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

Good morning, ladies and gentlemen. Welcome to Ser Educacional's video conference to discuss the results for the third quarter of 2022. This conference is being recorded, and the replay can be accessed on the company's website, ri.sereducacional.com The presentation is also available for download. Please be advised that all participants will only be watching the video conference during the presentation and then we will start the question-and-answer session when further instructions will be provided. Before proceeding, I would take this opportunity to reinforce that these forward-looking statements are based on the beliefs and assumptions of Ser Educacional management and current information available for the company. These statements may involve risks and uncertainties as they relate to future events, therefore, depend on circumstances that may or not occur. Investors and 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 respective forward-looking statements. The following are present. J�nyo Diniz, CEO; Jo�o Aguiar, Chief Financial Officer; and Rodrigo Alves, Investor Relations Officer. I would now like to turn the floor over to Mr. J�nyo Diniz , CEO of the company, who will start the presentation. Please, Mr. J�nyo, you can proceed.

[Interpreted] Thank you very much for everybody for being here on our presentation. Let's go straight to Slide 4, where we present the main highlights of the quarter. We had growth in our total student base and net revenue, which mainly due to recent acquisitions, grew 28% in relation to the same period for the previous year. In the same period, we had revenue growth of 20%. The combined effect of organic growth with acquisitions in the last 2 years transformed Ser Educacional, which surpassed 300,000 students mark and started to have a relevant base of digital education students in the company's total base. Digital Education now represents 55% of our total student base. Another highlight of these acquisitions was the substantial increase in the share of medical courses in the results. 2022 is also being relevant for better control of receipts of the pandemic, which the average pro forma term for acquisitions falling from 114 days to 110 days, demonstrating that we are growing the student base and revenue, which is an improvement in the [indiscernible] portfolio. Speaking of quality, our academic results were also a highlight for the quarter. According to information published by INEP, we showed significant improvement in our last index [indiscernible] solid performance in the IDD and the MEC accreditation scores of our digital undergraduate courses that showed excellence of these programs. Finally, this year, we had the first result of our strategy to create a continuing education ecosystem that aims to create revenue streams and increase the use of our educational assets. As you can see in this chart, in the upper right corner, where ancillary revenues as a percentage of net revenue represented less than 1% of the total. And today, more than quadrupled from 2020 to date and will represent more than 3% of the company's net revenue. On Slide 5, we again show our continuing education ecosystem, which continues to develop rapidly with [ free ] highlighted for this quarter. First, in this is that our [ Fintech B ] unit, the first in the field dedicated to continued education market in Brazil. Today, [indiscernible] has more than 16,000 customers and only this quarter is obtained its license to operate as a Credit Society Direct. We also had a quarter of solid evolution of Peixe 30, our professional social network, which is [indiscernible] the barrier of 300,000 users and is having solid growth to consolidate itself in the professional market offering, uses a free analysis of subskills and the possibility of interaction via our platform starting next year. Peixe 30, we will allow recruiters to offer and manage their vacancies within the app through the recruiter function, which is already in this testing phase. And the third entity was the opening of our newest, DOK, the veterinary hospital in Brazil. We now have 4 vet hospitals operating 2 by acquisition and other 2 opened organically. By the first half of 2023, we have 7 vet hospitals in operation, and we will already be one of the biggest players in the segment in Brazil. On Slide 6, we present in detail the evolution of INEP's academic quality metrics that demonstrate what is already known by the education. We had 11 percent point improvement by ENADE 2021 cycle compared to its comparable cycle in 2017 which is an improvement in the percent of courses in the grades between 3 to 5 of 11 percentage points making up 58% of courses. Another relevant highlight is our IDD, which represents the added value of our courses for [ enrollers ]. Note that we have 88% of grades between 3 and 5, the best rate among listed companies in Brazil. And finally, in the last season of reaccreditation of digital undergraduate courses by MAC, 92% of the courses received grades 4 and 5. Undoubtedly, a relevant milestone for any educational institutions in Brazil. These were my initial comments now, and I will pass the floor to Joao Aguiar, our CFO, who will comment on our operational and financial results, I will come back to make our final remarks before Q&A.

