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

Good morning, everybody. Welcome to our video conference from Ser Educacional to talk about the results referring to the First Quarter of 2025. This web conference is being recorded, and you can rewatch it on the website of the company, ri.sereducacional.com. This presentation is also available for download. [Operator Instructions] Before we start, I would like to reinforce the declarations here as the based beliefs of Ser Educacional, taking consideration about informations about the market. This may include uncertainties and macroeconomical tendencies, which may occur or not. Investors, analysts and journalists should take in consideration that events connected to macroeconomical, the segment and other factors may influence results influencing it in different ways. Taking the prospective considerations into consideration. We're going to have today Janyo Diniz, CEO; Joao Aguiar, CFO; and Rodrigo Alves, IRO. I would like now to give the floor to Janyo Diniz, CEO of the company, who is going to start the presentation. Please, Mr. Janyo, you can start.

Good morning, everybody, and thank you for joining us at the event to announce the results for the first quarter of 2025. Considering, as you may have noticed, the material we published last night, the results in the last quarter were very positive with the highlight being the growth of more than 16% in sales intake in hybrid education, marking our consecutive years of uninterrupted growth. Likewise, the students base in the category also grew by 15% compared to the first quarter of 2024, surpassing the historic mark of 185,000 students. This operational growth was reflecting the important financial results achieved during this period. We recorded the highest adjusted EBITDA and the highest net operation cash generation post CapEx since our IPO. This quarter adjusted EBITDA margin is the highest since the first quarter of 2017 when we had a similar base of FIES students, a program that today represents less than 4% of our total undergraduate students base. These record results are significant, not only because of the numbers, but because in our view, they change the company's level of value in the market. The results demonstrate that we have managed to create our operating leverage such that the additional revenues generated this year are largely converting into increased nominal EBITDA and profit, which is the main conclusion we draw from this quarter results. This phenomenon is most clearly illustrated in the 2 graphs shown on Slide 5. The first graph shows our success in consistently increasing the number of undergraduate students per on-campus unit, reaching a level of almost 3,000 students per campus, given that we have had 5 new campuses in operation for less than 24 months. At the same time, we have managed to significantly reduce our financial leverage to 1.35x net debt to adjusted EBITDA, bringing us ever closer to our goal of achieving adequate financial deleveraging, especially in a scenario of high interest rates. As a result, solid profit generation, our main revenue training, classroom teaching, which has recovered the operational efficiency promised to the market with high occupancy rate for buildings and classrooms. In addition, we maintain a robust cash generation in digital education business. Since last year, we have gained a significant portfolio of places, courses positioning us as one of the main players in the market with a large number of places available in this area classrooms. As well on Slide 6, in our new position over the last 12 months has included an additional 480 new medical places, 360 of which came from Ordinance issued by the Ministry of Education MEC and 120 from court injunctions, which have not yet become final. They highlight 2 relevant this quarter. Firstly, the accreditation of the course in Maracanau authorized at the end of March, which began the class in April with a full class. Secondly, we saw solid demand for our vacancies in the recruitment process, resulting not only in the vacancies offered being filled, but also robust average ticket for the current year, we utilized more later. We currently offer [ 1,000 place ] 92% compared to the first quarter of 2024, contributing significantly to the quarter's results and allowing us for continued revenue growth as places mature over the next 5 years. We emphasize that we are still waiting for the approval of a further 106 places this year through request for increase in places and injunctions as well as expect new accreditations among the 21 proposed via the Mais Medicos 3 public notice, which are waiting to release of results by the MEC. Certification therefore, reinforces its relevance as a trainer of doctors in account that lacks professionals in this area, especially in the North and Northeast regions we operate. Our course received 100% satisfactory evaluations within