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 the second quarter 2024. This video conference is being recorded, and the replay can be seen on the company's website, ri.sereducacional.com. Presentation is also available for download. [Operator Instructions]. Before proceeding, I take this opportunity to reinforce that the forward-looking statements are based on the beliefs and assumptions of Ser Educacional's management and current information available to the company. These statements may involve risks and uncertainties as they relate to filter 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, industry and other factors could cause results to differ materially from those expressed in the respective forward-looking statements. The following are present in this video conference, Jânyo Diniz, CEO; João Aguiar, CFO; and Rodrigo Alves, IRO. I would like now to turn over the floor to Mr. Janyo Diniz, CEO of the company, who will start the presentation. Please, Mr. Janyo, you can proceed.

Hi, everyone, and thank you very much for participating in our results video conference for the second quarter 2024. Please go to Slide 4, where we present the main highlights. In Q2, we completed the 2024 fourth cycle and continue the work reported in Q1. We successfully attracted summer students, especially on our on-site courses, which allowed us important growth in the student base. Operating margins continued evolving well, signaling that we keep absorbing the synergies of our operational optimization plan. Compared to previous quarters, the biggest highlight on Q2 was the financial quality of the results with a significant increase in net operating cash generation, allowing us more reduction in our financial debt indicators. This way, once more, we are presenting numbers that show solid progress, allowing us to remain cautiously optimistic about the coming quarters, which we will present below. On Slide 5, where we present for the last time, our already traditional map of operational optimization plan, as we concluded in July, the last real estate plant deliveries, which will provide us the third wave of synergy generation from Q3 on, which will be relevant to help us continue increasing operating margins on the following 2 quarters. From now on, we will dedicate to relevant work on fine-tuning our operations, aiming at ongoing improved results with the efforts on increasingly improving our students' experience, optimizing the core offering and efficiency in our capital allocation. On Slide 6, you can see some numbers that show the operational optimization plan is generating consistent improvement in results. Note the expansion of the gross cash margin of more than 3% and the adjusted EBITDA margin of almost 3% points comparing with the first 2 quarters 2022, which was the period before this project started, consistently changing our company, achieving results that allowed us to be much more competitive. The good news is, these results do not yet encompass the third stage of the plan, giving us confidence that our strategy has regenerated positive results and that we will still have levers to continue improving our performance. This year is also relevant from a regulatory point of view, especially because of the favorable decision we received from ADC-81, which discussed the constitutionality of Article 3 of the mice medical ruling. As shown on Slide 7, this decision standardized the procedure to be adopted after the evolution of 30 administrative processes for the accreditation of new medical courses we have in progress with Ministry of Education. Since the Supreme Court decision, we currently have 360 new annual medical spots. Half of that through a favorable conclusion, through the Ministry of Education ordinance in 3 administrative processes and the other half to deal with decisions, which are still preliminary and not yet final. As a result, Ser Educacional increased its offer of medical course, places from 521 annual places in Q1 '23 to 881 annual places at the moment, representing an increase of 6% to 9% when comparing the 2 periods. On Slide 9, we show the operational results for the period which are results of the student intake. As you can see in hybrid courses, we closed the semester with an even better enrolment performance compared to Q1. This was mainly due to the delay FIES education financing program, which was delayed from Q1 to Q2. In digital courses funding, they dropped mainly due to the more competitive scenario in this market. On Slide 10, we present the quarterly comparison of our average ticket, which had a slight reduction compared to last year when we individually analyzed the offer modalities. The average hybrid education graduation ticket in Q2 '24 fell 1.2% compared to Q2 '23, mainly due to the discounts offered in the intake processes of previous campaigns and the increase in students prompt on-time payment, reflecting the reduction in the average ticket. These effects were partially offset by the increase in the average enrolment ticketing 24.1%, and the student enrolment increased for health courses. In digital courses, there was a drop in the average ticket because of increased discounts. That happened because of an enhanced commercial market competitiveness in the period. The average ticket overall increased by just over 3% as the share of hybrid learning. The total student base was higher. On Slide 11, we present the evolution of our student base, where we can see that hybrid teaching led to the organic growth of the total student base, even with the reduction in digital courses. Hybrid courses became more relevant to the total base, practically dividing our student base between hybrid and digital learning. Moving on to Slide 12. We present this base distributed by area of knowledge, showing an increase in participation in health courses. This is the result of our strategy of focusing on the core with highest average ticket and greatest competitive advantage due to our unique value proposition to students consisting of providing quality teaching for courses with high market demand with quality infrastructure through brands recognized by society in the job market at competitive prices in line with the market. These were my preliminary comments, and now I hand it over to our Financial Director, Joao de Aguiar, so he can comment on the quarter's results.

