Sociedade Técnica Educacional da Lapa S/A (SEER3) Earnings Call Transcript & Summary

[Audio Gap] Access to the audio and slides of the webcast will also be available at tablet and smartphones with Android or iOS. The event will be available right after [Audio Gap] for a week. Before continuing, we would like to [indiscernible] that statements made during this conference call relative to Ser Educacional business prospects, operational and financial projections and goals are beliefs and assumptions of the company's management and are based on information currently available. Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions because they refer to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future performance of Ser Educacional and lead to results that will be materially different from those expressed in such forward-looking statements. Now we would like to give the conference over to Mr. Jânyo Diniz, CEO, who's going to start the presentation. Mr. Diniz, please.

Good afternoon, everyone, and thank you very much for your attendance in the conference call to talk about the acquisition of FAEL, Faculdade Educacional da Lapa, for which we signed the purchase and sale agreement this weekend and which is still pending on the approval of CADE, a Brazilian antitrust authority. Now moving straight to Slide 5. We can see a brief summary of the institution. FAEL is one of the leading educational institutions in Brazil and is dedicated to offering present online higher education courses through a network of more than 600 partner centers spread throughout Brazil and then in less than 180 kilometers from the capital, Curitiba. FAEL has about 900,000 (sic) [ 90,000 ] students, and its network has a very diverse distribution in Brazil, at which together [Audio Gap] more than 50% of the students. As you may notice, this is a very complementary institution to Ser Educacional. And together, based on March 2021, we will reach a student base of more than 300,000 students, which will be a milestone for our company because of the number of students and for giving Ser Educacional a truly countrywide footprint. On Slide 6, we detail another important complementary feature. FAEL is fully dedicated to the management of digital educational centers. And I believe this one -- this will be one of the greatest strategic synergies of this transaction. The digital education segment today has 3 relevant [ factors ] through own units online sales and through partner centers. We have grown a lot in the first 2 modalities in recent years. But although we have more than 400 hubs in operation, this segment represents only about 20% of the student base of digital education. And since last year, We have been evaluating different strategic alternatives to further strengthen us in this modality of course distribution. At FAEL, we offer partner centers. And that is the heart of the company and represents 98% of the student base. This is because -- now we are going to hear, the founder, Luiz Silveira Filho, who will be in this conference of us, and he will explain and talk about all these possibilities of significant growth of our student base. Thank you very much. Luiz, please, you may continue your presentation.

Thank you, Jânyo. Hello, everyone. It's a pleasure to be here in this conference call. My name is Luiz Carlos. I am the founder of FAEL. FAEL works in distance education in Brazil. We have been a major college until today, and we have a model based on partnerships with many hubs and also live educational. And we treat all our partners as if they were our true partners in our association. We have a structure that we built in all the way we operate based on performance of these hubs, in addition to all the care we have with the relationship with them because we know that it is through these hubs that our students have contact with us. They are very important for us to reach to places -- to reach places that very few organizations can reach. And we are sure that with the strength of Ser Educacional, we will be even stronger and reaching even more distant locations in Brazil. On Slide #7, you can see that FAEL's student base is complementary into what Ser has. All our courses are distance education courses, and we have great strength and capillarity, especially in the South and Southeast. All the structure that we have built for decision-making is very fast and also for monitoring. And so this provides strength for us to rapidly decide how to compete with all other organizations, and this is one of our strengths. Additionally, all of the structure that we have for distance education, that is proprietary technology, all our teachers and everyone. And we have been working along all these years to be a plug-and-play platform so that our platform could be adapted to any sort of content. And in this manner, I think we will be able to get further than any other of our competitors. We can see that FAEL, in any location, is a fair competitor with any other organization. Now I would like to give the floor to João Aguiar.