med for established courses in grades 4 or 5 in the accreditation visits for new courses in the last 12 months. Speaking of quality in Slide 7, we present an important update on the subject based on the data released last month by INEP on the 2023, which mainly assess course in the health area. It was a cycle of significant achievements for us with the expansion of our range of courses in this area, we saw a 53% increase in the number of courses assessed. We managed to maintain a high rate of courses with successful evaluations compared to the previous period, also remembering that the 2023 harvest was one of the most impacted by COVID and achieved an IDD student development indicator for 2.2 for hybrid teaching, which probably represents the best indicator for effective learning among the companies listed. We believe that we are moving in the right direction, and we believe that we are high track with the unique value proposition. This proposal combined strongly recognized brands and modern high-quality academic model which is Ubiqua, with privileged location and external infrastructure in our education institutions as well offering courses in high demand competencies. With these results, we will continue to improve our academic model, looking for lot of innovative ways to increase our students' ability to learn, thus perpetuating our value generation of our education institutions and reinforcing our value proposition for students. Moving on the quarter results. Let's go to Slide 9, where we present the students intake data for the first quarter of the year. As you can see from the figures on the slide, we had a solid increase in the intake of hybrid education students, which resulted in a significant increase in the overall intake of undergraduate students for the fourth consecutive year, as I mentioned in my initial comments. This growth was partially offset by a reduction in digital teaching, which was to be expected, considering that the academic model faced intense competition in the market with price below those we are currently practicing. However, in hybrid education, we are not only saw demand, but also more favorable pricing behavior in the market. This allowed us to successfully implement the Ser Solidario program throughout the funding cycle as well by applying an interesting price adjustment for both new students and veterans. Please let's go to Slide 10, where we detail the growth of our student base. Thanks to solid growth in hybrid undergraduate students intake combined with an excellent reenrollment season, we were able to expand our total undergraduate students base by 10%. We would highlight the 15% growth in the hybrid student base, excluding the medical course compared to the 2 periods as well as a 26% increase in the medical course student base due to the addition of the new places mentioned above. This significant result has allowed us to resume occupancy on all our buildings and classrooms, demonstrating our ability to recover operating leverage. This translated into more expressive margin increases as seen in the quarter results. On Slide 15 (sic) [ 11 ] we show the present evolution of students base by area of knowledge, which continues to reflect our strategy of focusing on offering courses in the areas of health and law, which are courses with greater demand in the market and provide a higher average ticket. This year, we reached the mark of 64% of hybrid education students enrolled in health course and 45% of the total student base. This movement, which began a few years ago, is now generating the expected results, reinforcing our operational resilience. This resilience is due not only to the area in which we operate, but also the fact that we have a significant proportion of students in the first 2 years of the course, the result of consistent growth in students intake and student base over the last 4 years. In Slide 12, we present the evolution of the average ticket, which is mentioned earlier, benefited from the focus on health courses. The expansion of places on the medical course and the favorable economical environment. We would highlight a 20% increase in the average ticket for the medicine course is mainly due to the fact that courses accredited in the last 12 months have a higher average ticket than legacy courses due to the higher prices in markets in which they were accredited. In hybrid education, the growth in the average ticket was mainly driven by the Ser Solidario program, which Aguiar will detail later, along with the price adjustment for inflation. This growth was partially offset by punctuality discounts as more students are paying by the FIES as well as an increase in PROUNI students. These factors together with the reduction in the distance learning students base contribute to an increase in our overall average ticket during the period. This result has provided very positive as Joao Aguiar, our CFO, will now present.

