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Edited Transcript of ANIM3.SA earnings conference call or presentation 13-Aug-19 1:00pm GMT

Q2 2019 Anima Holding SA Earnings Call

SAO PAULO Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Anima Holding SA earnings conference call or presentation Tuesday, August 13, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* André Tavares Andrade

Anima Holding S.A. - CFO & Member of the Executive Board

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Conference Call Participants

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* Caio S. Moscardini

Morgan Stanley, Research Division - Research Associate

* Joao Noronha

Santander Investment Securities Inc., Research Division - Head of Capital Good and Conglomerates

* Leandro Bastos

Citigroup Inc, Research Division - Research Analyst

* Marcelo Peev dos Santos

JP Morgan Chase & Co, Research Division - Senior Analyst

* Roberto Waissmann

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Samuel Campos Alves

Banco BTG Pactual S.A., Research Division - Research Analyst

* Susana Salaru

Itaú Corretora de Valores S.A., Research Division - Sector Head of telecommunications, media and technology

* Thiago A. Bortoluci

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. Welcome, everyone, to Ânima Education Earnings Results Conference Call to the Second Quarter of 2019. Today, with us, we have André Tavares, Chief Financial Officer; Marina Gelman, IR officer; and Isabella da Cunha, IR analyst.

It's important to note that the company released yesterday its IR website a video explaining its results for the period. So therefore, this conference call will be solely dedicated to Q&A session. Participants will be able to ask questions in Portuguese and in English, and the company will make the transcription available in both languages in its IR website. (Operator Instructions)

Audio is being simultaneously broadcast to www.animaeducacao.com.br/ir and our MZiQ platform.

Before proceeding, we would like to inform that forward-looking statements are being made during this conference call relating to Anima's business prospects, operational and financial estimates and goals that are based on the beliefs and assumptions of Anima's management and on information currently available. Forward-looking statements do not guarantee future performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur.

Investors should understand that general economic conditions, sector conditions and other operational factors could also affect Anima's future results and could cause these results to differ materially from those expressed in such forward-looking statements.

Let me now turn it over to Mr. André Tavares.

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [2]

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[Interpreted] Good morning, everyone. We would like to thank you all for being here and the interest for our earnings and results. As you all know, we presented the results of the second quarter yesterday after closing of the market. Together with the releasing, we also published a video, which has become common practice in our company.

In honor of our plan of efficiency, agility and respecting everyone's time, we are going to go straight to our Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Joao Noronha, Santander.

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Joao Noronha, Santander Investment Securities Inc., Research Division - Head of Capital Good and Conglomerates [2]

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[Interpreted] Great results. I would like to ask about intake in the second half. Tell us more about your evolution and competition, please?

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [3]

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[Interpreted] Thank you, Joao. Our intake profit has already grossed more than half. We are coming close to 60% of our intake profit already covered. It has been aligned with our expectations. The difficult traffic, though we don't see any significant changes in the competitive outlook, it's still very fierce, but still we haven't noted any deterioration or worsening of the situation. We are fully committed, as we've said before. And as we've published in our communication materials, we are focused on average ticket, managing this topic very closely and having a good correlation between intake and average ticket. This is what I can tell you about this topic.

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Joao Noronha, Santander Investment Securities Inc., Research Division - Head of Capital Good and Conglomerates [4]

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[Interpreted] Good. I have one second question, something about ROIC. If we observe the margin in all the different segments, you have been performing quite well in your expansion of margin, but to get to ROIC, you got it flat. Is there anything else that you've been discussing to try to speed up ROIC in the short term or anything else?

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [5]

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[Interpreted] ROIC expansion has been addressed in 2019. We still have a very high volume of CapEx because we've opened new campi, but our margins, as we've projected them, and lower pressures over CapEx will probably mean ROIC going up sustainably. No major surprises, but all our projections do indicate a positive evolution of ROIC.

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Operator [6]

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Roberto Waiss (sic) [Roberto Waissmann] from Bradesco.

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Roberto Waissmann, Banco Bradesco BBI S.A., Research Division - Research Analyst [7]

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[Interpreted] My question concerns nonrecurring expenses, especially the ones dedicated to restructuring. Could you please tell us more about that and explain how do you expect to get this line close to 0, as you've pointed out before? Is it something that we can expect for the second half of the year or just 2020?

Secondly, can you please tell us how have you been focusing on new acquisitions, especially in health care area, medicine? Are you really -- in addition to the acquisition of AGES, are you also going to expand your exposure in the segment involving additional tickets or maybe a spin-off? Can you please shed some light on it?

