Curro Holdings Limited (COH) Earnings Call Transcript & Summary

There was just a delay in the start there. Can I just ask if you all switch off your cell phones? And then we'll take some questions at the end. And if you have questions, just wait for the microphones so we can do them properly and our webcast participants can also hear that. Welcome to Curro's presentation of our interim results for the 6 months to 30 June, 2023. We are celebrating our 25th birthday celebration this year as well, and we are very proud of all that Curro has achieved over the last 25 years. This is a remarkable success story. We have built significant momentum in order to inquest to offer more opportunities to sort of provide a [indiscernible] and to drive up the attractive shareholder returns. Both of these goals, more opportunity then at a growing yield. In terms of today's agenda, I'm going to provide a brief overview of Curro's financial highlights for this first half and then really remind you of our strategic focus in the future. It hasn't changed much from what I've communicated before, but I'm going to reiterate that. And then I'll hand over to our CFO, Burtie September, to scrutinize the key financial information in our results. As usual, we'll take questions at the end. So recurring headline earnings per share increased by 36% to ZAR 0.346. Curro's weighted average number of learners for this first half increased by 3% to 72,385 learners. And then revenue increased by 16% to ZAR 2.4 billion, with EBITDA increasing by 21% to ZAR 566 million. Cash generated from operations increased by 1% to ZAR 607 million, which funded the ZAR 312 million of CapEx in this first half. Accounts receivable improved in virtually every key measurement area, being the overall aging of accounts, the average value of outstanding accounts, the provisions for expected credit losses and the ratios in this area relative to revenue. We also executed well on various strategies to drive up our operating margin, which increased by a full 1.7%, from 15.3% to 17%. Over and above our financial performance, we are delighted with the enthusiastic participation of our learners in our comprehensive extracurricular program. Curro generated strong growth momentum over the last few years in establishing and sophisticating our offering. Our strategic focus is now firmly on achieving the operating leverage that is available within the business model, and this means driving up operating profits and cash flows by growing revenue, by improving our operating margin and containing CapEx. Revenue growth is a function, of course, of the number of learners enrolled and the fees charged per learner. And based on the strong enrollment interest we continue to see, there is a sustained flight to the quality education that Curro offers, and that's despite prevailing economic conditions, which are naturally causing financial distress amongst consumers. Learner -- overall learner growth then is due to the termination of overdue accounts, with our management teams being particularly disciplined and responsible in their collection processes. Generally, tuition fees for 2023 increased by at least 2% above the prevailing inflation of about 6%, which assisted in expanding our operating margin. Operating margin then, in my opinion, is a measure of business excellence. We are pleased with the improvement of operating margin, and that again is despite the prevailing weak economic conditions. We have reduced the level of discounts and increased the revenue from and profitability of our ancillary revenue streams. Bad debt related costs have now reduced to below 4%, and we believe we will advance our operating margin further in this area in the future. We also expect more efficiency from our staff cost line as the business matures. Curro manages cost closely, and certainly relative to the learner growth in our portfolio. I mean, I think importantly, the group has reached a stage where the cash generated from our existing operations, our existing business exceeds the CapEx requirement for that portion of our operations. We will consider acquisitions with growth and cost savings potential, and we will fund viable and attractive transactions most likely with debt as far as possible. Excess cash being generated by Curro should go to shareholders. Curro's in a healthy financial position, and our business operations are resilient. We are confident that buying back shares is a smart capital allocation decision that will enhance shareholder returns permanently. We acquired and canceled 2.4 million Curro shares in the first half up to June for about ZAR 19 million, and to date of today, we've acquired 10.3 million shares for a total cost of ZAR 88 million. I always share this slide because I think it's quite powerful to demonstrate the strong expansion potential that's available in our business and particularly in our high schools, based on the rollover from 1 grade to the next. As an example, in 2023, we now have about 6,900 learners in Grade 8 and just over 4,200 learners in Grade 12. There is some attrition in learner numbers mainly due to the financial duress families experience during and after the pandemic, and more recently, due to increase in interest rates, and of course, inflation in food and energy costs. The rollover of learners across grades builds Curro's academic momentum, particularly in high school. We've certainly seen very keen enrollment interest in that portion of our portfolio. Curro built significant momentum over the last decade to establish a brand of quality education across different platforms. Our models are efficient and scalable to optimize service and profitability. By way of example, 3% of learner growth in this period translated to over 25% of growth in our earnings -- headline earnings per share. Curro is resilient, and we are well on track to increase shareholder returns as evidenced by the continued improvement in our return on capital employed as well as the increase in the -- an improvement in our operating margins. We expect this growth momentum to continue, and we look forward to the outstanding results from the Matric group of 2023. We will start setting the exams in the next 2 months or so. I'm going to hand over to Burtie now to address the financial details of our results. Thank you.