Thank you, Janyo. Hello, everyone. And once again, thank you for attending our results conference. In Slide 14, we present net revenue for the quarter. The growth in the students base and the average ticket as dictated by Janyo enabled us to achieve substantial revenue growth of 20%. This is a significant result for the period without considering the effect of the Ser Solidario program still have had a growth of around 15%. This shows that even like-for-like basis, the organic growth of student base, especially in the medical course was the main driver of the increase in net revenue. Slide 15, we present our adjusted IFRS EBITDA as well as adjusted EBITDA, including nonrecurring effects such as interest income from tuition fees and minimum rent paid, with the traditional report. As highlighted by Janyo, these were recorded for first quarter since our IPO. As you can see from the graph, the results were very positive for the period. These results were achieved not only by the positive intake on reenrollment cycle in the quarter and the expansion of medical places, but also by the success of real operational turnaround carried out over the last few years. This has included solid cost control, difficult decisions such as the return of the capital of the summer. This allow us this to reserve the rate control cost expenses, enabling us to expand our margins in these quarter. This quality of results, not only with the cycle of decapitation students, but the success of this turnaround operation enabling us to expand our margins. This includes solid cost control like the given back of real estate optimization of portfolio of costs, reposition of brands and many other programs we implemented this last 3 years. And this implemented exciting quarter with a cost structure, very controlled possibly the expansion of brands. On Slide 16, we show the presentation details of Ser Solidario program. As you can see, it was being made available to hybrid undergraduate students, the exception of government programs, PROUNI and FIES and the medicine course. As shown in this table, Ser Solidario replaces the tuition discount we offered last year, introducing the installment payment of the tuition fee and the actual tuition fee at the end of the course. In implementing [indiscernible] in the economic terms, we recognized BRL 23 million in additional net revenue and BRL 14 million of adjusted EBITDA for the quarter after AVB and PDD adjustments. This was crucial to increase operational cash generation in the medium-term as well as make our results healthier and more consistent following the successful implementation. Now moving on to Slide 17, we present our net profit and adjusted net profit, excluding nonrecurring items. As you can see from the graphs, not only did we reverse the accounting loss into profit, but we had also a quarter with a low impact from nonrecurring effect. This reflects that we said at the conference in March about the fourth quarter results. In addition to demonstrating the effects of the operational optimization process we completed last year, we were able to present results with a lower incidence of nonrecurring adjustments and increase our operating cash generation. Another important point in relation to accounting and adjusted net income is the net margins, which were quite significant. This is all the more relevant considering that despite the improvement, we still have fully achieved our goals of reducing financial leverage. On Slide 18, we present our net operating cash generation and post CapEx, which, as we can see, showed significant growth this quarter. This set another record for the period in nominal terms since our EPO was materializing a solid improvement in the year converting of EBITDA in cash compared to previous year. Improvement in results reflects not only the turnaround process that we have discussed extensively on this call, but also an important improvement in the punctuality of student payments that we have observed since 2023. This improvement in our students' ability to pay is linked to the favorable economic dynamics in the market in which we operate as well as a series of measures we implement to improve the collection of renegotiation process with students, this has contributed consider to improve our cash generation, while at the same time, we have reduced the discounts granted to defaulting students without any major impact on the enrollment, reenrollment process. This is an important result that we have achieved and which is helping us decisively to achieve our goals of reducing debt and financial leverage. The improvement in our management of credit operation is reflecting in our PMR, which even with the implementation of Ser Solidario program in the quarter, which in theory would increase the relative size of our accounts receivable on the balance sheet had the opposite effect. This is mainly due to the improvement of the punctuality of tuition payments. As a result, both our PMR, our PMR ex-FIES showed another part of decline, a part observed since the first quarter of 2022, as shown in the graph, even with the introduction of Ser Solidario which begins installment program would naturally increase our PMR. This shows that the company is on the right track, increasing its operational efficiency, generating cash and maintaining adequate provisional for losses. With that, we move to Slide 21, which highlights the substantial reduction in our debt and financial leverage this quarter. We are getting closer and closer to achieving our deleveraging goal. And after reaching these targets, it will be possible to increase the payment of dividends to our shareholders. This payment was already being resumed this year with the amount of BRL 90 million of scheduled for May 16. We are very confident in the execution of our plan and are consistently managing to reduce our financial liabilities this quarter-on-quarter, consolidating our position as one of the least leveraged companies in the sector at this moment. And before concluding our comments as we have the results where we show our evolution of CapEx, which fell this year compared to last year. This reduction was due to what I believe to be a one-off effect since we had a gap between the works carried out last year and the start of work, especially the expansion of the both [indiscernible] with the implementation of health laboratories to the maturing of new courses in the area of knowledge, which are scheduled for 2025. Those were my comments, and now I'll give the floor back to Mr. Janyo to make his final remarks before the question-and-answer session, the Q&A session.