[Interpreted] Thank you once again for being your presenter. On Slide 8, we present the results on the enrollment of students in the third quarter, which represents a reduction in volume compared to last year, both in hybrid and in-class teaching. We have some important factors that explain the results of September. We believe that the sector [indiscernible] continues, but some impacts have altered the pace of the [indiscernible], especially inflation and high interest rates, which ended up reducing the impetus of the middle class to commit to longer-term projects, and this ended up causing demands to lose some momentum in recent months. In addition, we had a very strong basis for comparison as last year was Ser Educacional's record in funding for the third quarter. So the reduction in funding alone does not represent a low volume in funding if we even compare it to the pre-pandemic indexes. This effect associated with more conservative commercial policy ended up causing funding to lose some traction in hybrid learning. And in the case of digital education, we are working on the reposition of the product as we believe that it's necessary to increase the capillarity of the offer of differentiated courses, especially in the health area, which needs more practical classes which since we believe that in the current price level, 100% online course has become unattractive from the point of view of return to the shareholders, especially due to the nature of operating costs that are practically [ available ]. On Slide 9, we have the evolution of the regulated education student base, mainly due to the acquisition of FAEL, generating a combined student base growth of 28%, which showed that our base was [ resilient ] to the lower enrollment of students we had in the quarter. On Slide 10, we have the evolution of the mix of courses, which, as you can see, the health of courses continued to gain space in hybrid learning comparing 61% of the student base in this segment. In digital education, we had a growth of 100% online humanities course due to the integration of UNIFAEL, which has few students from health course at its base. On Slide 12, we represent our average ticket, which had solid growth this quarter due to our more conservative commercial policy offering fewer discounts for attracting and reenrolling students. It's also worth noting that there was reduction of funding discounts of the [indiscernible] recognized to a lesser extent in the quarter, which benefited the average ticket as they are fully recognized in the same period. As a result, the average ticket for hybrid education in the quarter grew by 11% in the period, which in digital education, there was a drop of 1.5% in the case mainly due to the change in the mix of courses after integration, which in turn has 100% more relevant online course base. On Slide 13, we present the results for the quarter, which, as you can see, revenue growth occurred at a slower pace than the growth of expenses and costs, resulting in a contraction in operating margins. This effect occurred because the growth of the student base was not enough to promote the dilution of cost, not promoting an increase in the occupation of real estate properties and an increase in the number of students per class that would be necessary to promote the growth of results and operating margin, and there was not yet been enough time for the synergies arising from recent acquisition [indiscernible]. In this sense, this quarter, we started a cost and expense optimization plan based on reducing the number of properties leased and optimize the [indiscernible] investment, which will be detailed by Janyo later in this presentation. Slide 14 and 15, we opened our income statement divided by segment. And you can note that the hybrid learning continues to reach low operating leverage with medicine courses continuing to be increasingly relevant in the company's results, followed by digital education, which in turn in the second half of the year, it achieved some stabilization in its shares of results. The new businesses are expanding as the business of total net revenue, a relevant move for the strategy of revenue, diversification entry into the continuing education segment, but on the other hand, consume part of the operating result. On Slide 18, which shows how IFRS16 has an accounting impact on our results via EBITDA, which the cost of rents in order to allow you to compare us to the market peers as the same basis we use these metrics. On Slide 19, we should -- we showed that our average term of accounts receivable, which continues to show a significant improvement compared to Q2 -- third quarter of 2021 demonstrating that the company policy in this post-pandemic period based on gradually reducing discounts focusing on a more solid average taking earning profile of students, which better credit quality has shown solid and health results favoring cash regeneration and with a good balance of dropout rates. On Slide 18, we present our pre and post CapEx, operating cash generation, which, as you can see, there was a reduction in the comparison between the 2 periods accumulated in the year. This lower cash generation is mainly due to the higher financial leverage and the increase in CapEx, which we can see on the Slide 19, it shows that until the third quarter of '21, we were gradually resuming investments in new units and expansion of cost ecosystem. I state that should, from now on, be reduced to levels closer to 2020, as investments in the expansion are the final stage and the focus from now on will be to mature investments in the ecosystem, in the units and in digital education were mostly carried out this year. Finally, we present our indebtedness on Slide 20, which I mentioned earlier, is higher due to the finance of acquisition we made. These acquisitions were relevant to support our growth such as the acquisition of medical costs at UNESC and UNIFACIMED that helped us to give a greater continuity to result. On the other hand, acquisitions of FAEL and [indiscernible] and veterinarian hospitals are still in the early stage of generating synergies. Now we will hand the floor back to J�nyo so that we can make final remarks.

