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

Good morning, ladies and gentlemen. Welcome to Ser Educacional video conference to discuss the results for Q4 2022. This video conference is being recorded. And you can access the replay on the company's website, ri.sereducational.com. The presentation is also available for download. We inform you that the participants will be watching this video conference during the presentation. And afterwards, we will start the question-and-answer session. Before proceeding, I'd like to reinforce that the forward-looking statements are based on the beliefs and assumptions of Ser Educacional's management and the current information available for 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, the industry and other factors could cause results to differ materially from those expressed in their respective forward-looking statements. The following are present at this video conference, Jânyo Diniz, Chief Exec CEO; João de Aguiar, CFO; and Rodrigo Alves, IRO. Now I'll pass it over to Mr. Jânyo Diniz, CEO of the company, who will begin the presentation. Please, Mr. Jânyo, you can proceed.

Hi, everyone. It's a pleasure to be here, and thank you for joining to our Q4 '22 earnings call. As you could see for the numbers released earlier, it was another quarter of a very important of year for Ser Educacional strategy, a period we grew our student base and accelerated the development of the continued education system. As a result, we grew 32% our student base compared to last year, especially because of the integration of UNIFAEL, one of the largest digital education institutions in Brazil, an important acquisition done last year. We also had a 13% growing net revenue. And we also had the addition of the acquisition of UNIFAEL, which operates in the digital marketing with a lower average ticket with an increase in revenue into the organic growth of hybrid education. In addition to these operational highlights, I'd like to use this opening to talk about the partnership we announced with PraValer, an institution specialized in financing higher education students. We financed 70% of our long-term student loan portfolio between BRL 70 million and BRL 80 million between March and June. Almost BRL 70 million also was already received. This is an important transaction that improves the dynamics in the education sector in Brazil and will help us for sure, especially by reducing debt. This shows the quality of the work carried out at Educred, which has historically financed students in a more conservative manner than the market average with installments consistent with the financial [ rate ] of students, generating Ser Educacional shareholders and students a positive cycle. This year was super important for the growth of our continuing education ecosystem. With revenues, as you can see in the graph, we went to less than 1% of the total revenue to 3.3% in the net revenue. This ancillary revenue shows we are creating avenues to generate growth, especially offering undergraduate students, new initiatives in the unregulated marketing, the introduction of related products. We are relevant with GoKursos, a brand we created recently to have a relevant increase in the segment of our own courses. We also have GoDigital.Edu, a specific brand name that's serving this audience. We also launched Peixe30, our professional social work and also are recruiting to, which allows companies to be able to post open positions and look for professionals, combining soft and hard skills analysis. Finally, b.Uni is a financial services fintech that we started at the end of 2021, and we could have private approved by the Central Bank. In September, it's already surpassed the mark of 20,000 accounts opened. In '23, we plan to increase their operations, focusing on the higher education market. On Slide 6, we present an update of the plan to generate synergies and resume the operational leverage we announced after the recent growth in the student base and net revenue. We are generating synergies in the acquisitions made and optimizing our operations, especially in locations where property occupancy is lower. As you can see on this slide, the activities started last year are progressing well until the end of the first semester, especially when it's possible to return most of the buildings that have an expiring lease contract and then will not be renewed. We also [ hedged in ] an important systems integration that we could have synergies generated with UNIFAEL, and we will have our main integration initiatives finished and should present more visible return from now on. Another aspect is our focus on the mix of regulated courses, especially the exposure of health courses, which have better market demand and are more consistent margins. On Slide 8, you can see the conclusion of our intake process, the funding of 2022.2 We observed the largest share of intake in the second half with the reduction in enrollment of blended and campus students. We had an impact on disposable income, affecting the education market as a whole. In the previous year, we also associated with a strong basis for comparison that we had in the last year, as I said. With that, we had a spike in demand, and we are aiming with a policy of more conservative discounts to improve the average ticket. On Slide 9, you can see the graphs. It was possible to transfer the average net ticket in hybrid education. And while the average ticket in digital education continues to be more pressured by competition and the impact of file and the mix, of course, is more focused in the human sciences, which has a lower average ticket compared to Ser Educacional alone. On Slide 10, we show that in line with our strategy, the mix of health courses continues to increase. Its share in the hybrid student base and in digital education, just as I said before, reflects the phenomenon was not repeated to due to the acquisition of UNIFAEL. On Slide 11, you see the performance of total student base, which grew 32% compared to last year and 2% of the organic growth of the blended learnings to the base due to the acquisition of FAEL. Now I hand it over to João de Aguiar, our CFO, to comment the financial results.

