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Edited Transcript of ESTC3.SA earnings conference call or presentation 13-Aug-19 12:00pm GMT

Q2 2019 Estacio Participacoes SA Earnings Call

Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of ESTACIO PARTICIPACOES SA earnings conference call or presentation Tuesday, August 13, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eduardo Parente Menezes

Estácio Participações S.A. - CEO & Member of Board of Executive Officers

* Gustavo Artur Ciocca Zeno

Estácio Participações S.A. - CFO, IR Officer, VP & Member of Board of Executive Officers

* Rogério Tostes

Estácio Participações S.A. - Director of Investor Relation

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Conference Call Participants

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* Caio S. Moscardini

Morgan Stanley, Research Division - Research Associate

* Leandro Bastos

Citigroup Inc, Research Division - Research Analyst

* Marcelo Peev dos Santos

JP Morgan Chase & Co, Research Division - Senior Analyst

* Mariana Hernandes

Crédit Suisse AG, Research Division - Research 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

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Presentation

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Rogério Tostes, Estácio Participações S.A. - Director of Investor Relation [1]

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Good morning, I am Rogério Tostes. Well, welcome to the Teleconference of Results of the Second Quarter of 2019. The presentation will be done by our CEO, Eduardo Parente and the CFO, we -- Gustavo Zeno. We also have the directorship of the company. And at the end, we will be available for Q&A. The audio and the slides will be transmitted in our RI website, www.estacio.br/ri. I inform that the teleconference is being translated into English. Therefore, keeping with the corporate governance and avoiding any asymmetry of the information that is passed on to our stakeholders. (Operator Instructions)

This audio conference might contain some predictions about future events that are subject to risks and uncertainty. And should those things do not take place, they might have substantially differ from what we expected. These are only opinions issued on the date that they were actually done and performed and the company does -- is not obliged to update them.

Therefore, I give the word to our CEO, Eduardo Parente.

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [2]

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Thank you, Tostes. Well, good morning, everyone it's a pleasure to receive you here, our second quarter conference. Well, what we're going to start today is a sequence of what we had found over the last conferences in terms of results and how we see things up ahead.

I'll start on Page 3. Well, we're going to be 50 years next year. So in those 50 years, we build a brand. National brand, a very strong brand, very recognized. As you can see, we have 93 campuses, 110 DL courses, 710 DL centers, 500 cities, 8 schools of medicine and 97% of courses with a satisfactory grade.

Now as we have been evaluated, 84% of them had a grade 4 and above 5. So we have a view of reaching out to the students, where our company and educational institution that is very strong. Well, but we need to move up ahead. What do I mean?

We need to get closer, even closer to our students, broadening the scope going further -- going to other niches. Now we thought that to bring this would give us more flexibility to partner with YDUQS, YDUQS as it's said in Portuguese. In this way, we can have a different position in the market, and we can develop therefore new businesses and providing services for other institutions -- teaching institutions.

So anyway, YDUQS was born with -- being the new name for the company -- the overall company, Estácio, and it's a new way to start with an umbrella of companies. Well, during the presentation, I'm going to refer back to that once I talk to -- once I talk about distance learning and medicine, which are as you know, very important parts of our vision.

We're focused in businesses that may be as a whole might not seem so big, but they are growing. And we need well, to adapt our structure and this will facilitate things.

Now I'm going to Page 4. These are the highlights. For the second quarter '19, I think that on the left you can see the student base, the tickets -- the average ticket and the cost reduction. These 3 boxes, well, we have a very difficult economy as you know, rebuilding the country and these are results that we're very proud. And we think that it creates a very strong base for growth. We're talking about using this regaining of the economic growth in our favor.

Now 3% of the growth in the student base, if we get the base -- FIES out, we basically have a growth of 10%. Now this is the biggest base that we ever had at Estácio. This is reflected upon the quality of the teaching and the process that we are repeating to become more granular-focused.

