Q3 2019 Earnings Call
Welcome to the third quarter 2019 Laureate Education incorporated earnings Conference call. My name is calling for your operator for today's call. At this time all participants are in listen only mode. Later, well conduct a question answer session during the.
Question answer session. If you have a question. Please press Star then one and you touched on some please note that this conference is being recorded I will now turn the call Adam Our senior Vice President Finance It tracks right. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining us on todays call discuss lot Education's third quarter 2019 results.
Joining me on the call today, our I Lovestruck Hanson, President and Chief Executive Officer, and JJ, Sharon Chief Financial Officer.
Earnings Press release is available on the Investor Relations section of our web site at laureate Dot net.
We also posted a supplementary presentation on the website, which we'll be referring to during today's call.
This call is being webcast and a complete recording will be available after the call.
I'd like to remind you that somebody information, we're providing today, including but not limited to our financial and operational guidance constitutes forward looking statements within the meaning of applicable U.S. securities laws.
Forward looking statements are subject to risks and uncertainties that may change at any time and therefore, our actual results may differ materially from those we expected.
Important factors that could cause actual results could differ materially from our expectations.
Our disclosed in our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission.
Our 10-Q's, Scott earlier this year.
Our 10-Q filed earlier this morning as well the other filings made with the FCC.
In addition, all forward looking statements are based on current expectations as of the data This conference call.
We undertake no obligation to update any forward looking statements.
Additionally, non-GAAP measures that we discussed including adjusted EBITDA, adjusted EBITDA margin and free cash flow.
Our also detailed and reconciled to their GAAP counterparts in our press release or supplementary presentation.
Before turning over to highlight I would like to note that what the termination of our contracts in Saudi Arabia at the end of August as planned we are now required to move those operations to discontinued operations.
And therefore, our results being reported today.
Continuing operations exclude that business unit.
The impact isn't material for the quarter.
It does impact the presentation of historical reporting periods, given the move to discontinued operations.
In the appendix slide presentation. We have included a page that will help you adjust your models for Starkel purposes.
With that let me turn the call over to highlight.
Thank you Adam and thanks to everyone on the line for joining us on todays earnings call.
I'm pleased to report very strong performance for the third quarter with adjusted EBITDA well ahead of expectations driven by continued progress on our transformation initiative, which are yielding results at the pace softer than anticipated.
Following these strong results we are projecting an increase in operating profitability for 2019 in local currency.
Did you lose those to maintain or poor year, adjusted EBITDA and free cash flow guidance despite currency headwinds.
Over the past 18 months, we have reduced the complexity of our company.
Simplified our footprint.
And I know focused on gave markets, where we have leading brands.
We have remediated, though material weaknesses and lowered the overall risk profile of the organization.
This transformation has allowed us to reduce or Gionee expenses, but also improving operating model gaining efficiencies as the campus novel and launching new innovative digital offerings.
The pace and success of our transformation gives us confidence to make additional investments to further drive modular acceleration.
As a result, we're increasing or 2020, adjusted EBITDA margin target from 21% to 22%.
And we expect to continue driving increased margin progression in future periods beyond 2020.
I'm also pleased to share that's 150 million stock buyback plan and notes during the second quarter earnings call that's already been completed.
We continue to believe that returning capital to shareholders through stock buybacks is the most creative use of capital for our investors given the significant discount on our stock price versus the intrinsic value of the individual institutions in our network.
Therefore, or board has approved an expansion of.
Oh for stock repurchase plan by an additional 150 million, bringing the total authorization to $300 million.
In addition to delivering strong financial performance, we consistently received favorable recognitions.
Unquote, the accolades for our network institutions.
What makes laureates so unique is the core to.
Okay, and leadership positions, we enjoy and or core markets.
I'd like to highlight a few recent quality an outcome results that demonstrate laureates strong positioning in Latin America.
Online.
In the most recently published results by NRG exams in Brazil, L'oreal continues to be rated mode. The how are you.
All the public peers and many of our institutions received the highest rating possible.
A recent study conducted by our Yelena Research group in Peru on strategic brand value ranked you PC and European second and poor respectively, among all universities and not contract.
And our cyber take brand was ranked number one among all professional institutes in Peru.