Thank you, Cobus. My name is Burtie September, and I'm the Chief Financial Officer of Curro, and I will provide commentary on the financial results for this period and the key drivers thereof. In particular, I'll provide detail on the revenue and operating expenses, explain the progress we've made in trade receivables, and review the earnings for the business in this period before reflecting on our funding and CapEx. I will again provide quarterly information of financial results to support your analysis of Curro's performance. 2023 is a normal school year, which is comparable to 2019 pre-pandemic. Curro's average weighted number of learners increased by 3% in the first half of 2023. The average weighted learner numbers increased to 72,385 from 70,519 in the first half of 2022. Total revenue increased by 16%, driven by the annual fee inflation of about 8% and with the balance of the increase contributed roughly equally between like-for-like learner growth, new schools acquired and growth in ancillary income. Fee revenue is the main component of Curro's revenue, and increased by 14% in the first half of 2023. This slide demonstrates the growth and the resilience of fee revenue over the last 3 years on a quarterly basis. Curro is focused on increasing its operating margin. In this regard, we continue to reduce discounts granted, which was below 7% of division fees in this period from 9% in 2021. Ancillary revenue consists of non-tuition revenue income being rentals, boarding school fees, ancillary revenue, past services and other income. Tuition fees increased 62% since 2019, whereas ancillary revenue increased 47% during the same period. However, the ongoing recovery and ancillary revenue after the pandemic is encouraging. Ancillary revenue increased by 31% for the first half of last year or from the first half of last year, more than double the rise in tuition fees over the same period. Learner growth and activity at schools are the major driver of operating expenses. This slide provides operating expenses per quarter relative to learner growth. Total operating costs increased by 15% from the first half of 2022, below the 16% revenue increase. The 2 new schools acquired and investment in vocational and digital strategies added costs in this period. On a like-for-like basis, excluding the 2 schools acquired and the close of 1 school, the cost increased by 12%. The 31% increase in ancillary revenue required additional costs to execute the associated income-generating activities. This in itself explains 2% of the increase in the total cost. Participation in sport, leagues and extramural activities across Curro was higher than ever before. We are pleased with the enthusiastic levels of participation and the educational enrichment for our learners. The higher cost for extramural activities added 1% of the increase in total costs over inflation. Total staff costs increased by 11% from the first half of 2022. On a like-for-like basis, the staff cost increased by 8% due to learner growth of 2% and the increase of 6%. We do not expect a meaningful increase or improvement in the leaner-to-teacher ratio over the next 2 years due to the growth of our high schools which offer more subjects, and accordingly, group smaller class sizes. Facility costs increased by 15% to ZAR 195 million in this period. If the additional cost of electricity back up through diesel generators is excluded, facility costs increased by 7%. Curro's costs are well managed, and our operating leverage will be a powerful driver of future profitability as long as revenue growth outstrips expense growth. Gross receivables decreased to ZAR 445 million from the ZAR 491 million in December 2022, or from December 2022. The reduction is due to the write-off of inactive debt during this period, offset by an increase in the current outstanding active accounts. Curro actively indulges with overdue accounts to rehabilitate poor payers earlier and retain learners, or to terminate accounts with settlement remain outstanding. In terms of our provisioning policy, the full outstanding balance of each account is allocated under the oldest-aging category and is then provided on a step basis. Expected credit loss provision is now at 36% of gross receivables, down from 40% at the end of 2022. The provisioning methodology was unchanged and the reduced ratio of provision to debtors demonstrate the meaningful improvement in the aging of outstanding accounts. In addition to the provisions, we expected credit losses. Curro also incur other debt-related costs by collection fees. The total bad debt-related costs expressed as a ratio of turnover improved to 3.8% from 4% in the first half of 2022. We expect this to improve further. This graph tracks the change in trade receivables and provisions in the first half and second half of 2020 to 2023. Gross receivables increased by ZAR 27 million from 30 June, 2022 to 30 June, 2023. The 6% increase in gross debtors is less than half than a 16% increase in revenue, which demonstrate our collection progress. Curro wrote off ZAR 169 million of debtors and sold this nonperforming portion of its debtors book, which relates to learners who have left Curro. The expected credit loss provision decreased by ZAR 8 million in this period, after writing off the oldest account balances against both the debtor and the provision balances. Importantly, expected credit losses of ZAR 78 million in this period was virtually the same as the ZAR 76 million in 2022, despite a weakening consumer environment. Trade receivables are split between active accounts, or learners who are still enrolled in a Curro school, and inactive accounts for learners who have left Curro schools. The remaining debtors book, net of expected credit loss provision, consists of ZAR 194 million of actively enrolled accounts and ZAR 90 million of inactive accounts. The quality and aging of active book for enrolled learners improved during the first half of this year. Concerted efforts are made to recover outstanding amounts, including more frequent terminations of nonpaying accounts. The slow-paying portion of debtors book relates to the inactive book, which decreased from ZAR 112 million at the end of 2022 to ZAR 90 million at the end of June 2023, net of the provision beyond. This slide confirms the earning numbers per share. Recurring headline earnings increased by 36% to ZAR 203 million from ZAR 152 million in the comparable period. Curro's Meridian subsidiary received nonrecurring subsidy income of ZAR 25 million in 2022. This was included in the calculation of earnings per share and headline earnings per share in 2022, but was added back in the calculation of recurring headline earnings for the first half of last year. We expect a relatively balanced distribution of earnings for the full year of 2023. The group's balance sheet is well structured to support our growth ambitions. Total net debt reduced by ZAR 140 million to ZAR 3 billion at the end of this period from the ZAR 3.1 billion on 31 December, 2022. The global credit rating company upgraded both the long and short-term national scale issuer ratings assigned to Curro by 2 levels. Net finance costs increased to ZAR 131 million from ZAR 103 million. About half of the increase in interest costs is due to higher interest rates and the rates due to slightly higher net debt in the first half of 2023 compared to the first half of 2022. Cash generated from operating activities in the first half of this year increased by 2% to ZAR 607 million. Curro repurchased and canceled 2.4 million of its shares for ZAR 19 million up to 30 June, 2023. The group also purchased an additional 2.9 million Curro shares for ZAR 24 million during this period. This will be used to settle the group's vesting obligations in terms of its long-term incentive scheme. Cash reserves funded a dividend payment of ZAR 65 million in this period. Curro invested ZAR 312 million in its business in the first half of 2023, which includes the following: ZAR 17 million on the acquisition of a school, net of proceeds on the disposal of land. In addition, Curro invested ZAR 295 million in its existing business, of which ZAR 108 million was used to expand capacity in classrooms and facilities, including backup power solutions; and ZAR 187 million on CapEx for refurbishment, maintenance and replacement of assets. Our objective is to increase capacity utilization at our existing facilities. Curro plans to invest as much as ZAR 800 million in the 2023 year on expanding its assets and maintaining its operations. This includes the acquisition of [ Court ] International College at the start of this year for ZAR 28 million. CapEx and acquisitions will be funded from operating cash flows and Curro's unutilized debt facilities. Thank you, ladies and gentlemen. Cobus and I will now take questions.

