Vitru(VTRU) - 2021 Q4 - Annual Report

Part I Key Information This section presents selected financial data for fiscal years 2019-2021 and outlines the company's major business risks Selected Financial Data Key financial data from 2019-2021 shows significant revenue and net income growth alongside a reduction in total liabilities Statement of Profit or Loss Data (in R$ millions) | Indicator | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net revenue | 631.1 | 519.2 | 461.1 | | Revenue from digital education undergraduate courses | 531.7 | 423.0 | 336.3 | | Revenue from continuing education courses | 52.4 | 40.6 | 47.1 | | Revenue from on-campus undergraduate courses | 47.0 | 55.6 | 77.6 | | Gross profit | 390.2 | 297.7 | 249.5 | | Operating profit (loss) | 78.8 | 60.9 | (35.9) | | Net income (loss) for the year | 70.7 | 52.1 | (66.2) | | Basic earnings per share (R$) | 3.04 | 2.79 | (3.93) | | Diluted earnings per share (R$) | 2.87 | 2.68 | (3.93) | Statement of Financial Position Data (in R$ millions) | Indicator | As of Dec 31, 2021 | As of Dec 31, 2020 | As of Dec 31, 2019 | | :--- | :--- | :--- | :--- | | Total current assets | 514.8 | 731.7 | 214.9 | | Total non-current assets | 1,012.6 | 956.1 | 873.8 | | Total assets | 1,527.4 | 1,687.8 | 1,088.7 | | Total current liabilities | 259.4 | 382.6 | 221.4 | | Total non-current liabilities | 201.9 | 327.2 | 416.0 | | Total liabilities | 461.3 | 709.8 | 637.4 | | Total equity | 1,066.1 | 978.0 | 451.3 | Non-GAAP Financial Measures (in R$ millions, except percentages) | Indicator | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net Revenue | 631.1 | 519.2 | 461.1 | | Net Income (Loss) for the Year | 70.7 | 52.1 | (66.2) | | Adjusted EBITDA | 182.4 | 146.7 | 117.6 | | Adjusted Net Income | 91.5 | 98.2 | 57.7 | | Adjusted Cash Flow Conversion from Operations | 82.9% | 88.1% | 75.4% | Risk Factors The company faces significant risks related to its business, the Brazilian economy, a pending acquisition, and its shares - Key business and industry risks include the COVID-19 pandemic, dependence on hub partners, extensive government regulation, significant competition, and the importance of its brand reputation[83] - Key risks related to Brazil include government influence on the economy, political instability, inflation, and perceptions of risk in other emerging markets[83][87] - Key risks related to the UniCesumar Business Combination include the possibility of not completing the acquisition, challenges in realizing anticipated benefits, and potential for significant liabilities[85] - Key risks related to the company's common shares include anti-takeover provisions, reliance on exemptions as a foreign private issuer, and potential unsuitability for all investors[86][89] Information on the Company This section details the company's history, asset-light business model, organizational structure, and key properties History and Development of the Company The company evolved from an on-campus institution to a digital education leader following a 2016 acquisition and 2020 IPO - The company was acquired by The Carlyle Group and Vinci Partners in 2016, leading to a strategic focus on expanding digital education operations across Brazil[351] - In September 2020, the company completed its initial public offering on Nasdaq, raising U.S.$96 million in total proceeds, primarily intended to fund inorganic growth[355] - On August 23, 2021, the company entered into a definitive agreement to acquire UniCesumar for a total enterprise value of R$3,150 million, a transaction pending regulatory approval[357] - In response to the COVID-19 pandemic, the company implemented remote support measures, resulting in no material impact on operations as of the report date[359][363] Business Overview The company operates a scalable, hybrid digital education model through a large network of partner-operated hubs in Brazil Key Operational and Financial Highlights (as of Dec 31, 2021) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Number of Hubs | 939 | 709 | 32.4% | | Enrolled Students | 373,977 | 309,560 | 20.8% | | Net Revenue (R$M) | 631.1 | 519.2 | 21.6% | | Net Income (R$M) | 70.7 | 52.1 | 35.7% | | Adjusted EBITDA (R$M) | 182.4 | 146.7 | 24.3% | | Adjusted Net Income (R$M) | 91.5 | 98.2 | -6.8% | - The company operates an asset-light, scalable business model where hub partners manage day-to-day operations, with 86.6% of its 939 hubs managed by 275 hub partners as of December 31, 2021[373][375] - The business is centered on a hybrid digital education model that combines online learning with in-person weekly meetings led by over 3,000 local tutors[371] - According to the 2020 INEP census, Vitru was the second-largest digital postsecondary education group in Brazil by enrollments[491] Organizational Structure Vitru Limited is a Cayman Islands holding company that serves as the parent of its Brazilian operating subsidiary - Vitru Limited is a Cayman Islands holding company that became the parent of its Brazilian operating subsidiary, Vitru Brasil, through a corporate reorganization prior to its IPO[686] - As of December 31, 2021, the company had 23,329,324 common shares issued and outstanding[687] Property, Plant and Equipment The company protects its intellectual property through trademarks and operates entirely out of leased facilities - The company owned 28 trademarks as of December 31, 2021, including its key brands "Vitru" and "Uniasselvi"[690] - All of the company's