Abril Educação Management Report 2014

Transcription

1 Abril Educação Management Report 2014 Dear Shareholders, We hereby submit for your appreciation the Management Report and Financial Statements of Abril Educação S.A. for the fiscal year ended December 31, 2014, along with the Report of the Independent Auditors on the Financial Statements. The consolidated financial statements of the Company were prepared in accordance with the accounting practices adopted in Brazil issued by the Accounting Pronouncements Committee (CPC) and in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The information described in this report involves distinct consolidations. Four school acquisitions were concluded over the course of 2013: Grupo Ometz (Wise Up, Wise Up Teens and You Move), in April; Colégio Motivo, in July; Centro Educacional Sigma (Colégio Sigma), in October; and a 22.7% interest in MStech, in December. Lastly, in December 2014, we acquired the remaining 49% interest in Red Balloon. The assets arising from these transactions began to be recognized in the consolidated financial statements of the Company as from their respective acquisition dates, which influenced the evolution in the performance of Abril Educação between fiscal year 2013 and fiscal year An important event in the Company s trajectory in 2014 was the sale, in June, of a portion of the shares held by the Abrilpar Group to Thunnus Participações, a company owned by the investment funds managed by Tarpon. As a result of this transaction, the Abrilpar Group reduced its interest to 37.72% of the voting capital and 20.73% of the total capital of Abril Educação, with Tarpon Company now holding 24.21% of the voting capital and 19.91% of the total capital. In the same period, the Company announced its intention to migrate to the Novo Mercado, the listing segment of the BM&FBovespa with the highest corporate governance and transparency requirements. In August, the transaction between the Abrilpar Group and Tarpon Company was concluded, and the Company s Board of Directors approved the convening of a shareholders meeting to approve the migration to Novo Mercado. The focus of this Management Report was the performance and main events of Abril Educação S.A. in For more information on the operating and financial performance, as well as on our industry, please consult our Reference Form available on the websites of Abril Educação ( of the Securities and Exchange Commission of Brazil - CVM ( and of the Brazilian stock exchange - BM&FBovespa ( Message from the Management Marked by a series of advances in its organizational structure, 2014 was one of the most important years in the history of Abril Educação. The year was used to consolidate and integrate the newly acquired assets and to migrate to the Novo Mercado listing segment of the BM&FBovespa. Another important development, though more recent, in 2015, was the transfer of the Company's control to Tarpon. 1

2 Tarpon, which in June 2014 had acquired a 19.91% interest in Abril Educação, became its controlling shareholder after acquiring the remaining interest held by Abrilpar for R$12.33 per share, bringing its total interest to 40.64%. The operation was announced on February 9, 2015 and approved by Brazil s antitrust agency CADE on March 12, The transfer of control produced two effects: the need to offer the same proposal in terms of price per share to the non-controlling shareholders through a Public Tender Offer; and the reformulation of the organizational structure. Eduardo Mufarej, the CEO of Tarpon, became the CEO of Abril Educação, while Mario Ghio Júnior became the CEO of all the Basic Education businesses (Schools, Learning Systems, Publishers and Red Balloon) and Marcelo Bruzzi remained the CEO of all the Language Courses for Adults businesses (Ometz Group). The new CEO will also be supported by the Financial & Investor Relations, Strategy & Innovation and Culture & Organization departments. Without straying from its strategic focus to maintain market leadership in quality basic education, Abril Educação will remain alert to business opportunities in the sector that offer excellent growth potential and will also actively seek new opportunities in complementary education for adults. The Company will also invest in: expanding the network of schools it serves to further expand its student base in Learning Systems; expanding its offering of products via cross-selling at Publishers; education technology; and the in-school model under the Red Balloon brand. In 2014, we maintained the good performance of our main business lines, especially those with more consistent revenues over the course of the year. We have taken special care to ensure that the integration of the new operations preserve the previous growth dynamic to ensure the exchange of best practices among the various units. In 2014, we posted net revenue of R$1,265.0 million, up 22% on R$1,036.5 million in 2013, and EBITDA* growth of 6% to R$285.0 million, with EBITDA margin contracting 3 p.p. from 26% in This EBITDA margin compression is explained by the recognition of nonrecurring expenses with the provisioning for restructuring in the amount of R$27.9 million accrued in the second quarter of 2014, and by the expenses of R$18.7 million associated with the new stock-based compensation plan approved by the Extraordinary Shareholders' Meeting held in March. The main actions and results contributing to the Company's performance in 2014 are detailed below. In the Publishing business, the highlight of the year was the recovery in market share in the 2015 National Textbook Program (PNLD) to 25%, which is the same share as in 2011 (a reference year for the program) and much higher than the 2014 PNLD (16%). In the private segment, the Publishers posted contraction in book sales volume, which was offset by growth in premium collections (e.g., Teláris and Múltiplo projects) that increased the average ticket and by increased cross-selling in the School and Learning Systems segments. In Learning Systems, 2014 was a year of strong growth. The number of students increased 14% in the traditional brands and 54% overall, including the brands ETB and OLEM (O Líder em Mim). There was also strong growth in the OLEM system, which was installed in the public school system of an important city in the São Paulo Metropolitan Area, and in ETB, which as of 2014 has been present in the Institutions of Higher Learning participating in the PRONATEC technical education program. Another important contract closed in 2014 was to supply the SER Learning System to schools in the national network of Industrial Social 2

