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

[Interpreted] Good afternoon. Thank you for waiting. Welcome to our conference call to tell about the results of second quarterly reports of 2021. If you need simultaneous interpretation, we have this tool in the platform. In order to do so, click on the button, interpretation through the globe in the bottom part of the screen, may choose the language you prefer, Portuguese or English. So the ones listening to the conference call in English, you can mute the original audio, clicking mute original audio. We inform that this conference call is being recorded, and it will be available on the website of the company with a complete material available there. [Operator Instructions] We highlight the information in this presentation. Any statements that could be done during this conference call related to business perspectives, projections and targets in Ser Educacional. They are assumptions for the company and also information available, future estimations involve risks, uncertainties and assumptions because they are related to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that economic conditions, conditions in the industry and other operation factors may also affect the future performance of Ser Educacional and may be different of the one said here. I will now hand over to Jânyo Diniz, CEO of Ser Educacional.

Hi, everyone. Thank you so much for being present in our quarterly highlights. So now we have a different format with video and simultaneous interpretation, we hope you like. Let me show our results that were very important. We have a combined result of our base. We believe this is the inflection point. This because in the semester, we are back with our results. In the next quarter, we will have more students enrollment in the hybrid, on-campus and digital teaching. This way, we are going to speed up the net income growth. Another important aspect is that the results reflect our objective being a company with a higher education portfolio, more balanced between digital teaching, hybrid and medicine. The hybrid teaching represented 74% of our EBITDA in the last year. And then after the merger, the acquisitions, I mean, we consolidated in the last 12 months UNIJUAZEIRO, UNIFACIMED, UNIFASB, UNESC, and [ Educa ] and organic growth of our digital teaching, represents 50% of medicine corresponding to 35% and digital 50%. This diversification owes to our strategy to build an ecosystem of continued education, which is complete and maximize the revenue on our assets. In this quarter, we announced 2 new acquisitions, FAEL because it has strength in the offer of digital teaching and CDMV/DOK that increases our specialization in veterinary medicine market. We are strengthening our continued education ecosystem, with a course complete portfolio with a multichannel supported by Ubiqua, our core curricular and state of the art generation assures flexibility, scale, teaching quality state-of-the-art technology for our student base. And Slide 5 details the evolution of our results as medicine school. We have a growth of result, we have 65% occupation on our spots, and we have ongoing growth of result and we have a strong presence also in Rondonia and the countryside of Bahia, 2 regions that grow a lot because of agro business. On Slide 6, we present organic growth of our digital education which present the growth of the student base in 121% and almost doubled the revenue and grew the EBITDA adjusted in 56%. We executed our new strategic plan, and we could replace our teaching concept, our teaching grade of online digital teaching, having our course offer in this area with lots of news and speeding up our distribution online. We have a customization of our modern course portfolio. And our pioneerism in our market, we have been having very interesting results with lots of potential of growth and scalability. On Slide 7, we detailed the acquisition strategic rationale of FAEL. And we have value generation potential, which is strategic also. And Ser Educacional has specialized in offering digital teaching in our own unities through e-commerce. And we have a multichannel offer and we needed to evolve in our learning units offer. FAEL is a perfect fit for Ser Educacional. We have presence, which is very relevant in South and Southeast region. And we also have a national reach company with regional brands, which are strong. Another important aspect is to have synergies and costs and especially because of the offer, of course, in the health area, engineering in FAEL learning units. Now they offer only humanity scores, but also because of all optimization and utilization of brands in the -- in our learning units and have the capacity to leverage operationally. And on Slide 8, we show our acquisition, the most recent one, which is CDMV/DOK. We have on-campus, higher superior that makes sense for the future with a growth trend in Health and Engineering segments because of the practical classes. So we have a change of paradigm shift in our segment. The differential CDMV/DOK is a focus on veterinary practice in specialization and Doctorate and Master's degree I mean specialization courses, which is complementary to the Ser Educacional graduation. We have different showing the current veterinary medicine undergraduate course and also post graduate courses and continued specialization course based in practical classes. This way, we can sources of auxiliary revenue generation with and broadening of our social services in the operation cities. The theoretical content will be digitized and will be part of surgical system to be offered in all its platform, which we have sound regional brands. And we are only going to have online courses with GoKursos and commercial partnerships. Talking about it, GoKursos on Slide 9, we'll see that our online course portal is evolving very fast. There are 5,000 courses in the market, and we are going to launch at the -- we launch it at the end of June, our newest version of the portal. We are going to -- we have a platform to distribute courses with a powerful commercial model. And we also have a modeling of sales by subscription. It's a very interesting way of doing it, and we are going to expand each time more our course portfolio so that we have a content base, which is very broad. So that we can explore many different ways, opening space for innovation and new growth avenues of revenue. On Slide 11, we have the result of students' intake in the first quarter -- in the first semester, I mean. And as we've shown before in the presentation of last quarterly, hybrid teaching end up recovering well in the second quarter, and digital teaching followed growing because of all the investments. As a result of our intake, our overall intake, we had a 52% increase. What I understand it's important, especially on this period of pandemics with hybrid teaching, dropping only 10% in digital with growth of almost 200%. We could grow 22%, and you'll be able to see it on Slide 12, and FAEL will permit us to have a better capillarity and will benefit our proposal and different value for our students. On Slide 13, we have good news. Our average hybrid teaching ticket increased almost 9% in the quarter, supported for higher volume of medicine seats and the growth of our student base in the health segment overall. Our ticket presented a drop of 9%, especially because of a mix change. Other than that, as we showed in the higher education funding program in Brazil, it is a topic from the past, represented only 7% of our student base, showing our company could be profitable more than average. These were my initial comments, and now Joao Aguiar will tell you the results of the quarter with more detail.

