Cruzeiro do Sul Educacional SA

BOVESPA:CSED3

Earnings Call Transcript

[Operator]

Good afternoon, and thank you for holding. Welcome to Cruzeiro do Sul Educacional's conference call today discussing the earnings release of the second quarter of 2025. [Operator Instructions]. We inform that this conference is being recorded and will be available on the company's IR website at ri.creuzeirodosuleducacional.com.br, where 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.

Note that the information in this presentation and statements that may be made during this conference call relating to Cruzeiro do Sul Educacional's business prospects, projections and operational and financial targets are based on the company's management's 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 and lead to results that differ materially from those expressed in such forward-looking statements.

Here with us today we have Mr. Renato Padovese, CEO; Felipe Negrao, CFO; Beatrice Hoff, Executive Director of Academic Excellence Institutional Relations and Luis Felipe Bresaola, Installations Officer. I would now like to turn the floor to Mr. Renato Padovese, who will begin the presentation. Please, you may go ahead.

[Renato Padovese, executive]

Good afternoon, everyone. This is Renato Padovese, CEO of the company, and thank you for participating in our second quarter of '25 earnings call. It is with great satisfaction that we announced today to the market that we ended the first half of 2025 with BRL 149 million in net income. The highest that we disclosed in a 6-month period. To give you an idea, this result exceeds the net income of the full 12 months of 2024. The discipline and assertiveness in conducting our business have been determining factors for the evolution.

In addition, the company has been continuously seeking opportunities to generate value for our students and consequently, to all our stakeholders. In the quarter, we made progress in initiatives that reinforce our discipline in managing the core portfolio and pursuing greater operational efficiency. The on-campus units continue to be relevant strategic assets with a focus on full utilization and contribution to the expansion of results.

Nevertheless, we have started a review of the long tail course strategy. Considering the expected impacts of the new regulatory framework with the objective of ensuring the sustainability and attractiveness of the portfolio in the medium and long term. Envisioning the increase in investment in our students, we continue to deepen our discipline and expense management with a focus on efficiency and standardization. We revisited contracts, taking better conditions and alignment with financial sustainability guidelines. We have made progress in the implementation of internal benchmarks among the group's institutions, promoting comparability and identification of best practices.

In addition to evaluating opportunities against external benchmarks. As part of the evolution of budget governance, we are structuring a matrix budgeting model, which will provide greater visibility and control over cost levers with a focus on efficiency and better capital allocation. In addition, targeted training has been carried out to ensure the incorporation of these initiatives into the culture of the entire management team. We would also like to inform you that we have started a pilot project for the implementation of a new academic model, which includes computer science and system analysis and development courses in the on-campus and distance learning modalities.

The new model consists of a structured and updated response to the contemporary challenges of higher education. Placing the students at the center of the experience, combining innovation, flexibility, technology and direct connection with the job market. starting next year. The course is offered by Cruzeiro do Sul will have synergy between the formats of higher education on campus, hybrids and distance learnings, meeting the new regulation of higher education in accordance with the new regulatory framework recently published by the Ministry of Education.

I conclude my comments here and turn the floor to Felipe Negrao. And for family reasons, today, I will not participate in the question-and-answer session, but the team will be available.

[Felipe Negrao, executive]

Thank you, Renato. In the next slide, I will talk about the operational performance of On-Campus. We've registered a growth of 5.6% in the student base, reaching a total of 175,000 students. This result is due to the 1.5 percentage points increase in the retention index combined with the maintenance of the volume of intake in the period. More targeted marketing initiatives and actions to anticipate rumen were decisive factors for the success and expanding the on-campus space. We also bring the ticket data for the second quarter of '25, which remained stable vis-a-vis the same period of the previous year, despite the changes in the course mix. In the second quarter of '24, the student base was more concentrated in courses with higher tuition fees. In this quarter, there was an increase in the share, of course, as with lower tuition fees, reflecting the current dynamics of market demand.

In addition, the growth in the number of seats in the medicine program contributed to a higher proportion of freshmen at the base, which traditionally has a lower ticket price. In the first half of '25, the average ticket increased by 3.2% compared to the first half of '24. This growth was driven by the increase in the share of students in the health area, especially in the medicine and industry courses in addition to the improvement of 1.5 percentage points in the re-enrollment rate. On the next slide, we bring the operational data of digital, which ended the period with a base of 411,000 students. Which represents a growth of 13.8% compared to the same period of the previous year.

