Vitru(VTRU) - 2022 Q4 - Annual Report

Part I Item 1. Identity of Directors, Senior Management and Advisers This section is not applicable as per the report Item 2. Offer Statistics and Expected Timetable This section is not applicable as per the report Item 3. Key Information This section presents selected financial data, non-GAAP reconciliations, and significant risks related to the business and recent acquisitions Selected Financial Data The company presents key financial data for fiscal years 2020-2022, showing significant growth in revenue and net income Statement of Profit or Loss Data (in R$ millions) | Indicator | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net revenue | 1,317.3 | 631.1 | 519.2 | | Gross profit | 815.0 | 390.2 | 297.7 | | Operating profit | 201.0 | 78.8 | 60.9 | | Net income for the year | 93.3 | 70.7 | 52.1 | | Basic earnings per share (R$) | 3.52 | 3.04 | 2.79 | | Diluted earnings per share (R$) | 3.23 | 2.87 | 2.68 | Statement of Financial Position Data (in R$ millions) | Indicator | As of Dec 31, 2022 | As of Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | 371.5 | 514.8 | | Total non-current assets | 5,287.5 | 1,012.6 | | Total assets | 5,659.1 | 1,527.4 | | Total current liabilities | 392.4 | 259.4 | | Total non-current liabilities | 3,092.3 | 201.9 | | Total liabilities | 3,484.7 | 461.3 | | Total equity | 2,174.4 | 1,066.1 | Non-GAAP Financial Measures (in R$ millions) | Indicator | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Revenue | 1,317.3 | 631.1 | 519.2 | | Net Income for the Year | 93.3 | 70.7 | 52.1 | | Adjusted EBITDA | 447.1 | 182.4 | 146.7 | | Adjusted Net Income | 214.5 | 91.5 | 98.2 | | Adjusted Cash Flow Conversion from Operations | 96.0% | 82.9% | 88.1% | Risk Factors The company outlines significant risks related to its business, Brazilian operations, the UniCesumar acquisition, and internal controls - A material weakness in internal control over financial reporting was identified as of December 31, 2022, related to insufficient accounting resources and processes following the UniCesumar Business Combination[134] - The company's business is highly dependent on its relationships with hub partners, as 93.6% of hubs are partner-operated, and failure to maintain these partnerships could adversely affect business[95][96] - Significant risks related to operating in Brazil include government influence over the economy, political instability, inflation, and exchange rate fluctuations[77] - The UniCesumar acquisition presents risks, including potential failure to realize anticipated benefits, integration difficulties, and the adverse impact of increased indebtedness on liquidity[77] Item 4. Information on the Company This section details the company's history, hybrid business model, organizational structure, and the impact of the UniCesumar acquisition History and Development of the Company The company evolved from a regional institution to a leading digital education provider through strategic acquisitions and its 2020 IPO - In 2016, the company was acquired by The Carlyle Group and Vinci Partners, leading to a strategic shift to focus on the expansion of digital education operations[383] - On May 20, 2022, the company closed its business combination with UniCesumar for a purchase price of R$3.21 billion, a transformative acquisition that significantly expanded its operations[388] - In late 2022, the company secured a R$300 million investment from Crescera and raised an additional US$14.8 million through a Rights Offering, strengthening its capital position[391][392] Business Overview Vitru operates a scalable, asset-light hybrid digital education model through a vast network of partner-operated hubs across Brazil - The company's mission is to democratize access to education in Brazil through a digital ecosystem, empowering students to create their own success stories[403] - Vitru's core business is a hybrid digital education model that combines online learning with in-person weekly meetings led by tutors, delivered through an extensive network of hubs[406] - The business model is asset-light and scalable, relying on partnerships with hub operators who are compensated with a percentage of tuition fees; 93.6% of hubs were partner-operated as of December 31, 2022[407][661] Key Operational Highlights | Indicator | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Number of Hubs | 2,170 | 939 | 709 | | Total enrolled students | 768,384 | 365,433 | 309,560 | | Digital education to total enrolled students | 97.3% | 98.3% | 97.4% | Organizational Structure Vitru Limited is a Cayman Islands holding company operating in Brazil through its primary subsidiary, Vitru Brasil Empreendimentos - Vitru Limited is a Cayman Islands holding company that became the parent of Vitru Brasil Empreendimentos, Participações e Comércio S.A. through a corporate reorganization before its IPO[636] - The main operating subsidiaries providing educational services are Uniasselvi and UniCesumar, both held under Vitru Brasil[640][641] Property, Plant and Equipment The company's key assets include its intellectual property and brands, with