Hello, and welcome to the Vasta Platform First Quarter 2023 Financial Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I'll now turn the conference over to Marcelo Werneck, Vasta's IR. Please go ahead..

Good evening, everyone, and thank you for joining us in this conference call to discuss Vasta Platform's first quarter of 2023 results. I am Marcelo Werneck, Vasta's IR. And with me on the call today, we have Guilherme Melega, Vasta's CEO; and Cesar Silva, Vasta's CFO. Before we begin, I'd like to read our forward-looking statements.

During today's presentation, 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 includes, 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 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 today as well as those more fully described in our filings with the Securities and Exchange Commission.

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 the 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. Let me now give the call over to Guilherme Melega to make his opening statements..

Thank you, Marcelo. Thank you all for participating in our earnings release call. I would like to cover the Slide#3 with some highlights of the 2023 cycle to-date.

This first quarter also represents halfway through the 2023 commercial cycle, which goes from October 2022 to September 2023, and we have delivered all of our economic and financial results as per our guidance.

Vasta concluded the 2023 cycle to-date with a 18% subscription revenue growth over the same period of last year, which translate in subscription revenues totaling R$801 million.

Complementary solutions continues to present the highest growth rate among the business segment, with a 44% expansion in the cycle to-date compared to the same period last year.

As anticipated in the previous quarter, the 2023 ACV is slightly less concentrated in the first two quarters with a cumulative ACV recognition of 65% compared to cumulative ACV recognition of 66.5% in prior commercial cycle to-date. This is due to the differences analogy and mix of products.

The non-subscription segment as expected grew 9% in this commercial cycle and it represents now only 12% of Vasta's net revenue. Thus, in 2023 cycle to-date, the net revenue grew 17% to R$908 million. Moreover, we continue to see the normalization trend of the company's profitability and cash flow generation.

Vasta's adjusted EBITDA grew 10% to R$332 million and reached a margin of 36.5%. It is worth mentioning that the adjusted EBITDA and adjusted net profit were negatively impacted by the R$50 million due to provision for doubtful accounts made in connection with a large retail that entered in bankruptcy proceedings in Brazil.

Vasta's free cash flow totaled R$36 million in the first quarter of 2023, a significant 188% improvement from the R$13 million in Q1 2022. In the 2023 cycle to-date, free cash flow totaled negative R$7 million, an 89% improvement from negative R$65 million in 2022 commercial cycle to-date.

Worth mentioning that free cash flow to adjusted EBITDA conversion rate measured for the last 12 months period improved from a negative 52% to a positive 31% as a result of the company growth and constant efficiency pursuance. And finally, we would like to introduce two growth opportunities that we will be pursuing as a relevant for Vasta this year.

An important pillar of our growth agenda Start-Anglo continues to ramp up and in the first quarter of 2023, we acquired 51% interest in capital of Escola Start Ltda.

It is a flagship school focusing on promoting bilingual education with high performance in responding to an increasingly strong demand from families and students for academic excellence, bilingual education and innovation.

This will be a modern institution for the franchise project that we have launched this week at Bett Brasil, the biggest education event in Latin America.

Another key aspect of our business we would like to highlight is that starting this year Vasta entered with its products and service to the Brazilian public sector B2G, our broad portfolio of core content solutions, digital platform, and complementary products together with customized learning solutions tested over decades by the private sector, will now be available to K-12 Public schools.

K-12 Public sector in Brazil comprises more than 32 million students 5x the number of students in the Brazilian K-12 Private sector. Both initiatives will be covered in more details ahead in this presentation. I will now turn back to Marcelo Werneck who will talk about the financial results of the quarter and the 2023 cycle to-date..

Thank you, Guilherme. In this slide, we present the composition of Vasta's net revenue. As you can see on the left side, in the first quarter, total net revenue increased 6% organically year-on-year to R$403 million. Moving to the right side we can see the components of the revenue growth.

In total subscription revenue grew 7% excluding PAR subscription revenue increased 10% year-on-year, reflecting the superior quality of revenue mix in the 2023 ACV.