The growth is the result of the 10.6% increase in intake reaching a half year record of 171,000 students and the 0.9 percentage point increase in the re-enrollment KPI. Regarding the average ticket for the quarter, we see a drop of 4.4% compared to the same period of the previous year. This reduction is mainly related to the greater presence of students with below average tuition fees in the mix. acquired in the second half of 2024 during a more aggressive promotional campaign combined with the graduation of students with higher ticket price.

Hybrid courses continue to expand and already represent 25% of the digital base, up 2.1 percentage points when compared to the second quarter of '24. In the first 6 months, the average ticket decreased by 8% when compared to the same period of last year. Going into the financial details now. I will comment on net revenue in the quarter, which reached BRL 721.1 million, an 8% increase versus the second quarter of '24 as a result of the larger consolidated student base. In the first half of the year, net revenue was BRL 1.4 billion, 9% higher than in the first half of '24. In the On-Campus segment, net revenue for the quarter grew 6%, reaching BRL 493 million, reflecting the higher student base -- larger student base.

In the first half of the year, the growth was 9% when compared to the same period of the previous year, reaching BRL 923.3 million revenue from health courses in the quarter expanded 17% driven by the revenues from medicine as a result of the acquisition of FAPI and the 180 new seats authorized in 2024. In the half year, the expansion was 18%, reaching BRL 693.6 million. These quarters already represent approximately 71% of the on-campus revenue. In digital, we saw an 11% expansion in revenue in the quarter, reaching BRL 249.1 million as a result of the larger student base and the drop in the average ticket. In the first half of the year, the expansion was 8% versus the first half of '24, reaching BRL 461.9 million. On the next slide, we demonstrate the gross margin in the quarter, which expanded by 1.5 percentage points when compared to the second quarter of '24. This margin expansion mainly reflects the adjustments made in personnel as well as the contribution of the growth of the base in medicine and digital courses.

In the first half of the year, gross margin expansion was 2.1 percentage points. Next, we bring the adjusted EBITDA for the quarter, which totaled BRL 201.3 million, representing an expansion of 5.2% compared to the second quarter of '24 the chart shows the composition of the adjusted EBITDA margin, which was 27.9% versus 28.6% in the previous year. The margin retraction in the period is mainly a reflection of the 33.1% increase in DDA representing 10.9% of net revenue, an amount that 2.1 percentage points higher than that recorded in the second quarter of '24. As a result of the update of delinquency estimates implemented in the fourth quarter of '24 and the change in intra-quarter seasonality labor expenses were impacted by the collective bargaining agreement for employees in Sao Paulo and the provision of the salary adjustment for the month of February to June 2025.

The increase in gross cash margin added to the reduction in marketing expenses mitigated part of the impact of a higher PDA and labor expenses in the period. In the first half of the year, adjusted EBITDA totaled BRL 452.6 million, representing an expansion of 16.8% compared to the same period of last year. The adjusted EBITDA margin reached 32.5% and resulting in an increase of 2.2 percentage points compared to the same period of the previous year. This result reflects the growth of 1.9 percentage points in gross cash margin combined with efficiency gains of 1.2 percentage points in marketing and administrative expenses. In addition, the BPA and absolute numbers decreased 8.2%, representing 5% of net revenue in the first half of which represents an improvement of 0.9 percentage points versus the first half of '24. The increase in PDA reflects the improvement in credit on actions implemented over the last few quarters.

Moving on to the next slide. We demonstrate the update in the delinquency estimates made in the second quarter of '24. As disclosed in the fourth quarter of '24 over the past year, in addition to reviewing processes, the company updated its receivables portfolio provision model by performing an analysis that considers a 24-month horizon from January '23 to December '24. The work was carried out with the aim of establishing greater adherence to the profile of the portfolio in the post-pandemic period, when there was a faster expansion of the digital student base, which went from 62% in 2020 to 69% in 2024 in relation to the total student base.

