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

Good morning and welcome to the Ser Educacional Conference Call to discuss the company's results for the second quarter of 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] The 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 smartphones 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, uncertainties 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 could lead to results that differ materially from those expressed in these forward-looking statements. I would now like to turn the conference over to Jânyo Diniz, Chief Executive Officer, who will begin the presentation. You may begin, Mr. Jânyo.

Hello, everyone, and thank you very much for coming to our second quarter 2020 earnings conference call. Let's start on Slide 4, where we present the evolution of the action plans to combat the effects of COVID-19, presenting in the last results again. We completed practically all the actions plan, which requires a lot of change because there are challenged in the emergencies in different areas. We prioritize the safety of our students and employees, while we contributed to the society in combating the pandemic and its side effects, all without neglecting our role of resuming our value generation cycle. In the third quarter, we carry out the less debt that we'll try to fine-tune each of our units in operation. In Slide 5, we detail all the work we did in addition to being able to carry out 100% of the theoretical classes, they could be concluded via room Ser Digital, which has proven to be an extremely effective tool and allowed our students to keep in touch with their teachers, which led our academic routine to be maintained. We are now conducting practical class at college that could be reopened. We carried out a broad work of social support with extensive participation of our academic community, close to 950 teachers and more than 20,000 students together with our corporate team managed to donate more than 20 tons of food and productions of meals that are made by our [indiscernible] nutrition classes. In addition to extensive reports to make safety equipment, such as masks and hand sanitizers highlights for the creation of change restoration, 100% developed by our engineered teachers and students. Our human resource team acted decisively in preserving the house of employees. We were able to transfer virtually all administrative activities to home offices through the month of July. When face-to-face administrative activities or lumen on the replacing base. During the entire period of this crisis, our team has been contained for awareness and prevention which included intense work of our human resource teams in identifying and supporting contaminated employees and their families throughout the period of the pandemic. In Slide 3, we showed that we did not let our focus of generating shareholder value and successfully completed the launch of our new online core, which we call the digital distance learn course. This is a new format for offering course. It's a very dynamic portfolio focused on offering programs with the greatest demand in the market. It's suited to have the undergraduate or post-graduate diploma at an accelerated pace of evaluation, which does not need enrollment and is 100% offered and taken distantly. We are very confident with the launch of the UNINABUCO Digital brand in the market and the new UNAMA and UNINASSAU post graduate course, in particular, because we are able to beat our goals for the first official months of these operations in July. During this period, we also tested GoKursos, our marketplace for open course that now has 2 important partnerships. The commercial partnership to offer related to sports management and health at the Barça Innovation Hub Universitas exclusively in Brazil. And the partnership with IG to offer our course through one of the most successful portals in Brazil. On Slide 8, we present the evolution of our summer intake process, which as discussed since March was impacted by the COVID-19 and that there was no assumptions of face-to-face classes until the end of the semester, we have reduced the volume of the enrollment and [indiscernible], which ended up reducing the student base during the semester. On Slide 9, we analyzed how our students based was by segment and average ticket. A resource noting that our health student base remains very solid and represents 52% of our total base of students. The average ticket in line with the one disclosed in first quarter of '20 managed to recover in second quarter '20 since the base for ticket lease students was low in the quarter. And the effect of the reduction in the average tickets resulting from the promotional price of '19, BRL 49 and BRL 99. For practically student third quarter, it's no longer impacted the ticket result in a more comparable effect for this semester as a whole. These were my initial comments. And now I will give the floor to Aguiar to talk about the financial results for the quarter.