In Mexico, you VM continues to be ranked as a top 10 universe to among all public and private institution.
In the Reader's Digest and if so survey what you would it take remains a top 20 institution.
For online with the Nasr program in public health.
Has earned accreditation from the council of education for public health.
Demonstrating the strong quality with that program on providing valuable product differentiation for our students.
In summary, we are making strong progress on multiple fronts.
Or margin progression is accelerating and driving increased level of free cash flow conversion.
Although our operations are performing well and we continue to focus on providing superior student experiences to the approximately 850000 students that we serve across our network.
We are well positioned heading into 2020.
That concludes my opening remarks, and I will know turn the call over to JJ for a more detailed financial overview for third quarter.
Year to date 2019.
Thank you I left.
Before I go over our reported results, let me remind you that many of our institutions are out of session in July and August and therefore, the third quarter is a seasonally low appeared from a financial sad part.
However, it does represent the second largest enrollment in take cycle through here.
With that being said, let me now go over the highlights of our performance starting on page eight.
Revenue in the third quarter was $774 million and adjusted EBITDA was $134 million, which is $14 million ahead of the guidance, we provided three months ago.
On a comparable basis and that constant currency, our revenue and adjusted EBITDA for the third quarter, we're up to and 15% respectively.
Moving now to our year to date results.
When combining our Q3 results with the first half still on a comparable basis and that constant currency revenue and adjusted EBIT that growth three and 9% respectively, which he is also ahead of the guidance we have been providing for the full year.
Now, let's review in more detail our key operating metrics by segment, starting with page 10.
In Brazil are distance learning business continues to scale quickly with new and total enrollments up 71, and 55% respectively.
Total enrollments for a face to face operation continues to be negatively affected by the large graduating CS cohorts.
Pricing continues to be challenging and remains below inflation.
This has put even more emphasis on the importance of cost reduction initiatives, we shot before well ahead of expectations.
In Mexico, our Unitek brand continues to perform well as we further expand its physical footprint outside Mexico City.
This continues to be offset partially by the softer performance of our premium brands. You, then which has been disproportionally impacted by the weak economy environments.
However, I would like to note that you VM grew new enrollments, 5% during the September intake, making this last intake. The first 22 years, usually m. has seen you enrollment growth.
The engine segment realized another robust quarter in enrollments and profitability with strong performance in both Peru and Chile.
Year to date adjust EBITDA in that segment is up 10% versus the same period, a year ago, which is outstanding.
In our rest of the World segment, which is essentially our institution in Australia. We continued to deliver great results when youre enrollments up nearly 20% and adjusted EBITDA growing well into double digits.
Finally for online and partnerships enrollment results continued to be impacted by the platform position away from the international segment.
For Waltons domestic segment, you and total enrollments all broadly flat.
Growth in Health Sciences, and behavioral sciences, offset by the contraction in other verticals.
In summary.
Q3 was an outstanding quarter, clearly confirming the strong progress we deliver against all of our strategic priority. It during the first half of 2019, particularly in terms of margin expansion and free cash flow.
Let me now discuss the implication of all performance to date on all financial outlook, starting on page 15.
As noted by I live in his opening remarks, the pace of our transformation accelerated in 2019.
We're not expecting our run rate 2019 adjust EBITDA margin to be 20.8%.
This represents a full 60 basis points improvement versus the outlook. We provided just three months ago and put our adjusted EBITDA margin rate at the level, we have set of our target for 2020.
Since the start of our transformation in 2017, the breadth and depth of initiatives. We have undertaken I've continued to expand and now covers projects across all aspects of our value chain from enrollment to service delivery to middle office and back office.
In a matter of two years, we now expect our adjusted EBITDA margins to improved 350 basis points and reached 22% in 2020.
This is 100 basis points higher than the target we set for ourselves at the beginning of 2018.
Page 17 gives you a more specific overview as to the nature of this initiative and the impact they've had on our margin.
In short fall pillars, I've been central to our business model transformation Ginnie reduction service delivery productivity also refer as educational products to date.
Revenue optimization, and last but not least procurement and real estate savings.
As we have discussed during our prior calls the majority of our margin improvement has been associated with cost reductions will they forward well still have lots of opportunities in further driving productivity through scale.
