Vasta Platform Q2 2024 Earnings Call Transcript

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August 7, 2024

There are 6 speakers on the call.

Operator

Hello and thank you for standing by. At this time, I would like to welcome you to the Fasta 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. Before we begin, I would like to read a forward looking statement.

Operator

During today's presentation, our executives will make forward looking statements. Forward looking statements generally relate 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 benefit and our expectations regarding the market. Forward looking statements are based on 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.

Operator

The forward looking statements in this presentation are based on the information available to us as of today. You 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, Vesta's CFO.

Operator

Please go ahead.

Speaker 1

Good evening, everyone, and thank you for joining us in this conference call to discuss Vasta Platform's Q2 of 2024 results. I'm Cesar Silva, Vasta's CFO and today we have the President of Clive Mehlaga, Vasta's CEO, who will be joining me on the call. Let me now hand over the floor to Guillermo Melega, our CEO to make his opening statements.

Speaker 2

Thank you. Thank you, Cesar. Let's start on Slide number 3. As we approach the end of the current cycle, we are pleased to report that in 2024 cycle to date, our subscription net revenue has achieved a growth of 14% to reach EUR 1,152,000,000. Vasta concluded the 2024 cycle to date with 11% net revenue growth over the same period of last sales cycle, mostly due to conversion of ACV into revenue and to the performance of the B2G business.

Speaker 2

Pasta subscription revenue achieved in the Q2 of 2024, BRL280 million, a 32% increase compared to the Q2 of 2023 due to the previously disclosed shift in product deliveries, which were deferred to this quarter. As a result of the significant second quarter revenue number, the subscription revenue has reached BRL1.152 billion, a 14% increase compared to 2023. This accumulated figure represents an 85% of the annual contract value estimated for 2024 commercial cycle in BRL 1,350,000,000, which represents 12% organic growth compared to the previous sales cycle. Preliminary 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.

Speaker 2

In 2024 cycle to date, our adjusted EBITDA experienced a growth of 15%, reaching BRL428 1,000,000 while increasing an adjusted EBITDA margin to 32 0.7%. This increase was mainly driven by improvement 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 2024 cycle to date, free cash flow totaled BRL 90,000,000. As you can see, free cash flow increased by 4% from BRL87 million in 2023.

Speaker 2

In the last 12 months, free cash flow and adjusted EBITDA conversion rate improved from 26% to 32% as a result of Vasta's growth and implementation of efficiency measures. I will now turn back to Sadler Silva, who talk about the financial results of the quarter in the 2024 cycle to date.

Speaker 1

Thank you, Malaga. 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 Q2, which increased by 8.5%, reaching BRL294,000,000. Total subscription revenue achieved in this quarter BRL 208,000,000 on revenues, mainly due to seasonality effect mentioned before. This number represents a 32% growth compared to 2023.

Speaker 1

Non subscription which now represents only 7% of the total revenue dropped 26% to 15,000,000 dollars And in the government sector in this quarter, we did not generate new revenue. And as you can see in this slide, it represented $4,000,000 in the Q2 of the last year. However, in this sales cycle to date, considering the revenue performing in the Q1 of the year, we already achieved a 71% growth in this line of business. Moving to 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 1,300,000,000.

Speaker 1

The main factor should this exceptional BRL

Operator

1,000,000,000.

Speaker 1

Reaching $1,152,000,000 and continues to be the major contributor to our total revenue, representing 8.8 percent of the revenue share. Non subscription revenue as expected dropped 30% to $8,000,000 and the net revenue of B2G achieved $69,000,000 and represents 5% of our overall revenue in Hiseko sales like to date. In design of business there has been increase of 71% compared to last year. Moving to Slide number 5, we can talk about adjusted EBITDA. In this quarter, our adjusted EBITDA amounted to $26,000,000 a decrease of 36% from the $41,000,000 in the Q2 of 2023, mainly due to a higher commercial costs and no recurring positive effects in the Q2 of 2023 of a reversal of a provision for doubtful accounts related to a large retail customer.

Speaker 1

On the right side, we see that adjusted EBITDA in 2024 sales cycle to date increased by 15% and reached $428,000,000 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 6, we observed that the EBITDA margin achieved 32.7% in 2024 sales site 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 reducing 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 our revised credit landscape on the Q4 of 2023.

