Q4 2020 Laureate Education Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the laureate Education's fourth quarter and year end earnings conference call. At this time, all participants on a listen only mode.
After the Speakers' presentation there'll be a question and answer session ask a question at that time. Please press Star then one when you touch tone telephone.
As a reminder, today's conference call is being recorded.
I will now turn the cost or do you have us Mr. Adam Moore Senior Vice President of Finance.
You may begin.
Good morning, everyone and thank you for joining us on today's call discuss laureate Education's fourth quarter and year end 2020 results.
Joining me on the call today are ILEC Stark Hanson, President and Chief Executive Officer, and J, J, Sharon Chief Financial Officer.
Our earnings press release is available on the Investor Relations section of our website at laureate Dot net.
We have also posted a supplementary presentation to the website.
I'll be referring to during today's call and call is being webcast and a complete recording will be available after the call.
I'd 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 U S Securities and Exchange Commission. 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 discuss including and among others adjusted EBITDA and free cash flow are also detailed and reconciled to their GAAP counterparts, and our press release or supplementary presentation.
With that let me turn the call over to Iris.
Thank you Adam and good morning, everyone.
On the 20th year like no other which tested the resilience and adaptability of our students faculty and staff as well as the entire organization.
I'm extremely proud of what we achieved.
Strong execution solid financial performance successful operational response to the COVID-19, pandemic and and ongoing commitment to social impact and serving the community and which we operate.
I want to thank our faculty and staff once again for their agility and commitment to deliver on our promises to our students during these extraordinary times.
We realized the value of student place on.
Uninterrupted delivery of quality education, even during these times of hardship.
Our ability to quickly transition all classes to fully online when the pandemic hit those and lowering our students to continue their studies with emblematic of our students at the center approach.
We have now been operating almost without exception and the fully online mode for the past 11 months and likely to continue in this mode for the churn semester.
We are actively monitoring the local market conditions, and Mexico, and Peru, including and the government.
Requirements and are ready to implement and return to campus strategy when it's appropriate to do so.
The fourth quarter results, we are reporting today, we're ahead of expectations.
Despite the headwinds caused by the pandemic throughout 2020, we consistently delivered against all go and our results demonstrate the resiliency of our business model.
For the full year, we were able to drive increases in both adjusted EBITDA and free cash flow generation due to better than expected retention levels and tight cost controls and a focus on productivity initiatives.
Looking ahead 2021 will be a transition year for laureate as we complete the pending asset sales and the transformation of our corporate overhead structure.
The Covid pandemic is still causing enrollment and pricing headwinds and our markets and we expect this to continue to impact our reported numbers most notably in the first half of this year.
However, as we head into the second half of 2021, we anticipate that the impact of the tender and then make will start to abate.
Which we believe should set us up for a strong recovery in 2022.
Later in our prepared remarks, J J will provide more detail on the outlook for both 2021 and 2022 when he covers guidance.
Let me take and minutes no to provide and update on our strategic review.
Shortly after we reported third quarter results, we closed on the sale of operations and Australia, New Zealand from approximately 650 million us dollars.
Pending divestiture transactions include our operations, and Brazil, and Honduras, which are anticipated to close during the first half of this year and Walden University, which we expect to close during the second half of this year.
Total net proceeds from these pending transactions is.
Is approximately $1 95 billion us dollars.
For Lloyds institutions, and Mexico, and Peru, we have decided to continue to operate these assets within a very focused organization.
The corporate G&A burden associated with these two relatively homogeneous market is only a small fraction of what we have historically been required to spend to support the sprawling legacy networks.
We believe that this focused approach and.
Along with select innovation investments and Mexico, and Peru should return laureate to robust growth in 2022 and beyond.
That said the decision to focus on the regional operating model and Mexico, and Peru does not preclude further engagement with potential buyers for these businesses.
We are committed to pursue the best strategy to optimize shareholder value.
Now moving to slide number seven let me spend a few minutes discussing the Mexico and Peruvian higher education market.
Both of which are favorable industry dynamics and represent attractive long term investment opportunities.
The demand for higher education, and in Mexico, and Peru is large and growing fueled by several.
Demographic and economic factors, including a growing middle class and significant personal and economic benefits.
And by graduates of higher education institutions.
And while participation rate has been increasing in both markets. The overall market is still significantly underpenetrated with participation rates of 30% and Mexico, and 47% and Peru as compared to developed markets like the United States, which is well above <unk>.
60%.
