Vasta Platform - Q2 2024

Transcript

Operator (participant)

Hello, and thank you for standing by. At this time, I would like to welcome you to the Vasta Platform Second Quarter 2024 Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Before we begin, I would like to read a forward-looking statement. During today's presentation, our executives will make forward-looking statements. Forward-looking statements generally relate to future events, future financial or operating performance, and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those contemplated by these forward-looking statements.

Forward-looking statements in this presentation include, but are not limited to, statements related to our business and financial performance, expectations for future periods, our expectations regarding our strategic product initiatives and their related benefits, and our expectations regarding the market. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. These risks include those set forth in the press release that we are issuing today, as well as those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on the information available to us as of today. We should not rely on them as predictions of future events, and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, management may reference non-IFRS financial measures on this call.

The non-IFRS financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IFRS. With that being said, I would now like to turn the conference over to Cesar Silva, Vasta CFO. Please go ahead.

César Silva (CFO)

Good evening, everyone, and thank you for joining us in this conference call to discuss Vasta Platform Second Quarter of 2024 results. I'm Cesar Silva, Vasta CFO, and today we have the presence of Guilherme Mélega, Vasta CEO, who will be joining me on the call. Let me now hand over the floor to Guilherme Mélega, our CEO, to make his opening statements.

Guilherme Mélega (CEO)

Thank you. Thank you, Cesar. Let's start on slide number three. As we approach the end of the current cycle, we are pleased to report that in the 2024 cycle to date, our subscription net revenue has achieved a growth of 14% to reach BRL 1,152 million. Vasta concluded the 2024 cycle to date with 11% net revenue growth over the same period of last sales cycle, mostly due to the conversion of ACV into revenue and to the performance of the B2G business. Vasta's subscription revenue achieved in the second quarter of 2024 BRL 280 million, a 32% increase compared to the second quarter of 2023 due to the previously disclosed shift in product deliveries, which were deferred to this quarter. As a result of this significant second quarter revenue number, the subscription revenue has reached BRL 1,152 million, a 14% increase compared to 2023.

This accumulated figure represents 85% of the annual contract value estimated for the 2024 commercial cycle in BRL 1,350 million, which represents a 12% organic growth compared to the previous sales cycle. Complementary solutions continue to present the highest growth rate among our B2B segment, with a 20% expansion in the cycle to date compared to the same period last year. Moving to the company's profitability, in the 2024 cycle to date, our adjusted EBITDA experienced a growth of 15%, reaching BRL 428 million, while increasing an adjusted EBITDA margin to 32.7%. This increase was mainly driven by improved gross margin, benefiting from better margin products, a reduction in the product cost, and operating efficiencies. Finally, we continue to see improvement in our cash flow. In the 2024 cycle to date, free cash flow totaled BRL 90 million.

As you can see, free cash flow increased by 4% from BRL 87 million in 2023. In the last 12 months, free cash flow and Adjusted EBITDA conversion rate improved from 26%-32% as a result of Vasta's growth and implementation of efficiency measures. I will now turn back to Cesar Silva, who will talk about the financial results of the quarter in the 2024 cycle to date.

César Silva (CFO)

Thank you, Mélega. In this slide, we present the composition of Vasta's net revenue. On the left side, you can observe the organic year-on-year growth in total net revenue for the second quarter, which increased by 8.5%, reaching BRL 294 million. Total subscription revenue achieved in this quarter was BRL 208 million in revenues, mainly due to seasonality effect mentioned before. This number represents a 32% growth compared to 2023. Non-subscription, which now represents only 7% of the total revenue, dropped 26% to BRL 15 million. In the government sector in this quarter, we did not generate new revenue, and as you can see in this slide, it represented BRL 4 million in the second quarter of the last year. However, in this sales cycle to date, considering the revenue performing in the first quarter of the year, we already achieved a 71% growth in this line of business.