operational and administrative facilities, including its corporate headquarters, were leased as of December 31, 2021[691][692] Operating and Financial Review and Prospects This section analyzes financial performance, liquidity, capital resources, and key business trends affecting the company Operating Results Revenue and net income grew in 2021, driven by digital education, despite rising operating and impairment expenses Results of Operations (in R$ millions) | Item | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net revenue | 631.1 | 519.2 | 461.0 | | Cost of services rendered | (240.9) | (221.5) | (211.5) | | Gross profit | 390.2 | 297.7 | 249.5 | | Operating expenses | (311.4) | (236.8) | (285.3) | | Operating profit (loss) | 78.8 | 60.9 | (35.8) | | Financial results | (29.4) | (27.8) | (41.2) | | Profit (loss) before taxes | 49.4 | 33.1 | (77.0) | | Net income (loss) for the year | 70.7 | 52.1 | (66.1) | - Net revenue growth in 2021 was driven by a R$108.7 million (25.7%) increase in revenue from digital education undergraduate courses, reflecting hub expansion and maturation[789][792] - Net impairment losses on financial assets increased by 44.1% to R$110.7 million in 2021, primarily due to a higher proportion of freshmen with historically higher default rates[802][804] Liquidity and Capital Resources The company reduced its total indebtedness in 2021 through loan repayments, funded by operating cash and investments Cash Flow Summary (in R$ millions) | Cash Flow Activity | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Operating Activities | 65.0 | 75.9 | 56.0 | | Investing Activities | 100.0 | (610.3) | (49.5) | | Financing Activities | (175.4) | 617.9 | (6.5) | - Total consolidated indebtedness decreased from R$576.0 million to R$311.3 million as of Dec 31, 2021, mainly due to the full repayment of a R$150.0 million loan[836][838] - Capital expenditures totaled R$58.3 million in 2021, primarily for internal project development, IT equipment, and facility improvements[841] Contractual Obligations as of December 31, 2021 (in R$ millions) | Obligation | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Trade payables | 41.7 | - | - | - | 41.7 | | Lease liabilities | 28.4 | 55.6 | 54.5 | 121.8 | 260.3 | | Accounts payable from acquisition of subsidiaries | 155.6 | - | - | - | 155.6 | | Share-based compensation | - | 24.7 | - | 30.8 | 55.5 | | Total | 229.6 | 82.3 | 55.9 | 153.2 | 521.0 | Trend Information Future performance is expected to be influenced by the COVID-19 pandemic and Brazil's economic and political climate - The business is expected to continue being affected by the COVID-19 pandemic and governmental responses, impacting employees, students, and partners[849] - Key trends that could materially affect future results include the ongoing economic and political crisis in Brazil, the 2022 presidential elections, and potential inflation increases[851] Directors, Senior Management and Employees This section details the company's leadership, compensation policies, board structure, and employee base of 6,036 people Directors and Senior Management The company is managed by a seven-member Board of Directors and four executive officers with extensive industry experience - The Board of Directors is composed of seven members, including a Chairman and three independent directors who also serve on the Audit Committee[855][857] - The executive team is led by CEO Pedro Jorge Guterres Quintans Graça and CFO Carlos Henrique Boquimpani de Freitas[869] Compensation Executive compensation totaled R$25.2 million in 2021 and includes fixed salaries and long-term incentive plans Total Compensation (in R$ millions) | Year | Total Compensation | | :--- | :--- | | 2021 | 25.2 | | 2020 | 21.5 | | 2019 | 34.1 | - The company has two share option plans with a combined 1,101,919 options outstanding as of Dec 31, 2021[882][887][892] Board Practices The Board operates with an Audit Committee and a Disclosure Committee, leveraging foreign private issuer exemptions - The Board has two committees: the Audit Committee and the Disclosure of Information Committee[893] - The Audit Committee is composed of three independent directors, with Aline Leite San Lee Sun serving as the designated "audit committee financial expert"[894] Employees The company employed 6,036 full-time staff as of year-end 2021, with local tutors comprising the largest group Number of Full-time Employees by Function | Function | As of Dec 31, 2021 | As of Dec 31, 2020 | As of Dec 31, 2019 | | :--- | :--- | :--- | :--- | | Local tutors | 3,391 | 3,617 | 3,117 | | Student Support and Academic Staff | 1,715 | 1,788 | 2,075 | | General and Administrative | 681 | 422 | 303 | | Total Full-time Personnel | 6,036 | 6,174 | 5,711 | - The company was certified as a "Great Place to Work" with an employee satisfaction rate of 84 (out of 100) in 2021[904] Major Shareholders and Related Party Transactions Vinci Partners, NB Funds, and The Carlyle Group are the principal shareholders, with certain related party transactions disclosed Major Shareholders' Beneficial Ownership | Shareholder | % of Total | | :--- | :--- | | Vinci Partners | 26.8% | | NB Funds | 18.7% | | The Carlyle Group | 17.9% | | Compass Group LLC | 11.1% | | SPX Capital | 8.9% | | Navi Holding Participações | 6.3% | | Board of Directors and Executive Officers as a group | 1.2% | - The company has a Registration Rights Agreement with its Principal Shareholders, allowing them to require the company to register their shares for public resale[919][920] - Related party transactions include investments in funds managed by Vinci Partners and an insurance policy with Austral Seguradora S.A.