[Non-English content] Good afternoon and thank you for waiting. Welcome to the video conference on the results of the second quarter of 2023 of Cruzeiro do Sul Educacional. I would like to point out that if you need simultaneous translation, we would like to inform you that this tool is available in the platform. All you have to do is to click in the interpretation icon in the bottom of your screen and choose the language of your preference, either Portuguese or English. For those of you listening to this video conference in English, you have the option to mute your original audio by clicking in mute original audio.
We would also like to inform you that this video conference is being recorded, and it is also available at the company's IR website at ircruzeirodosuleducacional.com.br, where the entire material of this earnings release call is also available. During the company's presentation, all participants will have their microphones disabled. After that, we will initiate the Q&A session. To ask questions, click on the Q&A button in the bottom of your screen and write down your question. Once your name is announced, a pop-up will appear on the screen indicating that you have to activate your mic to ask your questions. We suggest that all questions are asked at once.
We would also like to inform you that the information posted in this presentation and any forward-looking statement that might be made during this conference call related to Cruzeiro do Sul Educacional's business outlook, projections and financial and operating goals are based on beliefs and assumptions of the company's management, as well as on information currently available. Forward-looking statements are no guarantee of performance as they involve risks, uncertainties and assumptions as they refer to future events and therefore depend on circumstances that may or may not occur. Investors must understand that such general economic and industry conditions and other operating factors may lead to results that differ substantially from those expressed in such forward-looking statements. Here with us today are Mr. Fábio Fossen, Director and President, Felipe Coragem Negrão, CFO, and Luis Felipe Silva Bresaola, Investor Relations Officer.
Now I would like to turn the floor to Mr. Fábio Fossen to begin the presentation. Mr. Fossen, you may proceed.
Hello, and good afternoon, everyone. This is Fábio Fossen, the company's CEO. Welcome to our second quarter results presentation. We have completed our first year since the implementation of the organizational realignment resulting from the evolution of the group's strategy with the creation of the on-campus and digital verticals. Since then, we have teams dedicated to growing the business, seeking for more speed and assertiveness in decision-making, always with the ultimate goal of delivering the best experience to our students. The initiative to segment by BUs brought important gains to the business. In digital, we accelerated the growth of our student base in hubs, focusing on courses with higher added value in the hybrid and on-campus formats, which also allowed us to grow on the 100% online courses.
In on campus, we restructured the teaching curriculum as a way to deliver a better student experience, delivering higher quality and differentiate our products. Additionally, in June of 2023, we went into a partnership with Google Cloud, aiming to bring more innovation and quality to our products. These initiatives used our reference brand in distance learning, Cruzeiro do Sul Virtual, to launch the first two undergraduate courses in our portfolio, targeting an area that is in need of technology and cloud infrastructure professionals. This goal is to increase the employability of our students in the field, offering updated and hands-on training, which includes Google Cloud Platform computing resources and also preparation for certifications. In digital, we aim to improve our understanding of the current profile of young audiences who are digital natives and always connected to a broad virtual ecosystem.
We teamed up with FURIA, one of the most important organizations in the world in the electronic sports and gamer spaces. At first, the partnership intends to understand the behavior and also connect with an ecosystem organizing communities that include both youth and adults. We will get even closer to recent high school graduates and start developing engagement methodologies and courses focused on the gamer world. On the academic side, we made important progress in the international recognition of our institutions. UNIFRAN was again included in the Times Higher Education 2022 ranking, and for the first time, CEUNSP and Braz Cubas entered this prestigious ranking with more than 1,800 institutions and only 47 Brazilian ones, mostly public organizations, recognizing that our efforts to provide quality education are appreciated by our national and international peers.
Additionally, the Research.com ranking, which ranks the best researchers in the world, placed Universidade Cruzeiro do Sul among the best research institutions in the country in the areas of medicine, biology and biochemistry. In medicine, out of the 12 Brazilian institutions listed, we ranked tenth. In biology and biochemistry, we ranked 13th out of 24 institutions and number one among private institutions. Professor Dr. Rui Curi represents the university through the interdisciplinary master's and PhD programs in health sciences. Moving now to the operating issues, we ended the first half of 2023 with a 10% growth in the on-campus student base and 26.7% in digital.
