Laureate Education, Inc.

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Lariat Education's second quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's prepared remarks, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1-1. Please be advised that today's conference may be recorded. I would now like to hand the conference over to speaker host, Adam Morse. Please go ahead.

Good morning, and thank you for joining us on today's call to discuss Laureate Education's second quarter 2022 results. Joining me on the call today are Iliff Sarkanton, President and Chief Executive Officer, and Rick Buzzkirk, Chief Financial Officer. Earnings precious is available on the Investor Relations section of our website at laureate.net. We've 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 would like to remind you that some of the information we are providing today, including, but not limited to, our financial and operational guidance constitutes forward-looking statements within the meaning of applicable U.S. securities laws. Forward-looking statements are subject to risks and uncertainties that may change at any time, and therefore, our actual results may differ materially from those we expected. Important factors that could cause actual results to differ materially from our expectations are disclosed in our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission, our 10-Q filed earlier this morning, as well as other filings made with the SEC. In addition, all forward-looking statements are based on current expectations as of the date of this conference call. and we undertake no obligation to update any forward-looking statements. Additionally, non-GAAP measures that we discuss, including, and among others, adjusted EBITDA, tonight's related margin, total cash, net of debt, and free cash flow, are also detailed and reconciled to their GAAP counterparts in our press release or supplementary presentation. Let me now turn the call over to Ilan.

Thank you, Adam, and good morning, everyone. Today, I'm pleased to report strong second quarter performance with operating and financial results ahead of our expectation. We are again raising our full year 2022 outlook, which Rick will cover in more detail later in our prepared remarks. Enrollments continue to trend well with June year-to-date new and total enrollment both increasing 11% versus prior year. During the recent semester, we returned to face-to-face operations across all of our campuses And we are effectively deploying our hybrid operating model, allowing students to study both in person and through online. We have more than 50 campuses in Mexico and Peru that reinforce our strong brand. And we are leveraging that brand power to become the market leader in online education. Digital delivery is increasingly important in both markets, as students expect to be able to access affordable quality education through flexible online and hybrid delivery modes. And the growth of online education is accelerating in this post-COVID era, as its acceptance by employers and regulators continue to increase. Going forward, we expect to provide between 40% and 60% of our taught hours online across our five institutions. This in turn will allow us to continue to grow in a more capitalized manner as a greater number of students can be accommodated in our existing physical campus space. At the core of our growth agenda is our mission, which is to deliver affordable, high-quality education to prepare students for successful career and lifelong achievements while building pride, trust, and respect in our communities. Our 2021 Impact Report, which now is available on our website, reflects our commitment to our mission. I encourage you to download the report and read more about what is happening across our institutions and the respective communities during the second half of this year we will be defining specific kpis related to our est agenda we will share more information with you during our year-end earnings call our strong brands and highly reputable institutions in mexico and peru uniquely position us to deliver on our promises we continually evaluate the institutions to ensure that we provide high quality education. As a result, our institutions and programs continue to earn some of the highest accreditations available in our market. These quality differentiators positions as well for continued success. And today, I am particularly pleased to share that UPC in Peru has been awarded the maximum 10-year reaccreditation by the Western Association of Schools and Colleges from the United States. This provides significant validation and recognition of the academic quality and strong student outcomes consistently delivered by UPC. I'd also like to emphasize that the WASC accreditation is in addition to UPC's local accreditation. Further, UPN in Peru was recently awarded a one-notch quality upgrade to four stars as their overall university ranking by two stars, the global university rating system. This is a great achievement and is a reflection of our quality positioning in the market. And equally impressive, all our universities in both Mexico and Peru have been graded five stars by QS stars, the highest ranking available in the category of employability. And in Mexico, I am pleased to report that UVM was recently recognized as the top university at the national level among public and private universities with 255 programs within the high academic performance program category as measured by results of the Yale exit exam taken by students upon graduation. In addition to delivering on our growth and quality commitments, we continue to prioritize return of capital to our shareholders. The $650 million share repurchase authorization program granted by our board of directors has been substantially completed at what we believe are very accretive levels for our shareholders. And we closed the second quarter with a total of 164.7 million shares outstanding. And as a reminder, we also plan to distribute the remaining net proceeds from the Walden sale in the second half of this year once the escrow account is released. Our cash-equated business model and strong balance sheet provides us with a lot of flexibility as we continue to think through future return of capital strategies, as well as shareholder value optimization approaches. That concludes my prepared remarks, and I will now turn the call over to Rick Boskirk for more detailed financial overview of the second quarter and year-to-date performance, as well as further details on our improved 2022 outlook. Rick?

