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Edited Transcript of ESTC3.SA earnings conference call or presentation 16-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Estacio Participacoes SA Earnings Call

Mar 16, 2017 (Thomson StreetEvents) -- Edited Transcript of Estacio Participacoes SA earnings conference call or presentation Thursday, March 16, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Pedro Thompson

Estacio Participacoes SA - CEO & Investor Relations Officer

* Flavia Oliveira

Estacio Participacoes SA - Head of IR

* Leonardo Moretzsohn

Estacio Participacoes SA - CFO

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Conference Call Participants

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* Bruno Giardino

Santander - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by and welcome to Estacio's Conference Call to discuss the Fourth Quarter of 2016 Results. This event is also being broadcast simultaneously on the Internet via webcast, which can be accessed on the Company's IR website www.estacioparticipacoes.com.br/ir and Engage-X platform, together with the respective presentation and the earnings release.

We would like to inform you that during the Company's presentation, all participants will only be able to listen to the call. We will then begin the Q&A session when further instructions will be given. (Operator Instructions) This conference call contains forward-looking statements that are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those in the forward-looking statements. Such statements speak only as of the date they are made and the Company is under no obligation to update them in light of new information. I will now turn the conference over to Mr. Pedro Thompson, CEO and Investor Relations Officer. Please Mr. Thompson, you may proceed.

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Pedro Thompson, Estacio Participacoes SA - CEO & Investor Relations Officer [2]

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Thank you and good morning, everyone. Welcome to our conference call to discuss our results for the fourth quarter and full year of 2016. With me here today are Leonardo Moretzsohn, our CFO and Flavia Oliveira, our Head of IR. Just to remind you all, there will be a Q&A session as soon as the presentation is over.

Let us go straight to Slide 2, which shows the agenda of our presentation. We will be talking about the following points, quarterly highlights where we present the priorities of this new management and the results highlights. Second, operating performance, which deals with the students base and the increase in the average tickets, thanks to the various recovery initiatives, which were [used] during the present quarter. Third, financial performance, showing more consistent indicators as the implementation of new policies. And finally the final remarks, where we highlights some of the new strategies and guidelines for 2017.

Moving to slide 3 where I will talk a little about this new management's priorities. 2016 was a period of change, which began with the election of the Board of Directors in April. The entry of new independent members and the election of the new Chairman of the Board of Directors provided Estacio's Management with a more accurate view on governance. From the beginning it became clear, the need to review our strategies, policies, internal practices, mainly because of the economic downturn and regulatory restrictions experienced by the Company. Therefore, we began with the replacement of a - the revamp of the entire Board of Executives officers and some of the main corporate managers.

I was elected as CEO at the end of September. Subsequently we hired new executives with extensive market experience into key positions and Mr. Leonardo Moretzsohn as our CFO . We are also concerned with the appreciation of our internal talent to compose the new Board of Executive officers, people who have enabled to change the internal knowledge required to recognize the strength and credibility of our Company with more than 45 years of operation. This team developed strategies to face the current challenging environment experienced by Estacio. Thus we readjusted the corporate structure with the objective of focusing in our core business. From the beginning, we understood the need to improve our operating leverage opportunities. So we restructured our business to eliminate non-priority products, even the macroeconomic crisis in Brazil and to strengthen our processes and management of our business units. In a separate way, the on-campus and distance-learning modalities. We also revised our significant accounting practices and policies, which were responsible for adjustment in the results of the second quarter of 2015. Based on the best governance practices and in order to ensure the correct comparability of information presented to the market, we have restated the comparative information for 2014, 2015, and the first quarter of 2016 and made one-off adjustment in the second quarter of 2016. With these lessons learned, the Company created a Compliance area and Internal Controls area, with together with new Governance, Risk Management area aims to ensure that the revision of policies and practices will continue and become a permanent fixture. I can say the changes were not easy but were absolutely necessary in order to realign our management and prepare the Company for sustainable growth and to be able to exploit the operational leverage of its scale.

