Q4 2019 Earnings Call

Welcome to the fourth quarter 2019 Laureate Education incorporated earnings Conference call. My name is called like Apple pay your operator for today's call.

Hi, all participants are in listen only mode.

Later, well conduct the question and answer session. During the question answer session. If you have a question. Please press Star then one on your catch town.

Please note.

It's been report I will now turn the call over to Adam <unk> Senior Vice President.

Treasurer you may begin.

Thank you operator, Hello, everyone and thank you for joining us on todays call Skus, Marty Education's fourth quarter and year end 2019 results.

Joining me on the call. They are I look Stark Hanson, President and Chief Executive Officer, JJ, Sharon Chief Financial Officer.

Earnings press releases available on the Investor Relations section of our web site at L'oreal Dot net.

We have also posted a supplementary presentation to the website, which we'll be referring to during today's call.

This call is being webcast a complete recording will be available after our call.

I'd like to remind you that somebody if rates were 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 differ materially from our expectations are disclosed in our annual report on form 10-K filed with the U.S. Securities Exchange Commission. This morning.

In addition, all forward looking statements are based on current expectations as of the data This conference call.

And we undertake no obligation to update any forward looking statements.

Additionally, non-GAAP measures that we discussed including adjusted EBITDA adjusted EBITDA margin and a free cash flow are also detailed and reconciled to GAAP counterparts in our press release or supplementary presentation with that let me turn the call over the island.

Thank you Adam and good morning, everyone.

I'm very pleased to report strong fourth quarter results that rolled out.

Very successful yeah florrie out.

Both margins and free cash flow performance came in.

Initial expectation.

And we are delivering on our commitments to investors with a simplified because mobile improved capital structure and focus on shareholder value creation.

In the past two years, we have significantly transformed organization by focusing on large markets, where we have scale and established in country networks.

This strategy has resulted in strong operating platforms within each country and the ability to leverage shared infrastructure technology curriculum.

Operational best practices within those country networks.

The operating performance improvements have been tangible.

Over the past two years, we have increased margins by approximately two percentage points.

And the business is no generating strong and sustainable free cash gross.

[laughter] both these metrics along with other important key performance indicators are anticipated to further improve during twentytwenty.

In addition, following the completion of the I saw it saves and noticed over the past two years or leverage profile, it's no but no to act.

This allowed us to reassess our capital allocation strategy and pivot to worked investments that maximize shareholder value creation.

Consequently.

During 2019 or board approved a total of 300 million and share repurchases or which have no been fully executed.

Although we have made significant progress management believes who the value can be unlocked for our shareholders.

We announced on January 27, Oh decision to explore strategic alternatives.

Each of our business units.

This strategic review would help us determine if we can accelerate or path to value creation for our shareholders.

We have improved a company wide operating performance through significant cost and efficiency initiatives over the past two years.

And we are adults, taking these strategic action from the position of strength.

Specifically, we have already initiated exploratory saves processes for our businesses in Peru, Mexico, Australia, New Zealand.

And we are actively preparing similar processes to evaluate options for all of the business units.

As we progress on our strategic plan, we will provide timely updates as appropriate.

Oh, no turn the call over JJ for more detailed financial overview of the fourth quarter.

Year to those 19, I know outlook for Twentytwenty. Thank you I'd that before I go over our reported results. Let me remind everyone that campus based higher education is a seasonal business. The first and third quarter is represent our two largest intake parents, which account for approximately 80%.

Overall total new enrollment activity for the here, but all seasonally low from a piano prospective asset classes are out session, but most of those mouse.

Conversely, the second and fourth quarters generate the majority of the revenue and adjusted EBITDA for the year, but all not large enrollment intake parrots.

Let me not go over the highlights about the faults in the fourth quarter starting on page eight.

Revenue in the fourth quarter, it was $883 million and adjusted EBITDA was $244 million on a comparable basis and at constant currency, our revenue and adjusted EBITDA for Q4 grew three at 14% respectively.

Consequently, our EBITDA marching were up almost 300 basis points in the fourth quarter and reflect the acceleration of our cost reduction initiatives.

Across all segments and our corporate.

For the full year revenue was $3.25 billion, then adjust EBITDA was $647 million on a comparable basis and at constant currency, our revenue and adjusted EBITDA for the full year growth three and 10% respectively.

Our adjusted EBITDA marching was up 135 basis points year over year are remarkable improvement when compared to our historical performance over the last few years.

Now, let's review in more detail our key operating metric by segment, starting with page 10.

Overall, we grow new enrollments by 10% for the year, while total enrollments on a comparable basis increased 4%.

In Brazil are distance learning business continues to scale quickly with new and total enrollments up 69, and 59% respectively.

Total enrollment for face to face segment continued to be negatively affected by the unwinding of the fitness program, which was only partially offset by the growth of new enrollment for private payers.

