Laureate Education Inc

NASDAQ:LAUR

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the First Quarter 2021 Laureate Education Earnings Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I'd now like to hand the conference over to your host today, Mr. Adam Morse, Senior Vice President of Finance.

[Adam Morse, executive]

Good morning, and thank you for joining us on today's call to discuss Laureate Education's first quarter 2021 results. Joining me on the call today are Eilif Serck-Hanssen, President and Chief Executive Officer; and Rick Buskirk, Chief Financial Officer.

Our earnings press release is available on the Investor Relations section of our website at laureate.net. We have also posted a supplementary presentation to the website, which we'll be referring to during today's call. The call is being webcast and a complete recording will be available after the call.

I'd like to remind you that some of the information we're providing today, including but not limited to our financial and operational guidance, constitutes forward-looking statements 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 and Exchange Commission, our 10-Q filed earlier this morning as well as other filings made with the SEC. In addition, all forward-looking statements are based on current expectations as of the date of this conference call and we undertake no obligation to update any forward-looking statements.

Additionally, non-GAAP measures that we discuss including, among others, adjusted EBITDA and its related margin, total debt net of cash and free cash flow are also detailed and reconciled to their GAAP counterparts in our press release or supplementary presentation.

With that, let me turn the call over to Eilif.

[Eilif Serck-Hanssen, executive]

Thank you, Adam, and good morning, everyone. Having just completed our primary enrollment intake in Peru, I am pleased to report that 2021 is off to a good start. We experienced a return to growth in Peru with new enrollment increasing 11% year-over-year on a comparable basis in that market, and with 5% new enrollment growth overall for continuing operations. Our first quarter results were ahead of expectations and very encouraging. We are optimistic on the outlook for the year, although we acknowledge continued uncertainties from the pandemic and recent weakness in FX rates.

In both Mexico and Peru, vaccinations are lagging well behind the United States, with less than 5% of the population having been fully vaccinated. And the general macro conditions have not yet experienced the pace of recovery that we have seen in the U.S.

In Mexico, our large new enrollment intake cycle will occur in September. It is too early as of today to have a firm read on that intake, but we will have a better indication by the time we report second quarter results. Therefore, we are maintaining our previously issued full year 2021 guidance and 2022 outlook, and plan to revisit our guidance as the September intake progresses.

The robust performance during the primary intake in Peru, despite the continued challenges from the pandemic, highlights this strong value proposition to our students and the quality of our offerings. During the current quarter, we received some additional recognitions for our institutions, including in Peru. According to a survey conducted by Ipsos, UPC was recognized as the #1 university brand in terms of top of mind, spontaneous awareness, consideration and first option by high school seniors. And in Mexico, despite the pandemic, both our brands gained market share during 2020, which reflects our strong brand position and leadership in digital learning.

Let me know take a minute as we provide an update on our strategic review process. In the month of March, we completed the divestiture of our operations in Honduras. Pending divestiture transactions as of today include our operations in Brazil and Walden University. Total net proceeds from these pending transactions is approximately $1.95 billion.

Last week, the Brazilian Antitrust Authority published its approval recommendation without restrictions. We expect final approval by the county commissioner shortly, and we anticipate that this sale will be closed by the end of May. The Walden University transaction is anticipated to close during the second half of this year.

Last week, the Department of Justice inquiry was resolved when we received notice that the Department of Justice formally decided not to intervene in a civil third-party complaint against Walden. We have immense pride in Walden, its program quality and the student outcomes, and we are pleased to now being able to moving forward.

Consistent with our prior discussions and use of proceeds, we continue to repay debt and return capital to shareholders as transactions are completed. Earlier this week, following the stepdown of the core premium, we redeemed $500 million over our 8.25% senior notes. We plan to retire the remaining balance of the notes once the Brazil sale transaction closes.

In addition, I am pleased to report that our Board has approved an expansion of our stock repurchase plan by an additional $200 million, bringing the total authorization to $500 million. Since beginning the plan in November, we have repurchased approximately $250 million worth of stock. We continue to believe that returning capital to shareholders through stock buyback is very accretive use of capital for investors given the significant discount of our stock price versus the intrinsic value of the individual institutions in our portfolio.

That concludes the opening remarks. But before discussing our detailed financial overview of the first quarter, I would like to welcome Rick Buskirk, our newly appointed Chief Financial Officer, to the call. Rick previously served as our Senior Vice President of Corporate Development and played an integral role in managing our portfolio optimization strategies. Rick has been with Laureate for over 5 years and prior to joining the company, he held senior positions in the telecom industry, investment banking and in one of the big 4 accounting firms.

Welcome, Rick, and over to you for the financial overview and guidance outlook.

[Richard Buskirk, executive]

Thank you very much, Eilif. As a reminder, higher education is a seasonal business. The first quarter represents the primary intake cycle for Peru, a Southern hemisphere market, and a smaller intake cycle for Mexico, which is a Northern hemisphere market. However, as classes are out of session for most of the period, it is a seasonally low quarter from a revenue and income standpoint.

As you may recall, last year, due to the COVID-19 pandemic, the start of certain classes in Peru were pushed to the second quarter of 2020. This year, the academic calendar is back on a normal cycle and the intake completed and classes started during the first quarter. This is illustrated on the chart noted on Page 10. The timing difference skews year-over-year comparability for our results. As I run through the highlights for the quarter, I will note those timing adjustments.

Now starting on Page 11 with the financial performance. Revenue and the seasonally low first quarter was $195 million and adjusted EBITDA was $10 million. On a comparable basis and at constant currency, revenue for the first quarter increased by 5% when compared to 2020 due to the favorable Peru intake and shift of the academic calendar, which benefited revenue by $18 million.