Thank you, Jânyo. Hello, everyone. And once again, thank you for coming to our conference call. On Slide 10, we present the summary of the financial results from the second quarter in the first half of the year. As you can see, our net revenue started growing again, mainly due to the entry of UNINORTE in our results and the growth of learning student base. The constant expenses performed well in the second quarter due to the action plan that we implemented since March, in which we renegotiated rents, reduced marketing activities and no essential expenses during the period as well as the inclusion of employees who had absolutely face-to-face activities in govern MP 936/20. And what reason more on our results for the quarter was the bad debt, which also increased because of the longer volume of enrollments in the semester, which impact is also an effect of the pandemic. It's worth mentioning that during the quarter, we had a good generation of operating cash, despite the delay in the process of adding registrations and payments during the period. On Slide 11, we have the breakdown of results between on site, new units, UNINORTE and distance learning. And once more, we note that our business learning presented itself again at a very favorable pace, both in terms of improving profit sharing and growth in EBITDA margin, reaching levels even above our consolidated results for the semester, as highlighted in the charts. UNINORTE on the other hand, which despite all the cuts in COVID-19 and in mid-term suspension of no essential activities presented at a positive result reflects, once again, the synergy gains generated by the restructuring we are carrying out after acquisitions. On Slide 12, we include an overview of our net income segregated in the effects of IFRS 16 from our results. See how this accounting effect ends up reducing our profit by BRL 15.5 million year semester, something that we believe is important to present as this change in practice was relevant. But from the point of view of return on the business, the impact on net income has been greater than demonstrated. Moving on to Slide 13. We have an analysis of our average collection period, which went from 107 to 121 days this quarter. The main reason for this increase is related to the impacts of COVID-19 on our student base, especially FIES, which has its process lead during the semester due to the efficacy of students leaving their homes and being served at the Caixa Econômica Federal to carry out their enrollment addition process. With regards to out-of-pocket students, also due to the pandemic, although we had strong cash generation in the quarter, we had a reduction in payment [indiscernible], which we are working to mitigate its impact in this re-enrollment process. On Slide 14, we present our cash, which, as with our costs and expenses as -- was reduced due to the impossibility of carrying out works and certain investments and thus closed around 4% of the net revenue. On Slide 15, we present our operating cash generation, which shows a substantial improvement in the semester. We understand that this improvement is due to the combined effect of maintaining relevant [indiscernible] payment rates for students at the base associated with the measures we have taken to reduce operating costs and expenses as well as the use of government support measures to combat the pandemic. As our CapEx also increased in the period, our conversion of EBITDA into operating cash remained solid, even in such an unusual period. And on Slide 16, we have a more detailed view of the company's financial health, which was prepared to go through this most critical period of the crisis. Even so, to ensure we will be filling in the market, we have raised significant resources that protect us even if it last longer or even to be used in acquisition as we have now done with FACIMED, which will be commented by Jânyo to whom I pass the floor back to your final comments.

Thanks, Aguiar. Let's please go to Slide 18 and 19, where we have this current rationale for the transaction on FACIMED we announced a few weeks ago. It's our positioned institution in the state of Rondônia in the North region of the country, with the medical course that has 75 annual seats. There is 90 annual seats if we include PROUNI and FIES. The institution already has a solid medical student basis about 440 students and have advantage of already having its structural standard including internship programs in the city. The transaction was BRL 100 million in cash with an additional BRL 50 million paid in equal annual installments. And in addition to medicine. It has a solid tradition with other house course, such as nursing, dentistry, pharmacy and veterinary medicine. The rationale for this transaction is very clear in the line with our history. We are interested in being a strong player in the North system and Northern regions of Brazil, and we are recognized as the strong player in the health segment, where we have 52% of our student base. In addition, the state of Rondônia has shown a solid historical growth, driven by our business and Cacoal the cities most benefited by this cycle in this region, which covers a population of around 400,000 people. We have opportunity for synergies in the current Faculdade, where we can generate operating margins to bring the transactions to be multiple post synergies in the range of 6, 7x EBITDA. In addition to potential growth through the offering, of course, already created by the institutions that should become a standard center later this year. As well as entering the activities of distance learning, something that is in the initial stage at FACIMED and that we can add with our expertise. Moving on to Slide '20. We conclude our presentation with a quick review of our value levers for the future. Our distance learning, which, as we have shown, is evolving well in the traditional model and from the third quarter, we have new initiatives in the digital segment with the launch of the GoKursos, Winburne, UNINABUCO Digital, UNINASSAU and UNAMA, post graduate digital brand, which also marked our entry in more [indiscernible] in the continuing education segment. In this segment, we're going beyond introducing new routes for organic growth. We have in our brand to generate new sources of income in the on campus segment, especially in health with course based on practical classes, but also to bring new fronts through acquisitions of specialized companies. Speaking of acquisitions, we still have rampup process of gaining synergies from UNINORTE, which has its integration 100% completed in June. And now we hope to carry out new activities. Now with everything integrated and prepared to move forward in the city of Manaus in the state of Amazon, where the brand is a leader in the region and has the potential to resume growth in classroom and distance learning. Our acquisition pipeline continues to move and are sure in to make the moves in the market to continue our growth plans for our shareholders associated with our focus on maintaining a solid financial position, capable of giving us very super growth while focusing on our business. Those are my comments. And now we can the take the layout of questions and answers.