I will now continue this quarter highlights on slide 4. We see that our net revenues came to BRL3.2 billion in 2016, 7.6% up from 2015 excluding the effects of the present value adjustment of FIES receivables in 2015. In the fourth quarter of 2016, EBITDA totaled BRL217.3 million more than the 100% up on the fourth quarter of 2015. With the following positive impacts, the first one, BRL43 million from the reversal of the provision accrued on the second quarter for some FIES receivables. Second, BRL7.2 million from the FIES discount rate as of the second half of 2016. And third, BRL46.7 million from the sale of receivables. For a fair comparison, excluding those impacts, comparable EBITDA would have come to BRL134.8 million, 30% than the fourth quarter of 2015, accompanied by a margin of 16.9% up by 3.4 percentage points. In 2016, EBITDA came to BRL652.4million, 3.1% up on 2015. Excluding the following non-recurring effects or effects that did not occur in prior periods as shown in the table, comparable EBITDA would have come to BRL691.2 million, 10.5% up on 2015, accompanied by a margin of 21.7% up 0.6 points year-on-year, virtually flats over 2015. I will now turn the floor over our IR to present with commodity sales performance of our student base and tickets. Flavis, you can go now.

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Flavia Oliveira, Estacio Participacoes SA - Head of IR [3]

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Good morning, everyone. I will talk about slide 5. Estacio closed 2016 with a total of 508,000 students, 2.0% more than in 2015, as it can be seen in the chart on the right side of the page. This growth is mainly due to the 3.4% increase on the on-campus undergraduate base, which was significantly influenced by 3.8 percentage points increase in the segment retention rate. We believe that with the changes in the student's accounting [policies], our base is cleaner and tends to show lower dropout rate. The 27.2% growth in our distance learning graduate base also contributed to the student base.

Our partnerships also played a key role in the segments in April. I must comment on the 2.2% reduction in our distance learning undergraduates base over fourth quarter 2015, [which came to] 106,900 students. In 2016, distance learning had three enrollment cycles only unlike the previous years when intake occurred every quarter. We thus extended the period of its two main intakes in order to reduce the operating cost of the smaller enrollment cycles. Despite the decline in the segment in student base in the fourth quarter 2016, it is worth noting that the 3.7 percentage points increase in the retention rate over the fourth quarter 2015.

Moving on to slide 6, I will talk about distance learning and on-campus average ticket. Beginning with the on-campus segment, ticket increased by 9.3% in the fourth quarter 2016 over the same period last year. Analyzing the on-campus undergraduate segment only, we see an increase of 7% in the fourth quarter in line with the inflation adjustment. The on-campus graduate segment increased by 24.3% in the fourth quarter due to the higher price for the new students and the gradual reduction of scholarships and discounts granted. Therefore, it is worth noting the deductions line, which dropped 11.5 percentage points over gross operating revenue. In fourth quarter 2016, the distance-learning average ticket increased by 24.1% over the same period last year due to the changes mainly with regard to the relationship with partner centers and the management of their performance. In 2016, we see an increase of 5.3% and 6.7% in the on-campus and distance-learning segments respectively.

I will now turn the floor over to our CFO Leonardo Moretzsohnl, who will talk about our financial performance.

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Leonardo Moretzsohn, Estacio Participacoes SA - CFO [4]

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Thank you Flavia. Good morning, everyone. Let's move to slide 7. I will present the net revenue figures. As you can see in the first chart, the net revenue came to BRL797 million in Q416, 8.2% up compared to the same quarter of 2015. In 2016, net operating revenue came to BRL3.2 billion, 8.6% up on 2015. In spite of the price of adjustment applied based on inflationary costs in the year, net revenue was negatively impacted by first, BRL51.3 million reduction in Pronatec revenue due to the graduation of the last students in this segment. Second, BRL17 billion reduction in other revenues mainly due to the end of Rio 2016 Olympic Games project related to training offered by Estacio to the volunteers. Third, the BRL14.3 million increase in other deductions, due to the accounting of transfers to distance-learning partners as of Q4 2015. Additionally, the 1.8% [increase] in scholarship as a percentage of gross operating revenue between 2015 and 2016 mainly due to the significant increase in monthly tuition exemption and discounts granted during the intake cycle of the first half of 2016.

Moving on to slide 8, I will talk a little bit about operating costs. The cash cost of services represented 57.1% of net operating revenues in Q4, 2016, an increase of 2.2 percentage point versus almost 55% in Q4 2015, essentially due to the personnel line switch, had three positive impacts in Q4, 2016 as follows.

