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

Good morning, everyone, and thank you for waiting. We welcome to the conference to announce the results of Ser Educacional for the third quarter 2021. Let me inform you that this conference is being recorded, and we will make it available on the company's website where we can see this with presentation also. [Operator Instructions] We highlight the information in this presentation. And what is being said in the conference with our financial goals and et cetera, they are beliefs and assumptions of the company administration and also information that is available now. Future considerations, they are not -- they are only predictions. They depend on the circumstances that can happen or not. Investors may understand that general economic conditions, market conditions and other operational factors can change the economic outcome of Ser Educacional. It can be different for the future considerations done today. Now I hand it over for the company so that they can start the presentation.

Good morning, and thank you so much to join our event to announce the results of the Q3 2021. It was an important trimester in a long-term strategy and shows the market of higher education is recovering gradually from the pandemic. And Ser Educacional is benefiting from its competitive advantages with strong brands as well as medicine courses and many quarters in the hybrid education. We can speed up investments in intake of students and creating new courses and segments, improving rapidly our continued education ecosystem, and we could have record student intake. As a result of this positive intake season associated to acquiring UNIFACIMED, UNESC and UNIJUAZEIRO, we could grow our net revenue in 20% and our adjusted EBITDA in 24%, which I consider relevant because we have been expanding organically. At the same time, we consolidate these acquisitions, and we are positioned to grow back in the post-pandemic period. Regarding the estimates, we have the new GoKursos platform that had defined business plan, and we are starting it ramp-up. There is potential to be explored in our new marketplace, and we have been expanding our course base that are our own and are available in more than 6,000 courses, and we are enhancing it, enhancing our base partners. We have been expanding our commercial expenses, and we are open partnership campus, and we could have fruit in this resumption in the market. We have been done 2 acquisitions. The first one is CDMV/DOK, which is a brownfield model for the grad school and the veterinary hospital. And we will have our ecosystem strengthened, and we can have theory content that can be digitalized and so that hospitals will have a better reputation in our market. Lastly, we have Prova Fácil. We have acquired this brand to enter the test management segment and knowledge management segment as well. This is a market with high potential. And we are trying to certificate professionals of the Prova Fácil, and it's an exponent in this segment. On Slide 6, there is the result of the intake of the quarter, and there are some comments. First is the Ubiqua implementation success, which is our learning methodology. And we have important differentials in the market as learning by competencies, modern content, intuitive platform and implementation of [indiscernible] mastery and the 2 doors among other innovations. Ubiqua has real differentials that have been creating important arguments for our commercial team to attract students for their attributes, and we can have arguments based -- we reduced our argumentation based on price. Pricing has also been other important factor because the intake was strong, and we could reduce the discounts offered, and we could start our intake 1 month earlier than 2020. We could have a volume of student base, adequate. In the digital learning, we saw the consolidation of the strategy that we implemented mid last year. We could reposition meeting the digital education with content portfolio, which is broad and modern. As a consequence of this intake and good indexers of reenrollment, we could grow our student base in 32%, and our digital students doubled compared to Q3 '18. And this was because of a positive intake we had during the first and second quarters 2021. On Slide 8, we have our student base. And we are more and more relevant to the health segment and engineering as well for the hybrid education. And together, they represent 70% of our student base showing that Ser Educacional is speeding up the new era of hybrid higher education with their [ plenty ] offering courses that need practical lessons and doesn't need to be worried with student transition and hybrid and digital learning. So we have our omnichannel offer concept because these units offer hybrid courses and 100% online courses as well. We also need to notice that our student base, who came from FIES, they are not relevant anymore. They are only 6% of our student -- total student base and 12% of our hybrid base. So our student base of digital education is growing meaningfully, and they represent more than 40% of our total student base when we integrate FAEL. And last, we have the ticket and net debt average ticket analysis that has been important data because we have been stabilizing the prices with strong growth of intake. This shows that with the current pricing, demand is being stimulated. And this will happen not only to grow our student base but we'll be able to see an increase of the occupation rate of our units. And this is fundamental to resume our growth in the operational margins after a long period that we had challenged to have our buildings full of students. Now I hand it over to João de Aguiar.

