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Ladies and gentlemen, thank you for standing by, and welcome to Laureate Education's Second Quarter 2020 Results Call. [Operator Instructions].
I would now like to hand the conference over to your speaker today, Senior Vice President of Finance, Adam Morse. Sir, please go ahead.
Good morning, everyone, and thank you for joining us on today's call to discuss Laureate Education's second quarter 2020 results. Joining me on the call today are Eilif Serck-Hanssen, President and Chief Executive Officer; and J. J. 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 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 on May 7, 2020; 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 good morning, everyone. In the context of being in the middle of the COVID-19 pandemic, I am pleased to report a solid second quarter. Our Adjusted EBITDA results were ahead of expectations, in large part due to tight cost controls and the acceleration of certain productivity initiatives.
The past five months have demonstrated the resiliency of our business model, enabled by our ability to deliver innovative and high-quality educational offerings at affordable prices. This has resulted in a relatively stable total enrollment base.
Our liquidity position is strong, and we are seeing early signs of a reversal in some of the foreign exchange headwinds we experienced during the early stages of this pandemic. These factors are leading to an improved outlook for 2020, which JJ will cover in more detail when discussing our updated guidance.
I want to thank our faculty and staff once again for their agility and commitment to deliver on our promises to our students during these challenging times. Laureate's top priority continue to be the health and well-being of our students, faculty and staff, while delivering high-quality educational offerings in a safe and responsible manner. As this crisis has unfolded, we have been carefully studying the emerging trends from across our network in comparison to what we experienced during prior economic shocks.
Historically, as economies in Latin America have been unfavorably impacted by macro events, the primary negative impact to our business was felt at our premium institutions, while our value brands performed relatively well as students traded down to more affordable offerings. So far, through this pandemic, we are seeing evidence that the most vulnerable parts of society are hit the hardest. Consequently, there has been a greater adverse demand impact on our value brands versus our more premium brands.
The typical student profile at our value brands in Latin America has parents working in jobs directly affected by the crisis, such as hospitality and other sectors in the informal economy. Those families are struggling right now. And although they are prioritizing their children's education to the extent that they can afford to do so, we are experiencing a slowdown in new enrollments as well as higher attrition in this value segment. On the other hand, in our premium segment, serving the mid- to higher end of the socioeconomic pyramid, where more parents have white-colored jobs, there has been less of a negative demand impact, although no segment seems immune to the impacts of the COVID-19 pandemic.
Net-net, Laureate has experienced reduced volumes, but is benefiting from favorable revenue mix dynamics. As we head into the upcoming semester, it is clear that we won't be back to business as usual for our campus-based operations and that online will continue to be the primary modality until this pandemic is behind us. Our institutions have a competitive advantage in online and distance learning, given the investments we have made in digital learning platforms over the past 3 to 5 years. Our plans for reopening our campuses this fall will continue to evolve in the coming weeks, and each market will likely have slightly different approaches based on how COVID-19 is trending in their regions as well as being impacted by the mandates of the relevant local authorities.
For example, in São Paulo, Brazil, campuses are expected to reopen in stages, starting with labs and clinics, and then expanding to more traditional classes by October. In Mexico, campus openings will depend on the COVID-19 conditions and the related reporting dashboards established by the federal health and education authorities as well as the local guidelines in the various states. The Minister of Education has said that face-to-face classes will only be resumed at any particular location when the dashboard is green. Peru and Chile have similar dynamics. We will continue to monitor the situation and adjust based on what is allowed in each market as well as what we feel is appropriate for the safety of our students and faculty. Before turning the call over to JJ for the financial update, let me provide a brief summary of our strategic review process. Last week, we announced the agreement to sell our Australian and New Zealand businesses for USD 643 million or approximately 16x trailing EBITDA. This transaction, as with most of our all the divestitures over the past 2 years, is highly accretive to our shareholders, and yet another testament to the quality of the institutions in our portfolio.
We also recorded a USD 418 million non-cash impairment charge related to our Chilean operations. In the second quarter, the company identified an impairment indicator and completed a valuation of the fair value of our Chilean operations, which revealed that the range of likely values that could be expected to be realized was lower than the carrying value of our Chilean reporting unit. The reasons for this include, among other things, the risks and uncertainties that the market perceives around operating higher education institutions in Chile, given the current political and regulatory environment as well as the possibility of a new Chilean constitution that could come into effect as early as 2022. Finally, let me conclude by underscoring that Laureate's Board and management are committed to continuing our strategic review process, which is designed to optimize the value of all of our stakeholders.
I will now turn the call over to JJ for a more detailed financial overview of the second quarter and first half performance of 2020. JJ?
