Ladies and gentlemen, thank you for standing by, and welcome to the Vasta Platform Second Quarter 2020 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Mr. [ Pedro Gomez ] with Investor Relations. Thank you. Please go ahead, sir. .

Hello. Good morning, everybody, and thank you. I'm very pleased to welcome you to Vasta's first ever earnings conference call, and we are here to discuss our second quarter 2020 results..

With me on the call today, we have Mario Ghio, Vasta's CEO; Clovis Poggetti, our CFO; Guilherme Melega, Vasta's COO; and Bruno Giardino, Cogna's IR Officer..

During today's presentations, our executives will make forward-looking statements.

Forward-looking statements generally relate to future events or 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, the statements related to our business, our financial performance, our expectations for future periods, our expectations regarding our strategic product initiatives and their related benefits and our expectations regarding the market.

Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. These risks include those set forth in the press release that we issued yesterday night as well as those more fully described in our filing with the Securities and Exchange Commission.

The forward-looking statements in this presentation are based on the information available to us as of the date hereof. You should not rely on them as predictions of the future events, and we disclaim any obligation to update any forward-looking statements, except as required by law. .

In addition, management may refer non-IFRS financial measures on this call. The non-IFRS financial measures are not intended to be considered in relation or as a substitute for results prepared in accordance with IFRS..

Let me now turn the call over to Mario Ghio, Vasta's CEO.

Please?.

[indiscernible] Vasta's first earnings conference call [indiscernible] I would like to start this presentation on Slide [indiscernible] highlights of Vasta's IPO, which was successfully concluded beginning of this month [indiscernible].

Ghio, sorry, to interrupt you, but the line isn't very good. If we could please restart, we really appreciate. .

Let's start again. Was emphasized in our [indiscernible] and I would like to start today's presentation to [indiscernible] highlights [indiscernible].

Ghio, Ghio. Sorry to interrupt you. This is Guilherme. We cannot hear you well. .

[Technical Difficulty].

So let me start here..

I would also want to emphasize our succession in presenting Vasta first earnings as a public-held company. I would like to start today's presentation on Slide 5, which shows the main highlights of Vasta's IPO, which was successfully completed... .

Guilherme, [indiscernible]. .

Sorry, Ghio, we cannot hear you. .

So let's move on [indiscernible]. .

Okay. Thank you. So highlights of Vasta's IPO, which was successfully concluded at the beginning of the month after a years of hard work. We listed 25% of the company on Nasdaq, which brought in a total of $405 million, the biggest IPO ever held by a Brazilian education company.

Our $19 price was above the initial range, and demand was very strong with volume at 15x the total offered. Our IPO funding means we are in a very comfortable position cash-wise, and we have a strong balance sheet to further accelerate our growth trajectory..

These conditions were already very favorable for Vasta's growth, which our current offering of services. The IPO funds are set to act as a catalyst for an even more prosperous horizon. But first, let's look at the reasons that have made us a real success story with lots of potential for organic growth.

In this respect, I would like everyone to go to Slide 7, where we present our mission. So... .

Melega, I am now connected.

Can you hear me now?.

Okay. Yes. Now perfect, Ghio. I was just about to start on Slide #7. .

Yes. I'm so sorry. I apologize for that, but because of the COVID crisis, we are apart and my connection was not that good..

helping Brazilian private K-12 schools to be better in terms of quality and more profitable by supporting their digital transformations..

Nowadays, basic education faces unprecedented challenges where out of [indiscernible] had to resort to remote education in order to avoid interrupting the school year. This digitalization, for which the pandemic was the catalyst, highlighted the importance of technology in teaching learning process and together, has helped shatter old models..

[indiscernible] which is our digital education platform, Vasta has offered thousands of private partner schools the possibility of continuing their operation and their activities. It enabled thousands of [indiscernible] by working through difficult times, we are leading in an offer in the Brazilian market's best teaching solutions..

the core education market, where in addition to brand, we also have Plurall [indiscernible] for digital learning and process helping teachers and preparing them to teach better using our solutions..

