Arco Platform Limited (ARCE) on Q4 2022 Results - Earnings Call Transcript
Operator: Good afternoon, everyone, and thank you for standing by, and welcome to Arco Platformâs Fourth Quarter and Full Year 2022 Earnings Call. This event is being recorded and all participants will be in a listen-only mode during the companyâs presentation. After Arco remarks, there will be a question-and-answer session. At that time, further instructions will be given. This event is also being broadcast live via webcast and may be accessed through Arcoâs website at investor.arcoplatform.com where the presentation is also available. Now, Iâll turn the conference over to Carina Carreira, Arcoâs IR Director. Carina, you may begin your presentation.
Carina Carreira: Thank you. Iâm pleased to welcome you to Arcoâs fourth quarter and full year 2022 conference call. With me on the call today, we have Arcoâs CEO, Ari de Sa Cavalcante Neto; and Arcoâs CFO, Roberto Otero. During todayâs presentation, our executives will make forward-looking statements. Forward-looking statements generally relate to future events or future financial or operating performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those contemplated by these forward-looking statements. Forward-looking statements in this presentation include, but are not limited to statements related to our business and financial performance, our expectations and guidance for future periods, our expectations regarding strategic product initiatives and their related benefits, and our expectations regarding the market. These risks include those set forth in the documents that we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on the information available to us as of the date hereof. You should not rely on them as predictions of future events and we disclaim any obligation to update any forward-looking statements except as required by law. In addition management may reference non-IFRS financial measures in this call. The non-IFRS financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IFRS. We have provided a reconciliation of these non-IFRS financial measures to the most directly comparable IFRS financial measure in our press release. Please note that except from revenue, gross margin, selling expense, G&A, and cash flow from operations all other financial measures we discuss here are non-IFRS. And growth rates are compared to the prior year comparable period unless otherwise stated. We also note that year-over-year comparisons are affected by acquisitions that were not included in our 2021 financials. Let me now turn the call over to Ari, Arcoâs CEO.
Ari de Sa Cavalcante Neto: Thank you, Carina, and thanks, everyone for joining todayâs conference call. 2022 was an important year for Arco. We delivered solid results across our main commitments with investors, including another strong year for ACV growth. The resumption of our healthy operating cash flow profile and important evolutions in our integration agenda to better and more efficiently serve our clients and continue to grow in a more sustainable way. On cash generation, we showed improvements on all metrics that drives free cash flow generation, including higher profitability with 150 basis point expansion of our adjusted EBITDA margin to 36.5%, better capital allocation, taking our CapEx back to historical levels at 9% of revenues, lower working capital consumption, and finally, a lower effective tax rate. As a consequence, we generate the higher cash flow after CapEx of Arcoâs history. On growth, the commercial cycle for 2023 year prove that we can focus on cash flow generation and dedicate energy to agendas without jeopardizing our growth rates. We posted intake and a strong price increase across all brands leading to a 24% year-over-year ACV growth to R$1.9 billion, 100% organic. Our two main Core brands combined and sustained high growth rates at 96% in our most recent acquired brand COC delivered good results in terms of growth, retention, and price increase. Our cross-selling efforts were once again key to such successful commercial cycle for Supplemental solutions with 71% of its intake originated from cross-sell. Finally, we had an important outcome from our integration agenda with the corporate organization leading to improved process and higher G&A dilution. We remain focused on reducing redundance in IT and in ArcoTech platform aiming at a more efficient capital allocation and higher quality across the brands. I will now turn the call to Otero who will continue the presentation. Otero, please go ahead.
