Q2 2020 Laureate Education Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to Laureate Education second quarter 2020 results call. At this time, all participants are any listen.
Only mode. After the speaker presentation, there will be a question answer session to ask a question. During this session you will need to press star one on your telephone please be advised that todays conference maybe recorded if you require any further assistance. Please press star zero I would now like the in the conference over to your speaker.
Today Senior Vice President Finance, Adam Borg, Sir Please go ahead.
Good morning, everyone and thank you for joining us on todays call to discuss learn educations second quarter 2020 results.
Joining me on the call today are Alister cancer, 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've also posted a supplementary presentation to the web site.
Which we'll be referring to during today's call.
Call is being webcast and a complete recording will be available after the call.
I would like to remind you that some of the information, we're providing today, including but not limited to our financial and operational guidance constitutes forward looking statements within the meaning of applicable us 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 to differ materially from our expectations are disclosed in our annual report on form 10-K filed with the US Securities and Exchange Commission.
Our 10-Q filed on May seven 2020.
Alright. Thank you filed earlier this morning.
As well as other filings made with the SEC.
In addition, all forward looking statements are based on current expectations as of the date of this conference call and we undertake no obligation to update any forward looking statements.
Additionally, non-GAAP measures that we discussed including adjusted EBITDA and free cash flow are also detailed and reconciled to GAAP counterparts in our press release or supplementary presentation.
Matt Let me turn the call Rhode Island.
Thank you Adam and good morning, everyone.
The context of being in the middle of the cooler than TV pandemic I am pleased to report is solid second quarter.
Adjusted EBITDA results.
Has of expectations in large part due to tight cost controls on the acceleration of certain productivity initiatives.
The past five months have demonstrated the resiliency of our business model enabled by our ability to deliver innovative and high quality educational offerings at affordable prices.
This has resulted in a relatively stable total enrollment base.
Our liquidity position is strong.
We are seeing early signs of reversal in some of the foreign exchange headwinds we experienced during the early stages of this been damage.
These factors are leading to an improved outlook for Twentytwenty, which JJ will cover in more detail when discussing our updated guidance.
I want to thank our faculty and staff once again for the agility and commitment to deliver on our promises to our students during these challenging times.
Laureates top priority continue to be the health and wellbeing of our students faculty and staff, while delivering high quality education offerings in a safe and responsible manner.
At this crisis has unfolded.
We have been carefully studying the emerging trends from across our network in comparison to what we experienced during prior economic shocks.
Historically as economies in Latin American had been unfavorably impacted by macro events. The primary negative impacts to our business was felt at a premium institutions.
Well our value brands performed relatively well as students traded down to more affordable offerings.
So far through this pandemic, we see evidence that the most vulnerable parts of society.
Hit the hardest.
Consequently, there has been a greater adverse demand impact on or value brands versus our more premium brands.
The typical student profile at our value brands in Latin America has parents working in jobs directly affected by the crisis such as the hospitality.
And other sectors in the informal economy.
Those families are struggling right now and all of their prioritizing the children's education to the extend that they can afford to do so we are experiencing a slowdown in your enrollments as well as higher attrition in this value segment.
On the other hand in our premium segment, serving the mid to higher end of the socioeconomic pyramid, where more patterns have white collar jobs. There is still open.
Have a negative demand impact, although no segment seems immune to the impacts of the co with 19 pandemic.
Nothing that laureate has experienced reduced volumes, but is benefiting from favorable revenue mix dynamics.
As we head into the upcoming semester.
It is clear that we won't be back to business as usual for a campus based operations and that online will continue to be the primary modality entered this pandemic is behind us.
Our institutions have a competitive advantage in online and distance learning given the investments we've made in digital learning platforms over the past three to five years.
Our plans for reopening our campuses. This fall, we'll continue to evolve in the coming weeks.
Each market would likely have slightly different approaches based on how cobot 19 is trending in the regions.
As well as being impacted by the mandates of the relevant local authorities.
For example, in some powder, Brazil campuses are expected to reopen in stages, starting with labs and clinics as an expanding to more traditional classes by October.
In Mexico campus openings will depend on the covenant teen conditions and the related reporting dashboard established by the federal health and education authorities as well as the local guidelines in the various states.