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [8]

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[Interpreted] Thank you, Roberto, for the questions. Concerning nonrecurring expenses, we are fully committed with our actions to get nonrecurring expenses to as low as possible. We've been very strict about it. If you look in first half -- over first half '18, we still have a level of nonrecurring expenses much lower than in the previous half 2018, and we do not believe that this level of nonrecurring expenses will suffer major oscillations in the second half. Nonrecurring expenses are concentrated on some academic restructuring, especially in some units where we have new career plans. As we have the rollout of these new career plans, we still have some nonrecurring expenses until the faculty base is really fully normalized.

In addition, there are some academic products that we have discontinued, especially in graduate degrees, associated graduate studies. So [we go with] all that Board, we have worked with very objective criteria on defining nonrecurring expenses. Therefore, I do not expect to have any surprises there. The fact that it is close to 0 does not depend only on us. It depends on the nature of the expenses. If it's something just attributed to restructuring, after we analyzed that, we've really agreed that it's nonrecurring. I think that is the best way to show that to the market. Classifying it as nonrecurring expenses is something that's not going to be there again. So it's a point [for attention] and we've been very strict about managing it appropriately.

Concerning new acquisitions. Yes, we are very active and paying attention to new potential opportunities of acquisitions according to our history, strong brands. And concerning the health vertical of courses, we have been working on it since the end of the first quarter last year. We have set up a team highly experienced in opening health care-related courses, especially medical courses, this team has been working for over 1 year in strengthening the health vertical and also creating new products for it, and the acquisition of UniAGES was one step resulting from the work that has been in place for over 1 year. So yes, we are highly optimistic about this health care optimistic -- vertical. We've realized it is something already positive and relevant for Ânima, and we think it's going to get even more relevant as a result of other M&As we execute in the upcoming months.

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Operator [9]

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Susana Salaru with Itaú.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head of telecommunications, media and technology [10]

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[Interpreted] Can you please elaborate on your efficiency strategy? Which are already prepared ready and which still have room for maturation? In the second half, we've seen a contraction of margin in your mature units. Can you please tell us what happened, and what are you projecting for upcoming quarters?

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [11]

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[Interpreted] Thank you, Susana, for the question. We have some initiatives of efficiency that were implemented from the first quarter to the second quarter and probably still have impact as of the third quarter. We are all focused on what we call our base, our base operation -- mature base operation. We have combined -- merged, so to speak, some units near the metropolitan region of Minas Gerais and in the outskirts of the state of Minas Gerais and we have also merged 2 units in the state of Santa Catarina. And these units, we are not going to lose any students, most students have already reenrolled in the units. So these were units in which we realized there was room to gain more synergy by bringing together units, especially in cities where we already have 1 campus and end up buying a new one. So Catalão or Jaraguá do Sul, these are cities where we already had a campus, acquired new units and end up concluding that we could gain more efficiency and synergy by bringing them together and also bringing together a group of campi in the metropolitan region of Belo Horizonte.

These are initiatives that are going to help us consolidate the concept of regional centers. Minas Gerais and in Goiás, we have 2 brands, Una and UniBH. And now we have realized that a more efficient concept would be of having regional units. So we have a regional unit Minas Gerais and Goiás gaining in synergy in the G&A of these units, bringing together administrative, clerical tasks more efficiently, using our teams working for both brands and these are results that are going to be more significantly noticed in the second -- in the third and fourth quarter, as we implemented them right now in July.

So efficiency initiatives are highly concentrated on our base operation. And as you've pointed out, it is -- we don't expect growth in this mature unit. But all these efficiency initiatives that we have put in place have led to an operating margin sustained, especially for the base operation. Our operating margin of the base operation has -- isn't improved if we compare the first quarter -- first half '18 to first quarter '19, we went up to 34.9%. But with the reducing revenues of the units, the operating result [introduced] somewhat lower, but it was to some extent, expected. We knew that we would have to face some difficulties, especially in the metropolitan region of Belo Horizonte. Everyone is aware of the situation in the region, I don't think I need to say anything else. But we are highly confident that expansion of margin that we have had from organic expansion and the new initiatives of efficiency in our base operation will mean additional margin in all different operations. But we have 1 operation of acquisitions performing quite well, especially UniSociesc. We have set the right path with margins very close to the base operations margin.

So in a nutshell, efficiency initiatives are still ongoing and focused on our base operation because acquisitions and organic expansions are following their own business plan and the ramp-up with very good performance, even better than what was initially expected.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head of telecommunications, media and technology [12]

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[Interpreted] Just a quick follow-up. The units that are being merged, I suppose you have rented the real estate. Once we just conclude or terminate your contract, are you paying penalties?