PAR net revenue fell 15% to R$31 million and the non-subscription revenue decreased 3% to R$46 million, which is aligned with our strategy of shifting revenue from textbooks to learning system and digital platform. Moving to Slide#5. We analyze the net revenue for the 2023 commercial cycle to-date.

Net revenue grew 17% organically in 2023 to R$908 million. From the center to the right, total subscription revenue grew 18% on an organic basis. Subscription revenue excluding PAR jumped 22% to R$703 million, while PAR revenue went down by 3% to R$908 million.

Subscription revenue, which affords greater loyalty, profitability, and results predictability represents now 88% of our total revenue, while non-subscription revenue represents now only 12% of our total revenue. Moving to Slide#6. We analyze the performance of the revenue in comparison to the guidance provided last quarter.

In the last quarter, we provide the guidance for net revenue subscription revenue and non-subscription revenue. We can now confirm that both the quarter and cycle results to-date were in accordance with our guidance range with the subscription revenue at the upper end of the guidance and the non-subscription revenue at the low end of the guidance.

Worth mentioning that 2023 ACV cycle to-date reached 65.1%. Moving to Slide#7.

Adjusted EBITDA in this quarter totaled R$131 million and reached the margin of 32.6% impacted by higher inventory costs caused by rising inflation on paper and production costs that were partially offset by gains in operating efficiency, cost savings, and the sales mix that benefited from the growth of subscription products.

On the right side of the slide, we see that adjusted EBITDA for 2023 cycle to-date increased 10% reaching R$332 million and the margin of 36.5%.

It's worth mentioning that cycle margin was negatively impacted by the R$15 million, which represents 170 basis points due to the provisions for doubtful accounts made in the first quarter of this commercial cycle in connection with a large retail that entered into bankruptcy procedures in Brazil. Moving to the next slide.

In the first quarter of 2023, adjusted net profit totaled R$26 million, and in the 2023 commercial cycle to-date adjusted net profit decreased 6% to R$98 million. Moving now to Slide#9, we show the free cash flow evolution.

In the first quarter of 2023, free cash flow totaled R$36 million an improvement of 188% from a free cash flow of R$13 million in the first quarter of 2022. In the 2023 cycle to-date, the free cash flow totaled negative R$7 million, also an improvement comparing to previous year, which had a consumption of R$65 million.

I would like to draw your attention to an important measure of the financial results of Vasta as we continue to see the normalization of the company's profitability and cash flow generation.

The last 12 months adjusted EBITDA to free cash flow conversion rate improved from negative 52% considering the periods from the second quarter of 2021 to the first quarter of 2022 to a positive 31% considering the periods from second quarter of 2022 to the first quarter of 2023.

This is a result of the company's growth and constant efficiency with forcing the message that cash flow generation continues to be a key areas of focus of our business. Moving now to Slide#10, I will give you more details on the provision for doubtful accounts.

Reported provision for doubtful accounts, PDA, grew 1.8 percentage points between the compared commercial cycles.

This increase in PDA was due to the provisioning of 100% of accounts receivable on a larger retail company in Brazil, undergoing bankruptcy procedures in the amount of R$50 million and represents 1.70 percentage points of our growth in the reported provision for doubtful accounts in the 2023 commercial cycle to-date.

Excluding this factor, the participation of the PDA in relation to Vasta's net revenue remains stable, 2.6% in the 2023 commercial cycle compared to 2.5% in the 2022 commercial cycle. Moving to the next slide. We see the average payment terms of Vasta's accounts receivable portfolio was 199 days in the first quarter of 2023.

One day higher than the first quarter of the previous year, and align with the seasonality of our business. I will conclude my part of this presentation, which is Slide#12. As of the end of the first quarter of 2023, Vasta's recorded net debt in the amount of R$1.42 billion equal to the net debt position of the fourth quarter of 2022.