principal corporate offices held under lease agreements - The business relies significantly on its intellectual property, including the "Uniasselvi" and "UniCesumar" brands, and owned 51 trademarks as of December 31, 2022[647][648] - The company's principal executive offices and corporate headquarters are located in leased facilities in Florianópolis (SC), Indaial (SC), and Maringá (PR)[650][652][653] Item 5. Operating and Financial Review and Prospects This section analyzes financial performance for 2020-2022, liquidity, capital resources, and key business trends Operating Results Net revenue more than doubled in 2022, driven by the UniCesumar acquisition, though net income was impacted by higher finance costs - Net revenue increased by 108.7% in 2022, driven by a R$466.5 million increase in digital education revenue and a R$204.1 million increase in on-campus revenue, both impacted by the UniCesumar consolidation[749][752] - Operating expenses grew 97.2% to R$614.0 million in 2022, mainly due to the UniCesumar acquisition, with selling expenses rising 119.6% and G&A expenses rising 100.8%[755] - Financial expenses increased 253.0% to R$264.4 million in 2022, primarily due to R$157.2 million in interest on loans and financing related to the debentures issued for the UniCesumar acquisition[773][774] Results of Operations (in R$ millions) | Indicator | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net revenue | 1,317.3 | 631.1 | 519.2 | | Gross profit | 815.0 | 390.2 | 297.7 | | Operating profit | 201.0 | 78.8 | 60.9 | | Net income for the year | 93.4 | 70.7 | 52.1 | Liquidity and Capital Resources The company's liquidity was significantly impacted by the UniCesumar acquisition, financed primarily through R$1.95 billion in debentures - Total consolidated indebtedness increased to R$2,450.9 million as of December 31, 2022, from R$311.3 million in 2021, primarily due to financing the UniCesumar acquisition[791] - On May 15, 2022, Vitru Brasil issued two series of debentures totaling R$1.95 billion to partially fund the UniCesumar acquisition, maturing in 2024 and 2027[798] - Capital expenditures totaled R$97.0 million in 2022, up from R$58.3 million in 2021, mainly for internal project development, IT equipment, and facility refurbishments[806] Cash Flow Summary (in R$ millions) | Indicator | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Cash flows from operating activities | 121.5 | 65.0 | 75.9 | | Cash flows from (used in) investing activities | (2,162.1) | 100.0 | (610.3) | | Cash flows from (used in) financing activities | 2,012.2 | (175.4) | 617.9 | Trend Information Future performance is subject to uncertainties from Brazil's economic and political environment and the successful integration of UniCesumar - Key trends and uncertainties include the economic and political crisis in Brazil, political instability related to the new presidential administration, potential inflation, and market volatility[812] - The company's ability to realize anticipated benefits from the UniCesumar acquisition and recent capital raises is a critical factor for future performance[812] Item 6. Directors, Senior Management and Employees This section details the company's board, executive team, compensation practices, and employee base, which grew significantly in 2022 Directors and Senior Management The company is managed by an eleven-member board and an executive team led by two Co-CEOs - The board of directors is composed of eleven members, with Carlos Eduardo Martins e Silva serving as Chairman[816][817][818] - The executive team is led by Co-Chief Executive Officers Pedro Jorge Guterres Quintans Graça and William Victor Kendrick de Matos Silva[835][836] Compensation Executive compensation includes fixed and variable components, with long-term incentives provided through two share option plans - The company has two share option plans, the First Share Option Plan (2017) and the Second Long-Term Incentive Plan (2020), to provide long-term incentives to management[851][858] Total Compensation of Directors, Officers, and Senior Management | Year | Compensation (in R$ millions) | | :--- | :--- | | 2022 | 2.2 | | 2021 | 25.2 | | 2020 | 21.5 | Board Practices The board includes an independent Audit Committee but follows home country practices by not having nomination or compensation committees - The board has an Audit Committee consisting of three independent directors, with Aline Leite San Lee Sun serving as the chair and designated "audit committee financial expert"[863] - The company does not have a nomination and corporate governance committee or a compensation committee, as permitted for foreign private issuers under Cayman Islands law[861] Employees The employee count grew to 10,177 in 2022, mainly from the UniCesumar acquisition, with a highly qualified workforce - The majority of employees are located in the South region of Brazil (7,212), followed by the Northeast (1,029)[869] Number of Full-time Personnel | Year (as of Dec 31) | Number of Employees | | :--- | :--- | | 2022 | 10,177 | | 2021 | 6,036 | | 2020 | 6,174 | Item 7. Major Shareholders and Related Party Transactions