Cruzeiro do Sul Educacional SA
BOVESPA:CSED3
Earnings Call Analysis
Q4-2023 Analysis
Cruzeiro do Sul Educacional SA
Investors would be encouraged to see that the company reported a 15% increase in net revenue for the quarter, amounting to BRL 599 million, primarily driven by growth in the consolidated student base. The revenue for the entire year reached BRL 2.3 billion, a 13% rise over the previous year. This boost came from both the on-campus programs, particularly in the health area with a 12% growth, and digital programs, which saw an impressive 22% revenue expansion. Gross margins improved significantly in the quarter to 46.7%, 4.7 percentage points higher than the corresponding quarter of the previous year, indicating better operational efficiency and normalized impacts from faculty bargaining agreements.
Adjusted EBITDA for the quarter rose to BRL 153 million, up 24% year-on-year, with the EBITDA margin for the year reaching 29.8%, a 1.2 percentage points enhancement. The scale of improvement in net income was dramatic, transforming a net loss of BRL 16 million in the last quarter of 2022 to a net profit of BRL 7 million in the same quarter of 2023. An astounding increase in 2023's net income to BRL 100 million, which is 15 times that of 2022, reflects operational improvements and reduced gross debt. Capital expenditures (CapEx) were substantial due to investments in new medical programs and technology, setting the stage for future endeavors.
The company's net debt saw an increase, reaching BRL 742 million compared to BRL 587 million the previous year. This uptick was influenced by the execution of a share buyback plan and payment of dividends. The accounts receivable period also extended slightly to 44 days, indicating a rise in ongoing agreements.
Management expressed satisfaction with early 2024 ticket dynamics and indicated efforts to improve reenrollment rates. They also highlighted substantial capital expenditures in the past year for medical course accreditation, with a successful achievement of the highest grade from the ministry, which is pending a final governmental decision. The company expects a decrease in infrastructure CapEx for 2024 while maintaining significant investment in technology. The company's leadership expressed confidence in adapting to any new regulatory changes in distance learning (DL) if they emerge. With DL forming a key revenue stream, potential further improvements in productivity via digitalization are projected. Importantly, the health education vertical has been spotlighted as a future growth driver, with major international partnerships already in place.
Executives concluded the earnings call with a sense of optimism, having registered the best results since IPO, and carried positive expectations into 2024. They expressed readiness to navigate any regulatory challenges and emphasized a focus on growth opportunities ahead.
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Good afternoon, and thank you for holding. Welcome to Cruzeiro do Sul Educacional's conference call today discussing the earnings release of the fourth quarter of 2023. [Operator Instructions] We inform that this conference is being recorded and will be available on the company's IR website ri.cruzeirodosuleducacional.com.br. There, you will also find the complete set of materials for our earnings release. You can also download the presentation on the chat icon also available in English.
During the company's presentation, all participants will have their microphones disabled. After that, we will begin the question-and-answer session. [Operator Instructions]. Note that this information in this presentation and the statements that may be made during this conference call relating to Cruzeiro do Sul Educacional business prospects, projections and operational and financial targets are based on the company's management beliefs and assumptions as well as on currently available information.
Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and hence, depend on circumstances that may or may not occur.
Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future performance of Cruzeiro do Sul Educacional and lead to results that differ materially from those expressed in such forward-looking statements.
Here with us today, we have Mr. Fabio Fossen, CEO; Felipe Negrao, CFO; and Luis Felipe Bresaola, Investor Relations Officer.
I would like to turn the floor to Mr. Fabio Fossen who will begin the company's presentation. Please, Mr. Fossen, you may begin.
Good morning, and thank you for participating in our earnings call. This is Fabio Fossen, CEO of the company; and Felipe Negrao, our CFO; and Luis Bresaola, our IR Officer, are here with me.
The year 2023 was marked by important advances in the company's strategic plan with the consolidation of the business model focused on 3 education verticals. We implemented the Health BU with an additional focus on leveraging the teaching of medicine and dentistry careers where we reinforced the senior team with the arrival of André Raeli who has extensive experience in this segment to advance beyond undergrad courses with free courses and graduate degrees. Health-related courses in addition to Medicine and Dentistry have become increasingly important in recent years. mainly due to the high adherence to on-campus education, which already represent 51% of the student base and 68% of the revenue in the segment.