Looking at the lifetime value of the student. Now we have an increase in -- 1% increase in the retention rate in both the DL and on-campus versus the second quarter of '18. This is a record in growth.

Now talking about the average ticket. We grow, as you can see, 3% average. We basically move not sideways, but we are growing in parallel. The base is what we have the growth in the medical student base, as you can see 7%. And we have done different pricings, and we've applied that very confidently in the first quarter. Once again, very granular application here and this is very positive.

Now the cost reduction. We really mentioned that in regards to the previous quarter -- well, the previous year's second quarter, we still had the entire year to capture a complete year of these initiatives. The results are, you can see, 5% reduction in cost per student and this makes the right side of the page very solid, very consistent with what we've been showing as a potential.

Now this cost reduction has really helped us to fight the loss of the FIES that we know -- we knew that it was going to be significant, the student funding FIES. Now we had the gross margins 58.4%, we have an ex IFRS 16, 57.7%, a margin of 36% of EBITDA and a cash conversion of 66.5%.

Now student base in detail. As I mentioned -- I'm sorry, Page 5. It's a little bit of what I already mentioned student base, very relevant loss in numbers of the students that were funded by the FIES. It was a loss of 37% of our base. We knew that we were going to lose those students. We think that up until the end of the year, we are still going to lose another 19,000 getting to a standard of 30,000 FIES students. There is something up ahead, but we start to see FIES as maybe as a side. We are in the new reality of FIES, and we believe that this is a very solid benefit of the program for society nonetheless what we see this in the government and perspective on the medium range is having a regrowth. Once we have this regrowth, we think that this can be good for the entire sector and FIES is almost the upside.

Anyway, we are very strongly growing with the distance learning, 26%. And the on-campus, which is former FIES also growing 3%. And down below to the left, we see the retention rate improving significantly year-by-year since 2017.

Now distance learning is getting very close to on-campus, which is very interesting. So smaller retention rates, lower retention rates in the on-campus, while this is normal for the sector. People understand better what the DL is and everybody is putting an effort to actually getting more technology, more content for the student in this very winning form of democratization of studies of teaching, which is distance learning.

Now I'm going to give the word to our CFO.

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Gustavo Artur Ciocca Zeno, Estácio Participações S.A. - CFO, IR Officer, VP & Member of Board of Executive Officers [3]

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Hi, good morning. Well, let's start once again at Slide 6. First quarter, we have the net revenues in comparison to the previous year, which is, you can see the numbers. So great performance, a reduction of 20,000 students from the FIES, and it was going to impact excessively the revenues. But the improvement in the mix of cost and the increase in DL have and note, in part, the impact on the FIES.

Now we have a positive effect of the restructuring of personnel that happened at the end of '18, reducing this in almost 8%. Now added to that effect, an improvement in the efficiency in the subcontracted parties, third-party services, neutralizing the increase of cost in these subcontracted costs. Basically, the third-party services, we have a drop of another 5%.

Now on the right, as we have mentioned before, there is an evolution of the gross profit and gross margin, which got to 58% without considering the former IFRS 16.

Now going to Slide 7. Stability and efficiency of the expenses. We have an increase in the commercial and administrative expenses in comparison to the previous year. Now we have a pressure here of the bad debt over the net revenues. This is due to the anticipation of the marketing campaign. Now -- sorry, I was mentioning the advertising over net revenues, which increased 6% to 8%. But the bad debt, there is a growth of 1% free -- facing the previous year.

Now the percentage here reached of the revenues 10% above the same period of '18.

Now general, administrative expenses, we maintained the same efficiency, and we have the benefit of 9%. I highlight the reducing -- well, we reduced the third-party services, reducing the consulting fees there you can see the 53%.

Now Slide 8, EBITDA and generation of cash margin. Now in this quarter, the EBITDA margin got to 30.1%, a standard that is above the 29.4% of last year. In absolute terms, EBITDA grew 1.6% in the same period. This comparison with '18 excludes the impact of ex IFRS 16. In the corner here on the right, we can see an improvement in the operational cash flow and an improvement of the conversion of the EBITDA and the cash conversion. This shows that our financial products are not big offenses to our cash generation.