Thank you, Luiz. Now moving to Slide 8. You can see a summary of the [ transaction, which ] is quite simple. There is a cash payment of BRL 208 million (sic) [ BRL 280 million ] made in the closing, which has, as its main preceding condition, the approval by CADE, which we believe will occur as early as in the fourth quarter of 2021. Then after adjustment of working capital and debt, we are -- and net debt, as is usual in transactions of that cash fee -- free format. In addition, we have an earnout to be paid to the founding shareholder, BRL 17.5 million, based on stipulated targets, are basically aimed at maintaining FAEL's growth for another 2 years and implementation of its operational model in Ser's network of hubs. So we have a minimal cash considering our cash with good EBITDA conversion. Moreover, our additional cash for the growth will be supplied with credit available to the company through first-line funding organizations. Now on -- moving to Slide 10. We have a summary table of what the combined companies will be in December 2020, showing that Ser Educacional along with FAEL will be a relevant player in digital education with more than 140,000 students. And these numbers do not contemplate the significant growth taking place in 2021, as additional digital education will become relevant in our results, representing almost 20% of our revenue, which is in line with our strategy of having a greater share of the digital education segment in our results and medicine, which are the objectives of previous presentations. Finally, I would like to point out that the combined companies have ample operating margin expansion capacity because FAEL still has double-digit margins, where Ser operates in this segment with margins above 30%. In this sense, our post synergies, only talking about costs and expenses of this transaction in our vision, was priced below 8x [ EG ] EBITDA, which we consider interesting given that we are not computing any synergy of expansion of the revenue base and the average ticket. So these are my comments about the financial aspects of the transaction. I'll give the floor to Joaldo for our final considerations.

Thank you, Aguiar. Hello, everyone. So I am Joaldo Diniz, I am responsible for the Department of Services. So in this area, we also have ourself focusing on student experience, again, considering the importance that we assign to the [indiscernible] because of the transformation of -- in the education segment. Moving to Slide 7 -- sorry, 11. You can see the transaction, which is different from the other transactions we have announced. So the acquisition of FAEL opens a series of new transactions, with the aim of maximizing our footprint and our digital ecosystem, which will be fundamental for the success of the strategy of creating multiple offers in education. This is related to Ubiqua that delivers synchronous and asynchronous in-person or remote experiences based on the relationship between education and learning. It's also related to our modernized matrix where we have LEGO brick system in offering in all our commercial channels. In addition to our traditional models, we have new models for continuing education, nonregulated model of free courses that we expect to distribute in our digital channels, including social networks, e-commerce and our marketplace, [ go ] courses. In that way, we have modern -- we are integrating e-mail and messages and delivering our products in our continuing education, such as [ Corso ] and [ Vedoca ]. In this manner, we consider FAEL integration as the possibility of delivering a full portfolio of courses, and the brand will have access to the same distribution platform. It will also have a complete line of health and engineering courses and will provide increasing margins and our penetration in the interior of Brazil. Ser, in turn, will start operating its network of hubs based on FAEL's model, and this will enhance the growth of our student in regions of our brand are strong, creating an avenue of the student base growth, making us more competitive than before. Now I would like to give the floor to our CEO.

Thank you. And now complementing what Joaldo was saying, the strategic rationale for this transaction, in addition to regional differences in complementing the hubs for the North and Northeast, the main strength of Ser Educacional in the South and Southeast to add more hubs, and in this manner, we are going to have more than 100 [ polls ]. And this will -- this provides proven success with cost gain with the acquisition of customers. In this manner, this transaction -- so soon it is approved by CADE, it has a transformational possibility, and this will change the capacity, reducing and diluting the cost structure of customer acquisitions and back office. Even better, we'll have healthy leverage and well positioned to make the most of new opportunities that might come up. Now I would like to close for our Q&A set.

[Operator Instructions] Our first question comes from Mr. Leandro Bastos from Citibank.

[Audio Gap] know a little bit about this national strategy. How are you thinking [Audio Gap] and further on and how are you going to do in there are some places where your brands are now strong? So how are you going to operate now on? What is your strategy going to be with that regard? And now talking about the more -- the broader track of acquisitions of the company, are you going to have new M&As? And what can we expect in terms of further acquisitions?

