Laureate Education, Inc.

Good day, ladies and gentlemen, and welcome to the third quarter 2021 Laureate Education, Inc. Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. To ask a question, you will need to press star, then one on your telephone. As a reminder, this conference is being recorded. I would now like to hand the conference over to Adam Morse, Senior Vice President of Finance. You may begin.

Good morning, and thank you for joining us on today's call to discuss Laureate Education's third quarter 2021 results. Joining me on the call today are Iliff Sarkanson, 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 are providing today, including, if 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 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-GAP measures that we discuss, including, and among others, adjusted EBITDA and its related margin, total cash net of debt, and free cash flow, are also detailed and reconciled to their GAP counterparts in our press release or supplementary presentation. With that, let me turn the call over to Eilidh.

Eilidh Eilidh Thank you, Adam, and good morning, everyone. The growth agenda we initiated during the first half of the year is taking hold and driving strong results. We have just completed our large September intake cycle, and new enrollment growth was robust, increasing 17 percent for the third quarter versus prior year. Total enrollment of 390,000 students were up 16% year over year, which today puts us at 5% greater volume than our pre-pandemic levels on September 30, 2019. In Mexico, new enrollments were up 11% versus third quarter of 2020, making a strong return to growth during their primary intake cycle. In Peru, the momentum we experienced in the first half of the year continues, with new enrollments increasing 35% versus prior year during their smaller secondary intake. These intake results demonstrate the remarkable resiliency of our business model. The strong operating performance during the third quarter saw financial results come in ahead of our expectations, which in turn led us to raise our guidance for the full year 2021. Let me now provide a brief recap of our portfolio transformation and related balance sheet actions. During the third quarter, we completed the divestiture of Walden University. On October 29th, we returned $1.3 billion of capital to our shareholders while maintaining a performer net cash position of over $400 million. The divestiture actions we undertook over the past several years drove significant value creation for shareholders. The board and the management team remain committed to continue closing the gap between the intrinsic value of our assets and the trading value of our stock. We believe the best way to create additional shareholder value is to lift our revenue trajectory through a highly focused set of growth initiatives underpinned by the favorable secular trends for higher education in our markets, including the acceleration of digital learning. What I like to call new laureates is now a strong and focused leader in higher education in Spanish-speaking Latin America. We intend to take advantage of our unparalleled market position with our leading brands, best-in-class digital learning assets, and hard to replicate physical footprints in both Mexico and Peru. As a result, we expect to accelerate our top line growth from the mid single digits to high single digits or even into double digits in the coming years. L'Oréal has gone through a substantial transformation in recent years. We have focused our operations, we have paid on our debt, and significantly increase both our margins and free cash flow generation. Since this transformation has attracted the interest of new investors, let me briefly remind you of the market dynamics of higher education in Mexico and Peru. Both countries are large and attractive markets with a combined population of more than 160 million people. Participation rates are growing but still well below the levels we see in developed markets, thus providing significant headroom for growth. The regulatory conditions are clear and very conducive to private participation in higher education in both Mexico and Peru. Over half the student population in the combined market is served by the private sector, and L'Oreal is a quality operator at scale with approximately 200,000 students in each country. We own the leading brands in both Mexico and Peru, and our institutions are among the most highly reputed universities in the respective markets. L'Oreal has also become the digital leader in higher education in Mexico and Peru. Over the past five years, we have made significant investments in technology and digital capabilities three pandemic 27 of our teaching hours were delivered online through the pandemic 100 of our teaching was delivered online in a very robust and content-rich environment post-covered normalization We anticipate our digital teaching hours to be around 40 to 60% across all our institutions in Mexico and Peru, thus bringing up significant campus capacity for future growth in the traditional undergraduate face-to-face segment. Consequently, our near-term and medium-term growth prospects, as outlined on slide number 10, are expected to be fueled by a robust post-COVID recovery as well as growth in online offerings and accelerated new program launches at our existing campuses. Finally, let me remind you that the digital enablement of L'Oréal has made our growth agenda much more capital efficient. Our business model is cash-incretive, and any investments in growth will be fully funded by internally generated free cash flows. I continue to be very encouraged by L'Oréal's future prospects. We have the right management team, the best brands, and a powerful online channel distribution network that we believe will allow us to lift our revenue growth rates and further our vision to transform the lives of students and the communities in Mexico and Peru by providing increased access to affordable, quality education. I will now turn the call over to Rick Buskirk for a more detailed financial overview of the third quarter and year-to-date performance, as well as our upgraded guidance outlook. Rick?