It should be noted that in our graduate portfolio, we already offer courses in partnership with 2 international institutions, relevant in their respective segments, where we hope to expand more quickly. The first of them with MARC Institute in Miami with courses in medicine currently offered at our brands, Unicid in Sao Paulo and Universidade Positivo, in Curitiba. The second, with the University of Alcalá de Henares, in Spain with undergraduate and graduate courses in dentistry.
With this move, we completed the construction of the foundation that guides the company's business lines with the Digital BU, On-Campus BU and Health BU. Regarding the advances on the On-Campus BU, we restructured the curriculum as a way to provide a better student experience, deliver higher quality and differentiate our product in addition to unlocking productivity gains.
On the Digital BU, we have changed our portfolio one of the most relevant organizations in eSport and gaming universes with the aim of connecting with young people who are digital natives and improving our understanding of the student's profile. In addition, we have partnered with Google Cloud to bring innovation in a more pragmatic and work-oriented approach to our graduate and undergraduate courses in technology.
The aim is to increase the scope of our brand through partnership with established companies in certain segments, offering up-to-date and hands-on training. Another relevant movement was the alliance signed with Hapvida NotreDame Intermédica. With the objective of boosting the training of health care professionals, providing internships and hands-on training to distance learning students in hospital environments. We believe that getting closer to the work universe is relevant to further improve the quality of education and integrate students to the current demands of the labor market.
On the academic side, we had important achievements in 2023. Leadership in the ranking of listed company for the Continuous General Court Index, IGC, weighted by the number of enrollments, reaffirming our commitment to delivering a quality product to our students. Achievement of the milestone of 69% of our institutions with a maximum grade of 5, according to the Institutional Concept, CI of the Ministry of Education, outperforming 6 (sic) [ 46 ] percentage points from 2022. Ranking for the second consecutive year of UNIFRAN in Times Higher Education as the best private HEI in Brazil, rising 4 positions in the Latin American ranking as well as the presence of Ceunsp and Braz Cubas for the first time in this ranking. Selection of the project by the faculty of Unifran Science Graduate Program to represent Brazil at the World Climate Conference COP27 held by the United Nations and the accreditation of UNIFRAN Medicine course by the accreditation system of Medical Schools of the Federal Council of Medicine, the only certifier of the quality of medical schools in Brazil.
With this distinction, the course, which began in 2012, is now part of a select group of 42 recognized schools, only 26 of which are private. As regard to technology, we continue to build our company's digitalization journey, always aiming at two major objectives, delivering a better, more engaging experience to our students and gaining operational productivity.
We launched the Duda app, which was created with the aim of improving the student's journey, meeting the main demands in the administrative spheres, becoming a unified, agile relationship channel that is closer to students.
We also made progress in the automation of back-office processes, which reduced by approximately 48% the number of services in the Student Service Center and reduced by approximately 70% the steps required to complete reenrollment. We have created an operational and management platform for our hub partners, enabling greater commercial agility at the end and easier management of the student base by the hub. We introduced e-commerce for graduate courses with a 70% reduction in the number of clicks for hiring and 24x7 sales for this portfolio.
Together with a large technology company, we developed a prediction model that can contribute to the reduction of dropout rates, we are now running the pilot in the 2024 1 cycle. Finally, we improved our dynamic pricing model, contributing to a faster and more efficient maximization of results. Regarding operational and financial target performance, 2023 was a year marked by important achievements.
In on-campus undergrad courses, we ended the base with 141,000 students, an expansion of 10.6% versus 2022, the second consecutive year of growth in the post-pandemic period, 15.4% growth versus 2021 compared to an overall relevant drop in the On-Campus segment in Brazil.
In the reenrollment of On-Campus courses, we renewed a record evolving 3.8 percentage points for '22, reaching 91.2% in the second half of '23 as a reflection of our employee retention and incentive alignment initiatives.
Regarding the On-Campus ticket, we managed to grow throughout the year, recovering the levels of the second half of '22. In digital undergrad courses, we renewed the record in intake volume, 25.6% higher than 22%, ending up with an undergraduate student base of 296,000 students, an expansion of 24.7% year-on-year.
In digital reenrollment, we grew 1.9 percentage points in the first half of '23 and 1.4 percentage points in the second half of '23, reaching 78.5% reenrollment in the second half of '23. As for the digital ticket, we also grew during the year, but the higher share of freshmen in the student base up 11.3 percentage points in the first half of '23 and up 0.7 percentage points in the second half of '23 and the higher demand for 100% online courses impacted average tickets decreasing 1.7% in the first half and 2% in the second half of 2023.