This quarter, we got to the conversion of 66.5% comparison to the previous margin. We have here the cash flow in the same accounting standards in IFRS 16.

Last but not least, we present a net income growth in the first quarter, with a growth of 3% comparison to the previous years -- to the previous year.

Now investment. We -- CapEx, we had an investment of, as you can see that what we had an increase in investments of -- that grew 59%. Now we have the support and the improvement, and we captured the CapEx of 6.4% versus 4% in the same period of the first semester of last year. Now an indication for '19, we believe that the CapEx should be around BRL 330 million. This is due to several initiatives, which is decreasing the disparity of our services and the expansion that is associated to revenues.

Now I give the presentation back to Eduardo.

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [4]

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Now I'm going to mention -- to reference Page 10, but before we do so, I believe that there is an issue that is very important. Let's just take a step back and talk about the concept of distance learning, EAD in Portuguese. Now we are mentioning about 2 million students that study distance learning, and we see a potential of that number doubling in the next years. The market is very good and the reason for our optimism, I think that we shared with several other teaching institutions is that the distance learning is very different here in Brazil when you compare to different countries, such as the United States.

When you see distance learning in the United States, it's an option for the student and sometimes the ticket is almost the same as the on-site. It usually is. Here it's a tool of -- for inclusion -- social inclusion, which has a stock of over 8 million people that can still study that have a high school education and do not have a bachelor's degree. And the distance learning is a way of bringing a lot of these people to studying back again.

Now you're offering access to a lot of people that did not have that kind of access before because of a financial issue, because of a physical geographic issue and a time issue as well.

This is a market that grows, and we can see that everybody is growing. The tickets had kept their stability even though there is a big margin in this market. So what we -- we are foreseeing this with a lot of optimism for the next -- for the years up ahead.

Now going back to here -- the table, we have growth. You can see on the left. Year-by-year, every time that we talk about this, we grew 20% versus the previous year. And we have a specificity here at Estácio. We grew a lot in the second semester of last year and the first year -- in the first semester of this year, the growth in the pools -- in the partnerships, the DL partner centers. They're still in the first intake cycle. So there is still -- they still have 30, 40 students. It's not -- it's something that takes a lot of time still. We see an exponential growth once you have the second and the third intake cycle, and we are expecting for these basically partner centers to grow with us.

Now the Flex also growing very -- this is very important to talk about. This Flex is -- it's a course distance learning, where you have some activities where you can have a physical experience, let's just say. So you take a test with our partner center and also on-site. They schedule a time, they have a technician with an anatomy class, with a skeleton or something that they need to do. They can schedule that and maybe they will be alone or alongside with a group of 3 or 4. But always with the concept of on-site physical experience, with -- associated to the distance learning. This has really improved the success -- our success because it has increased 70% of our undergrad basis -- base. Well, we've got to 500 cities covered almost, and I think that once again if we see the growth in the market, and we foresee the possibility that we have up ahead in technology, Internet evolving, people getting more and more used to having success. The quality and the success that we -- our ENADE, our e -- our distance learning, it's very much -- the experience is very much like the on-site. So once we see this DL or EAD in Portuguese, we foresee it with a lot of optimism.

Now let's go to Slide 11, talking about medicine. Now I wanted to highlight that in the fourth quarter of last year, we talked about medicine. And also in the first quarter of last year -- of this year, we talked about medicine. And we are very happy to talk about this, and this is something that is a focus for the market as a whole. So congratulations to the ones that foresaw this.

Well, we have been working for many years for this. This is a pedagogical project that is very solid. If you do take a look at our 8 units that offer medical education, they are all with the same pedagogical project with the same quality. If you take a look, a great -- testing of the quality of the medicine course, we have a very big number of students that come from the public sector. Anyway, in this presentation here on Page 11, we have some numbers. What are these numbers? We've been working with them for a long time.