First, BRL14.5 million increase in collective bargaining agreements, mainly due to the payment of retroactive amounts. Second, a non-recurring amount of BRL6.9 million referring to faculty severance due to internal restructuring and third an amount of BRL17.9 million referring to a difference of fewer vacation days granted in Q4, 2016 over Q4 2015. It's worth remembering that vacations to be granted in Q4 2016 were granted in 3Q 2016 due to the Rio 2016 Olympic Games increasing Q3 2016 results over Q4, 2016. Excluding these points highlighted on the slide, the margin in personnel costs line would have increased by approximately 2.3 percentage points in Q4 2016.

Let's jump into slide 9, we present our operating expense. Selling expenses margin increased by 15.5 percentage points in Q4, 2016. Provision for debt to our margin increased by 10.9 percentage points in Q4 of the same period in 2015 due to the reversal of BRL43 million from the provision reported in 2Q16, to comply with the obligation with the FNDE related to the specific receivables from FIES students. In the second half of 2016, we evaluated the matter with our internal and external legal advisors, deepened the study of students' academic performance and concluded that it has not breached the rules of academic performance, which was the object of the provision, and thus reversed, in Q4 2016, the amount previously accrued. In order that the net effect in the full year is null. Another factor that did [contribute to the increase in] PDA in Q4 2016 was the sales of the receivables portfolio, in the net [amount] of BRL47.1 million, of which BRL62.7 million from the sale of the customer portfolio and BRL15.7 million from the present value. It's worth noting that the sales of the receivables portfolio are thoroughly approved and should always represent a better opportunity for the Company when compared to the historical recovery of said values. Regarding marketing expenses, the end of the Olympic Games' institutional campaigns and the review of our marketing campaigns began to produce results, generating a year-on-year margin gain of 4.5 percentage point. It is worth noting that this line represented 6.7% of net revenue in 2016, of which 8% in first half of 2016 and 5.4% in second half of 2016.

In 2016, G&A expenses represented 13.8% of net operating revenue, 1 percentage point down on 2015, mainly due to one-off adjustments of Q2, 2016 in the amount of BRL28.1 million. As the result of the revision of the Company's contingency base; taking into account the nature in the market assumption. The following line also underwent one-off adjustment. First, personnel due internal restructuring as a result of the reduction on the corporate structure and staff adjustments and outside services due to the additional expenses, legal advisors involved in the ongoing M&A negotiation. It's worth noting that BRL19 million reduction in the institutional events line in 2016 due to the end of the Rio Olympic Games project, which partially offset the one-off effect I have just talked about. Moving to slide 10, we see that net income of BRL124 million reported in Q4 2016 was the result of 109.7% increase in the period EBITDA , which exceeded the increase in the depreciation and amortization line and in the negative financial results in this period. Net income fell by 16.4% in 2016 compared to 2015 essentially due to the increase in the negative financial results and the depreciation and amortization line. In 2016, the financial results of BRL86.3 million negatively impacted by the increase of approximately BRL27 million in the financial discounts line, due to the more aggressive campaign we carried out in second half of 2016 to recover credits, mainly from students who lost FIES support. It's worth noting revenue with fines and interest on monthly payments in arrears also increased by approximately BRL17 million, which did not exceed the increase in financial discounts. Moving to slide 11, we present the average receivables days. We continue to focus on improving our collection campaign and student debt renegotiation policies. The result of which have already become apparent in the performance of average non-FIES receivables days, which improved by 12 days in comparison with Q4 2015. The increase in the accounts receivable in Q4 2015 was primarily due to the upturn in FIES accounts receivable. Estacio's average receivables days came to 132 in Q416, two days lower than the same period last year, even being impacted by the delays in amending the FIES contract for the second half semester of 2016 and the consequence of the flow of transfer this quarter. As a result, FIES receivable days averaged 236 days.

On slide 12, in the first table you see the information on our capitalization and cash. Cash and cash equivalents closed 2016 at BRL404 million, conservatively invested in fixed income instruments pegged to CDI, interbank rate, government bonds and certificates of deposit with top-tier Brazilian banks. Bank debt of BRL1 billion, correspond mainly to the Company's debenture issues, second series of BRL300 million, third series of BRL187 million and fourth series of BRL100 million. The loan from the IFC, first installment of BRL48.5 million and second of around BRL20 million and the capitalization of equipment leasing expenses in compliance with Law 11638.

