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

Good afternoon, ladies and gentlemen. Welcome to Ser Educacional's video conference to discuss the results for the third quarter of 2023. This video conference is being recorded, and the video 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. After which will begin the Q&A session when further instructions will be provided. Before moving forward, I would like to emphasize that the 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 since they relate to future events, and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should take into account that events related to the macroeconomic environment, the segment and other factors could cause results to differ materially from those expected in the respective forward-looking statements. Here in this video conference, we have Jânyo Diniz, CEO; João Aguiar, CFO; and Rodrigo Alves, Investor Relations Director. I will now like to give the floor to Jânyo Diniz, the company's CEO, who will begin the presentation. Please, Jânyo, go ahead.

Good afternoon, everyone. Thank you very much for being here in the third quarter of 2023 results conference. Please turn to the Slide 4. As you can see from the quarterly results presented in this year, Ser Educacional is in the midst of an operational leveraging cycle, collecting the rewards of the success of the strategy defined at the end of last year, aiming to prioritize the operations optimization. We had another positive intake session this winter, both in the hybrid education segment and in the digital education, which combined with a consistent re-enrollment season, gave us a solid growth in our student base and in revenues. Our real estate optimization initiatives have also generated results. This movement and the improvement in the enrollment brought about by the maturing of Ubiqua, our academic model that has proven to be a market differentiator each season has led to another quarter of gains in operating margins that will have positive effects on the rest of the year. With this, we can say that 2023 was a good operational and financial year, and that will be crucial to create the necessary foundations to keep improving our performance. Now in the Slide 5, we have a time line of our strategic initiatives. We have executed and they are rescheduled to take place in the short term. We carried out an extensive repositioning of our course portfolio, focusing our activities on hybrid teaching to offer health and engineering courses. In the digital market, we were able to complete integration with UNIFAEL to improve the offer of our digital courses. We also increased the regional presence of our main brands, UNINASSAU, UNAMA, UNINORTE, UNG, and UNIFAEL, unifying some local brands, and that helps us to increase the return on our marketing investments. In the same period, we optimized our leased real estate, a long-term project that took place and it was completed in the second quarter with the return of properties in several important cities at Manaus, Recife and Salvador. This was unprecedented in the Brazilian market. Thanks to the innovation, we are an increasingly common and accessible alternative in the market. With this, we could improve our operating cash generation and debt reduction. Our commitment is to maintain our focus on teaching quality and increase our operating margins. Our focus is to complete our automation projects and review processes in our student relations center and shared services. We studied this project at the beginning of this year, and we hope to bear fruit from next year on. Here on Slide 6, we can see more clearly the positive impact of these initiatives with a nominal reduction in the cost of rent that generated a nominal reduction of 5%, which helped in the gain of more than almost 4 percentage points in gross cash margin, adjusted for the impact of rents and nonrecurring effects. We also saw a 3 percentage point reduction in commercial expenses as a percentage of net revenues. The positive thing about this is that they haven't had the full impact of our results yet because we are in a quarter with low seasonal results due to the funding discounts and because we are still halfway through the execution of our operational readjustment plan. Teaching quality indicators are also showing positive results. We can see this on Slide 7. Accordingly to the information on the National Student Performance Exam recently published by INEP, our higher education institutions showed progress in the cycle of 2022. We went from 63% of the courses evaluated in 2018 cycles with grades between 3 and 5 to 65% of the courses with grades between 3 and 5 in 2022. The highlight is that between the 2 periods, there was an increase of almost 30% in the number of courses evaluated even though most of the additional courses refer to digital education courses. This shows that our students in this segment are graduating with teaching quality, very close to hybrid teaching that shows the solidity of Ubiqua academic model and a differentiator in the quality of our digital teaching. Now in Slide 9, we can see the quarter's uptake results. You can see the graph and we had a double-digit growth in aggregate uptake and the individual analysis of hybrid and digital education. In hybrid education, this success is due to the repositioning of the course portfolio and the focus of commercial efforts on the group's more relevant brands that were supported by the [winning] market scenario, with rationality of supply and the willingness of students to resume their long-term academicals. In digital education, the biggest success factor was the successful integration of FAEL, especially with the unification of systems, training and investments in the centers so that they could better offer our value proposition to students, and also a complete portfolio of courses. This is very positive and is associated with the solid uptake we had in the first half of the year, which consolidated a renewal of the student base. That will help us to grow and be resilient. In Slide 10, we show the result of the student base in the quarter that grew substantially, both in hybrid and digital education because of the combined effect of positive uptake and a solid re-enrollment season. In Slide 11, we can see the average ticket. Despite having fallen compared to last year in hybrid education, we have to take into account the seasonality factor. As I mentioned before, it shows the recognition of the uptake discounts in the quarter. It's also worth noting that we had a double-digit growth in uptake this year compared to a double-digit drop between the third quarter of 2022 and 2021. That generated a stronger effect specifically in this quarter. Now we have a solid revenue-generating student base and an average ticket that we will recover from Q4 '22 onwards. This integration with FAEL and investments of health and engineering, as I mentioned before, allow us to offer courses with a higher average ticket. Before I hand over to João Aguiar; on Slide 12, we have the evolution of our student base by subject area. In line with our strategy, we continue to grow our student base in health courses. They now represent 41% of the total student base compared to 39% in the third quarter of 2022. This is really important to improve the average revenue for course and classrooms and recover our operating leverage and profitability. I now hand over to João de Aguiar, our CFO, to give comments on financial results. Thank you.