Now these bars, the blue ones -- the dark blue ones are the current units. We have 8 units. Four are, well, as you see, let's just call them original and 4 related to the Mais Médicos 1 expansion. We can see here and determine how many slots you have, seats per year you have and the potential for growth. And this is the natural expansion of these units. Why?

Because many of them -- 5 of them have not matured. So they are in their first, second year of course. These are courses that you get the first year students, but nobody has still reached the final year, the fifth year. The 5,800 is the maturing of the courses that we have already. Within the expansion and the operation of Mais Médicos, we have an expansion of the seats for courses. And what we see here later up ahead is the expansion. What we believe will happen in the base case for 2024 and what might happen until '24, if you get the full potential of all the seats are used, Mais Médicos 2, the intermediary green, we have 4 units that we earn, that we got. One, we already started. It's intermediary. So it's going to be dark blue soon in Canindé, targeting the state of Ceará and there are others. And there is still a judicial dispute in regards to Mais Médicos 1, the expansion here, but we are sure that the potential for getting a positive result here, at the course is something that will happen.

So we can expand them until 2024. We still have to mature them. So given this potential for growth and I highlight once again, the consolidation of a standard of margins with opportunities for growth in distance learning. On the right side of the page, we see how important this is to us. Having -- well, you can see 19% of the revenues come from this. Total net revenues come from this, BRL 174 million, a growth year-to-year of 19%. This is reflected on how we're pricing this evermore carefully with a ticket that is very relevant within our universe of courses.

Now before we go to Q&A, I want to invite you to take a look at Slide 12. On the right side up ahead where we have our watches, I should say. We introduced them in March. In the call of the fourth quarter of last year, this is a request from you to see how we are going along with the intake season. We don't like these pie charts, let's just say, they're much more -- we don't want to make a mistake on them. We think that they're important. If you take a look at the pie chart on the fourth quarter and you compare to what was announced in the results of the first quarter of this year, we have all of them basically in the middle except intake on the distance learning that we went well beyond, we had excellent results.

So once we take a look at these half watches or pie charts, when we have the on-campus intake, we are sure of these numbers. And nowadays everything indicates that we will be more going over the 10%, but we still need one more month. Now the aggregate, the on-site and the DL, we went over the numbers of last year. We surpassed them, and we still have 1 month to work to seek more people.

Now what we have here once again, the pricing project has given us a lot of results in the price. But also in the intake, we've been very careful because people can pay for this and the students are -- there is not a whole lot of turnover. So they're -- it's testing the quality of the course in comparison to our competition. We start to foresee an improvement also in the market and an environment that allows us to be more conservative with the price keeping -- ticket keeping the margins and still be able to grow.

Now these, on our view, it's positive and the last month, we can very -- well, we are sure that we are talking about this margin that we are showing to you. Now if you go to the left side of the -- well, we see here in the 10%, and we got you the cases of -- well, there was a lot of conversation here. We show that, yes, this is the center that we are talking about. The new reality of Estácio, YDUQS. And when we see the base of student that is growing 3% year-by-year -- 10%, if you do not count FIES, the intake record, the retention rates also going up. All of this resulting in the greatest base of students in the history of Estácio, and this allows you for the increase in the gross margin and a solid cash conversion. So we have a very solid base on which we need to leverage to seek a new stage for growth.

And we saw very clearly the position and the technology that we are discussing, the maturing of medicine as an opportunity. We are talking about -- well, this is good for us, this is good maybe if you look at the same institutions. And once we take a look, what is the cash position and generation of cash and net debt that is basically 0 with a lot of opportunities here, we are very tempted with the opportunities they're presenting. And as I told you, we're not going to do something crazy. Once we look at some bills, some pricing that has been done here, we think that some are very expensive. And in this situation we'd rather go back we've been doing with YDUQS. So once again, a very solid base and a lot of opportunities for growth ahead.