Ser Educacional is a company that has a very good strategy, and it has a strength of the brand locally. We attract new students at a more competitive cost. FAEL, as it has said -- been said before, it has more than 600 hubs throughout Brazil. And each of those hubs is about 150 kilometers away from each other. So it's very strong in the South and Southeast and Central West. So FAEL will complement our portfolio of brands, in this manner, expanding our footprint to the entire country. We already have some presence in the Northeast and North, little presence in the Center West and almost nonexistent in the South. The capillarity and the existence of hubs will turn us into competitors with strong brands all over Brazil. As to the -- to M&A, we have a pipeline of M&A that is still very considerable in many different areas to complement our digital education ecosystem. We are strengthening our position, both in terms of free courses and in online courses, as we did with FAEL. We also have in-person courses with strong local brands, which will [indiscernible] as our position and facilitate attracting new students for distance education. So we still have space, and we still have many M&A initiatives in our pipeline.

Our next question comes from Marcelo Santos from JPMorgan.

Can you talk about the margin gap between FAEL and Ser Digital and what we can expect with that regard in the future? So can you give us more details about FAEL's hubs? I would like you to give us a little bit more detail.

Thank you for your question. This is Aguiar answering your question. FAEL's model, as you saw in the presentation, is in the low 2 digits. So I think that in approximately 2 years, we can double FAEL's margins, considering what Ser is already doing and Ser's current margins. So in terms of costs and expenses, we'll be able to rationalize that. And we also can obtain revenue synergies. So we can implement in FAEL's operations in the area of health and engineering because they have higher tickets. So considering all of this, in the next few years, we're hoping that the margins and EBITDA will double in the next 2 years.

Next question comes from Vinicius Ribeiro from UBS.

Can you share with us FAEL's performance in recent years, your pricing strategy? [Audio Gap] a question that has already been asked, this operation model of distance education with third-party hubs, so when are you going to roll this out? And when should we think about your hub footprint based on this model of operation?

Just before answering Marcelo's question about the hubs and the footprint -- can you hear me well? The compensation model in itself is not so different. The issue is the focus on how processes are [ distinguished ] in order to serve. This is a model in which the hub is the center of the business, it's the hub, and many things are designed in order to meet the needs of those hubs and with fully dedicated processes. And this is different because we have created our model. We started from the in-person model and the strength of sales, and even though we created the structure of hubs, they have that model focused in the methodologies that FAEL has and that -- we like very much the way they work. So we want to converge everything so that we can take the best of both worlds. So in the last 3 or 4 years, and especially after the [indiscernible], we started to [indiscernible] So you heard a little bit about the past revenue growth, around -- in the low 2 digits more than the double of EBITDA growth between 2019 and 2020. And as far as we know, we haven't closed it yet. This is very preliminary, but 2021 results have been evolving well, but we are only going to [ have ] details on that when CADE approves the transaction so that we are not -- we won't be exposed to lock any future transactions.

And the second question, is the idea to have a rollout for this third-party hubs, how are you going to do that? What is your idea?

This will be with us. He will continue working with us. So soon as CADE approves, one of the tasks, in addition to the integration process using back office is the integration process, production of content, FAEL produces content and to transform a little bit of the model in Ser hub in terms of attraction of students. So we think that this is going to be normally transposed within 2 years. Thank you very much.

Our next question comes from [ Luca Danes ] from Bradesco.

My question is related to the marketing strategy of the 2 companies. So with the target audience, how have you been addressing this customer? Are you doing it similarly to FAEL? Do you see synergies in terms of customers or similar customers to be able to sell the products in FAEL's customer base?

Well, I will start, and Luiz will help. Well, Luiz is an expert in FAEL's attraction of students, and they have a marketing strategy that is very robust. The idea, especially in terms of digital courses, there is a synergy, especially in terms of the student base. I mean just -- not just talking about regulated courses, so we have engineering and health courses, but on the whole portfolio of products that is going to be offered that are part of Ser Educacional's ecosystem. Historically, our target audience for distance education has always been working people, and this has changed since last year. We have had a significant growth because of the pandemic, but the market also opened for digital education because realize that this is an alternative. So in this manner, we operate especially in small towns with the same kind of audience. And for this reason, we can take our model of work and relationship with the hubs, with Ser's hubs, which are very similar to everyone who works with distance education hubs in Brazil. And we have a product portfolio that we could not cater or cover the entire network, but now we can. So attraction of students is basically cheaper in our model because all types of costs will be there. So we have a very reduced cost of portfolio when we compare to the competition. Now with Ser Educacional, we worked with the same leads, but they can be enrolled now in courses that we didn't have before. So we work point on point, location by location, every day out in the streets, and this is going to remain the same, in addition obviously to Ser's strength in the locations where we were weaker.