Thank you, Jânyo. Hello, everyone, and thank you for taking part in our event. Let's go to Slide 14, please, to present a summary of the third quarter of 2023. As you can see in the table, in line with Jânyo's comments, we had a solid growth in net revenue, which was driven mainly by the consistent growth in the student base this quarter due to the success of the uptake and re-enrollment season in the period. This increase in net revenue was not only higher because of the seasonal effect we have at Ser Educacional. We recognize the commercial discounts to encourage students uptake in the quarter, which will benefit us in Q4, allowing us to expand the average ticket again. Our cash gross margin increased by 1.6 percentage points, mainly because there was an improvement in uptake during the quarter due to the increase in the hybrid school student base. Meanwhile, our adjusted EBITDA margin also increased by 2.1 percentage points. [And it only show] a more significant result due to increasing the provisions for doubtful debts in line with what has been happening since last quarter. This effect on provision for debts is due to the fact that we still have securities on our balance sheet that have reached a 2-year deadline for write-off. These allowances are from the period of the pandemic and were more challenging to recover, which is why we need to recompose this base. As an effect, this led us to a cycle of higher provisioning this year, which I believe should normalize over the course of 2024. Financial results also showed a slight improvement, but were still impacted by a still high cost of capital, which hardly reflected the recent reductions in the SELIC rate. As a result, the adjusted net income improved compared to the third quarter of 2023, which means that we are on the right track to revert the loss generated last year, giving the company the possibility of presenting adjusted net income again this year. On Slide 15, we analyze the results by educational segment. As you can see, hybrid courses have significantly increased the share of revenues, especially as a result of the increase in the student base. As for digital education, we also saw significant progress due to the solid uptake season we had with a healthy average ticket, and as a result, the segment had a good share of the results. And medical courses continue to be solid cash generators, and this was accentuated in this quarter due to the seasonality of revenue that occurs in hybrid education in odd numbered quarters, especially when there is a substantial growth in uptake as has happened now. Now on Slide 16, we present the average collection period. As you can see, there was an improvement in this indicator, both in consolidated terms and in the government's funding average collection period. This was because at the beginning of the year, we managed to complete the sale of [Educred] portfolio to Pravaler in an unprecedented transaction in the Brazilian market. The improvement was also due to the success of the re-enrollment season and lastly, an increase in the provision for the allowance of low and lease losses, partially offset by the longer average payment period for [FIES] since the flow of payments this year is low than the last year. On Slide 17, you can see in more detail the evolution of our operating cash generation with pre CapEx showing an increase of 20.8% compared to last year, and post CapEx also practically doubling compared to last year. This improvement in operating cash generation is also due to the effect of the Educred portfolio, which also benefited from a slight improvement in net operating cash generation in this quarter. On Slide 18, we have a comparison of our gross and net debt with the 4Q 2022 results. And as you can see, with the success of our operational execution during the year, as commented by Jânyo, we were able to significantly reduce our debt and get closer to our goal for the year of achieving net debt over adjusted EBITDA close to 2x in order achieve an even better result in 2024. As a result, we hope to continue to gradually improve our results with the aim of seeing Ser Educacional return to being a company with a solid track record of profitability and returns to its shareholders in the medium term. To conclude my comments on the results, we have Slide 19, where we present accumulated CapEx for the year. As you can see, it is showing a reduction compared to last year because during this period, we made investments in preparing our institutions to receive visits for medical accreditation. This occurred mostly this year, and we had to make investments to recover part of what could not be done during the pandemic lockdowns. I believe that our CapEx ratio is adequate for our needs in terms of percentage of net revenue, and we are comfortable with this level of investment for the coming years. Those are my comments. And now I'll hand the floor back to Jânyo to make his final remarks before we open up to the Q&A.

