Q2 2019 Earnings Call
Second quarter 2009, P. Laureate Education earnings Conference call.
My name is Sophia and I'll be operator for today's call.
At this time, all participants are in listen only mode.
Later, we'll conduct a question and answer session.
During the question and answer session. If you have a question. Please press Star then one and you touched on.
Please note that this conference is being recorded.
I will now turn the call over to Adam worse and worse you may begin.
Thank you operator, Hello, everyone and thank you for joining us on todays call discuss learnt educations second quarter 2000 likes the results.
Joining me on the call today are Alex or cancer, President and Chief Executive Officer, and JJ, Sharon Chief Financial Officer.
Our earnings press release is available on the Investor Relations section of our website at laureate Dr. that.
We have also posted a supplementary presentation on 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 somebody information, we're providing today, including but not limited to our financial and operational guidance.
Constitutes forward looking statements within the meaning of applicable U.S. securities laws.
Forward looking statements are subject to risks and uncertainties that may change at any time and therefore, our actual results may differ materially from those we expected.
Important factors that could cause actual results to differ materially from our expectations are disclosed in our annual report on Form 10-K filed with the U.S. Securities Exchange Commission.
Our 10-Q filed on May eight 2019.
Our 10-Q filed earlier this morning.
As well as other filings made with the FCC.
In addition, all core 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 adjusted EBITDA and free cash flow.
Are also detailed and reconciled to GAAP counterparts in our press release or supplementary presentation.
With that let me turn the call over to Ireland.
Thank you Adam and thanks to everyone on the line for joining us on todays earnings call.
I'm pleased to report another strong quarter for the company.
Both revenues and adjusted EBITDA were ahead of our guidance.
And we remain on track to deliver expected results for the full year.
[laughter] or new enrollment activity to fill us with new enrollment up 11% compared six month versus prior year.
Or little bit second quarter, it's not the launch in things like dual core campus based programs.
We continue to scale or just drilling segment in Brazil.
Two strong brands strong execution.
And they build.
Oh, Yeah go digital platform.
[noise] barbecue pizza page business continues to be impacted by revenue softness due to lack of local financing option.
And the weak macroeconomic environment.
However, this softness was more than offset by that strong enrollment performance in Chile and Peru.
During both the second quarter and the first half of this year.
And we expect these trends to continue into 20 Twond.
Or 2019 result.
Well also favorably impacted by significantly reduced overheads Jordan.
As of June Thirtyth.
Or corporate run rate do you have any expense has been reduced by 18%.
Hi, This is 2018.
And who are the cost actions are well underway.
For the second half of the year.
These efficiency gains reflect our disciplined approach to simplifying our business.
And leveraging scale.
The second quarter with source represented an important watermark for our company with no leverage cooling below two times EBITDA.
A significant reduction.
Who are the over four times leveraged profile in 2017.
During the quarter, we collected nearly $1 billion in proceeds.
From the completed divestitures in Spain, Portugal and India.
And we fully utilize these funds.
To repay our terminal in the United States.
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We have conducted nearly $1.8 billion in asset sale proceeds over the past 18 months.
These transactions have been extremely accretive for our shareholders.
With an average EBITDA valuation multiples in excess of 12 times.
In addition to significantly improving our balance sheet. These transactions have unlocked significant value for our shareholders.
And we remain committed to delivering value to our shareholders.
With a net leverage ratio no been no two turns.
It is prudent for us to revisit our capital allocation strategy.
Especially in the light of where our stock is currently trading.
Consequently.
Earlier this morning.
We know that our board has approved the hundred and $50 million stock buyback program.
Our top priority is to close the gap between the intrinsic value for our company.
I know a trading value.
And doing so without limiting the future growth of the business or putting on June strain on our balance sheet.
We will look to opportunistically repurchase stock during the remainder of 2019 and into first half of 2020 .
We believe such action to be a superior use of excess liquidity for our shareholders.
That concludes my opening remarks, and I will now turn the call over to JJ.
For more detailed financial overview of the second quarter and the first half of 2019.
Thank you Ireland.
As a reminder, the second quarter is an important earnings period for the company.
It typically represents about 45% of our adjusted EBITDA for the full year asset classes are in session for much of the quarter in all regions.