All right. The -- all questions coming in through the online platform. But while that sort of plays out, are there any questions from the attendees who are here?

Just some clarification on the buybacks. The 2.9 million -- 2.4 million shares was during the period. Are you saying that you purchased shares after the end of the period to get you to the ZAR 88 million?

That's right, Jason. So in total, we purchased 10.3 million shares, including a 2.4 million purchase up to half year.

So that's not purchases done in the previous period?

No.

It's a relatively unimportant question, but is there a difference in the performance of your African schools compared to South Africa? And do you plan to expand sort of more cash offshore in Africa? Or is on the margin CapEx going into South Africa?

It's a good question. Maybe I just need to zoom out a little bit. So we currently have 1 school in Namibia, Windhoek Gymnasium, it's an excellent outstanding school operating there, about nearly 2,500 learners. And then we have a primary school in Gaborone. So that's the extent of our international operations. Both of those are successful. We are not, at this stage, embarking on an ambitious African kind of expansion strategy. But having said that, we are opening 2 additional schools in Namibia next year in January, one in Walter's Bay and one in the north of Namibia in a region called Oshana, which is really is -- it's between Oshakati and Ongwediva and Ondangwa, one of those. So I've been there, it's pretty exciting. We're doing that in partnerships with the Namibian Development Bank and the Namibian Government Pension Fund who are constructing the facilities, and we will be running and managing those. So we think that's an exciting model to take quality education forward without having to commit heavily on the CapEx front. So we're looking forward to those ventures and those opportunities, and that's the extent of our foreign expansion at this stage.

Just a question on, I guess, the learner to -- or learner-to-teacher ratio not expected to increase, so expect it to stay pretty constant or even decrease with the growth in the high schools, where do you see operating leverage coming through on the EBITDA level? So which costs are pretty much fixed, and which -- what you get leverage from as you follow high schools?