Thank you very much, Eilidh. Before running through the results, I want to remind investors of two factors that impact our quarterly performance. First is seasonality. Higher education is a seasonal business. The third quarter represents the primary intake cycle for Mexico a northern hemisphere market, and a smaller intake cycle for Peru, which is a southern hemisphere market. Second, as you may recall from our discussion last quarter, last year, due to the COVID-19 pandemic, the start of certain classes in Peru were pushed to the second quarter of 2020. This timing difference skews year-over-year comparability for our performance and resulted in approximately 18 million more of revenue and related earnings recognized in the first half of 2021 versus prior year. This begins to reverse itself in Q3 this year, resulting in approximately 11 million less of revenue and related earnings, with the remainder reversing in Q4. Let's now move on to the strong financial performance for the third quarter. which we are very pleased with starting on page 12. Revenue in the third quarter was $268 million, and adjusted EBITDA was $76 million. Revenue and adjusted EBITDA were both ahead of the guidance that we provided three months ago. The majority of the outperformance was related to the growth momentum in the business, coupled with continued tight cost controls. As a result, we are increasing our full year guidance for 2021. In addition, during the third quarter, we expected to incur certain costs associated with writing our campuses for a return to face-to-face operations this semester. Those costs have been pushed to the fourth quarter as we now expect the return to campus operations in early 2022. On a comparable basis and a constant currency, Revenue and adjusted EBITDA for the third quarter were up 13% and 68% respectively. Adjusted for academic calendar impacts, still on a comparable basis and a constant currency, revenue for the third quarter of 2021 was up 17% versus prior year, and adjusted EBITDA increased by 84%. The strong revenue performance in the quarter was led by Peru, which experienced 20% year-over-year growth in revenue. The favorable results in Peru were driven by strong cycle one and cycle two intakes and significantly improved retention, driving total enrollment growth of 30% year-over-year. Mexico revenue for the third quarter increased 3% versus prior year, reversing the negative trends we experienced during the first half of the year. We expect that positive trend to continue in the coming quarters following the favorable primary intake just completed in that market. Moving now to our year-to-date September results. When combined with the first half results still on a comparable basis in a constant currency, our overall performance through year-to-date September resulted in revenue growth of 9 percent and adjusted EBITDA increase of 89 percent. Adjusted for academic calendar impacts, still on a comparable basis in a constant currency, revenue for the nine months of 2021 was up 8% versus prior year, and adjusted EBITDA increased by 79%, driven by strong operational performance and corporate G&A efficiencies. Let me now provide some additional color on the performance of Mexico and Peru, starting with page 15. Please note that all comparisons versus prior year are an organic and constant currency basis. Let's start with Mexico. Mexico just completed its primary intake for the year, and results were very strong. New enrollments were up 11% during the intake and through September versus prior year. As a reference point, Mexico's September year-to-date new enrollment performance is up 4%, versus pre-pandemic year-to-date September 2019, validating that with this intake complete, we have now come through the trough period in Mexico. The strong new enrollment intake combined with a four-point improvement in retention resulted in total enrollment growth of 6% versus the prior period. This is up from the 1% increase we reported last quarter. Revenue for the quarter was up 3 percent as a result of higher enrollment volumes partially offset by carry-forward impacts from increased levels of discounts and scholarships required during the pandemic. Increased levels of discounting began in Q3 of 2020 and continued through much of the pandemic. We are now starting to see that abate during our large C3 intake that we just experienced and are focused on continuing to optimize on a go-forward basis. We do expect to see the carry-forward effect of those discounts to impact our revenue for the coming quarters as those cohorts move through the system and we move to a more normalized level. Finally, adjusted EBITDA was up 61 percent year over year for the quarter on a comparable basis, resulting from revenue growth and timing of expenses. Let's now transition to Peru on slide 16. For the smaller secondary intake, which occurred during the third quarter, new enrollments continued to trend favorably with an increase of 35 percent versus the same period prior year. Through the first nine months of the year, new enrollments in Peru were up an impressive 20 percent versus prior year, and as a reference, are 9 percent ahead of pre-pandemic year-to-date September 2019 levels. Total enrollments increased 30% versus prior year, driven by the strong intake plus a double-digit improvement in retention rates, as we have seen many students who dropped out last year when the pandemic began are returning to their studies. Revenue for the quarter increased 20% on a constant currency basis, driven by the enrollment increase. Adjusted EBITDA of $71 million for the quarter was up 45 percent as compared to the third quarter of 2020. The increase year-over-year resulted from the strong enrollment intake and improved retention. Please note that year-to-date September revenue adjusted EBITDA were favorably impacted by the academic calendar timing discussed earlier. Year-to-date results adjusted for timing were up 22 percent and 65 percent respectively. Let me now briefly discuss our balance sheet position illustrated on page 17. As of September 30th, we were in a net cash position of $1.7 billion, and total shares outstanding were approximately 181 million shares. During the third quarter, we completed the sale of Walden University, which drove the large cash balance at quarter ends. Following the sale of Walden, On October 29, we distributed approximately $1.3 billion of cash to shareholders, or $7.01 a share. The cash and debt balances as of September 30, 2021, are prior to the approximately $170 million in estimated taxes and fees due on prior sales, including Walden University, and approximately $158 million related to the expected release of a letter of credit and escrow account, both related to the sale of Walden University. We expect that the majority of the taxes and fees will be paid during the fourth quarter of 2021, and the letter of credit and escrow amounts will be realized in 2022. Our net cash position adjusted for those items is approximately $410 million at quarter end. Now let's move to guidance starting on page 19. On the strength of our first nine months of results and the positive growth momentum following our recent intake period, Laureate is increasing its full year 2021 guidance at the midpoint by 35,000 total enrollments, 35 million for revenue, and 40 million for adjusted EBITDA. For continuing operations in 2021, Our updated full-year guidance is as follows. Total enrollments are estimated to be approximately 385,000 students. Revenues are estimated to be between $1,075,000,000 and $1,085,000,000. An adjusted EBITDA is estimated to be between 247 and $253,000,000. Ilif, with that, that concludes my remarks. I'm handing it back to you for closing comments.