Thank you, Jânyo. Hi, everyone. Let's go to Slide 13 to see the summary of the quarter's results. In line with Jânyo's comments, we have shown solid growth in the student base and net revenue, but our margins have been reduced because of the increase in costs and expenses and the increase in inflation in the period and also the resumption of operational activities after decrease of the direct impacts of the pandemic and investments in new businesses. Also, the organic growth of blended learning student base was not relevant enough to generate a significant resumption of occupancy in rented buildings in the number of students per class, which was impacted during the pandemic. Our gross margin adjusted EBITDA in the quarter diminished, and the increase in financial debt with higher interest rates reduced adjusted net income. We also had nonrecurring items as we observed during the year on Slide 14. We had impairment of assets with BRL 79 million in the quarter, BRL 151 million in the year, basically due to the write-off of part of the UNG referring to intangible assets with indefinite lifespan, whose acquisition was made in '14, and the changes in the CS policies took place in early '15 and led changes to the dynamics of demand and supply for higher education in Brazil that lasts until today. Other effects, BRL 6 million of severance paid for employees who were dismissed; and the BRL 8 million of properties, plant and equipment write-off related to the return of buildings both cases in line with operation optimization plan that we announced in Q3 '22. With this, we had a nonrecurring net effect that totaled BRL 227 million in the year, where BRL 127 million in the fourth quarter alone. On Slide 15, we present the distribution of courses between blended and digital teaching and digital courses and medicine courses. We see an increase in the share of medical and digital courses in our results. We saw the synergies of the acquisitions we made between '20 and '21: UNIFASB, UNESC and UNIFACIMED. That year, we also had the additional 48 places in the medical courts at UNESC due to the approval of this places in March of that year, the entrance exam in the middle of the year. We had the share -- the share of these came from the acquisition of UNIFAEL, which we joined in January this year. Blended learning showed the reduction in operating margins. It started to collaborate less with results, and that is where we are at the moment, increasing our efforts to improve resulting optimization, plan and generation of synergies. On Slide 16, we present the evolution of average receivables period. That's maintained the train for the year with a marginal improvement in this indicator, mainly due to the improvement in average dropout rates related to the pandemic time. Moving to Slide 17, we have the graphs that show the operating net cash generation for the year, which includes paid interest in the pre- and post-CapEx views. This happened because of the SELIC rate increase and indebtedness, which impacted the interest paid of the year, in addition to the nonrecurring effects that impacted cash, such as the payment of the severance pay for personnel optimization. In the post-CapEx analysis, this reduction is better detailed on Slide 18. As you can see, we went from 5% to 6.5% of net revenue mainly due to the resumption of activities after the pandemics, investments for accreditation of new cards, especially medicine, acquisition and project of digital content and installation of health laboratories in new markets. In the last slide, we present the indebtedness table, which grew in comparison with the same period last year, mainly because of the acquisition we accomplished in recent years, especially UNIFAEL with an investment of BRL 280 million so far. Also, we believe that we are at a feasible debt level for a company and even in line with the average for this industry. We understand that this level of leverage associated with the current scenario of high interest rates is reducing our ability to generate dividends for shareholders. And therefore, '23, our focus will be improving operating margin and reducing debt. To clarify the objectives, I will hand it over to Jânyo, who will comment on our main objectives for '23.

Thank you, Aguiar. Your comment is perfect. Our goals for 2023 are clear and include, first of all, the resumption of our operational leverage, especially in blended learning, which despite having returned to grow again, we still needed to carry out this movement in order to grow with greater profitability. And that is possible for the growth for period of high interest rate and inflation. We are now in the middle of reducing the real estate base and generating synergies with costs and related expenses, as I detailed before. The second goal is the reduction of financial indebtedness. The first step of which we announced at the beginning of the week was the sale of part of Educred portfolio. We believe that the combined effect of the sale of assets and efforts to reduce costs will generate the necessary path that we need to reduce the debt. We also have options that are working to reduce the impact of the financial debt of our results. They are materialized, and we can serve with the market. The third goal this year, the focus on courses with better profitability. As I mentioned before, it's already ongoing. This year, for example, we are focusing on offering courses with better average ticket and profitability in blended learning and rather transferring the offer of courses with lower ticket and digital teaching. And as a result, we expect to improve the profitability of the sites in the classrooms and labs. So we want to interact with sales channels, generating the omnichannel offer with the installation of hubs in the region. We believe this is necessary of our health courses. They're generating synergies between units, partner, schools so that the units serve the ball with the labs. And we finally continue developing the continued education ecosystem. It has been generating opportunities to create revenue and results that will be relevant for the company in the coming years. These were the initial comments, and now we are available for the Q&A.