Then we have the complementary content market with all the extra our solutions we have to offer, like language such as English Stars, social-emotional programs such as O Líder em Mim, STEAM subjects with Mind Makers and Matific, and the academic side with Olímpico Plurall (sic) [ Plurall Olímpico ].

On the bottom layer of the mandala are digital services, in which, so far, we only have our e-commerce channel, which is Livro Fácil. .

So there are 3 major themes to be explored here. Firstly, Vasta is the only company that has a full solution for any private school regardless of which method they are using. Bear in mind that 55% of schools in Brazil K-12 market are now using traditional learning systems, while the other 45% are using textbooks as their solutions.

Vasta not only has 6 different learning systems brands in the Brazil with different price spectrum, it also has the only company -- it is also the only company with a textbook-based learning system, the PAR brand, as a unique product to operate addition.

We have the most reputable brands in the market, the best quality [indiscernible] and technological solutions [indiscernible] the market. .

The second theme related to complementary activities. And here, it's important to note that in the 2020 ACV, we had only 2 solutions available, English Stars and The Leader in Me. Our penetration to partner schools is still very low. It's 0.5% of this market.

Therefore, we have a whole avenue to be explored in this market at a time when schools are increasingly looking to engage more new services. .

So here, we go on to the third theme, which is the beauty of [indiscernible] set. Because as soon as we add another service to the platform, on the very next day, we have the service available for more than 4,000 schools. Adding services does not necessarily mean we have to develop from scratch as we did with English Stars.

We can acquire as we did with Mind Makers at the beginning of the year particularly [indiscernible] platform as was [indiscernible] to get into digital services from now on is [indiscernible].

I would like to hand over to Clovis [indiscernible] Vasta's financial performance this quarter. .

Thank you, Ghio, and good morning, everyone. It's a huge pleasure being here with all of you. .

Moving to Slide #10. The purpose of this slide is to underscore the message that all the numbers for these first 6 months of the year were absolutely in line with the flash numbers shown in our IPO documents. In fact, they were near the high end of the forecasting range, which highlights the predictability of our business.

In other words, despite all the uncertainties related to the current period, there was no surprise in the results, and we are confident that 2020 can be another year of strong growth for Vasta's story. .

This confidence is based on what we see on the next slide, number 11. Here, an important reminder is that our business cycle and Annual Contract Value, the ACV recognition, runs between the fourth quarter and the following year's third quarter. So the behavior is unlike what we see in the fiscal year.

Therefore, as we can see on this slide, we are heading towards the 2020 business cycle's conclusion, with just 1 quarter remaining. And as we can see, we have already got 86% of ACV, and there is only 14% left to reach our target. .

Another point that is clear from this graph is the seasonality of our business, reach more revenue recognition in the first half of the cycle from fourth quarter to the first one, so the second quarter and the third quarter numbers obviously looks weaker. .

And finally, I would also like to emphasize that this year, we have experienced even stronger seasonality with a higher incidence of revenue at the beginning of the cycle, which ultimately affected our second quarter this year comparison to the same period of the previous year, okay?.

This behavior can also be observed when we analyze the input we present in the next slide, the #12. In this slide we have for revenues and adjusted EBITDA, revenues in the left part of the slide and adjusted EBITDA in the right one, the contribution of each quarter to the overall performance for the year for each respective metric.

As you can see, in 2019, the fourth quarter and first quarter represented 73% of the revenues of the year, which means the second and third quarters being responsible for 27%. For adjusted EBITDA, the relevance of the fourth and first quarter is even greater.

In 2019, these 2 quarters were responsible, the fourth quarter and the first one, were responsible for almost 97% of the adjusted EBITDA for the whole year, with the second quarter and third quarters together representing slightly more than 3% of the adjusted EBITDA of last year.

And just a comment, given this behavior, that's why we do not encourage investors to analyze our business in an individual quarterly basis. .

For this year, what we see is that despite different seasonality across fiscal years, the earnings recognition curve for 2020 is showing a trend pretty much similar to the one that we had in '19, which lead us to believe that, assuming all the impact regarding COVID being limited to this year 2020 and also, we are gradually moving to a normal state, which means the students returning to the schools next year and the student paid being recomposed to fulfill our 2020/'21 cycle with revenues regarding this next cycle starting in the fourth quarter as usual in our business, okay.

