Ser Educacional S.A. (SEER3) Earnings Call Transcript & Summary

Good morning. Welcome to Ser Educacional Conference Call to discuss the company's results for this first quarter 2020. With me today are Jânyo Diniz, Chief Executive Officer; João Aguiar, Chief Financial Officer; and Rodrigo Alves, Investor Relations Officer. We would like to inform you that this event is being recorded [Operator Instructions]. This event will also be broadcast live, audio and slides, via the Internet at ir.sereducacional.com. You can also access the webcast audio and slides through tablets and smartphone equipped with the iOS or Android systems. The replay of this event will be available soon after its conclusion for a period of 1 week. Before proceeding, we would like to make clear that forward-looking statements may be made during this conference call relating to the business prospects of Ser Educacional as well as to its operating and financial forecasts and targets. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainty and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, conditions in the industry and other operating factors may also affect the future performance of Ser Educacional and would lead -- and could lead to results that differ materially from those expressed in these forward-looking statements. I would now like to turn the call over to Mr. Jânyo Diniz, Chief Executive Officer, who will begin the presentation. You may begin, Mr. Jânyo.

Hello, everyone, and thank you for participating in our conference call, and I hope you and your families are healthy. This time, we are going to start by talking about the plans we have developed to face the impact of COVID-19. Our initial message for you who follow us is that we believe that a period of crisis like the one we are facing will end up distinguishing the leading companies in their segments. It will separate firms that can help from the ones that will need help. And we, as leaders of our companies, we know -- we now have the opportunity to test the strength of our corporate culture that we have been working on shaping over time. I believe that Ser Educacional has solid cultural base and is able to help society. We know that crisis always pass and this one will pass, but the recognition of companies that support their society remains. And this is very important, especially for those that work in educational, [indiscernible] manage and balance social support, business [indiscernible] operation and financial fundamentals. It was in this [indiscernible] divide our plan to respond to the COVID-19 challenge in 3 stages. The first, [indiscernible] our face-to-face class by mid-March, a period when many people were not aware of the risk of pandemic, which led us to spend a lot of efforts in communicating with our stakeholders. At the same time, we transferred our students to the remote school system through traditional classrooms, which is based on Microsoft [indiscernible] . We have the advantage of having an agreement with this company for many years, and our schools are allowed to own up to 5 license free of charge, what helps our IT staff members to migrate our students to attend to synchronous video class. To close this first stage, we also focused on the safety of our team and communities in which we are part of, and in this sense, we managed to put more than 90% of our corporate team on a home office application regime as well as start monitoring case of COVID-19 among our workers and as possible from students -- for students and suppliers. We managed to reinforce our cash positions with BRL 300 million to make sure that the company will probably have enough resource to go through this crisis. And we created a program of installments, of short-term tuition for students who demonstrate the lost income or job as well as extended the enrollment and the enrollment process in order to mitigate the academic impact for the students and for our results. We also started to [indiscernible] expense and [ cost-outs ] , therefore, reducing capital expenditure, market expense as well as initiating the adoption of MP936 to protect the job of our employees, especially those whose activity is essentially face-to-face. We have made a comprehensive plan to raise awareness and support to communities, hospital and health professionals, combining a series of activities that will take place through the period of the pandemic as well as for the recovery phase. The second stage was more dedicated to the impact following the implementation of the Ser Digital Classroom. Now we are dedicating ourselves to the format and execution of the resumption of classes, something that will certainly require special care on our side by working on a detailed plan for this. We have changed some of our operating activities that will be important for improving results over the next quarters, such as the permission of classes in the second half, optimization class in the structure as a whole. And of course, we hope to resume our business plan with the launch of new course and entering continuous education, which we will detail later. Moving on to Slide 5. We show a little bit about Ser Digital Classroom, which is being used to keep teachers in contact with students, maintaining study routines for theoretical class. As you can see in the graph, in the lower left corner of this slide, the participation rates of students are higher and in line with our traditional face-to-face class. And the grades given by class leaders in weekly surveys that we are conducting is also quite satisfactory. On Slides 6 to 9, we present a summary of the initiatives to try to mitigate the impacts of the crisis in the fields where we operate. We started with the communication efforts on the change from classrooms classes to remote school regime, motivational videos, health and prevention tips, but especially awareness of the risks that our society runs. We were able to quickly transfer our face-to-face congress to the online modalities, transforming this event into 2 interactive lives that kept our academic activity in their normal course. The lives of [indiscernible] teachers and engineers had in that period over 500,000 views. We created and participated in musical lives that helped to raise donations for different sectors of society as well as helped to reinforce our brand in distance learning, which has improved performance from these events associated with these other initiatives. Our teachers and students produced hand sanitizers and masks, and they are even in the development and production of respirators. And we also lead specific campaigns for donations to hospitals with support for the purchase of food, hygiene and cleaning materials, safety and food for health professionals, as well as we support a very interesting app that allows the population to be served by telepresence in the fight against COVID-19. On Slide 10, we summarized our solid financial situation, which is fully prepared to make our company go through this difficult period that we have -- that we are going through. Note that we have a proposition [ pro forma ] cash of BRL 482 million, that represents about 40% of net revenue over the last 12 months. And we have a comfortable scale for payment of our financial indebtedness. We are, therefore, in solid financial position to allow our company to follow our mission, and at the same time provide the consistent results to our shareholders as we did throughout our history, even in challenging periods in our economy in recent years. Moving on to Slide 12, where we will talk about the results for the quarter. As we announced in the disclosure of the last quarter, the intake of students was affected by the measures adopted to mitigate the impacts of COVID-19 at mid-March, making our performance in terms of growth in the student base and average tickets that was going in line with our budgets to be impacted. Even so, we managed to grow our total student base due to the acquisition of UniNorte that we consolidated in November last year and the distance learning that continued to grow at a strong pace. On Slide 13, we analyze how our students base was by segment and average ticket. It is worth noting that our health care student base remained solid and represents 51% of our total base. It is important to highlight that the enrollment of students was affected this final stretch of the path due to the lockdown in cities in which we operate due to COVID-19, which generated some particular effects in our student base and the average ticket that we will highlight. First is that we have been experiencing the change in the profile of students who started to become mostly out-of-pocket. The enrollment of these new students in the first month occurs at promotional price of BRL 49.90 or BRL 99.90 depending on the region, which is already present. The average ticket over the last years is increasing over time as we increase the share of our out-of-pocket students. Second, this effect associated with the delay of enrollments generated greater impact on the average tickets in this quarter, precisely because there are students with higher average ticket could not enroll as expected. Third, there was an additional effect generated by the postponement of the enrollment of veterans FIES of approximately 2,500 students. It ended up generating an atypical impact of the average ticket of the quarter, which when normalized will generate accumulated revenue for the semesters since these students are in the roll. These are my initial comments. And now I would like to give the floor to Aguiar, our CFO, to talk about the financial results.