Thank you, João. Please go to Slide 21, where we summarize our next steps for the year which were defined in November last year. We want to remain focused on regaining our operating leverage. We will continue to simplify our portfolio of brands and focus on offering courses with greater profitability and generating more and more omnichannel and back-office integration to achieve our goals. We also maintained our investments in developing our continuing education ecosystem as we believe this will be the next wave in the higher education sector. We want to be ready to be a relevant player in this segment in the coming years. This will ensure that we succeed in our goal of reducing our financial debt. And consequently, generating and increase our cash generation for shareholders and focusing on the organic and healthy growth of our operations. Finally, I'd like to point out that on August 11, we celebrated 20 years of Ser Educacional. As the company's CEO, I'm proud to have been part of the story from the very beginning when we couldn't even dream of becoming the company we are today. A dream of Professor Janguiê Diniz that has been transformed to reality. And thanks to a very competitive team, it has been created over all these years, we have gone through an incredible trajectory in the Brazilian market, which I am very proud to be part of. Our team is motivated today as it was in the beginning, and we have made many changes to our operations since the pandemic that are taking us to a new level of excellence. And we are ready for a new cycle of operational growth and profitability that will be very important and interesting to follow. I thank you all for the time we spent together and I hope we can celebrate the achievements to come in the same way. Thank you.

[Operator Instructions] Our first question comes from Mr. Marcelo Santos from JPMorgan.

First of all, I want to ask about the public consultant of the government because they are talking about making restrictions from some health courses. And since this is really relevant in your portfolio, I want to know how you see it, what's your perspective. And then I have another question. When we see the ticket in medicine, it looks like it dropped from the first semester to the second one, at least based on what we saw. Can you talk about the trends that you see for medicine courses?

Hello, Marcelo. I'll start first with your first question. And we think that medicine has an increase. And with this MEC, the local industry is looking into the metrics, the quality metrics. And in this journey, they could see the results of the previous exam. And in Brazil, now they are looking more and more into this revision of the online medicine courses. What we think is that the regulation for online courses is not a problem. It has a solid base. And if it's good, execute it. And if it is aligned to what they discussed on the foundations, then it shouldn't generate a problem or a lack of quality. What may be happening is that it needs to be controlled on a larger scale, especially if we think about the capacity of expanding the [both] and the capacity of offerings, especially if we talk about health, we can have different partnerships and they need to follow the rules. So there may be some cases on the market that may not be following the regulation. But our perspective is a positive one. If we think about online courses, we think that the change in the regulations in 2017 was positive. And I don't think we are going to be impacted by a change on the rules if we think about health courses because there is a demand. And it's not -- if it's not for online courses, it's going to be for in-person courses. So the idea is to be strong on both options so that we can make our company not be affected by changes on the regulation because the regulation is going to change.