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [13]

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[Interpreted] Well, in some -- in 1 case out of 4, the contract was coming to its natural expiration so there is no penalty being paid. The other 3 contracts, yes. But the penalties were all -- for terminating the contract were not relevant at all, nothing that would have impacted the closure of the units. And of course, these additional expenses were included in the efficiency gains we had, and still it was worth doing it.

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Operator [14]

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Samuel Alves with BTG.

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Samuel Campos Alves, Banco BTG Pactual S.A., Research Division - Research Analyst [15]

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[Interpreted] I have 2 questions. Tell us about the opening of new units. You had planned 8 new units in the beginning of the year. Are you going to focus on dealing with your current expansion and developing it and then maybe next year go about opening new units?

And concerning what you said about the intake process and how hard it is, can you please tell us about the competitive arena in all the different regions? That would be very helpful.

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [16]

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[Interpreted] Thank you, Samuel, for all these questions. Concerning opening of new units, let me reinforce what you've just said. For the past 3 years, we've opened over 20 units, very significant number. So for 2020, we thought it was high time we could really benefit from the maturation of those acquired units. So we focused our expansion strategy on M&A or transformational initiatives and corporate-sized M&As, which speed up the growth of the company, such as the 3 M&As we had last year in cities where we already had campus, acquiring other organizations so that we could gain synergy and expand our growth in existing units. So this is our strategy. This is what we are planning for 2020. But it doesn't mean that for 2021, we won't think again about opening new units, but that will be 2021. But for 2020, we will probably just working on developing the current campi and also working on M&A.

As to competition, along the lines of what I said in the first question, we haven't seen major changes in what we've noticed in recent years. São Paulo is highly competitive, it goes without saying. We know that this is the case in São Paulo, and we haven't noticed any changes. Nothing putting more pressure on competition or favoring it, just stability.

In Minas Gerais, we have been observing throughout the years more pressure in terms of competition, especially because of the economic situation of the state and of the city of Belo Horizonte, all the problems with mining, which is prevalent in the region. So we have seen an increase in competitiveness, especially in metropolitan region of Belo Horizonte. But to present, nothing seems to surprise us or impact our most recent plans.

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Operator [17]

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Thiago Bortoluci from Goldman Sachs.

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Thiago A. Bortoluci, Goldman Sachs Group Inc., Research Division - Research Analyst [18]

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[Interpreted] I have 2 questions and 1 follow-up. One follow-up is on what Susana asked, the migration to the concept of regional offices, would it be 1 first step for merging the brands or not? Do you plan to have the brands separated?

My questions. You've been talking about price management -- or efficiency of price management strategy for a while and this focus is going on a normalized base in the second half. Question is about thinking about a normalized neutral management going into price inflation?

Secondly, HSM and other businesses have got different seasonality, so how can we expect that for the second half of the year? So these are my questions.

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [19]

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[Interpreted] Thank you, Thiago, for your questions. Regional offices. No, we are not thinking about combining or merging the brands. We know the importance and what our brands mean and we want to maintain them. Creating a regional office is a way of organizing our inside tasks, so reducing shadowing areas, obtaining more efficiency and working as a team. But in our communication strategies, in our relations with the community, Una and UniBH are strong brands, which will be strengthened as such. So it's just an issue of internal work or back-office work.

In terms of efficiency price strategy, as you very well pointed out, we've been focusing our efforts on it. This is the #1 topic for the company, but we know that there is a competitive demand, which is not on us to decide, and it applies pressure on the ticket as well as the carryover of intakes we had in previous periods. So this is why it has taken a while to have a reaction of the average ticket.

But we are quite confident. We expect that in 2020, we will start seeing a new trend or a reversion of this trend. But I think it's too early to say -- to attest that we are going to have growth in ticket because this item is highly influenced by competition. Therefore, our initiatives will generate effect and I hope to see them as of 2020, but this is something that we have to go little by little. It's not something that we will ever stop doing.

Concerning HSM. HSM has its results fully in line with what we expected for the year. First half of the year, especially second quarter, was not as good compared to previous years, not because of the results of the second quarter per se, but rather because of the exceptional results that we had in the second half of last year when we have the first edition of Summit Singularity. So it was something completely off the curve, much above our expectations. And I think that, so far, the event has performed as expected and not extraordinarily. And we also had a slight decrease in HSM concerning its [I call it] academy courses and corporate initiatives with companies. Some initiatives have been postponed, but we strongly believe that we'll be able to pick up again on the second half of the year, maintaining the growth of these other businesses, which will also be benefited by the growth of EBRADI and HSM 1, which is online graduate courses for management, and they've been performing quite well and been in line or even exceeding our business plan and they will probably amount to a significant portion of these other businesses.

