presentation of results of the 1Q14. We will now give an opportunity for those who have questions to ask the question, and also give the opportunity to our Vice-President for Pedagogical Products and Services and our CFO to answer your questions. Thank you. Alexander Vitkalov, Chambers Street Capital: Good morning, and congratulations on your strong results. I have one question regarding the PRONATEC program. Could you, please, explain and elaborate on the impact of that program on your technical learning segment? Thank you. Just to clarify Alexander, your question is towards our technical learning system PRONATEC, right? Yes. How PRONATEC would be impacted down in next few quarters? OK. Thanks for your question, Alexander. All the PRONATEC student base will be made during the 2Q, so we did not invoice any learning system yet. And so far we estimate a market share on the PRONATEC around 50% of the number of students that the program allowed our higher education customers to fulfill on their classes. 5

6 We forecast a little bit above 100,000 students that we will serve through the technical learning systems, starting now in the 2Q; to be more precise, at the end of April and May we start shipping our teaching materials and recognizing this revenue. It is a very promising sector and we are very well positioned to capture this growth. Thank you. And my second question is regarding the public schools sub-segment within your learning systems. I was wondering if you could comment on a strong increase in the number of public students in that sub-segment. What were the factors that drove such a strong growth? I will turn this question to Mario Ghio, who will address it for you. Mario Ghio: Hi, Alexander. Well, the main factor is that this year is not an election year. Last year we had the election in So, the whole sales campaign was affected by the election. This year, we did not have this factor, so we could divulge our products and services, and we had an excellent campaign. I think the trends for the next year is the same. So, you expect that this momentum will be sustainable for the next years to come? Mario Ghio: Yeah, we believe that. Yeah. Great. Thank you so much and, again, congratulations Operator: This concludes the question and answer session. At this time, I would like to turn the floor back to Mr. Guilherme Mélega for any closing remarks. I would like to thank you for joining the 1Q conference of Abril Educação. This quarter is a very important quarter, where we consolidate our student base for many of our businesses, especially the proprietary school business, our Red Balloon business, and our learning systems. Also for the publishing business a very important quarter, because we ended the sales campaign for the private schools. And we are very confident that the strong student base and the price increases that we were able to past through will create a very sustainable result throughout the year. 6

7 On the 2Q, our focus remains in two businesses: the publishing business, with the marketing season of our approved books for the public schools, and for the Ometz Group we will remain focused in growing students and selling teaching materials for them. Those are the two major business units where we will focus our execution in the 2Q. Again, thanks very much for joining the 1Q conference of Abril Educação. Hoping to see you all soon in another conference. Operator: Thank you. This concludes today s presentation. You may disconnect your lines at this time, and have a nice day. Take care. This document is a transcript produced by MZ. MZ uses its best efforts to guarantee the quality (current, accurate and complete) of the transcript. However, it is not responsible for possible flaws, as outputs depend on the quality of the audio and on the clarity of speech of participants. Therefore, MZ is not responsible or liable, contingent or otherwise, for any injury or damages, arising in connection with the use, access, security, maintenance, distribution or transmission of this transcript. This document is a simple transcript and does not reflect any investment opinion of MZ. The entire content of this document is sole and total responsibility of the company hosting this event, which was transcribed by MZ. Please, refer to the company s Investor Relations (and/or institutional) website for further specific and important terms and conditions related to the usage of this transcript. 7