Adjusting for the timing of that calendar shift, revenue was down 5% on a comparable basis despite being up 2% in enrollment volume. The reason for this is due to the waiting of Mexico and Peru's results for the quarter. Peru drove the volume upside in the first quarter, but is mainly out of session for Q1, and as a result represents only around 30% of revenue generated for the quarter.

Conversely, Mexico was largely in-session and drove approximately 70% of the revenue generated in the first quarter. Mexico's revenue was down 11% year-over-year due to the fact that it has yet to experience results from its main intake this year, which will occur in September, and is thus operating from a smaller COVID-19 affected base from last year.

In summary, the first quarter year-over-year revenue performance is driven by the Mexico mix. Adjusted EBITDA of $10 million was up $39 million versus the prior period due to the strong intake results from Peru, timing of expenses and the academic calendar shift, which favorably impacted results by approximately $15 million.

Let me now provide some additional color on the performance of Mexico and Peru, starting with Page 13. Please note that all comparisons versus prior year are on an organic and constant currency basis.

Let's start with Mexico. Our overall results reflected the performance from our primary intake cycle that occurred last fall. Mexico just completed its small Q1 new enrollment intake, which typically represents less than 30% of the total intake for the year. This intake was down 4% versus prior year. With this smaller intake, we saw a mix shift between traditional face-to-face programs and our fully online offerings that have been accelerated by the pandemic. Total enrollment showed a similar trend overall, with total enrollments down 5% versus the prior year period. Revenue for the quarter was down 11% as a result of lower enrollment combined with the mix shift between face-to-face and fully online, as the average revenue per online program is roughly 40% below a face-to-face offering. Finally, adjusted EBITDA was essentially flat year-over-year on a comparable basis benefiting from cost and efficiency actions.

Let's now transition to Peru on Slide 14. Peru, on the other hand, completed its primary intake in Q1 and saw robust performance. New enrollments in Peru were up 11% versus prior year when adjusted for timing of the intake. Total enrollments increased 10% versus prior year adjusted for timing. Revenue for the quarter was up 68% on a constant currency basis, which equates to 19% growth when adjusted for $18 million of academic calendar timing. Revenue growth was driven by the enrollment increase, a positive mix between our premium and value brand, and increased student credit loads during their summer session. Finally, adjusted EBITDA of $12 million for the quarter compares to an adjusted EBITDA loss of $27 million in the first quarter of 2020. The increase year-over-year resulted from the strong enrollment intake and timing items, including the shift in class start dates, which favorably impacted results by approximately $15 million.

Let me now briefly discuss our balance sheet position illustrated on Page 15. As of March 31, our net debt position was $286 million and total shares outstanding were approximately 196 million shares. Additionally, the pending sales of Walden University and our operations in Brazil are expected to generate an additional $1.95 billion in net proceeds.

Let's now move to guidance, starting on Page 17. As Eilif noted in his opening remarks, we are reaffirming our 2021 guidance and outlook for 2022. For continuing operations in 2021, total enrollments are estimated to be approximately 337,000 students. Revenues are estimated to be between $1 billion and $1.040 billion, and adjusted EBITDA is estimated to be between $180 million and $190 million. Please note, this includes approximately $13 million of noncash charges related to the write-off of an indemnification asset associated with a prior period acquisition.

Moving now to continuing operations in 2022. Total enrollments are estimated to be approximately 350,000 students. Revenues are estimated to be $1.080 billion and adjusted EBITDA is estimated to be $280 million. This represents a $95 million or 51% increase in adjusted EBITDA year-over-year. This increase is mostly driven by approximately $50 million of corporate G&A reduction and a $32 million improvement in operation, as illustrated on Page 18.

Eilif, that concludes my remarks. Now back to you for closing comments.

[Eilif Serck-Hanssen, executive]

Thank you, Rick. We are encouraged by the momentum in the business under our new model as a regional operator in Mexico and Peru. The student value proposition for higher education is very strong in both Mexico and Peru, and our quality and brand positioning are unparalleled. Our business model has proven to be very resilient through the entire pandemic, and we are now starting to see signs of enrollments and revenues returning to growth.

We look forward to completing our transformation this year, including closing the Brazil sale this quarter and Walden University in the second half of this year. Our G&A transformation is on track and we are cautiously optimistic for the fall enrollment intake.

Operator, that concludes our prepared remarks, and we are now happy to take any questions from the participants.

[Operator]

[Operator Instructions] We have a question from the line of Shlomo Rosenbaum with Stifel.

[Adam Parrington, analyst]

This is Adam Parrington on for Shlomo. Could you just confirm, what I think I heard was the quantification of the semester timing impact in Peru. You say it was $15 million in revenue or $18 million on revenue and $15 million on EBITDA, is that correct?

[Richard Buskirk, executive]

That's correct.

[Adam Parrington, analyst]

Okay. And then in terms of the -- kind of what your expectations are in terms of the operating cadence in the second half of this year, particularly as it relates to guidance and then how that would be relative to what you're seeing on the ground, and then your confidence for 2022 guidance. Just kind of thoughts on that.

[Eilif Serck-Hanssen, executive]

This is Eilif. Clearly, we're off to a good start with the enrollment cycle in the Southern hemisphere. The next big event for us is the enrollment cycle in the Northern hemisphere of Mexico. We are about 1/3 of the way on the main intake. So we have some visibility, but the vast majority of the enrollment will happen in June-July. So we will have much better clarity in connection with our second quarter earnings release, and we will provide further update then on the balance of this year as well as 2022.

[Operator]

[Operator Instructions] I'm showing no further questions in queue at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.

[Eilif Serck-Hanssen, executive]

Thank you, everyone.

[Richard Buskirk, executive]

Thank you.