Roberto Otero: Thank you, Ari. Good evening, everyone. Thank you for your time. Moving to Slide 5, net revenues for the fourth quarter of 2022 were R$679 millions, a 47% increase year-over-year and representing a 34.7% revenue recognition of the 2023 ACV, which will detail a few slides ahead. Net revenues for 2022 totaled R$1,775 million, a 44% increase versus 2021 or 37% organic growth when excluding M&A is concluded in 2021 and 2022. Despite a 62% increase in costs year-over-year, mainly due to pressures coming from paper prices, we managed to deliver on 150 basis points EBITDA margin expansion year-over-year in 2022 due to the 4% contraction in our G&A and a more efficient sales process. Moving to Slide 6, as mentioned by Ari, 2022 marks an inflection point on our cash flow trajectory. We revisited processes made structural improvements in our operations and focused on better allocating our capital. As a result, we improved in every line of our operating cash flow leading to a free cash flow to firm of R$122 million at R$267 million expansion when compared to last year. We improved our working capital dynamics with delinquency days receivables, and collection returned to pre-pandemic levels. Our effective tax rate was 13% in 2022 versus 18% in 2021 as we optimized our corporate structure to take advantage of the tax benefits on recent acquisitions. And finally, our CapEx went back to historical levels at 9% of revenues below the guidance provided to the market of between 10% and 12%. On Slide 7, we showed the evolution of our CapEx in recent years. 2020 and 2021 were years of heavier investments, not to mention is slightly lower revenue recognition due to the students dropouts in our partner schools. As we integrated and improved acquired businesses while invested in tools to support our partner schools to weather the back to pandemic. In 2022, we invested in a more efficient and integrated way. Adjusted EBITDA minus CapEx also returning to historical levels, and we believe there is room to further improve in years to come. Moving to Slide 8, we ended a year with R$1,305 million in loans and financing and R$1,391 million in accounts payable to selling shareholders, translating in a 3.1 time net debt to adjusted EBITDA multiple down 60 bps from end of 2021. Weâre confident our cash position combined with future cash generation from the operations is enough to cover for our short-term obligations, and we are committed to continue reducing our leverage through higher profitability and strong cash generation years to come. To conclude this session on Slide 9, we present the main highlights of our 2022 ESG report. We had an important improvement in key metrics and are confident in the achievement of our 2025 goals. We increased our impact on education with the expansion of students impacted by our pedagogical solutions and initiatives from the Arco Institute and approval rates universities through SISU of students using our solutions increased 33% in 2022. We increased the percentage of women in leadership positions and the percentage of ethnical diversity. Our voluntary turnover reduced almost 5 percentage points, and our employee NPS improved 6 points versus 2021. Finally, we concluded our first Carbon Footprint measurement for scopes one and two, and in 2023, weâre committed to analyze the best alternatives to reduce or compensate for such emissions. We know we have an important and critical role in our society and we are committed to continuing impact lives through quality education and a sustainable business. Moving to Slide 11, we are proud of the results of our 2023 commercial cycle. Our ACV book is reached R$1,930 million, representing a strong 24% year-over-year organic growth. The Core segment grew by 23% year-over-year, R$1.5 billion and over almost 1.8 million students. Our Supplemental Content Solutions grew by 35%, of R$393 million and over 876,000 students. Weâd like to highlight the stellar performance of COC, a brand we acquired end of 2021 and had its first commercial cycle under Arcoâs umbrella in 2022. The solution delivered 30% year-over-year growth, a 15 percentage point improvement in retention to 95%, and our price increase 5 percentage points above inflation. Escola da Inteligência and Pleno, our social-emotional products delivered more than 40% growth year-over-year, confirming social-emotional as a relevant competency inside school. And on cross-sell, 71% of the new school intake for Supplemental Content Solutions was originated from cross-sell initiatives. Despite increasing the number of Core students using one or more Supplemental Content Solutions to 18% from 15% in 2022 school year, there is still room to increase this penetration and are convinced of the benefits of this strategy to the entire portfolio. According to our analysis, referrals increased by 23 times the lead conversion of Supplemental Content Solutions and having a supplemental solution reduce Core churn by 50% for those schools. On Slide 12, we detailed the buildup of our 2023 ACV bookings. Our growth has always relied on our ability to retrain our clients, improve our value proposition, driving price increases, excel our solutions within our partner schools and attract new partner schools. This year, it was not different. Despite the slightly higher consolidated churn at 91%. Our main Core solution sustained retention rates above 95%. This yearâs average price increase was more than 3 percentage points above inflation at 9%, and we delivered the largest ACV of new contracts in the companyâs history at R$391 million. Moving to Slide 14, weâd like to provide a quick update on Isaacâs operation. Isaac concluded 2022 with the top line is slightly higher than expected at R$163 millions, almost 1,200 partner schools and an annual recurring revenue of R$235 million. On Slide 15, we list Isaacâs main priorities for 2023, which include investments in the go-to-market to fully consolidate its leadership position in the market, enhanced product offerings and unlocked scale gains, and improve efficiency and capture synergies with our call through cross-sell leading to our reduction in its CAC. Iâll now turn the call back to Ari. Ari, please go ahead.
