Brazilian Market

According to the Organization for Economic Co-operation and Development (OECD) in its survey “Education at a Glance – 2017,” only 17% of Brazilians from 25 to 34 years old have a college degree, less than half the average of OECD nations, of 43%, and significantly below the rate of other developing countries, such as Chile and Mexico, with indices of 30% and 22%, respectively, which demonstrates the potential for the industry’s continuous growth in Brazil.

This market potential also becomes evident by comparing the number of enrollments in Primary & Secondary Education, of 48.8 million in 2016, based on data from the Primary & Secondary Education Census of the Ministry of Education (INEP/MEC), with the 8.0 million enrollments in Postsecondary Education in 2016, according to the Postsecondary Education Census of INEP/MEC.

INEP data shows that Postsecondary Education grew significantly between 2003 and 2016, during which period growth in enrollments at private institutions outpaced those at public institutions. As a result, the private sector increased its market share from 70% in 2003 to 75% in 2016, while the public sector reduced its share from 30% to 25%. The dynamic corroborates the expectation of a growing share of private institutions in postsecondary education. Below you can see the growth in enrollments in on-campus postsecondary education, broken down by public and private institutions:

                                Source: Inep/MEC Census 2016

In contrast to the Primary & Secondary Education segment, Postsecondary Education is marked by the presence of many private institutions, which accounted for most of the growth in the number of enrollments in recent years, consolidating their role as the main provider of Postsecondary Education in Brazil.

In Brazil, public institutions of Postsecondary Education focus on serving as centers of excellence and research, with extremely competitive admission standards and limited capacity to expand. Meanwhile, private institutions of Postsecondary Education focus on the professional requirements imposed by the labor market and develop flexible programs to meet the needs of young professionals.

Following the enactment of Federal Law 9,394, on December 20, 1996, also known as National Educational Guidelines and Bases Law, the federal government launched a series of measures to encourage private investment in Postsecondary Education. Key initiatives included reducing the bureaucracy for inaugurating new programs and institutions and regulating the law that permitted institutions of Postsecondary Education to be incorporated as for-profit companies.

Kroton’s Current Footprint

Position on 05/21/2018

Brazilian Market

Distance Learning (DL) has emerged as an alternative that to increase penetration of postsecondary education in Brazil, given its more affordable tuitions, which substantially increases the number of people who have the purchasing power required to study in these programs. Between 2003 and 2016, Distance Learning registered a compound annual growth rate of 30%, making it the highest growing format in Brazil’s postsecondary education industry.

Between 2015 and 2016, DL Postsecondary Education grew 7% to end 2016 with 1.5 million students, according to INEP/MEC. Below you can see the growth in the number of enrollments in DL Postsecondary Education, broken down by public and private institutions:

                                Source: Inep/MEC Census 2016

We are very well positioned in this segment, with major brands in Brazil’s DL Postsecondary Education, such as Unopar and Anhanguera, currently among the country’s largest providers of DL Postsecondary Education, which makes this format an important growth driver in our operations.

Kroton’s Current Footprint

Position on 01/31/2018

Brazilian Market

Brazil’s Primary & Secondary Education system is divided into three cycles: pre-school, primary education and high school. In Brazil, Primary & Secondary Education starts at the age of three or four and takes on average approximately 14 or 15 years to complete.

Brazil’s Primary & Secondary Education has improved significantly over the last ten years, with substantial increases in the number of enrollments and the graduation rates of primary schools and high schools. Based on the National Survey of Households (PNAD/IBGE), the schooling rate reached 99.2% considering the population between 6 and 14 years old, and 87.9% considering the population between 15 and 17 years old. Additionally, 32.8% of 18-24 year olds were attending school in 2016.

Based on the Education Census of the Ministry of Education (MEC/INEP), in 2016, Brazil registered 48.8 million enrollments in Primary & Secondary Education, of which 39.8 million in public schools and 9.0 million in private schools, considering all education categories, from pre-school, primary school and high school to youth and young adult education and vocational training. Of this total, 27.7 million enrollments were in primary education, 8.1 million in high school and 8.3 million in pre-school, the three largest education segments in Brazil. Below you can see the evolution in enrollments in Primary & Secondary Education, broken down by public and private institutions:

                                Source: Inep/MEC Census 2016

This sector is professionalizing significantly and we believe the main assessment results in both the private and public systems, which include the National Secondary Education Exam (ENEM) and the Basic Education Development Index (IDEB), attest to the greater effectiveness of Kroton’s Learning Systems, which leads us to project their increased penetration in the public and private systems.

Kroton’s Current Footprint

In the Primary & Secondary Education business, Kroton’s main activity is offering, through the Pitágoras Network, its Learning System, which comprises teaching book collections, teacher training, educational evaluations and other services, to private schools in the Pre-School, Primary & Secondary Education businesses. In 2018, the Company is serving 687 Associated Schools and around 227,000 students in the private segment, increases of 2.2% and 3.1%, respectively, in relation to last year. Kroton will continue to enhance the quality of its teaching model and to create competitive advantages for the Pitágoras Learning System. The segment also manages schools, especially for large companies, and operates own schools.

As part of the Company’s expansion strategy already disclosed to the market, Kroton created “Saber,” a holding company dedicated exclusively to the Primary & Secondary Education market. Saber will consolidate all of Kroton’s current operations in the Primary & Secondary Education business, which include learning systems, operating own schools and managing schools for renowned corporations, as well as any future deals that the Company carries out in this segment, including asset acquisitions and their subsequent expansion through new units using the brand of the acquired asset. Note no alterations will be made to the educational projects of institutions under Saber, since they concentrate a large part of the value attributed to the brand.

In April, Saber concluded its first acquisition, of Centro Educacional Leonardo Da Vinci (“CELV”). Founded in the 1990s and located in Vitória, Espírito Santo, CELV has unique facilities and serves 1,311 students (December 2017 base), 71% of whom are enrolled in full-time programs. With a strong focus on quality, CELV placed first in the state’s ENEM examination for six times in recent years, and offers a bilingual program from pre school to secondary school, including the option of a high school diploma that facilitates acceptance by U.S. universities.

More recently, on April 22, Saber announced the signing of an agreement to acquire a controlling interest in Somos Educação S.A., which has complementary operations, offering a wide array of high-quality products and services in Primary & Secondary Education, including high schools, learning systems, textbooks, publishing houses and language courses. With the acquisition, Saber will serve 37,000 students in own schools, 25,000 students in language courses, 1.2 million students in private schools served by learning systems, and reach 33 million students in public schools through the National Textbook Program (PNLD). Saber will also become an important community of teachers who use its products and services in Brazil, with approximately 85,000 professionals working in private schools and 1.7 million teachers in public schools. The consummation of the transaction is subject to evaluation and prior approval by Brazil’s antitrust authority (CADE). Until all due validations are obtained and the operation is approved by the regulatory agency, the companies will continue to operate independently.

Last update: June 13, 2018