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

[Foreign Language] Good morning, everyone. We welcome and this results report for certification of Q1 2022. Here, we have Janyo Diniz as the CEO; Joao Aguiar, CFO; and Rodrigo Alves, IRO. So we're going to begin our results presentation. I'd like to inform you this event is being recorded, and it will be -- this presentation will be available for you after the recording. We have simultaneous interpretation. And at the bottom of your screen, you can see the globe and you can click on the globe and choose the language you would like to listen to. If you are listening the presentation in English, you can move to the original audio by clicking on the button. [Operator Instructions] We'd like to make clear that any forward-looking statements made on this conference call related to the business prospects of Ser Educacional, they are beliefs and promises of the company's management. And also based on the available information, these are predictions and estimation than they are regarding to future events. And they -- these circumstances may occur or not, investors need to understand that these factors may affect our future development, and our results may be different than the ones expressed here. I'll now hand over to the call Janyo Diniz, CEO of the Ser Educacional. Mr. Janyo, please continue.

[Interpreted] Hello, everyone. Thank you for joining our 1Q '22 results webinar. A positive period for our company, especially from an operational point of view, which allowed us to have solid growth in the student base and cash generation quarterly. We'll provide context today and provide clarifications. This year's highlights the growth in enrollment of blended, I mean, we surpassed 330,000 enrolled students. The growth in enrollment of blended learners learning students by 27%, combined with the 14% decrease in the dropout rate, they are comparable to 2018 levels and helped us to grow the student base. The digital education in student base organic growth is a relevant segment in our results, especially due to the addition of 87,000 students from FAEL, an acquisition announced in May 2021 and concluded last January. As a significant result of the student base growth, we had another quarter of consistent growth in net revenue. And in this year, we have been working to balance the organic growth acquisitions and the maintenance of a solid capital structure that generates consistent and above-market average return to our shareholders. At the same time, we gained scale and remained very competitive. The financial results for the quarter had seasonal effects. We will detail it later because of our organic growth and a more conservative way of recognizing revenues. These factors combined show positive effects even in the short term as can be seen the solid operating cash generation in the quarter, which shows sound business in reenrollment of a quality student base. This is also reflected in the reduction of the average term of regular students ticket, gradually returning to pre-pandemic levels. We had 2 important launches this year. The first b.Uni, our fintech, with focus in the higher education market. And Peixe30, a very interesting professional social network. With these initiatives, our continuing education system will be even better, allowing us to generate revenues and maximize the use of our educational assets, allowing us to be present in their careers even when they are not with us. Slide 5, we detail digital learning, becoming a business not only relevant, but also jump in to almost 25% of revenue with healthy operating margins, maximizing the use of our educational essence and made us more resilient player and more prepared to move forward with the initiatives. With a strong digital education system, we will generate more opportunities to be explored in this digital environment. Slide 6 details -- there are details of the launch of b.Uni. And it will be important for our ecosystem. We will be closer to our students and have flexibility to offer financial service to the market. We started operations on a test basis with few marketing initiatives and features in the app now is available for QR codes and links that are in the presentation. We surpassed the 10,000 customers mark. The second semester, we intend to accelerate the availability of services to start the growth of the customer base, offering debit and credit cards, payroll loans for employees and cash back for students using our fintech. Slide 7, we have the launch of Peixe30. And the link for you to download is in the presentation. This is a social network focused on the new generation of professionals with visibility and opportunity both for users and companies free of charge. People can introduce themselves to the market by recording videos of up to 30 seconds. With this, we have the users' behavior profile using the DISC methodology. That is soft skills and automatically generating their CV in the web or PDF format. Peixe30 will be the newest alternative to monetize educational assets, generating new source of income and relationship with the students. And we will be -- it will be available for us to help understand the demands of the market. On Slide 8, we've shown we've done through the evolution of a continuing education system and a unique platform that we could have gains in scale and allowed us to maximize the use of our educational assets. And also our leading company to take advantage of the positive transformation that Brazilian continuing education is going through. Now I hand it over to Joao Aguiar, our CFO, and he will detail the results of the quarter.