Thank you, Mr. Joao. We now move on Slide 23, which is the last slide in this presentation. After having updated you on our new mission, vision and values in the March conference call, this slide summarizes our strategic objectives, which also have been updated in line with the achievements of recent years, such as the successful implementation of operational optimization plan and the expansion of our medical school places base. We are entering a new growth cycle where it will be crucial to maintain operational and financial discipline. At the same time, we have resumed organic growth achieved, especially in higher education with the opening of 5 new units between last year and this year. We will continue to focus on markets we know. Our goal is to maintain a lean course portfolio with emphasis on health courses, expanding our unique value proposition for our students. We will invest in the best experience for our students, developing our continuing education ecosystem in courses that are high demand in the market. Finally, we will continue to expand our base of places of medical courses with injunctions still being processed for approval and the expectation of receiving more places through the Mais Med 3 program. This will maintain a solid strategy focus on a gradual and well-controlled expansion of our offer in new markets without losing focus on generating cash and reducing financial indebtedness. In this way, we aim to make our company increasingly profitable offering quality education in a sustainable way and generating value for Brazilian society, stakeholders and society. Thank you very much. Now available for Q&A session.

[Operator Instructions] Our first question comes from Mrs. Mirela Oliveira from Bank of America.

I have 2 questions. First, about the [indiscernible] medicine courses, we saw growth in this quarter. Could you comment on the strategy, on the courses we have already, it is a stride of repositioning in the market, repositioning of the brands or focusing specific brand. I would like to understand more this movement. And the second question is about the competitive landscape. If you could comment on what you can see on long distance teaching and on-site students, if you see the strong demand after this first quarter, what do you think is helping you on the enrollment of new students?

Thank you, Mirela. I'm going to talk about the medicine ticket and Janyo is going to talk about the competitive landscape. What happened with us is that when we started with the courses on the new market, these markets had already average ticket that was higher than the markets we are already present. So the more -- the biggest part of the increase of ticket was offering new markets with a higher ticket. When we go to tickets that we operate, there are 2 movements that we consider important. First, the movement of maturation of the basis, more students going to the sixth period of the year with an increase of more practical classes, you have to increase the price of the course 20% with more practical lessons. And there is a reposition of price in some markets we operate, especially big markets like SEER3. With that, we generated this increase of the average ticket, but the most part of that was we starting new markets where we had a higher ticket. And we had already 2 harvest on those markets. Comparing that, they have a big impact on the average ticket.

And about the competitive landscape, Mirela, on-site is already very competitive and more controlled on price, and we were able to cover the inflation in all those courses, and we still have a great demand as with the new courses. And long distance Internet studies, it's very competitive, and we believe it's going to stay like that. When people don't know how the guidelines for the long distance students, we think we're going to stay like that. The market is more centric on the courses -- hybrid courses and on-site. But long distance courses, they still have this effect.

Our next question comes from Mr. Mauricio Cepeda from Morgan Stanley.

Talk about courses, if you see there was the biggest leverage on the margin increase. We would like to understand this benefit was only the leverage -- operational leverage or the mix that is coming from medicine courses. And talking about medicine on the cost of medicine courses, how do you see the ramp -- the leveraging medicine courses, there is the -- we have increase of revenue, but we're going to have an increase of costs. What do you see can happen there with maturing of medicine courses in relation to revenue and cost? And second question is about the intake of students. We saw increase in intake of students. I would like to understand if it was homogeneous around Brazil, if this has to do on you opening new campuses. How much would be the organic growth comparing the old campus, and the effect of the new campuses?

Thank you, Mauricio, for your questions. Let's talk about the margin and revenue and cost margin. This is a long-term work. We are focused on that and we started to make this [indiscernible] '23. And this comes from 3 main items. The main points are delivering -- giving back the real estate where you use more the real estate we have recapped. So we lower costs, giving back those real estate, we're not using totality, impacting a lot our cost in ranking and costs that come with the real estate, cleaning, finance, taxes and so on. And second point is the incession of Ubiqua on those parts of all levels of our teaching. Ubiqua brings the reduction of costs with teachers, the interaction of digital learning, distance learning and on-site learning. This reformulation of our systems brought lots of increase in revenue. And more and more, we look at the structure of back office, understand which would be the best structure for process, routines, automatization, people to provide the rentability of courses delivering the quality studies for our students and we focus on 3 pillars. The other point on medicine courses every new medicine course has lower cost because in the beginning, you have more theoretical lessons, lectures in the end with the progression of the course, you start using more labs, you have more costs on structure. And then averaging these costs in 50 years, you have a change of 50% on the cost. On this cost, the new courses in the process of the increasing of medicine courses, there is a component, what is the 10% of the revenue you have to give back for the municipalities, which lowers this final margin we have on the medicine course. Like in practice, this is a very strong margin. And we're not going to have increment of the costs looking on the new structure that we're able to install on new student places. I believe that we're going to keep a very good margin of revenue costs that we have already related -- we had a very uniform growth. On only a few points we -- on this management, we were more conservative on price. So we are following the market to see this development. The whole market in those units we opened, they're not relevant yet on capital -- on new implement. This growth, Marcelo, sorry, Mauricio was done on our units we had already. The new units, they have a very low impact on our revenue increase. A new unit we opened went really well. The other ones, they were -- they have a conservative growth. So they are not impacting our results.