Thank you very much. And here, I will give it back to Tostes.

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Rogério Tostes, Estácio Participações S.A. - Director of Investor Relation [5]

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Well, thank you, Eduardo. And now we'll go to the Q&A. So, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question will be from Roberto, Bradesco.

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

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The first question is in regards to the activities of the new poles. Can you attract the -- well, this is actually an organic -- of the factor -- the growth is based is in the growth of the market or so the increase in penetration, et cetera? Or are you getting share, the share from the competition?

Now, the second question is from a private sector, of course, well, we can see that in the first quarter that the second semester reduced the base of students. So how have you felt this with the second semester? We can foresee the levels to be around the 5% of the intake or this is something that we can increase -- that we can expect an increase?

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [3]

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Well, thank you for your question. I'm going to try and answer them. And if there is something missing, Alexandre can then -- can talk after me. Well, in regards to the poles, we think that this is a market growth. We don't see a fight. We don't see one taking away the pie from the other.

I think that everybody is growing, and we see that there is a lot of these and the growth is not so relevant, but we have the percentage. Well, maybe people are not in your radar and they're growing alongside with this -- with us. So we look outside and we see the growth of the market, we don't see fights. Well, sometimes there is a fight for the student in regards to the finance -- financing. We have an expectation of this number to be decreased. We see that there are students opting what we've been working very well with transparency what the Fed mean, the financing versus the discount here and there for the student and for us. Because we have situations that is better to give a discount of 20% that you expect X months or X years to receive another 50. I mean, it's better. It's healthier.

So we're getting to a balance point here and the vision that we have here is that it will be lower.

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Operator [4]

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Next question will be from Leandro Bastos from Citi.

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Leandro Bastos, Citigroup Inc, Research Division - Research Analyst [5]

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So 2 questions. Well, first of all, I am commenting that -- well, how do you foresee the competition and you -- in the on-site, the DL and on-site, how do you foresee the market in the future?

And also talking about CapEx well, BRL 300 million and BRL 330 million of CapEx in millions is it because of the improvement, Mais Médicos? I mean, can you share what will be the normal standard cruising altitude of investments that you still do? I mean, can you tell us more about the M&A?

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [6]

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Thank you, Leandro. Well, let's just see, intake. Intake that competition is not uniform. So as I commented with Roberto, indeed distance learning is a market that is growing, and we have once again grown a lot better in comparison to the previous semester to the previous year. Now in general, very little aggressiveness between the competition. Now in the on-site -- on-campus, it really varies.

Now the campuses are suffering more because of the decrease in the FIES financing. In the Northeast, in the first semester, we had a struggle -- fight there that is being repeated. For the rest of Brazil, I think, that there is a situation that we're improving. We've done our homework and the competition as well. So I believe that everybody is within the same new reality. Now we've been working to have a situation of costs that compensate this loss. So we can see the competition, certainly not as strong as last year.

But about the CapEx, I'm going to ask for my partner here to talk to you.

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Gustavo Artur Ciocca Zeno, Estácio Participações S.A. - CFO, IR Officer, VP & Member of Board of Executive Officers [7]

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Well, talking about CapEx, Leandra. Looking ahead, now there is an issue that is very associated to the strategic decision of the company in regards to expansion. Now it's very important that we talk about this, expansion is a CapEx that is directly connected to future revenues. Now this is very important because depending on what we decide for the next few years, this CapEx might increase or decrease, especially because of the expansion. Now last year, we had about 6%. This year, we are talking about BRL 330 million, which is our CapEx. And we try to better leverage with the market with the change of standards, with the change of thresholds and that might generate about 10% up ahead -- well, higher, if you take a look at the future.

But once again, this is a very important variable that influences CapEx expansion. The Mais Médicos 2 is a CapEx that we will do this year, and we will continue to do next year.

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Operator [8]

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Next question will be from Marcelo Santos from JPMorgan.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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I have 2 questions. If you can please explore a little bit the new businesses that are under the umbrella of YDUQS?

