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Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Laureate Education, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Adam Morse. Thank you, and please go ahead, sir.
Good morning, everyone, and thank you for joining us on today's call to discuss Laureate Education's third quarter 2020 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 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-Qs filed earlier this year, 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. Before turning the call over to Eilif, I'd like to note that following the closing of certain additional asset divestitures as part of our previously announced strategic review and the signing of others, we are required to move those operations to discontinued operations. Therefore, our results being reported today for continuing operations include only our remaining Mexico, Peru and corporate segments. In the appendix to the slide presentation, we have included a table with historical data for our revised presentation of continuing operations. We hope that you will find that information helpful as you update your models. With that, let me turn the call over to Eilif.
Thank you, Adam, and good morning, everyone. I'm pleased to report third quarter results, which were in line with expectations. Our business model continues to exhibit resiliency through the COVID-19 pandemic, and our liquidity position remains strong. The management team is focused on tight cost controls and the acceleration of certain productivity initiatives. These actions have kept us on track for the year, and we are reaffirming our guidance expectations for 2020 for the business units that remain within continuing operations. I would just thank our faculty and staff, once again, for their agility and commitment to deliver on our promise to our students. These past 8 months have been challenging for everyone. And I greatly appreciate all the team members' efforts. Laureate's top priority continues 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. During the quarter, we made significant progress on our strategic review, having signed definite agreements to sell our operations in Brazil as well as Walden University, which is our online institution here in the United States. In addition, we have closed on the sale of our operations in Chile and Malaysia during the third quarter. Given the significant size of the operations now sitting in discontinued operations, we have included in the appendix a summary of key operating metrics for those operations. As of September 30, we had approximately $2.6 billion of additional net asset proceeds expected from pending divestiture transactions. Of that, we collected nearly $650 million from the completion of the sale of our Australia and New Zealand operations earlier this week. Given our strong liquidity position, combined with expectations for continued positive free cash flow generation from our operations and the large cash proceeds from pending divestitures, earlier this morning, we announced that our Board of Directors has approved a $300 million stock buyback program, furthering our efforts to increase shareholder value. Our remaining portfolio now consists of 2 scaled markets with shared characteristics. In both Mexico and Peru, we operate leading brands that have similar market segmentation strategies, operating both premium- and value-brand institutions in those markets. Both markets are large with significant long-term growth opportunities given the relatively low higher education participation rates. And both markets have favorable regulatory conditions that are supportive of quality private education providers. The remaining business is at scale with approximately $1 billion in revenues and adjusted EBITDA margin of 29% prior to corporate overhead, and thus, provides multiple options for Laureate to maximize shareholder value.
In the event that our operations in Mexico and Peru were to remain in a standalone public company, we anticipate being able to operate these markets with a 70% to 80% reduced G&A footprint, which should yield very attractive margin and cash flow conversion profile for our investors. However, we will continue to explore strategic transactions for our remaining operations in both Mexico and Peru, and we'll pursue opportunities that can generate superior value for our stakeholders, net of friction costs versus retaining those operations as a publicly traded company. I will now turn the call over to JJ for a more detailed financial overview of the third quarter and the year-to-date performance. JJ?
Thank you, Eilif. Before we go through our results for the quarter, I would like to highlight that even though our financials have been recast for discontinued operations, the seasonality of the business remains largely unchanged. The first and third quarter represent the main intake cycles, and the second and fourth quarters are seasonally strong from a P&L perspective as classes are in session during those periods. Additionally, as discussed during last quarter's earnings call, the phasing of our quarterly revenue has been further impacted by the COVID-19 pandemic. This resulted in moving a number of classes from earlier in the year to the third quarter. In light of that, we believe that our year-to-date results may be more representative of our current operating performance. With that context in mind, let me now cover the financial results starting on Page 8. Revenue in the third quarter was $244 million, and adjusted EBITDA was $50 million. Results for the third quarter included approximately $20 million of revenue associated with classes that were deferred from early in the year. On a comparable basis and at constant currency, revenue for Q3 declined by 4%, while adjusted EBITDA was up by double digits. Moving now to year-to-date September results. When combined with the first half results, still on a comparable basis and at constant currency, our overall performance year-to-date resulted in a decrease in revenue by 7%. However, adjusted EBITDA was up 27%, showing continued margin expansion following cost and efficiency actions that we have undertaken this year across all operating segments and at corporate. Let me now provide some additional color on the performance of our 2 remaining operating segments, Mexico and Peru, starting with Page 11. Please note that all indicators we will discuss are on an organic and constant currency basis. Let's start with Mexico, where our main intake cycle was complete and enrolled 63,000 new students. Though this represents a 7% decline versus prior year, these results were broadly in line with our expectation given the continued impact of the COVID-19 pandemic. Total enrollment show a similar trend with a decline of 7% versus prior year. Revenue trends followed the decline in enrollments with year-to-date revenue down 7% as compared to the same period a year ago. Adjusted EBITDA through year-to-date September is down 14%, mostly due to