Q2 2022 Laureate Education Inc Earnings Call

Good morning, ladies and gentlemen, thank you for standing by and welcome to Laureate Education's second quarter 2022 earnings conference call.

At this time all participants are in a listen only mode.

After the Speakers' prepared remarks, there will be a question and answer session. Just a question. During this session you will need to press star one one please be advised that today's conference maybe recorded.

I would now like to turn the conference over to Speaker host Adam Morse. Please go ahead.

Good morning, and thank you for joining us on today's call to discuss laureate Education's second quarter 2022 results.

Joining me on the call today are outlet store, Camden, President and Chief Executive Officer.

Rick Baas, Kirk Chief Financial Officer.

Earnings Press release is available on the Investor Relations section of our website at laureate Dot net.

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

The 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.

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 to differ materially from our expectations are.

<unk> 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 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 Thats related margin.

Cash net of debt.

Free cash flow.

Are also detailed and reconciled to their GAAP counterparts in our press release or supplementary presentation.

Let me now I'll turn the call over to Ireland.

Thank you Adam and good morning, everyone. Today I am pleased to report strong second quarter performance with operating and financial results ahead of our expectation.

We are again, raising our full year 2022 outlook, which Rick will cover in more detail later in our prepared remarks.

Enrollments continue to trend well with June year to date, new and total enrollment both increasing 11% versus prior year.

The reason the semester, we return to face to face operation across all of our temperatures and we are effectively deploying our hybrid operating model, allowing students to study both in person and through online.

We have more than 50 campuses in Mexico, and Peru that reinforce our strong brand and we are leveraging that brand power to become the market leader in online education.

Digital delivery is increasingly important in both markets are students expect to be able to access affordable quality education through flexible online and hybrid delivery mode.

And the growth of online education with accelerating in this post Covid era.

Acceptance by employers and regulators continue to increase.

Going forward, we expect to provide between 40% and 60% of our taught hours online a cross sell a private institution.

This in turn will allow us to continue to grow in a more capital light manner.

As a greater number of students can be accommodated.

Our existing physical campus space.

At the core of our growth agenda is our mission, which is to deliver affordable high quality education to prepare students for successful career and lifelong achievements, while building Pride Trust and.

In respect and our communities.

Our 2021 impact report, which no it's available on our web site reflects our commitment to our mission I encourage you to download the report and read more about what is happening across our institution.

The respective communities.

During the second half of this year.

We'll be defining specific kpis related to our ESG agenda.

We will share more information with you during our year end earnings call.

Our strong brands and highly reputable institutions in Mexico and Peru.

Leaky position us to deliver on our promises.

We continually evaluate the institution to ensure that we provide high quality education as a result or institutions and programs continue to earn some of the highest accreditation available.

Our market.

These quality differentiator and positions us well for continued success.

And today I am, particularly pleased to share that UPC in Peru has been awarded the maximum 10 year re accreditation by the Western Association of schools and colleges from the United States.

This provides significant validation and recognition.

The academic quality and strong student outcomes consistently delivered by UPC.

I'd also like to emphasize that the worst accreditation is an addition to upc's local accreditation.

Further UPN improved was recently awarded a one notch quality upgraded to four stars.

Overall University ranking.

To start the global University rating system.

This is a great achievement and is a reflection of our quality positioning in the market.

Equally impressive all our universities in both Mexico, and Peru had been brought the five stars by <unk> the highest.

Ranking available in the category of Employability.

And in Mexico, I am pleased to report that UBM with recently recognized.

<unk> top university at the <unk>.

Personal level.

On public and private universities with 255 programs within the high academic performance program category as measured by the result of the.

Well.

Exit exam taken by students upon graduation.

In addition to delivering on our growth and quality commitments, we continue to prioritize return of capital to our shareholders.

This $650 million share repurchase authorization program granted by our board of directors has been substantially completed at what we believe are very accretive levels for our shareholders and we closed the second quarter with a total of $164 7 million shares outstanding.

And as a reminder, we also plan to distribute the remaining net proceeds from the Worldview sales in the second half of this year.

Current account is released.

Our cash accretive business model and strong balance sheet provides us with a lot of flexibility as we continue to think through future return of capital strategies.

As well as shareholder value optimization approach it.

That concludes my prepared remarks, and I will now turn the call over to Rick posture for more detailed financial overview of the second quarter and year to date performance as well as further details on our improved 2022 outlook.

Rick.

Thank you <unk>.

As a reminder, our campus based higher education is a seasonal business.

Although the second quarter is not a large intake period. It represents a strong earnings quarter for the company as classes are in session for much of the period.

Let's start with page 12, which highlights our strong financial performance for the second quarter.

Revenue in the seasonally strong quarter was $385 million and adjusted EBITDA was $144 million.

Both metrics were ahead of the guidance that we provided three months ago.

Half of the revenue outperformance versus expectations was led by a more favorable cycle two enrollment intake.

Positive mix from our traditional undergraduate segment and better than expected attrition rate.

