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Edited Transcript of SEER3.SA earnings conference call or presentation 27-Mar-20 1:30pm GMT – Yahoo Finance


Q4 2019 Ser Educacional SA Earnings Call

RECIFE Mar 28, 2020 (Thomson StreetEvents) — Edited Transcript of Ser Educacional SA earnings conference call or presentation Friday, March 27, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jânyo Janguiê Bezerra Diniz

Ser Educacional S.A. – CEO, Member of Board of Executive Officers & Director

* João Albérico Porto de Aguiar

Ser Educacional S.A. – CFO & Member of Board of Executive Officers

* Rodrigo de Macedo Alves

Ser Educacional S.A. – IR Officer & Member of Board of Executive Officers

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Conference Call Participants

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* Caio S. Moscardini

Morgan Stanley, Research Division – Research Associate

* Leandro Bastos

Citigroup Inc, Research Division – Research Analyst

* Marcelo Peev dos Santos

JP Morgan Chase & Co, Research Division – Senior Analyst

* Susana Salaru

Itaú Corretora de Valores S.A., Research Division – Sector Head, Telecommunications, Media & Technology

* Thiago A. Bortoluci

Goldman Sachs Group Inc., Research Division – Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Ser Educacional conference call to discuss the company’s results for the fourth quarter of 2019. With me today are Janyo Diniz, Chief Executive Officer; Joao Aguiar, Chief Financial Officer; and Rodrigo Alves, Investor Relations Officer.

We would like to inform you that this event is being recorded. (Operator Instructions)

This event will also be broadcast live, via the Internet, at ir.sereducacional.com. You can also access the webcast audio and slides through the tablets and smartphones equipped with the iOS or Android systems. The replay of this event will be available soon after its conclusion for a period of 1 week. Before proceeding, we would like to make clear that forward-looking statements may be made during the conference call relating to the business prospects of Ser Educacional and as well as its operating and financial forecasts and targets. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur.

Investors should understand that general economic conditions, conditions in the industry and other operating factors may also affect the future performance of Ser Educacional and could lead to results that differ materially from those expressed in these forward-looking statements.

I would now like to turn the call over to Mr. Janyo Diniz, Chief Executive Officer, who will begin the presentation. You may begin, Mr. Janyo.

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Jânyo Janguiê Bezerra Diniz, Ser Educacional S.A. – CEO, Member of Board of Executive Officers & Director [2]

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Hello, everyone, and welcome to our Fourth Quarter 2019 Earnings Conference Call. Before I start, I would like to let everyone know that Aguiar will give impact our work in — on a home office base and that it may take us a little longer than usual to answer your questions properly.

We’ll go directly to Slide 3 of the presentation that we made available to you earlier, in which, we present highlights of the quarter. The main highlight of the period was the integration of UNINORTE, a transaction that we concluded on November of last year. The quarter also had important development such as the consolidations of the SER Digital project, which took improvement in the experience of our students, with in the integration of our back costs through the robotization of process and improvement in our Distance Learning platform, which in addition to academic quality, comes today with a solid content base. And from the point of view of organic growth, last year, we opened our new units in Brazil and designed it entirely in the Campus 2.0 concept and is operating today in a shopping mall.

In terms of financial results, we had a 23% growth in our student base, 9% in net revenue, 32% in adjusted EBITDA and a 3% increase in adjusted profit. The results were helped by the work we have been doing to keep the company balanced, combining our entry in in Distance Learning with acquisitions, access into new markets and operational and financial discipline. During this long process, the company recovered costs in Brazil.

On Slide 4, we have the highlights of winter enrollment season, which was positive with a 50% increase in the total new enrollment of students with positive evolution both in classroom and in Distance Learning. On Slide 5, we have the evolution of student base, which now includes the addition of approximately 24,000 UNINORTE students. Our student base grew 23% and x UNINORTE, about 7%.

Note that our Distance Learning base had solid growth in the period as a result of all efforts that we have made to improve our platform. With student experience, in the content and advancing our commercial area.