And also second question, well, to -- tell us a little bit about the implications of the intake on the on-campus that you are indicating a growth of 0% and 10%? What does that mean for the base for the next year? I mean do we have a drop here -- a scenario that is foreseen 2 years of decreasing numbers or not? Or if there any variables that should hinder that drop and foster growth?

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [10]

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Now let's say this, new businesses with YDUQS. Now we have a series of opportunities here, and they were impressed or -- and we don't take a look at them because of how big our on-site undergraduate programs are. Sometimes, this was a hindrance to our focus and it caused some issues because of our own mentality of the teaching and I'm going to clarify this.

Well, for example, once you have a teacher on-site, well, and I can say that because I'm one of the 8,000 teachers. If you get a class, do you have a book that has been written 2, 3, 4, 5 years ago, it's one thing. For each of your class, there is a content online that is more up to date. This is updated in the weeks leading to the class. It's also more didactic for the student for the use to study in a way that is more modern and more online with what they expect.

This is the transformation I experienced. Instead of asking to read chapter x, you're telling them to go to the online class, which is not a video -- it's part of a video and then, with the text with exercises with something. And then, you have tools on the classroom and then you have a transformation in the teaching that we are working here and this new mentality of the separation of the business is very important. So what do we have as a history here?

Our medicine has grown a lot because of the entrepreneurship of some people. Now we have also a few teachers here, and we also have physician. I mean, he is a doctor, but there -- he also is an entrepreneur. And he was over the last years building our medical teaching curriculum here and our vision of YDUQS is to give our partners video, an opportunity to grow. But also everybody else that maybe do not have the same degree that you have. We have a lot of potential here. We also -- what we offer -- our potential is still not realized.

So we are solving issues here. Video which was one of a side thing from the on-campus and that was separated and developed, and it's growing. We don't want to say oh, we're going to do this and do that. Well, maybe we still think that there are things inside here that are being discovered by people and YDUQS will help us to give visibility but always taking one step at a time. The growth for the next 50 years is going to be more accelerated and the world here, we have a very strong step-by-step approach.

Again, new businesses, it's medicine. It's DL put in, placing more attention on the distance learning, the postgraduate studies also. And we will eventually get into -- we're acquire brands that we admire, and we believe that there is an opportunity to be present in different segments of the market. So we want to give you all this with YDUQS, and we're going to move up ahead.

Now your second question, which is about the indications for the on-campus. Our prediction is to grow the base in over the next years. Once again, if we grow 3%, we have the prediction of growing more until the end of the year, the relative base in regards to the previous year. And what we see on the on-campus is that growth that is highlighted and not the decrease of that number. I'm sorry, I talked too much.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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No. Just to clarify here. The base has grown, but the on-site is not -- the on-campus is not growing. So if you can imagine -- let me just try and understand the answer here. You expect growth, well, this year -- well, next year, you think that the on-campus is going to stop following the numbers?

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [12]

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No. Yes, the next year, the base of students -- the number of students will not drop. But I want you to take a look at -- on Page 5 -- Slide 5, where we see the on-campus, excluding FIES, that is growing in 6,000 students. Of course, there is a reduction in the FIES from the students, the on-campus -- the number is overall dropped. But we are taking a hit from FIES now and that's it. And what is for the future, there is a growth foreseen for the on-campus base, student base here in the thousands.

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Operator [13]

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Next question will be Susana Salaru from Itaú Bank.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head of telecommunications, media and technology [14]

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I have 2 questions. First, in regards to the expansion of the DL. You are looking at medium to small -- well, of the medium and small cities, what will be this definition? Or what will be a small city? What will be a medium city? If you think about a city with less -- with up until 30,000 inhabitants so you already have a very good offer of the distance learning. So what will be the cities that you want to, let's just say, increase your capital already? That would be the first question.

And secondly, you have a target of cities, you have about 500. How do you -- how many do you expect to cover in the future?

