Q3 2021 Laureate Education Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the third quarter 2021 Lawyers Education, Inc Earnings Conference call.
At this time I'll participant lines are in a listen only mode NATO.
Later, we will conduct a question and answer session and instructions will be given at that time.
I ask you a question you would need to pass Star then one on your telephone as a reminder, this conference is being recorded I would now like the hand, the carpets over to Ah Morse Senior Vice President of Finance you may begin.
Good morning, and thank you for joining us on today's call to discuss Laurie Education's third quarter 2021 results.
Joining me on the call today are I left or Canton, President and Chief Executive Officer, and Rick Buskirk, Chief Financial Officer.
Our earnings press release is available on the Investor Relations section of our website at <unk> Dot net.
We have also posted a supplementary presentation to the website.
Which will 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 are 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.
It's important factors that 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.
Our 10-Q filed earlier this morning as.
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 among others adjusted EBITDA and it's related margin.
Total cash net of debt and free cash flow.
Are also detailed and reconciled to their cap counterparts, and our press release or supplementary presentation.
With that let me turn the corporate eyeless.
Thank you Adam and good morning, everyone.
The growth agenda, we initiated during the first half of the year is taking hold and driving strong results.
We have just completed or load September intake cycle and your enrollment growth was were both increasing 17% for the third quarter versus the prior year.
Total enrollment.
390, so some students were up 16% year over year.
Which today puts us at 5% greater volume the no prepandemic two levels on September 30th 2019.
In Mexico, you enrollments were up 11% versus third quarter of 2020, making a strong returned to growth during their primary intake cycle.
In Peru, Peru, Mentha, we experienced in the first half of the year continues with new enrollments, increasing soon do you play percent versus probably a year during their smaller secondary intake.
These intake results demonstrate the remarkable resiliency before our business model.
This room operating performance during the third quarter financial results come in.
Of our expectations.
Which in turn led us to race or guidance for the full year of 2021.
Let me know provide a brief recap of our portfolio transformation and related balance sheet actions.
During the third quarter be completed the divestiture of Walden University.
On October 29th we returned $1.3 billion of capital to our shareholders, while maintaining a preferred pro forma net cash position of over $400 million.
The divestiture actions, we undertook over the past several years drew significant value creation for shareholders.
The board and the management team remain committed to continue closing the gap between the intrinsic value of our assets and the trading value of our stock.
We believe the best way to create additional shareholder value is to lift a revenue trajectory through a highly focused set of growth initiatives underpinned by the favorable secular trends for higher education in a market, including the acceleration of digital learning.
What do I like to call New laureate is though is strong and focused leader in higher education, and Spanish speaking Latin America.
We intend to take advantage of all unparalleled market position.
With our leading brands best in class digital learning assets and hard to replicate physically footprints in both Mexico and Peru.
As a result, we expect to accelerate or top line growth from the mid single digits too high single digit where even into double digits in the coming years.
Alright, I'm, just going through a substantial transformation in recent years.
We have focused our operations with paint on our debts and significantly increased both our margins and free cash flow generation.
Since this transformation has attracted the interest of your investors that'd be briefly remind you of the market dynamics of higher education in Mexico and Peru.
Both countries are large and attractive markets with a combined population of more than 160 million people.
Participation rates are growing but still well below the level you see in developed markets those providing significant had room for growth.
The regulatory conditions are clear and very conducive to private participation in higher education in both Mexico and Peru.
Oh, well over half the student population and the combined market.
Served by the private sector and Lori at is the quality operator at skate with approximately 200 closest students in each country.
We own the leading brands in both Mexico, and Peru, I know institutions are among the most highly reputed universities in their respective markets.
Yeah. It has also become the digital leader in higher education in Mexico and Peru.
Over the past five years, we have made significant investments in technology and digital capabilities.
Prepandemic, 27% of all teaching hours were delivered online.
Through the pandemic hundred percent of our teaching was delivered online and a very robust and content rich environment.
Whose COVID-19 normalization, we anticipate or digital teaching hours to be around 40% to 60% across all of our institutions in Mexico, and Peru, those screening up significant tempus capacity for future growth in the traditional undergraduate face to face segment.
Consequently, or near term and medium term growth prospects as outlined on slide number 10.
Specter to be fueled by a robust post COVID-19 recover it.
Growth and online offerings and accelerated new program launches outdoor existing campuses.
Finally, let me remind you that the digital enablement of laureate as NATO a growth agenda much more capital efficient.
Our business model is kashi accretive and and the investments and growth would be fully funded by internally generated free cash flows.
I continued to be very encouraged but laureates future prospects.
We have the right management team the best brands and the powerful Omnichannel distribution network that we believe will allow us to lift a revenue growth rates and further or vision to transform the lives of students in the communities in Mexico, and Peru, but provide the increased access to.