On Slide 6, we present the evolution of the FIES student base and the average tickets. Note that FIES continued to decrease in our results and this quarter represents around 90% of the total student base. The average ticket for on-campus students decreased due to the addition of UNINORTE, which has a lower average ticket and only recognized 2 months in this quarter. Note that excluding these effects, our average ticket has been stable compared to last year, which in turn had benefited from the recognition of 5 months of revenue in the quarter, due to the enrollment of about 100 MEC students enrolled in October, since the vacancies were released in September. Excluding this effect, the average ticket rose 1%.

These are my initial comments on the operational results, and I would like to give the floor to Aguiar to comment on the financial results.

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João Albérico Porto de Aguiar, Ser Educacional S.A. – CFO & Member of Board of Executive Officers [3]

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Thank you, Janyo. Hello, everyone, and once again, thank you for coming. Moving on to Slide 7. We have a summary of the results for the quarter that consolidated 2 months of UNINORTE, an institution that completed the acquisition on November 1, 2019. We can say that we had a more favorable quarter compared to the second and third quarters of 2019. The inclusion of UNINORTE in this — in the results certainly help us, but even when we exclude this acquisition from the results, we can say that there was an improvement and it includes mentioning that in the fourth quarter of 2018 had been the best quarter of 2018, in terms of financial results. As a result, we ended the year with a stable EBITDA margin with — but with the reduction in the net margin, mainly due to the lower cash position after the payment of extraordinary dividends and the acquisition of UNINORTE.

Moving on to Slide 8, we present the nonrecurring effects of the quarter. We’ve remained on being the monetary correction of the balance payable on the acquisition of UNAMA in the amount of approximately BRL 21 million, which, after a long discussion, in arbitrage referring to dividends in the calculation of the reimbursement of net investments and contingences that consider it fines for breach of contractual clause and amounts of provisions made in the net indebtedness, which in turn were denied in the court, thus generating the obligation to pay the installments in full severance in January 2020. The other impacts were similar to what we had during the year, such as adjustments in our team to adapt the evolution of the on-campus students base in the North, Eastern campus. Adjustment in UNINORTE recently incorporated into our results and expenses in the digital projects and in M&A projects.

Moving on to Slide 9. We have the breakdown of results between traditional classroom, new units, Distance Learning and UNINORTE results. Note that Distance Learning again shows us solid results and the new units are gradually reducing the negative results. The result of UNINORTE were above what we should find in the coming quarters because the company that controlled UNINORTE, previously recognized the revenue according to the formation of the classes and not to — by contract as we do here at Ser, and in that sense, the recognition of their revenues was slightly higher seasonally, but positively impact year results, that positively impacts our results.

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Moving on to Slide 10. We have an analysis of our Net Receivable Days, which went from 61 to 94 days, mainly due to the increase in the average receivables for regular students and FIES. As has already happened along the year, FIES payments were more [downturn] in 2018. However, the behavior didn’t substantially affect operations, except for this change in the cash flow behavior. Regarding the increase in the Net Receivables’ base from our out-of-pocket students, this mostly related to the change in our provisioning methodology that we announced in the first quarter ’19, which now incorporates the highest credit to recover index with more than 360 base in our provision for debt before accounting calculation base.

In addition, we have a regular student base that is growing 37% year-over-year. And in the graphs below, we illustrate these effects on our gross account receivables and comparing this increase with that of the x FIES student base and only the graduation base.

Moving on to Slide 11. We make a pro forma analysis of cash generation to facilitate the understanding of its behavior, which has been reflecting 3 important events. The late payment of FIES in the amount of approximately BRL 38 million in the year, higher volume of judicial deposits during the year that rose by BRL 13 million. The value of BRL 8 million of deferred tax assets booked in this quarter, which is a non-cash effect. Note that cash generation with these adjustments decreased by 8%, but when we analyzed post Capex, our recurring operations increased 5%.

On Slide 12, we represent our Capex, which is already observed in the other quarters of the year is trading from — falling from 7% of net revenue last year to 4% this year. As a result of having — already had a significant part of the expansion at rates contracted due to the investment in previous periods.

