Vitru Limited

Thank you, operator. And good afternoon, everyone.

Thanks for joining us. It's a real pleasure to be here with you all for the release of our results for the first quarter of the year.

Hope all of you are doing well and healthy. Here with me is Maria Carolina Gonçalves, the Head of our Investor Relations Department.

And a slide presentation will be part of today's webcast, which is also available in our Investor Relations website at investors.vitru.com.pr. So, I hope you all have this presentation in front of you.

And, of course, before we begin, I like just to make note that everything in the second slide of this presentation, Safe Harbor is in effect for this call. So now, I'd like you to go to Page 4 of the presentation.

So, this page briefly summarize what we believe are the main highlights of the fourth quarter of this year. First, we have launched a new academic model that we call the Flex Courses, which for us represents a huge opportunity to enter into hundreds of smaller cities in Brazil and other [indiscernible].

Second, the intake numbers were very strong in this current cycle with a growth of around 32% versus what we had in the intake of last year. And this again, purely on organic basis with the delay of the ENEM, as you all know, the shape of the first intaking cycle of 721 was more of say back-ended than what we had last year.

But at the inside it was a great compliment that confirms our resilience of our hybrid model. With that we reached more than 320,000 students in digital education with an organic growth in the southeastern region of 85% growth in the southeastern Brazil versus what we had in the first quarter of last year.

Regarding the future, we had, again very solid numbers. The net revenue in our core Digital Education Undergrad segment increased by 20% when compared to the first quarter of last year.

The consolidated adjusted EBITDA grew by 40% which means a substantial increase in our margins, EBITDA margin grew to 26.7% this quarter versus 22.4% last year. And last but not least, our adjusted cash flow from operations was up 55% this quarter, and we reached a adjusted cash flow conversion from operations of around 107% this quarter; so very solid numbers as well on the financial perspective.

All of this will be discussed in more details throughout my presentation, obviously. We're starting next page with the Flex Courses.

So now on Page 5, please. As I mentioned, we launched this new model, Flex Courses.

We did last year some fun projects regarding the subject, which were quite successful. And we decided with that to deploy the Flex Course concepts throughout Vitru.

So what is that? It is basically the same class-based and tutor-centric approach that we offer in our traditional hybrid model.

But instead of meeting weekly in a hub, with your classmates and your dedicated tutor, you meet virtually with your classmates in weekly live classes with your tutor. For instant model, the hub is different hour and used at a phase for exams.

So, why did we do it? Why are we doing that?

This model is very suited and is better for smaller cities. I mean, the students would not disturbed by us in our traditional hybrid model because as you can imagine, there is a minimum size, a minimum scale for us to open a new hub in a given city.

So we learned until now focusing our efforts in mid-size and large cities, because of the pure nature of our hybrid model with a night hub with weekly meetings in a hub. So this for us represents a huge opportunity to accelerate the growth of our student base by offering our high quality model throughout Brazil, with a faster expansion of hubs, with scale, and being present in every corner of Brazil with our vision, which is to offer education with high quality.

And again, tutor-based and class-based with few hubs that have the classes to have the sense of belonging, sense of the nice experience that you have when you go to university, you have a dedicated tutor from your region; and instead of going to a hub physically to meet, because you live in a small city, you basically go to hubs to take an exam and you have your weekly live classes with your tutor. So, this is different from what is offered from a competition when you think about distance learning.

Now moving to Page 6; here in Slide 6 we have a snapshot of the growth in our base. We have about end of March, almost 330,000 students being -- 97.5% of them engaged in digital education courses.

And we focused on the students base of our digital education undergraduate segment which is our main business. You can see that we have a CAGR of 32%, left side yield; and when we look at numbers for this quarter, growth is bit over 17%.

And why was that? Because as I mentioned before, this was due to the different shapes in intake taking curve in the first quarter of this year versus the first quarter of last year; and later on, I will show some numbers about it.

So, I think this shaped what may have backend with last year and did it mainly because of -- due to the delay in ENEM, which -- ENEM is an important, let's say catalyst for enrollment in the post-secondary segment in Brazil, as you know, it brings out a momentum to the sector. And the results this year were released in late March, instead of being off agenda as done last year.

So -- and you remember that when I said in late March, or when we were releasing the numbers of last year, I told you that our intake up to that date was growing high-teens; high-teens I meant 18%, in fact. And now with the full numbers for the intaking cycle, we have an important group of 32% when we take the whole intaking cycle; so a very nice growth in the intaking for this quarter, and for the semester, especially now in this pandemic, especially now in the coming situation we are confirming the strength and the resilience of our model.