[noise] affordable quality education.
I wouldn't know until the call over to Rick both Kirk for a more detailed financial overview of the third quarter and year to date performance as well as the upgraded guidance outlook Rick.
Thank you very much island before running through the result, I want to remind investors at two factors that impact our quarterly performance.
First is seasonality higher education as a seasonal business. The third quarter represents the primary intake cycle for Mexico, Ah Northern hemisphere market and a smaller in Cape cycle for Peru, which is a southern hemisphere market.
Second as you may recall from our discussion last quarter last year due to the COVID-19 pandemic started a certain classes in Peru were pushed to the second quarter of 2020.
This timing different skews year over your comparability for our performance.
And resulted in approximately 18 million more of revenue unrelated earnings recognized in the first half of 2021 versus prior year.
This begins to reverse itself in Q3 this year.
Salting and approximately 11 million loss of revenue and related earnings with the remainder reversing in queue for.
Let's now move on to the strong financial performance for the third quarter.
We are very pleased with starting on page 12.
Revenue in the third quarter was $268 million and adjusted EBITDA with $76 million revenue and adjusted EBITDA. We're both ahead of the guidance that we provided three months ago.
The majority of the outperformance was it related to the growth momentum in the business coupled with continued take cost controls.
As a result, we are increasing our full year guidance for 2021.
In addition, during the third quarter, we expected to incur a certain costs associated with writing our campuses for I turned to face to face operations. This semester.
Those costs have been pushed to the fourth quarter as we now expect a return to campus operations in early 2022.
On a comparable basis and a constant currency revenue and adjusted EBITDA for the third quarter were up 13% and 68% respectively.
Adjusted for academic calendar impact still on a comparable basis and a constant currency revenue for the third quarter of 2021 was up 17% versus prior year and adjusted EBITDA increased by 84%.
The strong revenue performance in the quarter was led by Peru, which experienced 20% year over year growth in revenue.
The favorable results in Peru are driven by strong cycle one in cycle two in case and significantly improve for attention driving total enrollment growth of 30% year over year.
Mexico revenue for the third quarter increased 3% versus prior year reversing the negative trends we experienced during the first half of the year.
We expect that positive trying to continue in the coming quarters. Following the favorable primary intake just completed in that market.
Moving now or a year to date September results.
When combined with the first half resolved still on a comparable basis and a constant currency. Our overall performance through year to date September resulted in revenue growth of 9% and adjusted EBITDA increase of 89%.
Adjusted for academic calendar impacts still on a comparable basis in a constant currency.
Revenue for the nine months of 2021 was up 8% versus prior year and adjusted EBITDA increased by 79% driven by strong operational performance and corporate G&A efficiency.
Let me now provide some additional color on the performance of Mexico, and Peru, starting with page 15.
Please note that all comparisons versus prior year or in a ganic in constant currency basis, let's start with Mexico.
Mexico just completed its primary intake for the year end results were very strong.
New enrollments were up 11% during the intake and through September versus prior year.
As a reference point, Mexico September year to date, new enrollment performance is up 4% versus Prepandemic year to date September 2019 Valley.
Validating that with this intake complete we have now come through the trough period in Mexico.
The strong new enrollment intake combined with a four point improvement and retention resulted in total enrollment growth of 6% versus the prior period.
This is up from the 1% increase we reported last quarter.
Revenue for the quarter was up 3% as a result of higher enrollment volumes, partially offset by carry forward impacts from increased level of discounts and scholarships required during the pandemic.
Increased levels of discounting began in Q3 of 2020 and continued through much of the pandemic.
We are now starting to see that abate during our large C. Three intake that we just experience and are focused on continuing to optimize on a go forward basis.
We do expect to see the carry forward effect of those discounts the impact our revenue for the coming quarters as those cohort move through the system and we moved to a more normalised level.
Finally, adjusted EBITDA was up 61% year over year for the quarter on a comparable basis, resulting from revenue growth and timing of expenses.
Let's now transition to Peru on slide 16.
For the smaller secondary intake, which occurred during the third quarter, New enrollments continued to trend favorably with an increase of 35% versus the same period prior year through.
Through the first nine months of the year, new enrollment in Peru, where up an impressive 20% versus prior year and as a reference are 9% ahead of Prepandemic year to date September 2019 levels.
Total enrollment increased 30% versus prior year, driven by the strong intake plus a double digit improvement and retention rate.
We have seen many students who dropped out last year when the pandemic began ah returning to their studies.
Revenue for the quarter increased 20% on a constant currency basis, driven by the enrollment increase adjusted EBITDA Ah $71 million for the quarter was up 45% as compared to the third quarter of 2020.
The increase year over year resulted from the strong enrollment intake and improve for attention.
