Ser Educacional SA

BOVESPA:SEER3

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the web conference on Ser Educacional S.A to discuss the fourth quarter of 2024. This web conference is being recorded and a replay can be accessed on the website of the company ri.sereducacional.com. The presentation is also available for download. [Operator Instructions]

Before we start, I would like to remind you that this information is based on the beliefs and assumptions of the Ser Educacional and this information is available now to the company in the market, This information involve risks and uncertainties. So the foreseen forecast is not possible and what may or not happen. Investors, analysts, journalists would take in consideration that macroeconomic events, the segment and other political facts can interfere with the results and what we were going to say here. We have today Jânyo Diniz, CEO; João de Aguiar, CFO; Rodrigo Alves, Investors Relationship Director. I would like to give the floor now to Jânyo Diniz, the CEO of -- who is going to start the presentation. Please, Jânyo, you can start.

[Jânyo Diniz, executive]

Good morning, everybody. Thank you for attending to our 4Q '24 results presentation event. Let's move to Slide 4, where we highlight the main points of the quarter, which was very positive for our company. In this period, we managed to attract a solid number of students in the semester, especially in hybrid education and achieved good numbers in terms of growth in the total student base and net revenue.

This enabled us to achieve significant double-digit growth in the adjusted EBITDA. Following the year of 2024 performance in the same proportions. The main highlight of the quarter was the net operating cash generation, which grew by more than 200% compared to last year. This result allowed us to accelerate our goal of reducing financial debt by almost 10% on the same basis of comparison as well as further reducing our financial leverage.

These results are undoubtedly important for our strategy of maximizing asset utilization, thanks to a solid operational optimization program that we have implemented over the last 2 years. This has allowed us to resume the distribution of dividends to shareholders after 3 years without any distribution, reflecting the confidence we have gained in cash generation for the coming years and our ability to reduce financial indebtedness even with the resumption of the distribution of this proceeds. We are planning to pay out BRL 19.6 million of dividends in May, which represent BRL 0.15 per share, depending, of course on shareholder approval at the next Annual General Meeting which will be held in the end of April.

On Slide 5, we highlight the significant improvement in results achieved over the last 2 years as a result of these various initiatives implemented since 2022 when we began our operational optimization plan. We have seen significant growth in both adjusted EBITDA and adjusted net income. However, the biggest highlight is undoubtedly the post CapEx operating cash generation and the notable increase in the conversation of adjusted EBITDA into cash. This increase in cash generation was fundamental in allowing us to reduce our net debt by 9% this year. And we will certainly facilitate a further decrease in 2025. Increase in the on-campus student base helped by the acquisition of new place on medical course was important in this process.

In addition, we noticed a solid improvement in the punctuality of payments by our students. The result of a strategy of focusing on courses which are higher leverage tickets, such as health and law. This approach also contributes improved margins and cash generation. On Slide 6, we present an update of our expansion of places on the medicine course following the ADC 81 decision, new places are now approved by MEC ordinances of core decisions that have not yet become final. The graph shows that for the exams, we are offering 1,000 places per year, which represent an increase of more than 9% compared to the first semester of 2024.

Another since our last event when we presented 881 annual places in operation was the issuing of the decree for 120 places, half in São Luís, Maranhão 2004 and about 15 days ago in Maracanaú in the metropolitan area of Fortaleza Ceará, which, by the way, had strong demand on the opening of the entrance exam in March with 480 new places in less than a year, we were the listed company that got more medical places through ADC 81 that all our listed peers put together. We were undoubtedly the big winner on this important issue, which will certainly help with the Brazil population to have more access to doctors, especially in the Northeast and North region where we operate most.