[Interpreted] Thank you, Janyo. Hello, everyone. Thank you for coming. Now on Slide 10, we present the enrollment of students in the quarter. And this is very important due to the recovery of blended learning and they needed to transfer. The inflation rates to freshmen veteran student. Because of acquisition of FAEL, we had a growth in digital learning. So Ser's funding fell by around [ 26%] and especially in the courses with higher average ticket, especially in the health area. Slide 11, we have a 44% growth in our student base this year. And ex FAEL, we grew 13%, demonstrating that we are managing to combine organic growth and generating an important student base so that we can spread our costs. Slide 12, we show that we are strengthening our mix of courses, implementing our presence in the branded learning in the health care segment. And now they represent 6% of our student base. This segment, of course, provides us with an average ticket as they are courses that require practical classes and have fewer market participants. The health care segment is also included in the Digital Education segment, as I mentioned before. On Slide 14, we presented details on the commercial dynamics that we have been doing for a few years associated the methodology for revenue recognition impacting the average ticket, especially hybrid learning. The better demonstrated, we prepared graphs to show the difference between the average ticket calculated between odd and even quarter. First, discounts on late tuition fees that were renegotiated with veteran students. And the second, it comes from new enrollments that are carried out the promotional values on the tickets. In both cases, these discounts are fully recognized in the quarter in which the contract is signed, reducing the average ticket in odd numbered quarters. In these scenarios, positive factors. In the period, we had an improvement on the dropout rate, which dropped from almost 17% to 14%, generating a greater seasonal impact on the average ticket, reducing the revenue recognized precisely for the discounts that we have historically made in this nature with a higher volume of students. On the other hand, as these discounts are recognized in the first quarter, they can be diluted through how the year, especially in the even quarters. We have been rebasing the inflation rates for new students. On Slide 15, we show the average ticket effects in the hybrid graduation. The drop in the average ticket results from the combined effect of immediate recognition on discounts for new students and reenrollment of veterans. The average ticket for digital education remained practically stable even with the combination with FAEL, which has a lower average ticket. This was precisely because we chose to consolidate our operations and avoid entering into the sharpest price reduction that we have seen, especially in the subsegment of [ 100% ] online course. On Slide 16, we have a summary of the results and note the effect of the ticket. And we see the consolidation of FAEL base, having a consistent growth in the net revenue. In terms of EBITDA, it's important to highlight that reduction in the average ticket associated with Q1 '21 being the last quarter we were experienced, restrictive measures imposed [ COVID ] pandemic. In terms of adjusted net income this quarter, the margins were more compressed because of indebtedness. And this should also be diluted because of the effects I mentioned, but also because we will use our cash generation for operations and synergies for financial leveraging. Slide 17, our results by segment are shown, highlighting the growth of digital education because of FAEL acquisition. And we included for a column for new business that includes companies recently acquired, including 2 veterinary hospitals in addition to pre-operation that we will open this year in 2023. These initiatives are part of what we said earlier. We are not only in a different period in terms of the basis for comparison with 1Q '21, but we are also gradually resuming our expansion process. In this quarter, these new streams that we have segregated in the results in the new business and pre-operation units consumed around BRL 4 million of adjusted EBITDA representing a conscious expansion movements to generate returns in the medium term. Slide 18, we see a representation of 3 main segments that generate results. Medical courses are leading the share of adjusted EBITDA with blending learning. Also, we have the increase in the share of digital education as a result of the organic growth of the student base in the integration of FAEL. We have -- Ser Educacional has a resilient platform that meets the objectives of maximizing the use of our educational assets and allowing us to be ready in different segments, creating a complete ecosystem that is improving. On Slide 19, we show how IFRS 16 has an accounting impact on our results and a view of adjusted EBITDA without the cost of rents. We can compare the same basis if you wish. On Slide 20, we show our average term of account receivable, which showed an improvement in this quarter, reflecting the reduction in division and the dropout rate. As you can see, we are back to pre-pandemic levels. Slide 21, we present operating cash generation, which grew by more than 20% compared to last year. And we have a different starting basis and accounting profit loss between the 2 periods, and the company has a solid generation and conversion of adjusted EBITDA into cash. Slide 22, we have CapEx, which is the line that we said in this call that we are gradually resuming, we estimate in new units and expanding our ecosystem. As a result, our growth in investments went to [ 4.1% ] of net revenue in the quarter. Slide 23, we have accounting debt. We are temporarily slightly above twofold net debt-to-EBITDA due to seasonal effects that are an effect that we really estimated. And our focus for 2022 will be to start leveraging process as we understand that a sector like our sector has a tax shield, which is very low. And we have a first quarter of important results with effects that we hope can be understood. And in our view, we'll have a consistent evolution throughout the year. These are the quarter results. And I give it -- I turn it over to Janyo for closing remarks.

