Cengage Learning Holdings II, Inc. (CNGO) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Cengage's Fiscal 2022 Fourth Quarter and Full Year Ended March 31, 2022 Investor Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Richard Veith, Senior Vice President and Treasurer at Cengage Group. Sir, the floor is yours.

Good morning, and welcome to Cengage Group's fiscal 2022 fourth quarter and full year investor update. Joining me on the call are Michael Hansen, Chief Executive Officer; and Bob Munro, Chief Financial Officer. A copy of the slide presentation for today's call has been posted to the company's website at cengagegroup.com/investors. The following discussion may contain forward-looking statements within the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements can be identified by words such as believe, expect, may, will, estimate, likely and similar words and are neither historical facts nor assurances of future performance and relate to future results and events, and they are based on Cengage Group's current expectations and assumptions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Many factors could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements. You should consider such factors, many of which are subject to the risks and uncertainties discussed in the slide presentation which accompanies this call, and in the Risk Factors section of our fiscal 2021 Annual Report for the year ended March 31, 2021, as updated by our quarterly reports for the first 3 fiscal 2022 quarters. The company's fiscal 2022 Annual Report for the fiscal year ended March 31, 2022, will be posted shortly. Any forward-looking statement made in this presentation is based on currently available information. The company disclaims any obligation to publicly update or revise any forward-looking statements, except as required by law. On today's call and in our slide presentation, we will refer to certain non-GAAP financial measures. Definitions and the rationale for using these measures and reconciliations of each to its most directly comparable GAAP financial measure are provided in the appendix to the slide presentation. I'll now turn the call over to Michael for an update on the business, followed by Bob, who will take you through the fourth quarter and full year details. Michael will return for summary remarks, and then we'll open the call for questions. Michael?

Thank you, Richard. Good morning, everyone, and welcome to our call. I am pleased to report that Cengage Group had a strong finish to the year, capping off a successful fiscal 2022. We hit our top and bottom line financial targets and continued to make strategic investments across the portfolio to support sustainable long-term growth. Our full year results reflect the successful execution of the growth plan we began 4 years ago and our focus on customer service through these challenging times for the education systems. We are particularly proud to achieve our goals despite persistent headwinds in certain sectors of the education technology industry as the pandemic slowly transitions. At the core of our success is the hard work and dedication of our 4,000-plus global employees who make Cengage a best-in-class employer and a great place to work, designations we recently received from 2 independent industry organizations. Adjusted cash revenue grew 6% organically, and adjusted EBITDA less prepub increased 9% year-over-year. In addition to meeting our financial outlook, we made great progress in increasing our resiliency to variables beyond our control such as enrollment fluctuations. As a result, our core U.S. Higher Education business performance improved in the second half of the fiscal year and continued to outperform the overall market. We strengthened and expanded our position in the growing Workforce Skills markets through strong organic growth and the recent acquisition of InfoSec, which marks our entry into the cybersecurity job vertical. We also continue to see strong performance from our other business segments that were severely impacted by COVID in the last 2 years. Apart from U.S. Higher Ed, all of our businesses grew in fiscal '22 and continue to show sustainable improvement, demonstrating our ability to scale content, data, and technology across our portfolio. Digital adoption, which now makes up more than 70% of our revenue across businesses, continues to drive growth, customer advocacy, and retention and improved predictability. We are seeing significant progress in digital adoption and usage in business segments where it has historically been slower, including English Language Teaching, International Higher Ed and the secondary markets. Internally, we tapped into our deep bench of talent to strengthen and broaden our leadership ranks, driving our strategy and execution with even stronger vigor. All-in-all, a truly exceptional year for Cengage Group. Let me now turn the call over to Bob to discuss our results in more detail. I will then return to share further insights into our operating model evolution and business strategy for fiscal '23 before we take your questions. Bob, over to you.