The remaining portion of revenue outperformance was the result of more favorable FX rates realized during the quarter.

Adjusted EBITDA outperformance, followed the revenue trend and was additionally, aided by some timing of expenses, which had been shifted to the second half of the year.

On an organic constant currency basis revenue and adjusted EBITDA for the second quarter were up 17% and 33%, respectively, which includes a $5 million favorable impact year over year related to academic calendar timing in Mexico.

When combined with the first quarter still on an organic constant currency basis. Our overall performance for the first half resulted in revenue and adjusted EBITDA growth of 14% and 33% respectively.

Let me now provide some additional color on the performance of Mexico, and Peru, starting with page 15.

<unk> note that all comparisons versus prior year are on an organic and constant currency basis, let's start with Mexico.

Mexico's revenue growth for the second quarter was up 16% or an increase of 12% adjusted for academic calendar timing revenue growth was the result of an 8% increase in total enrollment as well as a favorable mix.

Adjusted EBITDA increased 13% year over year for the second quarter, driven by the revenue performance and cost efficiencies, partially offset by anticipated return to campus expenses.

Through the six months of the year, Mexico has now completed its smaller cycle, one and two intake, which typically represent around 40% of the total intake for the year.

Cycled to intake, which occurred during the second quarter was robust driving new enrollments up 15% versus the prior year through June .

Our premium and value brands are both contributing to top line growth and improved levels of profitability in Mexico, and we are doing very well this year and the traditional undergraduate segment.

As a result year to date revenue and adjusted EBITDA are up 11% and 23% respectively.

Now I'll transition to Peru on slide 16.

On a year to date basis, new enrollments in Peru were up 7% versus the prior year period.

However, recall that Peru had the benefit of our COVID-19 recovery in prior years.

Put this intake performance into better context, peruse year to date, new enrollment were 16% greater than their pre COVID-19 year to date June 2019 intake.

In addition to favorable new enrollment trends in Peru. We are also seeing improved attrition rates for a re enrollment which helped to drive total enrollment value up.

<unk> percent as compared to June of last year.

As a result of strong volume performance, Peru experienced 17% year over year constant currency growth in revenue for the second quarter and adjusted EBITDA for the quarter was up 18% as compared to the second quarter of 2021.

On a year to date basis revenue in Peru was up 17% versus prior period.

Revenue for the first half was aided by the high level of returning students in the second half of 2021 related to the Covid recovery that benefit has now lapped a full year impact and for the second half of this year revenue growth in Peru will be more in line with our stated top line growth targets.

On a year to date basis, adjusted EBITDA was up 10% with revenue flow through partially offset by anticipated additional costs incurred this year as we return to campus operations in Peru.

Let me now briefly discuss our balance sheet position illustrated on page 17 of the earnings presentation.

As of June 30, we were in a net cash position of $18 million.

In addition to our cash on hand $74 million of the Walton sale transaction value with paid into an escrow account, which will be released in full or in part to lower yet later this month pursuant to the terms and conditions of that agreement.

As previously mentioned we plan to distribute these proceeds in the second half of this year once the amount are released from escrow.

Over the past two years, we've returned more than $2 billion of capital to our shareholders of which $1 4 billion had been through cash distributions and the balance through stock buybacks.

Let's now move to our updated outlook for 2022, starting on page 19.

On the strength of our first half results and the positive momentum. We are currently seeing in the business laureate is increasing at the outlook for the full year 2022 at the midpoint by 3000 students.

$14 million for revenue and $3 million for adjusted EBITDA.

As discussed earlier revenue performance in the first half of the year included the carryforward effect from last Fall's high levels of returning students in Peru, following the Covid recovery.

Our results for the second half of this year will be driven by the strong intakes already completed.

Our expected favorable results for the larger intakes in Mexico and secondary intake in Peru occurring this September .

We anticipate organic constant currency revenue growth of 8% to 10% for the second half of the year, which is in line with our medium term growth expectations shared with you during our prior earnings call.

This will result in another very good year for our company.

Based on current spot FX rates, we now expect total enrollment to be in the range of 413000 to 419000 students reflecting growth of 7% to 8% on an organic basis versus 2021.

Revenues to be in the range of $1 206 to one to $1 8 billion, reflecting growth of 11% to 12% on an organic constant currency basis and on a reported basis versus 2021, and adjusted EBITDA to be in the range of 329.

$9 million to $337 million, reflecting growth of 23% to 26% on an organic constant currency basis versus 2021, or an increase of 30% to 33% on a reported basis, which includes the effect of the noncash Fas five charge in <unk>.

2021.

I live I'm handing it back to you for closing comments.

Thank you Rick I remain encouraged as we enter the second half of 2022, and our next major enrollment intake cycle.

Mexico, and Peru are attractive markets with favorable growth dynamics, and we operate in leading brands in both countries.

Continue to see positive signs from a market perspective.

We're well positioned to continue to deliver on our growth agenda, given our differentiated product offerings.

And we have a strong balance sheet and the cash accretive business model.