In Mexico performance continued to be mixed with our unique tech brand growing mid to high single digits, while we're still experiencing softer enrollment at our premium Brian you have.

Yeah, I get segment had another strong quarter, which was yet again a record year for almost all of our institutions across the segments.

Adjusted EBITDA for the full year was up 13% versus the same period, a year ago, which is outstanding.

2019 will be the Ford you're in a row that the Andean region delivered double digit EBITDA growth in local currency.

In our rest of the World segment, which is our institution in Australia, and New Zealand, we continue to deliver great results, we knew enrollment up 20% and adjusted EBIT that growing well into double digits for the full year.

Finally for online and partnership segment enrollment results continue to be impacted by the planned transition away from the foreign based students new and total enrollment for Walden domestic segment were essentially flat for the year.

Now, let's turn our focus to free cash flow starting on page 14.

Free cash flow generation for 2019 reach $166 million, which is 15% ahead of our guidance of $145 million, we communicated at the beginning of 2019.

This result represents a 20% improvement year over year, which is even more remarkable when considering that it is net over 40 million dollar headwind from the timing of our App seven in Turkey and unfavorable effects.

Let me now conclude my prepared remarks, we are 2020 guidance starting on page 16.

As a reminder, we typically do not provide guidance by segments, but believe that in light of our current strategic review, we should share some color for the three distinctive parts of our portfolio.

Latin America, Australia, New Zealand and online the partnership which starting at 2020 is essentially Walton.

The main at night is that we expect very similar dynamics by segment in 2020, when compared to 2019 when a couple of notable exceptions.

First Brazil marching are expected to improve in 2020, thanks to the strong momentum we have built in the second half of 2019, when the margins were 20%.

Second we will increase investment at Walden, starting this quarter to fund future growth.

While we expect a rebound of our new enrollment trend already this year EBITDA margin will contract by 200, Rick the 300 basis points at Wal than in 2020, primarily as a result of these investments.

More specifically guidance for the full year in 2020 is expected as follows.

Total enrollment of 910000, which represents a growth rate of 4%.

Revenue based on current spot FX rate between 3.130 billion and $3.170 billion. This represents an organic constant currency growth of approximately 2% to 3%.

Adjusted EBITDA still based on current spot a fixed rate between 670 and $685 million and would represent 8% to 11% growth on a constant currency basis.

Finally, we expect free cash flow to be approximately $230 million in 2020 and increased nearly 40% versus 2019.

For the first quarter, which has been impacted by shifts in our Academy calendar as noted on page 19 guidance is as follows.

Revenue between 560, and $570 million adjust EBITDA is estimated to be a loss of $18 million to $22 million. This is consistent with our historical earnings seasonality and reflects the fact that most of our institution out of session for much of the first quarter.

Finally, please note that the guidance we are providing today assumed that all entity is currently reported in continuing operations will remain as such but the entirety of 2020.

And when.

Any of these entities are required to be moved to discontinued operation during the year guidance will be revised accordingly.

I live now back to you put a wrap up.

Thank you Jay Jay.

Well, improving l'oreal financial profile remains a top priority or core focus continues to be on our students.

We put our students at the center of everything we do.

2019 was a very strong year floor, yet we continue to execute well and we are delivering on our operational commitments.

Critical deliverables for Twentytwenty include completing our evaluation of strategic options for our businesses.

Also staying true to our mission of delivering high quality education at affordable prices.

The management team remains committed to creating value for all of our stakeholders.

Operator that concludes our prepared remarks, and when we're happy to take questions.

Thank you. Thank you.

We'll now begin to find out.

[laughter], Jonathan Oneneck attach telecom.

Thank you please.

Hash key.

You are using the speaker phone you may need pick up the handset or.

Once again, if you have a question. Please press Star then one touch town.

And our first question comes from Manav Patnaik <unk> from Barclays. Please go ahead.

[noise] not your line is now open.

[noise] airline is needed.

[noise] <unk> next question.

Our next question comes have Marcellus.

JP Morgan. Please go ahead.

Hi, good morning, Thank for taking my question.

First question will be about asset.

The capital gains tax actually.

Could you provide some of you are some some comments on what would you talk about how much will.

Think about taxes, you could be fulfilled corporation or alternatively could you discuss how we'd happening to previous divestitures that would be a the first question. The second question is above and beyond region. You mention a strong performance on both pricing and volume how does that how can you attribute that to.

Both speed when Chile is the behavior similar or what could you talk about the behavior, especially given the social unrest in Chile thing competitors.

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Hi, This is Jay Jay I'm going to address your first question and then I'm going to let 'em Ah I left talk about dynamics in the Andean region.

We're not going to provide any specific guidance on a tax friction associated with the asset sales. The only thing I'm going to say is I'm not gonna have you referred to the 10-K, a page 177, and a 178, which outlines our outstanding net operating losses, you will see there that we had about 500.