With all of that happening, the point we would like to make is that there is no reason to believe in a curve for this year that would be pretty much different than the one we had last year, plus/minus a couple of percentage points.

The percentage we may have this year maybe somehow different than the ones we had last year, but nothing that in our belief will change dramatically this U-shaped curve, okay. .

And another point that inspires confidence is that our campaigns for 2021 business cycle have already started.

And so far, we are getting a solid result in terms of sales conversion, especially now that we have our Plurall digital platform, which has been configured as the main support base for schools to keep to academic calendar since schools here in Brazil are still closed.

So we feel confident to predict that fourth quarter earnings will live up expectations as another strong quarter. .

Moving to next slide, #13, and as we saw on the previous one, our first quarter revenue recognition was stronger than the second, which skew the basis of comparison between second quarter this year and second quarter '19 earnings. However, when we analyze the 6-month performance, we see solid year-over-year growth against 2019.

This growth rate is even higher if we take the entire business cycle. In this analysis, our subscription revenues annual growth rate from fourth quarter last year through second quarter this year was 22%, which is completely in line with the curve that in the end of the cycle will match with the 18% ACV we have announced. .

On the numbers themselves, we can see that the semester revenues reached BRL 512.7 million with a gross profit of approximately BRL 297 million, adjusted EBITDA of BRL 125.6 million and a net loss of BRL 27.3 million. .

And now I hand the call to Melega to continue with the final part of the presentation. .

Thank you, Clovis. As was commented on the slide showing our service platform, we are now going through a very peculiar period due to the pandemic, one in which the whole of the society has had to adapt to this period of social isolation. In this respect, Plurall crucially enable our partner schools to continue their school activity.

Having previously been used to provide support for students, the platform took on a key role in the Digital School, as we have called the transition from analog to virtual classroom environment. .

Since mid-March, when physical-presence classes were halted, we have counted more than 3 million live classes, 2.4 billion interactions inside the platform and 200 million activities using this tool.

1 in 4 of Brazilian basic education students enrolled in private schools have started using this resource, which the added attraction of not having to leave their homes, which shows how successful the platform has been. And this becomes even clearer when we look at Slide 15. .

Here, we see that we accounted for over 50% of all educational traffic generated by Brazilian private schools over the last 3 months. This is a very strong message because just when schools needed it, we had the platform that was best prepared to support oncoming demand, which was precisely Plurall.

This was only made possible by all our investment in digital transformation in recent years. But our work is not restricted to supporting digital transformation in schools. We want to increasingly become an integral partner for Brazilian private schools.

We believe that the post-pandemic world will highlight the need for hybrid schools, and Vasta is very well placed to support Brazilian schools as they transition to this new reality. .

Firstly, we have developed the whole digital sales strategy with an inside sales team remotely managing to run the entire sales conversion process inside the platform. This has been essential for the company to keep up the dynamism expected to generate a solid number of contracts for the coming year. .

Secondly, we are making a series of investments in Science in learning to further bolster the efficacy of our solutions and their results.

In other words, what we are now proposing for our partners in relation to the use of technology is not merely a palliative to help schools get through this difficult time but a whole range of solutions that will help migration and disrupt the analog model that is still very much rooted in the academic environment. .

Now let me turn back to Ghio for his -- for the final slide. See if his connection is available. .

[indiscernible] Next slide we're going to show is the [indiscernible].

Ghio, Ghio, we cannot hear you well.

Would you mind if I go through the last slide, please?.

Okay. Melega, please go ahead. .

Okay. Thank you. .

So on Slide 16, that is why we are fully convinced that we are now offering a winning proposal for all stakeholders.

For students, because in addition to innovative content of proven quality, they have a whole digital platform at their disposal, one that has increasingly sought to deliver a customized product that meets their real needs and ensures better learning.

