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

Good morning, ladies and gentlemen. Welcome to Ser Educacional's video conference results for the second quarter of 2022. This video conference is being recorded, and you can see it in the company's website, ri.sereducacional.com. The presentation is also available for download. [Operator Instructions] Before proceeding, I'll take this opportunity to reinforce that the forward-looking statements are based on the beliefs and assumptions of Ser Educacional's management and current information available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should be aware that events related to the macroeconomic environment, industry and other factors could cause results to differ materially from those expressed in the forward-looking statements. We have here with us, Jânyo Diniz, CEO; João de Aguiar, CFO; Rodrigo Alves, IRO. Now I hand it over to Mr. Jânyo Diniz, CEO of the company, who will start the presentation. Please, Mr. Jânyo, you can continue.

[Interpreted] Good morning, everyone. Welcome to our presentation to show Q2 2022 results. Let's start our presentation on Slide 4, showing the main highlights of second quarter. We showed that Ser Educacional is gradually returning to its growth bet, with the first step coming from the increase in the total student base as a result of our strategy that combined organic growth and hybrid in digital education with acquisition, mainly through UNIFAEL done in January. Another important factor for organic growth was the massive decrease in dropout rates because our students returned to their normal activities with the cooling of the pandemic effects and also the great acceptance by Ubiqua, our learning system launched this year. As a result, our net revenue is growing around 20% compared to last year and our adjusted EBITDA has also grown again, even considering that in the first half of '21, we did not have the return on all operating costs or investments in expansion and new business as we will detail below. On Slide 5, we detail the first investment, the implementation of Ubiqua, our hybrid and ubiquitous learning system, which allowed students for all over Brazil to access quality education, supported by disrupted technologies and relying on creative strategies for connecting classroom with the outside world. Ubiqua is entering the fourth enrollment process, gradually making our blended education innovative and transformational which had important investments in content production, development of its academic concept, which it already has wide acceptance in the market. On Slide 6, we present our distribution network after the consolidation of UNIFAEL, leading Ser Educacional from this year to consolidate its network, increasing reach achieving national capillarity. Now we expand our operations, creating small units and super poles to expand the reach of our mix of courses, especially for the health and engineering segments, generating revenue expansion vectors with the capacity to expand operating margins in both digital and hybrid education. By doing so, we'll raise our offer, and we'll make Ser Educacional a complete omnichannel network in Brazil, generating synergies between units and poles. On Slide 7, you can see our earnings released new businesses, which has 3 verticals: health, added tax and services related to continued education. These are the new companies in our continuing education ecosystem, creating educational assets and revenue streams. With the new businesses, we can serve the population through our multi-clinics, dental clinics and veterinary hospitals through the CDM, CDO and CDMV brands, all of which offer post graduate and specialization course. This will happen across Ser Educacional's network and will be important both from the point of view of quality and reputation or perception of our compasses as well as helping the local dilution of costs and occupancy of buildings. In medtechs, we have GoKursos, our course marketplace, and the acquisitions of Delinea, Beduka and ProvoFacil, which offer along with the edtech, a series of related services such as certifications. These companies have a lot market to gain as they are positioned in segments with high growth potential, especially in the new markets that continuing education is joining such as free online courses, test certifications, among others. And finally, we have you b.Uni, the first digital account fintech that is on the final stages of the approval process with the central bank to start its operations independently and Peixe 30, our professional social network, which is showing accelerated growth already with more than 200,000 users. On Slide 8, we present our continuing education ecosystem that is gradually being implemented and transforming Ser Educacional into a company with a complete scalable offer with high academic quality of our students capable of offering courses and following their development when they are looking for professional qualification or not. Now I hand it over to João de Aguiar to present the operating and financial results.