We expect to continue to generate strong returns for our shareholders.

That concludes our prepared remarks, and we're now happy to take any questions from the participants.

Thank you, ladies and gentlemen, I'd like to ask a question at this time, you will need to press star one one please standby, while we compile the Q&A roster.

No John we have a question from Jeff Silber from BMO. Your line is open.

Thank you so much.

With all the talk about an economic slowdown worldwide.

An expert on what's going on in Mexico, and Peru, but maybe you could talk a little about what's going on there and what would be the theoretical recessionary impact on your businesses in those two countries specifically the different brands and segments you have there. Thanks.

Hey.

Jeff This is Paul.

Kick it off and Rick.

Eric will join in.

Laurie.

<unk> has fared pretty well through the cycles in the past.

We are very resilient business and when you look back to the two.

2008, 2010 financial crisis as well as the challenges.

2020 in 2021 during the pandemic.

<unk>.

Loosely correlated.

To the overall economic environment, so in good economic times.

We are doing extraordinary extraordinarily well both in terms of.

Volume growth.

Price mix.

And weaker economic times, we are still.

Performing solid.

A little lighter on the volume growth, but still delivered growth during the financial crisis of two little if any could you give us.

Tom.

And.

We see a little bit of a mixed shift.

The value brand is performing.

Greater than the premium brands, but as a portfolio of the business is performing really well so that's the.

We expect the business to continue to perform through the cycle.

We are.

Okay.

Very focused on.

On being prepared for an environment with much higher price inflation.

We.

We are building in a lot of productivity initiatives and.

Into our operating model can be can continue to provide and affordable.

Education solution to a customer.

Okay great.

My follow up question is regarding tuition levels I know last year you had some.

Some discounting and scholarships can you just talk about where we stand on that this year in terms of pricing and what we should expect going forward. Thanks.

Rick do you would take that.

Yes sure. Thanks for the question I would say overall, we're very pleased with our pricing.

As you recall and we've said this before we generally both the price that are implied inflation each year.

Our implied internal inflation is really lower than the headline inflation that you see in the market because thats heavily impacted by energy and food as an example.

Additionally, remember that the majority of our costs in 2022 were locked at the beginning of the year.

And last year and a big focus of our pricing. This year. It was I think what you're alluding to which is on Mexico.

Particularly on our premium brand at UBM, where we had a higher amount of discounting and scholarships.

During the pandemic and to this point in our pricing has been in line or slightly above our expectations in Mexico. So overall, we're pleased with our pricing that we're seeing in the market this year.

And going forward is there a range we should use in terms of calculating revenue per student.

Okay.

On average we have around $3000.

Average revenue per student debt.

That obviously differs.

Between our it's a weight between our value brands and our premium brands in each of the markets, but that's on average what we are looking at.

And changes in that going forward again, you said within line with implied inflation internally I'm just curious what that is roughly.

This year, our our inflation that we had.

At less than 10, 4% on our model.

So obviously, we're looking at what potential inflation will be next year in Mexico, and Peru, much as everybody is.

And we will analyze that inflation and understand what we can pass through to.

For the consumer.

Keep that affordable and drive the right volume announced we don't have a final point of view on that.

Because I think everybody's looking at inflation and what it's going to end up landing at in 2023, but I think <unk> point is the most relevant point, which is.

We believe we will pass through some deflationary.

<unk> on pricing, we hope we put through an implied inflation, but if we arent able to put through implied inflation. We have plenty of productivity initiatives that we think we can put in place to continue profitability, particularly in our Mexico.

<unk>.

Okay, Great that's really helpful. Thanks, so much.

Thank you and our next question.

And our next question coming from the line of Javier Martinez Delek Us from Morgan Stanley . Your line is open.

Hi, Thank you.

Jim.

So obviously you've done a pretty good job.

Yes.

Todd.

Yes.

I was wondering where are we in the process as opposed to celebrate and also.

This reduction in corporate cost.

Maybe give you the data and ensure operational.

Control issue that we should be aware of.

Rick do you want take that.

Yeah I'll take that thanks for the question of RBR. It's been we went through quite a transformation of right sizing the warhead corporate headquarters last year as you mentioned.

We have not seen and we are retired we were at $90 million of approximate G&A, we're targeting around.

$50 million reduction that is going very well.

Do you have a little bit higher costs that are one time this year in winding down the laureate network, but we feel very comfortable about getting to the right sized.

Run rate effect of or the downsizing of the G&A structure.

And to your point, we have not seen any friction in the business.

We continue to perform very well, obviously, we are very focused on maintaining our control environment and.

Cadence of our operation and it's gone very very well.

Fantastic. Thank you very much.

Yeah.

And as a reminder, ladies and gentlemen to ask a question. Please press star one.

Okay.

Showing no further questions at this time.

And ladies and gentlemen that does conclude our conference for today. We thank you for your participation you may now disconnect good day.

The conference will begin shortly to raise your hand during Q&A you can dial.

Okay.

Yes.

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