Ari de Sa Cavalcante Neto: Thank you, Otero. On Slide 17, we present our four main priorities for 2023. First, on Slide 18, weâll continue improving our structure to better and more efficiently serve our clients. We have initiated our efficiency roadmap in 2022 with the corporate reorganization and integration of the supply chain teams under a single structure. In 2023, weâll focus on strategic sourcing, especially on initiatives related to printing costs, logistics and inventory discards and optimizing our internal IT systems and improving the quality of our educational platforms. On enhancing our sales efficiency with the creation of an operational excellence center aiming to increase sales performance, elevate our planning and monitoring capacity, support optimal capital allocation between business units and lead cross brand initiatives. On Slide 19, our second priority is to sustain our high growth profile. Weâll continue to use our proprietary sales process, the quality of our solution in our reputation to increase our market share and the penetration of solutions in current partner schools. After years of strong growth and creation of this large platform, cross-sell became a central piece in our growth. So weâll continue to leverage on the close relationship with our partner schools to expand the adoption of other Arco solutions. Finally, as we continue to invest in updating and evolving our solutions, we are able to support price increases above inflation while improving satisfaction levels. On Slide 20, our third priority for 2023 is boost cash flow generation. We are confident that by making our operation leaner and more efficient our cash flow profile, we will improve significantly in upcoming years. Weâll do so by improving our process and structure, optimizing our corporate structure, and continue to reduce our effective tax rate. Of course, also investing our capital on a more diligent and efficient manner. Thank you for your time. Operator, we can now open for questions.
Operator: Thank you. The floor is now open for questions. The first question comes with Lucca Marquezini with Itau BBA. Please go ahead.
Lucca Marquezini: Good evening, everyone. Thank you for taking our question. So in the fourth, wherewe saw a significant dilution in G&A expenses, so if could youplease provide a call on the initiatives that latch this dilution. And also if you can comment if this initiatives have provide matured or appreciate expect more dilution going forward and would be helpful, please. Thank you.
Roberto Otero: That previously were not centralized or fully integrated across the brands, okay, that we own. So weâve been integrating whatever we think that is not what drives differentiation of our brands and more we think we can better serve our clients by centralizing and integrating, okay. This also applies to back office. We still had some back office areas that were located at the brand level that weâve been integrating into the holding level. As a consequence, we managed to decrease the size of some teams along 2022. The second reason relies on, I mean, managing third party services and third party suppliers in a more efficient way and internalizing some activities that previously we were hiring from third party suppliers in general, okay. So the largest effect was in 2022, when we look from 2023 onwards, I think this will allow us to grow the G&A at a much slower pace when compared to top line growth, okay. So we should not expect G&A to reduce in nominal terms, I think what weâll â in absolute terms, sorry, what weâll see is G&A dilution contributing to margins, okay. So thatâs the expectation.
Lucca Marquezini: Thatâs very clear. Thank you, Roberto.
Roberto Otero: Thank you, Lucca.
Operator: The second question comes with Marcelo Santos with JP Morgan. Please go ahead.