Automation and selective outsource think we expect that revenue initiatives will play an increasingly larger role in driving margin up in 2020 and be else.
As expected this improved adjusted EBITDA margin will also contribute to our cash flow generation, which remains a top priority for the management team as a key elements of how we define success.
Consequently, we now expect to exit 2020, with an unlevered free cash flow marching up 12% as noted on slide 18.
This would represent a 400 basis points increase versus where we are planning to end up in 2019.
Besides the operational approval would just offline we expect transformation investments decreased substantially starting in 2020, as we taper off large investments and sox related expenses.
Let me now conclude when an update on our full year outlook and the associated guidance for Q4, starting on page 21.
Three elements have been impacting our outlook for the year first operational performance in local currency. This year as being ahead of expectations. Both in terms of profitability margin progression and free cash flow.
Second the currency other geographies, where we operate have gradually weaken against various dollar, particularly in the second half and we expect that to unfavorably impact revenue and adjusted EBITDA by 66 and $20 million respectively.
Lastly, please note that we have to reclassify our end today's in Saudi Arabia to discontinued operations.
With that topics in mind, let me not provide you our guidance for the full year.
Total enrollments are unchanged at 865 students for year end.
Revenue based on current spot effects rate is expected to be between 3.233 billion and $3.268 billion.
Adjusted EBITDA still based on current spot FX rate is unchanged from previous guidance at $640 million to $650 million with outperformance in operations fully upsetting more than $20 million, if they'd be that reduction associated with FX and the reclassification of Saudi Arabia.
For free cash flow, we are reiterating guidance of approximately $145 million, despite almost $40 million of negative impacts associated with the timing of our divestitures and adverse effects.
In light of the expansion of our share repurchase program by an additional $150 million. We are raising the top end of the range of our net debt position by year end to $1.2 billion. The timing of the additional share repurchases will determine how close we come to that number.
Given our outlook for the year.
The associate guidance for Q4 is as follows revenue is expected to be between 866 and $901 million.
EBITDA is expected to be between 237 and $247 million.
Now back to you for to wrap up.
Thank you Jay Jay our transformation initiatives are using strong results.
Heading into 2020 .
We will be accelerating those efforts and focusing on multiple leveraged to increase or Martin and free cash flow profile, but also lifting the growth rate by investing in distance learning and innovative digital product offerings.
The management team remains committed to creating value for all stakeholders, including students on shareholders.
Operator that concludes our prepared remarks, and we're happy to take questions from the participants.
Thank you.
We will now begin the question.
Ash.
If you have a question.
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Can you tell us.
If you wish to date.
Hi.
It won't be delayed.
Yeah.
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Our first question.
Barclays. Please go ahead.
Hi, This is Ryan on for Mark.
I was just curious you know we've seen a lot of headlines about.
A little bit of unrest in the San Diego region, and Julie Bradley broadly has there been any impact there for you guys.
Hey, Ryan this is sell I live the.
The violence and demonstrations in Chile of course are concerned then they resulted in a short period of state of emergency and during that period of time, we suspended all classes.
To date, none of our buildings or facilities have ensured any meaningful damage as a result of the demonstrations and thankfully our stuff and students and faculty.
All of safe at this time.
We are known the process of restarting tosses than we expect to be able to return to normal scheduled within the next couple of weeks Oh of course borrowing on the further escalation of events.
Got it that's helpful. And then just on the buybacks, obviously pretty impressive to see the first round kind of wrapped up already.
Is there anything any framework, we should think about going forward and how you will apply that I mean, obviously of the new authorization do you expect that to be pretty spread out or do you still think it's a very attractive to use a lot of that you know to short period of time.
Oh, Hi, Ryan This is Jay Jay.
The share buyback is.
I'll review, the most value accretive way of really handling our excess liquidity is our view has not changed hence the approval of the second tranche of the $150 million will continue to be opportunistic as we see.
Parties, the marketplace to really buy back shares clearly the trading level is a below management expectations.
And certainly well below the interesting value of the business. So therefore that to continues to be an attractive opportunities for us.
Got it thank you.
Our next question comes from Jeff from BMO Capital markets. Please go ahead.
Thanks, So much want to go back to the increase in your 2020 guidance, obviously, a nice to see this but what really changed over the past quarter for you to get the confidence to boost that that dramatically.