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Operator [20]

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Caio Moscardini, Morgan Stanley would like to ask a question.

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Caio S. Moscardini, Morgan Stanley, Research Division - Research Associate [21]

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[Interpreted] [Company architects], what can we expect for the coming years in terms of percentage of revenues?

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [22]

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[Interpreted] Thank you, Caio, for your questions. Our CapEx has still been under pressure this year because of K -- Q2A, so we closed the half with something like 12% over net revenue. And in the second half, we expect the number to go down. It's likely to be at a similar level to what we had last year, about 9% to 10% over net revenue for 2019. And in 2020, we expect to have lower numbers.

If we exclude the effect of Q2A, CapEx for the first half would be 7.4% over the net revenue. By 2020, we should project something around this figure. We still have a little bit of Q2A in 2020 because of the maturing of the units opened in '18 and in '19, but something ranging from 7% to 8% seems to be very reasonable to have our goal for the upcoming year.

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Operator [23]

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Marcelo Santos with JPMorgan.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

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[Interpreted] The first question is, do we expect to see in the second quarter -- second half an impact of the new academic model because I think that now we start seeing the synergies from bringing together the classes and groups. In your business plans for greenfields and recent acquisitions, do you define your operating margins to get as high as the mature units? Or are there structuring factors that would lead you to believe in lower margins?

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [25]

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[Interpreted] Thank you for the questions, Marcelo. We hope to see an impact on our academic model E2A as of 2020. We've already captured some gains, so to speak, but the greatest impact will be as of next year.

When the classes that joined in 2018 when E2A was implemented throughout the Board, will get to the third year in the course and then we start observing more efficiency gains. We've already observed points here and there, but more specifically, we expect to see that in 2020.

Concerning operating margins, the other bases' operations are getting to the same level as our base operations. So with all operations coming close to the base operation in terms of margins.

There is one important trade-off here. Something that is against it is that in base operations, on average, we have larger campi such as in [Macau], in [Buritis], they are larger campi. Therefore, we can have greater efficiency.

Alternatively, Q2A campi are much lighter in terms of administrative infrastructure, especially because they rely on the administrative structures already existing by the brands, so one sector [pushes back, the other pushes still] and then we can really believe that Q2A operations are going to be very similar to margins of the base operation.

In terms of acquisitions, though, these operations are also moving towards that, but I don't think that's going to be exactly the same because there, we are going to have a smaller scale, especially of UniSociesc. Smaller scale means that the acquisition operation, even though it has progressing, will still not reach the same margins as base operations, but we believe it can get very close to that considering the scale issues.

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Operator [26]

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Leandro Bastos with Citi.

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Leandro Bastos, Citigroup Inc, Research Division - Research Analyst [27]

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[Interpreted] Concerning portfolio utilization in the 4 units, can you tell us about the expectations of savings, say, in terms of numbers, what you expect to save with this optimization? And have you already mapped more potential units not for this year, but probably for the beginning of next year?

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [28]

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[Interpreted] Thank you, Leandro. Yes, we have expectations as a result of the changes to have savings of about BRL 4 million in annualized basis. We expect to see at least BRL 2 million savings in 2019. In this -- half of the year will be impacted by the cost of discontinuing some of the units, but we still have expectations of having annualized gains of at least BRL 4 million. What was the second question again?

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Leandro Bastos, Citigroup Inc, Research Division - Research Analyst [29]

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[Interpreted] Are there any other units where you can see opportunities of optimizing your operations?

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [30]

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[Interpreted] Well, Leandro, this new structuring into regional offices will benefit the regional office of Minas Gerais and Goiás. But one of the main advantages is to prepare the company for future growth even if we acquire new brands in regions where we are already represented. And as is part of our philosophy we want to maintain and strengthen the brands, we'll be creating a model in which even by acquiring new brands, we won't necessarily have to create new structure to support them. So the opportunities we used to see are the ones we've already addressed, but we are preparing the company in a model of regional offices so that we don't have any additional costs should we acquire new brands in the regions.

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Operator [31]

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(Operator Instructions) If there are no further questions, let me now turn it over to André Tavares for his final remarks.

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [32]

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[Interpreted] Well, thank you all very much for being here, for your questions and interest. These were questions that have helped us provide additional information about our earnings. I would like to thank the team of Estacio, who managed to finish before 10 so that there would be no overlapping of our both calls. And I would like to also tell you that we are highly optimistic and very confident that we'll be able to deliver positive results in 2019. Thank you all very much. Have a great week and have a great day. Thank you.

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Operator [33]

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Thank you. Ânima's Second Quarter 2019 Earnings Conference Call is over. Have a nice day. Thank you.

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