In addition, the company revisited its policy of writing off overdue securities in accounts receivables, reducing the time from 720 to 360 days. In the chart, we present [indiscernible] between the preupdate and post update PDA and the delinquency estimates and the pro forma table illustrating the effect of the PTA on EBITDA. Due to the update of the PD throughout 2025, we will have temporary differences in relation to the PDA presented throughout 2024 with more pronounced variations throughout the quarters.

Moving on with the presentation, we show the company's costs and expenses as a percentage of revenue, excluding nonrecurring effects. In the quarter, Costs and expenses, cash effects totaled 73.2% of the company's net revenue, 0.7 percentage points above the second quarter of '24 with emphasis on efficiency gains in the personnel and marketing lines, which decreased by 3.3 percentage points compared to the second quarter of '24.

It is also worth mentioning that the PDA line was impacted by the update of the delinquency estimates implemented in the second quarter of '24. In the first half of the year, cost and expenses totaled 68.5%, representing a reduction of 2.3 percentage points when compared to the same period of the previous year. This result is due to the improvement in the personnel, PDA and marketing lines in the period. On the next slide, we show the evolution of the company's adjusted net earnings, which was BRL 62.7 million, representing an increase of 1.3% versus the same period of the previous year. In the first half of the year, adjusted net earnings were BRL 150 million, 21.6% higher than the amount registered during the first half of '24, with a margin of 10.8%.

[Foreign Language]

We present the investments made by the company in the second quarter of '25 which were approximately BRL 26.9 million, an amount that 9.8% lower than the second quarter of the first half, investments totaled BRL 39.2 million versus BRL 68.2 million in the same period of last year. It's important to note that the company continues with this annual investment process and that in 2025, we should see a greater concentration in the second half of the year.

Going forward, we show the free cash flow to equity in the second quarter of '25, which was of BRL 20.1 million negative versus BRL 6.8 million in the same period of the previous year, mainly impacted by the negative variation in working capital. In the first half of the year, cash flow to equity reached the amount of BRL 206.5 million, which represents an increase of 121% versus the first half of '24. On the last slide, we present the company's net debt, which stood at BRL 672.7 million compared to EUR 85.7 million in the previous year, representing a decrease of 21%. In addition, as disclosed in the material fact of June 23, 2025, the second issue of the ventures of the ASA was pre-profiled with a change in the final maturity date from December 24, 2028 was to June 24, 2030, and a change in the spread from 1.6% to 1.35% renegotiations are one of the pillars of the company's active capital management strategy, reflecting the commitment to financial soundness and discipline in the allocation of resources.

To better illustrate the company's debt profile, we present below the amortization schedule broken down by type of debt. Noting that the current level of cash allows us to honor our most out by the end of. With that, I conclude my comments and turn the floor to the operator to start the question-and-answer session.

[Operator]

[Operator Instructions]. Beginning with the first question Lucca Marquezini from Itau.

[Lucca Marquezini, analyst]

We have two questions on our side. The first is if you can give us an update on the intake in the first half on-campus NDL and comments whether this period with the new regulatory mark has affected the intake. If you have been feeling a more aggressive competitive environment in terms of discounts and overall. And the second question about the level of PDA. Of course, there's an effect in comparison to 2024 due to the update of the estimates, but pleasing about the current levels. Does it make sense that this should be a normalized level going forward? Or do you think there's still room for improvement to dilute this line?

[Felipe Negrao, executive]

This is Felipe Negrao. In terms of what it's like today, it's a process between DL goes into November on campus. There's still some time as well. So until today on business learning, we have a much better ticket. And from what we had last year, there's a good ticket growth, and we are also being able to increase intake. We don't see since it extended for a longer period, for the regulatory aspect, we don't see the impact today in the competitive side. We are very well positioned, but it's a process that goes on until November. On Campus side, we are -- we're into yesterday with a much higher ticket than we had in the past in to slightly lower, pretty much in line with what we had last year. But I think unlike the case of DL where we have to look at revenue maximization, I think there are opportunities that we see in the increase of tickets in the short term.

