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

Good morning, ladies and gentlemen. Welcome to our video conferencing from Ser Educacional to discuss results from the fourth quarter of 2023. This video call is being recorded and the replay can be accessed in the company's website, ri.sereducacional.com. [Operator Instructions] Before we move forward, I'd just like to enforce that all of these statements have as basis as the beliefs of [ CT ] Educacional and the current available information to the company. All of these statements can involve risk and uncertainties, take into consideration that they might be connected with future events and therefore need circumstances that may or may not happen. Investors, journalists, and analysts need to take into consideration that events connected to the macroeconomic environment to the segment and other factors may cause the results to be substantially different from the one that were expressed in these statements. In this video conference, we have Janyo Diniz, President Director; Joao Aguiar, Financial Director; and Rodrigo Alves, IRO. I'd like to now give the word to Janyo Diniz. He's the CEO of the company and he'll be starting out this presentation. Please, Dr. Janyo -- Mr. Janyo Diniz, please, move forward.

Thank you, everyone, for your presence to another results meeting. I want to go straight to the fourth slide where we talk about some of the results of the fourth quarter. We are combining profitability and organic growth of our operations. This new phase reflects the success of the execution of our strategy in deleveraging -- financial deleveraging with the main objectives defined for 2023. They were reached because of a detailed action plan that would take into consideration all of the financials and evolutions that we have on the quality of education. In this, we were reporting throughout the year, we were able again to show substantial growth in our main operational lines. And this happened, take into consideration that some of market conditions were favorable and helped us to reorganize our portfolio. And we have this offer, especially in health courses and the reorganization of some of the brands, making sure that our most relevant brands and some local brands were united in this. This initiative were quite positive, and they helped with a huge development of retention of students, and they proved as correct measures for us to favor our performance. Now going to Slide 5, we are able to observe that we were also able to generate positive results in our optimization of resources. Improvement in rents, in personal expenses and costs and marketing, all of them, we had an important decrease, taking into consideration that revenue. This is just a part of all of the operational optimization work that we've done because we divided this project in 3 different categories. Just like it was highlighted in Slide 6, we have a second wave concluded in December with another substantial reduction of rent costs and only going to be completely effective in the first trimester of 2024. The third wave will be completed in June, and we gave back some spaces that we're finalizing in Rondonia and Pernambuco. We'll also be concluding a long project that we started in February last year of improving the quality of customer service to our clients through automation of process, improving a better satisfaction, and a feeling of ownership to the students. At the same time, it rationalized the processes as it brings us different synergies in-house. Now going to Slide 7. We've demonstrated in the left graph that even though we are just in the initial stages of synergies recognition, we were able in 2023 to reach the biggest expansion of EBITDA margin from 2016, showing the difference in trend of the Ser Educacional was focused in this basis. That doubled in this period. We changed to a cycle focused on growth, profitability, and extraction of synergies. For 2024, we are confident that we'll have positive impact of this delivers in the second wave of operational optimization that will have an integral effect for this year and also for the second semester as an impact of the third wave. We are also observing a positive environment for capturing in reenrollment in this cycle of 2024. Now let's go to Slide 9 to talk about the main highlights of the operational aspect in 2023. As you were able to observe, it was quite solid. We had a substantial growth in student capturing, digital teaching, and performance in hybrid teaching. If we consider that second semester of 2022 was a strong base of comparisons for this market. We have good rates of reenrollment. Our total basis of students grew 13%, and we saw a good boost from the digital and hybrid graduations program. In 11th, we show the average ticket, and we saw an increase of 2.8%, very close to the inflation rate, and this is connected to the increase of basis from students from PROUNI and this caused our average ticket of the hybrid ticket was almost stable if compared last year. If we exclude this effect, the average ticket of on-site grew about 2%, which shows the success of our pricing policy, an increase in our student base. And before we go to Joao Aguiar, we want to present this slide, our base of students through growth area, and we continue working in our health courses. We have a total movement of renewal and revision of portfolio of courses in hybrid and digital learning. Since these courses have an increased demand in the market, the margin average ticket that have a very interesting worldwide. These were my initial comments. And now I would like to invite Joao Aguiar to discuss some of our financial results.

