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

Good morning, everybody. Welcome to the web conference from Ser Educacional for publishing the results on the first quarter 2024. This web conference is being recorded and you can watch it again on the website of the company on ri.sereducacional.com. The presentation is also available for download. [Operator Instructions] Before we start please, I would like to reinforce the information we have here, the beliefs we have in the administration for the future and the information that we have now about the company. These declarations can involve risks and uncertainties that future events depends on circumstances that may or may not occur. Investors and analysts and journalists should take into account that the macroeconomy plays a big role and can change the results in more or less than we expect and we are talking here today. We have present in this conference Jânyo Diniz, CEO; João de Aguiar, CFO; and Rodrigo Alves, Senior Director of Relationships with Investors. Now I would like to give the floor to Jânyo Diniz, who is going to start our presentation. Please Jânyo Diniz, you can start.

Good morning, everybody. Thank you very much for attending another results presentation event. Let's please go straight to Slide 4, where we will discuss the highlights of the first quarter of 2024. As you can see, the material we have published the results for the first quarter 2024, confirming all the operations turnaround work we have been discussing and detailing over the past quarters. We also had a solid season of enrollment in hybrid learning with double-digit growth. Despite the decrease in enrollment, blooming digital learning, we were able to more than offset this result with solid digit growth, which reinforces the success of our brand optimization strategy, course portfolio repositioning. And more importantly, when we analyzed the financial results, it reinforced that our operational optimization basis and focus are provided to be correct. Compared to the fourth quarter 2023, we again saw -- we again saw improvement in literally all of our indicators this quarter with new round of solid revenue growth, a 25% increase in EBITDA, increasing operational margins, reducing gross and net debt and cash generation. Overall, it was a solid quarter for start to finish, which in our view sets the stage for what we believe will be a very positive year based on the strong start we are presenting. Moving on to Slide 5, which we have been repeating for some time now, we must say that we are nearing the final spread of turnaround execution. This first quarter, we have already begun to notice more evident signs that new stage of cost reducing [indiscernible]. We still have the last stage of property returns in lease renegotiations to be completely by the end of the semester, which we drive the third wave of cost and expense reduction in the company. We also have some automation projects delivering in our CSA and CLA, which not only provide us with improvements in cost and expense structure, but also bring substantial improvements in studying experience and satisfaction. On Slide 6, we present key indicators that influenced the results on our plan execution note that a significant reduction in rental personnel and marketing indices as a percentage of net revenue, bringing our company to a new level of competitiveness and cash generation capacity. The best part is that we still have a new wave of operational improvement physically. So we have a cost reduction to be recognized in our results that will only be fully noticed from the second semester onwards. Therefore, we are still in the midst of a very promising cycle of results improvement. Let's now move on to Slide 8 to talk a bit about students enrollment for the quarter, which, as you saw, was quite positive in hybrid learning with a 10% growth compared to last year. Even with a significant delay in the students enrollment schedule due to inflammation of the social affairs set for this year, February, March was pushed in April and May, issuing was a solid enrollment for the second quarter of this year, which will further drive the results of hybrid learning. We continue with our strategy focused on increasing the average tick and maintaining the high level of profitability. We have the segment. We are increasingly dedicated to maintaining centers with high commercial potential, locating cities with a largest students base, expanding the certain base of health care courses in our course mix. In this sense, as we move away from business model, purely focus on volume and focus on profitability. It is natural for enrollment volume to decrease slightly as long as it's more than compensated by an increase in average ticket and margin expansion, which is our case. On Slide 9, we show exactly that. Our average ticket for in-person learning remains quite solid with the strong presence of health care course in our mix, allowing us to present a slight growth even with the 10% enrollment growth, which would easily put pressure on the average it to fall due to the commercial discounts recognized entirely in odd quarters. In digital learning, we have exactly the effect of the growth at the expense of volume increase that I mentioned earlier. And now moving on to Slide 10, where we see how this movement is reflected in the student base, which despite the small decline at the end of the quarter, an important mix change as the hybrid learning student base increase in share and total student base allowing us to continue growing net revenue this quarter. To conclude my initial comments we present on Slide 11, they student base by area of knowledge showing the successful implementation of our strategy to increase the participation of health care courses in our student base. This demonstrate that we are not only focusing on increasing the [indiscernible] of our business, but also to maximize the average ticket of our cost. These were my initial comments. And now I will pass it over to João de Aguiar, our CFO, to make his remarks on the results.

