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

Morning, ladies and gentlemen. Welcome to Ser Educacional video conference to discuss the results for the second quarter 2023. This video 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. We inform you that our 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. But before, I would 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 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 event 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. Mr. Janyo Diniz, Chief Executive Officer; Mr. Joao Aguiar, CFO; and Rodrigo Alves, IRO. I would now like to give the floor to Mr. Janyo Diniz, the company's CEO, who will begin the presentation. Please, Mr. Janyo, you may proceed.

Hello, everyone, and thank you very much for joining our second quarter 2023 Earnings conference call. On Slide 4, we present the quarter's highlights. We are fortunate to say there was a significant improvement in practically all operating and financial lines. We had solid growth in the student base in every ticket with emphasis on blended learning, which is growing again in a healthy way. due to the progress of the winter intake process so far, which we should maintain it until the end of the year. This positive dynamic provided us a 9% growth in net revenue in the quarter supported by the execution of the operational optimization plan we started at the end of last year which helped us to present solid growth in operating and financial margins, showing we are on the right track to regain operational leverage and thereby, provide better returns to our shareholders. On Slide 5, we detail the main practical results of this plan so far. The best news from the quarter's results is that we've been initiating the increase in the margin circle -- cycle as we had positive effects for cement to generated almost solely by our portfolio repositioning activities. Regarding the offer of blended learning courses for the health area and finalizing the integration of UNIFAEL in our digital learning, which we publicized in the last quarter's earnings call. On the other hand, the activities to generate synergies than in parallel are just showing the first results in the second quarter as we only concluded the first review of our real estate park in May and June which, as you can see in the corner at bottom on the left, generated savings for BRL 2.3 million in rental costs comparing this quarter with the first quarter 2023. This occurred because we extensively reviewed operation units that were generating negative results as well as our capacity to occupy properties in the cities where we operate. As a result, we've reduced the number of units in operation and for the remaining units, we returned the buildings we didn't need anymore and renegotiating rents. We also rebuilt our cost and expense structure, optimized the room distribution using the increased penetration of Ubiqua, our curricular matrix, which is in its third year of implementation associating this project with greater operational versatility generated by reviewing our core portfolio. These initiatives associated with a more favorable market scenario allowed us to grow margins again marking the beginning of the return cycle of increased profitability that we wrote will be consistent as the optimation plan will happen again in the coming quarters as we show at next slide. On Slide 6, we show the execution schedule in [indiscernible] what has already been completed next has to be taken. On the left side, we show the steps we took this semester in line with what I mentioned on the previous slide. which is the basis that provided the first improvements in the results to date and which will gain momentum in the second semester as they will be effective from now on. In addition, we will have a new generation of synergies that will be done in the third and fourth quarter 2023 which will also continue in 2024 within 2 new periods of real estate optimization and the completion of an important project. We started that year to review and revetize back-office processes. This important project initiated in February and currently being developed will help us improve the quality of our services provided to students at a lower cost than we have today. As a result, we expect our margins to return to a positive cycle of resumption of operational leverage for the second half and next year as well, especially if this more positive macro scenario for higher education is maintained compared to previous year. We will now go to Slide 8, where we show intake for the first half of '23, which has already observed in the first quarter was positive for blended and digital learning. The pace of growth in hybrid learning enrollment was slightly reduced in both segments compared to Q3 but this is because of a decision we took to start winter enrollment early than in previous year by around 15 bps. This meant part of the new students enrolled in the second quarter was redirected to the second semester, which will help us with the winter enrollment volume itself and in improving disease students academic and also room distribution. On Slide 9, we have the total student base, which in practice has not changed much compared to IQ '23 for blended learning. We had the seasonal impact of student dropouts in digital education that was traditionally something that happened in even numbered quarters due to our policy of removing from the base in revenue coordination these students that have not accessed the platform and paid this more than 90 days. This semester, we had a slightly higher intake through discount campaigns and we also had a slightly higher dropout rate in the semester due to profile of students recruited. On Slide 10, we present the average ticket. As you can see, it was very positive in the quarter, mainly determined by blended learning due to the conditions I mentioned earlier and allowed us to grow the general average ticket of the company's regulated education on about 8% in the quarter. to conclude the comments on the operating data. On Slide 11, we present the evolution of our mix courses which, as you can see, we'll have another quarter growing our base of students in the health area, in the hybrid and digital education as a result of our strategy of reorganization which, as you can see from the financial results to be presented by Joao Aguiar.