Thank you, Michael, and good morning. Starting with the Cengage Group financial highlights. The business finished the year well, maintaining its strong growth momentum through the final quarter and into the new fiscal year. Fourth quarter adjusted cash revenue was $347 million. This represents organic growth of 7%, excluding the acquisition of InfoSec, which was completed at the end of February. InfoSec contributed $2.5 million in revenues in the quarter or 1% of total growth. All businesses were ahead of Q4 last year. Adjusted cash revenue for the U.S. Higher Ed segment was up 2% in the quarter and 5% in the second half as adverse phasing effects, which held back first half performance reversed as we expected, and the business performed in line with expectations through the spring season. Adjusted cash ELPP in the fourth quarter was $64 million, representing organic growth of 9%, excluding InfoSec. With the strong fourth quarter, full year adjusted cash revenues finished at $1.37 billion, representing organic growth of 6% and firmly in line with our guidance. Within this, digital net sales were up 3% to $955 million, building on the accelerated gains we saw last year in the peak of the COVID pandemic and now represents 71% of total sales. Overall, digital sales were moderated by temporary effects in U.S. Higher Education, which I will come to. Adjusted cash ELPP for fiscal '22 was $326 million, up 9% on an organic basis, meaningfully outpacing revenue growth. We successfully built upon strong margin gains in both fiscal '20 and fiscal '21 to further expand our ELPP margin by 53 basis points on an organic basis to 23.9%. Our continuing focus on cost and transformation of our operating model underpins our ability to expand margins whilst funding investments in Workforce Skills. The combination of both strong ELPP growth and cash generation, improved our net leverage by 0.7x to 5.2x before the Q4 $191 million acquisition of InfoSec. We were able to fund the acquisition of InfoSec from excess cash whilst maintaining a strong cash and liquidity position, ending the year with $348 million of cash on balance sheet. InfoSec is performing to our expectations and was a significant step in the execution of our workforce skill strategy, which we expect to be a major driver of future equity value creation. Turning to the full year financial results by business segment. In summary, the results and underlying drivers by business segment and for Cengage Group as a whole are consistent with the performance trend shared through the third quarter and are in line with the full year guidance we provided previously. In U.S. Higher ED, adjusted cash revenues were essentially flat, with strong revenue growth across all other segments driving overall Cengage Group organic revenue growth of 6%. All market-facing segments contributed to the improved ELPP margin, other than Workforce Skills, where we are investing to sustain high growth and enhance future margins while scaling the business from its already profitable base. Looking at our segment performance in more detail, starting with U.S. Higher Ed. Full year adjusted cash revenues finished just behind the prior year, reflecting a 3% decline in net sales. Excluding Milady, which delivered growth approaching 20%, U.S. Higher Ed net sales were down 4% for the full academic year, including the recent spring season. This is in line with the 3% to 4% headline decline in enrollment, which was broadly consistent across fall and the recent spring intakes. Our performance through the spring season and experience in the current sales cycle underlines key points we covered in previous updates. Most notably that our overall performance this year was held back by a temporary stalling of net adoption share gains, which was as a result of our sales team's absence from the field for successive sales seasons. The selling season for the coming fall is well underway. Our sales team has returned to the field backed by leading customer service capabilities along with unique product and commercial offerings, including the recently launched Cengage Infuse. The sales team is focused on winning new digital adoptions, and we are seeing improved momentum through the developing sales pipeline, underlining our ability to address the temporary hiatus we saw in fiscal '22. Cengage Unlimited, our unique Courseware offering, has been a key driver of digital adoption share gains and Courseware growth since its launch. The impact of COVID in restricting sales activity and reducing customers' propensity to switch adoptions was thus principally felt in Cengage Unlimited and digital activations, resulting in what we believe to be temporary aberrations in the long-term growth trends. The business otherwise continues to see strong growth in institutional sales with Cengage Unlimited institutional growing 16% and inclusive access ahead by 30%. Institutional sales, which significantly improved sell-through across our adoptions, now represent 22% of total sales, excluding Milady, and are expected to continue to grow strongly. We were also encouraged to see average unit prices stabilize in fiscal '22 as the effects of changing mix through the progressive transition to digital have largely worked through the system. Moving to our other segments. In International Higher Ed, adjusted cash revenues grew 9%, reaching $165 million. With the exception of Australian higher Ed, all regions recovered strongly from the prior year, with Asia, Europe, Middle East and Africa and Latin America, all posting double-digit revenue growth. Our largest region, Canada, delivered mid-single digit growth being held back by a more extended recovery in international enrollments, which was also the primary driver of sustained weakness in Australia higher Ed. In contrast, our Australian K-12 business delivered almost 20% revenue growth on the back of strong export demand from U.S. K-12 market, which is expected to remain buoyant in fiscal '23 and beyond. Beyond this broad recovery, the business also sustained strong digital momentum with digital net sales up 15% and now representing 32% of total sales. We were also encouraged by our initial successes