Let me now provide a summary of our financial performance for the quarter, which we are very pleased with starting on page seven.
Revenue in the second quarter was $1.002 billion and adjusted EBITDA was $297 million.
Revenue and adjusted EBITDA were both ahead of the guidance, we provided three months ago.
On a comparable basis and at constant currency, our revenue and adjusted EBITDA for the second quarter were up three and 4% respectively.
Moving now to our year to date June results.
When combined with the first quarter Dale on a comparable basis and at constant currency. Our overall performance for the first half resulted in revenue and adjusted EBITDA growth of respectively, four and 5%.
Now, let's review in more detail our key operating metrics by segment, starting with page slide.
Brazil continues to perform very well from an enrollment perspective with new enrollments of our distance learning segment nearly up 100% versus the same period a year ago.
Your enrollments in our face to face business were up 3%.
Though overall enrollment trends all positive the pricing environment in Brazil continues to be challenging and we expect these dynamics to remain unchanged throughout 2019.
In Mexico, our unique brand in the value segment continues to perform well as we further expand its presence outside Mexico City.
This continues to be offset partially by the soft the performance of our premium brand you then.
The engine segment delivered in Q2, and not a robust core enrollments and profitability.
Year to date adjusted EBITDA in that segment is up 12% versus the same period, a year ago, which is outstanding.
In our rest of the World segment, our business in Australia continues to perform well and is expanding marketing through operating leverage and productivity initiatives.
For online partnerships Walton domestic new enrollment growth through the first six months was up 1%, which was in line with expectations.
Despite a contractual revenue base, mostly due to the de emphasis of our international segment adjusted EBITDA was up 9% in the first half.
Before I comment on free cash flow, let me update you on the 35 million dollar cost reduction in January we committed to execute throughout 2019.
As you can see on page 13, corporate agenda in 2019 on a reported basis is expected to be down $21 million year over year.
On a run rate basis and as of June 2019, corporate DNA is down another $10 million, which brings total corporate DNA $145 million.
Finally, if you integrate the full year benefit of all actions planned for the second half of 2019. The run rate is expected to come down by another $20 million to $125 million.
In summary by the time, we exit 2019, all these cost actions will have translated into a 29% reduction or $51 million versus our 2018 baseline.
Now, let's move to our cash flow performance, which you will find starting on page 14.
Free cash flow for the first half was $6.2 million higher when compared to the first half of 2018.
This continues to illustrate the strong emphasis management has been putting on operational cash flow.
On the debt side, the $1 billion of asset sale proceeds Glenn in Q2 as allow us to bring our net debt position below $1.2 billion, which represents a reduction of more than 50% versus our position at the end of 2018.
That puts our net leverage below two times adjusted EBITDA, the lowest level for lower ASP in over a decade.
Separately the outbreak in June of lowering corporate family rating by Moodys and standard <unk> Poors as provided us the opportunity to reassess our capital allocation strategy.
More specifically.
Given our current trading level, we believe it is now more value accretive to favor a return of capital to shareholders versus a further reduction of our net debt level.
The $150 million share repurchase program approved by lowered board of directors further illustrates the company's relentless commitment to shareholder value creation.
Let me now finish my prepared remarks, with full year and Q3 guidance starting on page 16.
Let's start with the full year.
Given our strong results for the first six months, we are reaffirming our full year 2019 guidance for all CNL and cash flow metrics.
For a net debt in light of the share repurchase program announced this morning, and the DNA of our sale process for Malaysia, our outlook for the ended the year as being revised upward to approximately $1 billion.
As we report each quarter, we'll provide updates on the amount of share repurchases executed.
For Q3, our view is as follows revenue is expected to be between 775 and $785 million.
Adjusted EBITDA is expected to be between 110 and $120 million.
And it's now back to you for the wrap up.
Thank you JJ.
Our results through the first half of 2019 reaffirm that we are making strong progress on our key priorities.
And it gives us great confidence in our ability to deliver on our commitments to our investors.
Management remains committed to creating value for all our stakeholders, including students and shareholders through 2019 and beyond.
Operator that concludes our prepared remarks, and we are happy to take questions from the participants.
Thank you we will now begin the question and answer session.