Moving to the right side of the slide, we analyze the net revenue for the 2024 sales cycle to date. We achieved an organic net revenue growth of 11% in the sales cycle to date, amounting to BRL 1,390 million. The main factors to this exceptional performance were: firstly, the subscription revenue has increased 14%, reaching BRL 1,152 million, and continues to be the major contributor to our total revenue, representing 88% of the revenue share. Non-subscription revenue, as expected, dropped 30% to BRL 8 million, and the net revenue of B2G achieved BRL 69 million and represents 5% of our overall revenue in this cycle sales cycle to date. In this line of business, there has been an increase of 71% compared to last year. Moving to slide number five, we can talk about Adjusted EBITDA.

In this quarter, our adjusted EBITDA amounted to BRL 26 million, a decrease of 36% from the BRL 41 million in the second quarter of 2023, mainly due to higher commercial costs and non-recurring positive effects in the second quarter of 2023, a reversal of a provision for doubtful accounts related to a large retail customer. On the right side, we see that adjusted EBITDA in the 2024 sales cycle to date increased by 15% and reached BRL 428 million, with a margin of 32.7% or 1.1 percentage points above the 2023 cycle to date. Let's now move on to the next slide and explain the breakdown of the adjusted EBITDA margin. In slide number six, we observe that the EBITDA margin achieved 32.7% in the 2024 sales cycle to date, and there has been an increase of 1.1 percentage points from 31.6% in 2023.

Firstly, our gross margin has increased 2.3 percentage points, benefiting from better product mix and reduced impact of product costs, as 2023 was a year that the industry faced higher inventory costs caused by global inflation on paper and production costs. Provision for doubtful accounts was stable between the years, in line with a revised credit landscape on the fourth quarter of 2023. As a percentage of net revenue, our commercial expenses increased by 2.3 percentage points, driven by higher expenses related to business expansion and market investments, and adjusted G&A expenses improved by 1.7 percentage points, mainly driven by workforce optimization and budgetary discipline measures. Moving to slide 7, we show the adjusted net profit. In this second quarter of 2024, adjusted net losses totaled BRL 37 million, a 14% decrease compared to adjusted net losses of BRL 32 million in 2023.

On the right side of the slide, in the 2024 sales cycle to date, adjusted net profits reached BRL 110 million. There has been an increase of 66% from adjusted net profit of BRL 66 million in the 2023 sales cycle to date. Moving to slide eight, we show the free cash flow evolution. You can see that in the second quarter of 2024, the free cash flow totaled BRL 38 million, representing a decrease of 59% compared to BRL 94 million in 2023. This quarter was negatively impacted by two main effects: the anticipation of marketing expenses and increased payments related to 2023 production costs, owing to a seasonal effect of paper and printing purchase. Considering these effects, we foresee a lower volume of production-related payments in the following quarters and, consequently, we expect to maintain an improvement in the free cash flow for the year-end.

On the right side of the slide, in the 2024 sales cycle to date, our free cash flow reached BRL 90 million, an increase of BRL 3 million from the BRL 8 million in 2023. On another important metric, our last 12 months' free cash flow to Adjusted EBITDA conversion rate improved from 26% to 32%, reinforcing the message that cash generation continues to be a key focus area of our business. Moving to slide 9, we show the provision for doubtful accounts and total expenses with PDA in the second quarter of 2024. Total BRL 10 million represented 3.4% of net revenue, compared to an expense of BRL 1 million in the comparable quarter.

The second quarter of 2023 was positively impacted by a non-recurring effect of a reversion of a provision for doubtful accounts related to a larger retail, and if we normalize this effect in order to calculate a comparative PDA for the second quarter, we achieved a 2.5%, and compared to 3.4% of this quarter, we had an increase of 0.9 percentage points. Moving to the right side of the slide, the PDA for the 2024 cycle to date amounted to BRL 52 million, compared to BRL 4 million in 2023. The provision for doubtful accounts represents 4% of the net revenue, and compared to the 2023 sales cycle, there has been an increase of 0.6 percentage points. This increase in the provision for doubtful accounts is related to a more restrictive credit landscape, and as we explained before, we keep our strategy focusing on contracts in premium brands.

