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Edited Transcript of ANIM3.SA earnings conference call or presentation 12-Nov-19 2:00pm GMT

Q3 2019 Anima Holding SA Earnings Call

SAO PAULO Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Anima Holding SA earnings conference call or presentation Tuesday, November 12, 2019 at 2:00:00pm 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

* Marcelo Battistella Bueno

Anima Holding S.A. - CEO & Member of Executive Board

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Conference Call Participants

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* 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, Telecommunications, Media & 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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(technical difficulty)

3Q '19.

Before proceeding, we would like to inform that forward-looking statements are being made during this conference call relating to Ânima's business prospects, operational and financial estimates and goals, are based on beliefs and assumptions of Ânima'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 Ânima's future results and could cause these results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Marcelo Battistella Bueno, who will begin the conference. Mr. Battistella, you may begin.

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Marcelo Battistella Bueno, Anima Holding S.A. - CEO & Member of Executive Board [2]

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Good morning, everyone. It's a great pleasure to be here with you for our earnings conference of the third quarter of 2019. Right next to me, André Tavares, our CFO; Marina Gelman, IR Officer; and Isabella and our team of IR. As we usually do, we have already given the presentation disclosed on the website.

So let's start with the Q&A. So we are open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will be from Mr. Roberto Waissmann from Bradesco BBI.

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Roberto Waissmann, Banco Bradesco BBI S.A., Research Division - Research Analyst [2]

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We have 2 questions. One is related in terms of specifically how you have the expense generated in terms of efficiency for expense, if that was already captured in this quarter. And based on that, the second one, if there is anything else forecasted in this terms -- in terms of 2019 and 2020 and if you do allow the noncurrent for the fourth campi. I mean has that already been totally absorbed by the third quarter? Or will we have that also for the fourth quarter?

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

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Thank you, Roberto, for your questions. This is André Tavares speaking. In terms of having the 4 campi joining, we have an expectation that this will bring an annual efficiency gain of around BRL 4 million approximately. And we are at a permanent evaluation obviously of looking into the mix of the units. All these 4 units were joined with a near no student loss because they were in a location where we had other close campi, and we could react with nearly no loss. And this was true for Uberlândia, Jaraguá and Belo Horizonte within the concept of university city that we created in all 4 units that are operating in the metropolitan region of the city of Belo Horizonte. So we are permanently revisiting to define. And at this point, we do not have any decision made in terms of closing or maintaining any other additional campus. But as I said, we are always revisiting the issue.

And in terms of impact of the nonrecurring [one form] closing them, we have that all already captured on third quarter. If there's anything for the fourth quarter, it will be something very much less, very close to 0, I would say. That won't have any impact. 100% of these costs are already reflected in the results that we reported third quarter.

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Marcelo Battistella Bueno, Anima Holding S.A. - CEO & Member of Executive Board [4]

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This is Marcelo, Roberto. There's also a concentration movement in terms of Belo Horizonte campus, Buritis. So we have concentrated all that, which is concentrated now at the Buritis campus. So we just announced that, so we do have that. But otherwise, we are really paying attention to any possible efficiency gain. But overall, that's pretty much what we had.

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Operator [5]

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The next question is from Thiago Bortoluci from Goldman Sachs.

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Thiago A. Bortoluci, Goldman Sachs Group Inc., Research Division - Research Analyst [6]

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We have 2. First, in terms of the operating margin of undergraduates, all the blocks are at an increased speed and especially the one of the legacy units. To what extent that is already, the one you know from the E2A project and/or the Ânima's learning ecosystem? And in terms of other businesses, I mean we see there's a great performance in revenue. So I would like you to tell us a bit about the main events you had for the quarter, please.

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Unidentified Company Representative, [7]

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Thank you, Thiago, for the question. We do really see an acceleration of our operating margin with undergraduate. We had also an acceleration for the base, which we call the base operating block. Although the revenue didn't have such a strong growth in this block, we do see and there is a certain gain from this operating margin. And it comes from a gain of efficiency that we have obtained from the E2A deployment in 2018 with it. And now we're already at the second year, start of the third. And actually, we expect an acceleration from this gain next year from the third year in the courses that are 4-year-period course and from the fourth period on, on the ones that have a 5-year period. It's where we have greater efficiency. So we shall see an acceleration of this operating gain in 2020 and especially in 2021.