In addition, both Mexico, and Peru has favorable regulatory conditions that are supportive of quality private higher education providers.
The private sector plays and meaningful role and higher education, and both markets bridging supply and demand imbalances created by the lack of capacity and public universities.
And Mexico private education providers constitute 44% of the total higher education market for the state and which we operate in.
And Peru, the private sector is 72 per cent of the total market.
This high level of participation validates the important role of the private sector and these markets.
Digital education is increasingly important in both markets are students I expecting access to affordable quality education, why why our flexible hybrid delivery mode.
This trend has been further accelerated by the Covid pandemic and laureate is a clear leader and online learning and hybrid delivery and our markets.
Accordingly, we believe that we are well positioned to take advantage of this growing market dynamic during the next three to five years.
Further we expect that pent up demand for higher education, and both markets will be released as a direct consequence of the economic rebound in the aftermath of the pandemic. During this same time period.
Now moving to slide number eight let me talk a bit more about the quality of our brands.
Our market segmentation strategy is identical in the two countries.
Two of the traditional market by our premium brands and the more price sensitive market by our high quality value brands.
And Mexico, and Peru are premium institutions of UBM and UPC are among the both highly weighted in the country.
Both UBM and UPC of four star rated by Qs stars and the overall University level.
Both.
Among the top universities and their countries.
UBM and number seven and Mexico, and UPC as and number three ranked university in Peru.
In addition, both UBM and UPC operate medical schools with combined enrollment of over 7000 Medical school students.
Medical school licenses are difficult to obtain and only granted to institutions that meet rigorous standards.
The presence of these medical school has the low dose to build broader health Sciences platform in both markets currently 17% of our total enrollments are and how.
<unk> Sciences verticals.
Field, which is growing rapidly due to the strong employer demand for health care professionals.
Our high quality and value institutions of unitek, and UPN are serving the market segments that require and more affordable offering, but still delivering top quality education programs and and no frills campus environment.
Both unitek and UPN has three star institutional ratings from Q U S dollars.
With five star rating and the categories of teaching and employability.
Both institutions art scale, usually take us the largest private University and Mexico and U P. M is the second largest private university and all occurred.
Our leading brands combined with focused investments and growth and the favorable macro dynamics, we discussed earlier give us confidence and our ability to return to growth at or above our pre COVID-19 organic growth rate in Mexico, and Peru of 6% per revenue and nine.
1% for adjusted EBITDA.
Finally, let me remind you that as of today and the oread consist of the attractive cut from institutions, and Mexico, and Peru with strong margins and strong free cash flow profile as well as the following financial assets first.
First and foremost contracts to sell our operations in Brazil, and Honduras as well as Walden University and the United States with combined proceeds net of taxes and fees of nearly $2 billion.
And secondly, net debt position at year end.
Which was approximately $200 million.
Our intent is to return large amounts of excess cash to our shareholders and a tax efficient manner. During 2021, following the completion of the pending divestitures.
I will now turn the call over to JJ for more detailed financial overview of the fourth quarter and full year 2020 performance as well as our guidance outlook.
J J.
Thank you Alex.
Let me cover first an overview of our performance starting on page 10.
Revenue in the fourth quarter was $285 million and adjusted EBITDA was $91 million on a comparable basis and at constant currency revenue for Q4 declined by 13% when compared to 2019, due primarily to lower enrollments while adjusted.
EBITDA was only down 2%, thanks to cost reductions associated with our online service delivery.
Moving now to full year 2020 results.
Revenue for the year was $1 billion and $25 million and adjusted EBITDA was $206 million on a comparable basis and at constant currency. Our overall performance from 2020 resulted in a decrease in revenue by 9% versus prior year. Conversely.
Adjusted EBITDA was up 13% showing continued marching expansion as a result of our large campus related cost savings, most and Peru, together with our $45 million G&A reduction net corporate.
And I'll provide some additional color on the performance of Mexico, and Peru, starting with page 13.
Please note that all comparisons versus prior year, our net organic and constant currency basis.
Let's start with Mexico, where all main E&P cycle was completed this past fall new enrollment declined 5% overall by modality and the dynamics for very different there is no doubt that the pandemic help accelerate that mix shift between traditional face to face program and are fully online offerings as a result online.
<unk> grew year over year, 28% y O enrollment for our face to face program were down 17%.
Total enrollment showed a similar trend overall and in terms of mix shift between online and face to face.
Revenues for the year was down 9% as a result of lower enrollments combined with mix shift between online and face to face by modality average revenue per student was marginally up from online and down low single digits for face to face.