We concluded the intake in the digital segment of the 2023.1 cycle with an expansion of 31.1% versus the 2022.1 cycle, and the acceleration of the intake in the period, combined with the expansion of 283 new partner hubs, contributed to the growth of the share of newcomers in our total digital base, generating a small impact on the average ticket freshmen plus veterans with a decrease of 1.7%. However, if we look at a veteran's ticket, we only grew 5% above the inflation. It is also worth mentioning that we managed to increase the penetration of students enrolled in hybrid courses with +3.0 percentage points vis-a-vis the second quarter of 2022, indicating our ability to grow in higher ticket products.
In on campus, we ended the intake with an 8.1% growth versus the 2022.1 cycle, with a slight decrease in the average ticket of around 1% due to the greater adherence to the ProUni program and the students who enrolled during the pandemic period. In re-enrollments, we maintain our improvement trend over the past three years. In on campus, we had 2.9 percentage points in addition in terms of enrollments and 1.9 percentage points in distance learning over the previous cycle, surpassing pre-pandemic levels. Considering that there is a natural pressure that could generate a deterioration in re-enrollment due to the increase in number of freshmen students, this continuous progress and improvement is a clear demonstration of the solidity of our academic model and the high quality of the experience we deliver to our students.
Moving on to the financial results in the second quarter, net revenue reached BRL 602 million, up 12.1% when compared to the previous year. Gross profit for the quarter was BRL 395 million, up 15.1%, with a gross margin of 49%, meaning 125 basis points versus the second quarter of 2022, and as a result of efficiency initiatives, as well as the termination of union agreements. Adjusted EBITDA totaled BRL 188 million, with a margin of 31.3%, an improvement of 159 basis points when compared to the second quarter of 2022, reflecting management initiatives to seek efficiency in G&A expenses, which mitigated the impacts of higher PDA, 8.9% of revenue versus 7.9% in Q2 2022. Net income stood at BRL 48 million, 3.3 times higher than the BRL 15 million of the second quarter 2022.
Operating cash generation was BRL 58.2 million, 151.1% higher than the second quarter 2022, and amounted to 44.4% of EBITDA ex IFRS. Now, I would like to thank you all for joining us during this call, and I will turn the floor over to Felipe Negrão, who will comment about our financial performance.
Thank you, Fábio. Moving on to Slide 5, we bring you the operating performance data of the non-campus undergraduate program, who ended the first half with 136,000 students, up 11% year-on-year, as a result of an 8% increase in intake over the 22.1 cycle and a three-percentage points improvement in the re-enrollment KPI. Health courses with a great appeal to on-campus and higher ticket remain relevant within our student base, representing 51% of on-campus undergraduate students.
We also present the global ticket data, which includes freshmen and veterans based on net revenue divided by the number of students at the end of the period, which showed a decrease of 0.3% year-on-year, impacted by the increased participation in ProUni, which grew one percentage point versus Q2 2022, and also by the mix of courses and units. On Slide 7, we bring the operating figures for digital undergraduate programs, which posted a 21% year-on-year growth, reflecting an increase in intake of 31% and an improvement of two percentage points in the re-enrollment KPI. The global average ticket, which includes freshmen and veterans in digital undergraduate programs, fell 4% versus second quarter 2022, mainly reflecting the mix of freshmen in the base and the challenging scenario of ticket pass-through in the hybrid courses.
The increase in the penetration of students in the hybrid modality was not enough to mitigate the increase in the base of fully online courses. Now, going to Slide 8, we bring you the performance of the consolidated digital student base, which grew 27% year-over-year. In addition to the stronger intake in the undergraduate courses in the period, we had the impact from the recovery in the post-graduate courses. Now, going to the financial details of the quarter, now on Slide 10. Our net revenue in the quarter stood at BRL 602 million, up 12% versus the second quarter of 2022, also as a result of a larger consolidated student base. In on-campus, courses focused on the health area grew by 12%, and the penetration of these courses was up one percentage point, reaching 68% of on-campus revenue.
In digital, revenue grew by 15.2%, reaching BRL 186.7 million as a result of the larger student base and the continued expansion of the hub base. In the first half, revenue reached BRL 1.1 billion, 12.2% higher than in the first half of 2022. On Slide 11, we show the gross margin for the quarter, which was 49%, 1.2 percentage points higher than the second quarter 2022. The increase in gross margin in the period reflects the efficiency initiatives in addition to the conclusion of negotiations with the union. Moreover, the costs line was impacted by the increase in the pass-through of hubs as a result of the expansion of revenue from digital and the student base in third-party hubs. The other costs line was mainly impacted by the increase in third-party services focused on the technology area.