A couple of things first of all the.
Transformation initiatives read you have accelerated as I indicated in my prepared remarks, we have continued to expand the portfolio of initiatives.
To really improve on margins across the board from.
Enrollments to Gnh service delivery and when you execute those initiatives as always.
The level of uncertainty as to whether you're going to get the full benefits as you put them in place Q3 was clearly strong evidence that well in the right track and therefore, that's on the additional cost actions we've been in place as positive estimation Bill. So as you may remember the additional initiatives we initiated.
Following.
The softness of the environment in Brazil already now paying.
Vince ahead of expectation so thats one elements the second element is.
Menial still D.
Mechanical impact of actually lower revenue associated with effects, but the ability to maintain really earnings guidance. That's obviously improved the margin rate.
Okay. That's helpful.
Any previous question you were talking about I guess the balance between repurchasing shares.
Or at least the focus on reports issued share how do you decide from a capital allocation perspective, whether paydown data repurchase shares will kind of framework are using.
So what we deal on over the summer after we had paid down.
All of our term loan is really look at the incremental benefit of continue to use excess liquidity is repaid down that sandy impacted would have on our really weighted average cost of capital versus the EPS accretion.
Associates with greedy, reducing our share count with the.
Number of secondary offerings that we've executed over the years, we believe that.
The reduction of of the float.
Is manageable as we execute our share purchase program that's for sure from a value accretion standpoint.
The share repurchase is the best drops for us.
Okay Fair enough and then just one quick follow up question on the 2020 guidance, what kind of revenue and enrollments are embedded in your adjusted EBITDA and free cash flow guidance.
We haven't provided any specific guidance on really to top line or even actually the bottom line from an absolute dollar perspective are you should expect to receive that in conjunction suites. When we report our fourth quarter results.
Okay looking forward to that thanks, so much.
Our next question comes from slow mall from Stifel. Please go ahead.
Hi, Thank you for taking my questions could you just a follow up on the last questions much share repurchases.
The company's doing really well.
You are increasing the free cash for the business you have increased the debt capacity.
At the same time that you're out there in the market, though very interested in buying stock you have a block of shareholders in Lincoln that seems to want to do secondaries and every time that happens in hits the stock and takes down why don't you just by their stock to add quite why do you why we having this thing where where they do a secondary and then you go out and by an open market why can't you get ahead of that.
Well first of all the wafer works is that.
Whenever a vending shareholder loans to really sell some of their shares the issue basically a demand notice that really triggers the process by which we organize a secondary offering there is until that consortium is shareholders call then going in to solve some negative impact associate.
Buying back shares directly from then it would basically be treated as a dividend and would have negative tax consequences that constrains really does appear sometime early next year and.
At that Tom Dolby, the possibility of all shareholders pork speaking to the share buyback.
Okay. That's for you.
Informative.
Then can you talk little bit what the revenue initiatives are.
I'm going to be next year or they can include M&A or are they really.
Ghana revenue initiatives.
There are exclusively organic revenue initiatives and they're really focus really two pillars first one is really continue to really lower our.
Cost of student acquisition by improving and marketing mix attrition is also a very significant area of focus.
Then lastly, it's really continues to promote the online part of our business, which is asset light and more I would say a cash accretive that in the face to face both in Brazil and Mexico.
Great. Thanks, and then the cash flow is really strong this year in the quarter.
Any of that is this all operational improvements or have any of it working capital that we can expect to kind of repeat in 2020, I'm just trying to figure out what we should be looking at going forward.
Yeah, I mean, I think on them on the cash side, we keep sharpening your pencil and how we allocate.
Really are available liquidity is and that includes really reprioritizing video capital expenditures.
And our working capital I think there's been tremendous opportunity to really.
Improve.
Really our terms with suppliers and medium managed working capital in general So most of those working capital Reni initiatives, all more recurring nature as opposed to a one off benefit.
Moving to 2020.
Really most of the benefits will be associated with this transitional.
Expenditures that all going to be coming down significantly.
After what has been a feeling all periods of the reinvestment behind our transformation.
Okay, and then just anything else last question on.
The revenue softness in Brazil, you had the fee as roll offs, and then you have the mix shift to the distance learning when did the comps get easier over there so you're really going to.