$30 million of and that number up about 74% of that these media. So should we they'll foreign operations, which leaves about 138 in the U.S. and most of that Threed ease at the state level, So foiled central purposes, our net operating losses, a full federal end.

The U.S. he will be a fully utilized by the end this year.

And moving to performance in the Andean region started with through and through we are clearly benefiting from having very strong brands in both the premium segment in the value segment and innovation leadership.

Make so some of the preferred.

Provider a player indication.

Given the strong outcomes that we deliver and 29 team was a record year in that regard for business improved a new enrollment grew 17% and Peru is.

But in network in terms of financial.

Profile laureate.

And.

Uh huh.

The only thing I'd like to add to that is that we of course in the mid low fee that made intake nouvel brew.

For for Twentytwenty, we should towards to another strong year for Peru and in Twentytwenty.

Chile, and it's a different situation.

We have the at really focus or grows and execution in Chile, rone online and hybrid it there.

No new investments could last couple of years and physical plant.

In July so the growth that we delivered last year of 7% in new enrollment and really came a you know all from just.

We shouldn't see an innovation in digital delivery.

Fourth quarter of last year was particularly challenging particularly.

Given the civil unrest and related disruptions that started in mid October of last year.

Management team did an outstanding job and managing at the complexities around that we were able to complete all of our courses on time by shifting classes from a physical.

At present, we will deliver it to two online and we also deployed significantly increased security.

To save card or infrastructure or stuff in faculty and students.

The disruptions in.

Sure they continues but a more moderate level the way, we're seeing the disruptions right no in first quarter is.

The overall enrollment process on being delayed.

The National IX known as the P. as you exams.

Been rescheduled multiple times.

Due to disrupt shoes.

In the streets, however that is no.

Largely behind Us and we believe that strong brands that we did we have in July.

Will help blunt the impact on these disruptions, but clearly.

The visibility in Chile is is a new enrollments it's difficult right now just given the shift in.

And then take.

Risen given these disruptions, but more to come.

On that during our fourth quarter call.

Thanks, a lot.

Our next question comes from Henry Chen from BMO. Please go ahead.

Hi, good morning.

I wanted to ask about the investment and.

Can you talk a little bit about.

Investing in it.

What are the.

Okay.

Thanks.

Sure on.

2019 was a very.

Hi, good year for Walton, we I've seen the domestic business in terms of new enrollment being state has stabilized.

And we have delivered strong momentum and improvements in retention, particularly.

First to second term retention has improved by 300 basis points, which resulted in a 150 basis point overall improvement in retention, so that kind of add momentum.

Just give us confidence to.

Increase the investment levels at World in order to restart growth and the investments are coming really three categories.

Launching new programs.

Including a accelerated.

Launch overall competency based products second loop, making further investments in student experiences.

And the investment that we will the more moderate investments that we made in 2019.

In technology and resulted in such a strong.

Performance in retention, so that is giving us confidence that we can and should make further investments in this area and then thirdly, we are stepping up our investments in marketing and brand investment.

Which we believe it's going to result in.

Increased demand and an increase growth rate.

Business.

Jay Jan you would like to add to that not to get covered it.

Okay great.

Thank you.

And I guess, just a follow up given the.

Yes.

The state markets and then Corona viruses wondering if you've seen any impact.

Around the virus on your operation. Thanks.

No nothing of of any particular significance at this point in time, where obviously monitoring the situation, which is fairly fluid Ah, but theres hasn't been any material negative impact that has been included in the Q1 or the full year guidance.

Okay, alright, thanks, so much.

Our next question comes from Kale MUSC Ardine from Morgan Stanley. Please go ahead.

Hi, Good morning, everyone. Thanks for taking my question can you. Please comment on the market dynamics in Britain view, we're going through the first and most important thing peak cycle are you being able to increase prices for the new students how the competition.

And second question regarding the share repurchase program, which has already ended.

We expect to have any further.

Repurchase program throughout 2020, and how much can we expect thank you.

In terms so some of the main intake in Brazil.

During first quarter, we will give.

Robust colder and details there one does during Q1 call, but we are you know of course, feeling very confident about operations in Brazil. We made some very important changes June 2019 revenue management team in place we have aggressively implemented dog.

From an operating model JJ commented on the very strong margin performance in the second half off of 29 team and because of the actions take it taken which is going to give us further momentum.

Run rate perspective into Twentytwenty as well as further initiatives that are underway. So we feel really good about our business in Brazil. The team is performing really well and we are.

You know.

Three quarter and through the the first intake and would provide full of accounting of that.

During Q1 call.

In terms of the additional stock buyback program.

If and when we are launching any programs, we will be communicating that to the market.

Alright, thank you.

Once again, ladies and gentlemen, if you do have a question. Please press Star then one on your Touchtone phone standing by for questions.

And we are showing no further questions at this time.

Well. Thank you everyone for participating on today's call on do we reported in speaking to again soon during our first quarter earnings release. Thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.

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