The effect of E2A for 2019 is still very small compared to what we expect for the next few years. So most of this operating gain comes from restructuring the academic support department where we have focused on in the last few periods of time.

What was the second question? Could you repeat that?

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Thiago A. Bortoluci, Goldman Sachs Group Inc., Research Division - Research Analyst [8]

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Sure. It's in terms of the growth of revenue of other businesses.

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Unidentified Company Representative, [9]

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Well, the acceleration of revenue is pretty much characterized by the acceleration or ramp-up of EBRADI and HSMu. EBRADI has a very strong performance, very successful in our graduates, fully online with quality proposition. And the market has been accepting it quite well, and it has been growing beyond our initial projections.

And HSMu, which is exactly the same proposition of EBRADI for management, using all the content that has been very valuable during the track record of HSM, although we're still -- at the start has been quite well accepted. So the total growth of this part are from these 2 businesses of online graduate course.

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Thiago A. Bortoluci, Goldman Sachs Group Inc., Research Division - Research Analyst [10]

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If you allow me to have a follow-up question, based on what I understand from your answer in terms of other business, and there's no seasonal event, does it make sense to think about this as a normal level as we should expect from now on in terms of revenue?

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Unidentified Company Representative, [11]

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No, I don't think so. I think HSMu is starting the process, and EBRADI is still at an increase. So we shall see a very strong growth still the next year for this segment.

There's the seasonality of HSM, true. And main event is the expo that we had last week, so there's the seasonality that cannot be totally disconsidered.

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Operator [12]

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Next question of Samuel Alves from BTG Pactual.

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Samuel Campos Alves, Banco BTG Pactual S.A., Research Division - Research Analyst [13]

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Just one question here. In terms of average ticket, we see that the average ticket has improved. You even talk about the average ticket of the entrants -- new entrants also improving. Can you tell me a bit more about that? And when you talk about improvement of mix, could you just please break down the average ticket of the base in terms of improvement of price of the new entrants? And what was the mix effect from the whole, just so we can understand the reasons of the average ticket having improved?

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André Tavares Andrade, Anima Holding S.A. - CFO & Member of the Executive Board [14]

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Thank you, Samuel. I believe it's important, and I'll ask Marcelo to explain a bit more about the management routine that we have implemented in the company in terms of the ticket. But it's important to say that we have celebrated the fact that in the last 4 years, we were able to -- within the intake of the second semester of 2019, to have had the first year where we were able to have a ticket growth, and it wasn't just a trivial one. It was a double-digit one for the ticket of new entrants.

And it's important to highlight that this is just the beginning of the journey. Our average ticket of the base is still being pressured especially because this intake, although there is a great performance in the growth of the ticket, the intake just is 13% of our base. So when you look into the ticket of the base as a whole, there are 2 sides to it: an improvement of mix that you have mentioned yourself and can be seen with a gain of representation of the courses in terms of the health vertical; and there is effect of other actions that we implemented here in our company.

And I'll ask Marcelo to comment about the dynamics that we have been managing the ticket with.

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Marcelo Battistella Bueno, Anima Holding S.A. - CEO & Member of Executive Board [15]

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We have

(technical difficulty)

in the cultural change, it's important to grow in intake, but most important at the end of the day is to have increased revenue. And that goes through number of students and ticket. So we see a digital transformation in the company that is at full speed. And some are dedicated. Some of the squads are totally dedicated into the application of scholarships and new methodologies so that we can have more of an individualized application of these scholarships. And we have great experience, I mean, with [average ticket], and we see that we are able to reap benefits. So I think this is really a milestone because it shows that we have chosen the revenue with analysis individually, and that's what we're reaping now.