Please note that year to date September revenue adjusted EBITDA were favorably impacted by the academic calendar tiny discussed earlier year to date resolved adjusted for timing were up 22% and 65% respectively.
Let me now briefly discuss our balance sheet physician illustrated on page 17.
As of September 30th we weren't in net cash position of $1.7 billion in total shares outstanding where approximately 181 million shares.
During the third quarter, we completed the sale of Walden University, which drove the large cash balance at quarter end.
Following the sale of Walden on October 29, we distributed approximately $1.3 billion of cash to shareholders or $7.01 a share.
The cash and debt balances as of September 30th 2021, a prior to the approximately 170 million an estimated taxes and fees due on prior sales, including Walden University.
And approximately $150 million related to the expected release of a letter crowded in escrow account.
Both related to the sale Walden University.
We expect that the majority of the taxes and fees will be paid during the fourth quarter of 2021 and the letter of credit in escrow amounts will be realized in 2022.
Our net cash position adjusted for those items is approximately $410 million at quarter end.
Now, let's move to guidance starting on page 19.
On the strength of our first nine months of her salt and the positive growth momentum. Following a recent intake period laureate is increasing its full year 2021 guidance at the midpoint by 35000 total enrollment 35 million for revenue and 40 million for him.
Dusted EBITA.
For continuing operations in 2021 are updated full year guidance is as follows.
Total enrollments are estimated to be approximately 385000 students.
Revenues are estimated to be between $1 billion and $75 million and $1.085 billion and adjusted EBITDA is estimated to be between 247 and $253 million.
I live with that that concludes my remarks on handing it back to you for closing comments.
Thank you Rick.
Cougars, indeed, pandemic accelerated or digital transformation, and we know it digital leader operating at scale with a powerful I'm not channels distribution model that the low sauce to deliver quality education in a variety of formats, including face to face fully online and hybrid delivery.
At the same time, we experimenting with new and emerging platforms to expand oh addressable market by leveraging or existing IP and proprietary products in areas such as B, two b and add the tech.
The transformation of laureate into markedly the pure play Education company and Spanish speaking Latin America has resulted in compelling financial and strategic attributes, which we believe will serve all our stakeholders well in the future.
Operator that concludes the prepared remarks, and we're not happy to take any questions from the participants.
Thank you, ladies and gentlemen, as a reminder to ask a question you would need to press one on your telephone.
To withdraw your question press the pound key.
Again, that's star one to ask the question.
Please stand by while they come out the county Rosten.
First question comes from the line of Javier Martinez with Morgan Stanley. Your line is open.
Hi, Thank you would want anybody really at least thank you very much for the for the cold. So what do you think I was quite impressed with a side order of sorts nope nope, but people really know quite impressive.
Both volumes, increasing city for saying I'm <unk>.
53%, Oh, Wow, so I'm trying to paint to gain perspective, where where the limit each for.
For both snowboarding somebody things.
I don't know if you can share with us some matrix and capacity utilization Oh.
Mm mm.
You have.
Alrighty 187000 students.
You respect 40, 60% pitching was deliberate or lying but so what did what did they start capacity would be what how much can you increase students.
Because of that also increase of operating Liberty commodities.
Hey, Javier this is.
We're very pleased with a quarter and of course, the quarter was favorably impacted by recovery from Covid.
And diabetic.
But it also are online capabilities in Peru.
Facilitating an expansion of our addressable market as it is a very convenient offerings for working students and postgraduates.
So we do believe we are in a trajectory to racing.
Growth rate in Peru, and Mexico, even when you normalize for the tailwind from Covid.
In terms of our margins.
We have.
Favorable impact from operating.
Fully online.
We are returning to campus next year there will be.
Some additional expense is getting all of our facilities ready for for the face to face.
In terms of capacity.
Really really important.
Topic.
Prepandemic we delivered.
27% of our.
$2 online.
Which meant that 22, 27% off.
Capacity was enabled by a digital.
Postponed to make it in the studies taken moment going forward, depending on the institution, we will have somewhere between 40, and 60% or $12 being delivered online which means that we are close to.
Opening the incremental capacity from from online delivery.
Versus prepandemic, which gives us significant headroom to grow.
Face to face environment without having to.
Physical pattern, and and and Capex programs to facilitate that so we have plenty of capacity.
Welcome students.
In a campus environment and given a hybrid deliberate as well as a.
Online for the online products.
Foster and see if there was any follow up questions.
From your end.
Yes. Thank you I live and so should you had already there can also go to everything that 40, 60%.
D V D.
What is the what do you think.
Assuming that that same task continuous going forward what is the level of capacity utilization of the on campus facility. So did you still happening.
Increase.
Oh to increase their they on campus they face to face as students because of that with the same percent I shall 40 60 to increase the total amount of for students.