[Operator Instructions] The first question today comes from Vinicius Ribeiro with UBS.

Vinicius speaking here. Two questions from our side. The first is related to the cost that was a really good surprise this quarter. How much of the savings that you guys presented in this quarter is related to -- it's recurring? And how much is related to the benefits that the government gives to protect employment? And the second question will be on the intake cycle. What's the strategy coming to starting the intake cycle, both for the distance learning and the on-campus operations?

Well, if I understood correctly, you were asking about the return of the dilution costs. Sorry. And there were a series of initiatives. Some of them should stay longer, it's rent that the negotiations are not only for [indiscernible] brand. As in the new post pandemic world, we are already renegotiating some brands and even returning some buildings that in the new context of the sector. More hybrid, it does not make sense to keep some [indiscernible]. With regard to pay rules, we have had an effective of approximately BRL 10 billion in the quarter. But on the other hand, it has not yet has impacted to help in this slide in the next semester. Since we are improving the training now enrolling these students, they are doing the work of operational levers by optimizing the allocations of Fundação staff. In the third quarter alone, we are unifying [indiscernible] cities where we operate. Market, in fact, we believe that over time, if we stabilize between 6% of net revenue in the range. On the expenses, such as trading, acquisition expense and service providers to not be normalizing this year and should not return at the same levels because we already had a mass volume of our credited course, and we have renegotiated many contracts with service providers. We are, therefore, very confident in our ability to adjust our operations and keep them well conducted, not only during the pandemic period, but also going for thinking, of course, that our business will be increasingly digital from now and distance learning will be increasingly relevant to our results and have attractive operating margins. I'm sorry. I didn't understand your second question.

Yes, that's okay. My second question is on the second half intake cycle. So how is your strategy in terms of pricing discounts, both for the distance learning and the on-campus segment, if I may?

Well, the intake is in some way advancing according to the pandemic. The season for us, in general, starts in line with facilities of Sandro as in mid-June, but the year started to address that the [indiscernible] started to open their face-to-face activities from in July. As classes should also start later and to be concluded after Christmas this year. In this sense, [indiscernible] that the process has always late, but performed much better than we had heard from the consulters in the pandemic. In terms of pricing, we are seeing the margin perform discounts in line with expectations as the sectors look to replace the student base. In distance learning, the trend is quite different. We are seeing the market quite hitted, both in traditional campus learning and the new digital distance learning platform we launched. In terms of price, we see this, we are seeing the market proposition looks more to increase in volume.

The next question comes from Marcelo Santos with JPMorgan.

I have 2. The first one is regarding the new distance learning courses and initiatives. Could you please comment more what are your ambitions for next year and for the coming years on this front? How much should this be relevant to Ser? And the second question is regarding the M&A strategy. So recently, as you discussed just recently, now you bought a medical school. So what is changing in -- is it something changing on your M&A view? And what is changing? How do you plan to proceed going forward?

Well, Marcelo okay. Please go on speak here. I'd like to say about the M&A. Sure, you want to answer about the question related to the [indiscernible] digital services. So in terms of M&A -- so there, just to remind, Macedo here...

Pardon me, can -- Rodrigo, are you there?

Yes, I am. Hello? Can you hear me now?

I can hear you on, Rodrigo.

I can.