Thank you, Rick. The COVID-19 pandemic accelerated our digital transformation, and we are now a digital leader operating at scale with a powerful omnichannel distribution model that allows us to deliver quality education in a variety of formats, including face-to-face, fully online, and hybrid delivery. At the same time, we are experimenting with new and emerging platforms to expand our addressable market by leveraging our existing IP and proprietary products in areas such as B2B and ad tech. The transformation of L'Oréal into a market-leading pure play education company in Spanish-speaking Latin America has resulted in compelling financial and strategic attributes. which we believe will serve all our stakeholders well in the future. Operator, that concludes our prepared remarks, and we are now happy to take any questions from the participants.

Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then 1 on your telephone. To withdraw your question, press the pound key. Again, that's star 1 to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Javier Martinez with Morgan Stanley. Your line is open.

Hi, thank you. Good morning, everybody. Thank you very much for the call. So, listen, I was quite impressed with Peru's results, particularly, quite impressive, both volumes increasing 30% and margins at 53%. Wow. So I'm trying to gain perspective where the limit is for both, volumes and margins. I don't know if you can share with us some metrics on capacity utilization. I know that you have already 187,000 students, and you expect 40, 60% teaching hours delivered online. So what is the installed capacity? How much can you increase still students and because of that also increase operating leverage and margins?

Hey, Javier, this is Ilif. We're very pleased with the quarter. And of course, the quarter was favorably impacted by recovery from COVID pandemic. But also our online capabilities in Peru are facilitating an expansion of our addressable market as it is a very convenient offering for working students and postgraduates. So we do believe we are on a trajectory to raising the growth rate in Peru as well as in Mexico, even when you normalize for the tailwind from COVID. In terms of our margins, we have favorable impact from operating fully online. So as we are returning to campus next year, there will be some additional expenses getting all of our facilities ready for fully face-to-face. In terms of capacity, really, really important topic. Pre-pandemic, we delivered 27% of our taught hours online. which meant that 27% of our capacity was enabled by digital. Post-pandemic, in the steady-state environment going forward, depending on the institution, we will have somewhere between 40% and 60% of our taught hours being delivered online, which means that we are close to doubling the incremental capacity from online delivery versus a pre-pandemic, which gives us significant headroom to grow in a face-to-face environment without having to add physical plant and CapEx programs to facilitate that. So we have plenty of capacity to welcome students in a campus environment given our hybrid delivery as well as our fully online products. I'll pause there and see if there was any follow-up questions from your end.

Yes, thank you, Elif. So you're already there, no? So you're already in the 40-60% hybridity. Assuming that that percentage continues going forward, what is the level of capacity utilization of the on-campus facilities? So do you still have room to increase capacity? both, or to increase the on-campus, the face-to-face students, and because of that, with the same percentage of 40-60, to increase the total amount of students? Where are you in the absolute level of capacity utilization? Are we in the 90%, 70%? This is what I'm trying to find out.