Moving on to the financial results, we ended the year with net revenue of BRL 2.3 billion, 13% higher than in 2022, reflecting the expansion of all of the company's business lines. Adjusted EBITDA reached BRL 684 million with a margin of 29.8%, an increase of 1.2 percentage points versus the previous year as a reflection of the efficiency gain in general and admin expenses and the improvement of PDA by 1 percentage point, which mitigated the impact of higher marketing expenses in the period.
Net income reached BRL 100 million with a net margin of 4.4%, one of the highest in the sector. and operating cash generation was BRL 370 million, up 21.6% versus 2022. Finally, the company's leverage remained stable at 1.6x versus 2022, even after the distribution of BRL 121 million between dividends to shareholders and share buybacks in the last 12 months, which represented a payment to shareholders of dividends flow buyback over EBITDA ex-IFRS-16 of 26%, the highest level since the IPO in 2021.
Thank you. I turn the floor now to Felipe Negrao, who will provide more details on our financial performance.
Thank you, Fossen. Going into the financial details on Slide 10. I will comment on the net revenue in the quarter, which reached BRL 599 million, an expansion of 15% versus the fourth quarter of '22 as a result of the larger consolidated student base. In on-campus, with the focus on the health area grew 12%, and their penetration reached 68%. In digital, we expanded revenue by 22% reaching BRL 198 million as a result of the larger student base and the continued expansion of the hub base.
In '23, revenue reached BRL 2.3 billion, 13% higher than 2022. On Slide 11, we show the gross margin for the quarter, which reached 46.7%, 4.7 percentage points higher than the fourth quarter of '22. The margin expansion reflects the comparison basis in the fourth quarter of '22, which was impacted by the provision for the faculty collective bargaining agreement retroactive to March '22 and by the adjustments in the academic matrix. Added to this are the efficiency gains in the personnel line, a result of initiatives implemented in the components of the curriculum. It is worth mentioning that the impact of provision was normalized in the annual analysis.
Note that the cost lines was fractured by the increase in the pass-through to DL Hubs as a result of Digital's revenue expansion, which grew by 22% and the student base in third-party hub which expanded 27%. In 2023, gross margin expansion was of 1.1 percentage points. Moving on to Slide 13. We bring the adjusted EBITDA for the fourth quarter '23 which was BRL 153 million, up 24% year-on-year.
Despite the improvement in the provision for doubtful accounts line, which went from 7.7% of net revenue in the fourth quarter of 22% to 7.2% in the fourth quarter of '23, higher marketing expenses and then a preferring margin expansion. The improvement in PDA in the quarter is the result of business amortization and change in the billing management model. In the year, adjusted EBITDA reached BRL 684 million, 18% higher than in the same period of the previous year with a margin of 29.8%, up 1.2 percentage points.
Moving on to Slide 15, which show the evolution of the company's net income, which went from a net loss of BRL 16 million in the fourth quarter of '22 to a net profit of BRL 7 million in the fourth quarter of '23. In 2023, net income was BRL 100 million, 15x higher than in '22, reflecting the improvement in EBITDA in addition to the reduction of gross debt. On the next slide, we show the evolution in accounts receivable within the last 12 months stood at 44 days, an increase of 2 days when compared to the same period of last year due to the higher volume of agreements in progress.
Moving on to Slide 17. We present the investments made by the company in the fourth quarter of '23, which reached approximately BRL 64 million, an increase of 19% versus the fourth quarter of '22, CapEx in 2023 was BRL 203 million, reflecting investments in new laboratories, given the progression of factors in health courses, in addition to investments in technology for a better student experience, efficiency gains and the specification of the new medical school seats.
Finally, on Slide 19, we bring the net debt, excluding lease liabilities, which reached BRL 742 million versus BRL 587 million last year. Net debt was impacted by the execution of the share buyback plan in the amount of BRL 36 million and by the payment of dividends in the amount of BRL 85 million.
I conclude my comments here and turn the floor to the operator to start the question and answer session. Thank you.
[Operator Instructions]
Our first question is from Frederico Mendes, sell-side Analyst Bank of America.
Thank for the call, I have 2 questions. The first one, whatever you can tell us about intake for the first half of '24, especially for the on-campus. We're seeing different speeches from companies. Some are more optimistic. Others are less optimistic about the on-campus. It would be great if you could define the trend. And the second is your PDA has been dropping, maybe it's one of the most positive highlights of these results, highly influenced by the billing -- the new billing you're implementing. So I'd like to understand, if we could understand these new levels as normalized or if there's still more room to drop further since you're doing this implementation.