Have kind of the distance learning growth shine through.
There's really two sources of headwinds in Brazil are the first one is dcs cohorts integrating classes are larger than obviously the annual enrollment, but we're getting that should taper off starting next year. This year. It is still a net reduction of 10000 students, which obviously very significant.
His business about full points for total enrollment next year, it's going to be about half of that so that we will have a much lesser impact into the revenue dynamics and then.
The second piece of it these media I think the chronic overcapacity that we seem to face to face business.
Economy is going to have some impact as.
I think the demand starts to be re bounce a little bit more between.
The various segments, but also between the online offerings in the face to face segments.
Okay. Thanks.
And our next question comes from Jeff from Baird. Please go ahead.
Thank you and good morning can you give some more detail on the drivers of the improved new enrollment trends in Mexico, India, and I know and it's been doing well for little while here, but it looks like it accelerated and then Mexico, Tom just to return to growth that you'd be on my guess wondering is this the early success.
Some of the revenue generating initiatives or are there other factors. Thank you.
Hey, Jeff this is items starting off with Mexico.
It's been a couple of fed challenges and Mexico's you are aware in the past the economic environment.
Has been challenging those favoring the value brand unitek.
However over the last.
18 months or so we have.
Focus true tremendous effort behind as strengthening the value proposition for you.
We have strengthened the commercial touch from the product offering.
And Windows CE favorable results from those those efforts.
The C intake summer.
Was the positive indication.
And of course, the main intake this cool.
Yes.
Tremendous resource for us to know we're growing.
In terms of new enrollment in both brands, both both segments in Mexico.
We are doing so with that you're very disciplined pricing. So it gives us a lot of confidence that we own the right strike in Mexico, and the portfolio, it's really working for us.
And then Andy and do you view it as underlying acceleration or is this just continued good growth.
So.
In Indian it reduced two stories it is the Peru performance, which.
It's continues to work really well for US we have three brands in Lima.
In the premium and the value and the textbook segment and it gives the ability to get that laureate playbook of the portfolio approach the market to work really really well and it gives us an opportune to of course also to expand those great brands.
Into secondary said, its but still there are plenty of Sip codes in Lima that we are still penetrating with our product offerings.
In Chile, we are.
More mature we are really in all cities and all segments that we want to be in and we have all of the program at portfolio really at scale. So at this point, it's a matter of.
Revenue optimization.
Driving a favorable mix shifts into.
The programs that are most relevant for the market and optimal for us.
Okay and then appreciate the Unlevered free cash flow guidance for 2020, just as I guess the picture gets a lot clearer on your portfolio is.
Maybe a little help on kind of Es and.
Levered free cash flow guidance, but what are you expecting in terms of interest expense or if you don't want to give us interest expense because of various or on the buyback maybe what's the effective.
Kind of rate, we should be assuming now and then same for for tax rate like what's the right formula or the right rate with the current portfolio.
So first of all on on EPS next year as I said, we'll be providing guidance.
On our usual metrics in conjunction speed the release of soft fourth quarter earnings in terms of leverage we sailed really comfortable where we are right now and that's obviously below to there's no appetite flux decreasing or leverage.
On that level at this point in time, the interest rates that.
We anticipate on a pro forma basis moving forward is just north of $100 million for the remaining debt. So that gives you kind of the.
The implied interest rates, which is just about 10% I'm, a little bit higher than that because of the.
Capital leases in Brazil, but.
That's we give you a sense as to where our capital structure is going to be moving forward.
Got it thank you thanks.
Once again, ladies and gentlemen, if you do have a question. Please press Star then one on new Touchtone phone.
Our next question comes from Marcello from Jpmorgan. Please go ahead.
Hi, Good morning, good morning, I leave Gigi Adam.
You commented on the first from Brazilian distance learning growth. You also said that you had some initiatives you Maxim Swift.
Some more broader update on your distance learning initiatives.
Tom.
To be the first question and the second question.
If you could comment a little bit dealt come off of the new regulations in Chile, where you're going some sort of process to adopt the new regulations is that over what was the impact expanding these are the two questions.
Great MISO I'll.
Take the first and.
JJ will.
Cope with the regulations and too late.
Brazil, we have invested.
Hi, and a.
Very innovative.
