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

Good morning, and welcome to Ser Educacional conference call to discuss the company's results for fourth 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] The event is also being broadcast live via the Internet at ir.sereducacional.com. You can also access the webcast audio and slides through the 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 it clear that forward-looking statements may be made during this conference call related to the business prospects of Ser Educacional as well as it is 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 call over to Jânyo Diniz, Chief Executive Officer, who will begin the presentation. You may begin, sir.

Hello, everyone. Thank you very much for your participation in our conference call and the results of the fourth quarter of 2020. Please go to Slide 4, where we present the highlights of the quarter, starting with the operating and financial results. I believe that we performed better than we expected this year compared to the beginning of the pandemic. And in the last quarter of the year with an increase in our student base and financial results adjusted by the nonrecurring effects with a slight decrease compared to last year. This result was chiefly reflective of the effort we made to adapt ourselves quickly to the setbacks created by the pandemic, prioritizing the safety of all those directly and indirectly impacted and providing a lot of support to the communities in which we operate. At the same time, we remain focused on protecting our team, student base and results while creating new opportunities for generating shareholder value. By the way, this quarter we received the Go Shop termination payment that boosted our net income for the year; it grew more than 20%, a quite important result in such a difficult year as 2020. Another important highlight was the sound operational cash generation that combined with the severance payment helped us to end the year in a very healthy position, even after the inclusion of the acquisitions of and UNIFACIMED and UNIJUAZEIRO in our results. From a strategic standpoint, 2020 was important because the pandemic accelerated our aim to transform Ser Educacional from a company that used to offer undergraduate course in the North and Northeast regions of Brazil into a company that offers higher education and vocational courses. Through strong brands and quality locations that are recognized by the labor end market and more importantly, without barriers, regardless of the supply chains or platforms we may use to reach our students or pitching outreach that can be online, hybrid or on-campus. With this concept, we made important moves in our business model and the key will be our new curriculum that we developed last year, which was launched successfully with very good acceptance by students and teachers in 2021. We launched our new line of digital courses that provide innovation and have been a great sales success and will certainly be a relevant product line as we will detail in this presentation. We made 5 acquisitions last year, increasing our base of medical seats and strengthening our presence in the North East and the North regions of Brazil. To demonstrate this, Slide 5 represents the increased number of medical seats in our company after the acquisition of UNIFACIMED, UNESC and UNIFASB and which took us to increase the base medical seats of 321 to 573 per year. And if we include the earnout we had UNESC, we will double our exposure to this market niche. Another important aspect is the regions where these institutions operate, which are very strong in the agri business and lie in a strong economic growth environment, which was the main reason, for instance, for having acquired UNIJUAZEIRO located in [indiscernible]. This year, we made our first acquisition in the EdTech segment, Beduka, a startup that helps students choose their course or higher vocation and that allow us to have an interesting reduction in the cost of [ lease ]. This is a segment that we are investing a lot of time in to bring new companies to our group. And with this, better explore the segment of digital education in these markets that are interesting for us. We have a budget of up to BRL 100 million for this market segment, and we already have a very interesting pipeline of acquisitions. On the right side of the slide, we show that UNIFACIMED, UNIJUAZEIRO and Beduka were consolidated in our results for 2 months, UNESC in February of last year and UNIFASB is scheduled for the second quarter. In the 4 following slides from 6 to 9, details of Ubiqua, our new operational model that focuses on the concept of ubiquitous allocation where students use active methodologies, access valuable education in a very dynamic environment and highly quality teaching. This happens because our content has been digitalized in a dynamic and user friendly state-of-the-art structure, including games, videos, gamification, digital reality, augmented reality and many other features that hold the attention of students maintaining their focus to finish their course. The interesting part of our strategy is that it allows the course to be used in [ hybrid way ] with flexibility in creating courses. With this, we are creating a broadened portfolio of courses, and that will create new avenues of growth as well as adapting our company tests through the introducing of the hybrid curriculum. As we detail on Slide 10. Not only we introduced the concept of the 40% online workload per students rule in 2021, but different to most of our market peers, the learning models allow the students to always have access to their digital learning regardless of the presentation course that was chosen. With this, even students who have more difficulty in learning online, will have the opportunity to take their doubts away in their face-to-face meetings with their teachers helping them to learn and adapting to the use of new technologies, reducing dropout and increasing learning quality. In addition, the teaching methodology focused on the best teaching format, making students learn through competencies with the online or on-campus class type to what best suits to what the students need to learn. The concept of competence in teaching is not new since 1948, when it was [ coined by Robert Clark at Harvard ]. The innovation comes from the combination of this content alongside cutting edge technology and continuous improvement of the students experience in this ubiquitous education concept we are creating. Ubiqua combines connected teaching with the concepts that only present in the state-of-the-art and even better with scalability. On Slide 11, we present the first of the practical results of this concept, the launch of the new line of digital course. In just over 4 months, after the creation of this course, we reached 6,000 students. And due to the pace of the student intake into this segment, we had good results in 2021. This, of course, maximized the use of our flexible content and are offered through a new commercial and academic model that aims to meet what students are looking for, such as short-term to graduation, student qualification, content drive, nonstop academic coaching, among others. Digital course are not only here to stay, but we believe it has become a new growth avenue within the distance learn segment. In the same concept on Slide 12, we present the Singular Tech School, a technology school focused on the segment and yet another avenue of growth in line with market trends. With Singular, we have partnered with big names in the history, such as IBM, Google and Avanade and we are launching courses together with strong commitments to hire these professionals after their graduation. We are very confident with the evolution of our project to transform Ser Educacional into a [indiscernible] for Brazilian education, maximizing the use of our assets, distributing higher vocational and professional courses through strong brands recognized by the market more borderless. These are my initial comments, and now I would like to give the floor to João to analyze the results for the quarter.