In this way, we entered 2025 with a significant increase in the numbers of medical practices, which will be an essential pillar for generating results in the coming years as we consolidate the operation of these new practices. Moving to Slide 8, we present the operating results for the period, highlighting the 16.7% growth in undergraduate enrollment in hybrid education and 9.2% growth in digital education. This result is especially significant considering the strong comparative base of last year where we were also had a favorable performance. This solid performance in attracting students coupled with a positive performance in reenrollment allowed for a considerable growth in our regulated education student base, especially in hybrid education, which grew by almost 10% as illustrated by the graph on Slide 9.

Moving on to Slide 10, we present our average ticket, which also had a solid performance in this quarter due to the reduction in commercial discounts, for fundraising, the increase in the participation of medical students base, the implementation of the student solidarity program, as mentioned earlier. On Slide 11, we present the distribution of student base by subject area, highlighting a significant growth in student participation in health courses. Today, these courses account for 64% of total hybrid teaching days and 45% of all students. This strategic move is the result of careful planning in recent years, especially which the reorganization of our course portfolio. We took advantage of our differentiated infrastructure of laboratories and clinics to expand our offer in this area, create an environment conducive to increase our average ticket.

It's important to note that health courses have a structurally higher price profile which boosts our results and generate greater resilience in the student base to face possible adverse scenarios in the coming years. Those were my initial comments. Now I invite João de Aguiar to share his vision of the final results.

[João de Aguiar, executive]

Thank you, Jânyo and hello to everyone present at our results presentation. We now turn to Slide 13, where we present our traditional summary of the quarter's financial results. The figures present show that this quarter represents the consolidation of a very significant 2024 for us. We saw a combined effect of increasing revenue together with the expansion of operating and financial margin resulting in a significant improvement in results or better results for this period. It's important to note that the expansion of margins seen through the year is less related to the increase in metro vacancies and more linked to the results of the operational optimization plan we implemented over the last 2 years. Another relevant point is that this year, we are not only substantially improving our DRE results, but also managed to significantly improve our cash generation as well as reducing financial leverage for the eighth consecutive quarter and nominal financial debt by almost 10% compared to Q4 last year.

Moving on to Slide 14, we present 2 graphs detailing the nonrecurring impacts that occurred in the quarter, which were higher than those recorded in the earnings release and it's worth noting that it was a typical quarter in this sense. The total of nonrecurring items in this quarter was approximately BRL 70 million, but it is important to note that only BRL 25 million of these impacts had a cash effect during the period or its expected in 2025. Among the nonrecurring impacts, we can highlight 3 relevant adjustments. Recalculation of return of leases. These adjustments in the amount of BRL 17.4 million was made to better adopt the IFRS 16 as well, mainly due to the write-off of properties returned in the period in the amount of 17.4% occurring in accounting standards, although it has effect related to previous periods.

Adjustment related to the actuarial loss of PDD of FG-FIES, we increased the amount of the provision by around BRL 70 million -- failure to improve compatible statements so we can keep track of the deposit controls on contribution to the fund as we have done until this year, keeping this information, making these improvements. Considering the PDD of the FG-FIES, we increased the amount and the assets of acquisitions. This year, as a precaution, we increased this provision by around the discounts on the acquisition we made on the last 10 years.

As a result, we lowered 20.4% goodwill from several of the acquisitions, which was made before the IPO as well [indiscernible]. It's important to note that although these adjustments had an impact on accounting net income, they had no cash effect during the period. For this reason, this context of the Board of Directors has decided to resume paying dividends to shareholders based on the net income adjustments by part of this nonrecurring adjustment.

This decision reflects our -- understand that our cash generation capacity already allows us to allocate part of the capital that was previously earned for servicing debt and reducing financial leverage and that of 2025, it will be a portion of the adjusted net income for shareholders' remuneration. This is exactly what we illustrated on Slide 15, which shows that our operating cash generation this year was significantly higher than 2024. This shows that we have a company which students base whose credit profile is much more consistent, which has allowed us to increase our cash generation. Another aspect in that the trend of 2024 so far is to maintaining the levels of those last year compared to previous year.

