Institutional Presentation September/2012
Overview of Brazil’s education sector
1. Most of students are in 3. Most of students are 5. Distance Learning is Private Institutions women gaining share 15% DL 26% Public 43% 43% Homem 57% 57% Men 74% 85% Women Mulher Private On-Campus DL Penetration rate: 17% 2. Private institutions students 4. Less than half of students 6. Distance Learning students are older 2 study at the night period graduate (working adult) 29 years old DL Student 15% DL On-Campus Student 21 years old 27% 46% 54% Others Graduate 7. North and Northeast Leave the regions increased more 73% Course than the national average Night between 2001 and 2010 1) Source: Censo MEC/INEP. 2)Source: UOL/MEC/INEP 3
Total Students in Postsecondary Education Students in Public Schools : 1,643,298 (26%) (in millions) CAGR Students in Private Schools : 4,735,981 (74%) 7% 6,4 CAGR 7,0 6,0 5,8 11% 5,3 6,0 On-Campus Students: 5,449,120 (85%) 4,9 4,6 5,0 4,2 3,9 DL Students: 930,179 (15%) 3,5 4,0 3,0 2,7 3,0 2,0 Total projected for 2012 (1) : 1,0 7.3 million students 0,0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2008/2009 Growth: 4% FIES First Impacts 2009/2010 Growth : 7% (1) Assuming 7% growth in 2011 and 2012 • Source: INEP-MEC 4
Distance Learning vs. On-Campus Students in Postsecondary Education (in '000 and million) 5,4 On-Campus 1.300 6,0 5,1 CAGR 06-10: 4% 5,1 4,9 4,7 1.100 5,0 4,5 930 4,2 Distance Learning 838 3,9 900 CAGR 06-10: 46% 728 3,5 4,0 3,0 700 2,7 3,0 500 370 2,0 207 300 115 60 50 41 5 1,0 2 100 -100 0,0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 On-Campus - 2008/2009 Growth: 0% FIES First Impacts On-Campus - 2009/2010 Growth: 6% • Source: INEP-MEC 5
Total enrollment rate: students in postsecondary education / population from 18 to 22 years 35% Brazilian government set a target in its National Education Plan (PNE) of a total enrollment rate 1 of 50% by 2020 1 Enrollment rate = (Students in postsecondary education / total population from the age of 18 to 22 years). Source: Unesco. 6
Percentage of population holding a postsecondary degree Brazil grew by only 3 percentage points (from 9% to 12%) the number of postsecondary degree holders, while South Korea managed to grow by 52 percentage points (from 13% to 65%) in the same period Source: Education at a Glance 2012: OECD Indicators 7
Brazil has the highest index in relative earnings from employment among 25-64 year-olds, by level of educational attainment Source: Education at a Glance 2012: OECD Indicators (Relative earnings from employment among 25-64 year-olds, by level of educational attainment) 8
Recurring demand Pent-up demand 31.8 million people 25 to 34 years old (highest probability of returning to school) 16 million people concluded secondary Each year 2 million education (50%) 3.5 million attained a post- students are in their last secondary degree (11%) year of secondary 12.5 million potential enrollments in postsecondary education education (1) Today there are 12.5 million people aged 25- 34 who concluded secondary education but did not enter postsecondary education Focus: On-Campus Learning Focus: Distance Learning (1) Source: Census MEC / INEP 2010. Source: Professor Maurício Garcia’s analysis presented in the IV Brazilian Congress of Private Education (May 2011). 9
Public Institutions Private Institutions Free for student Paid by student 100% subsidized by state Cost per student significantly lower than at public institutions High quality Inaccessible for part of population High cost per student Government strategies to expand Postsecondary Education Private institutions offer seats Student loans subsidized by at discounted prices in federal government exchange for tax subsidies Over 0.5 million students Over 1 million students 10
