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

Good morning. Welcome to Ser Educacional conference call to discuss the company's results for the first quarter of 2021. 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 that the this event is being recorded. [Operator Instructions] The event will also be broadcast live audio and slide via Internet at ir.sereducacional.com. You can also access the webcast audio and slides through tablets and smartphones equipped with the iOS and 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 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, industry conditions 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 Mr. Jânyo Diniz, Chief Executive Officer, who will begin the presentation. You may begin Mr. Jânyo.

Good morning, everyone, and thank you for participating in our results conference call for the first quarter of 2021. A positive quarter in terms of results despite the difficulty posted by the adverse economic scenario and the effects of COVID-19. Let us please go to Slide 4 of the presentation where I will show our highlights for the quarter. Significant increase [Technical Difficulty] allocation and cost and expense control made net profits to increase 78% in comparison to last year. [Technical Difficulty] adjusted by nonrecurring [indiscernible]. In fact, we had a positive operating cash [Technical Difficulty] that is less favored due to the commercial discounts, even during the summer enrollment season and the postponement of enrollment due to the pandemic. UNIFACIMED and UNIJUAZEIRO for which integrate [Technical Difficulty] which was consolidated in this quarter. At least, we had our [Technical Difficulty] posted solid approval rates of 90% or more by students. Considering the satisfaction with the hybrid model itself as well with our [Technical Difficulty] held by notable master, a new concept that [Technical Difficulty] bringing academic operations to experience. On Slide 5, we show quickly the concept of Ubiqua and its market differentials. Ubiqua learning that creates new features to students to provide them access to quality locations anytime, wherever they are and the best way to access learning at fair price. In this way, we create a value proposition that is increasingly differentiated to the students and sustainable to our results. This is only possible now because some years ago, we started to invest in cutting-edge technology, quality content, different formats of learning and distribution of education, creating higher education acquisitions that offer scores, whether in person, online or hybrid. As a result, we are launching new products on the market on a high frequency basis, such as shorter course and accelerated graduation as we did last year. This year, we launched a technology course with student certifications in partnership with tech giants like IBM and Google through Singular Tech School. And now we launched this differential in our undergraduate course with classes with renowned teachers, we call notable master classes. As you can see from the results, and by the great amount of new features that our business has already been transforming and what we have been presenting since last quarter is that we are initiating to harvest these results. And even better, I believe it is just the beginning because the more we started the possibilities within our new ecosystems and see the interesting things that are being produced in the market and the ideas that our teams are bringing. The more I see upside to our business and to repeat our formula for success . Moving now to the operating results on Slide 7. We show the -- seen some results so far. As you probably, the process as a whole was delayed due to the postponement of payment tests and to illustrate that, we provide a preview of the month of April behaving so that you can better see the trend to the whole semester. As I mentioned before, the digital teaching has good performance, both in the quarter and in April. And given the recent performance, we should have better-than-expected in this segment in the year. This is the result of the repositioning we started last year, launching new course in line with market demand as well as launching new online solution formats via social networks, messaging applications, among others. The hybrid education segment, on the other hand, had a good intake during November to January. As of February, intake started to fall in line with the increase in the number of cases in the second wave of COVID-19 and started to grow again in April with the opening of PROUNI and CRC, which historically brings marginal funding in the wake of this event. In this sense, it is worth noting that the percentage fall in intake ending the first quarter was reduced almost by half since April. On Slide 8, we show the evolution of the student base comparing to the end of the quarter in comparison with the month of April. As can be noted, our students surpassed an important symbolic mark of 200,000 students enrolling, thanks to strong growth in digital education. On Slide 9, we show that on campus, now hybrid student base from lead course of becoming relevant among health and engineering course. This proves that Ser has a premium and the resilient student, which explains a lot why we managed to remain profitable above the market average, generating cash and distributing dividend even after so many years of price. Another highlight in the Ser student base that's no longer relevant to our results, now representing only 7% of our total students. The average tickets for the hybrid segment stabilized this year compared to last year, having even grow slightly due to acquisitions. In the digital segment, the reductions in the average digital grew due to a change in the mix, given that 100% online course are being the main fields for new enrollments in our institutions. These are my initial comments. Now I give the floor to João to talk about the financial results for the quarter.