Thank you, Jânyo. Thank you for joining our and everyone. We present a summary of the results on Slide 9, and we have a highlight in the quarter and the growth of our student base net revenue in 20%. Our revenue has also grew 6%. And our digital education is back in our organic growth, and our company can combine organic growth and acquisitions. Our gross margin is as we expected because we resumed our present in-person activities. It's the end of the deadline of discount that we got with rent negotiated during the pandemics, 1.6% dropped, and we are in higher levels than -- 60% is very healthy. Our adjusted EBITDA also presented a healthy growth of 24%. And we have a small margin growth. With this record intake, we could have margins that are more pressured because of the intake discounts that are upward during enrollment season. Our EBITDA adjusted margin had a slow improvement in sound result because the margins supported our cost and investments in expansion and creation of new activities. The adjusted net profit reported a slight loss that we had in the same period last year. The improved the result reflects the revenue growth and maintenance of operational base. We improved the margin less because of the financial expenses increased because we have now with a net debt near our onetime adjusted EBITDA versus net cash a year ago. Another factor that impacted was our cash generation but we have our network consequence because we granted a bit more in the negotiations to make sure our students -- students paid their debt. On Slides 10 and 11, we have the analysis of the result in a segmented way. Most of them are medical exposed. So EBITDA margin is rapidly growing as we expected, and we still have 1 year to 1.5 year for its maturation. In the hybrid education, we have reduction of margins because of the student base is more compressed because of the second wave of pandemic that we have an impact of intake in the first semester. On digital education, we have been trying a sound operational and financial growth. This fulfilling important strategy objective with digital simulation, which is also to the better balance the range of results between these segments of higher education. In this way, we have a company that is not only consistent and with results above the market average but also quite resilient since results are well distributed among the most important segments of higher education. On Slide 12, we have the analysis of earnings, excluding the effect of IFRS, which shows that there is an impact of around BRL 7 million of our earnings during the adoption of this practice. On the Slide 13, we have the evolution of our average collection period where we also have a good news to present since the first time since the beginning of the pandemic. We had a general reduction in the average collection period compared to the previous quarter. This was due to the work we carried how to reenroll our students trying to take advantage of the reduction of the impact of the pandemic on the daily lives of students associated with the specific work with competition or areas for students who had already dropped out. As a result, we had a significant improvement in the average indicator as well as a reduction in the average team of account receivable, as you can see on the slide. In Slide 14, we are showing excellent and consistent cash generating this year, showing a good recovery compared to the last year in both pre- and post-CapEx analysis. It is worth remembering that this year, we had -- we paid BRL 28 million in taxes related to the Go Shop fine, and that if we adjust our cash generation for the last -- the year by this effect, we will have one of the best EBITDA to cash conversions in recent years comparable only to the years when FIES was relevant business. Moving to the -- they need the most of our help. We have here the recuperation of credits knowing the base of students was very important recovery in the cycle. On the Slide 15, we have the analysis of CapEx. As you can see, we have gradually resumed investments with a [ 55 ] increase in CapEx compared to the third Q but the capital allocation profile is different from previous years. As you can see, we are now investing more in content creation and IT at the expense of campus renovations and buildings. This is an important process because we are investing in expanding the portfolio of courses and students digital experience now as a way to build our continuing patient ecosystem to ensure that we have the structure and offering necessary for this strategy to work. On Slide 16, we have our indebtedness profile, which due to investment of more than BRL 500 million in acquisitions of 7 companies that we made in the past 12 months, change from neutral to the leverage of around 1x net debt adjusted EBITDA. When we complete the acquisition of FAEL, we will have made investment of BRL 280 million increase in source indebtedness level to less than 2x net debt, that is levels that are still adequate of comfortable for some more moves as we are quite confident that we will have a persistent consistent growth and cash generation. We believe that our focus of maintaining financial strength is fundamental to maintain our solid profitability ratios even in such volatile market periods as we are creating experience. Those were the comments, and now I give the floor back to Jânyo so that he can make final remarks.

