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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Second Quarter 2019 Laureate Education Inc. Earnings Conference Call. My name is Sylvia, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.
I would now turn the call over to Adam Morse. Mr. Morse, you may begin.
Thank you, operator. Hello, everyone, and thank you for joining us on today's call to discuss Laureate Education's second quarter 2019 results. Joining me on the call today are Eilif Serck-Hanssen, President and Chief Executive Officer; and JJ Charhon, 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 on the website, which we'll be referring to during today's call. The call is being webcast and a complete recording will be available after the call. I'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 the 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 on May 8, 2019, 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 adjusted EBITDA 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.
Thank you, Adam, and thank you, everyone, on the line for joining us on today's earnings call. I am pleased to report another strong quarter for the company. Both revenues and adjusted EBITDA were ahead of our guidance, and we remain on track to deliver expected results for the full year. Our new enrollment activity is robust with new enrollments up 11% for the first six months versus prior year.
Although the second quarter is not a large intake cycle for our campus-based programs, we continue to scale our distance learning segment in Brazil through strong brands, strong execution and enabled by our new Go Digital platform. Our virtual face-to-face business continues to be impacted by revenues softness due to lack of local financing options and weak macroeconomic environment. However, this softness is more than offset by the strong enrollment performance in Chile and Peru during both the second quarter and the first half of this year, and we expect these trends to continue into 2020.
Our 2019 results are also favorably impacted by a significantly reduced overhead burden. As of June 30, our corporate run rate G&A expense has been reduced by 18% versus 2018 and further cost actions are well under way for the second half of the year. These efficiency gains reflect our disciplined approach to simplifying our business and leveraging scale. The second-quarter results represented an important watermark for our company with net leverage falling below two times EBITDA, a significant reduction from the over four times leverage profile in 2017.
During the quarter, we collected nearly $1 billion in proceeds from the completed divestitures in Spain, Portugal and India, and we fully utilized these funds to repay our term loan in the United States. Considering our two-ways divestitures, we have collected nearly $1.8 billion in asset sale proceeds over the past 18 months. These transactions have been extremely accretive for our shareholders with average EBITDA valuation multiples in excess of 12 times.
In addition to significantly improving our balance sheet, these transactions have unlocked significant value for our shareholders, and we remain committed to delivering value to our shareholders. With our net leverage ratio now being below two turns, it is prudent for us to revisit our capital allocation strategy, especially in the light of where our stock is currently trading. Consequently, earlier this morning, we announced that our Board has approved a $150 million stock buyback program.
Our top priority is to close the gap between the intrinsic value of our company and our trading value and doing so without limiting the future growth of the business or putting undue strain on our balance sheet. We will look to opportunistically repurchase stock during the remainder of 2019 and into first half of 2020. We believe such action to be a superior use of excess liquidity for our shareholders.
That concludes my opening remarks, and I will now turn the call over to JJ for more detailed financial overview of the second quarter and the first half of 2019.
Thank you, Eilif. As a reminder, the second quarter is an important earnings period for the company. It typically represents about 45% of our adjusted EBITDA for the full year, as classes are in session for much of the quarter in all regions. Let me now provide a summary of our financial performance for the quarter, which we are very pleased with, starting on Page 7.
Revenue in the second quarter was $1.2 billion and adjusted EBITDA was $297 million. Revenue and adjusted EBITDA were both ahead of the guidance we provided three months ago. On a comparable basis and at constant currency, our revenue and adjusted EBITDA for the second quarter were up 3% and 4%, respectively. Moving now to our year-to-date June results. When combined with the first quarter, still on a comparable basis and at constant currency, our overall performance for the first half resulted in revenue and adjusted EBITDA growth of respectively 4% and 5%.
Now let's review in more detail our key operating metrics by segment, starting with Page 9. Brazil continues to perform very well from an enrollment perspective, with new enrollments of our distance learning segment nearly up 100% versus the same period a year ago. New enrollments in our face-to-face business were up 3%. Though overall enrollment trends are positive, the pricing environment in Brazil continues to be challenging and we expect these dynamics to remain unchanged throughout 2019.
In Mexico, our Unitec brand in the value segment continues to perform well, as we further expand its presence outside Mexico City. This continues to be offset partially by the softer performance of our premium brand, UVM. The Andean segment delivered in Q2 another robust quarter in enrollments and profitability. Year-to-date adjusted EBITDA in that segment is up 12% versus the same period a year ago, which is outstanding. In our Rest of the World segment, our business in Australia continues to perform well and is expanding margins through operating leverage and productivity initiatives.