The Minister of Education has said that face to face classes will only be real soon as the particular location when the dashboard is green.
Peru, and Chile have similar dynamics.
We will continue to monitor the situation and it's just based on what is the load in each market as well as what we feel is appropriate for the safety of our students and faculty.
Before turning the call over JJ for the financial update that we provide a brief summary of our strategic review process.
Last week, we announced the agreements to sell or Straightly anew ceiling businesses for 643 million us dollars or approximately 16 times trailing EBITDA.
This transaction as with most of all the divestitures over the past two years is highly accretive to our shareholders and yet another testament to the quality of the institutions in our portfolio.
We also recorded a 418 million us dollar a non cash impairment charge related to our two lane operations.
In the second quarter, the company identified an impairment indicator and completed evaluation of the fair value of our Chilean operations, which revealed that the range of likely values that could be expected to be realized was lower than the carrying value of our Chilean reporting unit.
The reasons for this include among other things the risks and uncertainties that the market perceives erode operating higher education institutions in Chile, given the current political and regulatory environment as slow as the possibility of a new chiller institution that could come into effect as early.
2022.
Finally, let me conclude by underscoring that laureate Board and management are committed to continuing our strategic review process, which is designed to optimize the value of all of our stakeholders.
I will now turn the call overdue JJ for more detailed financial overview of the second quarter and first half performance of Twentytwenty.
JJ.
Thank you I life as a reminder, anticipate higher education is a seasonal business and the second quarter represent an important earnings period for the company.
This year that seasonality as being impacted by decoding 19, pandemic, which result in the delay or the number of classes and ultimately some of them now being completed until the third quarter.
Please refer to page seven for an illustration of the associated shift in our Academy calendar.
Cash impact associated with that is about $40 million revenue all due to be recognized in Q3.
With that context in mind, let me now covered the financial results for the second quarter starting on page eight.
Revenue in the second quarter was $792 million and adjusted EBITDA was $259 million.
Adjusted EBITDA for the quarter was significantly ahead of the guidance. We provided in may due to tight cost control and the acceleration of a number of productivity initiatives we initiated in March.
On a comparable basis and at constant currency revenue for Q2 declined by 8%, while adjusted EBITDA was up 1%.
Adjusted for timing revenue was still down 3%.
This year over year decline in revenue was attributable to weaker in your enrollment in Brazil, and the Andean region as well as increased interest semester attrition due to the could be 19 pandemic.
Moving now to first half results when combined with the first quarter still on a comparable basis at constant currency overall performance for the first staff resulted in a decrease in revenue by 6%, while adjusted EBIT that was only down 3%.
Adjusted for timing revenue for the first staff was essentially flat at down 1% and adjusted EBITDA would have been up at least single digit versus 2019.
Let me now provide more detail on our performance by segments, starting with page 10.
Please note.
Year over year indicators will be on an organic and constant currency basis.
Let's start with Brazil.
Total enrollment declined by 5% versus the same period in 2019, and new enrollment decreased 13%.
Our distance learning segment increased total enrollment by 12% year over year on the back of strong you enrollment trends in the second half of 2019.
Total enrollment for face to face segment continued to be negatively affected by the unwinding of the CS program as well as increased level of attrition since the start of the Koby 19 pandemic.
For the first half revenue was down 5% versus prior year timing adjusted however.
Adjusted EBITDA should double digit improvement as the cost action taken in second half of 2019 continue to yield strong dividends.
In our engine segment, new enrollment were impacted by the could be 19 crisis as a result were down 7%.
The impact.
Our total enrollment was more limited to down 5% as compared to the same period last year aided by solid we enrollments.
As noted in Ireland opening remarks, we're seeing more pressure on our value brand institutions across all Latin American markets and European in Peru is no exception.
There is no doubt that the target segments of value institution or made up of students who is income as being disproportionally impacted by the koby 19 crisis.
Adjusting for timing revenue was down mid single digit as compared to the same period last year on a comparable basis.
Just EBITDA was also down versus the same period in 2018 due to in part to increase bad debt expenses across the segments.
In Mexico or large intake will occur in September.
Hi, just a timing first half revenue was down 2% on a comparable basis.