Thank you, Janyo. Good morning, everyone. And let's go to Slide 14, and we want to show our summary table for this quarter. We saw good improvements in our financial results with the growth of 9% in net revenue, an improve in our -- of 11.8% and our EBITDA margin in 5.4%. These improvements really reflect what Janyo just said. These are the first positive reflects coming from a ample and broad project that we've done in the company, and the idea is to go back to our historical margin since we invested so much in our student base and that almost doubled in 5 years. This was a movement that combined acquisitions and organic growth, and now we are focused on a different cycle, focused on improving profitability and growing this. As a result, our adjusted net profit showed improvement this year of a neutral result last year to 3.8 percentage points. Slide 15, we show some of the graphs that show our results by segment of market and teaching model. We have medicine courses as being some of the main booster for this result and show some of these good results from digital teaching. We want to highlight as well that hybrid teaching, our biggest business in terms of generation of revenue, finally started showing some improvements in development, something very encouraging. Once most works of optimization that was done in 2023 started showing some very interesting results and its impact will be completely integrated in 2024. This is quite representative because this is where we have most comprised margins in recent history of more robust margins. We can see that this is more tangible to make sure that we are able to do this from now on. Now to Slide 16, we have an average timeline of receivables. We have a general PMR showing a drop of 7 days and Ex-FIES of less 16 days. In March last year, we can see that was quite different, a pioneer operation that happened in the Brazilian market that helped us to improve our indexes in operational cycle. In the 17th slide, we want to show our net cash flow of our [ dispenses ]. You can see that we had a positive effect this year, especially because we are selling the credit portfolio that was partially offset for an increase of payment of interest and a big average CDI. Another aspect that affected our operation this year was FIES that delayed the payment of BRL 20 million that in the past years was paid up until December and this year they were paid only in January of 2024. Lastly, in this trimester, the net cash flow was a little bit lower than usual because of a negotiation that we did with rentals. On one hand, we had an anticipation of payment to owners that this impacted our cash flow from BRL 8.8 million, but we had a reduction of these rentals up to the end of the contract that are associated with in the value of BRL 108 million. This was allocated for interest payments. After CapEx, it's the same effect because the volume of investment between these 2 years was very similar. In the next slide, we show what is our debt and financial leverage. They had an improvement of net debt or for EBITDA that went from 2.68 to 2.17 this year because of the combined effect of the optimization project that we did this year and selling the EduCred portfolio. For this year, the objective is to continue with this trend of decrease of debt that we started last year so that the company can go back to having cash flow that works in alignment with dividend payment. And to wrap up, CapEx slides show that the volume of investments in 2023 was very similar to what we presented in 2022, being the main investments, the renewals in the field so that we can receive credential visits for health courses; especially medicine, technology, and production of digital content. The index of investment is in about 5% of our net revenue, and consent is appropriate for the current stage of development of company and expansion plans. These were my initial comments about the results. And now I want to invite back Janyo to say his final considerations before we open for Q&A.

Thank you, Joao. I believe that we are in a very positive moment for our company once we were able to advance significantly in every single strategy that we have so that we could retain a rebalance in our rentals occupation. With this, we hope that in 2024, we'll have another solid performance year, operationally and financially speaking, because of students that we'll have for 2024, it's been quite positive. And in 2024, we'll have an integral impact of the initiatives of optimization that we did last year. And another way of adjustments that we'll be concluding in June. In this sense, our objectives for 2024 is to maintain the execution of the plan that we started in the end of 2022, trying to improve our profitability and reduce our financial debt. We also want this year to increase our working capital just because we have an improvement of the profile of students that we've been capturing the last few years, the reduction of the recurrent events that we have. That's why we need to continue execution of the same plan that we've been presenting without leaving behind the development of our educational ecosystem, that it's more integrated and more ready to become a new way of organic growth. I'd like to thank everyone for being with us and the celebration of 20 years that Ser Educacional celebrated last year. This is a very rich story that transformed so many Brazilian families through quality education, feeling of social ownership that proves that education is the most democratic of tools that is possible in society. We are available for our Q&A session now.

[Operator Instructions] Our first question comes from Lucca Marquezini from Itau BBA.

I have 2 questions from us. The first one is connected to [ EAD ]. If you can comment, what are you seeing the evolution of capturing from onsite and digital teaching? If you expect any perceptive impact of what is so showing the first semester or second semester? This is the first question. The second question is connected to rentals. We had a reduction of 20% in this quarter as we had in the third quarter. I just want to understand, with this second and third wave of returning, do you expect an even more expressive reduction in the next quarters?

Now, connected to capturing, yes, it's been quite surprising, especially for hybrid teaching without a lot of pressure on ticket and we expect this to continue. We are already in the final process, and it's been really surprising what we had done initially. Now, for EAD, it's aligned with what we had expected, and now with the social test, we're starting the process of capturing. We just released last year. It's very early for us to assess results, but yes, the sale can increase a little bit the participation that we had of FIES from 6%, 7% to maybe approximately 9%, 10% of our capturing.

We had a huge reduction of rentals in this very second wave that happened in 2023. There's still another wave that we are foreseeing for 2024. But I'd like to say maybe 70% of what we had to do, especially what we had previously foreseen in this was 2023. What we have for 2024 is still half of what we were able to do in 2023.

And a quick follow-up, Joao. What exactly changed in this contract? Because the number of camps, it didn't fall in the same proportion, a reduction of 7%. So what allows this 20% reduction in rentals?

So when we talk about camping, there's some in several blocks. And what we gave back was some of the blocks, optimizing the work that was done of putting classes together and groups together in labs in the remaining blocks. So what we explored was understanding what was the capacity of every camp in every city in every place for us to give back the blocks and focus operation in last buildings inside of these campuses.

Our next question comes from Jessica Mehler from JPMorgan.