For families who are able to monitor their children's development in real time, with a series of indicators available in our platform, in addition to the certainty that their children are using the best materials and will be better prepared to face any challenges they may choose for their futures. .

For teachers, who now have access to statistical data showing the performance of each student in each class, who can transmit a more assertive content in addition to having a complete platform of videos, games and questions to assist the pedagogical process.

And finally, for school owners who, in addition to having the best content solution and best digital platform, are getting satisfied customers as a means of avoiding evasion and being able to charge a price that ensures the best return. .

This message concludes our presentation. So now I will open our Q&A session. Thank you very much. .

[Operator Instructions] Our first question comes from Diego Aragão with Goldman Sachs. .

I guess the first question is on the competitive landscape. If you can just provide some details and some colors.

So how do you think schools are, let's say, willing to eventually change or adopt a different platform? And how positioned you are at this point to, let's say, to increase your sales, to increase the penetration of your platform? I think this will be the first question. .

Thanks for your question. Let me give you an overview about the competitive landscape and how we are moving our goals through it. .

We have a very large base of schools and with very low penetration in many of our products -- complementary products. So as Ghio mentioned, when he were talking about the mandala slide, we have much room to grow ACV just with our current customer base. I think this is focus number one. .

Secondly, we supported a lot of prospect schools on the first semester by providing our platform today -- to them free of charge to support their classes. And this became a new sales funnel for this year, a funnel that is actually moving really well. So we are converting schools that we helped during the crisis, giving our platform to them.

Now we are converting them into contracts. This is also helping a lot our sales campaign. .

And lastly, we have very strong skills in inside sales because we have been investing in this methodology for the last 3 years. We didn't learn how to operate in distance selling through -- during the crisis.

We have a large team with 40 members that does the inbound marketing, generating leads, qualifying the leads, and then presenting them to our closers that reach them to close the contracts.

So by leveraging on internal skill that we already have, we moved our 180 hunters to the same methodology, and we are keeping the pace on the sales conversion digitally. So that's my overview about what we are doing in the competitive landscape. .

[indiscernible] can you hear me fine?.

It's a little... .

More or less actually, Ghio. .

More or less, yes. .

Okay, Diego. I'll try to add some [indiscernible]. So what we are seeing is that [indiscernible] not competing very well this year because they didn't have the kind of technology schools need today to operate. So what is different this year is, who invested in technology? Who has the best digital platforms? We will -- we'll win this game in 2020.

That's the main difference from this year and all the other commercial years prior to 2020, right? So very important to highlight that it's again, for big guys and guys that are tech-enabled -- tech able to provide all the services to the schools, right?.

And secondly, I think it's important to mention that we are not seeing price as -- a war of prices, I mean.

Because of that, because it's a year where technology and being able to support the school is the name of the game, right?.

That's super helpful. I guess just maybe as a follow-up here.

When we look forward, what do you think you need in terms of new solutions and applications looking to your portfolio of offerings? I mean how should we be thinking about your strategy to either develop these internally or eventually to pursue M&A to add new features to your platform?.

Wait.

May I start, Melega, and then if the connection is bad, you continue, okay?.

Sure. .

Well, there is always a decision to be done, which is making or buying, right? When we see there is an opportunity to plug a new service in our platform, usually, if we consider that we should be able to develop the service, we do. If we consider it's a key ability, but we don't have that ability internally, we prefer to buy.

So the main decision of making and buying is if the key ability, we should be able to do or to acquire a company that is able to do it. .

If we don't consider that the ability, the skill, it's -- should be proprietary, then we can consider the third way to plug a new service into our platform, which is partnering and plugging just as we did with Matific. Matific is a company dedicated to gamification in math.

We didn't consider that we could do that kind of content, and we decided to partner and plug in our platform. So that's what is in our mind when we are looking for a new acquisition. .

Perfect. That's very helpful. If I may, just one very short question here and just because we got like a few e-mails and few questions from investors.

But can you just explain quickly the main difference between your accounting standard to Cogna's accounting?.

It's Clovis, speaking. Let's say, we have 2 different auditors, okay, different numbers, different criteria.