Moving on to Slide 13. We have our indebt business, which as we can see, had a significant reduction of approximately 35%. And the main variations in comparison last year were payment of these annuity installments referring to the acquisition of UNG of BRL 40 million, payment of the first phase of our second issue after (inaudible) and — of BRL 115 million and liquidation of the acquisition of UNINORTE in the amount of BRL 185 million. As a result, we ended the year with a lower but still very comfortable position with net cash debt EBITDA in the year. These are my comments on the results, and I would like to give the floor back to Janyo, who will update our business plan.

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Jânyo Janguiê Bezerra Diniz, Ser Educacional S.A. – CEO, Member of Board of Executive Officers & Director [4]

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Thank you, Aguiar. Going to Slide 15, to update our business plan. In the past 18 months, we have done extensive work to evaluate successful opportunities. And we have decided that as of the second half of this year, we intend to enter the Continuing Education segment more strongly. It is a segment with a lot of synergy with our current activities, since it uses the single site and Distance Learning structure that we provide for undergrad students, first and students. Generating a [digital site] for our company.

Through the generation of additional revenues on existing operations, therefore, we’ve ways of generating solid operating margins as well.

In addition, it is a market’s lower regulatory requirement and — which allow us to better explore the change that has been occurring in the labor market. Our idea is to enter differentiated course. And for this reason, we will segment our operations 3 segments, Healthcare segment, STEM or Science, Technology, Engineering and Math, Legal, Business and Distance Learning. With this, we intend to create specific course for each segment in order to create course with higher added value for our audience. We also intend to make a position in this sector, which tends to be interesting since we have identified some players with significant differentials, and who may have these differences implemented in our units, generating a potential multiplier effect.

On Slide 16, we show the benefits that we can generate from our operations, when we enter this segment. Creation of [jails] and on-site marketplace that’s increased the students lifetime with us in the [lowest]. Greater share in the disposable income of the students. Where they’re offering fee extensions of — or post-graduate course. To maximize the use of our back costs, which are well integrated and robotized, thus incremented the chance of having additional revenues with high profitability. High return on invested capital. And finally better market timing that is. We’ll have greater flexibility and offer course that have more traction in the job market and the ability to direct investments.

On Slide ’17, the last of our presentation, we have a summary of our goals for 2020. We are focusing on continuing our growth target turn face to face in Distance Learning segment with the opening of 4 new units in the Campus 2.0 model throughout the year as well as continuing to increase the number of Distance Learning centers, only if the economy allows, of course.

We are also going to start the UNINORTE ramp up, which from the first moves we made between the end of 2019 and the beginning of this year. We believe that we still have potential to evolve in offering course at business institutions as well as continued optimization work that we start.

As I mentioned in the previous slides, from the second semesters onwards, we will start our entry into Continuing Education segment, both organically and through acquisitions. In acquisitions, in the undergrad segment, we have an interesting pipeline of opportunities that we believe we can exploit and which should generate good value for the business.

In this segment, we analyze each acquisitions carefully to understand their sensibility as a consequence of the curing coronavirus crisis. And finally, we want to maintain our financial discipline that we have historically maintained in order to keep our company growing safely. Before closing, I would like to briefly comment on what’s being done to minimize the impact of coronavirus and the current stats of our intake process. Regarding the coronavirus, we have not been conducting face-to-face class on the entire network since March 16, and going to resume classes on the 29th, if there is a clearance from the authorities or if societies’ perception is that this is already possible. If not, we extend this period for long as necessary. Our employees around 90% work in the home office, both in the corporate and the units. And I believe that this will generate change in the way we work, as we can say that it was implemented with great success in our company.

We greatly reduced margin and purchasing activities to avoid spending in a period of flat activity. So that the essential class are not totally paralyzed. We are using our Ser Educacional rooms, which is being availed or accessed to by teachers students.

And finally, we are intensifying our communication with our stakeholders to keep everyone with the best quality of information possible. We will continue to to minimize the impact but we understand that the situation is unprecedented, and we must also move and have new ways to minimize the impact as soon as possible.