Thank you, Eilif. As a reminder, campus-based higher education is a seasonal business, and the second quarter represents an important earnings period for the company. This year, that seasonality has been impacted by the COVID-19 pandemic, which resulted in the delay of a number of classes, and ultimately, some of them not being completed until the third quarter. Please refer to Page 7 for an illustration of the associated shift in our academic calendar. The financial impact associated with that is about $40 million of revenue, all due to be recognized in Q3.
With that context in mind, let me now cover the financial results for the second quarter, starting on Page 8. Revenue in the second quarter was $792 million, and Adjusted EBITDA was $259 million. Adjusted EBITDA for the quarter was significantly ahead of the guidance we provided in May due to tight cost controls and the acceleration of a number of productivity initiatives we initiated in March.
On a comparable basis and at constant currency, revenues for Q2 declined by 8%, while Adjusted EBITDA was up 1%. Adjusted for timing, revenue was still down 3%. This year-over-year decline in revenue was attributable to weaker new enrollments in Brazil and the Andean region as well as increased intra-semester attrition due to the COVID-19 pandemic.
Moving now to first half 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 a decrease in revenue by 6%, while Adjusted EBITDA was only down 3%. Adjusted for timing, revenues for the first half was essentially flat, at down 1%. And Adjusted EBITDA would have been up at least single digit versus 2019.
Let me now provide more detail on our performance by segment, starting with Page 10. Please note, year-over-year indicators will be on an organic and constant currency basis. Let's start with Brazil. Total enrollment declined by 5% versus the same period in 2019 and new enrollment decreased 13%. Our Distance Learning segment increased total enrollments by 12% year-over-year on the back of strong new enrollment trends in the second half of 2019.
Total enrollment for our face-to-face segment continued to be negatively affected by the unwinding of the FIES program as well as increased levels of attrition since the start of the COVID-19 pandemic. For the first half, revenue was down 5% versus prior year, timing adjusted. However, Adjusted EBITDA showed double-digit improvement as the cost actions taken in the second half of 2019 continue to yield strong dividends.
In our Andean segment, new enrollments were impacted by the COVID-19 crisis and, as a result, were down 7%. The impact on total enrollment was more limited to down 5% as compared to the same period last year, aided by solid re-enrollments. As noted in Eilif's opening remarks, we are seeing more pressure on our value brand institutions across all Latin American markets, and UPN in Peru is no exception. There is no doubt that the targeted segments of value institutions are made up of students whose income has been disproportionately impacted by the COVID-19 crisis. Adjusted for timing, revenue was down mid-single digits as compared to the same period last year on a comparable basis. Adjusted EBITDA was also down versus the same period in 2019 due to, in part, to increased bad debt expenses across the segment.
In Mexico, our large intake will occur in September. Adjusted for timing, first half revenue was down 2% on a comparable basis. Our Rest of World segment, which is Australia and New Zealand, continues to scale rapidly and is experiencing strong double-digit growth in enrollments, revenue and Adjusted EBITDA. Given the announced sale of this asset, please note that we will be moving this segment to discontinued operations in Q3.
Finally, in our Online & Partnerships segment, our core domestic market performed well with new enrollments growing at 3%. Overall, total enrollments were down 4% as we continue to deemphasize our international partnership business, which represented less than 10% of our total portfolio in Q2. Excluding the impact of timing, first half revenue was flat year-over-year for Walden. Turning now to our liquidity position, as noted on Slide 13. At the end of June, our liquidity position stood at $630 million, an increase of $83 million from the previous quarter as a result of operating cost reduction and tight control over discretionary capital expenditure spending. Additionally, we've been able to negotiate the extension of more than $100 million in debt obligations with our local banking partners in Latin America.
What's more, the $630 million of liquidity currently on hand does not include the $750 million in gross proceeds that we anticipate in the next 6 to 9 months from our previously announced pending asset sales in Australia, New Zealand and Malaysia. In short, our balance sheet is strong, and we remain well positioned during this pandemic. Let me now conclude my prepared remarks with our 2020 guidance, starting on Page 15. I am pleased to report that we are updating our full year 2020 guidance to reflect 3 elements: increased visibility into our enrollment dynamics; improved outlook from an operational standpoint; and finally, stronger FX when compared to our situation 3 months ago.
As a reminder, in May, we provided 2 scenarios for the 2020 full year guidance depending on the timing and the pace of our return to face-to-face operations. Scenario 1 assumed that we would reopen our campus in the fall, while Scenario 2 assumed the continuation of online teaching through the end of the year. Despite the fact that we are now assuming that reopening of our campus operations will be slow and limited, our financial outlook is more aligned with Scenario 1 as we will continue to have the benefit of the productivity initiatives we launched in the first half of this year.