[Operator Instructions] The first question is from Lucca Marquezini from Itau BBA.

You were talking about digital education and its intake, but the prices were more conservative. Are you still maintaining the policy? Are you not expecting an intake higher in same quarter this year? And how the ticket policy is?

Hello, everyone. We were talking about the third quarter. And what we are seeing at the beginning of this year, we are being more conservative. And of course, the prices are going to be impacted by the market. And in this expectation that we have for this year, but the following years as well, we are trying to recover the demand, a moderate recovery. We've been seeing this base on the inflation of the average ticket. So we are still having this policy and to recover what we think is that we are going to say the same for the first half of the year. So this is clear that this has been positive. And I think that for the rest of the year, we should have the same mindset of being conservative and an attempt to adapt ourselves to this context, and having this process of recovering the demand this way will go back to the average margin.

Next question from Lucas from Morgan Stanley, Lucas Nagano.

I have 2 questions. The first one is related to the previous question, and it's about the cycle intakes and its policy. But how do you see the competition and the policy for the end of the year, thinking about the average price, the average ticket? Because it had an impact last year. And the second question is about new businesses because the revenue could grow, but I think it may have had lower rates at the end of last year. So do you expect to have a downward trend? And I also want to ask about a breakeven.

As for the intake, it has been going on as we expected. We had less pressure. And related -- regarding the ticket, as I said before, we are working strongly to have the average ticket again. So we were to get with more value aggregated. And our expectation for this period till the April is as where we've been going on until now. And this is sold for in present, remote, and blended. As for new businesses and the revenue growth, the speed is not that fast because some of the patients were done at the end of last year, so the revenue would grow. And if we compare to the previous year, the rhythm is a little bit lower, but it is because of any acquisitions. As for the negative EBITDA, it was expected. The first year is the implementation year; acquisition for new businesses, creation of new businesses. And it was expected to have a cash burn. So for 2023, we expect to have this first year with these new businesses being acquired and having a faster growth. So with these, we could deal with the cost that we have that come from the acquisitions.

We have a question from Mauricio Cepeda from Credit Suisse.

And you were talking about the actions [indiscernible] for the year. And talking about FAEL, I understand that it was really important, especially if we consider intake. But I have a question. Are you thinking about repositioning FAEL? What do you think about the commercial strategy so that this asset can go back to how it was before a year?

Well, related to FAEL, we are finishing the acquisition process, especially the integration with different poles. I remember that in the previous session, we were talking about some actions. First of all, FAEL grows strongly in the South, and [ South East ]. Ser Educacional doesn't have a lot of actions in that region. But at the same time, it was not offering health courses, and Ser Educacional does. So we are working to adapt in this model of negotiation with the poles. And this is going to be implemented for Ser Educacional poles. So after the pandemic, we had to go there with strong years in 2020, 2021 of which schools without having perfect person. So we had to think about this model, and now we implemented this new model. It was -- we had big adjustments on the systems that we developed to do it, and now we expect to have more students. Now the poles are going to get stronger, especially in the health industry, the health courses. So when we think about the future, we consider FAEL, single goal is going to grow with different courses that was not approved before as nursery, for example, that are starting now. So we expect to have an integration of the 3 models. Last year, we did everything we got implement it, and now we're going to see the results.

Next question from Yan Cesquim from BTG Pactual.

My question is a follow-up of the average ticket. We understand that you are in recomposition process and you're being more conservative. But if we look into this dynamic of remote courses, I want to understand how the dynamic is going to be and how long we're going to see this pressure of having blended courses?

You are right. We have pressure on the average ticket for remote courses, but this dynamic is going to be translated in 2 fronts. First, we're going to see more omnichannels. We could install more poles with labs in different regions. And with this, we have the possibility of having more health courses in the countryside. And at the same time, we have the different units working with the poles, and this is going to improve the average ticket. So this is one of our focus. And the second thing that's important for us is focusing on cheaper courses. So this is a long-term work. We work with the marketing initiatives with the leaders -- commercial leaders. We offer more goals related to them selling cheaper courses. So they have more demand in the market of online education, so especially human sciences. But if we leave the commercial area, if we forget about the volume and we focus on longer courses with more profitability, this is going to be better for us.

Now Leandro Bastos from Citi.

Can you hear me? I have 2 questions. First of all, about the capital structure and the priority. Just to understand what you consider a good dealer for you to work on the initiatives you've been working on because you were announcing the new initiatives. And well, my question is about the optimization plan that's published on the third quarter. Do you have more information about that? I want to understand the different actions, if you are making assessment and our expectation for the economy with the different fronts you have.