Thank you, Janyo. Thank you, all, and thank you for sharing our results statements. Let's see the results of the quarter. And we have very positive news in growing our net revenue, which was impacted by the growth of our base students and the recent acquisitions. This is very important, especially because in this semester, it wasn't impacted by the pandemic. I mean, this semester was impacted by the pandemics, and hybrid teaching didn't recover. So we have a very important vector of to originate results from the third quarter on. Let's detail the behavior of costs and expenditures. The second quarter in '20, we had an atypical behavior. This happened because in that period, there was an impact of isolation measures what led Ser Educacional to reduce its expenditures in all fronts. For this quarter, it's the opposite situation. We are investing again in our organic growth, especially in the digital teaching in our recent acquisition, and they are still in its first synergy generation. This cost is only beginning its optimization trajectory because UBIQUA our hybrid methodology is still in its first cycle, and it will help us improve our performance so on. And this, our EBITDA since the adjusted one is 6% below the year. This happened because of the improvement of our revenue, combined with a margin contraction that tends to be temporary. The net income was impacted because of the financial results because of our indebtedness, because of the acquisitions we have just announced. Another factor that impacted income was the volume. The higher volume of granted discounts that despite of the -- our negotiation redirection will reduce the known income in the future, and then we will offer discounts, especially in the beginning of the pandemic. On Slide 15, we showed our results by segment. And as Janyo said, both digital pitch and our recent acquisition are having a very good performance this year. And this is important in the superior and higher education. Now we expect to see hybrid teaching the next quarter, reducing the operational costs we had from the third quarter. Slide 16, represented the net profit, excluding IFRS 16 effects that we have an impact in the semester, about BRL 14 million in our results. This is because of the accounting impact of the application in our lease contracts. On Slide 17, we show our receiving accounts. As you can see, it is on an inflection point, and it is a receivable longer cycle, but especially when we analyze the pro forma that we put on the graphics on the right side of this slide, include the revenue of the recent acquisition, considering the last 12 months to make the comparison more adequate. We see a good flow of payments of students that were funded by FIES before. And the flow of payments of FIES is regular and less representative in our results. We have a good coverage for inadequacy and we know that the level of provisioning has been higher and must have a better trajectory from '22 on. On Slide 18, we present our operational cash pre and post CapEx and illustrates my previous comment. We are having a good recovery of payment flow in the semesters. It's a trend we believe it gets stronger from now on with the reduction of the effects of the pandemic in our student base. On Slide 19, we have our CapEx where we do not have many news unless on the return of some tests, some activities. And our digital transformation plan and experience of the student is being dealt as debt as -- debt because of the [indiscernible]. Our financial debt based of a net cash of BRL 68 million to a net debt of BRL 305 million onetime our EBITDA adjusted in the 12 months. We had important investments for our future, including 3 medical schools. And we clearly have a very comfortable financing position to consolidate acquiring FAEL and CMVD and other acquirers that are in our pipeline. And I'll talk to Dr. Janyo, he will have his final comments.