[Interpreted] Thank you so much Aguiar. Let's go to Slide 22 of this presentation. As you could see, we believe despite the recovery project [indiscernible] education sector taking place, a resumption of demand growth after the reduction of the effect of the pandemic on people's daily lives. There is still challenges in this process, especially due to the impact of inflation on household income and its impact on demand and operating costs. This process should take longer. Our company's operational leverage process needs to be induced through some initiatives. To this end, we started to implement, as of the third quarter, some measures aimed at reducing the number of unused predications, especially where we have logos with less ostensible presence. In addition, we will reduce the spaces listing cities in the North and the Northeast of Brazil. Reducing idle capacity and optimizing our offer, of course, which should increasingly focus on the courses that demand practical classes and higher average tickets. With this measure, we will reduce the cost base, increase the average occupancy of the building use, improve our average number of students and optimize costs and expenses. These are measures that should bring synergies of at least BRL 35 million a year, and that will be implemented from this quarter until March next year. We understand these measures will be important to better control the offer, of course, and optimize our results. We understand that historically, this tripod of balance has always generated success for the company's shareholders based on the quality of the education, the company's healthy growth and financial solidity. To close, we show again the priorities for the year. And as you can see, we are following our planning, adjusting our operations as the macro and micro factors unfold our sectors. We are able to practically complete the integration of FAEL, and we are working to make improvements to our digital education, which has its first summer enrollment now in '23. We have the return of the growth of hybrid learning. Due to results of the year, we chose to make an offer adjustment in order to provide operational releverage in a more agile way. We want to see our continued education mature, in addition to maintaining our financial solidity a pillar that we consider fundamental for the company to continue to generate value for its shareholders in a long term. These were our initial comments. We are available for the Q&A session.

[Interpreted] [Operator Instructions] Our first question is from [ Luca Marchesini ] from Itau BBA.

[Interpreted] Regarding the expenses with advertisement, what can we expect on how you do that for the next trimester? Are we having more expenses on publicity? Is it reasonable to do so?

[Interpreted] Thank you so much for the question. I don't think so. We already have great investments in marketing. Now as J�nyo presentation, we should focus more in courses that have a higher average ticket value. More in presence and we are going to less focus in marketing the national market. We wish to have to [ co-op ] the students for the courses that leverage a higher value. We are going to have more stability in generating revenue. So we are going to rationalize and optimize the resources for marketing as well. Let me complement what he said. Other than online courses and digital learning, we are investing in stronger brands as FAEL. In the past, we had more and more [ generous ] investments, and now we are going to have more investment in FAEL other than the other brands. We are going to optimize the intake result by strengthening the brands regionally.

[Interpreted] Next question is from Vitor Tomita for Goldman Sachs.

[Interpreted] I have 2 questions. First, could you please have an update and provide more details on integration and synergies with FAEL. And how you are going through this process? And second question, could you talk -- dig deeper on the academic quality indexers. Do you have any specific brand that contributing for the evolution of the education more?

[Interpreted] Thank you so much for your question. Regarding the integration and synergies of FAEL, it took longer than we expected because of the difference of the academic model. This process is going fast. We could integrate to our administrative and academic activities. And regarding the synergies, we are going deeper now that the models are similar. The model of the [ latter ] is easier to be done than FAEL. We are having the synergies for the freshmen students and we are going to adjust in the Ser Educacional model. About the expense synergies, in this period of transition -- transition of systems and academic models, both of the models are integrated. FAEL and Ser Educacional are being integrated longer and the expenses will drop. About the quality indexers, we are developing a project, and part of it was about Ubiqua platform. Ubiqua's results are not still added because the students were having classes in the previous academic model. But the basis of Ubiqua were inserted in the previous model. Quality perception was improved because of the change of courses mix. We had an increase on the courses mix for the higher average ticket and there was a reduction on its students with a corporate to low one. So we have a mix on courses and students in this process. There's another case that we are reaccrediting digital graduation courses with a score 5 and 4. We were considering a program with a higher quality for online learning -- online education and this is being reflected in our assessment through the Ministry of Education and Culture in Brazil.

[Interpreted] Next question, Lucas Nagano from Morgan Stanley.

[Interpreted] We have 2 questions. First, new businesses segment and continued education. Could you update this initiative? And on Slide 22, you talk a bit about it. Are you going to have profit in a short term? And second, about the de-accreditation, I believe it will be stronger. It was stronger in Q3, and it is behind the industry segment of other institutions and what are your plans for 2023?

[Interpreted] Lucas, we have already adjusted real estate in the -- in the years. We had BRL 60 million of real estate debt we dropped from 2017 on. Now we need to have a different adjustment. We needed to have a fine adjustment focused in increase in the operational margins. Yearly, the education companies, they try to do something as this. They decide not to drop real estate and have their games focused on the student intake or we could consider that we are not going to have a higher student intake, and we will have lower margins. And this is what we did last year. We are going to operate with a tighter income. We are going to have less real estate because through the second semester process, we didn't have the same student intake as we had a year ago. So it doesn't make sense to have such a large real state buildings. Would you like to complement, J�nyo?

[Interpreted] Yes, other than that, [ mature ] of the micro model allows a kind of structure that needs less buildings. And this is going to complement what Rodrigo said, and we can have a change then, and we will be able to work with less buildings and less capacity.