Now, if we move to Page 7; we show the trends and increase in our digital education student base. We have expanded substantially throughout Brazil, well above the market, and this is a market that has been expanding a lot overall, and in our opinion will expand even further after COVID.

And within this growing and appealing market, we're having growing second in competition. So our growth was, as I said, particularly strong in the southeast region of Brazil; our base there grew by 85% in the first quarter of this year compared to what they had in March of last year.

Here on the right part of the slide, you can see as well, the evolution of the number of hubs in the last five years. We have been open around our site more than 150 hubs per year, mostly this quarter [ph], as you know.

And now we have more than 740 hubs throughout Brazil. With the Flex Courses, we are going to open even more hubs throughout Brazil.

As I said, this new concept will help us to accelerate growth throughout the year and in the future. So for this year, we are going to open 250 hubs throughout Brazil.

Now to move to Page 8; you have to focus again on the southeast. The growth, in fact, was very strong in the southeast where we have been historically shy.

But where we have been expanding a lot in the last two years. As you know, as I always tell this example, we were very, very, very shy in the southeast until 2018, and then we entered into the market of [indiscernible] with a number of hubs that were very successful, and then expanded the partners.

And then, we entered in Rio in '19, especially last year, we opened a lot of hubs in Rio last year in '19. By the way, the City of Rio de Janeiro this current intaking cycle is already our second largest capital in Brazil intake.

The first one is Sephalagris [ph], second one is the seat Rio de Janeiro. So this is just to confirm that our model is also proving itself in the southeast, and very strong in [indiscernible] and in Rio now.

And now we are growing a lot; in São Paulo we opened a lot of new hubs where in São Paulo, as you can see here in the chart, that we have 177 hubs in the southeast now, of which are already one-third in the State of San Paolo. And we are going to grow even further there in São Paulo; so São Paulo is our next frontier for important growth in the southeast.

Now on Page 9; we focus here on the most important driver for our organic growth overtime, which is the maturation of our expansion hubs. We have now almost 90% of our hubs under roof of expansion hubs that were open after the change in regulation in 2017, and are therefore, not yet mature; that's why we call the expansion hubs.

In short, we maintained a substantial growth rate overtime as those around 660 hubs at our expression hubs mature overtime. They are hit by cohort here in chart on the right, they are still working up, as I said.

And to illustrate this growth potential, we calculated this theoretical maturation index, which is basically the number of students we have now divided by the potential number, on average, in the hubs once they reach maturity, which is for this case, here after seven or eight years. So we have now a maturation index of around 32%, which means that those expansion hubs have the capacity to increase the working base threefold.

And, again, this is growth with limited execution risk. The hubs there, must have branded there; the two-third are hired, the partner is there; so it is growth with limited risk of execution.

What we mark hear as well, just to highlight that the numbers that we show here are the -- the picture is up and the marks, of course, that -- as I said, we're affected by this more back-ended profiling the intake in the first quarter of this year. So in a more normalized scenario, obviously, for total number of students in the base hubs, the ones that are mature already, they should have been flat, that is the normal trend.

And the growth in the expansion hubs would have been even stronger than what we expect to see now in the second quarter, for example. Now moving to Page 10 to focus here a bit more on the net revenues and the average ticket and the intake cycle as well for the digital education undergrad segments.

So net revenue in the quarter increased by 20% in the segment, and again, this was purely on organic base, and despite the second intake profile. So as you know, we have this modular approach in which we only have a revenue contribution for a new student once he or she join us; so it's different from the typical model that is used by our competition and which is based on the on-campus model.

In our purely digital model, it is a sequence of average subjects; so you can join us in March, or in April, and then you contribute in revenues once you join us. So because we have this expense [ph] here on the right, more back-ended profile for the intake, we had I'd say lower revenue contribution in the first quarter of this year.

So, again, here on the right; if you see the purple or the light purple, I would say, curve -- it occurred for 2020, 63% of the intake of newcomers were already here by February. While these year it was only 52%; 52% of the total intake in different intake cycles.

So here you can see clearly that last year, we had very strong January and February months, and then it was much slower after the pandemic; now it is more spread overtime. But this means what?

This means that we have a decrease in the average ticket this quarter, which you see here in the middle, a 4% decrease in every ticket, which was the main cause for that was clearly this delay in the entrance of new students. They are here in our picture of March, so they are in our off-season denominator in our every ticket, but they brought not much revenue in the first quarter of this year.

So this is -- as I always say, our tickets we faced a little bit in Sao Paolo, it would increase in Sao Paolo, less and lesser as you remember; our tickets increased by 3.5% [ph] compared to the first half -- second half, sorry, of 2019. And this reduction that we see -- that we saw in the first quarter of this year, the trend for that ticket will reverse now already in the second quarter -- in the second half obviously, of this year.