I would say to you, don't forget that in our case, we have the carve-out of 8 companies, let's say, composing our historical numbers, and this leads to some differences between the numbers of the 2 companies, okay?.

When analyzing Vasta, what we do is strongly recommend taking our figures, okay. They are all, let's say, built based on the same criteria. When analyzing Cogna, use them. What I can tell you is that difference is much more related to the past.

Things are now, if you compare the accumulated basis, are pretty much closed, and we should have no more difference from now on, okay?.

And one last comment, if I'm -- I'm pretty sure that in Cogna's call later this morning, we -- they will present a reconciliation, let's say, between the 2 numbers, okay?.

Our next question comes from Vinicius Ribeiro with UBS. .

Can you hear me okay?.

So, so. It's also not so well the line. Sorry. .

So just on a follow-up on the '21 go to market, can you give us an update on how renewals, and new sales and complementary services are going?.

one is regarding renewals, so retaining our base. And we had a very good start this year, especially because 90-plus percent of our school partners are 100% using Plurall, and we had a very significant conversion and renewals from the base. I can point out that renewals so far are much better from -- comparing to last few years. .

And regarding the sales campaign, we reached pretty much the 1/4 of the campaign because peak season is about to start. It's from September to November. And we had a great start in the first quarter of the campaign.

As I mentioned before, due to the Plurall and the conversions of the schools that we helped during the crisis with the freemium version of the Plurall, now they are being converted in long-term contracts on our base. But we still have much to perform on the campaign because 3/4 of the campaign will be generated this -- on the second half of the year.

And we are confident that we reach our goals. .

This is Ghio, speaking. I would like to complement Melega saying that, regarding to the complementary solutions area you asked, this is the first go to market that we really, I would say, we really organized the go-to market in the complementary solutions area.

Because last year, our first go to market [indiscernible] focusing on bringing new schools to our platform, right?.

And besides that, we have 6 products now to market in our complementary solutions, and compare it to the last year, we had only 2 products, right? So we see the cross-sell as a huge opportunity.

We did the research internally, and we discovered that if we are able to sell the 6 products we already have in our complementary area portfolio to all the students, we could reach more than BRL 900 million only in cross-sell opportunities.

So that's why we are super focused this year in making cross-sell in a better way than we did last year, right?.

Okay, perfect. If I may, and then I could hear you perfectly, Ghio. If I may, just on the 2020 ACV, part of the review on the number was related to some dropouts related to the pandemic.

Do you guys anticipate recovery in these contracts for 2021? Or did the schools went bankrupt?.

Great question, Vinicius. It's not -- I can start here, Melega. Let's have in mind that it's not -- we didn't lose the contract. But the schools, they faced a dropout, especially in the preschool, right, in the kindergarten. So we have the contracts.

The school is our partner, and we considered, as all the schools are also considering, that the preschool kids that today are out of the school because digital education for this specific age is almost impossible, these kids are going back to school at the end of this year or in the beginning of the next year.

So we consider that the first step for the next year is the full ACV of 2020, right? Because of these effects of kids -- young kids dropping out of the school is a transitory effect. At the end of this year, again, or in the beginning of the next year, we will see those kids back to school, and we will see the full 2020 ACV.

And on top of that, we are building the '21 ACV. .

Our next question comes from Ed Kuczma with BlackRock. .

Can you hear me?.

Yes, we can hear you well. .

Okay. Very good. So I just saw that in the second quarter, the EBITDA was impacted by some extraordinary expenses, such as higher PDA to align with the current situation, some higher tax expense and some inventory adjustments.

So can you just go through those? And like are we sure that they're not recurring? What makes them a one-off for this quarter?.

Okay. Good question. Just a reminder, the PDA was in the first quarter this year, okay, so we are adjusting. .

Regarding the PDA is that the BRL 5.7 million and also the nonrecurring expenses, the BRL 8.3 million -- I will start with the second one, the BRL 8.3 million.

Taking into consideration the following, this is 100% related to recounting that we had in our e-commerce inventory, okay? Don't forget, this is a business that we bought beginning '18, okay, from a family -- yes, family outfit. It was a family business.