This is due to the increased participation of medical students in our base as well as the fact that we have a higher proportion of students of course with high leveraged ticket, we have now adopted significant approach or rent agreements. These measures -- on the improvement. These measures have been reflected positively in our PMR as we can see on Slide 16, which shows a substantial improvement each quarter in the PMR ex-FIES. This indicates that our payment size is improving as a result of our working capital has also responded positively supporting our cash generation process after CapEx. This has allowed us to reduce net debt by 9% year-on-year.

Now we can move to Slide 17. We can see now these facts have a positive effect on our debt, which continues to fall. This applies to our financial leverage ratio, a topic, we believe we have addressed well. We are generating enough cash to reduce our debt organically through the results of the operations.

This will allow us to adjust our capital structure to face the current high interest rate scenario in Brazil. To conclude my comments on this quarter results and hand the floor back to Jânyo for his final remarks, I would like to highlight this slide on CapEx. We saw an increase of compared to the same period last year as a result of completing work on buildings that will have greater use to enable the return of other properties, which are the part of optimization plan.

[Jânyo Diniz, executive]

Thank you, Joao. Before we close this presentation and move on to the Q&A session, I'd like to share with you our objectives for 2025. At the end of 2024, we completed an extensive operational optimization project, which required a significant effort from our team. We are now ready to start a new cycle focused on maximizing the use of our assets -- we are going to adopt a conservative expansion process, valuing our brand and concentrating our efforts on courses with greater market appeal, such as those in the areas of health and law. We are committed to continuously improving our academic quality and strengthening our brand attributes in the cities and regions we operate.

This will allow us to optimize our average ticket and the occurrence of our compass of our buildings. In addition, we are gradually resuming the opening of new units always in strategic locations, preferably in shopping centers. These units will offer an integrated omnichannel approach to hybrid and e-learning courses with a modern learning structure. The aim is to ensure that these operations have the shortest possible payback time prioritizing regions where our brands are already recognized. Examples of these are the new units we are opening from 2025, the first in the east of Manaus using the UniNorte brand [indiscernible] Unama brand and the third [indiscernible] brand is well established.

These units joined the operations we started last year in Curitiba in Porto Alegre, which shows that we are carrying out well controlled expansion of capacities in place with good potential where we have brand recognition and therefore, don't need to invest so much in marketing, but we were been privileged to operate. This process is already bringing positive results and is supporting us in attracting customers for 2025 for the first quarter. With the progress so far, we can consider that we will have a successful cycle, providing another solid year in terms of growth in the students base since we are achieving robust indicators for enrollment and reenrollment.

This new round of great success reminds us of the importance of maintaining our efficiency, which is key to ensuring continued growth in our operating and financial margins for the third year running. We expect another [indiscernible] generation this time, supported by the growth in our student base and the new metro places we have won, as mentioned by both. And by the way, we will continue to search for more metro place either through the injunctions that we are being proceeded by with the MEC or through our participation in the Mais Médicos 3 program.

Thus, we will continue to expand our student base in the -- with the highest average ticket in Brazil. We are, therefore, starting a new operating cycle, activating our organic growth initiatives, combined with a firm commitment to operational efficiency. Our goal is to continue generating cash, reducing our indebtedness and making room for a greater distribution of dividends from 2026. Finally, before we open for questions, let's go to Slide 21, where we present the update on our mission, vision and values.

We carried out this update in order to align all of company's employees with our long-term objectives. Our focus is to intensify our commitment to offering an educational that trains entrepreneurial professionals centered on innovation, promoting prosperity and social transformation for the students who attend our institutions. With this initiative, we aim to increasingly recognize a benchmark in higher education in Brazil. especially in the areas in which we operate while maintaining our commitment to teaching quality and our social responsibility.

This update is significant step in the development of our strategy for the incoming years, especially for 2025, which we will mark a new stage of growth and success for our shareholders. We now open the floor for questions.

[Operator]

[Operator Instructions] Our first question comes from Mr. Lucas Nagano from Morgan Stanley.

