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

Operational results in this period. Having the move the slide represent the operational results for the period with the main highlight being the growth of undergraduate enrollment in hybrid education, which increased by 11% and the digital education, which grew by 6%. This is a significant achievement, especially given our relatively strong comparison base from the last year when we also performed well. The strong student enrollment growth combined with positive reenrollment performance allow us to significantly expand our regulated education student base with 9% increase in hybrid education as shows in the chart on Slide 10. Moving to Slide 11. We show our average ticket, which also had solid performance this quarter due to the reduction of commission discounts for enrollment, increased participation of medical students and the implement of the Ser Solidario program, as previously mentioned. In Slide 12, we show the distribution of our student base by area of knowledge with another quarter of increased participation in health-related courses. Health courses now account for 64% of the total hybrid education base and 44% of the total student base. This was a strategic move over recent years, particularly through the reorganization of our course portfolio where we leverage our differentiated lab and clinic infrastructure to expand our offerings in this area of expertise, creating a beneficial environment for increasing our average ticket as these courses have a structurally higher price profile. These were my initial remarks. And now I'll hand over to João Aguiar to discuss the financial results.

Thank you, Jânyo, and hello to everyone present in our results event. Please go to Slide 14, where we present a summary of our financial results of the period. In line with Jânyo’s comments, we experienced solid revenue growth, primarily due to the organic growth achieved during the period of a combined effect of increased student base and strong average ticket pass-through. This was the main factor driving revenue growth supported by 2 other smaller impacted events this quarter, which will become more relevant next year. The new medical courses seats of semester and the implementation of Ser Solidade. Operating and financial margin showed a solid improvement due to the positive impact of increased revenue and benefits generated by operational optimization and plan implemented over the past 2 years, such as property divestment, reorganization, of course, offerings and brands and series of administrative optimizations, which we plan to continue. The combined effect of revenue growth and cost structure improvement led to an increase of the adjusted EBITDA margin by 3.6 percentage points and reversed this loss recording the third quarter of 2023 to an adjusted net margin of 3.5% this quarter. Slide 15, we present a waterfall chart that illustrates what I mentioned earlier, that our organic growth contributed over BRL 15 million to the quarterly results, representing BRL 58 million of our adjusted EBITDA increase. Meanwhile, new initiatives such as new medical seats contribute only BRL 5 million to our operating results and Ser Solidario added BRL 6 million. We consider this information positive because it not only demonstrates that we had positive results this quarter, but also indicates that we have new avenue for generating results that are still developing for the coming quarters. The new medical class we continue to accumulate and Ser Solidario program will only be fully implemented in 2025. In Slide 16, we present the results by segment and mode of offering. As you can see, since this is an odd number quarter, the results from our medical programs had to be large followed by distance learning, EAD and hybrid education, both of which continue to improve margins as we execute our optimization plan. Our new business segment saw high investment this quarter, primarily due to the continued education ecosystem. However, looking at the year-to-date figures, you can see that this segment is already on trend towards reduced negative results, gradually moving toward a position of financial autonomy in the coming years. In Slide 17, we present our average collection period, which remained stable this quarter compared to the last 6 years. This is a positive trend, especially since reenrollments were strong semester and our PDD for account provision has decreased a percent of net revenue from 10.7% in the third quarter of 2023 to 9.7% this quarter. On Slide 18, we present operational cash run rate, which was very positive this quarter due to improvement on time payment by our students, along with the receipt of the second tranche of the sale of the loan portfolio, PraValer, netting BRL 12.9 million and higher fees received during this period. As a result, we had an adjusted EBITDA to cash conversion rate of 91% or 54% post CapEx, a very healthy rate that reflects the actions we are taking to improve the quality of our operations, not only from operational standpoint, but also financially and enhancing cash generation. Consequently, our debt level continues to decline as does our financial leverage ratio, which we consider well addressed. We are generating sufficient cash flow to organically reduce our debt through our operations, which will allow us to adjust our capital structure to navigate this period of high interest rates in Brazil. To conclude our remarks on this quarter results before handing it over to Jânyo for closing comments, we have the CapEx slide. Our CapEx showed the increase compared to the same period last year, mainly because this quarter, we completed projects related to property returns as part of our optimization plan and made improvements in units which existing medical programs, especially in polyclinics that were completed this quarter.