Let's go to Slide 22. Following with the presentation today. We talk about the ecosystem in our partners and acquisitions. We have here a number of courses and technical courses as a brand recognized in the education market. This strategy, we have to deepen our content and making a closer relationship with the students, bringing them to participate in a more active way in the curriculum. In this way, we want to combine acquisition and organic growth as a step to have -- to be a leader in our segment in our port -- to have a very broad portfolio. In this sense, was invested in the experience of our students, which are going to develop better in this new environment -- technology environment. We're focused growing continuous education ecosystem close to the reality of the market, bringing a different value, differentiated value for our students, customizing the way we educate, the way we teach. In education that is different and more consistent and to deliver for the society. Thank you for being here. We are here to start the Q&A session.

[Operator Instructions] Let's start with the first question from Marcelo Santos [indiscernible] in Portuguese.

I hope you guys are listening well. I have 2 questions. First, if you guys could tell a little bit more about the winter capitation and how this is impacting in the hybrid teaching and digital. And the way the environment of ticket, what do you guys see and the online and digital?

Marcelo, as we said before, I would like to say the study intake has been better than what we thought in the presidential education and has been much better than we expected. And we're expecting better results for the end of the year. We are going to -- between September or October, we're going to have our -- the end of our intake and has been much better than what we thought. Even with the vaccination, [indiscernible] are having already people with 18 years old vaccinating. The protocols for on-campus education are not very clear, but we are looking positive way for what we have foreseen. And when we compare the way we -- the second semester, the development we have there, this year have been much better. The vaccination is going to have a really good impact in the way we're going to continue doing business in education. About the ticket, we have here the way we expected, not much different. The discount we were giving here, we're not giving as much as we did before until the end of the student intake, I think it will be better.

The next question is from Vitor Tomita.

Two questions we have here. First, could you guys comment on how the on campus and the hybrid system is going to work? How is this arriving between the students? How is this -- the relationship between the hybrid system and the on-campus system? How do you guys would like see the growth of income? And with the demand and ticket, how much guys in the health courses and the general courses and the way the intake and tickets has impact on this system?

Good afternoon. I'm going to answer this question about the capitation and intake of students, and will connect with the second answer. There was a change in the behavior among the students and what they expect. We're doing some research in our units. What they expect and if they are going to come back, more than 50% of the students don't want to come back to campus. So when we talk about the intake of students in this new system. That's the answer for -- to answer for the students that don't want to be on campus. And the hybrid system is going to be the solution because he's -- some classes he has to do on campus, but some classes, he's going to be able to do on the digital environment. So like that, we can implement for the students. More than 40% of the possibility of the course happened on online education. The communication is going to be done in a hybrid way. We're going to step by step do in parallel this system. And about the second question, what we have to think here is that veterinary has a very high ticket among the course in education. So those courses, they give the perception of the -- and a very good income for the unit. We want to extend this network of hospitals using -- and with this network of hospitals, we're going to have like 20 courses credentiated. And in 3 years, we can -- these 20 hospitals, veterinary hospitals. In 3 years, we're going to maturate and they're going to ripe. So we can have this the best hospital in our perception. Interesting pricing ticket with a less evasion tax average of students here is we're going to have on the extension courses and post-graduation courses. With high education, we have here, we have to remember veterinary is one of the doors for that. There are different segments in health, education, where we can expect this idea of ecosystem in hybrid system, having -- maximizing the use of assets and making a better use of those assets and generating a better income and a differentiation of market where the units are and making a better reputation of our units where they are inserted. So our competitors don't have the same force.