Conditions FIES Structure Interest of 3.4% p.a. Economically viable for Class C 18-month grace period after graduation Payment term over 3x program duration, starting after grace Without Co-signer Product With Co-signer period Guarantor Fund Example of a 4-year program and R$500 Maximum monthly Maximum monthly Eligibility monthly tuition income of R$ 2,500¹ income of R$ 818 2 Criteria per family member per family member January January July 2016 August ~2.0% of Net 2011 2015 End of Grace 5.6% on Revenues 2029 End Costs and Beginning Graduation Period Revenues Contribution to PDA Kroton shares 15% of 4 years (48 months) 1 1 / 2 years (18 months) 13 years (156 months) Guarantor Fund collections losses Program Length Grace Period Pay back R$ 14.41 R$ 16.67 R$ 204.89 Kroton’s 65% of Contracts 35% of Contracts per per per Base month month month Note: (1) Considering courses with an average ticket of R$ 500.00. The Law states that financed monthly tuition must be 20% higher than per capita family income. (2) Amount equivalent to 1.5 minimum wage. (3) To finance 50 to 100% - maximum gross family income between 10 to 20 minimum wage 11 11
Higher value per student during the course… + R$/students received Higher Net Ticket FIES Benefits Lower dropout Students without FIES Duration Lower PDA ... and more students Higher penetration + Share in the + Intake x Higher turnover days current base +183% 09 10 11 12 2011 2012 12
FIES Growth inside Kroton (thousands) 53 23% Number of students 43 20 14 4 1H10 1H11 2H11 1H12 Aug/12 % Student Base 4.4% 18.2% 21.1% 33.9% 42.8% Why Kroton is the benchmark on FIES? Intakes Process - % FIES High Eligibility Quality 65.8% 3% 47.0% 27.6% 14.1% 97% 5.5% 2H10 1H11 2H11 1H12 Aug/2012 97% of all courses with satisfactory concepts are eligible to FIES 13
Kroton’s position in Brazil’s education market
National Presence 3 Businesses Nº of Students Brands 141,000 On-Campus students 271,000 Distance Learning students 289,000 K-12 students 496 cities Net Revenues Kroton Uniasselvi 2012E Distance 11% Campuses (#) 53 Learning 28% Distance Learning Centers (1) (#) 447 On-Campus 61% K-12 (1) DLCs accredited by Ministry of Education 15
Market Consolidation Through Acquisitions • 7 Acquisitions (3 transformational / 4 complementary) • 98 new regions in Brazil (11 campi and 87 centers) UNIASSELVI • 306 thousand new students - x9 R$510 M 86 k students • R$ 980 MM (equity) and R$ 550 MM (debt) UNIRONDON (76k DL students) 7 R$ 28 M UNOPAR 5,5k students R$1,300 M 6 162k students FAIS (146k DL students) 5 R$ 7 M 1,3k students UNIÃO Capital Increase 4 R$ 8 M Secondary 1,5k students FAMA Offering 3 R$ 24 M R$597 MM Grupo IUNI 5k students R$ 420 M 45k students 2 Debentures R$ 550 MM Advent 1 Follow On Secondary Offering R$380 MM Jun/09 Mar/10 May/2011 Jul//11 Nov/11 Dec/11 Apr/12 May/12 16
Jan/12 Mar/12 Jun/12 Sep/12 Dec/12 Mar/13 Jun/13 Phase 1 Phase 2 Phase 3 Phase 4 Conclusion: March 2013 Control, Organizational Academic Integration of - 17 Work stability and restructuring Model systems and Fronts enrollment processes - 125 Projects Phase 1 Phase 2 Phase 3 Phase 4 Conclusion: Control, Organizational Academic Integration of - 17 Work Fronts June 2013 stability and restructuring Model systems and - 89 Projects enrollment and systems processes Integration Concluded: 90-days ERP Integration Academic System and LMS Academic Model Concluded Ongoing 17
Students – 1H12 Net Revenues – 1H12 (Only Postsecondary Education) 14% On-Campus 34% On-Campus 24% 62% Distance 66% Distance Learning Learning K-12 Gross Income – 1H12 Operating Results – 1H12 On-Campus On-Campus 15% 14% Distance 44% Distance 47% Learning 38% Learning 42% K-12 K-12 18
Postsecondary Students 5% Market Kroton 95% • Total Students: 7.3 million 1 • Kroton Students: 376k On-Campus Students Distance Learning Students 25% 2% Market Market Kroton Kroton 75% 98% • Total Students: 6.4 milllion • Total Students: 1.0 million • Kroton Students: 128 k • Kroton Students: 248 k • Source: 2010 Postsecondary Census, with growth of 7% in 2011/2010 and 7% in 2012/2011 19
Strategies
- Improve the level of digitalization of - Increase profitability from education (On-Campus and Distance current 25% to 30% of EBITDA Learning) Margin in 2016 - Strengthening of the distribution channels’ contents through - Scale gains, productivity technology improvement and management Technology in Management optimization - Technology assisting quality Education Efficiency Market Consolidation Student Organic Through Growth - Growth of 10% to 15% of - Highly fragmented market: more Acquisitions students base per year. than 2,300 institutions - Main Drivers: - Low level of professionalization i) Funding (FIES) - Inefficient competition ii) Distance Learning 21
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