revenue deferrals into Q4. In Peru, the main intake cycle occurred early this year. However, in that market, we do have a smaller secondary intake which occurs during the third quarter. The results in Peru also continued to be impacted by the COVID-19 pandemic, and as a result, the secondary intake for Q3 was down 22% versus prior year. The impact on total enrollment was more limited, to being down only 13% as compared to the same period last year, aided by the better performance of our primary intake in March. If we look at our performance by institution, we continue to see what we experienced in the second quarter. The enrollment at our value brand institution, UPN in Peru, like UNITEC in Mexico, has been more affected given that their target market is made up of students whose income has been disproportionately impacted by the COVID-19 crisis. Revenue in the third quarter for Peru is benefiting from the deferral classes from prior periods. Year-to-date September, revenue was down 7% versus prior year, following lower enrollment trends, but was partially offset by positive mix shift. Similarly, adjusted EBITDA in the third quarter is benefiting from the deferral classes from prior period, whereas adjusted EBITDA on year-to-date basis is essentially flat versus prior year. Turning now to our corporate G&A segment on Page 13. Throughout 2020, we have continued to rightsize our corporate G&A infrastructure and already decreased our expense run rate by nearly $40 million. Looking forward, assuming Mexico and Peru are the only 2 countries that we believe that the corporate infrastructure can be a small fraction of what it is today, our current view is that once all of our announced asset sales have closed, the level of corporate G&A needed should be around $25 million or a 70% to 80% reduction of what our run rate is today. Let's now move to guidance, starting on Page 14. On a comparable basis, our full year guidance remains unchanged and is as follows: For continuing operations, total enrollment is estimated to be approximately 325,000 students. Revenue is estimated to be between $1 billion and $1.20 billion. Adjusted EBITDA, estimated to be $185 million and $195 million. This is comprised of approximately $100 million of corporate G&A expenses and between $285 million and $295 million of adjusted EBITDA from Mexico and Peru on a combined basis. For our consolidated operations, free cash flow is estimated to be between $150 million and $170 million. Finally, as it is typically the case after we have just announced asset sales, our current debt position and level of corporate G&A do not yet reflect the financial profile we expect once all the announced divestitures have been completed. Please refer to Page 17, which outlines how to think about adjusting for those 2 items using our 2020 full year guidance as the baseline. First, on the G&A front, as discussed earlier, we expect to reduce our run rate by 70% to 80%. This alone, assuming everything is similar to our current year guidance, will bring our adjusted EBITDA margin to 26%, which is 400 basis points ahead of the target we had originally set for ourselves in 2020. The business will also be much more cash accretive with an unlevered free cash flow margin of 14% of revenue. Second, the balance sheet, which today is in a net debt position of $803 million, would move to a net cash position of $1.8 billion following the receipt of about $2.6 billion net proceeds from the pending asset sales. Please note that of the $2.6 billion expected, $650 million was already received this week from the close of the sale of our businesses in Australia and New Zealand. Let me now close out my prepared remarks by providing some guidance on the use of our excess liquidity. Our capital allocation strategy remains unchanged: first, support our business operations; second, repay our debt only if needed; finally, return excess capital to shareholders in the most tax-efficient manner possible. On Slide 19, we have laid out a comment for how we are thinking about doing that. Today, we are taking the first step by announcing an authorization for a new share repurchase program up to $300 million.
Eilif, that concludes my remarks. Now back to you for the wrap-up.
Thank you, JJ. We are very pleased with the resiliency that our business model continues to demonstrate despite the impact of the pandemic. We will continue to be proactive in managing the business in a prudent manner during the pandemic, while at the same time, pursuing strategic transactions for our remaining markets to generate incremental value opportunities for our shareholders.
Operator, that concludes our prepared remarks, and we are now happy to take any questions from the participants.
[Operator Instructions] And our first question will come from the line of Shlomo Rosenbaum from Stifel.
It's Adam on for Shlomo. Could you talk a little bit more about the kind of -- your plan to return capital to shareholders in the most kind of tax-efficient way possible when all the assets are sold? And I see today that you announced the $300 million buyback program. But ultimately, there's going to be a pile of cash after all these sales. How will shareholders realize this, the value of the cash in kind of the most tax-efficient manner?
JJ, do you want to take that one?
Yes. I'll take that one. Thank you, Eilif. Shlomo (sic) [ Adam ], the most tax-efficient manner to return capital to shareholders is in the form of open market purchases, so share buyback, like the program we've just announced, as well as other means, such as a tender offer. So at this point in time, we are not thinking of distributing cash or excess cash to shareholders in the form of dividends. Obviously, that may change. But our priority is really to do it in the most tax-efficient manner.
Okay. And then the other question was the free cash flow range was tweaked to $150 million to $170 million, kind of the top end came down $10 million from last quarter's guidance. Is this due to operational changes or divestiture changes or something else like FX?
It's divestiture changes. It's basically the fact that we're missing 4 months associated with Chile. If you really adjust for that, we basically lost, between Malaysia and Chile, about $30 million of cash flow. And despite that, we only came down about $10 million. So there was clearly some improved outlook baked into the revised guidance.
Okay. And then the comment about kind of revenue and adjusted EBITDA guidance being broadly unchanged on Slide 5 -- or 4, is there anything behind that? Or is it just kind of what you just mentioned?
Yes, just what we mentioned. If you look at the assumptions that we had baked into the guidance that we released in conjunction with Q2 earnings and look at the segments that are remaining in our continuing operations, basically, the -- again, it is broadly unchanged for EBITDA.
[Operator Instructions] And at this time, I'm not seeing any further questions in the queue.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.