Thank you, Jânyo, and hello, everyone. Please go to Slide 10 where we have a summary of the results, which in general was positive especially if we consider that a significant part of the intake was transferred to the second quarter due to the pandemic and without a significant recovery in employment and income of students. First, the recognition of revenue remained practically stable with the following revenues from hybrid being compensated by the growth of digital teaching and acquisitions that began to be consolidated if the UNIFACIMED and UNIJUAZEIRO 100% aggregate in the quarter as well as 2 months of UNESC that was integrated in February. In addition, revenue was impacted by 2 operational topics. First, as of 2020 point 2, we changed our past due to vision renegotiation strategy, focusing on the reduction of future default for reenrollments, but charging the amounts due under discounts. This caused the operating discount to increase, putting a little more pressure on revenue, on the other hand, reducing financial expenses. As a result, the final effect was slightly lower adjusted EBITDA and would be flat if it were not for this change, but improving our financial results. Another important factor impacting the results was that for internal purposes, we got revenue recognition as of March 25. However, the last week of March was very strong in new enrollments during the customers' -- consumers with campaign, especially in digital education, and therefore, we will have some additional revenue to be recognized in the second quarter. Another highlight was the optimization of personnel costs, which went from 31.2% of net revenue to 28.7%, demonstrating the first effects of Ubiqua in the optimization of [indiscernible] educational costs. Therefore, the stabilization of revenues, coupled with the optimization of cost and net financial results as well as a lower rate of nonrecurring events in the quarter almost doubled our net profit this quarter with the adjusted net income showing a growth of 23%. On Slide 11, we present our results by segment, which is growing at the pace of a net effect, now it represents 13% of our net revenue and 14% of our adjusted EBITDA. Another impact -- important factor is that acquisitions started to add to the results, it's still in a timid way because they were institution with low margins. But as they are mostly in med schools, they will certainly improve, given we have the ongoing integration process that will bring operational synergies start in the coming months. On Slide 12, we have [indiscernible] our net profit, segregating the effects of IFRS 16. See how this account effect ends up reversing the profit by BRL 7 million in this quarter, which shows that were few parts of our profit payment and to be recognized in the future because of this change in the practice. On Slide 13, we show the average time of account receivable, considering the new practice of -- we implemented at the end of the year, since we started to write-off bad debt in 2 years instead of 1 year, better aligning our accounting practice with the company's operational reality. As shown on this slide, with the average team of accounts receivables decreased in the new comparison between the 2 quarters due to the revalidation of the payments of FIES and the increasing provision for debtors that we made in line with the historical behavior of student out-of-pockets. Even so the EX-FIES receivables increased slightly in cooperation with the first quarter '20 given that the impact of the pandemic is not reflected in the past year, and we believe that this is in line with the expected behavior given the current environment. On Slide 14, we show the improvement of operating cash flow, reversing last year and generating approximately BRL 38.5 million of cash. And if we consider that this quarter, we paid about BRL 28 million of taxes for the severance payment of Go Shop, our cash generation was BRL 66.9 million and post CapEx, BRL 55.6 million, which is very much in line with our reported adjusted EBITDA. On Slide 15, we present our CapEx that reaches BRL 10 million in the quarter due to the reduction of real estate investments, while most systems developments and user experience improvements are getting treated as expenditure, especially if they are being producing in-house. Finally, on Slide 15, we have the debt liquid, which reached BRL 117 million, mainly due to the acquisitions of UNIFACIMED, UNIJUAZEIRO and this quarter of UNESC. If we consider the acquisition of UNIFACIMED, our indebtedness will reach less than 1/3 adjusted EBITDA, what can still be considered the leverage balance sheet. These were my comments, and I would like to give the floor back to Jânyo to make in his final remarks.

Thank you, Aguiar. And before we start the question-and-answer session, we will highlight that we hope that some interesting levers of value generation we materialize in the short and medium term and that they will certainly bring improvements in the results as well as bring important status developments in the future. The first pillar is the growth of our medical student base, which alone represents BRL 57 million gross revenue in the quarter, an increase of 84% compared to the first quarter of 2020. As we still had only about 70% used, we will have contracted growth for the next few years, not to mention the gain in synergies that like most of these jobs, have now entered through acquisitions. The second pillar is the digital learning growth that we will surely highlight basic growth of students and results this year and coming years. And the third is Ubiqua, which allows the creation of a complete ecosystems with high-technology and academic quality, and which by functioning as a label, allow us to evolve our offer to new course and distribution models. In terms of short-term results, it's clear your -- is clear your success in our respects and was very accepted by the students and operationally are contributing to the maximization of returns through better distribution of course. As you can see, we are very excited about our future, and we have some reasons for this. The growth cycle this year signs of up ramp up. A proper operational structure and in line with our new reality with a return on investment greater than the market average. The new revenue generation lines are being created and implemented with speed and profitability. We still have a lot of space to generate synergies from acquisitions, and the pipeline of new acquisitions remain [indiscernible]. And we now have a higher education ecosystems, and the construction is a lot of growth potential ahead of us. Thank you, all, and I am at your disposal for any clarifications that you may need.

[Operator Instructions] That concludes the question-and-answer session for investors and analysts. I would like to pass the word to Mr. Jânyo Diniz for the final consideration. Mr. Jânyo, you may proceed.

Thank you all for participating in our disclosure of results. And our Investor Relations are -- is on hand to help you with further information. Have a nice day and weekend.