Our next question comes from [ Victor Gamesa ] from Goldman Sachs.

The first one is whether you could talk a little bit more about other of FAEL's technological platforms and how different they are from Ser's digital education. And are you going to adapt other platforms that FAEL may have? And the second question on our end is also about the hub management model of FAEL and how much autonomy they have in our commercial strategy and the coordination of these aspects with FAEL.

I think Joaldo and Luiz can talk a little bit more about technology. And then I can talk a little bit about the commercial aspects of the hub management. So talking a little bit about [ LNS ], we're still detailing all platforms and assessing all types of synergies that we are going to have. And obviously, just as we did in other acquisitions, that we are going to have what FAEL has, the best that they have, and also the best of Ser will be used, so 1 [ LNS ] with our own development, with development of satellite systems around it so we can have a more detailed analysis. And after the analysis, we will be able to decide what will be the [ LNS ] within this platform and within this ecosystem as a whole. As to the autonomy of the hubs, we have developed with Ser very aggressive work through our CRM, using autonomy for all hubs that they can consume content to be trained and to decide in the right way the best type of discount and pricing in each region regardless of the competitor. So all our work in terms of training hubs and giving them real-time information has been very helpful in recent years. There is also internal work with specific development for each one of the hubs. So FAEL, through its marketing center, can develop exclusive pieces specific for each one of the regions, working differently on text and contents in different regions. So the courses are the same throughout Brazil, with a local touch, when we talk about the marketing [ campaign ] pricing. And this is decided by our local hub, together with our commercial consulting. So we have consultants working throughout Brazil based on market research to know what are the prices of the competition. And we do that every day and every night. So it starts in January, goes to December 31 every year. So we always review what the campaign is going to be like for each one of the hubs and seeing the prices they can operate. And of course, in that time of work, in enrolling a student, the hub decides that, together with the consultants, because that's the best way of working on marketing, at the front end. And how we got from 10,000 students a few years ago, now we have 90,000 students, and we are the best case in terms of growth of number of students enrolled in Brazil. Thank you very much.

Our next question comes from [ Lucas Javier ] from the webcast. Once approved by CADE, when are you going to start to publish the integrated numbers for Ser Educacional?

Well, this transaction is to be an ordinary proceeding. Usually, it takes about 120 days. I believe that on the fourth quarter, at least partially, FAEL will be consolidated in our results if we have CADE approval.

[Operator Instructions] If there are no further questions, we now end our Q&A session. I would like to give the word back to Mr. Jânyo Diniz for his closing remarks.

I would like to thank everyone for taking part of another -- in another conference call about the acquisition of FAEL by Ser Educacional. And my message is that what this acquisition represents to Ser Educacional Group, not just in terms of complementary strategy, in terms of geographical footprint, region, commercial strength, attraction of students and also in product portfolio and, above all, the increase of Ser Educacional hub base to more than 1,000 hubs. And our student base today is 80% in our own hubs and 20% in third-party hubs. Additionally, FAEL has a potential of increasing margin, which is significant in FAEL's margins. Once integrated, can get to similar margins or similar to Ser Educacional. And we are very excited with an expectation that so soon as CADE approvals -- approves the operation, and we think they will approve in Q4, this joint model will be in operation, with both companies working together with significant potentials. To date, the potential [ base ] of Ser Educacional would double. With the 2 of them operating together, we show that they will be very representative in the total student base, making us one of the leading education players and digital education players in Brazil. And we are available to answer any questions -- any further questions you may have. Thank you very much.

The conference call [ of Ser Educacional ] has now ended. We thank you very much for your participation, and we wish you a good afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]