3 Services (SESI), with the potential for expanding sales to the organization's 26 regional offices, pointing to the possibility of strong growth over the coming years. It is also important to note that in early 2015, the Company began to adopt new educational technologies. The main product is the Adaptive Platform of the Anglo System, which was developed in partnership with MSTech and has already successfully passed the test phase. This innovation is yet another important step towards further strengthening the products and services of Abril Educação. In the Schools segment, 2014 was a year marked by stabilization and the consolidation of our brands, since the Company has maintained the 19 units it has held since The period also demonstrated the feasibility of investments in this sector, especially those based on the model of Colégio ph in Rio de Janeiro, which has registered strong growth over the last three years, with the launch of the ph Learning System at owned units, the expansion of the ph System offering to schools in surrounding areas, and the expansion of the offering of new complementary products, such as OLEM and the Red Balloon in-school model. Three new units two under the ph brand and one under the Motivo brand were inaugurated in Caruaru, Pernambuco in 2014 and posted excellent results in new enrollments for 2015 that surpassed the Company's expectations. In the first quarter of 2015, in keeping with its policy to expand, selectively, the network of owned schools via mergers of strategic units, Abril Educação acquired two new units: Sigma Centro Educacional de Águas Claras in Brasília, Federal District; and Colégio Maxi in Cuiabá, Mato Grosso. With a total of approximately 3,000 students, these schools are references in quality education and have been registering excellent results on the national ENEM exams. The Sigma school will use the materials of the Publishers Ática and Scipione, while Colégio Maxi will adopt the Maxi Learning System. The two institutions represent important acquisitions to increase the penetration of the Company's Learning Systems in the Midwest region. In the Language Schools segment, in 2014, Abril Educação concluded the stabilization of its business Wise Up, starting a journey towards achieving leadership in the Business English segment. The main challenge facing this strategy is the satisfaction, and consequently the retention, of both customer and franchise. To meet this target, the Company will focus on investments by franchise owners, on the Go Premium strategy for the student experience and on inaugurating a model school. In the Red Balloon brand, in 2014, we launched the pilot project for the in-school model, which offers English courses to children in basic education schools and is a trend garnering more and more approval from parents and students as well as school operators. The more than 2,000 schools supported by the Learning Systems of Abril Educação represent strong enrollment potential for the in-school courses, which represents an immense universe to be explored. In 2015, the Company plans to strengthen its investments in this model. Also in 2014, Abril Educação acquired the remaining 49% interest in Red Balloon. The Company had acquired the initial 51% in 2012 and signed an option to purchase the remaining interest, held by the Lam family, by Given the demonstrated feasibility of the language school for children business, with the possibility of synergies with the in-school system at partner schools, the acquisition's conclusion was brought forward to