in the take-up of institutional digital offerings, notably in the EMEA region. In our secondary business, full year adjusted cash revenues grew 10% to $150 million. At the start of fiscal '22, we repositioned the secondary business to focus on college and career readiness and high school segments, which extensively leverages our U.S. Higher Ed content and platforms. This strategy is proving successful, both in terms of results in fiscal '22 and the strong sales momentum carried into fiscal '23. In fiscal '22, sales of advanced placement products into the high school segment were up over 20% and were the primary driver of growth. We believe market conditions remained favorable with increased emphasis on career readiness and curricular and the underpinning of funding provided through the multi-year Federal Elementary and Secondary School Emergency Relief Act or ESEA. English Language Teaching successfully overcame unforeseen headwinds in China to finish the year essentially back at pre-pandemic revenue levels. Adjusted cash revenues were up 39% to $98 million, led by the Latin American and Europe, Middle East and Africa regions, which were both up over 50%. All regions benefited from a strong recovery in enrollment as schools reopen coming out of the pandemic. We also saw accelerated digital growth, supporting increased structural adoption of hybrid teaching with digital net sales growing approximately 35% and now representing over 40% of the total. EMEA benefited from a successful first year implementation of the multi-year partnership with an important Ministry of Education customer, which is expected to be a significant driver of growth over the 5-year term of the contract. We expect the English Language Teaching business to deliver strong double-digit growth in fiscal '23 and outperform a growing market. This is underpinned by new product launches, continued implementation of the ministry contract and further development of the business to government channel where there is a healthy sales pipeline. Turning to Research and Workforce Skills. With strong archive sales in the final quarter, Research finished the year better than expected. Full year adjusted cash revenues grew 11% to $206 million. This revenue performance was underpinned by strong subscription renewals of 95%, 1 percentage point better than the prior year and which translated into broadly flat subscription revenues. Growth was driven by a strong recovery in global demand for digital archives from higher Ed institutions and sales to the U.S. K-12 academic library sector, where we have a leading position and have seen buoyant customer demand for our digital collections supported by the multi-year ESEA federal funding program. In Workforce Skills, where Cengage Group provides training directly to students through online courses, full year adjusted cash revenues reached $60 million. This includes the $2.5 million contribution from InfoSec in its first month as part of Cengage Group. Excluding InfoSec, the Ed2Go business increased 18%, reflecting a more sustainable trajectory after more than 45% growth in fiscal '21. This was driven by growth of over 20% in advanced career training courses, which represent over 80% of the business and where we delivered training leading to certification in job verticals with high structural demand, most notably allied health, where we have a leading position. Our Workforce Skills business operates in a large and growing market, and we estimate the addressable market for online Workforce Skills to be over $13 billion. This market is growing at mid-to-high single digits, fueled by 2 durable drivers of demand. Learners looking for alternative paths to career skills that are short, affordable and flexible and employers facing severe talent shortages. Through Ed2Go, we believe we have a meaningful position in this highly fragmented market and a leadership position in the academic channel. We have been reinvesting in operating capabilities, lead generation, course catalog and academic partner network expansion in an effort to sustain high organic growth and market outperformance, whilst building a platform, which scales profitably. Our recent acquisition of InfoSec substantially accelerates our organic strategy in Workforce Skills. InfoSec extends our offerings in the highly attractive non-coding IT job vertical with market-leading products in cybersecurity professional training and also increases our position and capabilities in the employer segment. InfoSec is performing in line with our expectations, and we are making good progress against our operating plans for the business. On a pro forma basis, InfoSec adjusted cash revenues for the 12 months to March 31 were approximately $35 million, up around 30% from the prior year. We are making good progress in integrating InfoSec courses into our Ed2Go catalogs and expect to accelerate growth through distribution across our academic channel with the first courses now live. In addition, we are leveraging Cengage's scale and international footprint to accelerate InfoSec's growth plans. On a pro forma basis, the combination of InfoSec and Ed2Go generated adjusted cash revenues of approximately $93 million in fiscal '22, up 23% on a like-for-like basis. Workforce Skills revenues are expected to comfortably exceed $100 million in fiscal '23 and will be a significant driver of Cengage's overall growth. This expectation is supported by the strong momentum we take into fiscal '23 and the investments we are making to deliver against our strategy to aggressively grow this segment. The cash performance of the business is set out on the next slide. Our business is highly cash generative with attractive working capital dynamics and low capital intensity. In fiscal '22, the business delivered unlevered free cash flow of $295 million, with 90% of adjusted cash EBITDA, less prepub, being converted into cash. This strong performance and conversion rate reflects a normalization of the cash dynamics of the business compared to fiscal '21. In fiscal '21, cash conversion was 114%, benefiting from significant temporary COVID mitigation measures and a step change in structural working