What are you in in in the absolute limit of capacity utilization why you are when the 90% 70%. This is what I'm trying to.
Find out [laughter].
Okay. So just to say, it's a quick reminder.
Right now we are 100% online because all.
All of our go virtually all of our teaching is done in an online environment. We haven't opened up the campus except for some specialized.
Work that is needed.
And certain degrees. So right now are we upgrading troops 100%.
And a digital matter.
But I think the wait wait.
Wait to think about it is.
2019, Prepandemic, we had 27% online.
2022, Ah depending on an institution somewhere between 40 and 60% 650%.
At the midpoint that means that we get another 20.
5% plus minus incremental capacity versus 2019, we are.
We have we have added proclaimed.
Proximity to 10% in volume 2019.
Appropriate.
10% stick to cut it in 2019, which means that we have we can grow by 25%.
The face to face environment without having to add physical client in Peru, and I'm very similar.
In Mexico.
Vertically I. Thank you very much I just.
Thank you.
Our next question comes from the line I'll Shlomo Rosenthal with Stifel. Your line is open.
Is that I'm on for summer, what sort of a capital investments unnecessary to drive the 8% to 10% organic revenue growth expectations over the immediate term and do you expect the margin expect to expand margins, while making these investments or whether the margin deleted. Thanks.
Hey, Adam.
I live again.
The growth agenda, it's very type of July.
Describe to Javier.
We have plenty of capacity in the system and just because of improved utilization through online and hybrid delivery.
So when you're speaking with the backdrop growth.
Director is covered recovery, which is pent up demand and that's going to benefit certainly benefit results of 2021 would expect that to continue into 2022 before we have caught up most of the.
The COVID-19 headwind from from 2020.
The second a grocery where is online and we already invested in all of those online capabilities to insure.
Quality and concentrates environment for online student, so very little incremental investments.
[noise] is there, although we continue to commit to to innovation.
In this space to maintain a leadership position.
Hey girl flavor is to make sure that all of our programs.
Oh at all campuses. So we have a nursing program at one campus.
We want to lift the ship that to make that available consistently across the network.
So there may be some capex associated with with lap electric.
Let the equipment, but again relatively light investment because we don't foresee any facility.
Facilitate.
Investments in a meaningful way over the next couple of years.
And then at.
Oh of course, we also.
Developed a lot of.
P and proprietary products too.
To support the the laureate network excellent so that it's.
Industry, leading truck during solution.
Online education becomes increasingly important.
We are using that term land is an opportunity for us to sell.
Send that and it it would be.
To be manner or licensed that out to to other universities. So those are all the sources.
Growth drivers that again.
Piggybacking from investments that we've already made to serve the Lord that students.
Okay. Thank you.
Thank you.
As a reminder, ladies and gentlemen, that's star one to ask the question.
Our next question comes from a lot of Matthew degree UVB Galanis open.
[noise] Hello, good morning, everyone and congratulations on the on the race guidance and the good results.
I had one question about the <unk> designation, which the company used to.
On the benefit from.
I think it was corrupt so glad first could you confirm that [laughter] and could you who tried to explain what it means for the sustainability strategy at the company does it mean that you will have a diminished interest for sustainability question and the last settlement, which is linked to these question is what does it mean in the context of your state is.
As a public benefit Corporation.
Mm. Thank you Matthew.
We are a incorporated as a T B C public benefit Corporation and there is no.
A class to to change that.
During the transformation of Gloria.
We did discontinue the big trucks certification process.
That does not mean that we are not committed to sustainability and the ESG agenda to the country. We are working on a very deliberate path to make sure that we have the appropriate.
Certification and metrics being published.
As it relates to the environment, the social agenda as well, let's say governance and as you saw we made a big announcement.
On this yesterday.
When we.
We improved our governance structure by ensuring one share one vote I no longer being a control company. So all of these steps were taken in a very deliberate manner to advance to ESG agenda offshore yet.
You want to come in this in this in this area.
If I can have a fill up on those in terms of reporting when you say multi come can can we have a timeline on that I mean, I remember some of the impact reports that used to publish that were excellent. Thank you got a good story to tell.
So what would be yeah, the milestones that we could expect shoulder.
Yeah.
Reporting I would do that as being poor that's supposed to eliminated given the enormous transformation going from 25 countries to two countries and the focus of.
Oh, sorry, I think it's execution of its portfolio review.
So there there's no we are at purpose driven company.
And that continues to be the case there is no change in our DNA.
Our commitment to be.
Yeah for good answer all of our stakeholders. So we will provide.
Provides more upstate.
<unk>.
Revised metrics.
I'll finalized and we will share them with all the all the thing about this but this is something that the board and the management team.
About.
Great to hear thank you.
Thank you.
As a reminder, ladies and gentlemen that star one to ask the question.
I'm showing no further questions in the queue.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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