In the first half, gross profit was up by 10.3%, reaching BRL 543.1 million. Moving to the next page, here we present the adjusted EBITDA, which in the quarter totaled BRL 188.2 million, 18% higher than the second quarter of 2022, with a margin of 31.3%, which is an improvement of 1.6 percentage points. The expansion of adjusted EBITDA in the second quarter 2023 is mainly a result of management initiatives in the pursuit of efficiency in general and admin expenses, which mitigated the impacts of the higher PDA as a function of the more challenging macroeconomic scenario in the period, coupled with the expansion of digital, which has higher PDA. Adjusted EBITDA reached BRL 351.5 million in the first half, 16.3% above the first half of 2022, with a margin of 31%, an improvement of 1.1 percentage points.
Now turning to Slide 15, we show the evolution of net income. Net income in the quarter was BRL 48.2 million, 3.3 times higher than the second quarter of 2022, reflecting the improvement in EBITDA, coupled with initiatives in search for efficiency in financial management, such as bank fee renegotiations, discount control, shorter duration of accounts receivable, and reduction of the gross debt. In the first half, net income totaled BRL 60.3 million, 3.3 times higher than the first half of 2022. In the next slide, we show the evolution in accounts receivable, which in the last 12 months stood at 44 days, an improvement of one day versus last year.
Now on Slide 17, we show the investments made by the company in the second quarter of 2023, which amounted to approximately BRL 55 million, an increase of 40% when compared to the second quarter 2022, reflecting the resumption of investment projects in infrastructure and technology focused mainly on improving the student experience. Investments in the first half of 2023 amounted to approximately BRL 83 million, an increase of 38% when compared to the first half of 2022. On the next slide, we detail our operating cash generation in the quarter, which totaled BRL 58.2 million, up 151.1% when compared to the second quarter 2022 and amounted to 44% of EBITDA after rentals. In the semester, operating cash generation was BRL 200.4 million, 63.8% above the first half of 2022, accounting for 82.6% of EBITDA after rentals.
Finally, on Slide 19, we bring the net debt excluding lease liabilities, which reached BRL 634.4 million when compared to BRL 572.4 million last year, mainly impacted by the execution of the buyback plan in the amount of BRL 58 million and the payment of dividends in the amount of BRL 25 million. With this, I conclude my remarks, and I turn the floor over to the operator to start the Q&A session. Thank you very much.
We will now initiate the Q&A session. I would like to remind you that to ask questions, you must click on the Q&A icon in the bottom part of your screen and then apply to ask your question. Once your name is announced, a request to activate your microphone will pop up on the screen, and then you should activate your mic and ask your question.
We would also like to ask you to ask all your questions at once. Our first question comes from Fred Mendes, a sell-side analyst from Bank of America. Fred, your audio will be available, and you can now proceed with your question. Please, Fred, you may proceed.
Good afternoon, everyone, and thank you for this call. I have two questions. My first question, it's more sectorial, I would say. We understand that you had a very strong first half. How much of that is related to a strong carryover of intake into the second quarter? How much of that positive carry-on will spill over to the second half? You explained it quite well when you talked about the distance learning ticket in the mix, and that's why there was a decline.
I would also like to understand whether there was any variation, in the past quarters if you saw other players being more aggressive. Thank you.
Hi, Fred, this is Fossen. In terms of that carry, we are very pleased with all of the re-enrollment issues in all of the areas where we operate. We also have the continued effect as part of our internal productivity program. To that end, this carry is interesting going forward. Now, in terms of pricing and price competitiveness in the market, we've seen some ups and downs, some large players in some particular moments, and in some courses, particularly distance learning, they spend some time adjusting their prices. We react or sometimes do not react depending on our strategy in terms of the way we build up our revenue as a whole.
But it hasn't been too different when you look at the other half years and other intakes in terms of deal. We both said that we've been working and putting a lot of focus on added value courses in terms of deal because we want to escape the difficult part of the market in terms of prices. This is just a bit of our strategy because we want to escape direct competition when it comes to price against price.
Thank you, Fossen. It's very clear. Thank you very much.