Thank you for the questions. So about our capital, we are focused on different fronts, as I said before. First of all, we want to have the commercial leverage, and we needed to understand how this is going to be. We're going to have new margins more robust for the market. And we want to generate [ TAS ], and this is going to help us. As for the investments for this year and in 2022 after the pandemic, we had to make some investments that were needed because of the pandemic years. But the trend right now is showing that we are going to go back to normal so that we can keep the cash and operation, and then we're going to look for, in capital. And this was important for us so that we could grow and being less aggressive but consistent along the way, so we are going to go back to our structural and well, business as usual.

About the optimization plan, are we planning change?

Yes, we are. We can. So the optimization plan, as Jânyo said, we expect to have a relevant improvement. We highlighted this when we talked about Q3 reports. We expect that this optimization will bring better revenue as we are returning some real estate. And we are returning them, then we will have more revenue and the units with lower occupancy and having a better student base. As we started work in Q2 2022, we are restructuring about the professors and other topics, and we will be able to have a better revenue in '23. So there are many pillars that we are working on. And also, we need to improve the students' journey. It's something we have been working on. This deal is we will have for us savings so that we can work better and we can review our actions so that we can have the best efficiency possible and having a better revenue. Yes, in operational terms, we are going to have an adjustment done in 2 phases, the first in the beginning of last year. We told -- we didn't know the intake and the enrollment of the students in the first quarter, and now we know the students will have in the units of occupancy. So this process takes a bit. As we work according to the heads of the year, we need to expect to see our intake, the enrollment so that we have a better adjustment.

Next question is Jessica Mehler from JPMorgan.

Can you hear me? I have 2 questions. First, what's the space to renegotiate the rent? And second, how do you see the oscillation in the camp? What can you do in order to improve it?

Good question. The real estate industry is in a difficult moment. We see that the real estate with a lower occupancy and with higher rates in rent and it's more difficult to renegotiate. We should exchange it to return it and have another one, and we need to see the future of buildings occupancy. In the past, there were units with 20,000, 15,000 of students. Now it's changed because we have a huge online education. So now we are going to have lower -- smaller units in shopping malls. And ideally, we should return the buildings and renegotiate rent. Of course, this renegotiation is something interesting depending on the lower -- on the occupancy of the building and the future occupancy of the building. If there's a higher flexibility to renegotiate with the owners, it's best. Most cases, more interesting to exchange buildings. Now we are ending the intake phase. And for April, May, we'll know better what to do with some of the buildings due to this occupation -- this occupancy, that we are waiting to see how many students we'll have.

Perfect, Rodrigo. Let me understand better, the return of the buildings, are we being fined because of it? Because returning buildings, you may have some penalties.

This is a good point to discuss. As for accounting, we have a write-off of assets, and the contracts that are going to an end. It's best if we wait for the contract to expire, and then we will have a real estate reorganization. And for longer contracts there are fines that need to be paid, but we have an advantage. We do not have many real estate with these atypical contracts. In acquisition and renegotiation of real estate, we avoided to have longer contracts so that we had more flexibility. So the better we manage the contracts and try to prioritize the contracts that are at the end, we are going to have less impact in our account team.

I have a question from Lucas Nagano representing Morgan Stanley.

Another question regarding these rationalization process. It depends on the demand. But considering everyone is returning to study, do you think you would have consider intake of students or depending on the increase on CapEx, as you have just mentioned?

Lucas, you were very specific in the most difficult point to manage an educational company. The real estate issue, we never know if we are going to have a higher or lower occupancy in the buildings. We do expect to have more people coming from -- because of -- yes, but this should be gradual. From now on, we are trying to optimize operations faster according to what we -- the scenario we saw in the second half of last year, having an operational leverage. It was difficult because of inflation was rising. Families wouldn't have budget to study. So we need to think in the renegotiation of buildings. And when FIES is being considered again, we may have more students studying. But sometimes, it's not going to be the same as it was in the past. Yes, in this plan Lucas, we have already contemplated these, I mean the discussion of which buildings would have more students. And also because of the place is coming from FIES. And we should -- would like to have space so that this would happen along the plan.

[Operator Instructions] So we are finishing our Q&A session. We are handing it over to Mr. Jânyo Diniz to have our final considerations.

Thank you so much for participating in our earnings release report, and our Investor Relations there is, at our disposal to help you with further clarification.

The Ser Educacional video conference is closed. We appreciate everyone's participation, and have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]