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [15]

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Susana, thank you for your question. We have a goal, a vision of getting to 1,500 cities. We have a very good penetration in the big centers. We're talking about the cities that have over 2 million inhabitants. If you see the cities with 500 people, we are in every city. 300,000 to 500,000, there is only one that we are not in there. So what we have here is 300,000 to 500,000 even though we are in most of them, there is relevant growth. There are many cities that we will need another pole, another center, point of center. And we are talking about the cities of 100,000 people where we see a lot of potential for growth.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head of telecommunications, media and technology [16]

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But these cities are completely penetrated. I mean, you're going to be the second player, right?

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [17]

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Second, third, well, what do we foresee. We have 4, 5 players that managed to crack the distance learning. Now, we respect each other. We copy the good things. They copy our good things, and there is a lot of people that are trying. We -- there are people that think that submitting a PDF to the student is the distance learning or that corresponds to 20%. And I know this is not sustainable.

So we have -- we trust in our product, in our brand. I don't think that this will -- well, at least in the short term, unlock a war of prices. There is still a lot of people that want to grow. And actually in the small cities, and the introduction of technology that is very important for the expansion of all of them. Now I don't think in no way that these cities -- well, they might have distance learning, but I don't think that any have reached their potential.

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Operator [18]

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The next question will be from Mariana from Crédit Suisse. Mariana?

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Mariana Hernandes, Crédit Suisse AG, Research Division - Research Analyst [19]

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I have 3 questions actually, very quick. First, PDD. We see that this line is very stable year-by-year, but there is a change of behavior. So the dropout nonnegotiated, but the PDD of the monthly payer are dropping so the line is very steady -- very stable. So I wanted to understand that dynamic? How do you provision this? Do you expect more decrease? And how is this going to evolve to the future?

The second question, even doing a follow-up of the previous comment on the distance learning. You mentioned the competition is not so complicated, but the tickets suffered a lot this quarter. What happened? It was something one-off or it was your strategy to improve the intake? What is the logic here for the drop?

And the follow-up on what was commented on in regards to providing services for third parties, some contracted parties. If you can detail a little bit more there. What is the economics of that idea? Is there anybody that is doing that? Is there any difference from what is up ahead and what is in the market? And when is this going to be done? Is it for short term? More for next year? When do you expect to launch this? These are my questions.

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [20]

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Thank you. It's a pleasure to see you in the sector. Well, before I give to Zeno to answer about PDD, I'm going to answer the 2 questions about the distance learning. Well, and now talking about [savanna]. It's very important to understand it's not because the city has a center that they have distance learning. There is a neighborhood. There is a convenience of going into the center for you to use the Internet of the center. Even in the big cities, we see some penetration of the distance learning centers.

In regards to the ticket, now it moved parallel, I should say. So this is a fluctuation of the market. We are seeking to increase the penetration, increase while giving offers to bring more people inside doing the investment, but if you notice there is a relevant variation in our mix. We have the Flex course, more expensive and more people opting for that. So you have a situation where we're facing that 0.7 as a natural fluctuation in the market. In no way this is in an environment where you have big margins. This is not fighting for the prices.

Now the third-party services, once again we want to avoid bells and whistles -- whistles. Bells and whistles. Now what we see is that the customer starts to taking a look at the products, YDUQS has the online teaching. This is a very good partnership. Now we are working to deliver to ourselves a business with a quality that is good. Our challenge here is to do a quality education for many and there is tool. Digital tool is very important. It's fantastic. Because it allows us for us to have great control of what is given to the people. And it helps with the didactic and brings more modern tools to the classroom. Now if you can let us work a little bit more and just be a little bit patient, we will give you more results.