But looking at the long term, we have the possibility of having original pricing that we don't practice today for on-campus. We also have this increase in the short-term tickets and changing the strategy not only to maximize revenue, from what we've been doing until now. But to have a better positioning in terms of price considering the brands that we have with a very considerable reputation and also improving EBITDA, not only in the short term, but in the long term as well. As for the PDA, we've been improving consistently since 2022. So the part of recovery in collection overall. Consistently since 2022, we've been showing a lot of improvement. There are a series of initiatives that we implemented, but we still see a possibility for gains this year and next year.

We have a lot of initiatives that we're running, where I see opportunities for gain significantly in terms of PTA. In accounting income you may take some time because we always use estimates from the past. Putting accounts receivables overdue based on estimates from the past. So when we update it again, you will see PTA at a much better level than what we have today.

[Operator]

Next question Mirela Oliveira from Bank of America.

[Mirela Rodrigues de Oliveira, analyst]

Thank you for this opportunity to ask the question. If you can tell us a little bit of what you expect in terms of cash generation for the second half of the year and what are the main levers that you see that could help with this generation.

[Felipe Negrao, executive]

This is Felipe. Okay. So we don't provide guidance for cash generation I think it's important to look first at the first half. Not only the second quarter because there's a variation. I think there's 2 points that have an impact working -- that impact working capital. But a lot of things we had the opportunity to work on over the quarter. So for the company to this advance and monetize credits we had. So it already yields financial revenue. It was better for the company. In the first quarter, beyond above expected. In the second quarter, overall, we are better than what we had budgeted for. for the second quarter. I think there's this impact of working capital. That is a one-off in the second quarter. But for the half year, I think we're doing well.

There's also the impact of leases of lease payments higher than last year, not in accounting terms, but today, we're turning the company to a new ERP. And because of that, we have the leasing of some units, and we've been moving along with that. And we brought forward the payment of some units due to that change of -- so this is cycle -- we can't simply multiply it by 2. There's important seasonality in the education industry. But in our cash relationship is a constant focus we have for cash generation and we continue to see quite positive, positive cash generation looking forward.

[Operator]

[Operator Instructions]. We have a question by Beatrice De Paolo from BTG Pascual.

[Unknown Analyst]

I can talk a little bit about intake, but more specifically in medicine considering the acquisition of FAPI and the new seats authorized. I'd like to understand better feel the competitive dynamic is intake smooth? Or does it require more efforts? And how is the revenue share in the account?

[Felipe Negrao, executive]

This is Felipe once again. We had significant growth last year in terms of medicine seats. So that's higher the contracted growth that we have until all of the seats mature. For us, I think it was very positive. In terms of ice, it's something historical for the company. We have always chosen to work on large centers with high per capita income and recognized institutions. So that was the model of growth for the group in the last 60 years, since it was founded. And it was the right model, I believe, especially now for medicine courses because we have seats where the income is. So we don't see anything in terms of greater competition, still able to place as minister as we could before without having to work on product. So for us, we are filling the seats without any major price competition. We're simply seeing the maturity of the seats.

[Operator]

[Operator Instructions]. We have our next question from Alexandre Pavan from Meta Asset Management.

[Unknown Analyst]

What are the reasons for negative working capital even with the reduction of the average days to accounts receivable. That's Alexandre's question.

[Renato Padovese, executive]

Again, we need to look at the half year. Looking at the quarter alone, you can have variation in the assessment of working capital in the first quarter and it ends up getting here is in the second quarter. But if you look at the half year, the half year -- the first half of the half of last year, I think it's the best way to look at it. There's a slight variation from year-on-year, but it's nothing relevant. There is just no accounts that, for example, last year, we were able to monetize that was taxes to recover that we were able to monetize that this year this opportunity had already passed. So there's a small event, but I think it's something that's pretty much under control for us in the year. We delivered what we had expected in terms of budget.

[Operator]

Questions-and-answer session is concluded. I will turn the floor to Mr. Renato Padovese for his closing remark, you may go ahead.

[Renato Padovese, executive]

Thank you for everyone's participation. I would like to end by reinforcing the commitment to our purpose of driving learning and inspiring the student to transform their future and impact the community. We remain continuously investing in technology and in our new academic model to offer increasingly innovative, personalized learning experiences aligned with the demands of the contemporary world. Cruzeiro do Sul conference call on second quarter of 2025 earnings is now concluded. The Investor Relations department remains available to ask any further questions. Thank you very much, and have an excellent day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]