For Online & Partnerships, Walden domestic and new enrollment growth through the first six months was up 1%, which was in line with expectations. Despite a contracting revenue base, mostly due to the deemphasis of our international segment, adjusted EBITDA was up 9% in the first half. Before I comment on free cash flow, let me update you on the $35 million cost reduction in G&A we committed to execute throughout 2019. As you can see on Page 13, corporate G&A in 2019, on a reported basis, is expected to be down $21 million year over year.
On a run-rate basis, and as of June 2019, corporate G&A is down another $10 million, which brings total corporate G&A to $145 million. Finally, if you integrate the full-year benefit of all actions planned for the second half of 2019, the run rate is expected to come down by another $20 million to $125 million.
In summary, by the time we exit 2019, all these cost actions will have translated into a 29% reduction or $51 million versus our 2018 baseline. Now let's move to our cash flow performance, which you will find starting on Page 14. Free cash flow for the first half was $62 million higher when compared to the first half of 2018. This continues to illustrate the strong emphasis management has been putting on operational cash flow.
On the debt side, the $1 billion of asset sale proceeds collected in Q2 has allowed us to bring our net debt position below $1.2 billion, which represents a reduction of more than 50% versus our position at the end of 2018. That puts our net leverage below two times adjusted EBITDA, the lowest level for Laureate in over a decade. Separately, the upgrade in June of Laureate's corporate family rating by Moody's and Standard & Poor's has provided us the opportunity to reassess our capital allocation strategy.
More specifically, given our current trading level, we believe it is now more value accretive to favor return of capital to shareholders versus a further reduction of our net debt level. The $150 million share repurchase program, approved by the Laureate Board of Directors, further illustrates the company's relentless commitment to shareholder value commitment. Let me now finish my prepared remarks with full year and Q3 guidance starting on Page 16. Let's start with the full year. Given our strong results for the first six months, we are reaffirming our full-year 2019 guidance for all P&L and cash flow metrics.
For net debt, in light of the share repurchase program announced this morning and the delay of our sale process for Malaysia, our outlook for the end of the year has been revised upward to approximately $1 billion. As we report each quarter, we'll provide updates on the amount of share repurchases executed. For Q3, our view is as follow. Revenue is expected to be between $775 million and $785 million; adjusted EBITDA is expected to be between $110 million and $120 million.
Eilif, now back to you for the wrap up.
Thank you, JJ. Our results through the first half of 2019 reaffirm that we are making strong progress on all our key priorities, and it gives us great confidence in our ability to deliver on our commitments to our investors. Management remains committed to creating value for all our stakeholders, including students and shareholders, during 2019 and beyond.
Operator, that concludes our prepared remarks, and we are now happy to take questions from the participants.
[Operator Instructions] And our first question comes from Manav Patnaik from Barclays.
Yes. This is Ryan, on for Manav. Just curious on the decision to reaffirm guidance versus kind of move some things upwards given that it sounds like revenue and EBITDA coming in a little bit ahead of expectations and you're doing pretty well on the cost savings side.
Ryan, this is JJ. There is really some FX softness that we are experiencing at the start of this second half, so we've decided to stay conservative and stick to our full year guidance for revenue and adjusted EBITDA. We've reflected some of that FX softness in our Q3 guidance, but not in the full year.
Got it. Okay. Is it fair to say that the constant currency organic is outperforming the initial guidance and just the FX is dragging it down?
There is still some work to be done between now and the end of the year, particularly on the cost savings. So I think we are tracking to expectations. Obviously, we're working hard to try to generate some upside. But at this stage, we are sticking to the original guidance.
Got it. And then just on the improved capital allocation flexibility. Obviously, buybacks is a priority. Can you maybe talk about where does M&A fit in there at all? Or is that more focused on kind of the buybacks now and that's more of a longer-term kind of thought?
Yes. We are to focus in the near term being '19 and the best part of 2020 on continuing to create shareholder value in an accretive manner and stock buyback is an important part of that. And we continue to focus on strengthening the executional capability of the company. So focus on simplification and integrating the network and delivering superior free cash flow profile will remain our operational priorities for the next 12 to 18 months.
Understood.
Our next question comes from Alex Paris from Barrington Research.
Good morning. This is Chris, sitting in for Alex. I wanted to highlight just some of the key points. You discussed the Andean region. Can you share some of the incremental drivers that you're seeing within this region? I know in the past, you had mentioned the robust economy that you're seeing in Peru. Any atypical region dynamics versus other regions that's allowing you to sustain this growth?