No, no, no, very fair. So, just as a quick reminder, right now we are at 100% online, because all of our, virtually all of our teaching is done in an online environment. We haven't opened up the campuses except for some specialized lab work that is needed in certain degrees. So right now we're operating close to 100% in a digital manner. But I think the way to think about it is in 2019, pre-pandemic, we had 27% online. 2022, depending on the institution, would be somewhere between 40% and 60%. So call that 50% as a midpoint. That means that we get another 25% plus minus incremental capacity versus 2019. We are, you know, we have added, you know, approximately 10% in volume since 2019. We probably had, you know, 10% spare capacity in 2019, which means that, you know, we can grow by 25% in the face-to-face environment without having to add physical plant in Peru. And very similar dynamic in Mexico.

Very clear. Thank you very much. I leave.

Thank you. Our next question comes from the line of Shlomo Rosenball with Stifel. Your line is open.

Hi, it's Adam on for Shlomo. What sort of capital and investments are necessary to drive the 8% to 10% organic revenue growth expectations over the immediate term? Do you expect to expand margins while making these investments, or will the margin dilute it? Thanks.

Hey, Adam. This is Iliv again. The growth agenda is very capitalized. Just as I described to Javier, we have plenty of capacity in the system just because of improved utilization through online and hybrid delivery. So when you're speaking about the vector of growth, First vector is COVID recovery, which is pent-up demand, and that's going to benefit us, certainly benefited us in 2021, and we expect that to continue into 2022 before we have caught up most of the COVID headwind from 2020. The second growth lever is online, and we've already invested in all of those online capabilities to ensure, you know, quality and content-rich environment for online students. So very little incremental investments is needed there, although we continue to commit to innovation in this space to maintain our leadership position. The third growth lever is to make sure that all of our programs are at all campuses. So if we have a nursing program in one campus, we want to lift and shift that to make that available consistently across the network. So there may be some capex associated with with lab equipment, but again, a relatively light investment because we don't foresee any facility investments in a meaningful way over the next couple of years. And then, of course, we also developed a lot of IP and proprietary products to support the LORIAT network. Examples of that is, you know, industry-leading proctoring solution as online education becomes increasingly important. And we are using that internally, and there's an opportunity for us to sell that in a B2B manner or license that out to other universities. So those are other sources of growth drivers that, again, we are just piggybacking from investments that we've already made to serve the LORIAP students. Okay. Thank you.

Thank you. As a reminder, ladies and gentlemen, that's star one to ask the question. Our next question comes from the line of Matthew Negree with UPB. Your line is open.

Hello. Good morning, everyone, and congratulations on the race guidance and the good results. I had one question about the B Corp designation, which the company used to proudly benefit from. I think it was dropped, so first, could you confirm that? And could you also try to explain what it means for the sustainability strategy at the company? Does it mean that you will have a diminished interest for sustainability questions? And the last element, which is linked to this question, is what does it mean in the context of your status as a public benefit corporation?

Thank you, Matthew. We are incorporated as the PBC, Public Benefit Corporation, and there is no plans to change that. During the transformation of L'Oréal, we did discontinue the B Corp certification process, but that does not mean that we are not committed to sustainability and the ESG agenda. To the contrary, We are working on a very deliberate path to make sure that we have the appropriate certification and metrics being published as it relates to the environment, the social agenda, as well as governance. And as you saw, we made a big announcement on this yesterday. when we improved our governance structure by ensuring one share, one vote, and no longer being a controlled company. So all of these steps we're taking in a very deliberate manner to advance the ESG agenda of Floriat. And more to come in this area. If I can have a...

A follow-up on this, in terms of reporting, when you say more to come, can we have a timeline on that? I mean, I remember some of the impact reports that you used to publish that were excellent. I think you've got a good story to tell. So what would be the milestones that we could expect as you hold this?

Yeah, the impact reporting, I would view that as being paused as opposed to eliminated, given the enormous transformation going from 25 countries to two countries and the focus of L'Oreal in its execution of its portfolio review. So there is no we are a purpose-driven company. And that continues to be the case. There is no change in our DNA and our commitment to be here for good and serve all of our stakeholders. So we will provide more updates when our revised metrics are finalized, and we will share them with all of the investors. But this is something that the board and the management team care deeply about.

Great to hear. Thank you.

Thank you. As a reminder, ladies and gentlemen, that's star one to ask the question. I'm showing no further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.