Thanks, Jânyo. Hello, everyone, and thanks again for your presence. Please go to 14, which has the evolution of the student base that continues to grow organically driven mainly by distance learning and acquisitions. In this quarter, we had the inclusion of UNIFACIMED and UNIJUAZEIRO which were integrated in November as well as Beduka which, despite not having students, was integrated at the end of the year. In this matter, we had an interesting factor, the reduction of the student dropout rates compared to the first half of 2020, the most critical during the pandemic. In the table on the left, we have the evolution of student intake for the period which, as already presented in the review of the third quarter, had a reduction in on-site new enrollments. But on the other hand, there was a significant growth in distance learning segment, becoming the first semester of our history that distance learning new enrollments exceeded on campus. This segment has the extra influence of digital course that, in the first months of activity, are growing strongly and above our estimates. Moving on to Slide 15, we have the details of the student base and with important highlights. First, our on-campus student base in the health segment reached 55% of the total in this quarter versus 50% in 2019. If we add engineering, we had 66% of our on-campus student base linked to courses with a high need of practical [ supplies ]. This factor is important because it shows that the student base is not only in courses with a higher average ticket, but we will also support hybrid courses. Second, our on-campus average was relatively stable in the fourth quarter 2020 due to the effect of the change seasonally we are going through since it greatly increases the out-of-pocket students base of the company, which now comprise 89% of our total base and 85% of the on-campus base. Third, the growth of distance learning student base is consolidated as of 2020. Note the graph that we are -- we have a compound average growth rate of 64% per year, and distance learning has become an important part of the company operations, representing 28% of the student base. Moving on to Slide 16, we have the summary of the quarter results, which, in line with Jânyo's comment, we managed to balance relatively well despite all the difficulties created by the coronavirus. We had a slight drop in results on a recurring basis in terms of revenue, adjusted EBITDA and profit. The gross margin improved by 2.5 percentage points, especially because of our real estate leasing rationalization program, which included in the renegotiations, energy costs and canceling lease contracts as well as payroll. This effect was offset by the higher market expenses because intake process of 2020, 0.2, and 2020, 0.1, overlapped in addition to this acceleration of distance learning sales. In terms of accounts net profit, our fourth quarter was a record reaching BRL 122 million compared to a loss of BRL 2 million in the fourth quarter 2019. This [ profit was temporary ] the Go Shop receipt of BRL 180 million was recognized in our results, being this result partially offset by nonrecurring costs and expenses that we detail on Slide 17, where we show the net effect of the Go Shop receipt which had a high tax burden since its metric is not linked to higher education market, and therefore, is not subject to prolonged tax benefits. This added up financial and legal advisory expenses recorded a net noncurrent result of BRL 115 million in the period, an effect that was partially offset by approximately BRL 27 million of nonrecurring costs and expenses related mainly to tax expenses, write-offs of return and profits during the quarter resulting from our plan to readjust our base of listed profits to the needs of available space in each niche we operate. Moving on to Slide 18. We have our analysis of the results by segment and the highlight was the evolution of our distance learning, which today is representative, both in our student base and in participation in the results, representing 11% of the quarter's resulting revenue and 9% in the accumulated of the year. On Slide 19, we included an image of our net income segregating the effects of the IFRS 16. See how this accounting effect ends up reducing the profit by BRL 27 million in the year. Something that we believe is important to present because despite the changes in our content price is relevant, it shows that it's an accounting factor without cash impact. On Slide 20, we showed the average term of account receivables. In 2020, we made an adjustment in our accounting practice so that we -- until the third quarter, we were writing off receivables over 1 year. But we used 2 years to calculate the bad debt due to the solid receivables recovery index in this period. To better align our [ practice ], we started to write-off these receivables after 2 years, what we believe that better represents our activities and is in line with market practices. It's worth mentioning that this movement changes the balance of accounts receivables with no impact on our income statement. As shown on the slide, the average time of accounts receivables increased in the annual comparison and reflects all the efforts we made to renegotiate with our students with some financial effects during the pandemic. It's worth noting that we have already significantly increased bad debt provisioning during the year to reflect the reality of what we are experiencing, but the average sales still wait for [ FMB ] and Caixa Econômica Federal to normalize their operations, something that has not happened this year as a side effect of the pandemic. On Slide 21, we show our operating cash generation, which remains solid. This quarter was driven by the receipt of the Go Shop. But even when we analyze our operating cash generation, excluding these effects and post CapEx, we had a slight decline in line to what's happening to our adjusted EBITDA. On Slide 22, we present our CapEx, which dropped down by 22% in the year and ended up helping to generate cash for the company in the year, also reflecting the trend to reduce investments in real estate, physical libraries and on the other hand, investments in digital content and software license are increasing. Finally, on Slide 23, we present our net cash position stable at BRL 28 million with the main movements of the cash being the increase in commitments to pay for acquisition of UNIFACIMED and UNIJUAZEIRO in the cash outflow for the payments and closing of these transactions, offset by company's cash generation and cash flow from the termination received of the Go Shop. These were my comments on the results, and I now hand the floor back to Jânyo for his considerations before the Q&A session.