If you have a question. Please press Star then one touch tones.
If you wish to be very welcome to queue. Please press the conference or the hash key.
Well.
The first question is on now.
Anthony Speakerphone, you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press Star then one on you touched on.
And our first question comes from.
From Barclays.
Hi, This is Ryan on for Manav.
Just curious on the decision to.
Reaffirmed guidance versus kind of moved some things upwards given that.
Sounds like revenue in EBITDA come in a little bit ahead of expectations and are doing pretty well on the on the cost saving side.
Hi, Ryan This is Jay Jay.
There is clearly some FX softness that's where.
Experiencing.
At the start of this second half so we've decided to.
You know stay conservative and.
Stick to a full year guidance for revenue and adjusted EBITDA, we've reflected some of that.
FX softness Q3 guidance, but not in full year.
Got it Okay is it fair to say that the constant currency organic is outperforming the initial guidance and just the FX is dragging it down.
You know there are still some work to be done between now and the end the year, particularly on the on the cost savings. So I think we're tracking to expectations. Obviously, we're we're working hard to try to generate some upside but at this stage, we're sticking to the original guidance.
Got it and then just on the improved.
Capital allocation flexibility.
Obviously buybacks as a priority can you maybe talk about where does M&A fit in there at all or is that more focused on kind of the buybacks now and that's more of a longer term kind of thoughts.
Yes, we were going to focus.
In the near term being 19, then the.
The best part of 2020 on continuing to create shareholder value in an accretive manner is stock buyback is an important part of that.
And we continue to focus on strengthening the executional capability of the company.
So a focus on simplification and integrating the network and delivering superior free cash flow profile will remain or.
Operational priorities for the next 12 to 18 months.
Understood. Thank you.
Our next question comes from Alex Paris, with Barrington Research.
Good morning, this is Chris sitting in for Alex.
Good morning.
Good morning, I wanted to highlight or just some of the key points.
You discussed the Andean region.
Can you share some of the incremental drivers that you're seeing within this region I know in the past you had mentioned the robust economy that you are seeing in Peru.
Any typical region dynamics versus other regions, that's allowing you to sustain this growth.
And.
The strong economy that you are seeing here.
Can you talk about how this has impacted our job placement rates as students exit your institutions and overall just the runway for growth that you're seeing within Peru.
And with the within the overall Andean region as it pertains to.
Your margin trajectory in your organic growth projections.
Hi, Chris this is likely to be.
Make some comments and then JJ due to chime in but I think would we are seeing in both Peru, and Chile is a strong.
And.
Favorable economic situation.
We also have a terrific brands in those markets and we operate in we live within all three segments to remove the value.
On the textbook segment.
And.
These should a mature brands.
Strong reputation of quality and delivered consistently very strong outcomes, which.
Has been.
A key driver was a great to have been very strong industry relationships and then of course, we have a terrific management team and the Andean region as well as over the individual institutions in Peru.
And Chile, and we are leveraging a lot of our best practices from the Russ.
From these two markets into the into the rest of the the network as we are building more of our common operating model. So those.
Are the key factors.
So from a financial standpoint, what's.
Alex.
Alluded to radius translating into a favorable pricing dynamics for us.
While our value priced institution is growing a lot faster than our premier institution. So obviously that has an impact on the mix.
But.
The penetration of higher education in the 18 to 24 segment continues to increase and we're seeing also some potential consolidation of the market as the requirements from a regulatory standpoint, all getting increase so this is a great opportunity for us.
In the market given the strength of our portfolio.
That's great I really appreciate the color and would you say you are.
On track or where are you in terms of achieving your optimal steel for campuses within Peru, Chile.
Yeah.
There we have three three brands I'll start with Peru.
Great brands and through the.
Premium price brand I think is coming a little bit more maturity. Obviously, it's contained within the premium segment of the market.
The value priced institutional GPN still has got a ton of runway to grow, particularly outside of Lima and in some of the more extended Serbs Alina.
And then we have another uptake log institutions pull supertex, we did a modest facilities acquisition last year. We believe that's a business model account fees on the leverage on <unk> and so we we.
Definitely have aggressive growth our programs to expand the portfolio in health Sciences in other programs and also increase.