[Interpreted] The second question about the new businesses. The planning of the new businesses is following as we planned. We estimated we would have a loss of EBITDA. Our EBITDA is negative as we estimated. There are many new businesses that I'm not going to get into details, but the plan it was that these new businesses would be born and would be in the initial stages that we would need to have some investments done. And now when -- while we have the negative EBITDA, this period of having this negative EBITDA will be reduced. And now our university should provide more results. And second, the investments made will have the ROI done. So there has [indiscernible] new hospitals, our banks had a period where we had higher expenses. And now that the release period is ending, we know we are going to have a better EBITDA. There was a decrease of demand in the second semester. And we were hoping to have a better leverage on our campaign. We didn't have it. So we need to have a fine synergy done, a fine adjustment to have any [ spec ] to reduce the -- our offer and we closed 3 campaigns, so that this process could be done faster. We cannot have a company that is working to have a continued education without profitability. We should have a higher profitability when we have this fine adjustments done.

[Interpreted] Next question, Marcelo Santos from JPMorgan.

I have 2 questions. First, how can we capture this efficiency project from BRL 35 million to BRL 40 million per year. In Q4, we should have an impact and the lease of buildings should have -- should be larger? How is this evolution being done as we are going to have this campaign being dropped out?

[Interpreted] About lease, we have one-off effect there on [ BRL 4 million to BRL 5 million ] for 2023 course and second Qs. We didn't understand this is something that wasn't going to be recurring due to the nature of the negotiations. They were taking too long. And we understood that it's something planned for the year, it would be adjusted. And about real state, they started on this Q2. We knew that we had groups that were formed and we should do our homework about operational leverage. And this is the semestral plan, a 6-month plan. We are going to have the real estate returned. We will have some methods dropped off. And between first and second Q next -- is more evident. And when we talk about dropping building, this is a waterfall effect. We are going to diminish the need of having step in every [indiscernible]. You were having a higher occupation in the buildings, and there are a positive effect in students per class -- per group. In September, we are going to have news. And for the second semester, this is more [indiscernible] netted because we need to wait a 6-month cycle.

[Interpreted] You really have a new one-off for next semester? Will we have BRL 1 million one-offs in these 2 Qs? What does it mean? Did it normalize into one-off? What is this?

[Interpreted] The minimum lease we are considering the results is the cash effect of the lease with 4 to 5 one-offs in this third Q. The effect of the evolution of the building, this is not considered in the cash flow. This will not be considered for the impact of this. So considering the paid lease of the 4Q, we will see an improvement in the Q4 comparing to Q3.

[Interpreted] What you should see as a collateral effect of returning these real estate?

[Interpreted] This happened on Q3. We are going to have other expenses as well, and it is the devolution of the building. We are going to consider this as a nonrecurring effect, and we will provide details about it. They should happen more between Q4 and Q1 '23 where it will be possible to drop off this real estate without having an impact for the student.

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

[Interpreted] I have 2 questions. First, do you guys and other players are thinking about how this commercial aggressivity that you guys had last year is not bringing the numbers you guys expect for? And what's happening? Do you believe that the elasticity, this latency is according to the circumstances or is structural? What is -- how the industry is going to behave? And when you talk about like on-site courses, which courses are you guys going to focus to reduce the costs?

[Interpreted] Pedro, I understand that there is a recuperation of demand, but it takes time for it to consolidate because we don't have economic environment that's favorable for the families, the middle-class families studying it. They have to do this long-term investment as educational course with doing some operational adjusts in this sense. First one, we are working courses with more courses that have this presidential structure like health courses. So we're not focusing on engineering. So the most relevant courses for us is health courses, focusing on doing that offering -- differences for the quality, different values. So we're opening clinics -- vet clinics and changing the perception of our practical classes for the market and also the opportunity to have like an internship. So they can extend better their brands. And beyond that, we have been more restrictive giving discounts and focusing on the quality of the market, growing our average ticket. Now we are doing a more concerned work, reducing the offer if there is no demand. If you don't -- are not having the demands for some courses, we will not keep the structure for offering those courses, reducing our real estate costs and not being like dependent on the entry of those students. So we have like less courses on our operational situation. In the beginning of the year, we saw that we have a big intake of students. And then after that, we had the Ukrainian crisis war and it was worse than we were expecting. This had an effect on the middle class in Brazil. We can expect that. That's very clear. Thank you very much.

[Interpreted] [Operator Instructions] Our Q&A session is closed. I'm going to give the floor to J�nyo Diniz, so he can make his final remarks for the company.

[Interpreted] Thank you everybody for being here for results this quarter. Our relationship, Investor Relations will be available for you to give following questions. Thank you, everybody. Good afternoon.

[Interpreted] The video conference is finished. 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.]