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Operator [16]

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The next question is from Marcelo Santos of JPMorgan.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [17]

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Two questions. First, in terms of the ticket that Samuel just asked about, although there's a pressure that you have in terms -- I mean it has increased year-over-year and in this new semester, and there's the initiative Marcelo said about visualizing some points. But can we consider that from now on, we'll have an expansion and that this increase can be sustainable and we can even see that in the next semesters? Or do you think there is anything that was an outlier that made it grow? I mean I wanted to have an overview because it seems like it was a milestone, and now we are going to see the expansion. That's my first question.

And the second is a bit more about E2A. What can we expect in terms of margin for the next 2 years, especially for 2020? From what I understand, 2020 and 2021 will be really the big ones that will benefit from E2A. So should we expect something greater than 2019? Does that make sense? Those are my 2 questions.

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Marcelo Battistella Bueno, Anima Holding S.A. - CEO & Member of Executive Board [18]

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Okay. Marcelo, I believe that we are at a turning point in terms of ticket. So until 2014, we didn't have a commercial team. We just sold as an organic way. And once we had [command] set and we had control of the tickets, we started creating benchmark with other sectors, some very interesting benchmarks in terms of individualized discount, benchmark like the airlines. And we adapted that to our segments. And I believe now we are at a moment of having tools and methodology to be able to apply the ticket in the right way so that we can really find the optimal point, balancing number of students and tickets so we can have the best revenue and use it to its most. And this is something that we carry out. And I believe this is a concern that brings to us in terms of a cultural change in the company.

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

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Something I would add to what Marcelo Bueno has just mentioned is that as he said and I'd like to emphasize that we are not seeking improvement of ticketing volume. We are seeking to improve revenue to find the optimal point between these 2 drivers. So depending on the dynamics -- the [complete] dynamics and the dynamics of the intake from -- instance, from 2020, point one, which is at the beginning of the

(technical difficulty)

is relevant to the base then from 2019, too. It is possible that we can see an increase in the ticket or maybe not because we will seek the optimal point in terms revenue and volume and the base ticket, which will -- it will be much more dependent on the intake that we'll have in the beginning of the year than 2019. The matter of the fact that we should bear in mind here is that with a dropout that is more concentrated on the initial semesters, and we have improved greatly in terms of dropout, this, at the end of the day, if you consider that students who started in 2015, 2016 and had higher

(technical difficulty)

the dropout has a positive impact in the mix and increases our ticket as well.

So the message we get is that from a management standpoint, we got to a turning point. From a number figure standpoint, we will always seek optimal point between volume and ticket

(technical difficulty)

the revenue the best way possible. And definitely, the effort depends on the dynamics of the competitive environment that we'll see in the intake of 2020.

And in terms of E2A, which was your second question, I believe it would be too early to give figures out and talk about expectations of margin and gain. And our policy has been of not give this type of [misguidance.] But in terms of qualitative terms, we do see an acceleration of the gain of efficiency that we have been already having in the -- in this year and the increase for 2020 and 2021. So we do believe there will be good news for the next 2 years at least.

We're still focused on an agenda of recovery margin. Part is E2A, the other is maturity of other acquisitions, the other is Q2A at a maturity level as well, and the other one is a simplification of the [organization] format and the recovery of ticket. So that's what we believe is healthy.

(technical difficulty)

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Unidentified Analyst, [20]

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(technical difficulty)

talk about the opportunities of M&A increasing, and we see Ânima at a leverage level that is once or twice EBITDA. And it doesn't really give much space to greater space of M&A with [debt.] So what are the alternatives being considered to capture this potential of M&A you see in the sector?

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Unidentified Company Representative, [21]

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[Bruno,] thank you for your nice words. So we're focused on the opportunities, and we do see great opportunities in the market. We have the focus as our

(technical difficulty)

to really access debt and go to a level that we feel comfortable in terms of leverage. So there's a movement we're going through as we speak. So to access the debt market, what level that we do feel comfortable with and then knowing that we need to address liquidity and also understanding short term. That's something we have been working on and really take the advantage of great opportunities of M&A we see in the market.

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Unidentified Analyst, [22]

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I have a follow-up in terms of the ticket. Do you believe that there are condition for this first semester to have an increase in the ticket as you had in the second semester because there are the application tests of (inaudible), which is a bit different -- I just want to understand.