4 With the consolidation of the businesses acquired in recent years, the progress made on their integration and the strategic planning formulated by its new management over the course of the year, Abril Educação ended 2014 in an even stronger position to build a promising future for the more than 900,000 student served by its Schools and Learning Systems. Building this future in education is a collective task, given the importance of always working alongside employees and partners who are committed to the ideal of taking the highestquality education to all regions of Brazil. Thus, people who dream, are bold, tirelessly seek out innovation and, most importantly, are passionate about education. (*) In accordance with CVM Instruction 527/12, EBITDA is defined as Earnings Before Interest, Tax (Income and Social Contribution Taxes), Depreciation and Amortization. Adjusted EBITDA is calculated based on operating income including the amounts related to depreciation and amortization and including amortization of publishing investments, the provision for restructuring and the provision for the new stock-based compensation plan amounted to R$389.1 million in 2014 and R$311.9 million in Pursuant to CVM Instruction 527/12, the Company may opt to report EBITDA excluding the net amounts related to discontinued operations, as per Technical Pronouncement CPC 31 Non-Current Assets Held for Sale and Discontinued Operations, and adjusted for other items that contribute to information on potential gross cash generation. Analysis of Economic and Financial Performance 2014 Revenue In 2014, net revenue amounted to R$1,265.0 million, growing 22% from Excluding the revenues from the latest acquisitions of Grupo Ometz (Wise Up, Wise Up Teens and You Move) and of the schools Motivo and Sigma, net revenue grew 10%. The acquisition of Grupo Ometz and of the schools Motivo and Sigma contributed additional revenue of R$131.7 million in The combined organic contribution from our existing businesses amounted to R$1,133.4 million. The main growth drivers were the continued growth in the Learning Systems and Schools segments and the revenue growth in the Publishers segment, due to the higher market share achieved in the 2015 National Textbook Program (PNLD). In 2014, we continued to make progress in diversifying our revenue sources, which helped to attenuate the seasonality of the business and ensure more consistent revenue distribution over the quarters. Note: Corporate data. Eliminations include the divestments of SER to GEO, of Anglo to ph and of SER to ETB. In the Learning Systems business, which comprises Traditional Learning Systems (Anglo, ph, SER, GEO, Maxi and Farias Brito), ETB Learning Systems and O Líder em Mim (OLEM), we ended December 2014 with 931,300 students, for growth of 54% on This increase is explained by the organic growth of 77,000 students (14%) in the Traditional Learning Systems compared to 2013; the growth of 206,700 students in the ETB Technical Learning System due to the recognition of students under the PRONATEC technical education program; and the growth of 41,800 4

5 students in the OLEM program due to the signing of agreements in the public school system to serve 18,000 new students. As a result, in 2014, revenue from Learning Systems grew 27% compared to 2013, to R$303.0 million. In 2014, net revenue from Publishers grew 1%, from R$462.8 million in 2013 to R$467.2 million. In the public segment, the highlight was the leadership in purchases by the 2015 National Textbook Program (PNLD) for the publishers Ática and Scipione, which achieved 25% market share in 2014, according to estimates by Abrelivros. In the 2015 PNLD, the Publishers received total orders for 32.0 million books, 21.7 million of which for initial purchases under the program and 10.3 million for replacing books from previous programs. Revenues under the program came to R$245 million for physical books. Digital books were not included in the 2014 orders and are being negotiated with the National Education Development Fund (FNDE). In 2014, Publishers registered a decrease of 30% in book sales volume in the private segment, selling a total of 5.0 million books. The decrease is explained by a non-recurring sale of 1.7 million books to the São Paulo branch of the Foundation for Educational Development (FDE) in Excluding this effect, volumes declined by 0.4 million books in 2014, which was more than offset by a 10% increase in average ticket due to the higher share of premium collections. In 2014, revenue from Preparatory Schools and Courses amounted to R$307.5 million, increasing 45% from 2013, with this amount including the full recognition of revenue from the schools Motivo and Sigma that were acquired in the second half of On a comparable basis, net revenue grew 10%, driven by the 15% increase in revenue per student, which more than offset the smaller student base. The Schools and Preparatory Courses business (Anglo, ph, Motivo and Sigma) ended December 2014 with 25,200 students enrolled at 19 units, representing a decrease of 2% from 2013, due to a reduction in new enrollments in preparatory courses compared to In 2014, net revenue in the Language School business was R$164.4 million, R$32.2 million of which was contributed by Red Balloon and R$132.2 million by Grupo Ometz. The Language School business (Red Balloon and Grupo Ometz, formed by Wise Up, Wise Up Teens and You Move) ended December with 83,300 students enrolled at 393 units. In early 2014, we presented a few strategic changes to the Grupo Ometz franchisees to increase the profitability of their businesses. The main changes were the higher commissions paid on the sale of teaching materials; the maintenance of teaching material prices for Wise Up with no inflation passthrough; the 10% decrease in teaching material costs for You Move; 5

