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Edited Transcript of SEER3.SA earnings conference call or presentation 9-Aug-19 3:00pm GMT

Q2 2019 Ser Educacional SA Earnings Call

RECIFE Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Ser Educacional SA earnings conference call or presentation Friday, August 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jânyo Janguiê Bezerra Diniz

Ser Educacional S.A. - CEO, Member of Board of Executive Officers & Director

* João Albérico Porto de Aguiar

Ser Educacional S.A. - CFO & Member of Board of Executive Officers

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Presentation

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Operator [1]

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Good morning. Welcome to Ser Educacional conference call to discuss the company's results for the second quarter of 2019. With me today are: Jânyo Diniz, Chief Executive Officer; João Aguiar, Chief Financial Officer; and Rodrigo Alves, Investor Relations Officer. We would like to inform you that this event is being recorded. (Operator Instructions)

The event will also be broadcast live, audio and slides via the Internet at ir.sereducacional.com. You can also access the webcast, audio and slides through tablets and smartphones equipped with the iOS or Android systems. The replay of this event will be available soon after its conclusion for a period of 1 week.

Before proceeding, we would like to make clear that forward-looking statements may be made during this conference call relating to the business prospects of Ser Educacional as well as to its operating and financial forecasts and targets. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, conditions in the industry and other operating factors may also affect the future performance of Ser Educacional and could lead to results that differ materially from those expressed in these forward-looking statements.

I would now like to turn the conference over to Mr. Jânyo Diniz, Chief Executive Officer, who will begin the presentation. You may begin, Mr. Jânyo.

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Jânyo Janguiê Bezerra Diniz, Ser Educacional S.A. - CEO, Member of Board of Executive Officers & Director [2]

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Good morning, everyone. Thank you for joining our second quarter 2019 earnings conference call. We have a presentation available on our website that we divided into 2 parts. In the first, we will analyze the bridging and financial results of the quarter and semesters and then we will provide an update on our business plan status.

Please go to Slide 3, where we present the results of student enrollment, which had a positive semester with double-digit growth in general enrollment and we also present growth in all educational segments in which we participate. This is important because a growing intake, especially if continued, increases the chance of student base growth in the future. The main highlights of the build was in the Distance Learning segment, which had a favorable performance in our unit as also with partner centers.

In the on-campus segment, I believe the result was also positive, especially since we have not yet had the 2 movements we hope will benefit us in the future with Ser. The maturation of units opened in recent years that we expect to start helping us aggregate volume of enrollment as of the second semester. And recovery of economic activities, especially in the regions in which we operate, which should benefit the capitals of the states.

Regarding the second semester of 2019 intake process, we are seeing an improvement in the scenario so far, especially since we did have not incidents of extemporaneous events, such as the truckers' strikes and the soccer World Cup as we had last year. Let's wait now as the process that we still have at about 50% of the (inaudible) until the end of September.

On Slide 4, we present the evolution of our student base which grows in the semesters with a slight growth mainly driven by the growth off our Distance Learning base. On the other hand, our student base in the on-campus segment decreased due to the combined effect of greater volume of graduates, but mainly due to the increase of dropouts for financial reasons. It is worth mentioning that it is part of our strategy to maintain our accounts receivable at levels that we consider appropriate in order to retake our profitability as soon as the economy allows.

Our on-campus undergraduate student base continues to improve its mix with health course as its flagship. It is worth noting that we have 268 annual medical seats. And in September '18, we received another 100 annual vacancies. In this sense, we had only 55% of our 1,930 medical seats occupied.

On Slide 5, we present the evolution of the FIES student base and the average ticket. Our dependence on FIES has been decreasing in 2019. And this strength should continue in the coming years as the volume of new students today represent less than 5% of enrollment in this segment. Meanwhile, the average on-campus ticket slightly increased compared to the last year, demonstrating that the improving course mix has helped to sustain the ticket. Even at the moment, we find it more difficult for the Brazilian higher education segment since that there is the graduation of FIES students of (inaudible), [long] unemployment and the (inaudible).

Distance Learning average ticket was also (inaudible) in the quarter. And the reduction presented mainly refers to the increase in the participation of 100% online undergraduate and postgraduate course due to the increase in the participation of the partner centers in our student base. As a result, the company's overall average ticket decreased as they are due to the higher participation of Distance Learning in our student base.

These are my initial comments. And I will now turn to Aguiar to comment on the financial results.

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João Albérico Porto de Aguiar, Ser Educacional S.A. - CFO & Member of Board of Executive Officers [3]

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Hello, everyone. Thanks, Jânyo, and thanks again for your presence. Please go to Slide 6, where we present the summary of results. It was a slightly different quarter from the upward trend seen in recent quarters in our view for 3 key reasons.

First, these are the first semester in which the cost and expenses adjustment cycle found similar comparable basis. That is as (inaudible) had started in the second quarter 2018, now with the second quarter 2019. Even with the additional adjustment, this impact was mitigated by the second [reason].

Second, reduction in net revenues mainly due to the still high dropout rates, which has a lot to do with our position to focus on students who are effectively able to pay, something that we believe reduced the nominal result in short period but also preserves our ability to recover faster as the economy, especially unemployment, begins to improve.