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Gustavo Artur Ciocca Zeno, Estácio Participações S.A. - CFO, IR Officer, VP & Member of Board of Executive Officers [21]

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Now talking about PDD or bad debt. Now the bad debt, yes, this provision we are having a mix. It's not what is expected. We have communicated the market, DigiPare. These are products that have provisions for -- when the student -- well, you have a complement for the provision. So DigiPare, there is nothing beyond what is expected. Now looking at the monthly payer, this is very connected to the efficiency of charging the -- we've improved the recovery of this class. So DigiPare, digi pay, we are improving, but even the monthly payer, this is a more outdated modality. We understand it better, but we are improving on how we charge this. And so you can see the mix. There is a difference of mix if you compare to the previous year in the bad debt, but nothing different.

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Operator [22]

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Next question will be from Caio Moscardini from Morgan Stanley.

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Caio S. Moscardini, Morgan Stanley, Research Division - Research Associate [23]

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I have 2 questions. First, how do you pay your centers -- the partner centers? We have a growth in costs and a growth of distance learning growing. Is this due to an increase of payment that is done to the partners or an increase of share of the partners within the revenue of distance learning?

Now in regards to the campuses of Mais Médicos 2, which are on a judicial dispute, is there a timeline for us to know the final result? What is your expectation?

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [24]

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Thank you, Caio. Well, this is very -- I'm very happy. Every time we have that increase, we see that our partners are growing and the more they grow the healthier we are. And well, this is the B part of your question. The mix of partners is growing within our universe here, and this is natural that the payouts are increasing more than the revenue.

So we have about 90 of our own centers up until a year in the -- well, yes, last year, it was 100 partners. So we have almost -- we have 700 partners, so we have a lot of centers being opened. Mais Médicos 2, we have some decision coming there where started -- we started to work. We expect that the next 3 will be solved in the semester and then this will allow us to capture at least 2 next year or maybe the 4. And now it all depends on the legal system and that, that has a bit of unpredictability. But not only for us but for everybody, but we are very optimistic of having this for next year. Coming there for sure.

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Caio S. Moscardini, Morgan Stanley, Research Division - Research Associate [25]

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[Inaudible]

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [26]

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Well, another 2 or 3 for 2024 or 2023.

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Operator [27]

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Next question will be from Samuel Alves from BTG Pactual. Samuel?

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Samuel Campos Alves, Banco BTG Pactual S.A., Research Division - Research Analyst [28]

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Two questions actually. First question is can you comment a little bit about the percentage of the intake that is complete, this preliminary number for the next cycle that you opened?

And a second question would be if you allow me if you can talk about the student dropout? We see an improvement in those indicators in the second quarter, specifically on the on-site, on-campus. Now almost -- only 300 students dropping out in the second quarter. I think that is the lowest numbers in your company. Is there a change of criteria? Or is this a loyalty project? I mean if you can give us details that would really help.

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [29]

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Percentage, we are talking about 70%, 75%. There is still 1 month up ahead. So 1 month is a lot of time, but we are talking about 70%, 75%. What we have here if you compare to the same talk that we had in the first quarter, it's been a little bit up ahead than what we did.

In regards to the dropout, well, no there isn't anything. I mean, we have a very strong work that is been done, and it's very nice. Well, I have been here for a very short time and I can see the numbers making sense. So this is a big effort from the team. And from these undertakings, we can see the results, more clarity in the numbers, more the capacity to transform and react. Once again, this is the maturing of the work that has been developed over the last 2 years, and we are gathering the results. There is no change for criteria of dropout.

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Operator [30]

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Now we close the Q&A session. Therefore, I give the word to Rogério Tostes for the follow-up. Rogério?

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Eduardo Parente Menezes, Estácio Participações S.A. - CEO & Member of Board of Executive Officers [31]

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Well, It's Eduardo. Well, we had a few more questions asked, I'm sorry that we couldn't answer. But to respect the competition, there is a call starting at 10 and I mean I think that it's important to give them the space. So before the next results, we are going to talk about -- we're all going to talk on the YDUQS Day. And in October, we're going to have wonderful results for you. Thank you very much, and have a wonderful day.

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Operator [32]

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The teleconference of Estácio Participações is closed. Thank you for your participation, and have a wonderful day.

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