Thank you, Aguiar. Moving to Slide 18. We have so many goals for 2021 in our mission to build our continuing education system generating profitable growth and solid diversification of activities in higher education. This was an important year in this regard. We reinforce our base of vacancies in medicine with acquisition of UNIFASB, UNESC, UNIFACIMED. We will have a consolidation of FAEL that will take us to recover the entire national territory with more than 1,000 digital education sales. Finally, we will reinforce our presence in the segment teaching of offers via hubs with solid potential to generate synergies, not only with cost and expenses but also in revenue due to the complementary that we have Ser's health and generating cost offered at FAEL and first contribution to its expertise in managing partner centers. So in 2022, our goals, with this recent acquisition, will be to make them accelerate the synergy gains processes and help us build an increasing well-defined and balanced portfolio of activities in segments of digital education and medicine. Another important objective for the next year will be the resumption of the opening of hybrid units, which have been changing a lot of recent years. They are smaller units focused on having their presence in shopping centers, the focus of offering hybrid training and digital course in creating a true omnichannel environment. We will expand our services to the population taking advantage of CDMV/DOK's expertise to expand this model of veteran hospitals, taking advantage of the 20 veterinary courses that we have spread across the accounts. We will have also to create a new model of dentistry clinics. With these initiatives, we will continue to create new competitive advantage of our health care costs, increase the reputation of our brands and enabling us to offer on-site and online extension plus ready courses enforcing our concept ecosystem. And last but not least, Ser Educacional will continue with its disciplined approach to operational managing costs, expense and financial leverage focusing on generating solid returns with growth sixfold. Thank you very much, and we are at your disposal for any questions. Final -- and we'll be here for -- we're going to start now the Q&A session.

[Operator Instructions] Let's start with our first question from Vitor Tomita, analyst, sell side.

We have 2 questions here. First, you guys can tell a little bit about the reduction of the digitalization of surgeons. And even with the growth of students I would like to know as well if you guys could share with us about the profile of -- about EdTech and acquisitions of -- and the types of new functionalities that you guys believe will bring more value to Ser.

Vito, this is Rodrigo. I think evasion of the digital has 2 explanations, first, mathematical. The base grows a lot. And then when you calculate everything, it looks like that the number growths but the number is smaller. We have to see also operational alterations we made on this period on the experience of the student, trying to make that the student can focus better on the platform. So we have the introduction of a new concept, the [indiscernible] of experience that helps the student to navigate all this environment not stopping in academic questions. He's more or less like a coach that can start and grow the feeling of being part of the system. As you have on the hybrid system, which hands out the content that helps the student stay motivated and studying longer times. We realized as well that helps a lot this elevation is the concept of the payment. On the course that go up to 2 years, the students don't need to do anything, then put their credit card there to have the billing of the system. The system [ marks ] the student if the student doesn't pay more than 2 months. This reduces this accumulated evasion. And last but not least, we have to remember the way we are selling these courses with these students. Students, they can do longer courses when we manage that on the selling of the course. And short courses helps also make this integration. When we look the evasion on digital course happens on the third to the fourth semester, then it looks like there is the same type of evasion like short courses. In this way, we can prevent this evasion on longer courses because some students don't have enough discipline to follow their studies on the getaway. And talking about EdTech, we -- there's a very big universe. There is lots of themes we are looking at now. And some of them, we are very surprised because we are finding solutions we never think -- thought about. The concept we are buying now is to bring things to the team that we are not able to make possible in the short term. So in this way, we can grow our base in this way. So educ is the same -- we cannot believe that we're doing what's possible. So we were able to show to us what they're able to do and liking that, we made the acquisition. And when you talk about EdTech, we have to bring as well thanks to us that we're not able to produce. So today, we understand that for Ser Educacional to develop, we have to create this ecosystem idea, more integrated system.