Moving to the next slide, we observe that the average payment terms of Vasta's accounts receivable portfolio was 152 days in the second quarter of 2024, which is three days higher than the comparative quarter, in line with the seasonality of our business model. So, moving to slide 11, let's take a closer look at the net debt movement. As of the second quarter of 2024, Vasta had a net debt position of BRL 1,063 million, a BRL 6 million decrease from the previous quarter in the financial interest costs and the free cash flow incurred in the quarter, amounting to almost the same in broad stability for the total net debt in this quarter.

In comparison to the third quarter of 2023, the beginning of the 2024 sales cycle, the net debt position increased BRL 65 million from BRL 998 million, driven also by the financial interest costs and the second repurchase program, which were partially offset by a deposit of free cash flow of BRL 90 million in the period. I will conclude my part of this presentation with slide 12, explaining some more detail about our net debt composition, which represents BRL 1,063 million at the end of this quarter. The amount is composed by the debenture issued in the amount of BRL 706.8 million and accounts payable for business combinations, with a total of BRL 618 million, BRL 618 million, reduced by our cash flow availability, which represents BRL 324 million.

In the lower left part of this slide, we can see that in the second quarter of 2024, the net debt to last 12 months' Adjusted EBITDA ratio has increased just 0.06x from the last quarter, showing stability after having four consecutive quarters of decrease, and now stands at 2.28x. Compared to the second quarter of 2023, the indicator has improved from 2.57x, a decrease of 0.29x. Moving to the right side of the slide, we present the net debt maturities for the coming years, substantially related to the accounts payable in the acquisition of Eleva to be carried out over the next three years, and our debentures with related parties, which will take place in 2025, 2027, and 2028 on.

Additionally, in June, we can mention that we issued a new debenture not convertible into shares with an amount of BRL 500 million, acquiring interest at a rate equal to 100% of CDI, plus a spread of 1.46% per annum, averaged for the two series of these debentures. The debentures aim to strengthen the company's capital structure through the prepayment of certain existing debts and extension of the company's debt maturity profile. The debenture's final payment date is currently set at 59 months from June.

It's worth to highlight that with this action, we can manage to reduce the total average interest rate of our net debt by 50 basis points. With that being said, I pass the word to our CEO, Guilherme Mélega.

Guilherme Mélega (CEO)

Thank you, Cesar. Let's move to the final slide, slide 13. Let me provide you with an exciting update on our significant avenue of growth of Vasta.

As mentioned last quarter, the launch of Start Anglo franchise, combining bilingualism with academic excellence, continues to ramp up and signifies a strategic expansion in our new revenue streams. Since the last earnings release, we have signed 10 new contracts, and we now have 30 contracts as of this date, securely distributed across 11 states in Brazil and over 300 prospects in negotiation. This broad geographic presence and strong pipeline underscore the robust potential for future growth and market penetration of Start Anglo. In this quarter, we launched the revitalization project of the Liceu Complex, which will be our Start Anglo flagship in São Paulo. Besides creating an operating unit with 1,000 students' capacity, the entire historical architecture design will be preserved. We are pleased to inform the inauguration event will take place on August 27. Also on this date, we will be launching our enrollment campaign for 2025.

Having said that, I finish our presentation and invite you all to the Q&A session.

Operator (participant)

Thank you. The floor is now open for your questions. So, to ask a question this time, please press star and the number 1 on your telephone keypad. We're going to pause for just a moment to compile the Q&A roster. Our first question comes from Luca Marchesin from Itaú.

Luca Marchesin (Analyst)

Good evening, everyone, and thank you for taking our question. We noticed that the B2G business unit did not contribute to the consolidated revenue in the quarter. So, can you please provide more color on the seasonality of this segment and what we should expect for the second semester of this year for this vertical? Thank you. Thank you, Luca. Thanks for your question. Yes, we did not record any new contracts of B2G.

César Silva (CFO)

As we mentioned before, we prospect only large public schools network, so those contracts take time. And I would like to reinforce that we have a heated pipeline for B2G, and we maintain a very positive view for this business. Last year, we recorded BRL 80 million in revenue for B2G. We do expect growth for this year, and we are expecting new contracts to come up in Q3 and Q4. That's the update for B2G.