The impact of higher interest rates was offset by the cash flow generated in the period. In comparison to the first quarter of 2022, net debt position increased by R$103 million due to the impact of higher interest rates and investments made in the minority stake acquisition of Educbank and the acquisition of Phidelis in the first quarter of 2022.

Both of which were partially offset by our positive cash flow generated in the period. The net debt by the last 12 months adjusted EBITDA of 2.85x as of the first quarter of 2023 is 0.07x higher than the fourth quarter of 2022 and the 0.82x lower than the first quarter of 2022 in the comparable quarter.

With that being said, I pass the word back to our CEO, Guilherme Melega, who will give you more details about some of our growth initiatives..

Thank you, Marcelo. Let me now bring you more color on a new revenue streamline that is the public sector or B2G. Starting in the first semester, we begin offering our products and services to clients in the public sector in addition to our existing private schools client base.

Our broad portfolio of core content solutions includes for the public sector. Our existing Plural platform as a virtual learning environment, printed and digital structure content, adaptive diagnostic assessment and teaching, and the preparation of students for the public sector for main Brazilian assessments such as SAEB and ENEM.

Moreover, we have a robust portfolio of existing complementary solutions such as computation thinking and social and emotional and bilingual. As we can see in the graphic in the far right, the total K-12 sector in Brazil comprises more than 39 million students according to the latest census.

Of this total 83% or 32.8 million comprised students from the public sector and only 17% or 6.6 million are students enrolled in the private sector.

We know that our country is very unequal in providing quality education for part of the population we won't increase inequality, which does not speak to our ESG agenda as we can certainly capture good results by entering the public sector. The total addressable market for the public sector is more than R$406 billion.

Our initial assessment taken into consideration the areas of prioritization and our penetration capacity, we estimate a prioritize service addressable market of R$1.9 billion. We're not providing any guidance of this segment, but that as we begin to capture revenue from the public sector, we'll provide full disclosure about it. Moving to Slide 15.

Let me give you some update on the Start-Anglo. In this quarter, we acquired a 51% stake in Escola Start Ltda for R$4.5 million. Escola Start is located in São José do Rio Preto, São Paulo.

And it'll be our flagship school boosting our entrance in the bilingual franchise business in response to an increasingly demand of families and students for academic excellence. In this case, powered by Anglo content bilingual education and innovation.

The launch of Start-Anglo implies low CapEx and high know-how as we capture the synergies from existing products combine it together. This will be a modern institution for the franchise project that we have just launched this week in the Bett Brasil here. I'll end my presentation with Slide 16.

We are proud to say that Vasta's brands maintained leadership in numbers of approval in the admission test of Brazil best universities according to SISU, the unified selection systems.

Our top of mind brand Anglo expanded its leadership in admissions across the best universities and is the most competitive career in the country, with an overall increase of 12% in admitted students compared to 2022 and near 12,000 students approve it overall.

The top performance at Brazil's best university is among the key attributes considered by K-12 schools when choosing accountant partner. Having said that, I will finish our presentation, and invite you all to the Q&A section..

Thank you. [Operator Instructions]. Your first question comes from the line of Marcelo Santos with JPMorgan. Please go ahead..

Hi, good evening. Thank you for taking my questions. I wanted to explore a bit the B2G initiative.

How does the go-to-market work in this segment? I mean, what's -- are you going to cities or states that have, I don't know how to say this digitized bidding processes open? Are you going to -- like how are you going to approach and deal with this product? I think -- and what's the timeframe for you to start generating these results? And the second question, what did you include in the SAM of R$1.9 billion? It is mostly content that the cities or states would use to replace the national book program content or are you considering more other services? Thank you..

Hi, Marcelo, thank you very much for your questions. Let me give you more color about B2G. So on the B2G initiative; we are focusing to serve large public systems, either states or big municipalities. And we are targeting to enhance the learning of students using digital platform, adaptive diagnostic assessments, and preparation for SAEB mainly now.

And the way we are approaching it is definitely reaching the big states and large municipalities for auction process and open opportunities to serve with this products. We establish a Business Director that are pursuing these opportunities and we have right now some good contracts being discussed.