Thank you so much. Hi, everyone. Thank you for your introduction, Janyo. Please let's go to Slide 13, where we present the summary of the quarter's results, which I believe was very positive because of the combined effect of improvement in revenues, especially from blended learnings associated with the generation of the first real synergies of mutation by the readjustment plan. Highlights of the optimizations achieved in the quarter are certainly the greater efficiency of marketing as we were able to increase the enrollment indication and the improvement in the amount pending rate. As a result, we could resume growth in brass, adjusted net EBITDA margins, which denote that the company is taking the right steps to resume its operational leveraging, which will be fundamental for increasing cash generation and remuneration for shareholders more adequate. On Slide 14, we see the evolution of blended learning contribution in the quarter's results, proving the thesis that we have defended here. focusing our action plan to improve results with a special focus on increasing the occupancy of our leased properties and adapting the core portfolio, it would be possible to generate a change relatively quickly in the trend of our results towards a more promising scenario which we started to materialize from that quarter onwards. Another factor is the addition, the results in the medical courses and the growth of 48 vacancies we had in Vienna compared to last year. In the Digital Education segment, we continue to show solid margins, preparing for a new growth stage that we have completed with the integration with UNIFAEL concluded and we are back to increase this year to the enrollment without neglecting our value proposition to students focusing on improving our average ticket. On Slide 15, we show the average collection period, which improved compared to last year, mainly because of part of the credit portfolio sold to PraValer which so far has resulted in an increase of our cash by around 6 million to 9 million and was reflected in a substantial reduction of 13 days in our PMR which turned out to be a positive event to improve our financial position. On Slide 16, we analyze the net operation cash regeneration that year, pre and post CapEx which is the sale of the portfolio reasonably offset the impact of interest payments and the year's cash generation. After this period, of higher interest rates efficiently and now with the evolution of optimization plan, and a more positive scenario in Brazil regarding interest rates, we will improve our cash generation and start a more consistent process of debt reduction. On Slide 17. This year, we had already started the reduction of our net debt to EBITDA from 2.68x in December to now 2.35x. Wrapping up my comments on the results on Slide 18, we have the accumulated CapEx for the year that follows. According to the schedule with investments mailing the accreditation of new courses, especially in medicine, labs for distance learning centers and digital content. As a result, CapEx dropped compared to last year, increased from 5.8% to 3.8% of net revenue. Thank you. I turn the floor over to Janyo to make his final remarks.

Thank you, Joao. On Slide 19, from the numbers presented, you can see we are fulfilling our plans for the year. We are successfully executing our plan to resume our operating leverage, aiming to improve our capital allocation, streamlined processes and greater operational efficiency. With this, we expect to reduce our financial indebtedness regardless of the interest rate scenario, focusing on offering course that allow us to optimize the use of physical and digital spaces with an increasingly omnichannel operation that can continue to develop an ecosystem of continued education. These initiatives will allow us to have a generate avenues of growth that will allow us to perpetuate our activities in the education market with consistent rates of growth. Thank you very much. Now let's go to our Q&A answer session.

Thank you so much. And now we are going to start our Q&A. [Operator Instructions] Our first question is from Marcelo Santos from JPMorgan.

Good morning, everyone, and thank you for the opportunities of making questions. First of all, I would like to know about your perspective for the second half of the year, the entrance examination is? And the second question is more about the operating opportunities for medical courses. Because right now, we had the federal court talking about medical courses. Now we have things that we need and we have more medical programs. And I would like to know about the potential use for medicine courses.

Thank you for your question. As I said at the beginning, we are having a really good intake for blending and digital. And this makes improved right now, the scenario is different in the past. EBITDA average ticket is different because now -- the scenario is more aggressive, and this is helpful for us. So we are not at the end of the intake, but we understand that the average ticket is going to be positive. And as for medicine, we have some research that has been done. And we think that this is about different decisions. Some decisions are in a really advanced process. And this could make us have more positions open for the medicine courses. Of course, we need to understand more about the different decisions that we understand and we believe that some of them are covered and some decisions are in an advanced process and that is positive for us.

The next question is from Pedro Caravina from Credit Suisse.

Good morning, everyone. Thank you for the opportunity. I want to understand more about FIES. And first of all, I want to understand more about FIES, and the different adjustment the funding for students and how they impact based on your operations, if this is going to have an impact on your [indiscernible] And then I wanted to understand more about the medicine courses as well. And I would like to know the expectations for the new government and if you have an update about it.

Thank you for your questions. First of all, as for FIES, the government funding for students, we had information about this and we understand that throughout the history, what we do is with maintenance. And this is something really specific for FIES. So every 6 months, we assess it, and we follow the rules. So every 2 quarters, we assess FIES, in our database. And we received, FIES, under the average in the market. So when this rule started in the past with this new FIES, we made a decision here of reducing funds based different fundings and not only in the rule of 3%. So this number started to get bigger, and we started to consider the number as part of our PDB. So we don't have that impact. So this is because of our standard because this is what we were saying from the beginning of the new fees. So we don't see that as an impact in our results.

Just to add on what he said, the improvement on in the general scenario is related to the schedule of yes, and it's not that related to the medicine courses is because there they don't have huge number of medicine students compared to the revenue. So some years ago, we started making this base figure at more acquisitions. But in our case, with these adjustments that are being down dining and an improvement of the positions we have -- they won't have a huge impact in our results because of what the quarter. That as for the new FIES, we are in the same page as you are. The last announcement was made by the ministry, and they said that they are going to make an adjustment this month. So we are waiting for the steps, and we understand that this may be helpful for the area and to having adjustments in high school in Brazil, and that is trying to be something really important for the society.

[Operator Instructions] we wait until we collect all the questions. We would like to give the floor to Janyo Diniz to make the company's final remarks.

Thank you, everyone, for participating in another conference of results. This conversation is going to be available to help you if you have more questions. Have a nice day.

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