Our rest of World segment, which is Australia, New Zealand continues to scale rapidly and is experiencing strong double digit growth in enrollments revenue and adjusted EBITDA.
Given the announced sale of this asset. Please note that we'll be moving this segment to discontinued operations in Q3.
Finally in our online and partnership segment, our core domestic market performed well, we new enrollments growing at 3%.
Overall total enrollment were down 4% as we continue to deemphasize, our international partnership business, which represented less than 10% of our total portfolio in Q2.
Excluding the impact of timing first half revenue was flat year over year for world.
Turning now to our liquidity position as noted on slide 13.
At the end of June our liquidity position stood at $630 million, an increase of $83 million from the previous quarter. As a result of operating cost reduction and tight control over discretionary capital expenditure spending.
Additionally, we've been able to negotiate the extension of more than $100 million in debt obligations with our local banking partners in Latin America.
What's more the $630 million of liquidity currently on hand does not include the $760 million in gross proceeds that we anticipate in the next six to nine months from our previously announced pending asset sales in Australia, New Zealand and Malaysia.
In short our balance sheet is strong and we remain well positioned during this pandemic.
Let me now conclude my prepared remarks, with our 2020 guidance starting on page 15.
I am pleased to report that we are dating our full year 2020 guidance to reflect three elements.
Increased visibility into our enrollment dynamics improve outlook from an operational standpoint, and finally stronger effects when compared to our situation three months ago.
As a reminder, in May we provide a key scenario for the 2020 full year guidance, depending on the timing and the pace of our return to face to face operation.
Scenario, one assumed that we would work in our campus in the fall Wassenaar, you to assume the continuation of online teaching through the end of the year.
Despite the fact that we are now assuming that reopening of our campus operations will be slow and limited our financial outlook is more aligned with sooner you. One as we will continue to have the benefit of the productivity initiatives. We launch in the first half of this year.
Please note that our revised guidance now exclude the rest of World segment, which will be moved to discontinued operations in Q3.
With that context nine our revised guidance for 2020 is as follows.
Total enrollment estimated to be approximately 708 need 6000 students.
Revenue estimated to be between 2 billion 490 and to be in $590 million.
Adjusted EBITDA estimated to be between 510, and $540 million and free cash flow estimated to be between 150 and $180 million.
For the third quarter, our guidance is as follows revenue between 625 and $645 million adjusted EBITDA is estimated to be between 121 and $131 million.
I'd like now back to you for wrap up.
Thank you Jay Jay.
We're very pleased with the resiliency that our business model demonstrated in the second quarter.
With a solid balance sheet and with strong cash position laureate remains well positioned to deal with the challenges in these uncertain times.
We will continue to be proactive in managing the business in a prudent manner during the pandemic well opportunistically pursuing strategic transactions to further generate value for our stakeholders.
Operator that concludes our prepared remarks and were no happy to take any questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key again that star one on your touched on telephones ask a question. Please standby, while we compile the Q in a roster.
Our first question comes from a line of Shlomo Rosenbaum of Stifel. Your question. Please.
Hi, Thank you very much for taking my questions Jamie.
Certainly looks like.
The results are definitely a better than expected given the operating environment on the ground.
I want to just ask you a little bit more about the Chile operate a write down.
What does it mean for the outlook for the business and can you give us a little bit more detail it seems like what.
What specifically drove it in the quarter or was it that legislation that's progressing in in Chile, right now in terms of being more accommodative for tuition. During Covidien team is the is there something else going on like what and what's the what's the outlook for that business like into the future.
Hi, Shlomo this is Jay Jay I'm, I'm going to give you a little bit more background as to.
The process, we went through in the second quarter like we do in Ah. During every quarter you know each quarter, we evaluate Twitter there or any indicators of impairment for reporting units as you know we need to value our assets at the.
Lower value of the fair market value of the carrying value on the balance sheet and during the second quarter.
As part of the ongoing strategic review, we receive and considered information regarding the market valuation for control of our Chilean operations.
Which caused us to believes that it was more like in the now that the for that involve Chile reporting unit was less than carrying value.
And we put into the 10-Q, a number of drivers in the footnote that.
You know or behind that in August the.