Thank you, Jânyo. Let's please move on to Slide 13, where we present the summary of the results. As we -- Jânyo said similar to the fourth quarter, this first quarter of 2024 also shows improvements in our results across the board. We had solid growth in hybrid learning student base, widespread growth in net revenue in a quarter that is generally more subdued in revenue generation due to our more conservative accounting practice, which recognized enrollment discounts entirely. We also have not yet recognized FIES enrollment due to delay in the calendar, which will be recognized in our results starting in the period this year. However, revenue is recognized for the full semester. Furthermore, business in executing our operational optimization plan so far has provided us with solid improvement in operational and international results, which had 25% growth in our adjusted EBITDA and a 3 percentage point increase in our adjusted EBITDA margin. As a result, we have practically reversed the adjusted loss report last year, ending the quarter with an adjusted loss of BRL 2.8 million. And is a result of 5.7 million excluding IFRS 16. We had, therefore, a quarter of averse results, which still do not reflect the third wave of operational adjustments to be finalized to the end of the semester. Moving on to Slide 14, we can see that the digital learning and medical course is continuing to generate solid and consistent results. The best news of the quarter was the strong improvement in hybrid learning and new business results, both showing consistent gains in operational margins. These improvements demonstrate the effects of all the adjustments we had made in the company over the past 18 months. It's worth noting that the hybrid learning is the largest revenue generated for the company and the improvement in operational margins of this model delivered will be relevant in enhancing our cash generation capacity and continue to improve net results for our shareholders. On Slide 15, we present our average receivable collection period, which again showed an improvement compared to the previous quarter. The ex-FIES average collection is now the main driver of improvement with a reduction of 3 days compared to the same period last year. The overall average collection period, which includes FIES receivables showed a modest improvement, only 1 day due to the delay in FIES payments schedule that we had observed last year. This improvement in average collection period is happening, thanks to the improvement in our license payment point compared with the policy we have implemented agreement installments. This policy aligns with our objectives to prioritize the quality of revenue generation of the folks on the appointed office studies. Furthermore, we are in a cycle of increasing PCLD, as I mentioned in previous results presentation events which also contributed to the reduction of the average receivable collection period. On Slide 16, we present our operational cash flow generation, which had a good recurring performance. Note that in first quarter 2023, cash generation was favored by EUR 69 million due to the sale of the Educred portfolio to Pravaler, which the last year performance had an extraordinary benefit from a net payment of EUR 15 million from FIES. This payment is usually made in December of the previous years, but this year was paid in January. Excluding these 2 effects, net operational cash flow generation increased by approximately 200% compared to 2 periods due to the reduction on interest payment along with substantial increase in revenue, conversation -- conversion to cash. This once again demonstrates the success of the operational optimization strategy we are implementing, which were recently benefiting us in the coming quarter in achieving our goals of reducing financial debt and increasing profitability to our shareholders' slide. As we can see on Slide 17, this process is already underway. Note that the quarter, we repaid approximately BRL 100 million in debt, which thanks to the solid cash generation of the quarter allowed us to organically reduce net debt by about 32%. It's very important. It's a bad movement for us, which materialized in 2024. On Slide 18, we show all caps which increased by 27% compared to the same period last year, mainly due to ongoing works or the reorganization of our real estate portfolio this semester. These works are expected to be completed by July. So we may have slightly higher capacity at the beginning of the fiscal year, which will be reduced from the second semester onwards as we will not have a magnificent ongoing product with on the best interest on the sector, 5% of CapEx net revenue. These were my comments on the results, and now we hand back to Jânyo to make your remarks.