Marcelo Santos: Hi, good evening, Ari, Otero, Carina. Thanks for taking my question. I have two actually. The first one is you provided information on how the ACV changed on price, 9% on price, 9% on churn. How does this defer between Core and Supplemental Solutions? Could you give us some idea on how this changed between two types of solutions? And the second question, there was a decline in the ACV of other Supplemental Solutions. I know itâs quite small. I just wanted to understand better you mentioned you stopped some of the sales efforts for some of these initiatives. So what are you changing on those initiatives, which are these initiatives that are responsible for this decline? Thank you.
Roberto Otero: Hi, Marcelo, Otero here. Thank you so much for the questions. On the first one, I would say starting with pricing, this â in this cycle, we saw a more similar pricing performance when comparing Core to Supplemental, which is a change when we compare to historically Supplemental or the level of pricing power we had for Core, we did not have for Supplemental historically this cycle, we managed to increase both Core and Supplemental products by a similar rate, okay. So this is to answer your point on pricing. When it comes to retention, I would say that for Core brands, for most of the Core brands we saw isstability or improvement, okay, in retention taking for example, SAS,S-A-S as an example we reach at 98.5% retention rate. This is the most premium brand we own, as you know. So in general, it was a very good performance in Supplemental, as you know, I mean, retention rates for Supplemental are still lower when compared to Core, okay. So thatâs why when you look at the combined churn, it shows a deterioration compared to last year, mostly because of the higher share of Supplemental in the base of ACV, okay. So this is the first aspect there. And the second one, in this cycle, we saw Conquista, which is a lower price point Core also gaining share in the overall ACV and Conquista is still has slightly lower retention rate when compared to other Core brands. So it was mostly a mix effect, okay, driving this 9% churn, which shows to be higher than last year. But when you look on the brands and compared to last year in most of them, we saw stability. And in some cases such as SAS, for example we saw retention rate increasing. In regards to, yes, the other Supplemental segment, actually there â those are mostly tax services and to some extent some communication tools that we were offering to other players, okay. So to customers outside our base of schools, we decided to only offer those services in-house to our base of clients. So we interrupted to sell those services to clients that do not belong to our base of schools. Okay, so that â it was literally a business decision to reduce complexity and focus on what moves the needle? So we decided to keep those services in-house and stop selling them to schools outside our base of clients, okay.
Marcelo Santos: Okay. Perfect. Thank you very much.
Operator: The next question comes with Javier Martinez with Morgan Stanley. Please go ahead.
Javier Martinez: Yes, thank you. I have four questions if I may. The first one is on margins. You are guiding for a range of flat to 200 basis points, increasing margins from 36.5% to 38.5%. And I was trying to do math, the back of envelope maths, math on those numbers, and you are increasing prices 9%. So this is more than inflation. You have a churn of 9%. I guess, that logically you are probably losing some of the less profitable guidance. Paper was price pressure last year. So hopefully this year at least should be similar or improve. Printing, you mentioned in the call is going to improve because of scale. Operating leverage, you have the negative impact of around R$30 million from Isaac, but still margins should be increasing. No. Have you been conservative in that guidance? So why â what is behind that flat to small increase in margins? Thatâs number one.
Roberto Otero: Hey, Javier, Otero here. Good to speak to you. So on margins, the effect that we saw on paper prices last year affected the negotiations that we established for this year, Javier. Remember that we start producing and printing the content quite early in the process. So we start this process sometime around July last year. So those negotiations actually happened during 2022 when the level of paper prices was still quite high. And those contracts, they remain in place for the majority of 2023, okay. We are already in the process of negotiating prices for the 2024 cycle with a completely different price level, okay, for printing. So we should not see this effect next year based on the negotiations that we have in place. And there are quite advanced actually. But for the, Iâd say, at least half of 2023, weâll still deal with a higher price to print our content, okay? So thatâs the single reason why we are not increasing the EBITDA margin range. But youâre right, I mean, when you look at the other component of profitability, they would contribute to a higher margin. But I mean, we still see some gross margin pressure, especially in the first half of the year.