The physical footprint, so growth certainly on the revenue side and certainly margin expansion for that.
Last institution.
That's great. Thank you for taking my questions I appreciate the color.
Thank you Chris.
Our next question comes from Jeff Silber from BMO capital markets.
Thank you so much I know, we're not talking about 2020, but I just wanted to make sure. You guys think you are still on track to hit your adjusted EBITDA target in 2020, I think was 21% if I remember correctly.
Yes, John track, Okay, Fantastic and the net debt goal at the end of the year of roughly.
$1 billion.
Can you tell us what you're estimating for free cash flow and the share repurchase component of that to hit that number.
Yes, so the guidance for free cash does not change, it's still a $145 million when it comes to the.
Net debt estimates its a comp and an increase of $200 million. It's a combination of the share purchase program, which we are estimating.
Ill anywhere between 75 and $150 million executed by the end the year and then the delay of our Malaysia sales too.
2020.
Okay, Great and then speaking of sales can you just remind us what's left in terms of the divestiture plans.
Sure.
So, Malaysia, Turkey, Honduras, and Costa Rica, our outstanding we still need to close obviously held pattern nonunion North day, but a dual side.
Okay, Fantastic and if I could just switch back to operations.
Talk a little bit about the softness that you'd be at UBI App can you just remind us what's going on there and what plans you may have in place to offset that thanks.
As Weve indicated over the last few quarters economic environment in Mexico is putting some pricing pressure on what I would call. The the overall price ladder in Mexico and that means that the value price institutions tend to be savers. When you go through the done part of the economy cycle and this is why unitek continues to perform very well when you've been pricing your institution at too much of the delta versus that's a value priced segments. It becomes challenging to continue to grow. We've also decided to consolidate some of physical footprint. We've got a very extensive network of location and.
This plus the trimming of program has put pressure on our enrollment and a a topline.
Okay, great if I could just sneak one more in just a modeling questions.
Actually two if you don't mind, what revenue per student increase is embedded in your guidance for the rest of this year and also are there any one time issues between Threeq and Fourq you that we need to be aware of thanks. So much.
Sure on the on the pricing side, if you really carveouts distance learning in Brazil are.
Our face to face business all across the network basically is increasing total enrollment by about a 1% revenue guidance is about 3%. So you can get a kind of the 200 basis point Delta in terms of a net arps. Its obviously a mixed bag in terms of markets, where we are at or slightly above inflation and then the situation in Mexico, and Brazil, particularly where we're below inflation.
Okay, and then again threeq versus Fourq, you anything to call out.
The only thing I would say is as we are divesting institutions that were located mostly in the northern hemisphere. The seasonality of our business is changing both for income as well as for cash flow and is putting a little bit more pressure on Q3 with the offsetting impact in Q4.
Okay. That's really helpful really appreciate it thanks so much.
Our next question comes from Sean.
From Stifel.
Hi, good morning, and thank you for taking my questions.
Hey, Jay just based on current trends in Brazil.
It seems like you're getting the enrollment growth.
Certainly very strong in distance warning, but there is a mix issue that's weighing on the revenue in terms of the higher priced students that are kind of matriculating out when do you estimate that youre going to kind of cross over and the strong enrollment is actually going to start pushing up the revenue.
So you will have the revenue growth in enrollment growth more in continent.
Yeah, So I think for sure.
But being able to understand a little bit more directly how enrollment trends really correlate to revenue you really have to look at the face to face to face to face for the last few years has really been impacted by the reduction of the number of students in the first program in other words to graduating students a lot larger than the ones that are in coming.
We believe that negative impact is going to really be a significant debate. It starting in 2020. So this is the last year and 2019, where we're seeing a big of an impact from a revenue perspective, you'll see that much of an impact in terms of distance learning, but from a bottom line perspective, certainly starting in the second half of 2019, we're getting into positive territory and this is going to be margin accretive and we're expecting that trend to continue into 2020.
So I would say in in in summary, really the pressure on margins and the relationship between.
Really total enrollments and.
Revenue.
Should start to get a little bit normalize as we go into 2020, particularly because of fears and then the last factor that I think he is still hurting us quite a bit is the fact that pricing is below inflation. So if you really look at a cost base and.