Sorry, I was muted. Thank you, João. Moving on to Slide 20. We will remind ourselves of our goal for '24. We remain committed to our operational optimization plan. As you can see from the quarterly results, it's been successful, executed with great dedication by our executive team. We now need to finalize this project by delivering our last wave of property returns in lease renegotiations to optimize our company in terms of property, occupancy and increase the average ticket by the expansion of health care courses in the total student base. With this completed, we will focus on further increasing our operational efficiency especially converting EBITDA into cash to increase cash generation. We need to be assertively and mitigating the impact of financial results on our overall performance. We are in a phase of fine-tuning in our operations to have the students with better ability to pay tuition fees, having a more sustainable and higher quality operation. This is crucial work, and we are dedicating ourselves to move forward. We are dedicating considerable time and effort to build a relationship with the students. The Q1 '24 results show we are on the right path. We have not only had a solid improvement in our recurring operational cash generation, but we could reduce our net debt. Thanks to the improvement in our cash generation. Within our objectives for the year, we have been dedicated to our better offerings. We are developing better connections on our sales channels, investing to enhance the student experience and creating a more versatile ecosystem for lifelong learning. It will take time to translate into tangible results, and this will be relevant for the company when time comes. We are approaching the final stretch of a lean, the turnaround process that is proving to be very positive. And the results for the coming quarters will be relevant for our evolution in the mid- to long term. We would like to express our solidarity with the rebranded [indiscernible] that has been having that blood. And all of our units are point to receive donations that we will send for our friends in the South. They have been suffering so much. Until yesterday, we had 40 tons of food raised and more medicine and water. We salute the people from the south, and we hope God can end this tragedy. Thank you. Now I am waiting for your questions and answers.

[Operator Instructions] Mr. Lucca Marquezini, Itaú BBA, you can ask your question.

About the competitive scenario. You were talking about the commercial policy for the company for the quarter. It was to decrease discounts and this impacted taking students in the average ticket. Where you are working now? Do you feel a similar movement from the competitors? Are they more aggressive or you are the only ones that are reducing discounts?

Lucca, thank you for the question. As we said before, when we devoted our -- we publicized our results, this is a positive scenario, especially for the in-person teaching. We are going to take up the average ticket again. And there is a matter also of students profile, and this is being done right. We reduced the marketing campaigns, but the intake of students are better. In-person students is more difficult to observe because we need more time. The discount for students comes in the beginning of the quarter. In online students, we issued to improve the average ticket, not only improving our mix. And we have an average ticket that has been increasing. And it has been increasing despite the reduction of the volume of marketing investment. And this mid- to long-term proof that our brands can have a great intake of students. And we tend to have a better average ticket of our students. And it will be better yet. Having reduction in the ticket would only regenerate a positive result in the margins, if the intake volume would be much larger than the percentage of overall tickets. And in general, this has not been going on.

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

Two questions. First is about the optimization plan. The plan hasn't presented an integral improvement, but you have a second round in the semester. But as for cost, how much have you captured on this thing on real estate, is it relevant? The second about PDD. How long do you see this higher number of having real estate being returned?

Lucas. I will answer the first one and my friend will say about the second one. The second round is relevant. It's a substantial return of real estate in some cities in the Northeast. There's another round going on in the north area, and we still need to finish this round in this last delivery on some units that we have up in the north.

Are you listening?

Yes, I listen. I think Rodrigo lost his connection. He's back.

Yes, I'm back. The original plan was to have BRL 40 million synergy per year. And this last round of deliveries of returning real estate. There is a change of culture being planted in the company. And up to the pandemic, the company was dedicated to the lower income market with cheaper resources, and this has been changing creditably. With more health care courses that has an average ticket -- higher average ticket, this real estate phase will be concluded in July. And there will be new waves with lower size, and we will tune in this culture of courses, and we will have more profitability, and we will remove courses with a lower demand. The discussion will be tied in the way the buildings are occupied. So profitability of a unit needs fine tuning according to the quality of the building occupation, according to the course occupying that building.