Thank you. To wrap up our presentation before we open for Q&A. I believe that this quarter results reflect the consolidation of our operational optimization plan and set the stage for a new cycle of growth for the company with a young student base relatively concentrated in 2 strong years of enrollment, indicating a growth trend in the coming years with better compliance rates within a leaner, more dynamic structure. In this cycle, we will have new avenues of generating results such as the recent increase in our medical course seats and the successful implementation of Ser Solidario along with a greater maturity of our new business added to our ecosystem. In this regard, we are making consistent progress towards 2024 goals as described in the slide, showing solid improvements in cash generation, reduction on the debt ratios and which a more robust operation ready to grow with more adequate profitability indicators. Going forward, we are increasingly focused on enhancing our unique value proposition for students, which consists of providing quality education for higher demand courses offered in prime locations with quality infrastructure throughout brands recognized by society and the job market at competitive prices aligned with the market. As a result, we will continue working to present each quarter a company increasingly optimized in operational and financial terms with a year ever improving experience with our continued education ecosystem evolving and contributing more decisively to the success of our students and consequently, our faculty, employees and shareholders. These were my initial remarks, and we are now open for Q&A session.

[Operator Instructions]. Our first question comes from Lucas Nagano.

I have 2 questions. First, I'd like to ask a few points about Ser Solidario. How do you do the commerce? It's the option where they choose it or that's by definition applied on the month the students are coming. How do you come for this provision of 33%? And if the students start paying the installments, how is the marginal impact of evasion having an increment of the revenue? The second question is about the medicine courses approved by judicial term. We consider that eventually, they need the recognition for the students to be able to act on the professional. What are the steps being committed now to reach that?

Lucas, I'm going to answer the first question of your -- and then I give 2 to Aguiar to answer it and Jânyo to answer later about the judicial issues. Ser Solidario, it substitutes discounts on enrollment. The students don’t have enrollment discount. They can opt for paying without discount or do the installment system. This is the model we were working with. The difference that we had great results, the program in practice, especially because the competition of new students, the program would not be an issue. The process of capitation itself, believing Ser Solidario would be this transition didn't have no pushback on this point. And Aguiar is going to answer about...

The students don't have the option to choose or not Ser Solidario. In the enrollment of the student, that's the only option. They only can opt for the installment or not. When you start doing this PDB in this step, we take it as a base our credit, the credit going to issuing last year, which was -- there was a higher risk because of the financing aspect of that with this spread was doing, and we opt to keep the same level, maybe a little bit higher. The loss -- when we sold our portfolio of credit PraValer, a higher portfolio at the cred. And we have this history of absolute being a product that is going to be been coming on the bills normally with the monthly rate that starts on the -- when they start with Ser Solidario, I believe that the PDD is going to be much smaller at the initial percentage that we put here. But the history, we want to be conservative using the information we have already a similar data we had according to it. And about the evasion, thinking that the students, they start with us, the same bill, monthly bill that is paid by the students understand that it is not going to impact the indicators of evasion more than the financial perspective that we face in Brazil now. We have a very positive expectative for that.

Lucas, and to medicine, if the impact of judicial question, the courses start with a judicial decision where the students are covered by any eventual future problem. Our lawyers, they believe that we have the right to understand what's happening here. As we're saying, our lawyers believe that we have the right. And the decision has been very positive for us, the judicial decision. But we have the solicitation. We have the administrational resources in judicial moving forward. And we think the return is going to be positive.

Our next question comes from Lucca Marquezini from Itaú BBA. I believe he's having some issues. Let's go to the next question. [indiscernible] from JPMorgan.

I have 2 questions. First, I would like to know an update on the competitive environment of EAD and distance learning and what you expect in 2024, the margin dynamics? And the second question is that you mentioned in the release that the situation of the education of the students improved on distance education. Which were the impact that you could see in that perspective? And what do you think is going to happen on the segment in 2025, if you want to apply Ser Solidario to distance education?