Thank you, Jânyo. On Slide 14, we present Q2 summary results. This quarter had consistent results even with a less robust gain in operational and financial margins. This happened because the main cost and expense optimization movements occurred in June of last year, and now we can compare them better. Now, I'd like to discuss the results quality with fewer adjustments of non-recurring effects, a significant improvement in our net profit, better regeneration operating cash and a reduction in financial leverage of net debt as I will present. On Slide 15, we note hybrid courses continue being more important in our results because of the operational adjustments we made which were concentrated in this type of offering. Another highlight is the regular contribution of digital courses, proving to be paramount for our company, along with the medical courses. This will be a new avenue of growth due to the new medical spots we have obtained recently. On Slide 16, we show the average period of account receivable, which improved slightly in Q2 due to the punctual student payment. It's worth noting that on Q2, even with a high nominal PDD, it has already showed a slight reduction as a percentage of net revenue. So, we are more confident that PDD increase cycle is maturing as we continue to absorb solid performance indicator. It will be possible for us to have less need for provisioning in the coming periods. These better dynamics of student punctuality can be more easily observed on Slide 17, which showed a solid improvement in cash generation and conversion of EBITDA into cash with an important increase of 35% in net cash generation comparing both periods. This is an important result because one of our objectives for '24. In addition to improving our operating and financial margin, we also aim at improving the quality of the results, especially on cash generation, which was achieved because of the implementation of new policies, re-enrolment and recovery of outstanding monthly fits. On Slide 18, we show another quarter of significant reduction in financial leverage in nominal debt. We started this project with a net debt EBITDA indicator of 2.68 in 2022 and now we have reached 1.93x. This is an important movement that is already being reflected in increased profitability as we have already observed this quarter. On Slide 19, we detail our CapEx, which had a forced to half of the year with more investment than we are used to making historically. This increase mainly refers to the award we carried out to finalize the return of real estate this semester especially to adapting spaces in Recife for our new administrative Centre, having new laboratories and creating digital content. With this work completed and less need for investments in content and laboratory for the second half of the year, we believe we will need to invest less and thus maintain our final investment level for the year closest to our history. These were my comments on the results, and now I hand it over to Jânyo so he can make his final considerations.

Thank you, Joao. And to conclude our presentation before opening for the Q&A, I believe this presentation summarizes well not only our recent evolution, the result of all the operational optimization efforts we have carried out in recent quarters. It also demonstrates that we are ready to continue our journey of profitable growth. We faced a new round of operational synergies and growth avenues to be captured in the coming quarters with the completion of the last stage of the operational optimization plan, which we achieved, including the growth of the hybrid courses student base and solid profitability of digital education. In addition, we have new levers for generating growth, including an increase in the annual vacancy base for recent authorized medical courses, combined with the organic growth of our undergraduate courses which will be very important for our future will help generate results. Cash, while strengthening our unique value proposition and students competitive and with the ability to maintain even expanded participation in the markets we operate in, we are focused on achieving our objectives for the year, preparing to enter 2025 with an even more organized company ready to continue growth in working with profitability and quality of teaching. These were my initial considerations, and we are available for our Q&A section.

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

I have 2. First, in the medical courses, what should we expect a ramping up in these courses? What do we start with, an entrance examination now? Would you have more spots now? How would you have the evolution of this growth level? The second question is, what are the main levers? I know you talked about it, but the third stage of the plan, this third cycle, what are the main levers that you should have a better margin?

Thank you for the question. As for medical courses, we had the 3 units. As the ruling of Ministry of Education, we have this for the beginning of our courses. We already have these 6 courses. This is ongoing. We expect now to have these courses of having all the spots done. Now, we wish to offer 60 spots every year with these 3 courses having the overall 180 spots. So, we are going to present 60 spots now. In Q1 2025, we will have the other 60 spots. To answer the second question, I think there are not 3 levels of results for the semester. The commercial process of the year was positive. This happens and how it's need process to winter intake, the rest of the year will also be positive as we observed in Q1 and Q2 in cash generation. The second lever is the additional spots for the medical courses. Every spot will be included in the entrance examination, and this will happen as increasing the revenue. The third is the delivery of the 2 real estate and we will help a lot to have a new wave of reduction and also the cost of it because they are indirect cost of our operations. So, I'd say these 3 opportunities are the greatest ones we have. The fourth component will be concluding winter student intake and we believe we are in the right path, and we are in the middle of this process, and this will corroborate the offer of the first semester.

In the student intake, you said you're in the middle of the process, and we will have a positive year, can we expect the results similar to the first 2 quarters?

The dynamic is a bit different. For us, digital courses are growing better. In-person courses are also positive. But I can say last year, we had been a strong comparison. This would be the second year in a row that would have a growth student intake of in-person courses. The 2 processes are going well. Digital one is better than in-person one, but we still have an important path to go to. The second week of August, we will start classes for the fresh student, the new students and we are going to have students for the funding FIES students and this will complement the second part of the process, but we show a trend that makes us comfortable because cash revenue generation is in the right path to acquire to get the results we expect.