capital levels driven by the accelerated shift to digital. The temporary benefits have now largely reversed and the structural benefit, notably reduced inventory levels, have been successfully maintained and are being built upon. The high cash generation and strength of the balance sheet supported the funding of the $191 million acquisition of InfoSec from excess cash, resulting in an overall net cash reduction of $110 million in the year. Turning the page to our liquidity position and net leverage. Our total cash balance at the end of the fiscal year was $348 million. The balance sheet remained strong, as does our liquidity position at over $450 million underpinned by the cash position. Net leverage ended the year at 5.8x, with the acquisition of InfoSec offsetting strong underlying momentum in reducing net leverage. Before InfoSec, we further reduced net leverage to 5.2x, a reduction of 0.7x compared to a year ago. As previously stated, we remain committed to progressively reducing our net leverage to 4x over the medium term. Through strong cash generation and ELPP growth, we have demonstrated strong momentum against this goal in fiscal '22 and expect to maintain this momentum in fiscal '23 and beyond. We are also continuing to assess our capital structure to support our strategic objectives. With the call premium on the $620 million senior unsecured notes having expired on June 15, we are now within our planned window to refinance the notes. Whilst capital markets have not been constructive over recent months, with 2 years' runway, we believe we will achieve this well ahead of their maturity in June 2024. Our assessment of options for refinancing the notes, including potential use of excess cash is ongoing within the context of our overall capital structure planning to support our strategic objectives. This includes consideration of further potential workforce skills M&A, which would be assessed against strict threshold criteria, including the need to be accretive in the short term. Before handing back to Michael, I want to address changes in how we will report results across our business going forward and provide initial guidance for fiscal '23. We have recently realigned the Cengage Group operating model into 3 core business units: Cengage Academic, Cengage Work and Cengage Select. This is driven by our strategic priorities, which Michael will address in closing. And in line with this, we're evolving how we report the business going forward. We will have the following reportable segments. Firstly, Cengage Academic; and secondly, Cengage Work with Cengage Select comprising 3 reportable segments: Research, English Language Teaching and other being the combination of Milady and Australia K12. In addition to these market-facing segments, we will retain reporting of the Corporate Enabling Functions. In addition, to continue to provide a high level of transparency into our performance, we will further break out revenues in the Cengage Academic segment across U.S. Higher Ed, secondary education and International Higher Education. In the appendix to this presentation, we have provided analyses that restate historic adjusted cash revenues and adjusted cash ELPP to the new reporting structure. In summary, the key changes are as follows: Cengage Academic comprises U.S. Higher Education, excluding Milady, International Higher Education, excluding Australia K12 and secondary education. We will refer to Workforce Skills as Cengage Work going forward. And we have created a new other segment within the Cengage Select business, which comprises Milady and the Australian K12 business. In addition, we have integrated product technology teams and certain other activities from Corporate Enabling Functions into the business to enhance customer focus and drive synergies. Costs related to this have been transferred from Corporate Enabling to the new reporting segments. Turning to guidance. Cengage Group came through fiscal '22 on a strong growth trajectory, and we expect to broadly sustain this momentum in fiscal '23. From pro forma base revenues of $1.401 billion in fiscal '22, which includes a full year of InfoSec revenues of approximately $35 million, we expect Cengage Group adjusted cash revenues to grow in the mid-single digit range with Cengage Academic, Cengage Work and Cengage Select core business units all contributing to this growth. This is underpinned by expectations of improved underlying sales performance in U.S. Higher Ed before enrollment effects, reflecting the solid pipeline momentum and executed pricing strategies. On enrollment, we expect to continue to face headwinds in fiscal '23, the extent of which is difficult to estimate at this point. Aside from U.S. Higher Ed, we expect the rest of Cengage Academic and the Cengage Select businesses as a whole to deliver growth broadly in line with our overall mid-single digit range, with Cengage Work continuing to deliver very strong double-digit growth on a pro forma basis. Against these revenue expectations, we expect to deliver solid ELPP growth with ELPP margins being at least maintained as we continue to reinvest principally in Cengage work to sustain high growth and scale the business. These investments will be funded to a meaningful extent through continued productivity improvements and synergies from the ongoing simplification of our operating model. We also expect to continue to reduce leverage through fiscal '23 through the combination of sustained profit growth and strong cash generation. Our guidance reflects confidence in our ability to navigate the current market conditions, absent any further market deterioration. We are managing inflationary pressures through a combination of product pricing strategies, whilst remaining focused on our commitment to affordability and by working closely with suppliers. Beyond input price inflation, supply and capacity pressures are most evident in paper and printing. Whilst we believe we can secure the inputs we need, we may see some shift in order fulfillment and revenues between quarters as we manage manufacturing and delivery schedules against available capacity. Let me now pass the baton back to Michael to close.