[Interpreted] Thank you, Jânyo. On Slide 10, we present the funding results for semester. We follow the same positive trend that we presented in May. The uptake of hybrid education had an important performance in the semester with growth above 20%, while the uptake of digital education grew by around 5%, mainly due to the integration of UNIFAEL. On Slide 11, we have the result of the student base that benefited from the combined effect of good enrollment with a reduction in dropout rates in blended learning, while digital learning student base grew 6% with a decrease in the dropout rates with the acquisition of UNIFAEL. On Slide 12, we have the evolution of the mix of courses and the health courses continue to gain space while the opposite in hybrid education, while an opposite movement in digital education with a growth of 100% on online amenity courses due to integration of UNIFAEL. The expansion of health forces in our total student base has been relevant to protect our average ticket, improve our market differentials, and that is wide expansion of units and supercenters with health laboratories and service network that allowed expansions of these courses base. On Slide 13, we show our average ticket, which is growing again comparing to last year because of the seasonality effects that we mentioned in the previous quarter. While in Q1 and Q3, we fully recognized promotional discounts for students' enrollment and reenrollment, in the second half of the year, this effect is almost completely diluted and should continue to have a positive effect throughout the year. On Slide 15, we present a summary of the results for the quarter with a 20% growth in net revenue and almost 40% adjusted EBITDA compared to last year, which shows that Ser Educacional is growing again. On the other hand, our adjusted EBITDA margin contracted compared to last year because of 2 factors: the first, operational releveraging processes, which is gradually recovering as the student base, especially in blended learning, starts to grow again, increasing the occupancy of buildings and the number of students per class; and the second is the return to normal operations with the cooling of the pandemic, which increased operating costs and the investments we are making in the beginning of new units and new business, especially compared to the past year that we still didn't have the full return of activities due to the pandemics. In my opinion, these are temporary effects that aim to evolve considerably. As we resume our operations, new business and units start generating revenues as we absorb the operation synergies from acquisitions we made in the late 18 months. However, net income decreased in this quarter due to financial leverage because of this maturation phase that we are still going on. We created continued education ecosystem to grow to repay these loans and increase our profitability. And to wrap it up on the consolidated income statement. This quarter, we made an impairment of BRL 65 million with the acquisition of UNG, which was made at the end of 2014 when CS, the Brazilian program that funds education, was in full growth already. It is note worthing -- it's worth noting that this provision has no cash effect. On Slide 16, we break down our income statement into segments. And as you can see, we have a solid share of medicine and digital education in our results, which combined, represents 75% of total adjusted EBITDA. Another important factor is about the new business consumed part of the result, which represents the investments in the future of the company that we are making now. On Slide 17, we show the evolution of these segments in relation to last year, showing that we have an increasingly diversified asset portfolio. And blended learning is still with a small margin in relation to its history because of the low operating leverage. And this is an opportunity to expand operating margins when we consolidate base growth processes started this year. On Slide 18, we show how IFRS 16 has an accounting impact on our results in a view of adjusted EBITDA without the cost of rents. On Slide 19, we show that our average term of account receivable followed the trend already shown in the previous quarter and had a significant improvement in this quarter, reflecting the reduction in the [ evasion ] rate and dropout rate. On Slide 20, we show our operating cash generating that reduced compared to last year, mainly because of the increase in interest expenses and loans, and which we understand are being addressed over 2022 and '23 as the company continues to generate cash to amortize its debt and it is still at the beginning of the process of generating synergies from its acquisitions and maturation of recent investments in the ecosystem expansion. On Slide 21, we have CapEx, which aligned to what we said before, shows that we are gradually resuming investments in new units and expanding our ecosystem. As a result, we resumed growth in investments, which went from [ 4.8% ] to 5.8% of net revenue of the quarter. On Slide 22, we present our indebtedness. As I mentioned earlier, it's higher due to the financing for the acquisitions we made. We have a well-controlled leverage level and below to the market average. Now I turn the floor back to Jânyo so that he can make his final remarks before we open the Q&A session.

[Interpreted] Thank you so much. Now we'll talk about the main goals, finalized the integration of UNIFAEL that we start this year, and it is an important strategy which position us as a relevant player in digital education. It allows national reach and opportunity to expand the mix of different courses for the health area. The second goal is to focus the return of growth and profitability of hybrid education, which will have in the second semester another important round of increased enrollment and occupation of buildings. Ubiqua has also been important in its process because it is creating differentials increasingly recognized by the market, helping in quality control, increasing students' satisfaction and, of course, reducing dropout. The evolution of our continuing education ecosystem, which, as I commented earlier, we are planting the first seeds that are creating sources of scalable revenue generation and allowing us to go beyond offering for the [ new ] students. Another key aspect is the generation of synergies from recent acquisitions to ensure that the companies we brought to Ser Educacional have not only have G&A synergies, but also create value by growing the revenue base and generating new businesses. Last but not least, maintaining our financial strategy, that has always been and should continue to be a focus in our company with operational cash generation and shareholder returns. And now we'll open the floor to Q&A for investors.

[Interpreted] [Operator Instructions] The first question is from [ Lukas Marcosini ] from Itau BBA.

[Interpreted] Can you hear me?

[Interpreted] Yes, we can.

[Interpreted] Yes, great. I was going to talk about expenses because if we compare that to the revenue and the activities going back normal after the pandemic, can we consider that this situation is back to normal again? And then as for health, 60% of the hybrid base was presented and considering the maturity of health processes, what's the importance of the long term?