Okay. Sorry, I was speaking and sorry and somebody muted me. But just to reanswer the question about the M&A strategy. What we have been doing and FACIMED fits precisely in that strategy. We like the transactions related to the North and Northeast regions, with brands that are dominating in their own regions. And especially FACIMED's transaction have the 2 points, right? The health care, the potential to expand in the North region of Brazil, comparable to what we have done to UNINORTE. And it has a very solid health care base that also have a good medicine course that is well-known in the region. We would like to do more of these transactions and transactions that are related to mid-size and small transactions should be all focused within those regions. Larger deals can also be done. And outside of these regions, they have to be larger transactions. And the other part of the pipeline that we have been building in this year is also related to the continued education market. So we like the idea of not only growing organically, the continuing education, but also to increase our presence in this segment by adding players that are focused in market niches and continued education and also add tech. We see that the market is changing and it's going to be changing fast and continued education will be important to the high education sector, and we want to participate there through either M&A and also through organic growth. And the part for the digital, this is also related to the continued education strategy. So I will turn to Jânyo to answer that portion of the question.

Well, in the case of distance learning, our strategy of changing it to reach a good profitability is around 40% to 45%, 50% growth per year. And we believe that we are reaching these goals. Now we are launching a niche partnership to increase the growth of our distance learning, increase demand for our instantiating distance learning partners and repositioning our offer for 100% online course. We already launched UNINABUCO Digital distance learning, and we are expanding to the other brands we operate as we are already launched the post graduate admission at UNINASSAU brand and UNAMA will expand to the other brands. In addition, we launched our line of different standard course, and our GoKursos is our marketplace to free course. We expect it to open from this year to enter round around 50 to 100 new distance learning centers.

Next question comes from Mauricio Cepeda with Crédit Suisse.

I think my question is pretty straight forward. First to congratulate you that you -- the way you have managed the cost and expenses and have managed to keep the results on track. But going forward, we saw that there was an increase in receivables. We also see that discounts are increasing the scholarships, et cetera. And the market has been a little bit traumatized about this kind of rule because of other competitors doing this in the past. And now it's a hard situation to come out. What do you plan for the future to get back on track in terms of receivables or scholarships or any other measures to keep students while keeping a certain financial stability?

This is Rodrigo speaking. And I think that what we have in this semester, considering all the effects from COVID-19, it's normal to expect to have some increase in account receivables. But if you look to the number, especially the aging, you will see that the increase in accounts receivables, the aging is much more related to the short-term rather to the long term. And this is related to the period that we will have from now on related to the re-enrollment season that is starting now. So we are expecting to resume collection from the students that have already dropped about, but also to be able to negotiate with students now. And if you also see the health of our operating cash flow in the quarter and in the semester, we think that we had a very good collection in the quarter. Even more, if you consider the impact of FIES. FIES was the biggest issue related to cash flow in the semester because Caixa Econômica Federal made a lot of effort to pay the BRL 600 per month that the government granted to the population, but they were not so intense in operating FIES as they would be doing in this semester. So the whole FIES program was delayed for the semester, and this explains a little bit the part of the accounts receivables, the stretch the accounts receivables for the semester. Regarding pricing, I think what we have to keep is that the industry is changing. So the industry now is under pressure because the on-campus segment, state of the COVID issues and all the hurdles we have in the semester. But you will also have to understand that going forward, the factor will have the increase of the workload from 20% to 40% of distance learning in this segment. So this -- the industry will change, in our view, in a way that the chances for the industry to penetrate the 35 million people, that is the addressable market we consider will be higher. Therefore, pricing will probably improve slightly after the COVID-19, but we are not expecting pricing to really change substantially back to what it was a few years ago. Having that said...

Pardon me, we've had a disconnect with Rodrigo. I will be calling him back shortly. Rodrigo has rejoined us.

So we believe that we are very well positioned in one hand, we invested in technology and student experience over the last 2 years. So the platform is fully ready. We are ready to -- our new syllabus is ready to be deployed with a 40% DL work loading on campus. And we have created the new -- the digital -- the campus 2.0 strategy that is deploying smaller quantity in shopping malls and in areas that will increase our chances to add students, not only students from the old downtown country, but also now students in the metro regions and in the countryside, where is one of the company's most spreaded in terms of number of quantity in our region. And now with the DL strategy, the old DL -- the traditional DL that you are used to see that compete with the other players is not only behaving well and growing over 40% per year, but also the new DL strategy, the digital DL has abnormal potential to grow over time, especially now that -- what we understand is that the students are much more interested and accepting distance learning than before. So these are the comments we had about your questions. Thank you.