As you can see in the table below row, the enrollment of students until March 16 was in line with what we expected. When we started to move students, which ended up taking us, of the gross group, of more than 5% on the same campus and on-campus undergrad segment that we have into them.

In Distance Learning, we continue with a lot of strength, also we have felt the same effect. We believe that with the return to classes, we still have a new round of intake activities in April, because one of the main [goal stats] attract students is that most are the mid-semester academic tests, which will be postponed. In this sense, that we are working on now is to grow an intake and our enrollment work now in March. Take advantage of the fact that our team is not focused on academics to try to return with sports as soon as the situation normalizes. These are my comments, and I am available for the questions-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And our first question comes from Marcelo Santos of JP Morgan.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division – Senior Analyst [2]

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Janyo, Aguiar, Rodrigo. The question is about COVID-19. So could you please share a little bit about the behavior of the campus students? How is attendance going now that they are going to video classes? The second question would be also on this line is — so you mentioned you expect to resume the case to have more intake in April, I didn’t really got that point? And how are you preparing — how does this affect the second half intake? I mean, when do you usually start the second half? And what kind of implications could we see there?

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Rodrigo de Macedo Alves, Ser Educacional S.A. – IR Officer & Member of Board of Executive Officers [3]

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Hi, Marcelo, this is Rodrigo speaking. We have been communicating a lot with students and the perception we have is that probably, as you know, in the country and worldwide, people are still trying to understand what is going to happen next. Obviously, there is concern among students, even that they don’t know about an employment and economic behavior in the future. And what we’ve done is rapidly to roll out our classes through video using the Teams, the Microsoft Teams platform that has been very well accepted by the community. The teachers were the ones who most embraced the idea, and we could see that students like the idea to have something to be doing while maintaining their day-to-day lives by still taking the classes through the videos as something that could make them — to keep their activities ongoing and avoiding them to be studying during the vacation season. In terms of resuming the intake season, the sooner the classes resume and the day-to-day resume, the better for us to resume intake still in the summer season. Otherwise, what we believe that will probably happen is part of the intake will be postponed into the winter intake. But this is all we know so far. We don’t — obviously, as we probably don’t have enough information to really forecast what will probably happen over the next weeks.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division – Senior Analyst [4]

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Perfect. Just a follow-on. Are there any requests from students to be currently discounts since they’re watching the classes digitally? Or is that something that they understand?

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Rodrigo de Macedo Alves, Ser Educacional S.A. – IR Officer & Member of Board of Executive Officers [5]

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Well, we have all sorts of requirements. We have people applauding the initiatives we are having. We have people concerned about their jobs in the future. We have a lot of movements in the social media, and this is why we want to communicate we want to let people know that the classes are happening online. We are communicating them the risks of the current pandemic and trying to give them a word of hope for the future. Working as — coaching as well. But it’s something that we don’t really know. So we have to to really be patients by now, doing things in a step-by-step basis, and keep on working with the tools we have. And fortunately, we have a lot of teams to keep on doing. What we cannot avoid is the fact that we have a lower movement in the general economy, and this reduced our intake process since March 16.

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Operator [6]

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Our next question comes from Leandro Bastos of Citi.

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Leandro Bastos, Citigroup Inc, Research Division – Research Analyst [7]

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I have a question. Just if you could comment a little bit on the re-enrollment process for this window because you had that very strong intake during the second half of last year. So if you could provide some color in that sense in terms of re-enrollment, what do you expect? And what are initiatives you have been adopting? I think it will be very helpful.

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Rodrigo de Macedo Alves, Ser Educacional S.A. – IR Officer & Member of Board of Executive Officers [8]

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The re-enrollment happened in the same way as the market started to slowdown. The day-to-day, the enrollment also has slowed down but re-enrollment had a different way — a different behavior. So this is more related to the activity and the activity of the team with the students related to the enrollment. So we will have to wait a little bit more to understand how this dynamic will play.