As my colleague here was talking about evasion, first, we made some changes on the operational model, on the portfolio of courses we offer. When you look at the operational model, when we talk about the Tutor Guardian (sic) [ Guardian Tutor ], it's a person who has contacted a student. And then we create a different relation with the student on the courses the way we make the course and then reducing also the duration of the course is associated to the new profile of the professional in the market. So we want to have like faster courses to put the person able to work in the market. And then we have to -- as my colleague also said, the model of paying the course through the credit card, our institution was the first institution to use [indiscernible] as a mode of payment. All of that is helping to reduce the students' evasion. And we have very satisfactory results with these changes we have been making. Thank you very much.

Our next question is about -- is asked by Ian, asking for BTG Bank.

Jânyo, João, Rodrigo, can you hear me? Can you hear me?

Yes, yes, we can hear you. Go ahead.

Two questions. First one, with regards to PDD. There's relevant material regarding PDD on reenrollment indexes. Can we consider this improving as a recurring result of the company as we have now an improvement on vaccination and pandemic situation in the country? And the next one, it's a follow-up from the previous question, which is about pipeline and organic, nonorganic investments. You talk about this inorganic pipeline, talking about EdTech, but I would like to focus on veterinarian medicine and medicines. I'd like to understand what's your views on that. Can you see inorganic possibilities in order to expand these segments? Or would we like to talk about a growth environment, a growth -- organic growth, I mean, with more veterinary hospitals?

Thank you so much. The first question, when we talk about the reduction and our better reenrollment levels and our reenrollment, we have an improvement in the PDD. As we faced a critical period in the pandemics, now we are having more students coming back. And as the pandemic is dropping -- the pandemic's levels are dropping, these students, as they are coming to our campus, again, we're having more success. We are having a better student intake. And the tickets are being paid also. In the pandemics, many students didn't cancel the will of study with us, but they only suspended that. And now we are having these students back and we are able to ask them to pay their old tickets. We have -- we're still worried with the macroeconomics, but we expect an improvement because of the internal efforts that we have been doing and we are having more students with those.

Thank you so much for the question. I think you asked about the M&A pipeline, veterinary medicine and medicine. We still have many possibilities of acquisition in this field. We would like to have a broad ecosystem of continued education and not only an education marketplace so to be dependent on in-present course, in-person courses. We still have possibilities to acquire some EdTechs that will complement this education ecosystem that we'll have with GoKursos and also the existing products so that we can meet all the demands, and some of these alternatives may be materialized. Regarding veterinary medicine, we have many courses. We had 3 hospitals in place. We have [ GoVet ] in Guarulhos, 3 units in Rio de Janeiro, and we have other units that have veterinary medicine. And we will have some acquisitions. I mean it's possible to have some acquisitions. And you see this where our courses are relevant so that we can -- people can perceive new products with either graduate courses, open courses and specialization courses that are related to these products. In medicine, we may have new pipelines but our focus is to diversify our products with our continued education system. We cannot be dependent on hybrid education or digital one, but we need an ecosystem of education with many products that are tied to our core business, which is higher education.

Our next question, Pedro Leandro, analyst in [ Citi ].

There are 2 questions on my side. The first one is about competitive environment. I would like to know your view in this last cycle and maybe have a projection for the next year, in these competitive dynamics. This is my first question. The second one is about the recent improvement of inflation -- of the inflation rates. Are we going to have an impact because of the inflation in next year's intake? And about our cost, are we going to have challenges for a specific line of business? Are you paying attention to that? These are my questions.