Please note that our revised guidance now excludes the Rest of World segment, which will be moved to discontinued operations in Q3. With that context in mind, our revised guidance for 2020 is as follows: Total enrollment estimated to be approximately 786,000 students; revenue estimated to be between $2.490 billion and $2.590 billion; Adjusted EBITDA estimated to be between $510 million and $540 million; and free cash flow estimated to be between $150 million and $180 million. For the third quarter, our guidance is as follows: Revenue between $625 million and $645 million. Adjusted EBITDA is estimated to be between $121 million and $131 million.
Eilif, now back to you for the wrap-up.
Thank you, JJ. We are very pleased with the resiliency that our business model demonstrated in the second quarter. With a solid balance sheet, and with strong cash position, Laureate remains well positioned to deal with challenges, in these uncertain times.
We will continue to be proactive in managing the business in a prudent manner during the pandemic, while opportunistically pursuing strategic transactions to further generate value for our stakeholders.
Operator, that concludes our prepared remarks, and we are now happy to take any questions.
[Operator Instructions]. Our first question comes from the line of Shlomo Rosenbaum of Stifel.
And certainly, looks like results are definitely better than expected given the operating environment on the ground. I wanted to just ask you a little bit more about the Chile write-down. And like, what does it mean for the outlook for the business? And can you give us a little bit more detail? It seems like -- what specifically drove it in the quarter? Was it that legislation that's progressing in Chile right now in terms of being more accommodative for tuitions during COVID-19? Is there something else going on? Like what -- and what's the outlook for that business like into the future?
Hi Shlomo, this is JJ. I'm going to give you a little bit more background as to the process we went through in the second quarter like we do in -- during every quarter. Each quarter, we evaluate whether there are any indicators of impairment for our reporting units. As you know, we need to value our assets at the lower value of the fair market value or the current value on the balance sheet. And during the second quarter, as part of the ongoing strategic review, we received and considered information regarding the market valuation for control of our Chilean operations, which caused us to believe that it was more likely than not that the fair value of our Chilean reporting unit was less than carrying value. And we've put into the 10-Q a number of drivers in the footnote that are behind that. Obviously, uncertainties that market participants have around the operating of higher education institute in Chile, for instance; the challenging politic and regulatory environment that we've experienced; and of course, the possibility that the new Chilean constitution could become effective as early as the summer of 2022.
We're not going to be discussing specifically what information we received. However, using that information, we performed the impairment test, and that resulted in the impairment charge. So that's really the process we went through and really what triggered the impairment in Q2.
Got it. So what's the carrying value now for Chile?
We haven't reported that information specifically for Chile. There is obviously additional disclosures in the 10-Q that you will find around the net assets associated with all VIEs that we have. That includes also Honduras. And similarly, you will find additional disclosures around the unrealized FX losses, but we haven't disclosed the carrying value of Chile.
Okay. And then just -- is there anything else that we should be considering in terms of like an enterprise value for Australia? It's just a fantastic price that you're getting and seems like the assets are really good assets. Is there any debt or cash that's allocated there as well? In other words, if we're looking for an enterprise value, are you guys going to be absorbing some of their debt? Or are they going to be -- are you going to be leaving a significant amount of cash there? Or anything else we should be considering?
The price that we disclosed is a debt-free, cash-free valuation that really is the enterprise value. And the reflection of the prices -- Laureate has a track record of building really strong businesses, and our business in Australia and New Zealand is no exception to that. I'm very pleased with the business that we have built over the last decade or so and very pleased with the transaction as well.
Our next question comes from Ryan Leonard of Barclays.
I was just wondering, I guess, what -- I know you've given multiple scenarios in your guidance. But I guess, what are you assuming for specifically attrition in those numbers? And I guess how did attrition even trend through July, if you have any kind of data points there?
Yes. Ryan, this is JJ. For the guidance, we've really taken a look at all the key drivers of our business that we've experienced over the last 90 days. And what we've seen is enrollment dynamics that tend to favor the higher price institutions. Re-enrollments have been strong fairly across the board. But there's been definitely an uptick in attrition, particularly at our value price institutions. As I said in my prepared remarks, the students that are attending those institutions tend to be disproportionately impacted from a socioeconomical standpoint by the COVID-19 crisis.
So although enrollments are in the middle of the range that was established by the low book ends of the second scenario, and the higher book ends of the first scenario, it is slightly lower than the first scenario and reflects really what we've said, which is that the return to face-to-face operations is going to be slow and only gradual. So that has been factored into the guidance. Obviously, it's offset by the positive mix that I was referring to in terms of our enrollment dynamics and then all the cost actions that we've taken proactively to mitigate the revenue-related impact. So that's why we were able to hold guidance actually higher than the midpoint of the first scenario, partially due to FX favorability.
Got it. Then just in terms of portfolio review, from a regulatory standpoint, do you think further consolidation in Brazil is possible today? Or do you think amongst the large players, the government may not look kindly on that?