Thank you, Jânyo. Hello, everyone, and once again, thank you for attending our event. On Slide 14, we have a summary of the results for the quarter, which had as main impact the net revenue recognition that was below expectations due to the effects of the COVID-19. It's important to highlight that as the crisis impacted the last -- 2 last weeks of the quarter, our efforts to mitigate the impact of the lockdown through costs and expenses reductions did not reflect yet in our results, but on the other hand impacted revenue recognition and the formation of classes, preventing us from the ongoing forecasting cost dilution. This made the impact of the revenue reduction to be fully reflected in the EBITDA and net income since costs and expenses line behavior was quite generally flat as expected. Therefore, we also expected to have a good revenue generation given the positive intakes and reenrollment pace we were having. On other hand, for the second quarter, we expect a reduction in our cost and expenses structure since we started this optimization work by mid-March, reducing these expenses to the minimum necessary to maintain our operations and jobs, as already mentioned by Jânyo. On Slide 15, we have the breakdown of results between on-campus, new units, UniNorte, and distance learning. And again, we noted that our distance learning presented very favorable pace, both in terms of improving its participation in results and EBITDA margin growth, now reaching levels even above our consolidated results, as highlighted in the charts on the right. UniNorte, on the other hand, which despite all the problems with COVID-19 presented a positive result, reflecting once again the synergy gain generated by the restructuring we are carrying out after the acquisition. Moving on to Slide 16. We have an analysis of our net receivable days, which followed the same trend observed as of the first quarter '19 when we changed the provisioning format, and we understand that this average term around 90 days for regular students best reflects the actual payment cycle of our student base. The chart below show how strong our out-of-pocket students base is growing and becoming significantly more important. Regarding the net receivable days on FIES, it's worth mentioning that the federal government continued with a longer payment cycle, something that also started to occur in the second quarter of 2019. On Slide 17, we present our CapEx, which, in line with that observed in the last quarters, has been reduced since the investments we have made in fixed assets are already prepared and part of them have been transformed into OpEx as they are related to the project Ser Digital. As this was one of the company's cash generation preservation initiatives, I believe that this year we will see an even more significant reduction in CapEx, [indiscernible] for activities that cannot be interrupted, such as preparing laboratories for courses that are entering the phase of practical classes, for example. And on Slide 18, we have a more detailed view of the financial health of our balance sheet, which, as Jânyo said, is prepared to go through this more acute period of the crisis and now with a very solid cash position since we have raised significant results to go through this challenging period in a healthy way. These were my comments on the results, and I give the floor back to Jânyo so that he can make the final remarks.