Fred, this is Fabio Fossen. As for your -- about the intake, what we've been seeing recently we should close the growth of our student base for on-campus. Now in the first quarter in the -- between mid- to high single digit for on-campus and for DL, the student-based growth should be on high double digits. We have a series of mechanisms that we've been using and deep down we're always aiming at the total growth of revenue. So the mix of different tools and strategies to increase student base and ticket that are part of the total in our strategy. But it's important to see the student-base growing. This is more -- the student-base growth is more important than intake.
Fred, this is Felipe. About the PDA, first, it's important to mention that it's always an important component that's both macro and student index and geographic details and so on. Some areas have higher delinquency and costs. But maintaining it constant in 2023, we see a lot about billing management. We've worked a lot and policies -- discount policies, renegotiation, administration of proxies and collection offices. That was a result of our billing management. In 2024, during this first quarter, we were able to implement 100% of our billing platform. So it is possible to see it at better levels compared to last year. It depends on mix and macro, but there's still room for improvement, yes, for the billing side and credit recovery.
Excellent Fossen and Felipe. That was very clear. If you allow me another one, I apologize for taking so much time, but about dividend. You have a very strong policy, and we believe it's positive as well. This strong payout, even slightly above the income for the year. But the trend for us to model here is it to remain close or slightly above net income of coming years? I mean dividends and share buyback and everything.
Okay. So this is Felipe again. This is a decision that we always make together with the Board, we make a proposal, but the final decision is at the Board of Directors meeting. What we always look at, the drivers that we look at for this decision. First is the company's leverage that I believe is very healthy. This year, we had that decision because of that, it better to leave cash with the shareholders than in the company sitting.
In addition to low leverage, we also have a long-term debt profile. Within our financial plan, we don't see a need for a lot of that rollout, and even operating cash generation if there's no extraordinary event, we are able to pay the entire debt. Of course, a company doesn't have an optimal capital structure. So we do the distributions or share buyback to adjust it to our capital structure.
Next question, Lucas Nagano, Morgan Stanley.
Good morning, Fabio, Felipe, Bresaola, we have 2 questions as well. The first, would like to understand the moving parts of average ticket for 2024. If you see a similar pricing dynamics as last year, how the student mix will influence, because as I understood, in 2023, the ticket was more stable because the environment was more difficult and due to price and on-campus was more the mix.
The second question is about CapEx. If you can tell us what led to this greater need for investment last year and whether CapEx will start -- stay at this higher level at 8.59% of revenue in 2024.
Lucas, this is Fossen. About the ticket dynamic, we're pleased with the first quarter. We are seeing more favorable dynamics for us now in this beginning of the year, both for on-campus and digital, there's always influence. You talked about last year. But there's always a lot of influence from the size of intake compared to the student base we had last year, that was relevant and a great share of 100% online courses. If you look at the other types of DL, the other format of Distance Learning, we do very well, but 100% online courses is where we have the most competition in the market. So it's more difficult in terms of pricing. But we see it in a good light for 2024.
Now about the CapEx of last year, we had the medical courses accreditation and additional investments made for those courses. We had the maximum grade of 5, that's the top grade in all of our medicine courses that we requested authorization from the Ministry of Education, so everything is already ready to go. We're waiting for the final decision from the government. So that was extraordinary CapEx to grow for this push in medicine that was done last year.
In the last year, there was also a lot of CapEx recovery from the pandemic. In 2022, we did a part of it and '23, we did the rest. Technology CapEx tends to remain at significant level because we must invest in technology. But in terms of infrastructure, we believe that there is a reduction for 2024 compared to '23.
Thank you, Fossen. Just a follow-up. If you can talk about the number of requests and requests that had that grade from the Ministry of Education, and what you're expecting, like the most likely scenario for the decision of the Supreme Court.
Lucas, as regards the Supreme Court's decision it's hard to try to guess at this time. The score is, it's a tie right now. So we're waiting to see what happens. But what's important is that we did our homework. Everything that depended on us to prepare the evaluation process, to implement all of the quality of our faculty, the quality of the education that we provide in the medical courses at Cruzeiro, if you look at our opening message to win and frankly all of this UNIFRAN certification from the Board, the medical board in Brazil, it's not something that our medical schools can achieve in Brazil, so that is proof of our overall quality.