And third factor is related to the perspective of economic environment improvement and the other seasonal effects generated in the second Q 2018 that changed the dynamics of advertising expenses. Last year, we reduced these expenses because at that time, we understand that it made no sense to advertise in the months of May and July -- to July since the economy was impacted by the strike effect of the truck drivers and the World Cup. This year, we normalized our activities. And so we have an expectation of improvement in enrollment for the second Q '19, which increased the spending on advertising but also contracted margins a bit more.

As it is another investment related to the beginning of the recovery cycle already observed by the good enrollment that we had in the first semester, I see these kind of expenses as the first signs of the work needed to grow the student base again as we are already seeing this year. As a result, recurring results for the quarter were provisionally negatively impacted compared to the second Q '18.

Despite the reduction in results, it's important at this point to take into consideration that keep conservative in preserving students who effectively have good credit conditions. We are focused on taking advantage of the resumption of the economic growth. And we have good indicators of attendance and quality of education even in this period of crisis, which should also help us in the recovery process.

Moving to -- moving on to Slide 7. We present some nonrecurring effects that ended up generating an even higher accounting result in the second quarter. The first one is the accounting profit of BRL 6.8 million, generated by the sale of the aircraft we had on our balance sheet during the second quarter as we reported in June. The second effect was the write-off of net lease obligations of use rights that generated a total of BRL 6.9 million due to the return of properties whose rents were already suspended in the operational optimization plan.

The third effect had the [opposite fact] being BRL 1.6 million nonrecurring expenses related to conserving termination fines and the structured adjustments we are making due to the change in campus student base. And the fourth impact relates to the extra expenses related to the digital program and ongoing M&A transactions in the quarter totaling BRL 5.7 million. Thus, eliminating these effects, our recurrent net income comes from BRL 53.8 million to a net accounting profit of BRL 59 million in the quarter.

Turning now to Slide 8. We have the breakdown of the results between the on-campus, new units and the Distance Learning segments, which by the way, has been the main highlight in operating results and from 2019 in financial results as well and also contributed positively in terms of adjusted EBITDA for the first time since the start of these operations. The new units continued their trend to reduce the impact on results due to the adjustments we made since last year to provide the effect that we are currently seeing.

Finally, on-campus operation has been concentrating more than (inaudible) impacts as they are locating the largest cities they have, had the highest student group graduation volume and have not yet recovered from the economic scenario. But we hope this will be able to reverse in the medium term as we are beginning to see the first signs of improvement even still shy.

Moving on to Slide 9. We have an analysis of our average net receivables days, which went from 120 days to 107 days, mainly due to the payment of PN 23 announced last year, showing a more significant decrease compared to the second Q '18, partially offset by increase in the average period of receipt of regular students. In this case, as a result of the change in our provisioning methodology that we announced in the first Q '19, which now incorporates the highest credit recovered rate over 360 days. Therefore, this average [set] increase in our view is natural to the scenario. We are experiencing and more accurately reflects the actual payment cycle of regular students as well as more adequate provisioning on a conservative base.

Note in the table below that the valuation in our gross receivables flow compared to the first semester of last year, even with the ex-FIES student base growing by 8%, which shows that we are gradually improving our delinquency. Our FIES accounts receivable, on the other hand, deteriorated by BRL 38 million, which was paid in the following quarter.

Moving to Slide 10. We analyze the behavior of our operating cash generation, always adjusting the effects of the IFRS 16 to maintain the comparability. This quarter, we had 2 events that changed the operating cash flow behavior. The first was that the payment of most of the FIES tuition that in 2018 were paid in June had an amount of BRL 41 million paid mostly in July and August. The second was the judicial deposits of BRL 11 million made during the quarter related to the contingencies arising on business combination for which responsibility is contractually assured by the seller and therefore will be charged to them if by chance there is no favorable decision.

To better illustrate these effects, we demonstrate that our ex CapEx cash generation remains healthy. Since even with the reduction in the results, it presents growth of approximately 33% when we exclude these nonoperating effects mainly due to the greater investment discipline we adopted this year that was able to compensate for the reduction in results.

And speaking about CapEx, on Slide 11, we show that this drop is related to the effect that we have a significant part of the expansion already contracted due to the investments in previous periods and also that we do not stop investing. Only this year, we made more relevant investment in expansion and refurbishment of campi. Our expectation is that with this new campus model, we will be able to continue to explore future growth opportunities with significantly smaller but much more assertive and more marketing-efficient investments that Jânyo will comment later.

Moving on to Slide 12. We have an analysis of our indebtedness, which as you can see, has the largest variation in the reduction in gross indebtedness due to the period of (inaudible) made quarter of UNG acquisition during the first quarter. In net cash terms, we had a more significant reduction since this quarter, we made an extraordinary dividend payment of BRL 250 million.

These were my comments on the results. And I will give the floor back to Jânyo, who will update our business plans.