There are some effects to have a higher PDD on this level of adjustment that we had been doing in the -- over the last quarters. The first 1 is about the renegotiated titles that happened after the pandemic. In this period after the pandemic, we had great efforts to be able to work with the student base so that students could pay the courses at the time. The students after the pandemic are renegotiating these titles and this calibrated PDD for this -- in this default, this remaining default. In a way, there is this way of the digital learning that we have today compared to 2 years ago. This is a more sensitive product -- sensitive to price and they have more vision. So this also happens compared to online teaching. Credit impacted these dynamics as well. And all the discussion done around FIES, the scholarship program. And this happened from now back to 18 months. So when this flow is being adjusted, we have this PDD effort -- this higher PDD effort over the last 4 to 8 quarters. When we look ahead all this place to improve revenue, improve the average ticket, the quality of the pay student as well. We have been working hard to gain these students back and to work with the default students. The ones that are in debt with us for half a year, the tendencies to have an improved process regarding PDD, and we will be able to see improvement already in the second part of the year. When PDD presents an improvement with second part of the year, but we are not going to see the levels we saw in the past. We have a different reality today than we had 4 years ago. But the trend is to have an improvement in the second part of the year, lowering the percentage of PDD regarding the revenue.

Our next question comes from Mr. Marcelo Santos with JPMorgan.

I have two questions as well. First of all, you had a good intake in the in-person, but it could be better. I would like to know your views on the impact of social FIES in these dynamics. These changes in FIES will have a relevant impact on this? And the second question. The minimal number of students being present to university. How do you imagine the impact of these?

FIES is occupying about 60% of the spot. It represents 5% to 6% of our intake process. If it was successful, it would change to about 9% to 10% tops in our intake process. This would be the maximized amount on the FIES for an operation of our size, and they have 27.5% PDD. As the company's PDD is around 8% to 9% of the revenue, 27.5%, we are losing too much. They wouldn't be able to occupy spaces in the classrooms because it would not generate results. Optimizing FIES concept for us, they would have the concept of margin students. When this margin is covered, we will have more students in the classroom, even with a higher PDD. This would be compensated because it would pay all the fixed costs. This minimum presence in the online students this year, Secretary Head of presentation, we were there, and she talked about it. People discuss it a lot on what we could do but we haven't decided anything, especially the courses that form teachers, especially pedagogy. We would have 50% of students present. They maximize this in the best to prevent that the online courses would be transformed into res in-person ones, Loss still needed to evolve, Nothing is concrete now. There's a discussion in the Education Ministry about being present in the courses. How -- we see that legislation needs to be done.

If every player would follow this legislation, we wouldn't discuss about it. So we will have a big discussion, nothing is concrete. For us, we would change this meaningfully. Let us try to improve inspection and to improve the quality of the courses, especially the licentiate and pedagogy ones. But concrete. Other than the publication was done that they could demand 50% of the time being present in the course is nothing was solved now. The main discussion is discussion of the profile and quality of the courses being offered, but nothing concrete so far.

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

My question is to the strategy, clearly the base, bringing more premium students, there is a movement that we see being done by our competitors as well. How long do you see the effects on this space. When should we understand this new base? And the second question is following the next question on the legal spectrum. There is a frame for the discussion for that. Does the Education Ministry has a frame for the discussion.

Well, understand that this project to implement more on medicine health care. We have a few semesters to conclude that. We -- on the on-site students, we have a different participation. More than 60% of students are on health care students and online student size a little bit different because we see some is from other courses. This changed a little bit. Internet courses are going to be more complete in this way. We want to occupy our sites, our buildings. What we can say is that we still need 2 years to see this transition on our having more premises change. It's a long process because you have to see the seasonality. This -- we talk about 4.5 years season and internet courses, 3 years. Next year, this season, the pandemic students that we got during the pandemic years, they are going to be leaving our base. That is going to be very important for us to understand and see how it's going to be imaging. The enrollment in 2023-2024. We had a very substantial growth on the price and the most pressure on the ticket today is on the decisions we got on the pandemic and to the discounts we gave on the time. I thought I was able to answer your question. I hope I was able to help you.