Thank you, Aguiar. Let's please go to Slide 20 for an update on the next steps in providing a sequence to what we talked about in the last earnings call. We started the [indiscernible] project to create a new lever dedicated to value generation to increase our presence in the distance learning and in continuing education. We understand that those are broadly complementary to the activities we already have and provides capacity to create new source of revenue with potential high operating margins. Within this planning we decided to prioritize in 2020 the expansion of our course portfolio. As you can see on Slide 21, we are focusing on some initiatives that tend to maximize our investments in the distance learning platform. The first is that the launch of GoKursos, which functions as a distance learning marketplace that aims to offer continuing education course with a new brand that can even be offered by third parties in a white-label format. In this model, we will have partnerships with other companies in order to increase the amount of content as well as to bring recognized brands to be offered to the public. The second is the launch of the Uninabuco Digital brand to launch a new line of undergrad course in different formats compared to those practiced by the market in general. We are preparing new [ types ] that will also be launched on a large-scale in the second half. The third is a new model of supply after the Uninassau distance learning graduate students who have [indiscernible] quite broad course and offer format. And the fourth initiative will be our face-to-face collaboration with a 40% distance learning workload following the new rules published by the MEC earlier this year. I believe that this new modality will be relevant to increase the penetration capacity of higher education in Brazil, especially because of this crisis that is leading people to have less resistance to the use of distance learning tools. With these initiatives, we will lead important steps in the development of the company especially because we are modernizing or increasingly offer them through and distribution capacity with the head [indiscernible] the transformation that higher education is going. On Slide 22, we detail GoKursos a little more, which has very interesting features such as breaking the barrier of students entrance between regulated education or not, beginning of class [indiscernible] need to wait for class formation and especially the ability to offer via partners as is the case with our first partnership with IG that we are testing as a beta version. And we believe that it will go into production starting next month. On Slide 23, we present the first operational partnership of this new distance learning offer format, which is our commercial agreement for the distribution of Barca Innovation Hub Universitas course, exclusively partner of Barca in Brazil. This is our first partnership within the new strategy of entering into continued education, and it demonstrates how we can leverage our operational structure to quickly offer new course to the market. These are brand new course in the field of sports from a well-known brand in our field, and I believe this will be the first of many partnerships that [indiscernible] our initiatives in continued education. And to conclude, we highlight on Slide 24 our value generation levers with this for the solid development of our distance learning and which we will have a totally new line of course and brands to be offered to the market. We are very involved in this since we believe that distance learning will even be more valued by the market from now on. Our entry in the continuing education segment is just beginning, but with a portfolio of new course, new ways of distributing content in different segments for the most economical and short, to the longest and premium. We also have the integration of UniNorte, which is generating representative synergies and is helping us a lot this year, and we will still have opportunity for ongoing acquisitions as we kept the due diligence process in progress during this period, awaiting a definition of the scenario and if the negotiations are still going on. Interesting, we will have this more advanced process. We also believe that the new opportunities will appear as we are realizing that many players in the sector will not have the competitive advantage of financial strength that we have today. Those are my initial comments, and we can now start the Q&A section.

[Operator Instructions] Our first question is from Marcelo Santos from JPMorgan.

The first question is if you could provide a little bit more detail on the Uninabuco digital new undergrad course that you mentioned? What are the main changes that you're bringing to the market? And the second, if you could provide some color on the trends in April and May, especially regarding collections, but also what other things you are seeing in those months, if possible?

Marcelo, well, what we are doing now is Uninabuco digital, the main difference between the other course we have is that they have a reduced time of duration of the course. For example, a course that has 2 years in the Uninassau Distance Learning project, we have only 18 months in the Uninabuco. The second step is that the student has a different -- not just a different price but a different way to pay the course. And it is already available at uninabuco.digital. You can go there and see what we are doing as we offer our course. We are offering at the first moment students different course but we're preparing more to launch in the next semester.

Marcelo, this is Aguiar speaking. Well, we are experiencing a low-to-moderate delay increase so far, which is important because it shows that we have a very [indiscernible] student base with a very good credit profile. We need -- at this moment, we need to see how that works for the rest of the semester.

Our next question is from Susana Salaru from Itaú.

We have 2 questions. The first one is regarding the GoKursos, the marketplace. If you could elaborate a bit more how it's going to be the revenue sharing between Ser and the other company that we participate in the market share? How are going to be the mechanics? That will be our first question. And second question. On the cost-cutting initiatives mentioned during the initial remarks, you said that we have a mismatch between revenues and costs and the cost will -- the cost cutting will actually be seen in the next quarters. If you could just elaborate a bit more, which line should we expect to improve going forward? And what kind of -- at what degree we should expect these lines to improve? That's actually for Aguiar, the second question.