So I'll start, and then complement if they wish. As incredible as it may seem, our -- we had lesser, a smaller growth. We could see a reduction on the discounts because of the -- I mean the intake is more than we expected. The intake would be favorable. This -- we have started this process responding well. We could do it in advance compared to the last year. The first and second semesters' intake of last year, they extended a bit. In 2021, the intake process finished as we expected. The 2022 intake process is ongoing. We will have a good response. As an effective risk, we see that with the growth of inflation, we will have an increase on the unemployment level in Brazil, but this is a risk for the market as a whole not only higher education industry. When we see the future, we have a possibility to have an average ticket improved. This is a post-pandemic result.

Leandro, when we look at the inflation rates that we estimate for next year in the macroeconomic environment, we are worried, of course. When we look at our main courses, some of them are linked to the inflation rates. However, we are aware of what we can do next year, considering all synergies that we are going on with the accomplished acquisitions, with our relationship with our vendors because they are impacted on the expense and costs. And our educational matrix also, they leverage improvements and cost efficiency. We are worried, and we need to have a daily monitoring of this situation. We have an environment that we can keep our characteristics, which is to be strict and reach the best conditions, giving the students return on our campus and we had recent acquisitions. So this inflation pressure would be a bit smaller in our results impact.

Our next question is Carlos [ Herrera ], he is sell-side analyst of Condor Insider. Carlos, are you there? Now let's go to our next question as Carlos is not here. Marcelo Santos, sell-side analysts of JPMorgan.

First, I would like to talk about the online education tickets. The ticket improved the bids. Are we going to see expansions of these tickets. And the second question is about big advancements and hybrid education. In the current units, are you going to have smaller campus? Are you going to have smaller campus or not? These are my questions.

Regarding to the tickets, in the digital education as a whole, we observed that the dynamics of the segment tends to change. Many people in this market, many of them were successful. And many of them saw this is not a simple market as they thought in the beginning. We believe that a consolidation of the digital and 100% online education will happen, they will consolidate. And on the other side, we will implement the health courses and engineering courses, especially in FAEL. We'll have a more structured campus in one side that can work with all the campus, the campus in FAEL and other places. This will improve our ticket in these kinds of courses that we cannot sell them without this structure. Bearing that in mind, I will tell you, you are right, one part of the pricing pressure tends to diminish. And this high education industry with some players leaving the market that cannot keep up with the current pricing, specifically in the specialization course, in the grad school course. These are the industries that suffered with the online use. So depending on the evolution of course mix for engineering and health areas, this changed a bit. With regards to the rented spaces, I think we got to a level where the volume of buildings that were -- are not rented anymore is -- they stopped. I think now they will have more students in the buildings because we will have an increased student volume next year. And this will make us to have a higher occupation of these buildings and also because of the students that come from the clinic. And this also helps having more students in our buildings and having an increased margin because we had an expressive number of students in the latest 2 years. This semester, we could stabilize it, and we didn't have an increase of this number because the first semester was very difficult. Our starting point was complex to have students in our buildings again. We will not have lots of adjustments in building occupation. If we are successful in the summer intake of this -- our student base, we're thinking having building occupation in levels that we had before in buildings that we didn't have many students there.

Some units that we started in 2008 that we reduced the numbers of building, these units are performing well now. They are occupying bigger spaces. We need to see the result of the institutions that units that are consolidating the ones that are starting now. We need to see how the intake will proceed from now on. And we imagine that some units need space and other ones, they are resuming their intake process, and we are keeping some classrooms and the level of occupation.

Our next question is Mauricio Cepeda, sell-side analyst.

I would like to ask something that was talked already before is about the perspectives. When you guys did this diversification of the veterinary hospitals with a different strategy, I would like to know how is this working. And if you guys are going to create different unity with different buildings, what -- how do you guys see that?