And when you talk about the legal aspect, on Internet courses. We don't know when this is going to happen, the discussion. But we know -- we understand that the discussion on the Internet courses. It's a very deep conversation in Brazil, and it is going to have an impact on the offering of courses that are given through Internet. So when we have those changes in the legal frame, it is very important to understand which impact is going to have in the interior of Brazil, which has a very right range of courses that are not offered on those sites. And this was the Secretary of Education. They did the presentation showing how deep those Internet courses can go on the country side of Brazil, on those sites for Internet students, The majority of them, they are worried about -- their main concern is that the participation of those students on the country side, where on-site courses would not reach. This change can happen, but this cannot bring reduction of the benefits of those courses on the country side of Brazil. Mainly the majority of this causes, we're talking about education and pedagogy courses. So we have a deep discussion on the Ministry of Education, discussing a lot in health care students, law, psychology, if you can keep that on ERD. And how long this is going to get and the courses of health care and the discussion about pedagogy and how this framework is going to be. It is not easy to do. And is being deeply discussed. And we know that main concern is on the credit of the courses, how they are offered and the Ministry of Education is working based on that. But as we said, we don't know how long it is going to take for us to make a decision or to see how this is going to be this new framework.

Our next question comes from Mr. [indiscernible] from Citi.

Now I have some follow-ups on previous questions. When we talk about the optimization of infrastructure, as you said, BRL 40 million, it's only about this last year, there was -- should be delivered now in July or the whole work that was done before. That's the first detailing, I would like to have. And second, when you talk about discounts, you said it made put effort in reducing the discounts. I would like to know if this is going to happen in the next semesters or quarters or this was just this on the beginning of the year. These are my questions.

BRL 40 million is the whole sum is on the beginning of the project. Half of that we did last year. Delivering in June and December, new sites. What we saw in the first quarter here on a bigger margin we didn't have a bigger revenue growth because of discounts we gave at the beginning of the year for new enrollment. Because we have a very big event for the pressure they've taken on short term, but this increase on the margin of 3 points on this first quarter. This reflects this plan would be executed [indiscernible].

Let's give an example. If we see the line -- put in line of PDP, we had a margin even bigger. The last part of this plan has impact but very significant on the delivery, we're going to see this on the results on the third quarter and beyond, Complement is asked when we talk about BRL 40 million is just we got this on the first wave and on the third wave we are going to see, how we can see the result of this EUR 40 million that is going to be the part of the results on 2024. They're going to be part of the results now 2023-2024. But when I talk about the discounts, as you said, we are doing this big effort, putting this effort of recovery, our receivables beyond the year. We changed the base, this base that has default. This share of these people on the default that we had classification on the contract and not considering the discounts we gave on the enrollment. The discounts were not given the enrollment sometimes. They are not on the revenue, but we can see them on the PDP along deadline. But we see this PDP increasing. So we can say 30%, 40%, it make possible for receivables from the students. Some students are not more in the institution, and they're not paying. We're putting effort in working on these default students. And these values to recover as much as possible. We have this policy on discount on the values that we have opened, considering the liquid PDP for us to bring the most -- the biggest revenue possible. So we're going to see as well this year, a very big base on these discounts, on the enrollment and on the defaults to finish this base on 2024. We started that in the middle of 2023. And we -- until the middle of second semester, at the end of the year, you're going to see this. In 2025, this will be resolved. It depends how successful we're going to be on these activities that very recent judicializing the defaults and these are the toll we are using now. We're going to improve this process and we're going to see a shortage of these discounts.

[Operator Instructions] The Q&A session is with zoom. Let's give the word to Jânyo Diniz to make the final consideration about the company.

We'd like to thank everybody for being here to be part of this presentation. Our Department of Relationship with Investors can answer any questions you might have on the next stage. We would like to invite you to be part of this big movement on Ser Educacional is doing to help the victims of the flood, Rio Grande do Sul. If you see in the -- we have 6 million students helping a lot, collecting clothes, water and medicine. And all these things, we're going to send to Rio Grande do Sul to distribute that later. If you want to donate any money on social networks on Ser Educacional, we are showing the bank number, the PICs number where you can donate and we can buy clothes, water, medicine. And again, we would like to invite everybody to pray all of those who are suffering with this flood. Have a good day. Have a good weekend. We hope for you guys to get in touch with our Department of Relationship with Investors. Thank you.

The web conference from Ser Educacional is concluded. Thank you very much for your participation, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]