Thank you, Bob. I wanted to take a few minutes to elaborate on the evolving Cengage Group operating model, Bob outlined and the pillars to our accompanying strategy, which we believe will support and drive the financial outlook for fiscal year 2023 and beyond. We are experiencing an inflection point in our education system today. The pandemic, advancements in technology and learners' expectations for outcomes have shifted underlying demand for education. Students want choices in how they learn and how they achieve their goals, which are increasingly tied to leveraging education to gain skills and land a job. Cengage Group is well positioned to meet this evolving needs and support student choice as our business support many education paths to gain employable skills and proficiencies. This will ultimately enable learners to land a job, get a better job and improve their earnings potential. As we head into fiscal '23, the strategic transformation of our business into 3 business units: Cengage Academic, Cengage Work and Cengage Select allows us to better leverage synergies, resources and scale and underpins our outlook of mid-single digit revenue growth and predictable growth in profitability. The first pillar of our fiscal '20 strategy centers on Cengage Academic. We have successfully transformed our U.S. Higher Education business by delivering differentiated products and superior service that we believe increases our resiliency to variables beyond our control such as enrollment fluctuations and will continue to enable us to gain market share. Additionally, we will leverage the insights and resources used to grow the U.S. Higher Ed business to more than 80% digital to expand digital adoption in our International Higher Ed and secondary business. Second, we expect our Cengage Work business will continue to grow its position in the workforce skills market through organic and inorganic growth strategies. We are focused on furthering our leadership position in the allied health and cybersecurity while also expanding into other in-demand fields and channels. Our business is profitable and with the investments we are making, we expect the business to scale effectively and increasingly contribute to Cengage's overall ELPP growth over time. And third, we expect our Cengage Select businesses to continue to deliver strong top and bottom line momentum as the market continues to recover from the impact of the COVID pandemic. These businesses play in markets where we have a leadership position, our products are differentiated. And as a result, we command a price premium. In summary, we are excited and increasingly encouraged about our growth prospects as we move forward into the new fiscal year. While the overall economic outlook is pointing towards a recession, this has historically favored countercyclical businesses like Cengage. In addition, we are gratified that the market is increasingly recognizing our strong profitability and cash flow characteristics, which we believe are the underpinnings of a robust and resilient enterprise. We entered the year a leaner, more efficient operator with a focused growth plan to drive continued strong financial results that we believe will create sustainable value for all stakeholders. We are grateful for the support of all of you and look forward to reporting our progress as the year unfolds. Let me now hand the call back to the operator to start the Q&A portion of this call.