And the strong economy that you're seeing here, can you talk about how this has impacted job placement rates as students exit your institutions? And overall, just a runway for growth that you're seeing within Peru and within the overall Andean region, as it pertains to your margin trajectory and your organic growth projections?
Chris, this is Eilif. Let me make some comments and then JJ can speak to, chime in. But I think what we are seeing in both Peru and Chile, is a strong and favorable economic situation. We also have terrific grounds in those markets, and we are operating really within all three segments: the premium, the value and the tech/voc segments. And these fairly mature brands have a strong reputation of quality and delivered consistently very strong outcomes, which has been a key driver for us to build very strong industry relationships.
And then, of course, we have a terrific management team in the Andean region, as well as over the individual institutions in Peru and Chile, and we are leveraging a lot of our best practices from the rest, from these two markets into the rest of the network, as we are building more of our common operating model. So those are the key factors.
So from a financial standpoint, what Eilif alluded to really is translating into a favorable pricing dynamics for us, while our value-priced institution is growing a lot faster than our premium institution. So obviously, that has an impact on the mix. But the penetration of higher education in the 18 to 24 segment continues to increase. And we're seeing also some potential consolidation of the market as requirements from a regulatory standpoint are getting increased. So this is a great opportunity for us in the market given the strength of our portfolio.
That's great. I really appreciate the color. And would you say you are on track or where are you in terms of achieving your optimal scale for campuses within Peru and Chile?
Yes. There, we have three brands. I'll start with Peru. We have three brands in Peru. The premium priced brand, I think, is coming a little bit more at maturity. Obviously, it's contained within the premium segment of the market. The value-priced institution called UPN still has got a ton of runway to grow, particularly outside of Lima and in some of the more extended suburbs of Lima. And then we have another type of tech/voc institutions called Cibertec.
We did a modest facilities acquisition last year. We believe that business model currently is on the leverage. And so we definitely have aggressive growth, our programs to expand the portfolio in health sciences, in other programs and also increase the physical footprint. So growth certainly on the revenue side and certainly margin expansion for that last institution.
Our next question comes from Jeff Silber from BMO Capital Markets.
Thank you so much. I know we're not talking about 2020, but I just wanted to make sure, do you guys think you're still on track to hit your adjusted EBITDA target in 2020? I think it was 21%, if I remember correctly.
Yes, still on track.
Okay. Fantastic. And the net debt goal at the end of the year of roughly $1 billion. Can you tell us what you're estimating for free cash flow and the share repurchase component of that to hit that number?
Yes. So the guidance for free cash flow has not changed. It's still $145 million. When it comes to the net debt estimates, it's a, and the increase of $200 million, it's a combination of the share repurchase program, which we're estimating anywhere between $75 million and $150 million executed by the end of the year and then the delay of our Malaysia sales to 2020.
Okay. Great. And then speaking of sales, can you just remind us what's left in terms of the divestiture plans?
Sure. So Malaysia, Turkey, Honduras and Costa Rica are outstanding. We still need to close obviously on Panama and UniNorte, but those all signed.
Okay. Fantastic. And if I can just switch back to operations. Can you talk a little bit about the softness at UVM? Can you just remind us what's going on there and what plans you may have in place to offset that?
Yes. As we've indicated over the last few quarters, the economic environment in Mexico is putting some pricing pressure on, what I would call, the overall price ladder in Mexico. And that means that the value price institutions tend to be favorites when you go through the done part of the economic cycle. And this is why Unitec continues to perform very well.
And when you've been pricing your institution at too much of a delta versus that value price segment, it becomes challenging to continue to grow. We've also decided to consolidate some of the physical footprints. We've got a very extensive network of location and this plus the trimming of program has put pressure on our enrollment and top line.
Okay. Great. And if I can just sneak one more in, just modeling questions. And actually two, if you don't mind. What revenue per student increase is embedded in your guidance for the rest of this year? And also, are there any one-time issues between 3Q and 4Q that we need to be aware of?
Sure. On the pricing side, if you really carve out Distance Learning in Brazil, our face-to-face business all across the network basically is increasing total enrollment by about 1%, our revenue guidance is about 3%. So you can get a kind of a 200 basis point delta in terms of a net ARPS. It's obviously a mixed bag in terms of markets where we are at or slightly above inflation. And then the situation in Mexico and Brazil, particularly where we are below inflation.
Okay. And then again, 3Q versus 4Q, anything to call out?
The only thing I would say is, as we are divesting institutions that were located mostly in the northern hemisphere, the seasonality of our business is changing, both for income, as well as for cash flow and is putting a little bit more pressure on Q3 with the offsetting impact in Q4.
Our next question comes from Shlomo Rosenbaum from Stifel.