We're not going to speculate on which business combinations will be permitted. But clearly there's been a recent trend in consolidation. The market remains fairly fragmented. So we believe there are significant opportunities for further consolidation as the macro trend in Brazil.
Our next question comes from Marcelo Santos of JPMorgan.
[Technical Difficulty] when you look at Adjusted EBITDA for the first half, it was the region that was hit the hardest. So if you -- perhaps you could discuss the results in terms of what happened in Peru and Chile? That would be the first question.
And the second question is regarding the educational reform in Peru. If you could provide some comments on, if you think there could be any changes given the political reshuffle that's taking place there? So any color on that would be very helpful.
Marcelo, this is Eilif. I'll take -- I'll frame it from a big picture perspective, and then JJ will jump in and provide more details here on the numbers in Peru and Chile. But you are right, Peru and Chile have been hit as a segment by COVID. Peru probably more so than Chile because Chile has a student loan program that blunts the impact somewhat from an affordability perspective. But in Peru, it's 100% private pay, and we have found that our consumers are struggling. I mentioned that in our opening remarks, particularly in the value segment. And so just -- there's been an element of affordability where students just said, "Listen, in this -- in the middle of this quarter, I just can't afford to sign up." So they are deferring. We do expect there to be a pent-up demand, but probably not in 2020, it's probably going to be more in 2021.
In terms of the educational reforms in Peru, I think it's just simply a reflection that consumers are hurting and the legislators are looking for ways to reduce the burden on students. There's been a lot of projects or proposed legislations in Peru as well as in other markets in Latin America. But to date, there's been no material price controls or other adverse legislation that has been -- have been enacted. The legislators are focused on affordability. Laureate is focused on affordability. So we are well positioned in that regard. And we are working very collaboratively with the policymakers and the regulators, and our students and their families, to ease the impact of the crisis in a way that makes sense for everyone. So I'll pause there.
I should also say, although there has been no legislation passed that is causing material adverse impacts to our business, we are monitoring, of course, all of these various proposed legislations in Peru and elsewhere very, very closely.
[Operator Instructions]. Our next question comes from the line of Caio Moscardini of Morgan Stanley.
So can you please provide the main initiatives that you are taking in order to increase the cost efficiency of the company? So I was wondering if you are, for instance, reducing the number of campus that you have, I don't know, but maybe merging two campus that are close to each other? And the second question about the intake and re-enrollment dynamics in Brazil. I believe the intake cycle in Brazil already started. So if you could comment how is the environment there? And how the re-enrollment process is going?
JJ, you will take on the cost side?
Yes. Yes, absolutely. So on the cost side, the productivity initiatives are really associated, first and foremost, on all the cost expenses that are associated with the running our face-to-face operations. Obviously, there was a lot of opportunity to reduce on-campus expenses. We've also been proactively negotiating with all of our landlords, the reduction of rent and driving the acceleration of some of the return of buildings that were always part of our productivity initiatives for 2020. But clearly, there was an opportunity to accelerate that trend.
As you know, in Brazil, there's a lot more flexibility in doing so given the way the leases are structured versus in some of the other markets. And then, of course, the ability to deliver mostly online also provides opportunity to drive educational productivity a little bit further. So that was the second bucket.
And last, but not least, all discretionary expenses have been contained to a minimum. And that rounds up, if you want, the 3 big buckets of productivity initiatives that we've had that have obviously benefited Q2 and will continue to yield dividends in the second half.
And on the enrollment and re-enrollment cycle in Brazil, we are about 2/3 through, about 65% through the intake for Brazil for the year. Of course, the main intake was cycle 1, and that's fully behind us, and we are far along on cycle 2. And the trends are very consistent with what JJ and I have been saying as strong re-enrollment performance. We have had good collections. In terms of intra-semester attrition at the value segment, that remains a challenge for us. And also, the new enrollment trends are a little lighter than prior year as a result of COVID.
I'd also like to just comment in Brazil briefly on DL and face-to-face. We grew DL very rapidly in 2019, and we have now taken a step back and done a couple of fine-tuning adjustments on that model. The model now is at scale. It is now accretive to our bottom line. But we are focusing on higher price points and more profitable programs. That has resulted in DL volume coming down about 25%-26% year-over-year for the first half, but revenue is growing robustly. ARPs are growing for the second quarter by approximately 15%. So we do believe that the steps that we have taken to optimize the DL model is working for us.
And then face-to-face volume for the first half is down about 7% year-over-year, and that is really all due to the COVID crisis, the affordability particularly in the value segment. And we're seeing certain regions being more impacted than others. The South is a little bit harder hit than São Paulo and the Northeast.
And at this time, we have no further questions in queue. This concludes today's conference call. Thank you for participating. You may now disconnect.
Thank you, everyone.