[917] Financial Information The company does not plan to pay dividends and has provisioned R$14.9 million for probable legal proceeding losses - The company has not adopted a dividend policy and does not anticipate paying cash dividends in the foreseeable future, intending to retain earnings for business expansion[927] - As of December 31, 2021, the company was a party to 1,274 legal proceedings and had recorded provisions of R$14.9 million for cases where a loss is considered probable[931] - A significant tax proceeding involves an ISS tax claim for R$32.9 million, for which the chance of loss is estimated as possible and no provision has been recorded[935] Additional Information This section details the company's corporate framework, material contracts, and key tax considerations for shareholders Memorandum and Articles of Association The company's articles grant major shareholders director appointment rights and include anti-takeover provisions - The company is a Cayman Islands exempted company with an authorized share capital of 1,000,000,000 shares and 23,323,224 common shares outstanding as of the report date[944][946] - The Articles of Association grant major shareholders Mundi and Vinci Partners the right to appoint directors as long as they meet certain ownership thresholds[978] - The Articles include anti-takeover provisions, such as the Board's authority to issue preferred shares without shareholder approval[1000][1002] Taxation The company is not subject to tax in the Cayman Islands but notes a potential PFIC classification risk for U.S. Holders - The Cayman Islands does not levy taxes on profits, income, or gains, and the company has received a 20-year tax concession undertaking[1022][1023] - For U.S. Holders, distributions on common shares are generally treated as dividends, and gains from the sale of shares are treated as capital gains, subject to PFIC rules[1033][1035] - There is a risk the company could be classified as a Passive Foreign Investment Company (PFIC), which would result in adverse U.S. federal income tax consequences for U.S. Holders[346][1037] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate, credit, liquidity, and foreign exchange risks - The company's primary market risks are interest rate, credit, liquidity, and foreign exchange risk[1050] - Interest rate risk exposure comes from short-term investments and accounts payable from acquisitions, which are subject to variable rates like the CDI and IPCA inflation rate[1051] Interest Rate Sensitivity Analysis (as of Dec 31, 2021) | Financial Instrument | Balance (R$M) | Index | Probable Scenario (R$M) | Possible Scenario 25% (R$M) | Remote Scenario 75% (R$M) | | :--- | :--- | :--- | :--- | :--- | :--- | | Short-term investments | 253.0 | 111.11% CDI - 4.42% | 11.2 | 8.4 | 2.8 | | Lease liabilities | 161.5 | IGP-M - 17.79% | 28.7 | 35.9 | 50.3 | | Accounts payable from acquisition of subsidiaries | 149.8 | IPCA - 10.06% | 15.1 | 18.8 | 26.4 | Part II Material Modifications to the Rights of Security Holders and Use of Proceeds Net proceeds from the 2020 IPO are intended to fund inorganic growth, including the UniCesumar business combination - The company closed its IPO on September 22, 2020, selling 6,000,000 common shares at U.S.$16.00 each, for gross proceeds of U.S.$96 million[1073] - Net proceeds from the IPO are primarily intended to fund inorganic growth, with a specific plan to apply them to the UniCesumar business combination[1073] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were ineffective as of year-end 2021 - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were ineffective due to material weaknesses in internal control over financial reporting[1074] - Management's annual report on internal control over financial reporting concluded that, as of December 31, 2021, these controls were not effective due to insufficient accounting resources for SEC and IFRS compliance[1078] - The company has implemented additional internal controls during 2021, including personnel training and system implementations, which are expected to materially affect internal controls[1082] Corporate Governance and Other Matters The company follows home country practices for certain Nasdaq rules and discloses principal accountant fees and code of ethics - The company's audit committee chair, Aline Leite San Lee Sun, is considered an "audit committee financial expert" as defined by the SEC[1083] Principal Accountant Fees (in R$ millions) | Fee Type | 2021 | 2020 | | :--- | :--- | :--- | | Audit fees | 4.4 | 4.6 | | All other fees | 0.5 | — | | Total | 4.9 | 4.6 | - As a foreign private issuer, the company follows home country (Cayman Islands) practice in lieu of certain Nasdaq rules, including requirements for a majority-independent board and a nominations committee[1092][1093][1099] Part III Financial Statements This section contains the company's audited consolidated financial statements for fiscal years 2019, 2020, and 2021 - The report includes the audited consolidated financial statements for the years ended December 31, 2021, 2020, and 2019, prepared in accordance with IFRS[1130][1139] - The independent registered public accounting firm, PricewaterhouseCoopers, issued an unqualified opinion on the consolidated financial statements[1139]