First, a follow-up from Lucca's question. If you could go deeper about the competitive dynamic of tickets in every segment, how do you look at this dynamic now in the first semester? And if you could maybe comment a little bit about the PDD line, what is its behavior for 2024 as you foresee it?

Before, just to follow-up in the rentals discussion, minimal rental drops 20%. But when we add the class rental plus the other rentals, there is a drop of 7%. The thing is that we need to add 2 lines to have total cost that impact the result, okay? Now, in terms of ticket, I want to invite Janyo to comment what is the capturing in terms of market dynamic.

Just like I said, capturing comes strong, especially in hybrid mode without a lot of pressure on ticket. We believe that we will have an improvement on the ticket. And we have been focusing in improvement of ticket to then in basis, different than what was done in the past. So especially now at the end of this where the prices are more aggressive, especially for EAD, with high average ticket for some courses, but in general, this we didn't have a lot of pressure. Onsite, it was actually quite good, and we had an improvement of ticket for EAD. Now, in connected to PDD, second semester of last year, we identified some of the agreements that we did at the time of the pandemic that they had sensibilized the PDD, but they changed it. And this was done throughout time, but when this started coming here closer to 2 years of these agreements being due that were done around 2022, we started seeing that we had a higher delinquency of these tickets. And we have adjusted all the PDD, taking into consideration because of the improvements we had during the pandemic. And we also had an increase of the amount of students in the digital world. We have a more sensitivity of PDD for this year. But I would like to say that considering the percentage of our net revenue, we have reached a maximum limit for provisioning. Maybe for the first semester of this year, we might have something similar that happened in the last 2 semesters, but the trend is with all of this credit recovery work that we've been doing inside the company that we go back to something closer to what it was the 2023 calendar year, considering the percentage of net revenue.

Our next question comes from Leandro Bastos from Citibank.

There are 2 quick questions. The first one is just a quick follow-up on this process of camps devolution, but we already talked about some CSC revision process. Does this have additional CapEx or is just more of an internal change? This would be the first. And the second question is, even nice that you opened and released a line of new businesses, and apparently, we had a breakeven of EBITDA at least in this quarter. And I wanted to understand this dynamic moving forward. We have reached a breakeven that we need to expand this or more of a seasonal result of this fourth quarter? These would be the questions.

Well, now, talking about the entire project that we had for process review and returning some of the campuses, there are some additional CapEx, but nothing relevant. Since this project is already running for some while, and the main CapEx here, it's a CapEx of support consultancy to review process, automatize, robotize, and the provision of this for CapEx is not relevant inside of what we usually do in terms of CapEx for projects of this magnitude. But now campus return, no, we have no additional CapEx that's being foreseen. This is just a low amount inside the process. Now, for new businesses. Just like we've been saying some quarters ago, there are some things that are scalable throughout time. So we still have in our point of view another year for us to really have the breakeven most of these new businesses, and we want to make sure that they are scalable and contributing positively for EBITDA and the results of the company. But these are some businesses that are being well monitored. And throughout this year, every single one of them in their segments are already doing some contribution or having the breakeven throughout 2024 or the beginning of 2025.

Our next question comes from Mirela Oliveira from Bank of America.

We have 2 questions. The first one connected to margin gains. What do you still see as an opportunity now in 2024 other than the rentals piece? And second question is connected to medicine. If maybe eventually this were not approved in STFs, we know that we have some discussion that, is there may be a write-off that we need to do? What was this investment in terms of threshold in their final phases? If you can comment on that, please.

Well, the margin gain, I think, we continue still maybe scaled as margin when all of these projects from this third wave of all the projects that we've been doing will actually happen. We still had the expectation of 2023 capturing maybe a little bit more. But obviously, there are some things that slipped in 2024. And now in 2024, we're not going to have the entire project out of this energy that we wanted to have. I'll probably say that we are very close to it. And with this, this margin scales. While we are treating this, we improved the quality of revenue with capturing and reenrollment of students being better than what we had expected. The average ticket scaling like we've been seeing and improving this synergy and improving a little bit of what we are aiming for in terms of execution. I'd like to say that this margin scales in 2024. Now, connected to, there are no write-off because the investments that were done in the units that were already visited can be utilized in health courses. So we wouldn't have any reason to do write-off due to it.

Our next question comes from Lucca Marquezini from Itau BBA.

Just adding, voting in the STF now has no voting in favor of [indiscernible]. All of them have modulation in favor of one way or another of the approval of [indiscernible] positions outside of [indiscernible]. All of the votes are modulated.

The next question comes from Lucca Marquezini from Itau BBA. Mr. Lucca, your microphone is open and you can ask your question. Mr. Lucca, you can ask your question. Thank you. The session for Q&A now is closed. We'd like now to invite Janyo Diniz for his final statements.

Thank you, everyone, for participating of another results session. I'd like to put our area of relationship with investors at your disposal to help with further explanations. Good afternoon, everyone.

The video conferencing of Ser Educacional is now closed. We'd like to thank you for your participation and have a wonderful day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]