Following to the next question. I'm going to talk to Leandro Bastos.

Hello, everybody. I would like to ask a little bit about the courses in the last semester. We see pressure in the numbers as we thought in relation to last year and things going back to normal. My question would be, I would like to understand where we are on this process of normalization for the second semester and going to on-campus education. And the way you guys see the costs on the second semester, I'd like to know a little bit more about that.

Thank you, Leandro. Aguiar, talking here. What we can say, looking about the costs, the recurring costs. Let's separate in 2 different ways. We have to talk about the costs as they are going to have now with the return, economic return. So we have the effects here that happened in between the pandemic time. Those costs that we -- operational costs, the units went down. But what is happening now and the cost environment is here 2 or 3, we have to talk about marketing. We went to talk about marketing in this moment, we have to talk about -- in this process of implementing a bigger number of students income and more income of students to have a better revenue. We have to know. Because of the pandemic, the accounts received, we have here some students, they are working on paying their debts with us and go back, we have seen a growth on these elements. So capitation in PDD is going to be -- take a little bit longer. On this way, we have here the personal service we deliver, that we have to invest in the structure to work on these situations. In the relations, we're going to talk about like the relations digital and a better culture in the units and in the system. Going forward with this system, and we're going to have a better income and revenue. And these costs we're going to have a better understanding and better impact in the environment there. We have less interference on the macroeconomics because of the pandemic. We're going to have a bad idea about debt.

Only to make it clearer. Talking about second semester, is this already on? Or is this a gradual process?

It's a more gradual process, but the risk return we are having with the student intake process, the recovery. We understand we will have some dilution in this cost and expenditure. But it will be more gradual. In this dilution, we understand it will happen when the economy is back. Our expectation is that it is -- it happens in 2022.

Maybe to help you understand. Second quarter of '20 has expenditure and cost atypical without on-campus students. So with less revenue, we could have more results. Now it's something reversed going on. The student base is growing again. The acquisitions helped us grow in one side. Digital teaching helped us grow in the other side and on-campus suffered only a bit. Now it's reversed. On-campus will grow organically speaking from now on, it has already happened. It will have a ramp-up in the digital one and medical schools are going on. So we need to dilute our cost structure. Now some items are back in this quarter, which ones other expenditures because of some provisions we had in labor processes, civil processes, marketing is a little bit higher because of digital ramp-up, but the revenue will dilute this. PDD is something that we are going to have again -- have back again. So we are calm regarding our results. We are very well aligned with the budget made -- And more interestingly, on-campus teaching is back and the hybrid model is being well accepted by the market as well.

Our next question, Mauricio Cepeda from Credit Suisse.

Hi, everyone. Let me have a step back about students intake something more qualitative. What have you realized on this new intake on the third quarter, which is the profile of this student? Are they coming from high school? Or are the students that dropped in the past are not coming back. What is the profile of this student? And is this seasonal thing. I was talking to other people in the segment in the industry. We had a problem of getting hold back. Did this happen? Was it a change in the curve? Or this year, we are going to have a lower student intake regarding the first quarters -- the first semester? I would like to understand the qualitative part in the student intake. Regarding the other courses, the veterinary course, thank you for the idea. The society has turned to the animals. Would you do it in separate? How would you explore this market better with the veterinary hospitals.