Javier Martinez: Understood. Very clear. Thank you, Otero. If I may go for the second is only Isaac. So you are growing pretty fast. No, just go to double or more than double in â itâs already reaching quite a reasonable scale. So why â when do you think that youâre going to be in breakeven or maybe the strategy is not to go into breakeven, it is just to use this as a distribution or marketing cost to subsidize the growth in Core or what is the strategy in prices? Because I guess, the reason why you are still expecting negative margin is because of prices, you have already quite a reasonable scale not to be profitable.
Roberto Otero: Thanks, Javier. Yes, youâre right. I mean, when we model Isaac, we expect the company to be able to reach a breakeven by the end of next year. So thatâs the expectation. So end of 2024, beginning of 2025, considering the scale that the company is supposed to reach that should be the inflection point in terms of profitability. There could be upside and downsides, okay, to this assumption. A potential upside, for example, is the speed at breach will evolve in terms of cross-sell. We are assuming a certain percentage of this incremental growth to come from cross-sell, but this could prove to be conservative, especially because Isaac is not a pedagogical product. And we are basing the cross-sell assumption on our experience with pedagogical products, right. So eventually, we could see upsides there, but we could also see downside. So I think itâs realistic to assume, and I think itâs reasonable to assume a breakeven as we cross 2024, okay.
Javier Martinez: Okay, thatâs fair. So the idea is to make money eventually, okay. So Otero, another question is on Supplemental. The bookings obviously theyâre growing, so youâre going to have a fantastic 2023. So donât misunderstand my comment. But youâre growing only 26%. Youâre growing quite similar to Core. And youâre growing more volumes and less on price than Core. So what is â shouldnât we be expecting Supplemental to grow double than Core given the penetration, the cross selling? So are you having more complexity or difficulty to cross-sell? And thatâs also part of the reason why prices are lower, what is happening there?
Roberto Otero: Sure. Thank you. Yes. I think I agree overall with your opinion Javier, if we look at the Supplemental performance excluding international school, we would have grown above 40% close to 45%. So I think once we are managing this company completely for sure this will impact performance â growth performance. We saw a stronger performance in other bilingual products that we own. So I think we can say that once we are fully managing international school, weâll probably benefit more from cross-sell and also from, I mean, to go to market strategies and processes that weâve been applying to other brands, okay? So again, I mean, when we exclude international school, the performance would be about 40% growth, which I think considering the scale of those products already, I think itâs a very solid performance, okay. So itâs difficult to compare to the growth rates of three, four years ago of above 60%, 65%, because the scale of those products was also much smaller, right? So â but again, I think we can do better than what we did in 2023, and having international school in our portfolio will be one of the drivers, but not only, I think cross-sell is a learning curve, okay. I think we still see a room to improve cross-sell processes internally, okay. Itâs a learning curve. Itâs something new. I think weâre doing step by step there, but this should also be a source of improvement in growth rates for Supplemental.
Javier Martinez: Okay. Thank you, Otero. And my final question for Ari, on the offer, the offer was on December 1, four months ago. Can you update us a little bit? So why is taking so long for the board to have a view? What is happening there?
Ari de Sa Cavalcante Neto: Hi, Javier. Thank you for your question. Just on the last question regarding the Supplemental, I just want to clarify that in this year, we had 71% of the new intakes for Supplemental coming from cross-sell. So as Otero said, we have been improving the cross-sell process, and as you exclude International School from the Supplemental solutions, we posted a growth of more than 40%. We still have a very low penetration, but we went from 15% to 18% of at least one solution of Supplemental in our Core brands. And we also have the growth that are coming from new schools that do not use products from Arco. So we expect to have a solid growth of Supplemental solutions throughout the years in a higher level than we have on Core, of course, which is a larger business. Regarding the â your second question, unfortunately, I donât have any update for you right now. The last update that we gave was through a formal communication, and thatâs what we have to say, itâs written on the last communication that we did with the market.