Luca Marchesin (Analyst)

That's very clear. Thank you.

Operator (participant)

Our next question comes from Mirela Oliveira from Bank of America.

Mirela Oliveira (Analyst)

Good evening, everyone. Quick question on my side on the commercial expenses. Could you guys give us some clue here on why this has been increasing?

And also on the ACV for next year, I know it's still soon to have a feeling around that, but if there's anything you could comment on the commercial cycle, that would be great. Thank you.

César Silva (CFO)

Thank you very much, Mirela, for your questions. Let me give you some color about our sales cycle. We are very excited with our first semester. We are definitely growing significantly from the same season last year. But as you all know, the first semester normally represents between 35%-40% of the total sales cycle. So, so far, we are really excited. We are growing rapidly, but we'll give the guidance for the 2025 sales cycle at this year's end. So far, so good. And going to your question about commercial expenses, we definitely are investing more on this season. We have a new GTM for 2025.

We are investing in key accounts in regional expenses to grow fast in learning systems and complementary products. So, we are investing in gaining market share in learning systems and keeping the good momentum of the complementary products. So, you can expect higher commercial expenses for 2024 since we are harvesting the 2025 sales cycle. We do expect a significant growth for 2025, and we are investing in 2024.

Mirela Oliveira (Analyst)

That's perfect. Thank you.

Operator (participant)

Our next question comes from Lucas Nagano from Morgan Stanley.

Speaker 5

Hey, good evening. Mélega, Cesar. Thanks for taking our questions. I have two questions. The first is a follow-up on the ACV for the next year.

If you could break it down on what is driving this better growth, how competition is behaving, if it's the same as last year's or if it's more behaved now, because we are reaching where we know that the penetration of learning systems is increasing. And what is driving this faster growth for this year? And the second question is related to Start Anglo. Your main competitor announced a similar investment, and we wanted to get some perspective on how this interferes in your business plan and where you see your competitive advantages. Thank you.

César Silva (CFO)

Thank you very much. Let me give you a little bit more color about the ACV growth. Our growth is based on regional focus. We are focusing very heavily on regions that we do not have the market share, the average market share of Vasta.

So, we do focus on where we can grow, and we are investing on that. And for competitive reasons, I cannot give you more color about that, but we do have a strategy to grow market share, thinking about regional opportunities. And complementary products keep having a very good momentum. Schools need to differentiate themselves, and complementary has been shown as a very good way for the schools to enhance their offer to their community. So, I would say that in the past, complementary products used to be a cross-sale on our base, but now it has its own market. We sell to new schools that do not belong to our base. So, the growth comes from regaining market share and from complementary products on ACV. Regarding Start, we are very confident about our business model.

We launched it last year, and we have been investing on it for two years. So, we do believe that we have a very strong base to keep growing. Our competitive advantage definitely comes from our brands. It's based on the Anglo brand, which has very strong academic results. And the bilingualism that we developed with Macmillan, that has shown exceptional results on our partner schools. So, we strongly believe that we have all the way to grow on Start. And additionally, we are investing on a very sound flagship here in São Paulo, Liceu, which is a very traditional school, more than 100 years old, that are switching to Start, and we'll be launching it this month of August. So, we do believe that Start has a great future in our business and is a growth avenue for Vasta.

Speaker 5

Very clear, Mélega. Thank you.

César Silva (CFO)

There are no further questions at this time. So, I'll turn the call back over to Guilherme Mélega, Vasta CEO. Thank you all to participate on Vasta Q2 conference call. Let me reemphasize that in our B2B business, we are very pleased with the sales campaign for 2025. Our GTM strategy has shown great results. We'll give more color at the year's end about that. Both our growth opportunities, B2G, we have a heated pipeline, and we do expect to have new contracts very soon. Start Anglo keeps growing ahead on our expected curve, and we also have great expectations on that. Our core business is doing good, and both our growth strategy avenues are also doing growth and performing ahead of our curves. That's for Q2. Looking forward to seeing you all in Q3 conference call. Thank you all.

Operator (participant)

The meeting is now concluded. You will now disconnect.