[Operator Instructions] And the first question is coming from Raghav Garg from DoubleLine.

Just on Higher Ed, can you walk us through the impacts -- so obviously, there was enrollment declines and then -- on performance with what happened with sell-through and then also just with pricing, you said pricing seems to have stabilized. And then as you look out into 2023, do you expect -- what are the drivers that you're expecting with obviously, enrollment being uncertain between the dynamics of sell-through and then pricing as it plays through.

Yes, Raghav, this is Michael. Thanks for your question. Happy to do that, and Bob can chime in on this. I think what we're seeing -- if I take a step back, what we've seen in U.S. Higher Ed was a year prior to this year where we had the massive impact of the pandemic that has basically led faculty to a predominantly virtual environment. In other words, the demand in the prior year, i.e., fiscal '21 for digital was spiked by the fact that nobody was on campus and all faculty needed to teach virtually, and they grabbed any kind of option that they had for a digital solution to continue teaching. What we are starting to see in '22 is a normalization back, meaning that the hybrid model is more in favor. In other words, many students are on campus, but also faculty continues to elect to teach certain portions digitally. So they use digital product, but not to the same degree as they did in the -- in the height of the pandemic, so to speak. The impact, basically, if we look through those 2 years is, that we are back on the trends that we have seen developed before, which is, we are seeing continued gains in sell-through. We are seeing a normalization of the pricing pressure, particularly given our introduction of Cengage Unlimited and it's very competitive price point. And we are continuing to see a trend towards using digital products, but not with the same spikes as we saw in the peak year when the pandemic hit. So overall, I would say, a return to the prior observed trends that we've seen happening over the last, I would call it, 4 to 5 years.

That's helpful. And then on the print side, any sort of tougher comps as some of those businesses were impacted in fiscal '21 and a lot of them came back in '22. Do you see some difficult comparisons going into '23 in international K-12 and some of the other businesses on the print side?

Bob, you want to talk to that?

Yes, perhaps I can step in here. So I think it's sort of different market-by-market. If you look at English Language Teaching, which was arguably the hardest hit, it's both recovered pretty much to pre-pandemic levels, and we expect it to return, as I said, to strong double-digit growth as we go forward. And that's really fueled by a strong underlying dynamics in the market together with an accelerating digital strategy, which also sort of came through the numbers. If you look at secondary, again, we would expect the momentum to be maintained. We pivoted the business to focus on career and college readiness. We're less prone to the big adoption cycles in K-5 as a result as we've exited those markets. And of course, the favorable funding environment underpinned by ESEA is extending over a number of years and remains there. I think in international, we've still got a couple of markets to come back. I called out Canada and Australia, which are more highly dependent on international enrollment, and we expect that international enrollment to start to recover in fiscal '23. But the other driver of growth in International Higher Ed is going to be continued growth in digital. And I think that's going to be accelerated and supported through the strategy and the new operating model with Cengage Academic. And we're encouraged with the initial success that we've seen there with Cengage Unlimited Institutional, where we've actually recorded institutional sales in every region around the world now. So off to a good start, but more to go.

And last question on the potential refinancing. How much excess cash do you potentially have? Maybe talk about minimum cash? And then what incremental capacity would you have at the costing level to refi the bonds?