[Interpreted] Thank you, Aguiar. And moving on to the last slide of our presentation, we have our goal and vision for 2022, which is summarized based on 4 pillars. One, we are dedicated to working integrating FAEL, making our digital education relevant in the market, and we will have a national reach. This acquisition will allow us to generate new avenues of growth. And increasingly well-structured omnichannel network. Number two, the return of growth of hybrid learning, showing results, and this is a reality. And we will have a larger student base capable of testing on an average ticket. And also the generation of synergy from recent acquisitions. And last but not least, the maintenance of our financial soundness, which we will consider an important pillar and a hallmark of our management that historically has always focused on cash generation and a healthy debt profile. These are our opening remarks. And now let's have the Q&A session done.

[Interpreted] [Operator Instructions] So we have Vitor for Goldman Sachs.

[Interpreted] First question, could you talk more about the FAEL and the Edtechs integration? And second, could you please provide further details on this competition for tickets when you are at the end of the intake of students and the online distant organically intake of students. As you talked about online digital and in-person learning, they are in a competition.

[Interpreted] Vitor, let me answer your questions, and they will complement them. FAEL and Edtechs integration is going as expected. FAEL started with us on January 14, and a part of the intake of the students had already began. Even this way, they could offer Ser Educacional's content because the classes would start in February, and they were already prepared. So we started having synergies and the EBITDA was -- the adjusted EBITDA was already prepared. With the Edtechs, there's -- we had already provided integration with them. Now we are on a second part, which is working being focused between them and in the ecosystem as well so that we have better offers than in concurrence and that we have initial synergies because with that tax as they are small companies, we need to have the offering done integrated and combined to create new products. On the competition point of view with online education, in Ser Educacional historically, we have about 80% of the student base intake done through the units themselves. And 50% of digital online student intake is done by the campaign. And this is something important because I'd say the greatest point in the student intake is in the 100% online learning. If we compare the intake of students with the online intake and engineering, medical students, this last one, this is the greatest number of people wanting to study. And in FAEL, growth of intake is due to the introduction of this type of course. We decided not to participate in this increase of tickets, this was something positive because LTV CAC on 100% online course is variable. And we need to address this matter further because of the cash generation of this activity. I understand that our participation in the online student is a combination of factors, file integration and increase of the offer of different courses and a marginal participation in the 100% online education market. And this is due because of price versus CAC. Let me complement something on the operational point of view. In this first moment, the approval that happened in January is due to change of processes. And we cannot do anything until it's approved. When the approved was done, we adjusted the content in FAEL and increased the portfolio of course is being offered in FAEL. And we also need to use the intake model, the student intake model from FAEL. And they have a strong student intake in their campus -- campaign. And this model has been migrating. And there's a combination of both models. In FAEL, the intake model we used in technologies, the Internet direct in the back office. And we are bringing this to the group, strengthening the both the campaign directly. This mode is being implemented stronger now.

[Interpreted] Now next question is from Carlos Herrera, Analyst -- sell-side analyst, Condor Insider. He says, I have some questions. One, regardless from the acquisitions, do you see any difficulties to have new students onboarded? Do you see pressure from the competition emerging plans. Is it -- does it happen because of the acquisition? Or you see also a deterioration in the financial condition of the students? Three, for 2022, the company will only focus in having synergy and reduce the leverage or you will keep looking for new acquisitions?

[Interpreted] So the first question, we didn't have any difficulty in growing organically, especially in hybrid learning, blended learning. This 27% was mainly organic. In the online education, there is additional pressure in our market is interesting, which is the health and engineering course. We had a mix -- a better mix of courses and the average ticket is well in the sector. Regarding inadequacy, we are in a better cycle. There's a better provisioning because of the increase in the dropout rates in 2021, but the dropout rate started decreasing because of cash generation and reduction of the average period of receiving the tickets. And the third synergies to reduce leverage, we understand that the way to go is to focus in the acquisitions done. We need to have a very well done integration. And naturally, this will generate synergies and cash flow. This doesn't mean we are not having more acquisitions, but acquisitions are not our focus now. This is a process that had already happened, and now the acquisitions will be specific.

[Interpreted] Next question is from Pedro Caravina from Credit Suisse.

[Interpreted] Congrats on the results. 2 questions. One, if you can comment on the dynamic of the competition when the sector is improving and which measures you have been taking to increase the intake -- student intake levels, both online and hybrid models? Do we need to provide more discounts, better financing? What can we expect for the 2022 ticket for the student? I appreciate if you could read my question, okay?