Thanks for your question. I'm going to talk about the competitive environment on distance education. The competition is starting now. So, in the beginning of these steps, in this moment, it's still too early to say how this is going to behave as the process of enrollment of 2024 finishing October. We start the process now, and we are going through the Black Friday. Our process of cooperation is always with the same period of the previous year to understand that. The competitive is active as it has been in the last years. It's a very competitive enrollment, but the capitation of this first enrollment has been very good.

Let's do update on this comment on financial situation of the students. At the end of last year, we had some internal decision where we want to qualify our revenue and qualify our receivables. At the beginning of the year, operating is more restrictive policies for discount or financial negotiation when there is a default by students on the receivables. With a higher policy we were very successful in the long-term default students as well. We changed the default policies for those long-term default students, and we could see improvement when we go to look at the base, we see our discount margin, what we see of increase now, we see a punctuality of the payments, what the base, students that pay better, they interact better with the they study better, they’re more committed to study. And this has an impact on our revenue, even reducing the discounts increasing the average revenue ticket, we have a better performance on the payment levels of the students. And this shows in our on-site students also long-distance students, showing the journey of the students in the digital platform of education. On Ser Solidario, we don't have this perspective of the first bills of the faculty. We have just here installment plan. So, no discount on the first bills and Ser educational doesn't apply to hybrid education.

Our next questions come from Renan Prata from Citi.

First question, on PDD, you talked that excluding Ser Solidario, PDD has a nominal reduction of 6%, getting to very close to the net revenue. Again, excluding this PDD of Ser Solidario, this is going to be the new level? That's the first question. And second question, I would like to know as the new business are improving the negative EBITDA, I would like to understand if there is a perspective of breakeven or we can wait for that in 2025 or this should be a long-term tendency. These are my questions.

Renan, I'm going to answer the first, Aguiar to initiate the rest. PDD, as we said, since last year, we were reestablishing this level of PDD that is above what we are practicing on the previous periods. We did an adjustment of our calculus adjustment, the same term and at the time of this proposal, we had a recovery time on PDD, what had a great impact in our operation with a lower PDD. Following with that, establishing new parameters, new standards, indicators of default, we could see that the PDD would in a level of 8.9%, 9.2% of the net revenue. This standard for us is healthy for our student base and our revenue base. With all these improvements that we're doing, as I answer to Livia on the qualification of the revenue and qualification of the collecting of those bills, those receivables this PDD and obviously, the implement of the revenue from medicine with a lower PDD on hybrid education, we can have here a percentage, lower percent of PDD long term. But today, considering the operation as it is, I think that we are close to 9% of the net revenue is very fair, makes sense on addition of our business plan.

Commenting on the new business idea is of PDD. We have inside of new business, lots of investments on what we understand that education, this tends to have a lower margin. We understand that this is still in a level of burning the cash balance. But in the next 2 years, we want to reduce this necessity have a positive result on this period. But this new business, they should develop according to the market as a whole. And that's we are going to see if this investment on education for the future bring more results.

Next question from Lucca Marquezini from Itaú BBA.

I had a problem with the audio, but I would like to ask, improvement on this PDD question, the standard of cost of HR is going to be the recurring level of costs.

We see this implementation of our academic model. This brings the reduction of the cost of HR and the cost according to the classrooms that has this big difference on the improvement of our operational indicators. I see it stay in this final plan of implementation in this period where the cost in the next 5 years is going to have a big impact and it's going to stay here, this PDCA running on our academic model according to see the average cost, every company goes through that. We're still going through this period where we are related to this cost. We have to fit this according to these parameters that we are analyzing and are improving now.

We have a question from Thiago.

The question is from explore more the possibilities of inorganic growth and M&As.

Thank you, Thiago, for your question. I think our focus now is to implement reduction of our leverage level, and generate cash flow and the leverage level generate to us a better position of profitability. This cycle is going to be complete. This is our focus after this reduction of leverage of debt, we're going to pay dividends. Health company should pay dividends, recurring dividends payment and it doesn't interfere on the level of leverage short term. This is our focus now and not really on merger and acquisitions. We always attend to that, but that's not our focus now. We are focusing on running our business and reduce our debt.

[Operator Instructions]. Having no more questions, we close our session. I would like to give the floor now to Mr. Jânyo Diniz to conclude and present a final conclusion for the company.

Thank you, everybody, for joining our earnings presentation. Our Investor Relations department is available to assist you with further clarifications.

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