4% inflation country in Brazil that puts us really in the whole about $20 million every year.
Together with CS, which is about $10 million of headwind, that's about $30 million of Edwin altogether. That's we've been experiencing for the last two two and a half years and we've been working very hard through the management team to really upset that which.
Integration benefits and reorganization, which has allowed us.
On a comparable basis to have relatively stable margin in Brazil.
Okay, Great. That's great color and then what was the timing item that contributed to Mexico's organic 1% constant currency growth.
Yeah, it's all.
Marginal shifts of the academic calendar, that's favoring old bid to the first half the offsets in space to be in the fourth quarter.
Okay and then.
In the in the Q talks are they like the new one show in China. So it's going to open bid for services is there any serious competitor are there any serious competitor storage to provide those services.
The short answer is yes, so I think let me give you a little bit background around the new education low in Chile is that provided that you do you go through an RFP and you have multi multiple parties bidding you don't have to get approval for from the superintendency and.
So that's been really the.
The default process we have.
Really two types of services that we're providing to those universities the ones that are.
Infrastructure related there really support to students and faculty for those services, depending on the institution stains being in most cases, we need multiple parties bidding for the services.
And then Weve also gone and gone to an RFP for IP services.
And those are more I would call commoditize.
Services, all standard services as they will be probably a little bit more competition same applies for market research services, we're providing to those institutions.
Okay, great. Thank you very much.
Our next question comes from Marcello Telles from JP Morgan.
Hi, good morning, Thanks for taking my question.
Just wanted to.
Well I need a bit more to decline that we saw in Brazil.
In the first half of the year.
Are we talking here, but more or less a 40% decline versus the previous year.
I understand yes has a role on this but.
I've been declining for many years.
Just please provide a little bit more color on what has hurt so much the margins and little bit of the actions that you think are going to help to offset this in the future.
The first question.
Hi, Marcelo so the drivers have been fairly constant over the last two and a half years. What I think has been different in 2019 is really the fact that some of the reorganization and transformation of our operating model or a little bit more back end loaded in the execution of that into 2019 than they were in 2018. So you will see a a jump in margins for Brazil in the second half versus the first half. There was also some some some timing associated with some investments that we've made.
Distance learning business that.
You know will not impact as much obviously the that segment in the second half, but the dynamics of being fairly similar so we just to give you some some rough numbers.
We're losing about 10000 students per year in the fewest program, we anticipate that to be about half going to 2020. So that by definition is going to be a more muted as we go into 2020, and then because of the backend loaded nature of our transformation of the operating model, Brazil in 2019, we should get a quite a bit of tailwind going into 2020, which we didn't have as much from 2018 to 2019, so it's more timing, but the dynamics all the same and the levers were using to try to offset those pressures.
I've been very consistent.
Okay perfect and the second question is just to dig a little bit more on the Chilean new muscle.
Just to understand what stage of the process are we there in terms of the bidding process for the conference has already something big goals or are used to.
Collecting the proposals.
Where are we now.
Yes, we're not going to comment specifically on the timing, but let Lynn.
Just.
Just some.
Overall color on a very high proportion of the contracts that were up to bidding I've gone through the process. You know, we still have quite a few of them to go through in the third quarter and by the time, We report third quarter will provide an update.
And have you won't.
Oh man has Laurie.
Continued to providing these ones that you already finished.
Yeah, we're not going to provide any specifics on that but we are satisfied with the process. We believe whatever has happened. It was a good outcome for both to lower it and the institutions and we are very much on track with our internal expectations.
Okay, Okay perfect. Thanks.
Thank you.
Our next question comes from Kyle Mcgrady from Morgan Stanley .
Hi, Good morning, everyone can you. Please comment from the proof of the peak cycle in Mexico, We all know that.
Environment is not favorable so if we can get some color on that.
Very helpful and also I would like to ask if you have opportunities to merge campuses down here in Brazil, so that too.
Gaining some gross margin which would help.
Margins overall.
Sure.
Hi, Kyle this is Jay Jay on the on the first question concerning Mexico, we're still going through the cycle. Obviously, we're not going to comment further but things are going according to expectations and what we are expecting for Mexico's reflects into Q3 and the full year guidance.