Regarding student intake, some things may be happening. This student intake moment was a bit lower compared with the other years. But 2020 was atypical year. We had a reduction because it was isolation first moment. People didn't know what would happen, and they were delaying decision-making. And this kept going on until the end of the year. And the student is a little bit different to what happened to distance learnings. They are older. Hybrid teaching has been recovering better to what -- than what we expected. One part of it is due to the decision make process being delayed. And this doesn't justify this growth. The other one is that things will return to normality. Classes will -- on-campus classes will return and the economy will go back to the track. And this has been happening in a meaningful way. Intake student process is going back to the time previous to lockdown to pandemics. It has a curve that is similar to even before the pandemic.

According to the second question, DOK team, we have an executive that will be on a technical role in operating the veterinary hospitals. And we would like to be on this business. The acquisition of CDMV, DOK a specific legal entity that is going to manage the clinics. And our DOK model will be expanded in the other 19 veterinary accreditations. And I believe we're building an acquisition pipeline of other hospitals. Of course, if we have a good price level, a fair price level, we believe on this, and it illustrates the ecosystem concept that puts together hybrid models and on-campus models. All the CDMV content is being digitalized, and it will be offered in every Ser Educacional channels, the other brands, the other courses. So this is a project that works in this segment, and it can be transported to other ones as well.

Only complementing these acquisitions have been recurrent. We will operate, especially in the edtech and now with Veterinary Medical School, the founders look at the inside of the business and help us scale this new model. In the specific case of DOK/CDMV, they have double -- it's a win-win situation. They put together learning and training in the hospitals alongside with hospital operations and also the patch up part that follows it. But this specific focus and how nice this business is. They ended up training in the hospital with the practical classes in a differentiated way. We have a public profile that comes from graduation. And they end up offering professionalization courses that can be scaled and transferred for all our other units. As it happened to our veterinary hospital in Guarulhos in Sao Paulo. And they end up transferring this for our undergraduate course is a prestige that ends up being moved for the hospitals as well. So both end up winning. We increased the ticket numbers and the volume of students as well. And this goes for our third digital channel, the ecosystems of continued education that offer as well these health area courses.

Our next question is Vinicius Ribeiro from UBS.

I hope you are all well. There are 2 questions here. First, about [indiscernible]. After student intake process, we consider these [ main ] activities? Are we going to have a window to have consolidation moment as we had before? Second question about hybrid teaching, hybrid education as 40% online learning and the downsize of operations. Does it make sense to imagine a higher margin for hybrid education to convince these students to go to the hybrid teaching, it should be lower price?

Regarding NMA, May we used to say it is the bright month and the rest of the year we have all the transactions in the market. The market is so warmed up. We do not have a bright month anymore. Every month, we have all kinds of transactions. And we have been focusing the edtechs and in assets that can generate a networking effects. And combining -- combined to it, they can support building the ecosystem model we have been working on. [ Educa ] for example, they do not have an edtech and we bought some medical schools. And FAEL, which was the online learning that we have now. So we have been -- we still have been focusing on May transactions on these streams. On the second semester is more dedicated to FX, more than on campus transactions, even medical school. We have a good volume of seats. We may have more seats added, but the main focus is the digital one. The other question was about hybrid education. How was hybrid implanted in Ser Educacional. We have a new curriculum matrix, which is Ubiqua, and we could acquire flexibility in the academic model that we found the best one to offer to our students. Having said that, Ubiqua implementation happened in parts. The first part was in fourth semester and the second completely hybrid intake will be in the second semester. Semester thinking costs and expenditure will have a massive improvement of our teaching professional when we have Ubiqua penetrating on our student base. And on another side, we will adjust -- we have been adjusting since 2017, our real estate part. It hasn't been different now. The only difference is that from now on, we have a tendency of having less evolution of real estate. Now we do not see the need to return a real estate, to drop a real estate. And now we see a response on our overall student intake with hybrid having better responses. And so having more students, we do not need to drop having some real estate. Now it's not very well leveraged in operation wise because we had a drop of on-campus students. So we intend to have our operational releverage because great part of work was done.