[Operator Instructions] The next question comes from Thiago Bortoluci with Goldman Sachs.

We also have 2 -- these are 2 follow-ups. The first one is also regarding distance learning. This has been clearly a key area of focus for you, but also for competition, right? How does the company expect to differentiate from the large competitors? Is it through the academic model, the location of the hubs, branding, prices? What is the overall strategy here? And still on this issue, you have just launched a new line of graduate distance learning digital courses. What are the implication of that for your core distance learning under graduate program? Is it fair to say that you think that the 100% online model seems to be the best form to address your demand? This is the first question. And the second question is also a follow-up on receivables. In the press release, you mentioned that you see current levels appropriate given that negotiations typically happen at the end of the semester. That said, shouldn't we expect further pressures through collection until we gradually converge to 180 days. These are our questions.

Thiago, those will require longer answers. But I think in the DL strategy, what we see we're doing different than the competitors. It's basically -- we now will have 2 sets of DL deployments, right? So the first one is the traditional DL that competes with everybody else. But the difference we have is that our platform is very well advanced. Just to remind you, since 2018, we invested with Accenture, probably something around BRL 20 million, not only in creating a better student experience, but to integrate the student experience with the on campus in a way that we changed the way our campus behaves, creating the campus 2.0 concept. Moreover, what we are doing now is we're positioning our 100% online courses to provide a pricing that is closer to what the competitors have been doing since the beginning of the year. And we are increasing the number of new DL centers, allowing smaller partners to join Ser and to provide a better capillarity in the regions we have. If we add that to the level of recognition we have with our local brands, being UNINASSAU brand, the most well [indiscernible] and recognized brand in the Northeast. You name the most recognized brand in the state of Para. We launched the most recognized brand in the state of Amazonas, this together will provide more room to grow distance learning. What is also important and different than the other is that our DL is not so mature. So we believe to have space to grow DL going forward. And the last advantage we believe to have is the deployment of labs in the cities we operate and how spreaded our 58 units are in the regions. This is important because DL, when it comes to the hybrid DL, this is a difference between us and the local competitors, especially when they operate with DL partners that usually don't have the labs. The second part of the strategy, which is the digital distance learning. This is a new line of courses that is much more aligned to what the youngsters want. Courses that are shorter. Our 100% sold online or through the part -- I'm sorry, through the call centers or through the social media. And they are 100% sold through credit cards in a way that if the students drop out in the middle of the process, we don't need to wait for them to reenroll that the re-enrollment is automatically. The time frame for them to graduate is also faster because instead of waiting for 2 to 3 years to give graduation, they can have a graduation pace about 25% faster as compared to the traditional courses. This is also important because new ways of selling distal learning are being deployed. So this semester, we launched the graduate courses that are 100% made through the Ser Digital classroom. So you can create 1 classroom with each 200 or even 300 students per class. And this will provide us to give not only interesting access to interesting teachers, but also a very good number of students required that will be 100% mutual. I think the DL strategy is being very well repositioned during this period of crisis that we are hopefully moving forward as of 2021. About the accounts receivables, we understand that for a COVID 19 period, everything we have passed through, to have it increasing a little bit is normal. And also, what you could see in this quarter is that the level of bad debt has increased precisely to start causing the need to provision the bad debt for the period. And it's quite probable that during the second half of 2020, our call center and negotiation team will be more successful to negotiate to collect students that were not being able to pay punctually during the year. Of course, to collect money from the students has been harder. And this is why we understand that the normal levels will be in 2020. What we believe on the other hand is that in 2021, this peak of bad debt will probably be away, and this will enable us to have a better collection and probably to have the levels of accounts receivables to be normalized again.

[Operator Instructions] There appears to be no further questions. I would like to pass the call over to Mr. Jânyo Diniz for any closing remarks. Mr. Jânyo, you may proceed. Mr. Jânyo you can proceed with closing remarks.

Sorry. Thank you for participating to our disclosure of results, and our Investor Relation team is on hand to help you with further information. Have a good day, everyone.

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