This section outlines the company's major shareholders and details significant transactions with related parties Major Shareholders As of March 2023, major shareholders include Vinci Partners, Compass Group, Neuberger, The Carlyle Group, and Crescera Beneficial Ownership of Major Shareholders (as of March 31, 2023) | Shareholder | % of Total | | :--- | :--- | | Vinci Partners | 18.0% | | Compass Group LLC | 17.2% | | Neuberger | 12.9% | | The Carlyle Group | 12.3% | | Crescera | 11.4% | | Ninety One UK Limited | 7.3% | | SPX Capital | 6.2% | Related Party Transactions The company engages in transactions with related parties, including lease agreements and investments in Vinci-managed funds - The company has lease agreements for properties owned by former shareholders of UniCesumar, with a monthly rent of approximately R$1.8 million and a 20-year initial term[893][894] - An Amended and Restated Registration Rights Agreement is in place with major shareholders, granting them rights to require the company to register their shares for public resale[889][890] Item 8. Financial Information The company has no dividend policy, retains earnings for expansion, and discloses R$29.2 million in provisions for legal proceedings - The company has not adopted a dividend policy and does not anticipate paying any cash dividends in the foreseeable future, intending to retain earnings for business expansion[899] - As of December 31, 2022, the company was a party to 2,400 legal and administrative proceedings, with an aggregate provision of R$29.2 million recorded for probable losses[905] - The legal proceedings are primarily civil (2,031 cases), labor-related (349 cases), and tax/social security matters (20 cases)[906][907][908] Item 10. Additional Information This section details the company's corporate governance, shareholder rights, anti-takeover provisions, and key tax considerations Memorandum and Articles of Association The articles grant specific director appointment rights to major shareholders and contain anti-takeover provisions - The company is a Cayman Islands exempted company with an authorized share capital of 1,000,000,000 shares with a par value of U.S.$0.00005 each[919][924] - Major shareholders Vinci Partners, Carlyle SPX, and Crescera are entitled to appoint directors to the board based on their percentage of share ownership[958] - The Articles of Association contain anti-takeover provisions, including the board's authority to issue preferred shares without shareholder approval[981][969] Taxation The company is a tax-exempt Cayman Islands entity but highlights the potential PFIC classification risk for U.S. investors - The company is a Cayman Islands exempted company and is not subject to taxes on profits, income, gains, or appreciation in the Cayman Islands[1006][1007] - The company believes it was not a Passive Foreign Investment Company (PFIC) for the 2022 taxable year, but its future PFIC status is uncertain, which could lead to adverse U.S. federal income tax consequences for U.S. Holders[1022] Item 11. Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate, credit, and liquidity risks, with sensitivity analyses provided - The company's primary market risks are interest rate risk, credit risk, and liquidity risk[1036] - Interest rate risk exposure relates to short-term investments and liabilities tied to variable rates like Brazil's CDI and IPCA inflation rate[1038] Interest Rate Sensitivity Analysis (as of Dec 31, 2022) | Financial Instrument | Balance (R$ millions) | Index | Probable Scenario Impact (R$ millions) | | :--- | :--- | :--- | :--- | | Short-term investments | 26.4 | 100% CDI – 13.65% | 1.0 | | Trade receivables | 51.5 | IPCA – 5.78% | 3.0 | | Lease liabilities | 1,645.4 | IGP-M – 5.45% | 89.7 | | Payables from acquisition | 509.2 | IPCA – 5.78% / CDI + 3% | 29.4 | Item 15. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were ineffective as of year-end 2022 - Management concluded that disclosure controls and procedures were ineffective as of December 31, 2022, due to a material weakness[1063] - A material weakness in internal control over financial reporting was identified, stemming from insufficient accounting resources and processes after the UniCesumar acquisition[1067] - The company is adopting remediation plans to improve its processes and internal controls environment to address the identified material weakness[1070] Part III Financial Statements This section contains the audited IFRS consolidated financial statements for fiscal years 2020, 2021, and 2022 - The independent auditor issued an opinion that the consolidated financial statements present fairly, in all material respects, the financial position and results of operations in conformity with IFRS[1135] - The acquisition of UniCesumar was accounted for using the acquisition method, resulting in the recognition of R$1,556.3 million in goodwill and significant identifiable intangible assets[1163][1164][1167] - As of December 31, 2022, the company had a negative net working capital position of R$21.4 million, though management expressed confidence in its ability to meet obligations[1155]