The trend is for ticket to be stable overtime, given our model. Now Page 11; we show a bit more about the several lines of our income statement.

You can see growth in net revenue led by the completion of education of undergraduate, as I said before. As there were important increases in gross profit, adjusted EBITDA and margins.

So let's now move to the next slide to dig a bit deeper about the drivers of these numbers. These relatively will focus on the net revenue between these two quarters.

As you can see, the growth in the consolidated net revenue of 17% was driven by -- not only by the growth in digital education undergrad that we just discussed, but also by the growth in continuing education, mainly with our digital education graduate courses, there was a substantial growth in net revenue segment led by a better mix of courses and by I'd say a more intense and focused use of digital marketing this quarter compared to last quarter. So, the run rate here is extremely positive, and we shall continue to see a important growth in our continuing education segments throughout this year as well.

This consolidated growth was diluted by the reduction in all kinds of segments, which has been declining overtime, in line with our view for the whole post-secondary sector in Brazil. The segment is much more concentrated now on courses not offered in digital education such as law and mostly psychology, etcetera.

And we do believe that the relative contribution of the segment for our consolidated figures overtime would use further, which means that our consolidated net revenue growth will be more and more closer by -- close to the growth in our two digital education segments which are growing a lot. Now on Page 13; the driver, the pieces of the adjusted EBITDA which -- again, a growth in our margins are 4.3 points, which is 26% of this in the first quarter, and usually -- in the first quarter of the month, it is usually a smaller margin for the whole year.

We have -- we had a reduction in cost of service and an increase in selling and PDA expenses, which is here on the following slides. On Page 14; you can see important reduction in the cost and the margin -- in the cost of service and in the -- I would say, leading to an increase in gross profit.

This was due to a number of things. First, naturally gain of scale; as we grow further, we can dilute more our fixed costs.

We have also an important reduction in personnel costs, and this was driven by a better ratio of students per tutor. As we go further, as we optimize on a daily basis our business, we are improving steadily, slowly but steadily the differentiation [ph] as well.

The Flex Courses also helped to maximize this situation. And we have as well -- we had as well an important reduction in the cost of academic material sent to students.

Our model is still based on sending some books to students, they like it to have, as well besides the app and besides the computer-based learning systems; they also like to have a book and the reduction in the cost with books [Technical Difficulty] there was important increase in the margin here as well. Regarding G&A on the right; G&A include roughly 20%, in line with increase in our net revenue.

And such increase was part due to out to travel [ph], but also due to our new reality as a little company, in ways the generated 8.6% of net revenue is, in my opinion, I would say a nice number and way below what we see in the ratio of our peers. So basically to focus on selling expenses; selling expense increased a little bit this quarter.

And this was due I'd say to first to the pandemic. Last year, a big chunk of our intake was, as I said, in January and February, before the pandemic.

Now with the pandemic, our hubs are closed and hubs play an important role in our enrollment, in our intaking process, and the delay in ENEM; so, which was also seen in the whole sector. With delay in ENEM, we had to spend a bit more money to attract the attention of students.

So, with -- going forward, we shall see a possible reduction as well here in the segment line. Regarding PDA; on the right, PDA improved a little bit compared to the first quarter of last year, it is more or less aligned to what we have seen in the last quarter, but is higher than what we saw in the first quarter of last year.

And this was due to three reasons: the first one was the very strong intake we had left in the second half of last year; last year, in the second intaking cycle, we grew 40% versus the second semester of 2019. So as you know, most of the PDA is concentrated around newcomers; so these newcomers, they are part of explanation for this increase in PDA.

The second one is, of course, our current line of credit; we cannot provide it, which is the truth, which is different from what we saw last year. Last year, the pandemic crisis hit us harder in the second and the third quarter, not in the first one.

And also, third one, the fact that our hubs are closed. Our model is a hybrid one.

Our typical traditional model relies on those weekly meeting with a tutor in a hub; it helps us to keep the students more engaged overtime, it brings the set of communities that I mentioned before in enhancing engagement. So, as we move out of the pandemic and with the return of the weekly meetings at the hub, our members here as well show, I'd say, return to normal numbers as we go out of this pandemic.

On Page 16; net income and cash flow. Net income, there was a reduction in net income, basically because of a one-off we had last year.

Last year, we recognized for the first time deferred tax assets of around R$18 million [ph]. So if you see the cash earnings, that we have, it is virtually doubling.

So if you take out this R$18 million last year, their net earnings would have grown from R$ 8 million to R$16 million more or less. So, important growth as well in net earnings on a cash basis.