[Lucas Nagano, analyst]

We have 2 questions. First, it's about the intake on the first quarter. The on-site courses has a different results, but they have a rate of development, very nice. The second question is about the PDD. If you could explain a little bit better how this impacts on the ex FIES because we had a ceiling of 25%. But as you said, there is a consistent cash generation process, excluding I would like the PDD could decrease in 2025 to a level of converging.

[Rodrigo de Macedo Alves, executive]

Lucas. Thank you for your question. I'm going to answer the capitation of new students, and then I'm going to give the floor to Aguiar. The capitation of on-site students is very robust, much above what we thought. We are trusting that we're going to have a very successful year on getting new students. Online courses are suffering after this huge -- after the pandemic established itself and it stayed flat. But the on-site courses is still growing and I think there's going to be -- generate lots of cash flow. That's an important detail, as Jânyo said, we are still in the middle of the process. We didn't finish the process. The information are truth. We still need to conclude this process to understand the students enrollment.

[Unknown Executive]

Lucas, it's important to talk about the PDD, those who pay and those who use the financial support. We have a cap on the student loans where -- operators on the market, financial institutions who does it has to control and charge the students, those who finish the education process. The new help -- financial help for students is still working since last year, the student loans. What we can see here, it's a marriage between the information that the cash from the bank was given to us, to our control we do with yes, we had a very effective workflow and the rule here enable us to receive these contributions, the contribution to the fund that is governance and that has control on these contributions. We control those loans, but we're doing that ourselves.

So this CapEx is for hard moments, and that's what is happening on these student loans. They are very well managed. So what we can see here, we have this protection on 20%, understanding this makes sense in the context of 37%, making sense on what we have happening all with those banks, but we were able to see some consensus. So we have to prevent some facts. We had conversation with the bank, understanding that what was happening, control manage of these values. And to improve this provision to 27.5% because of this inconsistencies, we are following this up with the bank, we're being very diligent with the bank to see how much of this provision is part of the fund that pay this loans.

If there is default of a group of students that we didn't finish the first cycle, it is not part of what we want to have. We want to have follow up this very closely, but the PDD is going to structure this in a better level. On PDD of those who pay well, pay normally without loans' is the same what we reported. And Lucas here, there is -- I would like to complement this answer.

The PDD, recurring PDD coming from the student loans was BRL 3 million and was addressed on the PDD on the fourth quarter, showing us what is the impact of the student loans on us. On the BRL 70 million we were able to make, it's different than what we did years before, following up the BRL 3 million at what we -- is the part of the student loans.

[Operator]

Our next question comes from Lucca Marquezini from Itau BBA.

[Lucca Marquezini, analyst]

First question, I would like to talk about the students enrollment. It's clear that they have a higher volume, but could you comment on the dynamic with your competitors and what's happening with the ticket on site and online students and about the ticket on hybrid students. We have impact with students with discounts. So I would like to understand what is the strategy the company is going to use in 2025 or are going to see the impact of what is happening along the year?

[Unknown Executive]

Well, about the average ticket on our competitors on new enrollment, what we were able to see is that we see a market that is improving on site. The market has improved in the in-person students, and we have the participation of this work to give back some real estate and have a better use of those real estate locations so we can be more conservative, not incur the risk of have a worse enrollment, not participating on a movement participating in some small city or another city. But we're able to see this summer until now, not finish the process yet, we see a very healthy market, which is going to help us on generating revenue, which is our main goal.

And talking about it, the increase of cash generation that we were able to see on 2024, which seems to as we see here, low unemployment and 0 development on the higher education. The punctuality on the payment is reflecting on recognition of revenue because the student who pays on time has a discount of 10% in comparison to the student that pays on the last day. This on one side, pressure the average ticket, but on the other side, increased the cash flow generation positively, which is the main highlight on this quarter, having seen that we were able to not only generate a very good cash after interest of BRL 7 million a year, but in a period where we pay vacation and we can reduce the debt in almost BRL 20 million.