Thank you, Fred, for your question. Our next question is from Lucas Nagano, sell-side analyst from Morgan Stanley. Lucas, we will just open your audio, and you can now proceed with your questions. Go ahead, Lucas.
Good afternoon and thank you for taking my question. I have two questions. My first question is about the on-campus ticket.
I just want to understand what were the main things that led it to be stable. You're saying that you had an increased number of students, but when you look at that decline, and then you compare it with the ticket delivery that you had last year, 5%-7%, I would just want to understand the reason behind it and also the impact of the pass-through, especially in the medical courses. My second question relates to costs. I just want to understand what are the initiatives that led to the better performance of the gross margin and how structured this improvement should be going forward. If you can also talk about the collective bargaining agreements.
Hi, Lucas. This is Fossen. In relation to on-campus pricing, I think we already indicated in the first quarter that we have the issue of the mix of the units.
We have 25 buildings where we do the intake of the students, and each one of those have a different reality, and they face different demands in the different markets. That's why we operate very localized when it comes to providing different offers. There was an increase intake in units that had a lower average price when compared to others with a higher price. So, in terms of the mix, we are increasing the student base, not necessarily in our large units. We had increases in all of them, but some of them in particular had a more significant increase in intake.
This is not a topic that concerns us in this regard, but going forward, I think that the fact that we have quality institutions, well-recognized, it means that you can really differentiate our brands in the minds of the future students when it comes to the intake process. But it's always a point of attention, but it's not a focus of greater attention in our everyday work. So now I'll turn the floor to Felipe to talk about margins and cost.
Good afternoon, Lucas. This is Felipe. Okay. First of all, about FIES, I will just list a few important aspects. First of all, we do the reconciliation on individual student basis. The second point is we do it not only for FIES. Yes, the write-off is after 80 days of non-payment, regardless of the fact if I would have or not a return.
We always focus on a more conservative scenario. That is why the impact is very minor to us. Just to give you an idea, we are an organization that have always made very little use of FIES. We only have slightly over 1,000 students with FIES, and the difference with what we have in terms of revenue and how much we collect, it is very immaterial. We are talking about BRL 2 million or BRL 2.5 million per quarter. The impact is very small. When we have any good news of return, we will probably indicate that. But in terms of cost, we should look at the first half of the year. Our margins are very sustainable. Of course, the market is very competitive. Things may change, but we do not give any guidance. But I think this also shows that our gross margin is very sustainable.
We have had a lot of efficiency gains. As I said before, we made some very relevant renegotiations in all of the lines of the company, not only in terms of financial expenses like tariffs or energy and the purchase of textbooks and academic products, and also in terms of telecommunications. Looking ahead, we see some opportunities, especially in terms of rental renegotiation. We are renegotiating the leases with all of the owners, and this is also a very important point. Also, the carry of all of these negotiations, not all of them find themselves in a running rate because some renegotiations are being concluded and are not yet reflected in our results. We should see some further impact of the negotiations going forward. I think that is it.
Great. That is very clear. Thank you very much.
Thank you, Lucas, for your question. Our next question is from Yan Cesquim, sell-side analyst at BTG Pactual. Yan, we will open your microphone and then you can go ahead and ask your question. Yan, you may proceed.
Good afternoon, Fábio, Felipe and Bresaola. I have two questions. The first one is probably a follow-up from previous questions, and I would just like to understand how you see your next intake cycle. We noticed that in this first cycle, this was a very strong cycle in terms of volume, both for on-campus and distance learning, NDL. How do you anticipate intake in the second cycle, considering the fact that you are still growing your volumes and whether it would make sense for me to have a reading that giving the answer or the competitive scenario that the pricing dynamic should still remain as such. This is my first question. The second question is about CapEx.
CapEx is accelerating in terms of infrastructure investments, et cetera. What do you expect in terms of your CapEx level for the end of the year and also going forward in 2024 given the pipeline of infrastructure that you have? That is it. Thank you.
Hi, Yan, this is Fossen. We do not give guidance for future funding as a whole, but I think what I can tell you is that the constructive base of early this year is very good. So, it is bringing a good carryover for the entire period, entire year. We are within our expectations in terms of what we see from now until the end of the year in terms of intake and re-enrollments, both regarding prices and volumes. We remain quite optimistic with the fulfillment of our internal budget.