Hi. Good morning, and thank you for taking my questions. Hi, JJ. Just based on current trends in Brazil, it seems like you're getting the enrollment growth, certainly very strong distance learning, but there's a mix issue that's weighing on the revenue in terms of the higher priced students that are kind of matriculating out. When do you estimate that you're going to kind of crossover and the strong enrollment is actually going to start pushing up the revenue so you'll have the revenue growth and the enrollment growth more in consonance?
Yes. So I think for, being able to understand a little bit more directly how enrollment trends, really correlate to revenue, you really have to look at face to face. And face to face, for the last few years, has really been impacted by the reduction of the number of students in the FIES program. In other words, the graduating students are a lot larger than the ones that are incoming. We believe that negative impact is going to really be significantly abated starting in 2020. So this is the last year in 2019 where we're seeing a big of an impact.
From a revenue perspective, you won't see that much of an impact in terms of distance learning. But from a bottom-line perspective, certainly starting in the second half of 2019, we're getting into a positive territory and this is going to be margin accretive, and we're expecting that trend to continue into 2020. So I would say, in summary, really the pressure on margins and the relationship between really total enrollments and revenue should start to get a little bit normalized as we go into 2020, particularly because of FIES. And then the last factor that I think is still hurting us quite a bit is the fact that pricing is below inflation.
So if you really look at our cost base and 4% inflation country, in Brazil, that puts us really in the hole about $20 million every year together with FIES, which is about $10 million of headwind. That's about $30 million of headwind altogether that we've been experiencing for the last two, two and a half years. And we've been working very hard through the management team to really offset that with integration benefits and reorganization, which has allowed us, on a comparable basis, to have relatively stable margin in Brazil.
Okay. Great. That's great color. And then what is the timing item that contributed to Mexico's organic 1% constant-currency growth?
Yes. It's all marginal shift of the academic calendar that's favoring a little bit the first half. The offset is anticipated to be in the fourth quarter.
Okay. And then in the queue, we talked about the new launch Chile and Chilean affiliates going to open bid for services. Is there any serious competitor, are there any serious competitors for Laureate to provide those services?
The short answer is yes. So I think let me give you a little bit of background around the new education law in Chile is that provided you do, you go through an RFP and you have multiple parties bidding, you don't have to get approvals from the superintendency. And so that's been really the default process. We have really two types of services that we are providing to those universities: the ones that are infrastructure-related, they're really to support the students and the faculty.
For those services, depending on the institutions, there has been, in most cases, really multiple parties bidding for the services; and then we've also gone through an RFP for IT services. And those are more, I would call, commoditized services, or more standard services, as there'll be probably a little bit more competition, same applies for market research services we're providing to those institutions.
Okay. Great.
Our next question comes from Marcelo Santos from JP Morgan.
Hi. Good morning. Thanks for taking my question. Just wanted to explore a little bit more the EBITDA decline that we saw in Brazil, in the first half of the year. We're talking here about more or less a 40% decline versus the previous year. I understand FIES has a role in this, but FIES has been declining for many years. Could you just at least provide a little bit more color on what has hurt so much the margins and a little bit of the actions that you think are going to help to offset this in the future? That's the first question.
Marcelo, so the driver that has been fairly constant over the last two and a half years, what I think has been different in 2019, is really the fact that some of the reorganization and transformation of our operating model are a little bit more back-end loaded in the execution of that in 2019 than they were in 2018. So you will see a jump in margins for Brazil in the second half versus the first half. There is also some timing associated with some investments that we've made in our Distance Learning business that will not impact as much obviously the, that segment in the second half. But the dynamics have been fairly similar.
So we, just to give you some rough numbers, we're losing about 10,000 students per year in the FIES program. We anticipate that to be about half going to 2020. So that, by definition, is going to be more muted, as we go into 2020. And then because of the back-end nature of our transformation of our operating model in Brazil, in 2019, we should get quite a bit of tailwind going into 2020, which we didn't have as much from 2018 to 2019. So it's more timing, but the dynamics are all the same and the levers we're using to try to offset those pressures have been very consistent.
Okay. Perfect. And the second question is just to dig a little bit more on the Chilean new law. So just to understand at what stage of the process are we there in terms of the bidding process for the contracts? Has already something being closed or are you still collecting the proposals? Where are we now?
Yes. We are not going to comment specifically on the timing, but let, just some overall color. A very high proportion of the contracts that we're up to bidding have gone through and process. We still have quite a few of them to go through in the third quarter. And by the time we report third quarter, we'll provide an update.