This impact very well our average ticket is very positively. And to complete this answer compared to what we're going to see in 2024, the tendency is that to be established. On one side, we don't see a great improvement on payment timing what we have as on payment flow in 2024 was good. It is going to improve in 2025 coming from the medicine medical courses on 2024, the medical course generated little results because it was the first courses on the offering of 240 student place.

And now we're going to have 2025, this 240 going to the second year students, but the offering of the first class, we have 400 students more. So we're able to have these new certain places, Maracanaú, which we launched this test for enrollment, and we're able to fulfill these new certain places 100%. We complement this answer, that's what Rodrigo said, this movement on the improvement of the payment, which shows we're not giving big discounts. We still have some capitation of students. So have the new enrollments. We have a very important movement for the company, which shows -- sorry, this movement shows that it's very healthy for the company. Thank you.

[Operator]

So now Samuel Alves from BTG Pactual.

[Samuel Alves, analyst]

I have 2 questions. First, on medical courses, I would like to know if you could talk about the performance on the quarter -- on the fourth quarter, what was the revenue consolidated compared to year-to-year. To understand what -- how is the progress on the segment on this industry and some information about the ticket. This is the first question. And the second question is about -- on the same segue of Rodrigo use, we have a better occupation of real estate. What is the occupation that you have now in your company?

[Jânyo Diniz, executive]

Yes, Samuel. The quality of medicine on medical course, we have a high enrollment. So the 140 student place were offered in September, the courses of -- all courses by [ liminars ] by judicial decision that were delayed. So we did enrollment until February. And what we have now to comment related to -- sorry, I forget the other question. The occupation on real estate, we had the occupation today on these units on 80% of occupation, 85%. So we launched new units, new student place, new colleges, and they have lots of space to occupy. Complementing the majority of students is still [indiscernible]. So we are getting close to the limit of occupation and something that's very nice, as Rodrigo said, there's no pressure for discounts, we can do this by substitution. We can change the quantity of students by the quality of the ticket, the better prices. So this has a direct impact on the revenue.

[Operator]

Next question from Mirela Oliveira from Bank of America.

[Mirela Rodrigues de Oliveira, analyst]

I have a follow-up on the question on medical courses. I would like for you to comment if you see a difference on the ticket among those spaced by judicial decision and the ones you had before in your base? And the second question is the costs. We see there was an increase of cost on personnel. You commented on there is an impact of the increase on on-site, in-person courses. What you expect on gross margin seeing this growth on in-person courses? Related to this, we didn't see all this potential. We have very similar tickets, but have a very high capillarity. We are presenting Bahia, Pernambuco. All of those sites follow the same ticket we had before. There's no pressure yet on the medical courses yet, on the price of the medical courses. We're not worried about it. As Rodrigo said, medical course of Maracanaú -- we opened this 3 days ago, and there was a very high rate of enrollment. So we're going to fill the places very...

[Unknown Executive]

Thank you for your question. This point that happens on the in-person courses in 2023, we launched it -- we went on the stock market. We didn't know what was the provision that were on the policies of the company. When we see these bonus, we were adjusting the payment of this bonus seeing this indicated these goals were being reached on the goals we established. And the biggest impact was the increment of new businesses, which were contributing to our EBITDA and revenue. Consequently, with increase of these operations, we were able to increment, increase our personnel cost to give support to that even if the revenue was not there yet.

This was one of the first points we had here in 2004 thinking on the cost -- this margin is going to be very similar that we saw in 2024, going to be a very margin even with the operational improvements we did with these investments, which tend to be very normal now, be very -- and Mirela, to give a historical perspective, what we were able to see after the CES period, this less leverage on the students, less debt, where we had a higher discount on the enrollment of students. What we can see now in 2023 and '24 is the opposite effect.