Next question comes from Leandro Bastos from Citi.

There are 2 questions. On the ticket wise, you told us in the first semester, you saw more competitiveness. I would like to ask you what do you see on competitiveness for the cycle, both digital and in-person student and learning? The second about the medicine spots. Can you talk about the tickets for the regions? Have you been working on that?

About medical courses, it's very similar. The ticket is about almost BRL 10,000. As for the average ticket, it's going on at what was expected. It's a bit higher, but this hasn't been affecting the student intake. The student is taking good even comparing with the in-person courses student base of the first 2 quarters. Let me tell you something, the ticket has a component that is aligned with the improved PDD, which is about students paying on time. Students are using this campaign of ticket to pay on time. The more veteran students, which is our largest student base, this end up diminishing the average ticket, and this will end up masking our student intake. We are improving the intake of the students, and we are promoting this improvement on the average ticket. But this is a bit masked because it's kind of being offset. Because students are paying on time. Another point being masked by it is the improvement of our cost mix. We have increase on the health courses. So, improving health courses and improving intake, this makes us more helpful for now on being a lever of growth. However, this movement we saw in payment has been compensating negatively on one hand and improving our cash on the other.

Next question, Lucas Nagano Morgan Stanley.

We have 2 questions as well. First of all, about the medical courses. As I understood, you do not have problems to fill these spots and a regulatory point of view. Is there a risk to lose these spots because of the Supreme Court ruling? Are you having some time of special provisioning on that matter? The second question about PDD. PDD is stable on this quarter, but it's too high. When do you expect to start reducing the PDD?

Lucas, about the spots on medical courses, the classes started this week of the group that had already formed. If there are some changes about having a ruling about these credentials, the idea is to continue with our administrative provisioning with the ruling. But this doesn't mean the end of the process. As it is an administrative process that happens because of the judicial demand. We can continue this process and we can question some point that could be identified as inconsistencies because of a ruling. Meanwhile, the classes are on and these courses will generate social and local impacts. The idea is to keep with these rulings that are on in the Ministry of Education. We will continue our work on regulatory matters until its end and this can take some time. Negative ruling will finish these forces. We have some of them that are already accepted by the Ministry of Education. Thank you for the question. As for PDD, we are talking about it in the last 3 results meeting. PDD has been through an accommodation process as for the pandemics. That process during the pandemics of students negotiating their debt, students having problems in paying and this debt was being rolled out until the end of the pandemic and beginning of '23. When these debts are continuing 2 years, 3 years, we are having a worse PDD. We are having a higher level that we foresaw in this process of maturing the pandemic process. More and more I see because of the current behavior of students paying more on time, they are paying the negotiation of delayed tickets. We are asking students to pay, especially after the pandemics, we have a policy of negotiation more contingent. Students are paying more, and we have been working with the students that are finalizing their provisioning so that we can have the ticket paid and we are being more aggressive on that. Because of it, the PDD level with the percentage of revenue, the PDD will drop. I believe for the digital courses, they are strong in our student base but the courses have better quality. PDD dropping the percentage of revenue will be better. So, we have a more mature level with a high level. Now, we have been working on this drop and we will have more quality on our revenue.

On medical courses, do you have a plan of reparation if at the end, students cannot graduate because of these spots that could be denied?

As we told you, a part of the courses were accepted by Ministry of Education. In other words, have been working on the limits of law. There's no necessity of having legal reparation because of it. Even the worst of scenarios, this court order is denied, and we cannot retrieve this spot, the students would be transferred to another course because they are regularly enrolled in an institution that is legally authorized to operate. Eventually, if this court order is denied, they would be transferred. But we believe that our right, we have the right of working, and we believe it will be approved. We know that legal things have both sides, but today, to ratify it, we have been operating with every courses even the ones by court order and even the ones accepted by Ministry of Education, they have been operating within the law boundaries.

Next question comes from Phillip Mancio with Itaú BBA.

I have also 2 questions. First of all, in the market, we see improved marketing resources efforts, and we see more expenditures on that matter. Are you going to explore this strategy? Second question about evasion. We saw an improvement of 1.4% of evasion in a hybrid course. Can you comment on this reduction? Do you have a discount and negotiation for students? I would like to understand up to what point we are going to have in evasion of the students? It doesn't have impact on the base improvement but I would like to understand how you are dealing with that?