[Interpreted] Okay. As for the first question, the trend on the market is reducing the expenses on the brand and the process is being hybrid now. The teaching process is being hybrid. And if we talk about the rent cost, the market is being more mature. If we consider the distance and we consider that now the intake is being done in person, so now I think that this is reasonable and as expected. If we think about health, I think that we need to think about 2 environments, medicine that is on a ramp-up process, and we are in 70% of the opportunities opened. So in medicine, we have many positions and they help on next medicine, which is the base in Ser Educacional. And this is the difference in the market because it is one of the company's with a huge participation on health, and it needs to keep going like this because we are still investing, and this is part of our business plan. We want to have more health offerings. And these should be digital as well, online as well. Students from the human careers are migrating to the digital environment. So this is making the hybrid teaching is focused on practical courses. Engineering could be another option. But what we figured out is that engineering doesn't have a huge demand for now.

[Interpreted] Next question is from Marcelo Santos from JPMorgan.

[Interpreted] First of all, I wanted to understand your point of view of digital education. Because if we think about the intake that you had, it decreased, but you had a strong year last year. So how do you see the future? And how do you see the growth potential? How the hybrid scenario is going to be? And the second question is that your B2B had decreased. The financial discounts were low. I think that receivable as well. So how do you see the sustainability of this in the future? Can you explain this a little bit more?

[Interpreted] Well, first of all, I'll talk about online teaching, and then we're going to talk about receivables. What we see for online teaching is that it had an increase during the pandemic, especially on the online courses. They had an average ticket that was considerable. But right now, we consider that this has an intake for 100% online doesn't make sense because now our cost structure segment, 100% online is changing. Now the cost of the intake is more expensive. So our strategic planning is focusing more and more on improving the average. We want to increase our capability on engineering and bringing more capability for our front. The student base is changing. And now our focus is not on the market and on more profitable markets. Of course, we can stop participating on the 100% online courses. But in order to create cash and return on the investment, we think that is more attractive to invest on segments that have practical courses and this is being done through more popularity.

[Interpreted] Hello, Marcelo. Talking about B2B and the financial discount. On the pre-pandemic, we were having old tickets because of where we sit on the company. But with the pandemic and the receivables changing, we had a negative impact. But then, if we think about the 2 years, we have this recovery phase. And now the return in B2B, with this, you can't have a normal recovery. And there were more [ evasion ]. So we had more dropouts and this has an impact on B2B. But after the pandemic, we started to recover tickets -- newer tickets, but we still have difficulties on recovering older tickets. So the financial discount is decreasing because of the dropout. And within new tickets, we can recover some of them, and we registered it as a reduction of the net revenue. So with this scenario, it takes a while to translate these. the new figures. But if we keep working like this, and if we still get new tickets with less dropouts, then the B2B is going to recover, if we think about previous quarters or if we compare this with the pandemic. So I think we can think about a more normal B2B without considering these 2 years because of the pandemic.

[Interpreted] [Operator Instructions] The next one is from Vitor Tomita of Goldman Sachs.

[Interpreted] I'm Vitor Tomita. We have 2 questions. First of all, can you give an overview of how you are doing the intake now? And then the second question is if you can provide more context on the margins for the second quarter -- for the second half of the year and then about the impact?

[Interpreted] Okay. This is an interesting question. As you know, our intake process is 50% right now. So it's earlier to have a proper answer, but it's similar to what we expected because the intake process now is extended and we are going until September or October with this process. So I think that we are going to finish as expected, both for in-person and online. As Rodrigo explained, now the online process is different, but we are trying to hold the price for now. We are not changing many prices on the intake, thinking about the dynamic, the profile of the online courses. But generally, the intake is going as expected if we consider the last half year of last year. And thinking about the margins on the second half of this year, I think that the sector is trying to recover the occupancy rate. So we suffered this in the past during the pandemic, and we had made many adjustments. They have a good occupancy rate on the buildings. And this is a trend that's still going on. So what we think is that if we can have a reasonable intake, and we can have new tickets on this half of the year, with a significant intake rate, what's going to happen is that now this new intake and the courses that were created on the first half of the year, there is a good possibility of financial recovery. This way, we can have more margin. We still don't know how the intake behavior is going to be, but this is the trend. We've went through the difficult years of pandemic and operations, and we had a beginning of the recovery and what we think right now and the rest of the sector is to keep going like this mix in, good dropout rates and a big intake. So we need to grow. And it doesn't need to be a huge change. You just need to use their buildings and have some courses, so we are reeducating ourselves with the market. So this is really interesting right now for the market because the demand is back because of the end of the pandemic. And now we are going to make adjustments. The economic scenario is still a challenge for us, but what we see, as they said before about the B2B dynamic, is that now we have a better scenario if we compare it to last year. So now we have a better scenario. And we had a huge work of doing our homework, working on our course structure, so we are preparing ourselves for this recovery.

[Interpreted] [Operator Instructions] The next one is from [ Renan Grata ], Citi.

[Interpreted] I had a first question just to understand what the CapEx rate for this year is. Because you were talking about investments and some things were freezed or kind of freezed during the pandemic. So what would be a good CapEx rate for this year?