Regarding the SAM, representing the R$1.9 billion here, and this is the prioritized large municipalities and states with the basic teaching materials and platforms and assessments. We use it external consulting firm to help us to target those top large public systems..

Your next question comes from the line of Lucas Nagano with Morgan Stanley. Please go ahead..

Hey, good evening. Thanks for taking our questions. We have two. The first one is on cost. Should the paper inflation keep pressuring margins for the rest of the cycle or do you see some room for improvement? And what are your expectations for the next cycle? And the second questions -- second question is also about the B2G strategy.

I wanted to understand how's the business model exactly? Are you selling the exact same product or do you need to make some type of adaptation? And from the strategic point of view, why are you seeking to do this now?.

Thank you very much, Lucas for your questions. Let me start with the margins. We expected the price increase in paper and printing and it's already factored in our numbers. What we are pursuing this year is to be around the 30% EBITDA margins, the 30% level. We do not expect any other impact that is not reflected on the figures right now.

You mentioned the cycle. I understand that you were asking for the sales campaign for 2024. We already launched the GTM for 2024. We are very excited with the initial numbers. Normally up to April to the end of April, we account for 10% of the total growth of this -- of a normal cycle, and we are seeing very positive figures from the very beginning.

Regarding B2G strategy, we are not -- we are -- the contracts that we are discussing right now are very customized contracts to enhance the learning process of students leveraging on all of our digital tools.

The platform adaptive diagnostic assessments and some of the discussions with tailor made solutions and content for them to address their specific needs on their public system. So we do not plan to use our products in the private market to serve the public.

We are counting on leveraging our scale for digital solutions to serve the public sector with products. And everything that we are pursuing right now are white label products for the public sector. And we're doing it right now; obviously do because of the large TAM of the market.

And now we have the technology and the products to scale up with digital solutions for the public sector. Thanks for your question, Lucas questions..

[Operator Instructions]. And you have a follow-up question from Marcelo Santos with JPMorgan. Please go ahead..

Thank you for providing the follow-up opportunity. I wanted to understand better if there's going to be a margin impact of this B2G initiative given that you're using different products.

Are we -- this something that's going to be noticeable maybe in the cycle or -- and cycle already gave the idea of the margin 30% for the year, but in the next couple of years, is this going to impact somehow your margin profile? And the second question is regarding the franchise model that you announced using this school -- start school that you acquired, how does a franchise model differ from, for example, a school client of yours that adopts Anglo and puts the Anglo brand? I mean, what are the main differences between these two models? Thank you..

Thank you, Marcelo for your questions. I would say regarding B2G margins, I would say that it's too early to tell about their margins since it'll be based on digital materials mainly. We do not expect lower margins than the public market, than the private market, but it's too early to tell. We don't have any contract yet.

But we definitely expect to be very sound margins since it is digital.

Regarding the franchise model that that we are just launching at [indiscernible] with the -- our flagship in São José do Rio Preto, we bundle together Anglo Solutions with a brand new curriculum of bilingual product tied up with innovation materials such as headbands and other tools with a different, it's not the same product of a regular private school we have access to.

And we are also leveraging the new brand of Start, putting everything together, we will set a new pricing point for new entrance. We have this model already established in São José do Rio Preto. São José do Rio Preto has an Anglo and an Anglo-Start, and they're completely different schools with different publics serving different targets.

We're very confident that this will be a very sound business of franchise providing the full know-how to a new entrant in the business..

There are no further questions at this time. I will now turn the call back to Guilherme Melega, CEO..

Thank you, all very much to participate on Vasta Q1 conference call. We are very excited about the new growth opportunities on B2G and on Start-Anglo. And we had a very good start on our sales cycle for 2024 campaign. And lastly, we're very proud of our students' performance in 2023 university mission cycle.

And we are very, very excited about the perspectives of 2023 results and 2024 commercial cycle. Thank you very much. Looking forward to see you all in Q2..

This concludes today's conference call. You may now disconnect your lines..