We have financial leverage, less leverage, occupation by students. The discount on the enrollment we are using less, even seeing the numbers, this doesn't still show the final picture on the discounts of the on-time payments generating revenue and the new medical courses enrollment. And we have 2 effects happening. The financial leverage with our own capital and the new student place on medical course where we have a better ticket. We are now in the third and fourth cycle, and we have the total occupation of the student places. This helps us on this expansion.

[Operator]

Next question from Marcelo Santos from JPMorgan.

[Marcelo Santos, analyst]

I have 2 questions. First question, I would like to know more about the average ticket, the increase of punctuality on the payment. This is you are doing that already in 2024. We are now in a moment where we should -- where everybody is paying on time. So in 2025, this headwind should not be there. So the results of 2025, I would like to understand where we are. 2025 is a very benign year, but don't have this effect of debt and default. So I'm talking about the ticket. I know the cash generation is very positive, but I'm talking about the ticket, the average ticket. I'm talking about the leverage, as you said before generating cash and reducing the debt, how the company see what we accept the financial leverage and which will -- yes, we should not go on the lower this level.

[Unknown Executive]

Marcelo? First question. Those who look at the cash flow are going to say that the tendency is to have the established on the punctuality discounts. If the financial panorama in Brazil improves a lot, we are getting to a level that's very interesting now working with these discounts. When we see the new medical courses, this generate a better cash flow, better revenue. So this punctuality improves a lot. And there is -- but we have -- it's not going to improve more with the punctuality, but we have most of the places. Our -- the tendency is now to have the increase of ticket, not because of the establishment of the punctuality, we have the capitation of [indiscernible] do not recognize these discounts we would -- seasonally and this might help us recognize in improving our ticket. So we have also the commercial aspect of that, where we successfully in a very conservative way, we have less impact on P&L, and this helps us a lot.

[Unknown Executive]

This improvement of the punctuality, you will be able to observe this now because if this improvement will have a very low impact throughout the year. So we gain but a little impact. So and we don't see the visibility of that on the average ticket. So we are able to generate more revenue and this leverage is going to be to a better level compared to EBITDA, not yet this year, but maybe next year or the year following. So with less leverage, we can work on our financial investments better. So growing with opportunities and less leverage. So I believe this level compared to EBITDA is what we are looking for and very possible to keep the same levels.

[Operator]

[Operator Instructions] Next question from Renan Prata from Citi.

[Renan Prata, analyst]

I have a few questions. On FG-FIES, the student loan, we have the provision of BRL 70 million recurring because of the -- for other years. And then we have this BRL 3 million is already part of the 17%. So how should we see that in the future? And what are going to be the updates from the bank? I see that confirming. And the other one is that I would like to understand what's the level of students -- evasion of students in this semester on online courses. And what is that? What are you expecting for these indicators for the future on online education, on the evasion? And what kind of adjustments you have to do?

[Unknown Executive]

As I said, confirm that you are right, but I would like to remember that FIES is more and more irrelevant on our results. The increase of PDD that we had this semester is going to have a low impact because we have less impact on the revenue of FIES as the program got smaller and smaller. About the evasion, we have some strategical changes on the way we teach online, enroll students online. We reduced the offering of 100% online courses. And this showed to us the resilience of the student base. So we're able to bring students with less discounts. When we look the result of online education this year, the average ticket is increasing. That's the growth of participation of students, medical courses on this participation.

So we're able to say that they have the same behavior on the online students and then the in-person students. So that's why we have a lower evasion. We did the same with post-graduation. We stopped offering courses with low average ticket and without in-person lessons. We focus on having less students on post-graduation online with a better ticket and more resilient, and this has a very positive impact. Thank you.

[Operator]

The Q&A session is closed. We'd like to give the floor now to Mr. Jânyo Diniz to make the final remarks. Please, Mr. Jânyo, you can continue.

[Jânyo Diniz, executive]

Thank you all for participating in our results release. Our Investor Relations department is available to provide further clarification. Thank you very much. Have a good day.

[Operator]

This web conference from Ser Educacional is closed. Thank you for participating, and have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]