And let's say, this year, when we start, let's say, integrating the business, we realized the need for a recounting, and then we had this BRL 8.3 million adjustment, okay? That's not the nature of the expense that we say should be adjusted because recounting inventory is -- happens in annually basis.

But we are, let's say, advise investors to consider this as an adjustment because we don't expect this amount of adjustment, BRL 8 million, in a recurring basis. Again, that was the first time we made given the integration. .

And with regards the PDA, this is 100% related to COVID pandemic, 19 pandemic, okay. That was an increase in our provision for doubtful accounts to adjust, let's say, the balance to what we have in terms of the momentum. These 2 are the main ones. .

Okay. So -- and the PDA, as you mentioned, it was 100% related to the first quarter.

Do you expect to have additional provisioning for doubtful accounts in the second half?.

Yes, yes. We -- that relates to adjustment that was made in the first quarter and appears in our figures here in the first half accumulated figures. .

And what's the outlook for provisioning for doubtful accounts for the second half of this year?.

No, there was no provision for -- the provision for doubtful accounts then that we had in the second quarter, we are not, let's say, advising to any adjustment because it's the regular business.

We do have in a regular way something -- about 1%, 1.1% of the revenues, okay, we expect as a provision, okay? And that relates to future expectations of losses.

Given the nature of the business of our business, we believe this is a quite low percentage, but it's okay and it's based on historical losses, okay?.

[Operator Instructions] Our next question comes from Marcelo Santos with JPMorgan. .

I have 2. The first question would be that in the media, there was some news saying that the schools that took Plurall free version, they committed to hiring some solutions from Vasta next year.

Could you just please clarify what kind of commitments were made? And like exactly that, what commitments were made?.

And the second question would be, I want to get your perspective on how the complementary solutions behave under a difficult macro scenario. We understand that the demand for core K-12 was very resilient. Parents would do the most to keep their children in private school.

But does that also apply to after-class activities? How are you seeing demand in face of like high unemployment? If you could comment on that, it would be great. .

Great. Marcelo, this is Ghio speaking.

I will start with your second question, and then I'll pass the floor to Melega to cover the first, okay?.

We are seeing a positive trend for bringing complementary education, Marcelo, to the school. Let's have in mind that families are already invested in complement or were already investing in complementary education, but outside the school. For instance, they were bringing their kids to a street franchise to teach English.

And that kind of activity is not the best way to provide English education today. So we are seeing that many families, they are concerned to make their kids traveling around the city to have the complementary education.

So families and schools are willing to have all the activities in the school but not in a presential way, right, not on-campus, not inside the school every day. .

So that's why it's so important to have Plurall because for core education and complementary education, this new normal for schools is to be a hybrid school. So for sure, Plurall, it's the backbone of everything and also because we are providing digital products in order to complement the students' education. .

When we say we are offering English Stars, part of the [indiscernible] can -- everything through Plurall, right? They don't need to go to school to have classes in English Stars. They -- if the school prefers, they go to school to have classes. But if the school is closed, they have classes using Plurall, and there is no problem. .

And moreover, we have many digital features that are helping students to have complementary solution in their homes as well. So by my -- in short, my answer is, the trend is positive for complementary solutions that are hybrid solutions with lots of digital features, right, and everything transforming the school in the new hub of the full education.

So for us, we see as a positive trend. For sure, for the street franchises will be a hard time. .

Regarding your first question about Plurall and what were the commitments that were made for the school, and the answer is none. There is no commitment whatsoever for the schools that used the Plurall freemium version during the crisis to commit with a contract with us.

What happens is a natural movement of schools that was -- that were supported during the crisis by us and are happy with the Plurall solution, they are becoming long-term partners signing contracts with us.

It's a natural movement but we did not require any commitment from them, and it was a very supportive action from Vasta's side, and this action is resulting in a good sales conversion. .

I'm not showing any further questions at this time. I would now like to turn the call back over to Mario Ghio for any closing remarks. .

Thank you. Thank you all for participating in our first earnings release, and hope to see you in the next, and have a good day. Bye-bye. Thank you. .

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..