Laureate Education, Inc. (LAUR) Earnings Call Transcript & Summary

Good morning. Welcome to the conference call of Ser Educacional to announce the Material Fact announced on September 13. As today, here, we have Mr. Jânyo, CEO; João Aguiar, CFO; and Rodrigo Alves, IRO. This conference call is being recorded [Operator Instructions] This conference call will not have a Q&A session. The investors relations team will be available to answer any questions you may have. This conference call is also being simultaneously transmitted on the Internet with audio and the slide deck at the address www.sereducacional.com/ri. The access to the audio and the slide deck of the conference call is also possible through tablets and smartphones with iOS and Android. The recording of this conference call will be available for a week after its end. Before continuing, we would like to say that statements made during this conference call relative to Ser Educacional business prospects, operational and financial projections and goals are beliefs and assumption of the company's management and are based on information currently available. Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions because they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future performance of Ser Educacional and leads to results that will be materially different from those expressed in such forward-looking statements. Now I would like to give the floor to Mr. Jânyo Diniz, CEO, who's going to start the presentation. Please, Mr. Diniz.

Good morning, everyone. It's a pleasure to be here with you today to announce that the management of Ser Educacional and Laureate after months of negotiations have arrived to a binding offer, involving the assets -- the merger of the assets of both companies in Brazil to form the fourth biggest group in Brazil. The combination is strategic, make it possible for the company to reinforce its presence in the South and Southeast of Brazil to considerably increase its number of students, its exposure to medicine courses and to accelerate its growth in segments of distant education and continuing education. Going through the structure of the transaction on Slide #3, in addition to offer of shares, there will be a payment of cash worth BRL 1.4 billion. Ser will issue 101 million new shares for Laureate, which after the closing will hold 44% of the capital of the merged company. These shares will be issued for Laureate the maximum of 7.5% of the company's shares. There will also be a level 3 ADR program at the time of closing, ADS will be delivered from Ser to Laureate. In this manner, Mr. José Janguiê, controller of the company will hold after the transaction about 32% of the shares. And will continue as a reference shareholder, appointing most of the members in the Board of Directors. Also as a result of this merger, the company will take measures to improve even further its covenants, including increase the size of the Board of Directors, increase the term in office of Board members will create several committees, including an audit committee, an integration committee and among other measures aimed at adapting the company to comply with Sarbanes-Oxley. This new Board of Directors will include 2 members appointed by Laureate and 2 independent Board members. The completion of transaction will depend on a few conditions that Laureate will not accept proposals from -- competing proposals in the next 30 days. If Laureate receives and accepts the competing binding offer, Ser will have the right of equaling the proposal. And if they refuse, Ser will receive a fine of BRL 180 million. In addition to that, we need the approval of the CADE and other regulation agencies in Brazil. We hope that once we move forward, the transaction will be completed before the fourth quarter of 2021. Now on Slide #4. As you can see on the right-hand side, after the completion of the transaction, Laureate Brazil will become a full wholly owned subsidiary of Ser. Moreover, it's important to highlight that the distribution of shares for Laureate and the free float will significantly increase along time and may reach up to 68% of the shares, which we believe will help to increase the liquidity of shares. Another important point is that according to the legal structure that we agreed on, Laureate will have 44% of the company shares, will exercise the voting rights at the top of 7.5% of those shares. So Laureate will have no limitations to sell its shares, either in a public or private markets, so long as they observe the maximum amount of shares to be sold every week and the preferred rights to Mr. José Janguiê, once certain conditions are applied, as set forth in contract. On Slide #4, you have a summary of Laureate operations in Brazil. It has 11 higher education organizations with more than 267,000 students in 50 campuses, 13 cities and 7 states. Laureate has 500 distant education hubs, with 18% of its student base studying through this modality. In the first quarter of the year, this company reported revenue superior to BRL 2 billion EBIT and adjusted EBITDA of 413. There are more than 800 students or places in courses of medicine spread throughout Brazil. Laureate Brazil has regional brands associated to a high degree of quality in the academic performance with top rating from the assessment of the Ministry of Education. On the right-hand side, you can see the higher concentration of students in cities, such as São Paulo, Rio Grande do Sul and the geographical footprint is very complementary into Ser, which is one of the main interesting features of this transaction. On Slide #6, you can see how the merger with Laureate is perfectly combined in the context of the Ser's strategy, significantly contributing for the development of growth pillars as previously defined by the company. The merger provides significant scale gains, significantly strengthens the positioning of Ser in South and Southeast regions. It adds strong brands with strong regional recognition to the portfolio of the company, strengthening its position in the market. It improves the positioning of the company in digital and distant education segments with strong brands and additional portfolio of courses. It adds a significant number of places in -- for students in schools of medicine associated especially to the premium market in the country. In this manner, it will expedite the growth strategy that Ser has been executing in the past few years. On Slide #7 transaction will significantly enhance Ser's positioning. And after the transaction, it will be one of the top organizations in higher education in Brazil. It will have a significant position in a distant education market with strong regional brands to be explored in the strategy in this segment. It will be one of the leading companies in the segment of medical schools, with exposure to the main markets and capacity to develop a wide-ranging platform in health-related courses based on tradition of the organizations of the education in medicine. It will be positioned to make the most of other avenues of growth, both live education and distant education. It will be run by a strengthened management team, combining the best of both companies. Now within a more robust governance framework and international standards, Ser positioned amongst the largest education players in Brazil. So after the transaction, the company will reach the brand of 555,000 students, represents a CAGR since the IPO of approximately 21%. With the transaction, Ser will become part of a very special group of companies that have effective national countrywide footprint and a broad base of students, on