Hi, this is Felipe. About CapEx, again, we do not provide any guidance, but what is important to highlight is that all of our CapEx is mostly earmarked to improve student experience, and this should reflect prices further on and the differentiation of our product because then we can also apply better prices and productivity as well. I think we are very diligent in all of the projects that we operate. All the projects have to bring adequate returns to all the partners.
That is very clear. Thank you very much.
Thank you, Yan, for your question. Our next question comes from Caio Moscardini, sell-side analyst from Santander. Caio, your audio is available. It is already on. You may proceed.
Hello, good afternoon, and thank you for taking my question. I would just like to get some color on the potential M&As.
What about your M&A pipeline or whether you see that this is a topic that is improving or it is moving along or progressing well?
Hi, this is Fossen. I will repeat what I said in the past quarter and previous quarters. We are constantly looking at new opportunities. We have some available cash to look for opportunities and then grow the organization. We are always looking at several opportunities, but the moment is yet to arrive. But we are constantly looking because we want to grow. And we are also very keen of the educational industry, and this is a very important segment as we have cash at the moment. If a good deal appears, we have to look at the opportunities as they come.
I just have a quick follow-up, and Fossen, thank you for your answer. What is the leverage level that in your view is comfortable for the company?
We do not comment on that. We cannot give you any guidance about that, Caio.
Sorry. I am sorry. Okay. Fine. Thank you.
Thank you for your question, Caio. And our next question is from Luca Marchesini, a sell-side analyst from Itaú BBA. Luca, we will just open your microphone, and then you can go ahead and ask your question. You may proceed, Luca.
Good afternoon and thank you for taking my question. My question relates to your medical courses. There was a decision by Justice Gilmar Mendes. I would like to hear your opinion about that decision, and what is the outlook for your medical courses and how could that impact the company's business? Thank you.
Hi, Luca. This is Fossen again. In terms of the recent decision by the Supreme Federal Court, Justice Gilmar Mendes, we are still waiting to see the final opinion from the Supreme Federal Court and what will be the response from the Ministry of Education. But regardless, we are getting prepared to face any possible scenario and also try to take advantage of all the opportunities regarding the medical courses. We have some injunctions, but we do not comment on them. But everything depends on this Supreme Federal Court decision so that we can have a more clear view of what will happen. There is a new bidding document, and nobody knows what that will entitle. So, so far, it is just speculation, and it is too soon to say anything about that.
Perfect, Fossen. Thank you.
Thank you, Luca, for your question.
I would like to remind you that for questions, you must click on the Q&A button in the lower part of your screen, then sign up to ask a question. The Q&A session is now concluded. I would like to turn the floor to Mr. Fábio Fossen for his final remarks. Please, sir, you may proceed.
Thank you all for joining us today. I would like to reinstate what I said at the beginning of my remarks related to all of the fruits that we are getting from our new strategy, and this is becoming more visible to everyone in the market. Also, I would like to emphasize that much of that comes from long-time topics in the company, and that relates to our care with the quality of education. This is part of our DNA.
We are native educators, and that has led us to be recognized by our peers, both domestically and abroad. Mainly, this acknowledge comes from our students. Our re-enrollment is increasing since the end of the pandemic. Our intake ratings are increasing. This proves that we have the approval from students, and the quality of our faculty members is extremely good. Also, this proves the quality of our education methodology. This has been a constant revolution on the part of the company since we started this reorganization work some one and a half years ago. We are focused on our continuous growth, building the blocks that will lead us to further evolution. At the same time, we are getting ready to grow in different scenarios and taking all of the opportunities that may arise.
Most importantly, I have been dedicating a lot of my time, in addition to the M&A and the strategic topics, I have been dedicating part of my time to putting together a group of executives, managers, faculty members of great professionalism. We grew the company, and in the past quarters, I have been referring to all the work we are doing to build up a winning team inside Cruzeiro do Sul Educacional. Now the team is playing ball without even looking, and they are working as a team, and that is really cool. This is a very positive moment for us right now, and we are very excited. We are very excited to grow going forward, no matter the landscape. Thank you all very much, and have a very good day.
Cruzeiro do Sul Educacional earnings release call for the second quarter 2023 is now concluded.
The IR department is available to answer any other questions that you may have. Thank you all for those who joined us today, and have a very good afternoon.