Distance learning platform on an all go digital.
Technology base load of expertise and capabilities from Goldman.
Combined with some of the experiences that we had early on in Brazil has resulted in this go digital platform that is.
Offering.
Innovative products that are really in meeting the expectations over the consumer and employers.
That has resulted in very rapid growth.
And.
The growth rate.
As it's been 50% to 70%.
This year and we are.
Shifting to end up with 70, plus those and students and distance learning. This year that has taken us to the point, where this business is accretive for us and that gives us additional confidence in order to.
Entry, so investments going forward to further grow and scale this product.
In Brazil.
Similarly, we have launched online products in Mexico, and the Andean region.
The regulations is slightly different we don't need the polo's. This we have in Brazil, but.
But again, we are leveraging the same center of expertise leveraging the networks capabilities and that has enabled us to again have very robust growth rates in online in Mexico, and Andean region and we're seeing.
Yeah.
A lot of our working adult.
Products from the past, which used to be face to face a migrating rapidly over to the online.
It is more convenient and an about our value proposition for consumer so we are having some.
Mixed mixed shift, but we're also taking significant market share in this emerging digital segment in Latin America.
On the on the Chile fronts, just as a reminder, the new higher education law was enacted in March 2018, So really what we've been doing since then is really complying with the new regulation.
For our related party transactions.
We've gone through the bidding process for almost all of them and we're in the process of reworking, we'd regulatory authorities to put them into effect.
The.
Financial impact in our consolidated results East negligible.
Some contracts hats price come down to the contracts for were added to the existing portfolio, but the net impact on our profit moving forward is de Minimis.
Thank you very much.
Our next question comes from Alex from Barrington Research. Please go ahead.
Good morning, you have and Jay Jay This is Chris how soon for Alex Paris.
Looking to your 2020 guidance.
You are raised guidance for adjusted EBITDA with your four main pillars in place.
However, you may like or choose how should we assess the incremental margin improvement. If we were to break this out from a value to premium institution basis geographic basis.
And more specifically what type of contribution are you anticipating out to 2020 and beyond.
The growth that you're seeing for the online student base in the Mexico Andy regions.
Got it starts on the margin progression and then I will hand over to I less on the on the growth side.
You know if you just look from.
Penal geography standpoint, a lot of the improvements really are in cost reductions and effectiveness, both virginie and educational productivity that is.
From a geography standpoint, most need really in Brazil.
In Mexico and that culprits.
Yes.
The marching of our business in in Peru for instance, our aim Chile into great. Two two great extent already where we steel.
They need to be there still always over TTAC reni leverage scale as those continues continued to grow but I would say the disproportional contribution to the margin improvement is really in the two drugs. The I just mentioned and corporates.
And.
Thats really goes across the whole value chain most of those revenue initiatives also in just two geographies and this is where we believe we've got still some ways to go until we reach I think the margin level that we've seen in the Andean region.
And in terms of growth, we are going to see growth coming from improved retention thats been a and initiative as part of our transformation that is yielding results.
We will see continued growth coming from.
Digital.
Most notably from.
DLT product in Brazil.
We continue to expand our operations in Peru, where there's a lot of white space.
Similarly for or value segment.
In Mexico, which is primarily today.
A Mexico city product and we have the opportunities and we are expanding to secondary cities in Mexico without offering similar to what we have with with you would you be.
So those are the.
Three.
The main geographic.
Gross leverage we're also encouraged the fact that Walden has.
Stabilized and we have developed new product offerings that we intend to launch and Walgreens and also step up our investments and little bit involved in in terms of.
Marketing as we see opportunities in some of our verticals that are.
Underpenetrated disciplined.
That's very helpful. Thank you for the color.
And my last question.
You mentioned.
The expansion.
Of the of the physical locations outside of Mexico City.
Can you provide an idea of where we are in that extension and where there is to go and just what you're seeing so far there.
In regard to your expansion of your footprint.
So if you look back over last couple of years, we've added.
One sometimes to new campuses.
Every year.
There's been some periods, where we had taken a pause due to economic concerns and or focus on free cash flow, but we know back into the rhythm of aggregate campus.
And you said it is.
The you to take brand at each year.
Thank you you look at Jay that's all have for now.
Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you participating and you may now disconnect.
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