Slide 9 with national presence and significant opportunities for scale gains. So we will complement the positioning of each other with a strong presence of Laureate brands in the South and Southeast of the country. And moreover, we have a back-office structure that will be centralized and integrated. The company will be able to extract significant value through scale gains as a result of the consolidation of its presence in Brazil and operational leverage. On Slide 10, Ser presents a strong track record of value creation through acquisitions. On Slide 10, we have, as we can see in the case of the acquisitions of UNAMA and UniNorte. In the case of UNAMA, Ser was capable of generating a significant revenue growth of 131% in 5 years, significantly expanding the basis of students in this period, generating also EBITDA margin. The company was capable to make the most of the original strength of the brand and exploring opportunities in distant education too. In the case of UniNorte, Ser was able to deliver a gain of 18 percentage points in EBITDA margin between 2018 and Q1 or the first half of 2020, capturing significant operational strategies, making the most upscale gains and expanding revenue through new distant education hubs and camp in this manner. Ser believes that it will be capable of generating significant gains of scale in the transaction of Laureate, integrating efficiently new brands. On Slide 11, Laureate adds highly recognized brands to Ser portfolio with having received several awards along the years with strong positioning of its brands in the regions where it operates. It uses the strength of these brands in their respective regions where essential part of the company after the transaction creating several opportunities of growth for Ser. On Slide #12. So the combination complements Ser to boost DL platform, adding about 48,000 students to the company's undergraduate distant education courses that will then total 80,000 students in this modality. It also creates several opportunities to be explored by Ser in the segment, fast integration of platforms of Ser and Laureate, considering the use of LMS, making the most of recent investments of Ser in its digital platform to improve the experience of its students and Laureate students. So making the most of a high complementarity between Ser and Laureate programs, make the most of the strong regional presence of Laureate brands in the live education brand and also distant education, make the most of the strengths of the brands of each one of the companies in the target regions, expanding the offer for hybrid courses and then significant scale gains through the merger. On Slide 13, we note that the transaction will add 832 vacancies in medical schools, which will then have 1.175 (sic) [ 1,175 ] places in medical schools, becoming the fourth leading player in the segment in Brazil. So this positioning of highlight in the segment is reinforced by distribution of places for students in the company concentrated in the most important regions in the country. In addition, the strong presence in this segment, combined with renowned brands, makes it possible for the company to integrate more effectively new vacancies, opening space for relevant acquisitions directed to the addition of vacancies of medicine in its platform. On Slide 14, it's uniquely positioned to make the most of trends related to lifelong learning. So demand for extension, post-graduates, Master's degree, PhD in MBA courses in addition to free and specialization courses should grow significantly over the next few years, with the transactions here will be geographically positioned in order to capture most of this additional demand, considering the combination with Laureate, a brand that is in a premium market where the company can offer these types of course and should rapidly. Moreover, the investments made recently by Ser in its digital and distant education platform, combined with more robust brand portfolio and a wide-ranging program of courses after the transaction will make it possible for Ser to have a more attractive offer to students seeking free courses and specialization through distant education. Another important point is that the company is first-line structured to meet the demands of medical students that have requirements for lifelong learning. So on Slide 15, Ser will become an improved governance framework, both in Brazil and overseas, which will lead the company to comply with all internal and external controls and governance required by Sarbanes-Oxley. The time to meet all the requirements is 2 years. Moreover, there will be several committees to assure effective management of company's governance. The transaction will also change the composition of Ser Board of Directors, which will have 9 members, 5 of them appointed by Mr. Janguiê Diniz, including the Chairman and 2 appointed by Laureate. The Board of Directors will also have 2 independent seats. On Slide 16, we note that there will be a significant growth in operational and financial indicators of the company. The student base of Ser will go from 188,000 students to 455,000 students. In terms of revenue, the company reached BRL 3,451 million of pro forma revenue in Q1 '20, going from BRL 1,280 million in the same period. In EBITDA, the transaction will add BRL 413 million going from BRL 315 million for Ser in Q1 '20 to BRL 729 million pro forma in Q1 '20 after the transaction of 21.1% margin. The Ser's leverage should reach 3.2x EBITDA pro forma in Q1 '20 in the last 12 months as a result of the transaction, considering the cash of BRL 1.700 billion (sic) [ BRL 1,700 million ] and net indebtedness of 623 to be taken on by Laureate. So the transaction will also generate significant amount through synergies or through main -- created through 3 main areas. So we are going to rationalize academic costs through the standardization of syllabuses offered by the company and are going to optimize hour loads. And we are going to increase the presentation of both live and online courses. We will be able to dilute fixed costs and optimize the admin structures. We will also optimize expenses in marketing and sales, rationalizing the structures. We are going to capture significant synergies and to explore the value levers mentioned during this presentation and hope the transaction will add value to shareholders in the first 12 months after its closing. On Slide 18, we have the key takeaways. So the change of level of Ser after the transaction becoming the 4 top player in education in the country at the same level as market leaders. So higher robustness in the corporate governance of the company after transaction, complying with SOX requirements and it's double listing in Brazil and the U.S. We are going to add brands with strong regional presence, opening several opportunities for the company to grow, strengthening the positioning in digital and distant education segments for multiple opportunities to be explored. Ser's positioning as one of the leaders in the segment of medicine with the opportunity of creating a full ranging platform of health-related courses and also the possibility of capturing the growth through initiatives related to lifelong learning and the digital platform. These were my comments. Thank you all very much for attending our conference call. And our Investor Relations team will be available to answer any questions you may have in the future. Have a good day.

Thank you. The conference call of Ser Educacional has now ended. We thank you all very much for your participation and have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]