Philip, let me answer about marketing and Aguiar is going to talk about the evasion, okay? On marketing, we have worked from '22 to '23, very hard to organize our portfolio and re-organize our brand. We reduced some brands that had operations only on specific counties and we are using the more recognized brand in the regions. For the courses in the hybrid base, it offers basically the law course, humanity course and the other courses are health courses. We have changes in portfolio city by city, but this is the work we have achieved in in-person courses and the humanity courses that had lower tickets. They are offered digitally, and they have 30% of hours in-person. If you will observe the comparison of market expenses for revenue, between '22 and '23, we can notice a relevant drop and this is stabilized in the first Q. As for second Q, we have an increase, but it's not necessarily a market operation. It is a necessity that came from the delayed offer an FIES schedule. So, we need to have a campaign that is not usually in Q3 because of this FIES. We also had the credentials of courses in June. We had a specific campaign for these courses in the second quarter. This May does have a change in the level of marketing investment in Q2 that was a bit different in seasonality.

Thank you for the question, Philip. There's slight reduction in evasion. As PDD, I think this is a kind of accommodation of the market. We have a stricter policy of negotiation of the delay, and we saw that the students are paying more. We believe that this is an accommodation of the students that joined us more recently, and they have been trying to negotiate the debt and we are trying to collect more credit. So, in a way, we are considering the students that are paying better over the students that have been trying to negotiate without paying anything. This qualification in our student base will be developed for the second semester. I think it will be relevant in the Q1 next because the improvement of earnings on part of the student and the improvement of our economy. So, PDD will stabilize. This is what we see.

Next question, Mirela Oliveira, Bank of America.

Two follow-ups on our side. First of all, as for PDD, can you comment a bit on the first quarter, it has been stabilizing below 10%. Q2, we have seen a part of this improvement. Could you comment on the levels you see it will be stabilized at long term. The second one is for medical courses. How have you been dealing with the negative on court orders in Salvador and how long do you think this court orders, how long do they take to be solved and having a final solution?

Thank you for the question. We have been discussing the consolidation of the maturation process of PDD. As we have been discussing by the end of last year, our expectation that PDD will bring around 8% of the net revenue from now on. This is a level of slightly above what we used to make before the pandemics. But on a way, we have a higher participation in digital courses. We will have more default, we have more efforts to ask for a student to pay. But the course is with more added value, we are having a better payment on the students. So, the movement to reduce PDD as for revenue, we think it will be about 8% of net revenue of overall courses. We believe this accommodation will happen from the second semester, the following 3 Qs 2 in '24 and one in '25. Mirela, as for medical courses in Salvador, there are 2 paths to be following. We are on both of them. First of all, this is an administrative process. This appeal is an administrative one. And the second is legal, judicial one. We are going through 2 pets. We do not know when this is going to happen. But we are going to follow the proceedings, the legislation allows us to, administrative and judicial. In the medical courses, the ruling in Salvador was basically done because the Ministry of Education is following 2 pets. On judicial path, ministries considering the number of people on the court order. These 2 criteria has been discussed because this is a dual ruling. They said the court orders cannot affect the proceedings than before it. So, we have 2 processes, one administrative one, one judicial one. We expect to have a positive result. We need to see, wait and see what is going to happen and we cannot say when it's going to happen. It's unknown.

Next question comes from Caio Moscardini Santander.

I would like to understand whether the demand of social FIES, the social funding. Can you realize the kind of student if the students are more engaged or if they are going to evade? The second question about CapEx, it's very high in this quarter. I would like to understand how you would have a forecast as for CapEx in the future.

Caio, the social funding, the social FIES didn't have great attraction in the second quarter. We had a schedule of student intake that was delayed. It was late. It helped in the volume of the second quarter. We had a lower intake to have a clear view on how this program will behave. I'd say that only now in this half of the year, we will know better. It was a great delay we had on the schedule, and we couldn't realize the kind of the student we brought and how sustainable they will be here. When they joined the university, the classes were already on for quite some time and they aim at that not being adjusted to the program in the first half of the year.

Thank you, Caio. As for CapEx, there are 3 components. First of all, we have efforts to have every unit relating to these approvals ready for the second half of the year. We are basically talking about 7 units. They are already ready for that, so, we have 7 units with medical courses and the other ones, we are keeping the investment done to be able to support authorizations that may happen in the second half of the year. This movement of the medical courses, they are heavier on the CapEx. The second movement was an initiative, an important movement. We are going to deliver another beauty we are having the administrative Centre nearer for our main operation in Recife, in a different model, much more modern one and more compact as well. The teams are closer to each other, so this also brought this additional CapEx factor. The third is digital content. We have been finalizing our quarter, so we have a strong in investment in this organization. Moving forward, on the second half of the year, we are going back to levels according to our track record, 5%, 6% of the net revenue mix. We are not expecting big investments as for CapEx.

[Operator Instructions] The Q&A session is closed. We would like to give the floor to Mr. Jânyo Diniz to make the company's final remarks.

Thank you so much for being part of this results meeting. Our Investor Relations area is available to help you with further clarification. Thank you so much. Have a nice day.

Ser Educacional video conference is closed. We appreciate everyone's participation, and have a nice day.