Yes. So perhaps just to level set, we finished the year with $348 million of cash, as I'm sure you've seen. I think as you're also aware, through the first quarter, we typically burn cash anywhere between $100 million and $150 million before building back. And as I also referred to, we expect the business to generate significant amounts of cash going forward. So based on that simple math, you could start with a number of $200 million, where we too start to think about using our ABL as working capital funding rather than a pure safety net, then arguably the number would be a touch higher, but perhaps sort of grounded to a couple of hundred million. In terms of the capital structure, we are looking at that, as you're aware, the markets are not particularly constructive at the moment. But as we think about alternatives, whether it's in the high-yield market or the term loan market, we are thinking about potential deployment of that or some -- a portion of that excess cash, which we'll continue to do as the markets evolve over the course of the coming weeks and months.

And the final question this morning is coming from Joe Ghergurovich from Assured Investment Management.

Just first, you mentioned potential inorganic opportunities that you would look at in Workforce Skills. But I guess taking that the opposite way. Do you think that all the assets you have right now makes sense to keep under the Cengage portfolio or maybe you might look to divest some of these non-core assets?

Yes, Joe, it's Michael. Thanks for your question on this. We are currently not actively engaged in selling any of the assets that we have. And as you heard from our presentation, we are very confident in the trajectory of all of the businesses that we have. That said, we have maintained and always said that we look at strategic options on a regular basis, and we're talking to the Board about those strategic options. But currently, there's no process underway.

And then I wanted to ask also about your free cash flow. I guess just first in this higher interest rate environment, do you hedge your floating rate debt?

Our floating rate debt isn't hedged. Looking at the sort of forward yield curve, taking account of our -- of the recent rate rise, we would expect our cash interest cost this year to be between sort of $165 million to $170 million.

And then just one more on free cash flow. As you mentioned working capital was a big source of cash last year from some COVID actions and then it be neutral this year. I guess, do you expect it to be neutral going forward? Or I guess, how should we think about that contributing or taking away from the free cash flow?

Yes. I think broadly neutral. But bear in mind, we are projecting mid-single digit sort of top line growth and growing businesses tend to absorb a bit of working capital. So we are continuing to drive improvements, which we expect will give us some benefit against that sort of natural upward pressure.

And we do have a follow-up question that came in from Raghav Garg.

Just on recruiting and hiring. Can you talk about you're seeing a lot of attrition hitting a lot companies. Can you give us some metrics that you guys follow? Are you seeing any pressure there on hiring and finding corporate people in the right positions?

Yes. Thank you, Raghav. It's Michael. We are monitoring this very closely as every company does these days. We are very pleased to see that we've not seen a material uptick in turnover at the company. And the recruiting markets are competitive. But I think what stands out as we dig deeper into the analysis is that, in those markets, the purpose of the company and the culture of the organization make a significant difference to a lot of recruits. And therefore, we have not seen the recruiting markets for us being more challenging than they have historically been. So we're very pleased with that, and it's obviously the result of the work of thousands of people at Cengage to build this culture. But thankfully, so far, this is the results that we've seen.

And then looking at the potentially for increased margins on an adjusted ELPP basis, where are the levels of potential operating leverage, assuming there will be some inflationary pressure in the business?

Bob, do you want to take that?

Yes, sure. I think the primary lever is through bringing together in Cengage Academic, the U.S. Higher Ed, International and secondary business to really optimize the synergies and productivity across those businesses. Bear in mind that they share product, technology and content extensively. International Higher Ed and secondary now both generate around 80% of their revenues from U.S. Higher Ed derivatives. And by bringing those teams together, we expect to be able to continue to expand our margins in Cengage Academic, which is the largest part of our business.

And just lastly, are you looking for replacement for Fernando or is his role being absorbed by some of the other leadership within the company?

No. That transition, Raghav, has already happened. We have announced a co-leadership structure between 2 individuals, Morgan Wolbe and Nhaim Khoury who are long-term Cengage executives, who have assumed the co-leadership position of the business. And this has been implemented very smoothly over the last few months already.

And there are no further questions. And at this time, I would like to turn the floor back to Michael Hansen.

Yes. Thank you, everybody, for joining us on the call this morning. I appreciate the questions, and we're looking forward to updating you later in the year. Goodbye.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.