6 and the incentives given to the current network of franchisees for recommending potential new franchisees. These changes made on the Company s initiative were required to reestablish the economic balance between franchiser and franchisee and ended in January 2015, with the new strategic proposal now focused on the Go Premium experience and on the satisfaction - and consequently retention of both customer and franchisee. Cost of Goods Sold (COGS) Cost of Goods Sold in 2014 increased by 27% to R$413.1 million. In 2014, we fully recognized the costs related to the acquisitions made in 2013 (Grupo Ometz, Schools Motivo and Sigma). Excluding these events, COGS in 2014 increased 15%, leading to gross margin contraction of 2 percentage points, driven mainly by the higher COGS at Publishers. This increase is explained by: (i) the investment in digital content for the PNLD 2015, without a corresponding net revenue in 2014; (ii) the investment in publishing for the government program Education for Youth and Adults (EJA); and (iii) the higher amortization in the Publishers segment due to the change in criteria for the production of books for the private market, which optimized production and reduced inventory levels. Selling, General and Administrative Expenses In 4Q14, we recognized an expense of R$18.7 million related to the stock-based compensation plan approved in the Extraordinary Shareholders Meeting held on March 19, which reinforces our policy of meritocracy and talent retention. The decision led to the cancelation of the former Stock Option Plan and the Extraordinary Executive Incentive Plan of the Company. The stock options to be offered under the new plan will represent a maximum of 5% of our capital stock. In the year, total expenses amounted to R$645.3 million, increasing 28% from This amount includes: (i) the recognition of the restructuring provision, as previously announced in 2Q14, (R$27.9 million); (ii) the expenses related to the new stock-based compensation plan (R$18.7 million); (iii) the incremental expenses associated with the acquired businesses (R$57.4 million); (iv) the expenses related to moving the Company s headquarters (R$7.8 million); and (v) the nonrecurring expenses with consulting services, which did not occur in 2013 (R$6.2 million). Excluding the aforementioned effects, expenses in 2014 increased 5%. Adjusted EBITDA* and Net Income In 2014, adjusted EBITDA* amounted to R$389.1 million, growing 25% on This increase is explained by the significant contribution from the Learning Systems and Preparatory Schools and Courses, given the full recognition of the schools Motivo and Sigma. Excluding the assets acquired in 2014, adjusted EBITDA grew by 15%. (*) In accordance with CVM Instruction 527/12, EBITDA is defined as Earnings Before Interest, Tax (Income and Social Contribution Taxes), Depreciation and Amortization. On this basis, in accordance with this Instruction, EBITDA amounted to R$268.4 million in 2013 and R$285.0 million in Adjusted EBITDA is calculated based on operating income including the amounts related to depreciation and amortization, the amortization of publishing investments, the provision for the Company s restructuring, as well as the new stock-based compensation plan. Pursuant to CVM Instruction 527/12, the Company may opt to report EBITDA excluding the net amounts related to discontinued operations, as per Technical Pronouncement CPC 31 Non-Current Assets Held for Sale and Discontinued Operations, and adjusted for other items that contribute to information on potential gross cash generation. Net Income before non-controlling interest was R$58.7 million, decreasing 26% from The reduction is explained by the increase in the financial expense in 2014, due to the growth in the Company s debt position resulting from its investment strategy, and by the 6

7 higher interest rates compared to Net income adjusted by the amortization of goodwill and the tax benefit from the use of goodwill amounted to R$195.0 million in Dividends The Board of Directors approved the distribution of R$11.6 million as dividends, which is equivalent to 25% of net income for the period, after the constitution of a 5% legal reserve, based on the 2014 financial statements. The proposal for the allocation of net income for 2014 will be submitted for approval at the Shareholders Meeting to be held in April Investments Operating investments amounted to R$114.5 million in 2014, distributed as follows: (i) R$70.5 million to acquisitions of property and equipment and intangible assets; and (ii) R$44.0 million to the production and updating of content for the new collections of the Learning Systems and Publishers. Total investments in the period were 26% higher than the R$90.6 million invested in 2013, mainly due to the new assets acquired in 2014 and the onetime investments related to moving the Company s head office in the amount of R$14.6 million. Excluding this non-recurring effect, investments in 2014 amounted to R$100 million. Acquisition of 100% of Sigma Centro Educacional de Águas Claras in Brasília, Federal District; and Colégio Maxi in Cuiabá, Mato Grosso The Company concluded the acquisitions of 100% of Sigma Centro Educacional de Águas Claras in Brasilia, and of Colégio Maxi in Cuiabá, in the first quarter of Both schools are a reference in academic quality and achieved strong results in the national ENEM exam. These acquisitions are in line with the Company s strategic plan to focus on school growth to replicate their quality in the services and products offered to our partners. Acquisition of the remaining 49% interest in Red Balloon In December 2014, Abril Educação acquired the remaining 49% interest in Red Balloon. The Company had acquired the initial 51% in 2012 and signed an option to purchase the remaining interest, held by the Lam Family, by Given the demonstrated feasibility of the language courses for children business, with the possibility of synergies with the inschool system at partner schools, the acquisition's conclusion was brought forward. The total amount paid for the company to the acquisition of Sigma Centro Educacional de Águas Claras in Brasilia, and of Colégio Maxi in Cuiabá and the remaining 49% interest in Red Balloon was R$106 million. Operating Cash Generation Operating cash generation in 2014 increased by 42%, or R$96.8 million, to R$328.5 million, from R$231.7 million in The positive result was mainly due to: (i) organic growth in our Learning Systems and Schools businesses; (ii) improvements in working capital management; and (iii) the full recognition of the acquired businesses (Wise Up, Sigma and Motivo). Cash generation, net of interest and tax payments advanced 9% on the prior year to R$172.1 million. The main offsetting impact on operating cash generation in relation to the prior year was interest expenses, due to the payment on an annual basis of the interest on debt contracted in