Alright.
EBITDA was down 14% year over year, given the fixed nature of more than 40% of our cost base.
On the other and debt.
Performance of our operations and Peru showed a lot more resiliency. Despite similar supply challenges as experienced in Mexico, new enrollment and Peru were down 9% versus prior year and impacted by the Covid pandemic taller.
Total enrollment were down 12% as a result of lower new enrollments and higher attrition versus prior year levels.
Please note that we continue to experience different dynamics and performance by institutions and the enrollment of our value price institution, UPN and Peru, like Unitek, and Mexico has been more affected than our premium brands given that their target market is made up of students whose income has been.
Disproportionally impacted by the pandemic.
Revenue for the full year and 2020 was down 7%, mostly as a result of the enrollment declines.
Despite challenging top line dynamics adjusted EBITDA on the fourth quarter and full year were up two and 1%, respectively, which was.
Impressive performance and reflect both institution lean fixed cost structure.
Turning now to our corporate segment on page 15 four.
For the last three years, we have disproportionately and reduce our level of corporate G&A as we have typically followed portfolio 2020, so and acceleration of that trend, we expect to complete the transformation of our corporate G&A over the next 12 to 15 months, we'd your objective and maintaining our stewardship infrastructure.
And with a portfolio we operations in only two countries. We continue to believe that corporate G&A can be reduced further by 70% to 80% versus our average rate.
Great and 2020.
Before moving to guidance, let me now briefly discuss our balance sheet position illustrated on page 16 as.
As expected the sale of our operations in Australia, and New Zealand and to a lesser extent in Malaysia has allowed us to significantly reduce our debt leverage.
As of year end 2020, our net debt position was down 202, new and adults.
Additionally, the closing of the sale of Walden, and our operation in Brazil, and on doors or expect to bring in and additional $1 95 billion and net proceeds.
Finally, let me reaffirm that our plants continue to be to return excess liquidity to shareholders and the most tax efficient way possible.
Let's now move to guidance starting on page 18.
2021 will be a transition year flow out for two reasons first enrollments are expected to still be impacted by the pandemic, resulting and similar dynamics by segment as we experienced in 2020.
The reduction of our corporate G&A will occur throughout 2021, but mostly in the second half.
We anticipate that by the end of 2021, the corporate G&A reduction will be largely completed and the impact from the Covid pandemic will be mostly abated, allowing the company to return to growth at levels more in line with historical performance prior to 2020.
Page 20 gives a three year perspective of the transformation our business is going through with the adjusted EBITDA margin expected to jumped to almost 26% by 2022.
With that from Opex in mind, let me now provide guidance for the next two years for continuing operation in 2021 total enrollment are estimated to be approximately 337000 students revenues are estimated to be between $1 billion and $1 billion and $40 million and.
And the EBITDA is estimated to be between 180 and $190 million.
Please note. This includes approximately $13 million of noncash charges related to the write off of the namely the education assets associated with the prior period acquisition.
For continuing operation in 2022, as though and it still on page 20 total enrollment are estimated to be approximately 350000 students revenue.
And are estimated to be $1 billion and $80 million and adjusted EBITDA is estimated to be $280 million.
This represents a $95 million, a 51% increase and adjusted EBITDA year over year, mostly as a result of the $50 million corporate G&A reduction and the $32 million or 11% improvement in operation as illustrated on page 21.
As I alluded to on his opening remarks, the company strongly believe that Mexico, and Peru represent attractive market opportunities long term with low higher education participation rates and favorable dynamics for the private sector.
Our track record of growing revenue and profit and these markets prior to the Covid pandemic was very strong as illustrated on page 22.
We expect to return to at least these dynamics one of the pandemic is over.
More specifically our current view is that starting in 2022 Enrolments should grow about 5% revenue should grow about 6%, reflecting the continued shift towards online while the adjusted EBITDA. Thanks to operating leverage should grow about 10%.
We expect cash flow performance to increase and follow on margin progression.
For 'twenty and 'twenty, one excluding one time.
Items associated with the transformation and timing impacts from pending divestitures, we expect free cash flow to be consistent with 2020 levels and.
Sure.
We feel that the post COVID-19 future for low rates remains bright.
That concludes my remarks now back to you for a wrap up.
Thank you J J, we look forward to the completion of our portfolio transformation during 2021.
The business model has proven to be resilient and we anticipate that the husband from Covid will start to abate in the second half of this year and that will position us well for the return to growth in 2022 and beyond.