Javier Martinez: But weâre supposed to be waiting for an answer from the Board, right?
Ari de Sa Cavalcante Neto: Yes, I believe so.
Javier Martinez: Okay. Okay. Thank you, Ari.
Ari de Sa Cavalcante Neto: Thank you. Thank you, Javier.
Operator: Thank you. The next question comes with Mauricio Cepeda with Credit Suisse. Please go ahead.
Mauricio Cepeda: Hello. Hello, guys. Thank you for the â for having the opportunity to put questions here. I have two questions, one related to the debts itself. So you â I understand from the speech that you are relying a lots on the operating cash flow to the leverage. But if you could maybe detect if there are other options to decrease to that level given itâs in kind of a considerable high level now. And the second one itâs related to Isaac now that the macroeconomics are deteriorating and the interests rates are up. If there would be problems in Isaac related to more delinquency or PDA or even if there could be a risk of adverse selection of wallets that are dealt by Isaac. Thank you
Roberto Otero: Hi, Cepeda, thanks for the questions. Itâs Otero here. So as you said, I mean, we think we actually assured that the leverage will continue during 2023, okay? This will be mostly driven by EBITDA expansion, okay, for this year. So we expect the 3.1 times that we ended 2022 to be below 3 times at the end of 2023, okay? But as you said, I mean, we still have a relevant amount of sellers notes coming due this year, okay? As we show both in the presentation and the financial statements we continue to book International School as a short-term obligation. This is more a contractual obligation, but as you know, this is still under arbitration. And the most likely scenario is that International School will become â will come to a definition only in the beginning of next year, okay? So in terms of outflow, we should not expect based on the information that we have today, and of course, the scenario can change that this outflow will only happen next year. Still in terms of balance sheet management what weâll probably do is replace those sellers notes with banking loans along this year, okay? Despite the impact from the American as event in the market, weâre not seeing a negative impact in our ability to attract or to add those lines and financial institutions appetite to offer those lines to us, okay? So this will probably â this is what weâll probably do, okay, in terms of balance sheet management, again replace sellers notes with banking loans, and weâre not seeing a negative impact in terms of appetite, our conditions for us to do so this year, okay? So that will be the source of â the single source of incremental liquidity that we would plan to seek this year. Aside from that, the leverage will come from EBITDA expansion and operating cash flow generation mostly, okay? In terms of Isaac actually the collection period for Isaac is finishing right now, right? So after the completion of the enrollment process at schools, so the period between January and March is actually quite important. Itâs actually what drives the result of the cycle for Isaac. So at this point, we can say that the collection performance was very good. It was much better than how the market performed in terms of NPLs and it was better than Isaacâs performance in the prior cycle, okay? So despite the deterioration in the macro environment in general driven by several factors, including the interest rates we did not see that affecting the collection or the ability to collect for Isaac. Again, NPLs and the liquids in general is performing better than last year, and much better than the market is performing. Still I mean given the profile of the business and how contracts are renewed Isaac can use all of this information to reprise the contracts for the next cycle, okay? The numbers Iâm giving is the average of the portfolio, but of course, in some specific situations, you have different performances for specific schools, and they can use the moment to â the renewal moment to reprise those contracts and bring genetic rate back to where it should be, okay? So at this point, again, weâre not seeing any negative implication to the business.
Mauricio Cepeda: Do you see any kind of risk of the potential client seeing now a little bit more adversely selected, like the worst schools or letâs say the worst paying parents could end up with Isaac?