And have you won most of the bid, I mean, has Laureate continued to provide in these ones that you already finished?
Yes. We're not going to provide any specifics on that. But we are satisfied with the process. We believe whatever has happened was a good outcome for both Laureate and the institutions.
And we're almost on track with our internal expectations.
Our next question comes from Caio Moscardini from Morgan Stanley.
Hi. Good morning, everyone. Can you please comment on the process of the intake cycle in Mexico? You all know that the economic environment is not that favorable. So if we can get some color on that, would be very helpful? And also I would like to ask if you have opportunities to merge campuses down here in Brazil, so that you could gain some gross margin, which would help margins overall.
Sure. Caio, this is JJ. On the first question concerning Mexico, we're still going through the cycle. Obviously, we're not going to comment further. But things ongoing according to expectations and what we are expecting for Mexico is reflected in the Q3 and the full year guidance. When it comes to Brazil, the answer is yes. There are opportunities to consolidate some of our physical footprints in some of our universities across Brazil and that's part of the broader margin improvement plan that we're still working on for Brazil in 2019 and beyond.
Our next question comes from Jeff Meuler from Baird.
Thanks. First, just want to ask about Walden domestic. I know you're characterizing it as in line, but you had a pretty easy comp there. I think it was down in the year ago and you said it's timing factors at that the time and it got a little worse year over year despite that. So just anything else you can say on Walden domestic trends or outlook?
Jeff, this is Eilif. Clearly, the priority over the last 18 months for the Walden management team has been to rebuild the commercial function. You will recall that it was in 2017 we had a lot of volatility and we turned that around in 2018. And we continue to deliver according with our expectations on low single-digit enrollment growth. We have developed a very impressive commercial team, strong digital marketing capabilities and strong data analytics tools to help us continue to compete in the market. But again, the first priority was a turnaround. The operations stabilized, and we can conclude that that job is done. And the focus now is going to be on how to lift the growth rate going forward.
We will be doing so by looking for investments in new programs, health sciences is a core focus area for us. We are, we continue to invest behind competency-based education and also invest in other tools such as AI and VR to help further differentiate the product portfolio and the overall experience at Walden. But those growth drivers clearly has to put in the context of Walden operating in a very mature and a very competitive market in the U.S. And our guidance remained very consistent that this business is large, it's mature and it's going to be growing in the very low single digits.
Okay. And then what's your view of what the steady state leverage on this business should be? Are we now there in the one and a half to two times range? And I get that long-term acquisitions could be an option for you, but, I guess, what I'm wondering is if you continue to see a gap between your assessment of intrinsic value and market price, should we expect share repurchases likely remain kind of an ongoing feature of the company at this point even beyond the current authorization?
So the progress we provided on leverage was about anywhere between two and three. We're now going to be below two. We are comfortable staying below two. We're obviously not going to comment on future share repurchase program, but I think the shift of our capital allocation strategy should give you an indication on how we're going to be using excess liquidities after we'd reinvest these in business. And right now, the focus is really on executing the current share repurchase program.
Okay. And then just last one from me. Can you provide any sort of like adjusted EPS metric for the quarter after excluding the asset sales gain on an after-tax basis?
Yes. I mean, we can certainly provide you that information separately, but I think most of that EPS data really is included in the Q.
[Operator Instructions] Our next question comes from [Andrew Basos] from Citi.
Hi, guys. Good morning. I have a question regarding operations in Brazil talking specifically about matching courses, which has been sort of a heated topic here following capital markets activity. So you have, we see, according to the regulator there you have a, roughly a thousand medical seats in Brazil. So I guess the question would be how do you think about this medical arm of the Brazilian business going forward from a strategic perspective? If you could share a little bit of your thoughts, that will be my question.
I think the question was about the health sciences mix in our portfolio? Is that correct, including medical seats?
Yes. You have a portfolio of a thousand medical seats in Brazil, right? And, so just like to understand how do you see this business going forward from a strategic perspective in terms of growth, profitability and so on? How do you think about it if you see strategic value on this business?
Yes. Thank you, Andrew. Very clear. And absolutely, we are focusing our institutions around delivering programs where we believe the jobs of the future is going to be, and health sciences is, of course, a very important vertical for us. And medical schools are, of course, the conjure within the health sciences programs.
And we find that having strong medical schools within our institutions gives it the halo effect to really grow and differentiate our other health sciences programs. So that's been our strategy. The medical schools are integral part of a full health sciences offering at our scale institutions in Brazil. So we just opened up two new medical schools in the interior of Sao Paulo and you can expect us to continue to go after increased licenses and increased footprint in the medical field.
We have no further questions. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.