Just to add to what he said, aligned to what Rodrigo said before, even though there is an impact, we have a possibility to adapt ourselves in both modalities. So we think that the regulations should be more rigid for the exams. And when we talk about the exams and the grades that the students have, Ser Educacional is having good results. Even compared to some of the best courses in Brazil, both for hybrid and online, we had good results. So if there is a change in the regulation, we are not going to have a negative impact. It's going to help us to have better products and help the students. So we aren't afraid of those changes. They may happen, but if that's the case, as Rodrigo said before, the health industry is really strong and we have different in-person units. So if we have changes, we are going to have this transfer for the units that we have. So we have a really important number of health students. This is why we feel calm with both scenarios, if the scenario stays the same or if there's a more significant change in legislation. Thank you, Marcelo.

There was an actual fall in our average ticket for medicine here in the third quarter due to 3 factors. The first one was mostly regarding like the capitation of government-funded students here. The second factor was an increase in the number of positions which were still following and vacancies in the universities which have a higher average ticket than in other units. We also looked at another aspect was the punctuality of the students who use this punctuality discount. So these 3 situations together, they have resulted in a reduction of the average ticket for the medicine course. But that will be stabilized as we finish the semester with a lower reduction than what was observed. Yes, for the third quarter. Yes, from the second to the third quarter. Yes, of course, it's a very high ticket. But as Jânyo has mentioned here, this is a point that we see so many of the students who are studying long distance, that they are in places where we have a campus. So we will have the capacity of offering physical courses for the students, in-person courses. Yes, there would be a huge possibility for growth with these new areas here. Most of the health course, they were offered in their own units, and the units in the labs were present in our in-person universities.

For the health course, they mostly have like their own units.

Yes, that's very useful information.

Our next question comes from Mr. Lucca Marquezini from Itau BBA.

Questions regarding the marketing expenses. We saw a great downfall here regarding your liquid income. Is that the new level of investments of the company or was it like a typical decrease? So what is the logic behind this level of investment in marketing and what is the strategy?

Lucca, thank you so much for the question. I believe this is a question that comes from our last event here. We understand that this will be the new levels. We've done a reevaluation of the communication model we used to have, especially with the long distance courses. And during the pandemic, we had to increase our courses with marketing and communication. But this reevaluation and reassessment allowed us to change how we understood our limits for marketing expenses per regions. And this is an ongoing analysis and communication regarding these topics will continue depending on the economic landscape of each one of the spots. But we also had like a large reevaluation and reassessment of our communication channels in general and how our commercial structure will be affected by that. This allowed us to maintain and reassess all these levels of investment.

The next question comes from Mr. Lucas Nagano from Morgan Stanley.

Two questions from our side. One is about the price dynamics. I've heard we feel mixed effects here about the negative ticket, long distance courses. So I would like to understand how would that behave and how it will normalize. And what was the policy to repass the price to consumers and how you're going to be inserted in this new competitive scenario? Second question is about PDD. We would like to understand how does that increase -- how is that a recurring one or not? And what was that impact in terms of the lowering of titles in 2021? Just so I could understand what is new and recurrent here.