When it comes to Brazil. The answer is yes, they all opportunities to consolidate some up some bulk physical footprint in some of our universities across Brazil, and that's part of the.
Broader marching imprudent plant that we're still working on full Brazil in 2019 and beyond.
All right. Thank you.
Our next question comes from Geoff Miller from Baird.
Yeah. Thanks, first just want to ask about Walden domestic how you're characterizing it as in line but.
You had a pretty easy comp there I think it was down in the year ago. When you decide to timing factors at that time and it got a little worse year over year. Despite that so just.
Anything else you can say on on wall, then domestic trends or outlook.
Hi, Jeff This is I live.
Clearly the priority over the last 18 months for the.
Well the management team has been to rebuild the commercial function you will recall that there was in 2017, we had a little bit.
And until today.
And return that to Ronan 2018, and we we continue.
To deliver.
Equipment with our expectations on.
On low single single digit enrollment growth.
We have developed a very impressive.
Commercial team strong digital marketing capabilities and strong data analytics tools.
To help us continue to compete in the market.
But again the first priority was a turnaround at the operation stabilize it.
And we can go through that that job is done and the focus no it's going to be on hold to lift the growth rate going forward.
We will be doing so by.
Looking for investments in new programs Health Sciences. This is a core focus area for us.
We continue to invest behind competency based.
Agitation and also invested another tool such as <unk>.
And.
VR to help further differentiate the product portfolio and the overall experience at all.
But those.
A growth driver is clearly has to put in the context of world and operating in a very mature and a very competitive market in the us and our guidance remained very.
Consistent that this business is large it's mature and it's going to be growing in the in the very low single digits.
Okay.
And then.
What's your view or.
What the steady state leverage on this business should be are we now they're in the one after two times range and.
I get that long term acquisitions could be an option for you, but I guess, what I'm wondering is.
If you continue to see a gap between your assessment of intrinsic value and market price should we expect.
Share repurchases, while we remain.
Kind of an ongoing feature of the company at this point even beyond the current authorization.
So the prior guidance, we providers on a leverage was about anywhere between two and three were now going to be below two.
We're comfortable staying below two.
We're obviously not going to comment on future share repurchase program, but I think the.
The shift of our capital allocation strategy should give you an indication on how.
We got to be using excess liquidities after we'd reinvest isn't business.
And right now the focus is really on executing the the current share repurchase program.
Okay, and then just last one from me.
Can you provide any sort of like adjusted E. P. S metrics for the quarter after excluding the asset sales gain on an after tax basis.
Yeah, I mean, we can certainly provide you that information separately, but I think most of that as data. It really is the inclusion into Q.
Okay cool thank you.
Once again, if you have a question. Please press star one on your Touchtone phone.
Our next question comes from Andrew Baum from Citi.
Hi, guys good morning.
I have one question regarding operations in Brazil.
Talking specifically about matching courses, which has to be sort of for heated topic you're falling.
Capital markets activity so.
According to the regulator video have fallen from pre roughly a thousand medical seeds in Brazil. So I guess the question would be how do you feel like a multi medco arm off the Brazilian business going forward.
Strategic perspective, you could share a little bit.
If your thoughts on that will be my question. Thank you.
I think the question was about the health Sciences mix in our portfolio is that correct, including medical Zips.
You have a portfolio of 1000 medical seed in Brazil, right and then so just like to understand how do you how do you see this business.
Going forward from a strategic perspective in terms of growth for doing so what how you think about it.
Strategic value on this business. Thank you.
Yes, Thank you Andrew very clear an absolutely we.
Focusing or institutions rone delivering programs, where we believe the jobs of the future future is going to be and how the science is of course, a very important vertical for us.
And medical schools or of course the big.
The crown jewel within the health Sciences programs and we find that.
Having strong medical schools within our institutions and gives us the halo effect to really grow and differentiate our other health sciences.
Programs. So that's been our strategy the medical schools are integral part of a.
Full health Sciences offering.
Or scale institutions in Brazil. So we just opened up two new medical schools in the interior of some polo and you can expect us to continue to go after.
Increased licenses and increased footprint in.
The medical field.
Perfect Super helpful. Thank you.
We have no further questions. Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Thank you all thank you account.
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