And here on the right, a very important growth in cash flow from operations and adjusted cash flow conversion from operations. We have here a tough increase in the cash generation, and the cash flow conversion of more than 100%, 107%.

This is very important for us, we are attracted to this, we thank students, and we collect from them as well. We are very focused about service management.

We, for example, we could have a higher student rate; for example, if we simply provide a discount for people to lure us [ph] without paying their tuition. It would have been very easy for us but it would have not been a nice indication from cash flow perspective.

So that the balance between tickets, student base, retention and cash flow is very important for us. Now regarding expansion on Page 17.

On top of the growth in the student base in our digital education segment, that I mentioned already, we -- as I said before, we are -- we launched the new second quarter in the first -- in the Brazil, and with the success that we found still in very few hubs. We've decided now to expand this new offering of technical courses throughout Brazil in the second half of this year.

Now, we are going to offer this in around 145 hubs throughout Brazil; this is a new growth avenue, this has a huge potential in a very, very segmented market. And the public, the typical client is the same person that later on will enroll and engage with us in our critical undergrad courses.

So for us here it's a very important way to team up from large, this life-long dealing with the students overtime minimizing the cost effect this client. And last but not least, on Page 18, M&A.

M&A, we are going through the funnel, we are advancing in our process, we have been discussing with a number of players, and with a few of them we are, I'd say advancing strongly and quickly in the M&A process. Nothing yet to be announced but we trust to be able to something to you quite some.

So, to wrap up on Page 19; key takeaways. Again, we are the leading pure-player in digital education in Brazil, delivering growth above expectations of the past, we promised during the IPO last year delivering important growth in average in every ticket -- sorry, in the base with a hub ticket with improvements in margins and important focus as well in the southeast with cash flow generation for all of that that you know, as well, to get to our future growth.

So with that, I would like to open for questions.

Hello, good afternoon, and thanks for taking our questions. So we have two questions on our side; and the first one is, if you could elaborate a bit more on competition dynamic during this kind of thrash of intake process?

And our second question is, if you [indiscernible] do you believe Flex Course will be in the long-term, say, five years from now, as a percentage of your revenue or student base? Thank you.

Starting with the first question; the competition dynamics in the first quarter. I guess that with the delay in the ENEM, everybody had to complete a bit stronger this quarter than in a normal quarter, I would say.

And then, I think it's very important piece in the overall enrollment calendar. So this quarter, there was in the -- in the first half of the intaking cycle I'd say, the expected environment, especially in January and February, then -- and March, April and May, I'd say it was more normal.

So with that, we had a very competitive scenario and we were able to deliver a nice growth. But I guess it was slightly stronger in the first most of this intaking cycle because of the delay of the overhead to -- say to fight bit stronger [ph].

And for the second question, the Flex Course potential, I mean, we -- I think I heard you that the potential we can have in Flex Courses in the future. We have in Brazil around 800 cities, for example, that are between 20,000 and 40,000 people that we could enter with our Flex Course, for example.

So they would typically focus on cities that are bigger than 40,000 people in total population. So, the Flex Course has a important potential to expand with this growth and deferred growth [ph].

I don't have here a number to say what would be the target for Flex Courses but this is clearly an important driver, as well, just for our growth potential going forward. And with that we can now consider -- we can reach every corner of Brazil.

Perfect Thank you very much.

Well, we have here a question from Pedro from BTG. He was here -- he is making two questions.

First one, what is the ideal level of PDA looking forward? The PDA is, as I said, it's very higher around -- within the newcomers intake, and much lower with seniors.

So, that ideal level of PDA is something very tricky, very, very dangerous. I mean, if we stopped growing next quarter, for example, if we don't have any intake, our PDA would be very smaller in the second half of this year.

So, it would depend on the growth that we have. What we expect to see is that given the nature of our growth and this number here we had at 16%, at last year it was around 14%; so it slowly declined overtime as we have more seniors in our student base compared to new commerce.

So, this will -- that as an overall intake in the middle term, we shall have a PDA level of around I'd say, 9% to 10% within the three, four, five years because we are going to keep growing a lot our student base. If we stopped growing, PDA would have been smaller than that.

The second one; the second question of Pedro is, what is our expectations for the next intake cycle? It is I'd say very strong, we have been already preparing ourselves for the next intaking cycle.

It will, of course, depend on how the pandemic evolves in Brazil because we -- it is a fact that the hubs closed affect our intake cycle. But even with that we had 32% growth this quarter -- this semester, and 40% growth in the second semester of last year, which was within the middle of the pandemic; so we have a very strong prospect for the second half of this year as well.

Thank you. So, I guess we were able, again, to deliver nice numbers.

And myself, Carol and whole IR Team, we are at your disposal to solve any other questions. Thank you very much.