Susana, this is Rodrigo speaking about GoKursos. Unfortunately, we cannot tell you the revenue share. Obviously, it is something that is brand new and something that we are just starting. They are usually working as content providers, and we are working on the distribution side on those, when we are distributing the content. On the other hand, when we have the marketplace working as a white-label, it is the opposite; we are providing the content and the platform and the partners are only the distributors of these products. We will -- we are still in the first operation, the first agreement signed. And when we have a broader base of partners in this project, we believe that we can provide some more detail. What I believe is that those first contracts we are signing, they also have significant changes going forward with the next contract. So maybe it's not even the right time now to provide more detail on that. I will hand the floor to Aguiar to answer on the cost side.

Well, Susana, at this time, we are renegotiating with the suppliers. We are understanding how kind of activities we need to diminish in our units. And it's quite early to say how it will be [indiscernible] the whole structure of cost and expenses at this time. But we are really going deep in all of the expenses we have and costs we have to understand what kind of cuts we need to do at this moment.

Just to provide a little bit more detail on the mismatch. The point is, when we have had the news about the coronavirus, all suppliers and ranks and all cost structure was already set because the coronavirus struck [ the Brazil ] as of the second half of March. So the whole quarter in terms of payments and cost, et cetera, they were already gone. So all payments were already gone because usually suppliers are paid in the first half of March. What we wanted to say is that in the second quarter what is likely to happen is that all the efforts we have done will start taking effect. Therefore, all the reductions in marketing, all the reductions in nonessential contracts in the day-to-day basis and so on, even the adoption of the labor we did a provisoria is also going to benefit us over time. And there will be a third stage that will happen probably in the second half that will be more related to the adjustments we will do focusing on reoptimizing the company. So what is happening to our results now is that basically we have set the classrooms expecting a certain level of enrollment, and this was not finalized because of the coronavirus impact. But when you change the semester, go to the next semester, this can be helpful, and we can reoptimize the structure.

Our next question is from Thiago Bianavizi (sic) [ Bortoluci ] from Goldman Sachs.

Our first one is regarding prices. You mentioned in the press release a more competitive overall environment, and your peer was very vocal about the situation in the state of São Paulo. I would like to understand a bit more how are you seeing the market trending in terms of competition and prices? And how sensitive or not students are to higher discounts. I mean if you think it's just a matter of finding the right price for them to take the decision and enroll? Or is this more related to confidence and then probably if volumes will be postponed to the future? This is the first one. And the second question is regarding provisions. Just to understand if you are or planning to finance the students during this moment? And under this new provisioning methodology, how should we think about PVA over the next quarters?

Thiago, this is Rodrigo here. The line [indiscernible]. So I will try to answer this. And when they join us, we can -- they can help you with the answer. But in terms of pricing, what we saw in this first semester was the aggressive market that we are relatively used to over the last 2 years. Obviously every year the market is getting a little bit more aggressive, but in our view the market is taking out 1 or 2 more [indiscernible] in different regions. The market was relatively similar in terms of [ the city ] and discounts as we could see. What happened to our average ticket is much more related to the lack of reenrollment, especially considering that we are in an odd quarter. When we enrolled the new student in the odd quarter, they take the promotional price. So they don't contribute much to average ticket. But when you don't reenroll the students that are in our base, this impacts more our average ticket. The other question related to financing students. We understand that it's time to help students and we created a financing line to students that can prove to us that they have lost the job or they had some sort of income loss. And this will be a short-term financing between 3 to 9 installments. We are working still with the total volumes that we will offer, but we had positive news in terms of collection. So as we had positive collections from March to May, slightly, obviously, below to what we were used to, we can take the advantage of having these positive connections to help a little bit more those students who are suffering more. And this will probably allow us to increase a little bit the students per class rate. In terms of provisioning, what we are doing as of now, and this can change obviously because we don't know the extension of the crisis yet, but as of now we are not taking different approach to provision. But again, things can change in a week during this crisis. We don't even know today when the classes will resume in face-to-face basis.

[Operator Instructions] Our next question is from Susana Salaru from Itaú.

Rodrigo, I just want to ask if you could elaborate a bit more, if I'm not mistaken you mentioned that July and May your collections improved year-over-year. I just want to make sure if that's the case. And if that's the case, at the bottom, I mean the last data continues to have the same trend as July or May? Or you have seen some change in the mid trend?

Good point. Susana, just to make it clear. In March, we had an impact in collections that improved in April and May. However, we are collecting less in a year-over-year basis. On the other hand, maybe we were too conservative. We were expecting this to be worse than is actually happening. Collections are occurring, I would say, in a normal pace considering the student base we have enrolled today. But it's below in a year-over-year basis.

[Operator Instructions] At this time, we have no more questions. So I want to thank you. This concludes the question-and-answer session for investors and analysts. I would now like to pass the call to Mr. Jânyo Diniz for final considerations. Mr. Jânyo, you may proceed.

Thank you all for participating in our disclosure of results. And our Investor Relations team is available to help you with further information. Have a good afternoon and stay healthy.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.