The BRL38.6 million reduction in the loans and financing lines over 4Q 2015 was essentially due to the settlement, in 2016, of a foreign-currency loan from Banco Itau of BRL227 million and the entire first issue of debentures of approximately BRL214 million. To compose cash spent with these operations, we issued BRL300 million in Promissory Notes in November 2016 and BRL100 million in debentures in December, which is the fourth issue, both operations carried out by Banco Itau. Including commitments for future payments related to past acquisitions, which totaled BRL125.9 million, as well as taxes payable in installments of BRL15.9 million, our gross debt came to [BRL1.16] billion at the end of 2016, resulting in net debt of BRL760.4 million.

Still on this slide, we presented our investments. In 2016, we invested BRL186.8 million, BRL118.8 million of which maintenance, mainly in the upgrading of systems, equipments, libraries and laboratories in our units. In 2016, investments accounted for nearly 5.9% of the period net revenue, mainly in our academic model and in the new IT architectural projects, which increased by 25.1% and 59.1% respectively over 2015.

On the slide 13, we present our cash flow. Operating cash flow was positive by BRL51.7 million and BRL339.7 million in Q416 and 2016 respectively. Substantial improvements over the same period last year, especially when analyzing the EBITDA to operating cash flow conversion ratio, which stood at 23.8% in Q416 versus 3.8% in Q4 2015. In 2016, this ratio was 52.1% against minus 14.4% in 2015.

Now I would turn the floor back over to our CEO Pedro Thompson for his closing remarks. Pedro?

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Pedro Thompson, Estacio Participacoes SA - CEO & Investor Relations Officer [5]

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Thank you. Mr. Moretzohn. Well to finish our presentation, I present our 2017 objectives on slide 14 and 15. Since we took on the challenge [we made last week], we implemented the relevant changes focusing on three great drivers of value creation. First one, maintain the organizational climate, with so many changes in such a short time. Our major concern was the maintenance of the organizational climate in order to establish a good level of productivity among the employees. Therefore, focal points have been appointed in each executive area, who's main reason is to report their needs, concerns and perception of new challenges faced by the Company. The first results could already be observed in the annual climate survey concluded in February 2017. This survey conducted by an external consulting firm, specialized in human resource projects, was answered by more than 10,000 people equivalent to an engagement of 73% of staff and employees and achieving a significant overall result of 74% level of satisfaction. Redesign one of Estacio's most important projects, enrolling new students in applied science in the first cycle of 2017. We believe that the fastest profitability is growth, we've mainly driven by the scale of its operations. Its focus falls on making significant changes to some one of the main pillars of the Company's intake strategy, including our new pricing strategy reduced the number of scholarships and discounts granted in order to simplify the management of processes should we enroll new students. Regionalization of marketing campaigns: Rationalization of marketing campaigns we exchanged our advertising strategy from a more national institutional focus to a more regional appeal using a cheaper and more efficient communication channel in each location. Resizing of the sales force, the number of sales advisors nearly tripled betting on aggressive approach with high financial returns vis-a-vis the investment on this channel. New goals and compensation systems, at the same time, we expanded our sales force.

We also restructured our goals, KPI, in order to associate them with quality, rather than just quantity, they increased its net operation revenue of (inaudible). Moving to slide 15, another major objective is to recover operating and financial results focusing on the cash generation. They need to restructure policies and practices in the financial area, aiming at greater control, also resulted in some changes in the management of the financial area itself. One of the greatest products we began implementing was the redesigning of the charging and collection processes. The work will be focused on creating a culture of timeline payments, which have significant reduction in regular and aggressive benefit grantings to the foreign students and the creation of qualities that encourage timely payment. The focus is no longer on PVA in that it's more than 180 days overdue, but on collection since the beginning of the debt exclusively, through specialized companies contracted for such purpose.

In addition, the charging processes will be more rigorous with shorter contact intervals, blacklisting and protest, using cluster strategies based on that risk profile. We also had the launch of Estacio's Installment Payments Program, students enrolling in Estacio as of the beginning of 2017 can pay their monthly tuitions through Estacio's Installment Payment program, or PAR, which allows students to pay half of the total amount of the course while studying and the other half after graduation. The payment installments will occur gradually; students can pay 30% of the tuition in the first two semesters; 40% in the third semester; 50% in the fourth semester and 60% as of fifth semester. We believe that a healthy with an interested student base willing to study is the secret for the sustainability of a post-secondary education company. For this reason, it began its plans to build student loyalty, mainly focused on reducing dropout rates. The reduction in dropout rates is a great opportunity to improve profitability, given the Company's full cost structure is better used in optimizing the returns efforts to attract students.