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Operator [9]

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Our next question comes from Susana Slaru of Itaú.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division – Sector Head, Telecommunications, Media & Technology [10]

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Actually, we have 2 questions. The first 1 is related to the new commercial actions that you guys took during the second half of 2019 in the Distance Learning, which yields good results. Could you elaborate a bit more what was done and what you forecast for this year? Is it going to continue to become changes in the commercial activities for the age-specific for the Distance Learning? That would be our first question. And the second question, if you could talk a bit more about the integration of UNINORTE, what kind of synergies we can expect to be unlocked? What are going to be the priority in the first month?

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Rodrigo de Macedo Alves, Ser Educacional S.A. – IR Officer & Member of Board of Executive Officers [11]

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I’m answering the question related to the dynamics of the market and Aguiar will answer the part related to the synergies. We are — in terms of intake process, we have worked a strategy that is similar to what we have done in the winter intake during our regular marketing strategy, changing prices in different seasons of the intake process. The biggest difference is that we have to obey — the process of enrollment in the summer is different than the winter because you have the — more PROUNI intake. You have — FIES is a little bit more important. You have the seasonality of the year-end parties, you also have Carnival and so on. But we used, in general, the same strategy. We saw that the market was very positive in late 2019 and early in 2020. Then close to Carnival, as expected, the market slowed down a little bit. And during March, we were seeing a pickup in the demand. Obviously, it was suddenly reduced after March 16th. But we were expecting to have a positive intake in terms of growth, close to double digits for the on-campus excluding UNINORTE. So what we saw after the beginning of the crisis of the coronavirus was a gradual slowdown that started as of March 16.

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João Albérico Porto de Aguiar, Ser Educacional S.A. – CFO & Member of Board of Executive Officers [12]

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Susana, Aguiar speaking. The opportunity is opening up. The idea is to make a company at least double which adjusts EBITDA margin. Considering, and as a cushion in 3 years, carrying out the integration of the institution’s current metrics with our efficient gains with digitalization of this structure, the timing of costs and expenses with suppliers too. Well, to do this, we have an integration team with a solid track record of execution in previous transactions, such as UNG, UNAMA and Sobral and that’s [what’s over]. Which already formed by the team, analyze everything that can be done in detail. Our scenario for absorbing these synergies would be 30% in the first year, 7% second year and the remainder in the third year of consolidation, working that scenario in which the season shift would take place in December at least in July 2020.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division – Sector Head, Telecommunications, Media & Technology [13]

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Sorry, Aguiar, can you repeat the main synergies level, you said suppliers? And what were the others?

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João Albérico Porto de Aguiar, Ser Educacional S.A. – CFO & Member of Board of Executive Officers [14]

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Sure. Our efficiency gain is centralization of tax structure. But the timing, of course, and expenses with suppliers and also the integration of institution (inaudible) .

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Operator [15]

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Our next question comes from Thiago Bortoluci of Goldman Sachs.

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Thiago A. Bortoluci, Goldman Sachs Group Inc., Research Division – Research Analyst [16]

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We would like to explore a bit more the COVID-19 outbreak situation. We would like to check in on what contingency plans [meant] that might have on the table, especially related to future growth prospect, which could arise from financial constraints from students and also from academic engagement, right? We have been already hearing some companies talking about private funding or even access to an employment insurance to its students. Although, we completely understand this is a fluid situation, we are very interested to hear on March, what are they doing and thinking about it? And also curious to hear if there are any indications from the government in terms of PROUNI or FIES?

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Rodrigo de Macedo Alves, Ser Educacional S.A. – IR Officer & Member of Board of Executive Officers [17]

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This is Rodrigo speaking. We are working in several initiatives. The first ones we launched were the initiatives related to communicating and to roll out the video classes because this keep students busy and focused on studying, and this reduces their initiatives to think about leaving or to think about dropping out later or even during the course. So this is very healthy to keep see that engagement. And communicating with them and keeping them understanding that we are together in this, is important in this moment. The second way we are studying now basically, the initiatives you said are similar to what we are working on. The point on this is that insurance and the cost of funding for doing those initiatives are still unknown. So we have to keep on stating and launching this as we develop — the event develops. So we don’t know the expansion of PROUNI will have on the economy in reduced activity. And then this is what we are working on in the Phase 2.