We remain committed to value creation for all our stakeholders on.
Operator that concludes our prepared remarks, and we have no happy to take any questions from the participants.
Thank you, ladies and gentlemen, if you'd like to ask a question on the phone line you will need to press. The Star then the one key on you touched on telephony to withdraw your question press the pound key.
Please stand by while we compile the Q&A roster.
And I'm showing we have a question from Matt Swope with Baird. Your line is now open.
Good morning.
I guess a couple of questions. Please could you update us on what's happening and what's the Walden sale and the department of Justice investigation, there and whether that might might unwind. The sale and then secondly, and associated I think how you were thinking about the take out of your bonds.
I know the call price on the bonds steps down on on May 1st.
At a point at which that could come out or do you need the Walden sales to close first any color would be appreciated. Thank you.
Hey, this is oil and if I'll take the first and then I'll ask JJ to take the bond take a question.
In terms of.
Well first and foremost we are very proud of Walden.
Diversity, and the quality and rigor of the degrees offered.
It was.
The outcome to volume are very strong and.
Including our graduation rates.
And as an example on Masters of Science of Nursing program. It is the largest.
Graduate program and the United States.
And our graduation rates are well over 80%.
And on.
Hum.
I also wanted to also want to note that well is producing and students with high outcomes and getting good jobs and becoming leaders in their field.
And this will be the.
The department of Justice.
And investigation.
And the laureate received a notice on September 14th.
Doj inquiry and it related to master and the nursing program.
Specifically Doj was interested and the compliance culture era.
And the false claims act Laurie and have been fully cooperating with the book.
Adjusted inquiry.
And specifically, we retained external counsel, which was sidley and this case and we ask them to conduct a complete and thorough review of the matter.
That review was substantially completed at the end of last year with no evidence and being found to support any allegations.
Misrepresentation.
And in conjunction with live we met with the department of adjusted to presenter of finding and we are waiting feedback.
I'll pause there and see if there was any additional color on follow up you wanted on on the department of Justice and mitigation. Yeah. No. Thank you that's very helpful color and and I believe there is cash.
Committee meeting and June.
That will that will sort of decide ultimately on this and.
Is that the timing that you see for this well will this be resolved and I know you've been targeting second quarter or second half and probably in July for the asset sale close.
Do you expect us to be resolved and June in order to let that close happen on time.
And I think what you're referencing to the committee meeting in June is the HL Sea change of control and approval process that meeting is an and.
In late June early July and.
That's one of the regulatory hurdles, we need to complete.
And the application there is.
It.
And that's been submitted and everything is on track to meet.
And that requirement. In addition, the department of education needs to approve the change of control application and that process is also progressing very well.
And then of course.
We're looking forward to.
A resolution on the Doj inquiry is well well in advance of that timeframe.
So you would expect the Doj part of that to be done before the HFC meeting and before the department of education and mix has to make their decision.
You know, it's very hard to.
Project specific timelines.
Destination is ongoing but we have them.
And as I said, we have computed or.
Until the investigation and we share that finding with reported with Justice and us.
And that they will.
Come to conclusion on this matter and a time day matter, but I don't want to be.
Got it and make the representation of on specific time parameters.
And that's certainly fair and in a worst case could could add talent.
Actually break the deal and walk away from the transaction and depending on how this turns out.
There are various conditions precedent and reps to go over and the Transat.
And of this nature.
No.
But the buyer and cannot unilaterally and cancel the transaction.
The deal adults required regulatory approvals that I just referenced.
And.
On the.
And the.
<unk>.
And the various regulatory approvals would we've achieved that.
And then the parties have a contractual obligation to move to close.
Thank you.
Helpful and answer that made that led us to my second part of the question do you need the Walden deal to close before you can retire the bonds.
I'll take that one Matt.
Matt.
The answer is.
We don't need the walls and transactions, but we need either the walls and all the Brazil transactions to close.
And so right now on.
We have to make.
Final termination, but should the Brazil transaction flows in the.
First half of this year, then we would be and are positioned to retire the bonds and.
And can you just remind us what your best guesses at the timing of the Brazil close.
And we set the first half that's what we've said.
And that externally.
Got it okay well. Thank you guys I really appreciate all the color.
Sure.
Thank you.
And as a reminder, ladies and gentlemen to ask a question. Please press star one on your touched on telephony.
And I'm showing no further questions at this time ladies.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may all disconnect.
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