Thank you, João Aguiar. Please go to Slide 25, where we present some of the short and medium-term value generation levers. We have the consolidation of the 4 educational institutions that will add revenue to the company and we almost double our base of medical seats in relatively low position of around 55%. The maturation of our new medical seats will be important, not only in terms of additional revenues but also because of the operating margins that this institutional experience with the integration process and gaining synergies. Distance learning until 2019 was not representative in our results is growing rapidly and gaining strength, growing from 5% of EBITDA in 2019 to 12% in 2020 with strong growth in 2021. On large as it represented 20% of EBITDA in the first quarter. And the third aspect is Ubiqua, which in addition to the educational advantages and the generation of new growth avenues will be relevant in the hybridization of the base. And with the reduction of the on-campus teaching costs from the current levels that are close to 20% to close to 40% from last year should mature quickly in the next 2 years. To finish our presentations, let's go to Slide 26, where we show a summary of our main strategic growth drivers. We are transforming Ser Educacional from a company based on campus programs into a hybrid company that offers higher educations and vocational course online on-campus or hybrid, with quality content through its strong regional brands with leading technology combined with state-of-the-art technology and cutting-edge teaching concepts. We turned our units in digital campus through the transformation of occupied space from its locations to the concept of digital infrastructure, fully aiming at an increasingly differentiation experience to the student as well as network of distance learning centers that is experiencing high-growth rates. With this, we will generate medium to long-term results with innovative initiatives already incorporated to our digital education acquisitions ecosystems, such as GoKursos and Beduka and Singular Tech School. The other relevant pillar will be to move forward with our health platform, which includes increasing our base of medical seats creating differentiation in the market in patient care in our clinics. And finally, supporting this strategy, we intend to continue with acquisitions in the key segments of our business, and I believe that these are generating very interesting results this year. These were my comments, and we are available to help answer questions in the question-and-answer sessions.

[Operator Instructions] As there are no audio questions, I would like to turn the call over to Rodrigo to answer any webcast questions. Please go ahead, sir.

Hi, everyone. This is Rodrigo speaking. We have a question from Julia from Santander. It's related to having some color about the intake process for 2021. Julia, thank you for the question. We are still with the process rolling, as you probably follow the process as a whole delayed a little bit, given that the [ NM ] schedule was postponed from late 2020 to early this year. And a significant portion of the PROUNI students and the FIES students are still about to enroll. Classes also are starting a little bit later this year and will end later in this semester, probably invading the month of July. So what we see so far is that the demand is still fluctuating, given that in a weekly basis, you have different stages and changes of the pandemic in one hand. On the other hand, we see a general change in the comparison of the how the COVID is behaving this year as compared to last year. So just to remind everyone, last year, the pandemic starts for us in mid-March. And in this year, you have the full pandemic coming in. But on the other hand, things are not as closed and as shut down as it was a year ago. Having that said, we believe that the process will finalize and will be important over the next 30 to 40 days when we expect the permitting process to finally conclude, then we will disclose full information about it. And what we can say so far is that as expected, the process is competitive, both in terms of pricing and also different offers and different products coming to the market, what we believe that is healthy. We understand, on the other hand, that distance learning or what we call the digital courses, they live in a different atmosphere with significant growth coming from the last year process changes we made, product launches we made. So it's likely to follow for the next quarters in the same pace. So this is where we are today. We hope that the process finishes as expected. We still believe that the good change that the combination of the vaccines and the reopening of the cities over the next couple of weeks and months, everything normalizes and help us to finish the year as planned.

[Operator Instructions] This concludes our question-and-answer session for investors and analysts. I would like to pass the call over to Mr. Jânyo Diniz for any final considerations. Mr. Jânyo, you may proceed.

Thank you all for participating in our call. Our Investor Relations department is fully available to help you with any further questions you may have.

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