So we're waiting to see what's happening, and there are changes coming in the Ministry of Education. There's a new Secretary. There's a lot of things changing for us to be able to guess the future. But what's important is that we did our homework, and we had the top grade. So that's what's relevant here in this process so far. As for the number, we don't disclose this information yet, it's strategic information for us.
Next question, Lucca Marquezini, Itau BBA.
Good morning. We have 2. First, if you can give us an update about the regulatory aspect of DL, we know that a considerable share of the company's revenue come from DL. So if you can give us an update about this, what can change, and what may be the impact for the company? And the second point is about cost with personnel, we saw a good dilution this quarter due to the decisions of the company to optimize costs. So if you can remind us if there's more efficiencies to come or if this is a sustainable level looking forward, that would be helpful.
Good morning, Lucca, this is Fossen, and about your question on DL, as everybody, we're at -- on standby looking at the Ministry's next steps. We have a very positive overview, whatever comes, at least considering the intentions that have been mentioned by the Ministry of Education's representatives whatever they bring to improve the quality of education has our full support.
We have the capacity to make that type of investment and intellectual capital or the capital required to continue to grow in Distance Learning. So this is something that does not worry us because if it does come it will be to improve quality of education. If there's measures to restrain growth, of course, it's going to harm everyone. And we do not see that as the tone that they're using, everything we've been talking about improving quality of education, we believe that for us will adapt to whatever guideline that the Ministry of Education puts forward, in cost of personnel or the company's operating cost overall, more recently, we've been making more investments in digitalization, both in terms of student experience and internal digitalization of the company, and we believe that there is still room for improvement in terms of productivity.
We don't provide guidance on this sense. But recently, we started to make all of the investments needed in technology. So there is room for us to improve further.
Next question, Caio Moscardini, Santander.
Good morning. I have 2. First, about re-enrollment that has been a positive highlight, and we saw good improvement this year, both in the On-Campus side and on digital. I'd like to understand a little bit more about the opportunities that you have to continue to improve this and what we should expect for 2024, and the second question is about the strategy in the health field, especially now with Raeli's arrival, what we should expect, the changes you may have in mind or which direction you might be headed, anything in this sense would help us. Thank you.
Good morning, Caio. This is Fossen. About reenrollment, this is the result of a process we started in the beginning of 2022, a series of process improvements, engagement and the institution within the reenrollment process. This is very important for us. For me, it's a great way to measure the actual quality of our courses, which is the repeated purchase that the customer makes at the end of the day, we can call it like that.
The student comes and they are liking it. They enjoy the classes. They want to continue at our institution. So that's -- we have had very high levels if we compare with other players that we normally compare ourselves with both for DL and on-campus, we are at very high levels for this metric, and we are still progressing. There's the dropout algorithms that we're working on. So we're moving towards improving this even further, understanding where we need to improve in our internal processes, the quality of the education we deliver so that we continue to motivate students to come and stay with us.
About the health education. We understand and throughout the year, this will be clearer to everyone. This year, we're going to have our first Cruzeiro day during this year, and you understand more our strategy about the health education vertical. We had already been developing some aspects internally, with Raeli's arrival at the end of last year, we will progress further for us to structure and advance in this sense.
We have high expectations, and we have already those 2 major international partnerships signed. I think we never talked about them in details with everyone, but we've been developing this for 2 years, and we believe that this will be a driver of growth for the company in coming years. It's a vertical in the health area that we're seeing appeals both for the undergrad and the continued education, especially as a base to expand our revenue lines.
[Operator Instructions] We would like to conclude the question-and-answer session. I'll turn the floor to Fabio Fossen for his final remarks. Please, Mr. Fossen, you may go ahead.
Thank you all very much for participating on our earnings conference call. We conclude the year of '23 showing our best results since the company's IPO half-on-half and quarter-on-quarter with significant growth, we are very excited and optimistic with 2024. We are seeing the first indicators and they're very relevant for us.
We'll continue with all of our strategies, and we expect to deliver good results this year. We see it in a very positive light, and the barriers and hurdles that may arise in terms of regulation or any other topic are things that we can handle and move forward. I think it's very important to look forward and see that there's a lot of growth to capture than we've had in the past. Thank you all very much. Have a great day.
Cruzeiro do Sul's earnings conference call for the fourth quarter of 2023 has been concluded. The Investor Relations department remains available to ask any questions and doubts. Thank you to all participants. Have a great day.