8 Capital Structure In December 2014, the consolidated net debt of Abril Educação amounted to R$903.5 million, composed of gross debt of R$1,272.5 million and cash and cash equivalents of R$369.0 million. Total gross debt was formed by R$859.6 million in financial debt and R$413.0 million in debt with the sellers of the acquired companies. Of this amount, 93% corresponded to long-term debt. With the aim of restructuring and lengthening the Company's debt maturity profile, in October, bonds were issued by the subsidiaries Ática, Scipione and Abril Educação Learning Systems. The additional balance of R$120 million in proceeds from the transaction will be used for working capital purposes. Corporate Governance In August 2014, with the conclusion of the sale of a portion of the shares held by Abrilpar to Tarpon Company, the Company s Board of Directors approved the migration to the Novo Mercado. As a result, on October 21, 104, Abril Educação concluded the process to migrate its stock to the special trading segment of the Brazilian stock exchange BM&FBovespa called Novo Mercado, and as of October 23 its stock, now formed exclusively by common shares, began trading on the segment under the stock symbol ABRE3. The Board of Directors of Abril Educação is composed of nine members, of whom two represent the non-controlling shareholders and two are independent. The track record and market knowledge of our main shareholders, with whom we interact frequently, provide important support to the management. Furthermore, the Board of Directors is supported by an Audit Board, which has been installed since April 2012, and formed by five members, two of whom represent the interests of the non-controlling shareholders. At the end of 2014, the Company approved its new Information Disclosure and Securities Trading Policy to establish the practices for disclosing and using information that must be observed by the controlling shareholder, the managers, the audit board members and any other persons who become aware of privileged information. The new policy also establishes the rules and procedures to be adopted by the Company and by related persons for trading securities issued by the Company in order to ensure ethical conduct by all those with access to privileged and material information. Submission to the Market Arbitration Chamber The Company submitted to arbitration in the Market Arbitration Chamber, pursuant to the submission to arbitration clause in its Bylaws. This chamber, which was created by the stock exchange, adjudicates disputes and controversies that may arise between the controlling shareholders of companies listed on the Novo Mercado listing segment, shareholders in general, managers, audit board members and the stock exchange itself. Relations with the Independent Auditors In compliance with CVM Instruction 381/03, we hereby inform that the Company and its subsidiaries have formally adopted the procedure of consulting the independent auditors PricewaterhouseCoopers (PWC) to ensure that the provision of other services does not affect their autonomy and the objectiveness needed to carry out independent audit. 8

9 In the fiscal year ended December 31, 2014, PWC provided additional services totaling R$175 thousand, for fiscal consulting purposes, which is equivalent to around 14% of the fees for auditing the consolidated financial statements of the Company for that year. PricewaterhouseCoopers Auditores Independentes considers that the services were provided in strict compliance with the accounting rules related to the autonomy of independent auditors during audit work and therefore did not represent any situation that could affect their autonomy and objectiveness while carrying out the independent audit services. Declaration of the Board of Executive Officers Pursuant to CVM Instruction 480/09, the Board of Executive Officers hereby declares to have discussed, reviewed and to be in full agreement with the financial statements for the fiscal year ended December 31, 2014 and the opinions expressed in the Independent Auditors Report. Acknowledgments We would like to thank and recognize all of our employees, clients, shareholders, partners and government representatives for their support and trust in our mission of building a Company that is capable of having a positive influence on the quality of basic education and pre-college education in Brazil and on the constant pursuit of value creation. The Management São Paulo, March 23,