Roberto Otero: I think itâs difficult to put to generalize a bad school. I think at the end the adverse selection for this business is actually benefits from the fact that you have a very polarized base of families paying you one single client, right? So the client is the school, but at the end, you have a base of 200, 300 families there. So this mitigates the adverse selection risk in general, okay? I think at the end, Isaac leverages a lot on their proprietary historical data of payment performance for schools, for families. So they have a lot of data intelligence backing their pricing strategy, okay? So if this is the case either they will decide not to bring that school or they will price that school at a completely different level relative to the portfolio, okay? So the risk appetite is low because itâs not necessary and they rely a lot on their proprietary data to price the contracts completely individually, okay? So the pricing is done individually for its school based on historical figures that those schools supply to Isaac combined with information that Isaac through its technology can collect to also combine and bring the ideal pricing for those schools, okay?
Mauricio Cepeda: Okay. Great. Thank you.
Operator: Thank you. The next question comes with Yan Cesquim with BTG Pactual. Please go ahead.
Yan Cesquim: Good evening, everyone. Two questions here on our side. The first is regarding our working capital dynamics. We see that Q4 is usually hit by wars working capital dynamics, especially because of the concentration of revenue recognition in the quarter. And this time, we also saw a similar scenario and especially because we had these higher revenue concentration. But I just wonder if this is the reason and we should see the normalization of these working capital dynamics soon, or if there is any other reason for the print in working capital that we saw, right? Thatâs the first one. And the second one is regarding the very nice breakdown that you gave us on the ACV splitting, what was the churn and price increases in new clients? And I just wonder if you could share with us what was the historical churn levels? I imagine that if we compare to the last couple years, the churn probably improved a lot. And I just wonder if we are seeing here a normalized churn level if you see space for improving this ahead or if it should continue at this run rate â healthy run rate, okay? Thatâs it. Thank you, guys.
Roberto Otero: Hey Yan, Otero here. Thanks for the questions. So on the first one, the key reason there is as you said a higher revenue recognition in the quarter, but more than that, okay, itâs a higher revenue recognition for Supplemental solutions in the quarter, okay? So Supplemental has a different DSO profile when compared to Core, okay? So I mean when we compare brand by brand relative to last year, weâre not seeing an increase in DSO, okay? But we did see a higher revenue recognition or a higher revenue concentration for Supplemental solutions in Q4, okay? And they have a different profile. So we should see as collection kicks off, and it has already started. We should see a normalization there, okay? So delinquency in general is performing quite well, okay? So at this point, we are running with delinquency levels better than those that we posted before COVID. I think itâs a combination of the school market recovering after the pandemic, but also several internal processes that we implemented during COVID that combined driving this improvement in collection in general okay? So you should see the DSO or the cash cycle as a whole normalizing as the revenue recognition and the mix also normalizes, and this is an is moved, okay? In terms of ACV and the churn level, when we look at churn levels before the IPO used to range around 5% after the IPO, as we added more Supplemental solutions to the portfolio, it went up to between 7% to 8%. And in this cycle we posted 9%. Again, I think the key reason here, we did not see a deterioration in churn, out the churn that we provide is actually combined churn for all the solutions. So the mix impacts a lot here. And we have two components. The first one is Supplemental, which is still a higher churn compared to Core. I think here we donât think it should be structurally higher than Core. It should be higher, but not structurally higher and not at the magnitude that it is today. So I think it â there is room to improve here, and also some Core brands with still higher churn when compared to the more mature ones, and they outgrew in this cycle. So as a consequence, the combined churn looks higher than those levels that we posted a couple years ago. So looking ahead, what should drive a churn reduction is our efforts to reduce churn on Supplemental as a whole, okay? we still have brands in Supplemental with 15% almost 20% churn. Itâs extremely high. So there is room to improve. And in the Core brands, challenging those less mature brands to bring their retention rates to levels close to SAS positive or for example, COC all of them with retention rates above 95%, okay? So thatâs the challenge. Thatâs the goal. And we expect that to drive combined churn to close to 7% as we posted in previous years at least.
Yan Cesquim: Thatâs clear. Thank you, Otero.
Operator: Thank you. Well, thank you very much. At this time, we have no further questions in the queue. This concludes Arco fourth quarter and full year 2022 earnings call. Thank you very much for your participation, and have a nice rest of your day.