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Unidentified Company Representative, [23]

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We're working on that, [Bruno]. Thinking about the main focus of management is to really have the ticket at a level which we believe is healthy for our market position and for those who want to offer quality education. So we're working on that. It's still too early to say. We're starting the process of -- we are working day and night to be able to deliver.

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Operator [24]

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Next question from Susana Salaru, Itaú.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology [25]

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Two questions. First, talking a bit more about the retention rate, we see a significant improve in this quarter. This -- is this the first improvement? Should we expect improvements that way further ahead?

And the second question is related to the intake. The way it is composed, we see that there is a

(technical difficulty)

[PraValer] or the funding for students. So the students, you get funding for. Do you believe they're more sensitive to funding than discount? The question is, if you didn't have the FIES, would you be able to give them a discount? Or do they not have that interest in that type?

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Unidentified Company Representative, [26]

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Well, in terms of retention, this [is in the] long run. We have been working with this over and over again. And my view and interpretation is because of improvement of service and the digital transformation that Ânima is going through, it's been now 2 years. Our understanding is that students today no longer compare the service rendered by PUC college, the Catholic school; or Mackenzie college, but with Uber and other platforms. So this is what our squads are working on. So when we start having results, the dropout mirrors that, which is important for us to make it clear. And our dropout management has been improved semester over semesters. And the team servicing students, I mean, has a great work, but it's really step by step. And this is not a specific initiative. This is a long-term initiative, I would say, in terms of many initiatives joining and being able to have an impact in the result

(technical difficulty)

[retention] from 1 semester to another. So the idea is to really perfect that and have students remain with us for a longer time.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology [27]

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I just want to understand more about the retention rate in terms of services for students. Do you have any metric like NPS as how students perceive the quality of service so that we can check the improvement over time?

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Unidentified Company Representative, [28]

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There are many metrics, many KPIs that you can follow. The re-enrollment, which before was really tough and in any education institution, I mean, think about [2,500 wants] to enroll at the same time. So one of the main squads we have been working on, which is [renovar], has a specific KPI of re-enrollment, of improvement of time to service in terms of troubleshooting. So we do have many KPIs related to service rendered with this different rationale.

In terms of the second question about financing, I believe we also follow a rationale sustainable. If we compare the intake of 2019 [2] with intake 2018 [2,] we went from 73% of students out-of-pocket to 71%. So it's a difference of only 2%. And we do see an increase of FIES capturing because of a better composition of our courses and then better service of FIES to the regions where we are at. So we are keeping our mind straight in terms of financing with FIES and PraValer being used, but we are still very strong on having 3/4 and in the beginning of the year, usually, more than 80% of our intakes come from students that are 100% non-financed. So we believe that there should not be any relevant impact on our intake, not now, not in the future.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology [29]

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So if I understand right, the discount that you had will still remain the same. Is that right?

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Unidentified Company Representative, [30]

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We explained much when we talked about the ticket about how we have evolved in the granular control and individual control of the discounts. In terms of policies, overall policies, we do not have big changes there. But from the management standpoint, there are relevant changes.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology [31]

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Okay. More granular.

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Unidentified Company Representative, [32]

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Yes. We're not even using the term discount, but scholarship because of meritocracy, that's what we are focusing on. We have realized with our data science hub that the better the student is, the better

(technical difficulty)

they are. So the -- to bring the concept of scholarships, meritocracy, we don't believe in a silver bullet, now it's all FIES or not. There needs to be many initiatives of financing to be able to really address the intake.

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Operator [33]

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(Operator Instructions) There are no more questions. I'd like to turn to Mr. Marcelo Battistella Bueno for his final remarks. Mr. Marcelo, the floor is yours.

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Marcelo Battistella Bueno, Anima Holding S.A. - CEO & Member of Executive Board [34]

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I would like to close by thanking and congratulating our whole Ânima team for the results of this quarter. It shows that we are heading the right way. We will keep focused on recovering margin, focused on delivering quality education for a greater number of people, growing healthy and, that way, reaching our focus, which is a country for education. So thank you very much for your time.

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Operator [35]

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So the teleconference of Ânima, and thank you very much for your

(technical difficulty)

Have a nice day.

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