Speaker 1

As a percentage of net revenue, our commercial expenses increased by 2.3 percentage points driven by higher expense related to business expansion and marketing investments. And adjusted G and 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 Q2 of 2024, adjusted net losses totaled of $37,000,000 a 14% percent decrease compared to adjusted net losses of $32,000,000 in 2023. On the right side of the slide in the 2024 sales cycle to date, adjusted net profits reached BRL110 1,000,000.

Speaker 1

There has been increase of 66 percent from adjusted net profit of R66 1,000,000 in 20 23 sales are to date. Moving to Slide 8, we show the free cash flow evolution. You can see that in the Q2 of 2024 the free cash flow totaled $380,000,000 representing a decrease of 50% 90% compared to $94,000,000 in 2023. This quarter for negatively impacted by 2 main effects. The anticipation of marketing expenses and increased payments related to 20 22 production costs owing to a seasonal effect of paper and printing purchase.

Speaker 1

Considering these effects, we foresee a lower volume of production related payments in the following quarters and consequently we expect to maintain and improving the free cash flow for the year end. On the right side of the slide, in the 2024 sales to date our free cash flow reached 90,000,000 dollars an increase of $3,000,000 from the $8,000,000 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 areas of our business. Moving to Slide 9, we show the provision for doubtful accounts and total expense with PGA in the Q2 of 2024, total $10,000,000 represented 3.4 percent of net revenue compared to an expense of $1,000,000 in the comparable quarter. The Q2 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 PGA for the 2 second quarter, we achieved 2.5% and compared to 3.44% of this quarter, we had an increase of 0.9 percentage points.

Speaker 1

Moving to the right side of this slide, the PDA for 2024 cycle to date amounted to 52,000,000 dollars compared to $4,000,000 in the 2023. The provision for doubtful accounts represents a 4% of the net revenue and compared to 2023 sales cycle, there has been an increase of 0.6 percentage points. This increase in the provision for doubtful accounts is a rate 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 observed that the average payment terms of Vastuz accounts receivable portfolio was 152 days in Q2 of 2004, which is 3 days higher than the compared quarter in line with the seasonability of our business model. So moving to Slide 11, let's take a closer look on the net debt movement.

Speaker 1

As of the Q2 of 2024, Vasta had a net debt position of 1,063,000,000 dollars a $6,000,000 decrease from the previous quarter and the financial interest costs and the free cash flow incurred in the quarter. Amount almost the same in broad stability for the total net debt in this quarter. In comparison to the Q3 of 20 23, the beginning of 2024 sales cycle, the net debt position increased 65,000,000 dollars from $998,000,000 driven also by the financial interest costs in the second repurchase program, which were partially offset by the positive free cash flow of $90,000,000 in the period. And I will conclude my part of this presentation with the Slide 12, explaining some more detail about our net debt composition, which represents $1,063,000,000 at the end of this quarter. The amount is composed by debentures issued in the amount of R70, R68,000,000 in accounts payables for business combinations with total

Operator

$60,000,000 $618,000,000

Speaker 1

reduced by our cash flow availability, which represented $324,000,000 In the lower left part of this slide, we can see that the Q2 of 2024, the net debt to last 12 months adjusted EBITDA ratio has increased just 0.06 times from the last quarter, showing stability after having four consecutive quarters of decrease and now it stands at 2.28 times. And compared to Q2 of 2023, the indicator has improved from 2.57 times, a decrease of 0.29 times. Moving to the right side of the slide, we present the net debt maturities for the coming years. Substantially relate to the accounts payables in the acquisition of 11 to be carried out over the next 2 years and our debentures with related parties which will take place in 2025, 2027 and 2088 on. Additionally, on June, we can mention that we issued a new debentures not convertible in shares with an amount of 500,000,000 dollars according to the rest at a rate equal to 100% of CDI plus a spread of 1.46% per annum average for the 2 thirds of these debentures.

Speaker 1

The debentures are to strengthen the company's capital structure to the prepayment of certain existing debt 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 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 Marrege.