Yes, I think it's -- if I consider operating leverage, I mean, the basics of it is the extent to which your revenue can grow at a quicker pace than your costs. Staff costs constitute nearly 2/3 of our total cost, so it's clearly a massively important part of that equation. And when we guide that we don't expect the learner-teacher ratio to increase much over the next kind of 2 years, we're probably being a little bit kind of prudent, but I just find in how people model that they do some extravagant things. So maybe I'm managing expectations a bit. I think the kind of crux of it, though, is that if you look at the business, we think there's opportunity to drive operating margin in the bad debt-related space. So at the moment, we're kind of below 4% now, but we think we can do even better in due course. We think that there's still opportunity in ancillary revenue, both in the absolute number of ancillary revenue and the profitability thereof. Issues like discounts, I think, is quite well under control, but there may be a little bit of room in that space. And then over the last, say, 2 years, we've increased our school fees by more than common inflation. So inflation is 6%, we passed an increase across the portfolio of about 8% in this year. And we think as the schools fill up, there's a bit more pricing tension available that may allow us to keep driving school fees slightly ahead of the cost of doing business. Now, that's a sensitive topic in the constrained market where the consumer is under pressure, and so we're also working very hard to give learners and parent communities an incredible experience on our campuses. So when we spend more on extramural and extracurricular activities, it really is to enrich that experience and holistic education that we offer. I'm going to come to [indiscernible] to look at some of the online stuff. Okay. So there's a question here around the average school fee increase for '23, which I think we answered. Plans for future increases, which I've answered. And then is there a pushback from parents? Now the short answer is, parents are under pressure, and so I think in every aspect of consumer spending, there's a degree of pushback. What we're finding though is that the quality of the education we offer is really sort of setting us apart, and I think we're doing things reasonably and responsibly so we haven't seen a material kind of pushback from parents. There's a question on the working capital changes in the cash flow. So if you recall, the operating cash generated from operation's up 2% with about ZAR 30 million less in that working capital movement. But that's, to some extent, a function -- it's between accounts payable and debtors. But in the main, it's because of the timing of CapEx spend and how much of that CapEx was still outstanding. And if you look at that movement, particularly in the accounts payable line, that explains a lot, mostly about ZAR 30 million, most of that difference. There's a question around -- did service burden lead to higher interest rates? Or does this change your view to de-gear the balance sheet versus share buybacks? Where does your priority lie, if you have to choose only one of these? I think it's very important to understand that. I mean, I've referred to it, but this business has a lot of growth momentum. And we -- certainly, coupled with the extent to which we are now generating more cash from operations than what's required in terms of CapEx, we'll consider share buybacks from those operating cash flows in due course. And so far as de-gearing the balance sheet, that will happen naturally as the business grows and as its profitability kind of pushes up. So what today is effective 3 or 3x EBITDA, debt kind of burden will reduce as EBITDA increases. So we're not -- I think in terms of how we view the business, we would expect to maintain the absolute kind of number of debt in the business for the foreseeable future. We're not necessarily seeking to de-gear from here. We believe it will happen as a natural course. There's a question just on return on equity. It's currently around 6%. When do you anticipate earning a return on equity in line with your cost of equity? And what operational metrics do you need to achieve to get there? So I think if you measure the return on equity on the balance sheet, you get the 6%. If you measure return on equity on buying the stock today at the current market price, I would suggest that your return on equity is much higher than that. And I'm not trying to belittle the issue, but it's an interesting mathematical thing in investing. I think when you consider the sort of scale of assets that's invested in this business, well over ZAR 12 billion, we simply cannot open that, push up return on equity significantly. But the key leader we had at this stage is to drive up the operating performance of the business, operating profits, and in that way, drive up the return on equity. And I think mathematically, again, you can appreciate that may take some time. So we expect then the cost of -- weighted cost of capital of this business is about 14%, 14.5%, and we would expect to exceed that number within the next 5 or so years. It will take -- it's a disciplined journey that we're on here, and it's all about operational excellence on a daily basis. I think there was another question here, so should we just take that one first?

Thank you very much, [indiscernible] here. Just on the EBITDA point, just maybe would like to get some color on like maybe in the next 3 to 5 years, how are you guys in the senior level think about EBITDA progression, the absolute amount and the margin amount?

So just to repeat your question, how much we?

Thinking around EBITDA margin and the absolute demand? Also thinking, as you're mentioning that as EBITDA grows, then that's also how you deleveraging the business, so net debt to EBITDA will drop from 3%. Is it going to 3%, 2.5% to 2%? And maybe the escalation of that process?

I think the best way to understand is this is a business that is capable of producing annuity kind of cash flows, and I think as a capable management team should manage a reasonable degree of gearing in that context. Not irresponsibly, but reasonable. So should we ever be without debt? I don't believe so. I think it would be suboptimal for shareholders. So the sweet spot is probably where we are now and maybe a notch below. But not -- yes, we're not under pressure at the moment, and certainly, I would seek to maintain a reasonable level of debt in the operations. I think patient -- shareholders have been patient for a long time to get returns from the investment at Curro. I think we should look after them in terms of excess and free cash flow.