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

I have 2 questions. First, Ser Solidario, there was the first quarter where you had this program as a full. I would like to understand what's the size of this program. Looking ahead, do you think this is still possible to increase this program on a certain base? And then I would like to have a follow-up on the last question on the cost aspects. One of the main drivers of reducing costs was giving back real estate. Looking at you can still give back more real estate, reducing costs on rent or how, this will be our questions.

Lucca, I'm going to answer the first question, Joao Aguiar is going to answer the second. Ser Solidario impact 80% of our enrollment base. That is our maximum result because students from PROUNI and FIES, they don't have Ser Solidario, there are more or less this 20% of students on medicine courses. From now on and ahead, Ser Solidario is going to have the same size.

To talk about real estate, we still have a less route, but it's not going to be very relevant. Obviously, we need to be observing new possibilities to restructure our real estate and occupation of space, new negotiations on our rents we have. We are paying attention to that to our real estate. But what we still have to do, we still have things to do, but they're not going to impact in a great way our results. About the costs that we are talking about. We go through steps. We do the first adjustment where then we go trickle down until we have this panorama we're going to improve parameters. But in our view, we're going to be always looking at this perspective on efficiency on cost on every unit also on back office. This context on new improvements on course will be always part of our management. It's going to be always part of results, but we already advanced a lot in this aspect.

Our next questions come from Mr. Marcelo Santos from JPMorgan.

First question is I'd like to go deeper on discussion of our friends on costs, looking at gross margin. We have the restructure of back office in Ubiqua and real estate. I would like to understand more. When you look at the revenue, we had a great increase and the cost increased very little. This due to the time or the level of cost, I think this would be -- we stop there reducing costs, but I would like to understand how do you improve the costs and what could be the effects there? And for Joao, when you get into your level of leverage, the dividends could be improved. How is that going to work?

I'm going to answer the first question, and Joao answer the second. A part of the increase of gross margin that's permanent that this increase of courses, a part is about time, that a big part of this quarter, didn't have lectures. So a big part of the cost now from -- we don't pay that on the first quarter is the effect of expansion of margin that we have the revenue of Ser Solidario. The other side, the maintenance of our cost structure that's a period of less prices. So this is an impact on that. This change seasonality is permanent. So we have to think that second quarter and third -- fourth quarter, we don't have this expansion, this increase of margin on the quarter.

On the fourth quarter, comparing all of that, we can have this clearly. We have some seasonal aspects on the quarters and the other quarters, it's permanent because we have to consider the semester perspective on the cycle of teachings. Complementing this point, when you have a growth of the enrollment of students you keep this growth during the whole course, this is also very positive aspect. And having a health student base on the first and second year of the course is a result, as we said, on our enrollment, we are increasing our rate of enrollment, since the worst moment we have in the pandemic. This increase year-after-year, we have better revenue and this accumulates with time. This is also a very positive point on our students base, it carries this out through the whole course.

About leverage, when we are at the spirit of more leveraging -- financial leveraging, 2019, 2022, we commented that the health leverage is this financial leverage 1% and 1.2%, maybe 3%. But we're going to be passive there we want to be done with EBITDA. When we talk about health leveraging, financial leveraging, we have to look at where this leverage, short, medium or long-term. So our leverage -- financial leverage is very healthy because it's only 0.3% of our EBITDA. But this is also long-term and our goal is that.