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Thiago A. Bortoluci, Goldman Sachs Group Inc., Research Division – Research Analyst [18]

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And any indication from the Ministry of Education, Rodrigo?

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Rodrigo de Macedo Alves, Ser Educacional S.A. – IR Officer & Member of Board of Executive Officers [19]

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We don’t know anything about that yet. We are through the associations trying to reach the government.

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Operator [20]

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Our next question comes from Caio Moscardini of Morgan Stanley.

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Caio S. Moscardini, Morgan Stanley, Research Division – Research Associate [21]

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So can you please provide some color on the behavior of the costs related to faculty during this period of low classes? I imagine that many of the teachers are paid by the hour, so I’m wondering if we could see some seasonality change on the cost combination related to teachers? And also, if you could give some comments on the PDA that has been diluted in the past couple of quarters, what has been the drivers here and considering that we come to a normalized coronavirus thing, should we continue to see a potential PDA dilution in the mid to long term?

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Rodrigo de Macedo Alves, Ser Educacional S.A. – IR Officer & Member of Board of Executive Officers [22]

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Caio, this is Rodrigo again. In terms of cost, what we are doing now is reducing, obviously, the day-to-day expenses. We have something around 90% of our personnel in home office as we are all at this — in this conference call. Therefore, the day-to-day purchases, the day-to-day marketing efforts, we have been reducing. They will probably have some shift in terms of cost of teachers from one quarter to the other that we resume full classes, especially the typical classes that required teachers and tutors in the classroom to support those students. But the expansion of business, we don’t know yet, given that we don’t know precisely when the economy will return and the school will be able to have on-campus classes open. But what you have said made sense, part of the costs that we avoided, given that part of the day-to-day expenses won’t happen. But part of the cost will be shifted from one quarter to the other.

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Operator [23]

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Our next question comes is a follow-up from Marcelo Santos of JP Morgan.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division – Senior Analyst [24]

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One is the intake for Distance Learning. Perception is that the impact of COVID seems to have been tough around the Distance Learning because it was a segment that was growing much more last year. I see that this deceleration was harder. Is this just because of the maturation of the learning centers, which were like ramping up intake last year in March or April, so it would happen in May? Or was there some particular reason maybe a later intaking Distance Learning? And the second question would be, what are your plans? How do you plan to take advantage of the 40% — the new 40% limit of Distance Learning content in the campus curriculum? I mean, you tend to launch new products, you plan to incorporate that into your current products, how do you plan to use this?

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Rodrigo de Macedo Alves, Ser Educacional S.A. – IR Officer & Member of Board of Executive Officers [25]

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It’s very hard to listen to what you have said, so I’ll try to answer what I understood, okay. For the Distance Learning. Distance Learning, in one hand you have the practice of having everything — being done online. This is true. On the other hand, usually, the Distant Loaning student is a lower income students. So it is important for us to understand going forward how the economy will impact those students who have a lower income, usually they opt for it, first. So in one sense, yes, I believe that Distance Learning will have a better perception of the overall market, especially now given that the on-campus students are doing video classes. And the perception that Distance Learning is a good product will probably be enhanced. But on the other hand, we have to understand that economic impact. For the additional workload that the means of education allowed, we will be rolling out these new products in the second semester. We are adjusting this product, especially in terms of how to maximize the on-campus crisis combining the students from the traditional on-campus with the 20% workload with the on-campus client with the 40% workload, but this product is being worked on and to be launched, now, in the winter intake season.

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Operator [26]

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That concludes the question-and-answer session for investors and analysts. I would like to pass the word to Mr. Janyo Diniz for the final considerations. Mr. Janyo, you may proceed.

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Jânyo Janguiê Bezerra Diniz, Ser Educacional S.A. – CEO, Member of Board of Executive Officers & Director [27]

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Thank you all for participating in our earnings release and our Investor Relations (inaudible). And our original guidance on hand to help you with further clarifications. Thank you all, and have a good afternoon.

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Operator [28]

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The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect, and have a nice day.



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