Before concluding our presentation, I want to show on slide 16, that our 2015 [IGC results] disclosed last week, is similarly to previous year, reaffirm the success of our teaching model. In this cycle. 98% of our courses were evaluated with positive results with grades above three, as you can see in the first chart. In the second chart, you also can see the evolution in the number of institutions with positive grades. Totally 97%, eight of our institutions were graded four on a scale of one to five with three being minimum. We are proud to say that [Unidas Feira de Santana], the largest single institution of our group is among the eight institutions graded for in the evaluation cycle. It is worth noting that institutions and courses graded for have higher priority in some math processes, leveraging potential in our plan to offer new courses in distance-learning and to increase the number of places reducing our growth restrictions with qualitative results that proved the group's educational susceptibility. The level reached in our Group is something is totally historic business model.

I would also like to emphasize that students of course is evaluated in the 2015 cycle accounts for approximately 55% of our total base, which would add significant qualitative growth in the general indicators. (inaudible), for example, reached the level of institutions graded [four] and became the second best private university in (inaudible) traditional non-profit institution. We're very happy with the results achieved, we have part of sustainable long term growth with collaboration with over 7,000 faculty members and who will continue with great diligence and [clarity]. With this [announced] results, I can affirm on behalf of staff that we are proud to be one of the educational groups, whose results offer academic quality evaluation mostly proven. I highlight our commitment as one of Brazil's largest education institutions to balance an operation on scale of more than a half a million students in order to deliver academic excellence. Therefore, I can say that started the year 2017 with energy focusing on ongoing pursuit of better peer rating, academic and financial performance. We learned a lot in 2016. And we are sure that 2017 will be a year of hard work, we can now move to Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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Ladies and gentlemen, we will now begin the Q&A session. (Operator Instructions) Bruno Giardino, Santander.

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Bruno Giardino, Santander - Analyst [2]

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Hello, good morning everyone. First question, could you help us to understand the movement in the provision for doubtful accounts in the quarter as when we look at our financial statements, we see that the BRL47 million from the net sale of receivables have been already written off but apparently this transaction represents a gain of a similar size in this line. so I just wanted to understand this movement if my understanding is correct.

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Pedro Thompson, Estacio Participacoes SA - CEO & Investor Relations Officer [3]

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Bruno, can you repeat your question please because we didn't get it?.

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Bruno Giardino, Santander - Analyst [4]

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Okay. We had this BRL47 million net impact from the sale of receivables in the quarter. And as far as we understand, this BRL47 million was already out of your provision for doubtful accounts and we saw this coming back to your results as a gain. Is this interpretation correct? So when we look at your PDA, we should adjust for this BRL47 million, is that alright?

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Pedro Thompson, Estacio Participacoes SA - CEO & Investor Relations Officer [5]

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Yes, you are right. The accounting policy was to reverse PDA of this value just to emphasize that the sale of these receivables was a trade that we made and we compare the return of the discounts of that we had in these receivables with our organic recuperation of this receivable and it was much higher. So the opportunity to sell, but your thoughts about the accounting treatment is correct.

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Bruno Giardino, Santander - Analyst [6]

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Okay, thanks. And a second question, if I may, in the cost line, you commented on impact of BRL50 million regarding to retroactive agreements with your faculty. I just wanted to understand, if it was already expected by you when you assumed at the Company or this was a new negotiation you had to make recently. That's it.

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Leonardo Moretzsohn, Estacio Participacoes SA - CFO [7]

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No, I didn't expect in those terms.

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Operator [8]

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(Operator Instructions) Since there seems to be no further questions, I would like to turn the floor over to Mr. Pedro Thompson for his final remarks.

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Pedro Thompson, Estacio Participacoes SA - CEO & Investor Relations Officer [9]

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I would like to thank you all for your taking part in our results conference call. Our Investor Relations department is always at your disposal to help you with any questions you may have. Our contact information is available in our website. We hope to see you again at our conference call next quarter. Also again thank you very much and have a great day.

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Operator [10]

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This concludes Estacio's conference call. You may now disconnect and have a good day.