Our next question comes from Mr. Renan Prata from Citi.

I have a quick question on the cash generation -- operational cash generation. How you see the generation of operational cash for the year. On this quarter, we had a big step on deleveraging on net debt. Then on CapEx, as Aguiar said, we have a reduction on this quarter. I would like to understand what you expect for the year on the CapEx?

Well, when we talk about operational cash generation, what we do is our enrollment is improving even with Ser Solidario. Ser Solidario promotes cash generation in medium and long-term, but you have the instance of the students that pay our courses. We have improvement of our payment process and default process in students service process. These changes have a very positive impact on the operational cash. And today, we can bring students that in the past we were not able to pay on time. They're going to be back only to do negotiations on the next. Today, we have students are coming earlier, and we have the opportunity for them to pay this fees in better ways for the student and for us. This is one of the reasons where our average ticket doesn't show elasticity. This brings average results. But this brings very good impact on our operational cash generation. In this process of turnaround, this generates impact on everything we do on payment models buying -- our process of buying procurement process and this brings impact strongly on our operational cash generation. And the value of our gross debt and with less real estate occupation, we reduced costs impacting our operational cash generation. For the year, we hope for -- we have to look at many macroeconomic aspects debentures and we did 2, 3 years ago. They're going to impact at the end of this year and next year, but I take the seasonality and those macroeconomic aspects, I think we have this operational cash generation strong impact on the reduction of financial leverage. Our CapEx every year have the review even with the initial planning, you have our building sites that you're going to consider this, the review when start those building sites and how they impact the enrollment possibilities. So we got this beginning of building sites in the beginning of 2025. We have to see how this is going to impact our enrollment and how we would redirect these building sites. We would start in January, and we're going to start this later. As I commented in the results I understand that for the year, we're going to keep our CapEx in a very good level as we were able to demonstrate the effort we had last year on the medicine course we're going to keep our CapEx. There's very good historic results, taking consideration the improvements we have done on our real estate and the structure we have to deliver for our students through the journey they have in our institutions.

The next questions comes from Mr. Samuel Alves from BTG Pactual.

Two questions. I would like to have a follow-up on the medicine ticket. Could you tell us what's the range ticket on medicine courses from the lower to the highest ticket? That's the first question. The second question is about the allocation of capital in M&A. Joao comment that you have the goal on financial leverage, the company reaching this level -- this better level on financial leveraging. How do you see the appetite on M&A in medicine? How do you see the space for merger and acquisitions in this sense?

About the medicine ticket. We have 3 points that are very important to be talked about. First of all, at the beginning of our speech, we have the harvest. We have new harvest on these medicine course. When we start these new harvests and you give it back on the inflation on the medicine course started having a value that gets to the average ticket on the last harvest. The second point is harvest more, right? You have the income of new students on the working market where we have to build them on the new harvest of students, the most recent harvest last year and this year, we have the highest average ticket. Looking ahead, this average ticket is going to be close to what we are working to the new students on these last 2 years. And on the sides, the new students, the lowest prices are BRL 9,000 and for all the students the highest tickets are BRL 13,000, so -- there is a -- and that is the difference on the markets and they are made according to the practice in each market, every geography. We don't put prices above the geographies. So we work on the average ticket by each geography and generation of capital, as Janyo and Joao commented, our main focus is on reducing our financial leverage, reducing our debt, getting to 1x our EBITDA and this came from 2.8x. And starting there idea is to concentrate on organic growth. We have 5 new units operating since 2024 to now 3 new this year. The idea is to evaluate the performance of each unit, having our ceiling of cost open new units next year. And with that, we have this path for organic growth in our view can be very interesting on capital acquisition. On M&A, we are more reactive. The idea is that we analyze opportunities, good opportunities. But the main focus is on reducing our debt, payment of dividends that this year, we did the first movement after 4 years, not paying dividends. Last Friday, we had the first payment of dividends and then have the organic growth after that. If you can list our priorities on capital generation.

[Operator Instructions] The Q&A sessions is concluded. I would like to give the floor to Mr. Janyo Diniz for making the final considerations.

We'd like to thank you all for participating in our results release. If you have our Investor Relations department will be available to provide further clarifications. Have a good day.

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