Thank you, Lucas, for your questions. The issue about the price, so as Jânyo has mentioned here, we have worked a lot together with marketing. But what we have identified in terms of prices that in addition to the odd quarters when we have that issue about recognizing the discounts that we give to the quarter, it's more effective in the odd ones in the first and the third one. And it makes us reduce the costs of hybrid courses. When you look at the hybrid course along the semester, the inflation is mostly what affected those tickets. So the idea is that those tickets start reflecting the adjustments in the tickets due to inflation with punctual adjustments in a few units where we need to understand how are those prices behaving, what is the current demand for those courses, how are those positions being filled in those units. So we're doing associated work in order to optimize our pricing strategy. Regarding long distance learning, we've been trying to understand the whole long distance learning dynamics, mostly regarding those courses that are uniquely online or some of those that have a certain percentage of practical classes, those that have a certain percentage of lab classes. So we can modulate it little by little, the health care courses mix that is getting stronger now with long distance learning. And we can actually keep track of how that works in hybrid learning. I believe those are the biggest things connected to price right now. So regarding PDD, during the pandemic, we had to -- I believe the whole market as a whole, we had to flexibilize our policy for discounts and negotiation. And during this flexibilization, we started doing more deals at that time because we noticed a lot of delays happening during the pandemic in the first 2 years of the pandemic, like we saw a huge pressure in the first year due to renegotiations because people were actually late with their payments. And some maintenance in the year of 2021, which carried over a little bit of that context. When these titles get to 2023, they become old already, and we may have increased our level of recovery. Those titles from the pandemic, they brought a higher complicator when we're trying to recover them. And this was affected -- this ended up affecting PDD a little bit. And by the movement we have seen and looking to the future, we realize that we will have a final movement maybe in the fourth quarter, maybe not aggressive as we've had in the second or the third one, but also at a higher level, as I understand it. And it will be reduced since the first quarter of 2024. As these occurrences regarding the titles and tickets from the pandemic that have been renegotiated in 2021 and they actually leave our base.

That was a very complete answer.

Next question is from Mirela Oliveira of Bank of America.

I just wanted to ask a question about the regulation. I think that your position is clear, but can you talk about MEC's position? I don't know if you can explain more about this, how the regulation is going to be and how you see this discussion.

I think the MEC was really transparent on their perspective of the next steps on the regulation. So the trend that we see in medicine, it looks like MEC is really aligned with the ministry. And of course, it still need -- they need to start voting, but the ministry and all the movements that we see are aligned with the report and that's reasonable for us. On medicine courses, there's an interested on the medico's report. And they've been talking about changing the deadlines. It was clear that what they needed to register all the proposals was something that made them hurry to make all the proposals before the deadline. And then talking about long distance courses, we see that there's a demand which is more clear right now. I think that now we can see the trend in the market and CS and all the negotiations were really important for the sector. So they needed to understand how their position and how the government funding is going to be right now. And now they are focused on education, they need to see some regulations that haven't been modified for a while. But this was nothing expected with the change in the government.

Next question is from Renan Prata from Citi.

Actually, this is a first question about new businesses. We see that it is still negative. But I wanted to understand how you see it and how you expect to see these in the next months or quarters. So when do you expect to have a breakeven or how you see it?

New businesses are a long-term project. So we understand that high education is going to be with continued education, and there are adjustments, organic adjustments we've been doing in the previous 2 years. This is always more difficult because some scenarios become real and some don't. And you need to act accordingly so that you make sure that the long term is not only a long-term goal, but that you can create a road map to make it happen. So from June, we started to make some adjustments on the operations so that we can improve our margin from this year. We don't expect to go back to operations 100% that fast because they are a long-term plan, but we understand that our current cash burn is really high. So the idea is to see the assets that are more promising and that could make us grow more and invest on that. And then on the rest that are not that interesting after the pandemic, we are doing some adjustments. So the idea is to reduce the gap as soon as we can. And from the fourth quarter, we are going to follow the road map that we created. And from -- in 2024 or '25, we could have a breakeven on those operations.

[Operator Instructions] The Q&A segment is now adjourned. We would like to give the floor to Mr. Jânyo Diniz to make his final considerations of the company.

I'd like to thank everyone for participating in another conference of results here of Ser Educacional, and we'd like to offer our areas here of investment assistance to your disposal if you have any other requests. Have a good afternoon.

The video conference of Ser Educacional is now adjourned. We thank you all for your participation, and wish you an excellent afternoon.