Mauricio, that's a very good point. We are step-by-step differentiating the company in 3 blocks. One is what we call the 3L Digital, it's going to have like all the digital assets. We are creating area first and then to consolidate that as an enterprise that is going to be dedicated to operate those clinics and veterinary hospitals. We have already a team working on this process. And in a few weeks, we're going to have -- we're going to approve the budget for these areas. And the third point -- the third enterprise is a hybrid operation where we have medicine inside and part also in the clinic, and then we have the hybrid system there. These operations in the hybrid model, and the clinic operational, they have to work in a symbiotic way, the way we use the labs and the higher education. And with the evolution of those business, we're going to report that in a more separated way so that people can see the evolution of this data. And that was the reason why we start using the EBITDA in the medicine course in a separate way. And with the clinics, they have the size and a more specific and relevant size. We're going to segregate their data.

The second question, what do you -- what do we expect from the hybrid and system here. But the colleague already asked that, if you can explore a little bit more the question.

It's okay. We talked a little bit about it before. And we expected the hybrid system is going to recover with the gathering of new students here. And we think that we're going to have better levels than 2019. With going back to normal life, we see a growth in our intake of students. So in this global way of this ecosystem we offer for our students, they're going to see a variety of products that they can -- we have here already the GoKursos and inside our institutions and our partners. We're putting our products to sell on this ecosystem with the -- coming from the FAEL, we are growing new possibilities and also the possibility to bring engineering courses and medicine to Brazil as a whole. So this offering of hybrid products, we see this is a very important step on the retaking of the market. In this pandemic, we had some setbacks. But still, we were able to sustain some growth. And in this system, we have some new courses, bringing with them new products that we were not able to offer in the past.

The next question is from Carlos Herrera, sell side from Condor Insider.

The 2 questions. You guys can deliver a view how it's going to be the fourth quarter? And how are you guys arriving in 2022? What are the risks and opportunities for the company?

Carlos, thank you for the questions. The fourth quarter, when we -- is going to be very interesting as the third. The big difference is going -- we're going to see, a dilution of the [ medicine ] ticket when we see that we are gathering new students. The third -- the other point is, when compared to the third, is because the ticket in the third semester, we're able to maintain with the record gathering of new students, even with the discounts we gave to get more students. We will gain some BRL 99 discount for 2, 3 months. There was a big wait on the ticket. But with the growth of the number of students we could like dilute those costs. And we see here the reduction of the cost of marketing that is going to impact more on the fourth quarter. On the other side, the courses with the -- our workers is going to have also a good impact on these courses because we're going to not have this course now. For 2022, we see a few opportunities that we would like to talk here. First is the hybrid system growing also because of the pandemic even if last year, we have some impact on the gathering of new students. So we don't see a third wave happening next year. And just that is going to help a lot, the gathering of new students. In our sector, we can see some behavior that is year by year. And if we see a different gathering of students from 1 year to the next, and with the coming back of the normal life going to the pandemic, we can see some consequences, positive consequences on the growth of students' numbers. And here, another important point for 2022 is the consolidation of FAEL. That was a very important acquisition. And we're going to see any week now the approval from CADE. And the -- we see it in a very positive way. That's going to be very soon, the approval from the CADE. And we see the approval happening even already this year, and this is going to help us to consolidate based off digital education, helping to consolidate also the last acquisitions we had and helping the synergy between our products, our portfolio of courses to integrate between them and offering a broader offering to the students. We see a big recovery for 2022. And developed like that, the next summer is going to be the first summer after 2 years without impact from the pandemic, helping us to recuperate results and showing that the work we have been doing is doing a very good symbiosis between the investment and organic growth. Like acquisition, we want to grow with acquisitions and in an organic way.

[Operator Instructions] With no further questions, we're going to finish this session now. We would like to give the floor for the final considerations.

Thank you, everybody, who have been here with us during our results report. And we are available for any questions you guys want to send us.

The conference about the third quarter of 2021 is finishing. The Department of investment relationships is going to be open for questions and for any issue. Thank you very much. Have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]