Uncertainties that market participant of around the operating of higher Education Institute in Chile for instance, in all the challenging boutique and regulatory environment.
That's that's we've experienced and of course, the possibility than the new Chilean a constitution could become effective as early as the summer of 2022.
[noise], we're not going to be discussing specifically what information. We received however, using that information we sure we perform the impairment test and.
You know that results in the impairment charge, so thats really the process, we went through and.
I would really what triggered the impairment in Q2.
Got it so what's the carrying value now for Chile.
[noise], where we havent.
Reported that information specifically for Chile, there is of the ski additional disclosures in the 10-Q that you will find around net assets associated with Olivier ease that we have that includes also Doris and similarly, you will find additional disclosures around the.
Unrealized FX losses, but you know we have where we haven't disclosed.
The carrying value check.
Okay. Thank you and then just.
Is there anything else that we should be considering in terms of like an enterprise value per Australia, it's just a fantastic price.
Theres are getting it seems like the assets are really good assets is there any debt for cash that's allocated there as well in other words, if we're looking for an enterprise value or are you guys going to be absorbing some of their debt or are they going to be or you can be reading a significant amount of cash there or anything else, we should be considering.
The prices, we disclosed as the duct free.
Tax free.
Oh.
Thanks valuations that reduced the enterprise value and the the reflection of the prices you know lorem has a track record of billing really strong businesses.
And our business in Australia, New Zealand is no exception to that and I'm very pleased with the business that we have.
We have built over the last decade, or so and I'm very pleased with the transaction as well.
Okay, great. Thank you very much.
Thank you.
Our next question comes from Ryan Leonard of Barclays. Please go ahead.
Yes, Hi, guys I was just wondering I guess what.
I know you've given multiple scenarios in the guidance, but I guess what are you assuming for specifically attrition in those numbers and I guess, how did the attrition even trend.
Through July if you have any kind of data points there.
Yeah I'll.
Hi, Ryan This is Jay Jay for the guidance.
Really taken a look at all the key drivers of our business that we've experienced.
Over the last 90 days and what we've seen is really enrollment dynamics that tend to favor the higher price institutions.
Reenroll have been strong fairly across the board and but there's been a definitely an uptick in attrition, particularly at our value price institutions as I said in my prepared remarks.
Students that or attending does institutions tend to be disproportionally impacted.
From a fish social accounting Mikkel standpoint by de Koby 19, a.
Crisis. So you know, although you know enrollments you know are in the middle of the range that was established at the low book ends of the.
Second scenario in the higher bookends on the first scenario.
It is slightly lower than the first scenario and reflects really what we've said which is that the return to face to face operations is gonna be you know slow and only a gradual so that has been factored into the guidance, obviously, it's offset by the.
Obviously makes that I was referring to in terms of on Roland dynamics, and then all the cost actions that we've taken proactively to mitigate the.
The revenue related impact. So that's why we were able to to whole guidance actually higher than the midpoint of the first scenario, partially due to a effects favorability.
Got it but just in terms of portfolio review from a regulatory standpoint do you think.
Further consolidation in Brazil is possible today or do you think.
The large players the government.
We're currently about.
We're not going to them in a speculate on on which business combinations will be a permit but you know clearly that's been a recent trend and consolidation the market remains fairly fragmented.
So we believe there are significant opportunities for further consolidation as the macro trends in Brazil.
Thank you.
Thank you. My next question comes from Marcello Santos of JP Morgan Your question. Please.
Hi, good morning, Thanks for taking my question.
When you look at adjusted EBITDA for the first half. It was the reason that was hit hard to so.
Perhaps you could discuss the results in terms of what's happening due in Chile.
That's the to be the first question and the second question is regarding the educational reforming through if you could provide some comments on on if you think there could be any any changes regarding given the political reshuffled, that's taking place there. So any color on that will be very helpful. Thank you.
Most of this is not only will take him.
We are big picture perspective, and then JJ will.
Jump in and provide more details there on the numbers in Peru, and Chile, but.
Youre right.
The Peru, and Chile has been been hit US a segment.
Good Peru, probably more so than Chile, because Chile has a student loan program that blends the impact.
Somewhat from an affordability perspective.
But in Peru, it's a 100% a private pay and we've found that.