[Interpreted] Pedro, thank you for your questions. We believe the industry has been on a stronger cycle to reduce the average tickets, especially in the hybrid learning. This year, we kept the discount levels as the same on the previous semesters. And we has 9% for the students. Maybe we will have a little less than 9% because there are some students that still have debt with us. And this effect is recognized in the trimester ticket, and this has been diluted throughout the year. We do not see additional pressure in the hybrid learning. On the digital learning, as I said, on the health and engineering courses, we believe the market competition is stable, but the pressure in the competition of 100% online, this is higher, but the market is behaving as we expected, and the ticket behaviors following as expected as well. The difference between the average ticket between veteran students and new student for the odd quarters is [indiscernible] [Foreign Language]. One question. We will enable our audio, Marcelo, so that you can ask your question. Go ahead.

[Interpreted] Thank you for answering my questions. Only one question. There were many seasonal effects, as you said. And this made the reading of margin evolution harder. What could you talk about the evolution for 2022? Could we keep 2021 levels or get closer to them?

[Interpreted] Thank you, Marcelo, for your question. We can talk about future margins because we have a policy of no disclosure of guidance. But in order to tell you about our strategy, what have we been doing in operational point of view. We see hybrid learning in the market. And with this, the company can leverage operations that has been diluted during the COVID pandemic because our campaign had less people there. And we also expanded operationally gradually. We acquired Edtechs. We created some questions, and we have been opening 10 units this year. We wanted to have Ser Educacional to be a more complete company, and we wanted to make grade from a market that had in-person learning. And we are migrating to a market that combines the offer of our in-person courses and they had been digitalized. And we are offering there on an omnichannel platform. And by doing so, we can maximize our educational assets. All the structures and all content digitized will be offered by many channels simultaneously. And we will create new competitive advantages by recognizing our brand, especially in health and engineering because his market recognition will help us be differentiated in the market and be less depending of the competition. And also with this scenario create new sources to generate revenues. And this is why we have services of education. It can be the fintech or Peixe30 and other tools in the marketplace. This trend is that all over the years, the company will gain margin because we are scaling the operations. And now we have invest short term investments, and this is what I can tell you so far.

[Operator Instructions] Continuing our next question is from [ Luca Macazini ] Sell-Side Analyst from Itau.

I'd like to ask about the [indiscernible] we have some effects here. But we continue comment how is this going to be for the development? How impact would be on the next semesters?

[Interpreted] Luca, that's true. We have 2 components here on the dropout rate of students in digital system. We had a change of season last year, where we took the student of the base. When -- after the dropout rate, if they were not paying the fees or they were not like coming to classes. So what we have here on the -- not even semesters, we have the opportunity to reassign in the course. And this seasonal -- this temporal changes is going to show that on the fourth quarter, the dropout rate was bigger than the third quarter. Why this happens? The students coming on the not even semesters. And if they did not adapt, if they got in the course by any motive that they are not very sure. So we have this dropout rate. And then we have solutions to change this revenue connects to this students on the digital system. We have here because the digital platform sees this dropout rate in a faster way than the normal system. When we think about the discounts we have been doing here on the renegotiation of the debts, we see this is going to get better in a bigger way. The dropout rate on the digital system is just like this time to time problem. FAEL has smaller dropout rate than Ser Educacional. And that's very important to know.

[Interpreted] Continuing next question from Pedro Lima analyst from BTG Pactual.

[Interpreted] My question goes on the PDB. We have a big rate this quarter and would like to understand what you guys expect for -- on this dynamic for the rest of the year? And what you guys are doing for that? What kind of strategy you have for that? And what kind of guidance you guys are expecting for a healthy revenue on PDB? We had the 7.5%. What do you guys expect?

[Interpreted] PDB has a big factor. When we think about the EFRS 9, we have this period as we had the pandemic period, our intake, we have to stretch it, and we have to think about how can recover this revenue. The PDB that we have now the first quarter is very seasonal because we're recognizing the effects of the pandemic period, and we are also remembering the returns that have less on the second quarter last year, where we see that intake raised a little bit. And looking at this data, we see that with improvement and recover on the intake and the PDB is still is hurting us when we see this semester where we will negotiate the debts of the students. So we expect that this PDB is going to stay on the historic levels of Ser Educacional even in this pandemic time.

[Interpreted] If we don't have any more questions, we finish our session of Q&A. We'd like to give the floor to Mr. Janyo to finish this presentation.

[Interpreted] Thank you, everybody, for being here with us on the results panel. And we like to see you guys soon. Thank you very much.

[Interpreted] This conference on the second quarter of Ser Educacional is finished. The Department of relations with the investors will be open for any questions. Please get in touch. Thank you everybody for being here. Have a good day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]