Speaker 2

Thank you, Salve. 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 in the last quarter, the Lautra of Start Anglo franchise combining bilingualism with academic excellence continues to ramp up and signify the 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.

Speaker 2

Securly 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 Startango. In this quarter, we launched the revitalization project of the Liceo complex, which will be our start and will flagship in Sao Paulo. Besides creating an operating unit with 1,000 students capacity, then the entire historical architecture design will be preserved. We are pleased to inform the inauguration event will take place on August 27.

Speaker 2

And also on this date, we'll be launching our enrollment campaign for 2025. Having said that, I finish our presentation and invite you all to the Q and A session.

Operator

Thank you. The floor is now open for your questions. Our first question comes from Luca Marchetti from ITAU.

Speaker 3

Good evening, everyone, and thank you for taking our question. We noticed that the B2G business unit did not consolidated revenue in the quarter. So can you please provide more color on the seasonality of the segment and what we should expect for the 2nd semester of this year for this variable? Thank you.

Speaker 2

Thank you, Luca. Thanks for your question. Yes, we did not record any new contracts of B2G. As we mentioned before, we prospect only large public schools network. So those contracts takes time.

Speaker 2

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 B2G 80,000,000 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.

Operator

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

Speaker 4

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 is anything you could comment on the commercial cycle, that would be great.

Speaker 4

Thank you.

Speaker 2

Thank you very much, Mirela, for your questions. Let me give you some color about our sales cycle. We are very excited with our 1st semester. We are definitely growing significantly from the same season last year. But as you all know, the 1st semester normally represents between 35% 40% of the total sales cycle.

Speaker 2

So far, we are really excited. We are growing rapidly, but we'll give the guidance for 2025 sales cycle at this year 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.

Speaker 2

We are investing in key accounts, in regional expenses to grow fast in learning systems and complementary products. So we are investing in gain market share in learning systems and keep 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.

Speaker 4

That's perfect. Thank you.

Operator

Our next question comes from Lucas Nogana from Morgan Stanley.

Speaker 5

Hey, good evening, Malaga, Seder. Thanks for taking our questions. I have two questions. The first is a follow-up on the ECB for the next year. If you could break it down on what is driving this fatter growth?

Speaker 5

How competition is behaving? If it's the same of last year's or if it's more behaved now? Because we are reaching like we know that we're like the penetration of learning is increasing and what is driving this faster growth for this year? And 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?

Speaker 5

Thank you.

Speaker 2

Thank you very much. Let me give you a little bit more color about ACV growth. Our growth is it's based on regional focus. We are focusing on 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.

Speaker 2

And for competitive reasons, I cannot give you more color about that, but we do have a strategy to grow market share, thinking about regionals 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 does not belong to our base.

Speaker 2

So the growth comes from regain market share and from complementary products on ACV. Regarding STAAT, we are very confident about our business model. We launched it last year and we have been investing on it for 2 years. So we do believe that we have a very strong base to keep growing. Our competitive advantage definitely comes from our brands.

Speaker 2

It's based on the Anglo brand, which has a very strong academic results and the billing with that we developed with Macmillan that has shown exceptional results on our partner schools. So we do we have very we strong believe that we have all the way to grow on start. And additionally, we are investing on a very sound flagship here in Sao Paulo, Liceo, which is a very traditional school, more than 100 years old that are switching to Start and will be launching it this month of August. So we are we do believe that start has a very a great future in our business and is a growth avenue for Avastra.

Speaker 5

Very clear, Madhika. Thank you.

Operator

There are no further questions at this time. So I'll turn the call back over to Guillermo Melga, Vasa's CEO.

Speaker 2

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 showing great results. So we'll give more color at the year end about that. And our both our growth opportunities, B2G, we have a heated pipeline and we do expect to have new contracts very soon.

Speaker 2

And we start keeps growing ahead on our expected curve. And we also have great expectations on that. So our core business is doing good and our both growth strategy avenues are also doing growth and performing ahead of our curves. So that's for Q2. Looking forward to see you all in Q3 conference call.

Speaker 2

Thank you all.

Operator

The meeting is now concluded. You may now disconnect.

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Vasta Platform Q2 2024
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