You know consumers us a struggling I mentioned that an opening remarks, particularly in the value segment.
And.
So just that's been in an element of the affordability was due to just said listen in this.
A bit of this crisis, just can't afford to sign up.
So they are deferring, we do expect that to be pent up demand that probably not in twentytwenty is probably going to be more in 2021.
In terms of from the educational.
Reforms in Peru, I think it's just simply a reflection of the consumers are hurting.
On the legislators and looking for ways to reduce the burden on our students there's been a.
A lot of and projects or proposed legislations.
In Peru, as well as in other markets in Latin America.
But to.
Today Theres been no no material price controls on the other adverse legislation that has been it had been enacted.
The legislators are focused on affordability laureate is focusing on affordability is we're well positioned in that regard and we are.
You know working.
Very collaboratively with the policymakers and regulators and or students and their families.
To east the impact of the crisis in a way that makes sense for everyone. So I'll pause there I should also say, although there has been no and legislation passed that of course thing you know material adverse.
Thanks to our business.
We are monitoring of course all of these areas proposed legislation in Peru and elsewhere.
Very closely.
Thank you.
Thank you Mark ladies and gentlemen to ask a question press star wanting your touched on telephone.
I am at Star one to ask a question.
Our next question comes on the line of Shalimar study.
Morgan Stanley Your line is open.
Hi, Thanks for taking the questions. So can you. Please provide the main you should use that word take in order to increase the cost efficiencies of the company. So I was wondering if you're wearing a for instance.
Reducing the number of campus that do have I don't know, but may be merging two campuses that are close to each other.
The second question about being taken real enrollments dynamics in Brazil, I believe thing takes cycle in Brazil already started so if you could comment how the environment there and how they re enrollment will assist is going in Q.
So did you will take has a cost yes.
Yeah, absolutely saw the cost side, the productivity initiatives already associated first and foremost on all the or cost expenses that all associated with the running our face to face operations. Obviously, there was a lot of opportunity to reduce.
On campus expenses, we've also been.
Proactively negotiating with all of all landlords are the reduction of rent and ER and driving the acceleration of some of the return of buildings that were always part of our productivity initiatives for 2020, but clearly there was an opportunity to.
Accelerates that trends as you know a in Brazil, there's a lot more flexibility in doing so given the way do leases all structure than in some of the other markets and then of course, the the ability to deliver on most scale in line as also provides opportunity to well.
Dr. educational productivity a little bit so further.
So that was the second bucket and last but not least all discretionary expenses as being a continued to a minimum and that's a rounds up if you watch that the three big buckets of productivity initiatives that we've had that have obviously benefited Q2, and we'll continue to a yield dividends in the second.
Yes.
And the on the enrollment.
Reenrollment cycle in Brazil, we're about.
Two thirds through but 65% through the the intake for Brazil for the year of course, the main intake recycling one when it's fully behind those and we are far along on cycle too.
On the the.
The trend a very consistent with what their book JJ and I've been saying as strong Reenrollment performance.
As we've had good collections.
In terms of.
In.
Semester attrition as the value segment.
That's that's remains a challenge challenge for us.
And also the you know the new enrollment trends are a little lighter.
Than prior year as a result of Cowen.
I'd also like to just common in Brazil briefly on on Diablo and face to face.
We grew deal very rapidly and in 29 team.
And we have no taken itself banking.
During a couple of fine tuning adjustments on that model the model know as at scale.
It is no accretive to our bottom line.
But we are focusing on higher price than higher price point and more profitable programs.
That has resulted in deal volume coming down about 25, 26% year over year for for the first half.
About revenue is growing robustly.
Arps are growing for the second quarter.
By approximately 15%. So we do believe that the steps that we've taken a two to optimize the deal Nautilus working for us.
And then face to face.
Volume.
For the first half its own about 7% a year over year and that is really all due to the you know the covert crisis the affordability, particularly in the in the value segment and we see certain regions.
The more impacted than than others or the so theres a little bit a harder hit the and then some polo and the northeast.
Alright, thanks, very much and appreciate it.
Yes.
And at this time, we have no further questions in queue. This concludes todays conference call. Thank you for participating you may now disconnect.
Thank you everyone.
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