Janyo says, regarding the expectation of students as Ubiqua pedagogical model, students and [indiscernible] accepting it because there are some disciplines that end up being online. So we mix on campus, classes and distance classes done remotely. So we have -- this way, we can have great students from other states and other countries because we have a partnership with other schools in other countries. So these students have some discipline on subjects that are 100% online. Having subject, having the content online. So they do not feel the difference of going 100% or 60% on campus to online. So this mix, we have partnership with great companies as Google, for example, to have courses and some subjects to our students. These subjects are online. And the online classes are synchronous for all of them. So it is a complete change, a complete shift to our pedagogical model that has been implemented before -- had been implemented before the pandemic and has been growing a change of behavior of the students.

Our next question comes from Lucca Marquezini from Itau BBA.

I would like to ask -- when we would like to know how the environment and talk about this M&A-specific field?

Edtech environment is very different for us. Historically, from our acquisitions have been presidential acquisitions. Maybe some things on EAD, remote education. In this process, we are learning that Educa -- bring Educa for our house. And we have new platforms when we adapted the way we look to this business and the way they make commerce. So with our team, we could adapt in a very fast way. So we have a pipeline edtechs. We have 2 groups. One is what we call the one that generates revenue. They have a focus in bringing revenue for us. And the other one, it's also a part from Educa as well that they had before. What we want to do is to better the attention we give to the student, the way you make this [indiscernible]. That's a different focus. And the third focus we have here is the edtechs that can better our robotization, the service we deliver. We have 3 different aspects but related to same business model. And we have a big focus on this field. And our team is working very hard with our entrepreneurs to understand the way we can get value from that. The second semester, we're going to harvest some fruits from this field.

Our next question come from Cristiano Duque.

I hope you guys are hearing me. I would like to know a little bit about the discount policy. And how this -- the fact this had on the pandemic time now, if you guys have any gap to close and what you guys -- want to keep working on this subject for the next years?

When we talk about like price, I have to talk a little bit about our history. Higher education performs better when the economic situation is better. Because we don't have much public education financing for high education. So our economics are not performing well, and this has a very hard impact in higher education. And this make bigger the demand for discounts. And the -- and what we expect now for the economic growth is not working well. So what we have to see and think about here is that we had a smaller volume of discounts. And we had to research and see the price bookers per unit to see how this unit in this course could be competitive in its field, in its region. So we have to think about pricing in the environment it fits. From last year to this year, we had think very much about the some projects of law that want to have impact on the education, and we would like to fight that from last year. And we have to see here in the way the courses are situated. And we have a big pressure on the price here because people want to study less, they has less money to study and then have to adapt our price to that. Where we are seeing our post base of growth now. So this, we can also think about the better pricing season for us. When the better supplied economy, we can think about like better prices, and then we believe soon, we're going to have a better impact on the pricing.

[Operator Instructions] Our Q&A session is closed. We'd like to give now the floor for the company.

Thank you, everybody, who was here on this conference, where we could like to talk about the results and that we can show our strategic change and what we have been implementing. And what's the circle of life, the students when they decide to study with us and then still when they turn change into a professional. This system of education, and we have here in digital field, we are doing some acquisitions that are going to have a big impact in what we are delivering. First, the students finish the middle school, they have to decide what they're going to study and where to study. And if they can pay for it. This new model we're building now. We help the student making these decisions. Since making the -- what they're going to be, where they're going to study, which institution they're going to choose, what kind of courses? And remembering how much the student has to pay for the course. After the student does this course, they're going to look for a job. And this finish the circle about choosing the profession, have the training. And then after the circle, they come back when they want to change the field or whether they want to do some postgraduation. And we are delivering this whole package for the students. So we can bring technological products that make this education, continuous education system possible for the student to be training to be a better professional, and deliver a better service for the student and that's going to happen on the next months and years. So we finish here showing a little bit what is our new concept in this way of education and our harvesting and capitation of students. So we have here on this hybrid system on campus and online, we have here. I would like to say thank you for our AI team. If you guys have any questions, please contact us. Good afternoon. Thank you very much for being here with us. [Statements in English on this transcript were spoken by an interpreter present on the live call.]