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Jânyo Janguiê Bezerra Diniz, Ser Educacional S.A. - CEO, Member of Board of Executive Officers & Director [4]

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Thank you, Aguiar. Going to Slide 14, let's talk about how we are developing our activities. We believe that the new regulatory framework of the Distance Learning is allowing higher education modernized as it became possible to offer on-campus and Distance Learning in a much more integrated and efficient manner.

With this view, since last year, we started our digital contribution plan. And from 2019, we started to generate the more significant deliveries. The first wave was the robotization process, which provided further improvement in our already well-integrated back office. Another major factor that we are working on this year is the use of a new pedagogy based on achieved methodologies supported by systems and applications dedicated to education. With this, we are implementing a new, more modern and better quality academic future that is more attractive to our target audience, who are increasingly looking for more modern and flexible learning alternatives.

Also, we started the Campus 2.0 design, which will be well-accepted by the students and had a quite [satisfactory] intake in the [previous] unit model that has already tested this year. Campus 2.0 is increasingly integrating on-campus, semi-present, hybrid and 100% online courses into state-of-the-art facilities with premium labs and classroom infrastructure. Another interesting aspect is the new location, shopping malls or their surroundings, which are gaining attractiveness in our market.

The new concept is also being gradually implemented in the legacy units since a significant part of the model is for the improvement of the technological platform as shown in Slide 15. The developments are coming out and need to further improve the students' experience, generating new competitive advantage that Ser Educacional will have in their markets. We have done extensive reformation work on our platform.

First, we launched new student and teacher portals, which make access much more intuitive and with many new features. The new digital class rely on activity generated and our state-of-art [studies]. And the learning trails have become much more interactive with games, computers, quizzes and many other compelling features. In addition, thanks to current technology, the students can choose how to study, opting for more interactive modes or more static formats that is easy to read. Both models are adapted to different school formats and allow students that can be -- studies can be performed anywhere. Finally, we started using a new generation of virtual labs that in the future will enable students to learn better and through the partners centers, offer a wider range of courses.

On Slide 16, we present some improvements that we have made more specifically in the partner centers' business model. We have created the new Distance Learning center manager, a system that allows partners to be able to manage their centers with managerial quality of a complete educational institution and only has (inaudible), the system acts as a [BI] that helps us sponsor and control the Distance Learning centers' performance with great granularity.

Since last year, we have structured the management of our partners. We created a new management team to focus on our relationship in prospective DL centers focused on capturing good partners as well as creating a process of verification of the system created category for each partners. And as they grow, the student base will increase their portion in the revenue share and marketing investments.

We also started to bring master franchises to support us in seeking more centers with these companies that are already operating other segments, such as English course and open course, thus creating a new [venue] of attraction of new centers.

And finally, we are still working hard with data. We implemented new models of Blackboard Analytics and accelerated our [Guardian] Tutor project. As a result, we are improving our students' experience, one of the greatest challenge in Distance Learning.

As a result of these efforts, Slide 17 shows that we are the first Brazilian company to receive international Blackboard award for innovation and successful implementation of the 2 associated with the student [strategy]. In addition, last week, our Distance Learning was voted the best undergraduate degree in modality. And our courses appeared in 3 of the top 10 courses in the area according to Distance Learning Ranking, a list held by the Brazilian Association of Distance Learning Education in partnership with the Brazilian Association for Training and Development, (inaudible). These recognitions demonstrate that we are on the right direction in providing an education model with best management practice and academic quality.

And to conclude the presentation on Slide 18, we summarized our strategic objectives. And to facilitate understanding, we divided our vision into 5 objectives. First, our growth plan, which will be based on the maturation of units opened in recent years and the gradual recovering of the opening of new units. Now for the second half, we opened new unit already 100% in the Campus 2.0 concept. And for 2020, we move at a pace that should range from 4- to 6-unit openings per year. We are also working on opening new Distance Learning partner centers next year.

But as we have opened, our M&A activities have intensified again in May and we are again with an active pipeline of opportunities. We believe that the market is there actually and directed towards a new round of consolidations. In addition, the acquisition of UNINORTE has entered the final phase of analysis at CADE and is proceeding as expected. We hope to have news in the coming weeks.

Third, as we explained in this presentation, we are putting a lot of effort in our digital transformation process. We believe that we are on track with this process and our results of 2019 are showing the first signs of evolution.

Fourth, we want to keep our cost and expense control generally associated with the cash flow view of results, which means we will keep our business lean, focusing on a well-controlled accounts receivable. In parallel, we will be prepared to grow with good indicators of service support, quality of education and units prepared to resume revenue and margin goals.

Fifth and finally, maintain a solid cash position capable of executing new transactions and [deepening] a strategic gain, either by gaining scale, by adding more (inaudible) brands or even by adding new technologies or entering no-regulated segments. These were our initial comments, and we are now available for the Q&A session. Thank you.

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Operator [5]

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(Operator Instructions)

I would like to pass the word to Mr. Jânyo Diniz for final considerations.

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Jânyo Janguiê Bezerra Diniz, Ser Educacional S.A. - CEO, Member of Board of Executive Officers & Director [6]

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Thank you all for participating in our results this quarter. And our Investor Relations area is available to assist you with further information.

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Operator [7]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.