Thank you, Ilis. As a reminder, campus-based higher education is a seasonal business. Although the second quarter is not a large intake period, it represents a strong earnings quarter for the company as classes are in session for much of the period. Let's start with page 12, which highlights our strong financial performance for the second quarter. Revenue in the seasonally strong quarter was $385 million, and adjusted EBITDA was $144 million. Both metrics were ahead of the guidance that we provided three months ago. Half of the revenue outperformance versus expectations was led by a more favorable cycle two enrollment intake, positive mix from our traditional undergraduate segment, and better than expected attrition rates. The remaining portion of revenue outperformance was the result of more favorable FX rates realized during the quarter. Adjusted EBITDA outperformance followed the revenue trends and was additionally aided by some timing of expenses, which had been shifted to the second half of the year. On an organic constant currency basis, revenue and adjusted EBITDA for the second quarter were up 17% and 33% respectively. which includes a $5 million favorable impact year-over-year related to academic calendar time in New Mexico. When combined with the first quarter, still on an organic constant currency basis, our overall performance for the first half resulted in revenue and adjusted EBITDA growth of 14% and 33% respectively. 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 on an organic and constant currency basis. Let's start with Mexico. Mexico's revenue growth for the second quarter was up 16% or an increase of 12% adjusted for academic calendar timing. Revenue growth was the result of an 8% increase in total enrollment as well as a favorable mix. Adjusted EBITDA increased 13% year-over-year for the second quarter driven by the revenue performance and cost efficiencies partially offset by anticipated return to campus expenses. Through the six months of the year, Mexico has now completed its smaller cycle one and two intakes, which typically represent around 40% of the total intake for the year. The cycle two intake, which occurred during the second quarter was robust, driving new enrollments of 15% versus the prior year through June. Our premium and value brands are both contributing to top line growth and improved levels of profitability in Mexico. And we are doing very well this year in the traditional undergraduate segment. As a result, Year-to-date revenue and adjusted EBITDA are up 11% and 23%, respectively. Let's now transition to Peru on slide 16. On a year-to-date basis, new enrollments in Peru were up 7% versus the prior year period. However, recall that Peru had the benefit of a COVID-19 recovery in prior years. To put this intake performance into better context, Peru's year-to-date new enrollments were 16% greater than their pre-COVID year-to-date June 2019 intake. In addition to favorable new enrollment trends in Peru, we are also seeing improved attrition rates for our re-enrollments, which helped to drive total enrollment value up 15% as compared to June of last year. As a result of strong volume performance, Peru experienced 17% year-over-year constant currency growth in revenue for the second quarter, and adjusted EBITDA for the quarter was up 18% as compared to the second quarter of 2021. On a year-to-date basis, revenue in Peru was up 17% versus prior period. Revenue for the first half was aided by the high level of returning students in the second half of 2021 related to the COVID recovery. That benefit has now lapped a full-year impact, and for the second half of this year, revenue growth in Peru will be more in line with our stated top-line growth targets. On a year-to-date basis, adjusted EBITDA was up 10%, with revenue flow-through partially offset by anticipated additional costs incurred this year as we return to campus operations in Peru. Let me now briefly discuss our balance sheet position illustrated on page 17 of the earnings presentation. As of June 30th, we were in a net cash position of $18 million. In addition to our cash on hand, $74 million of the wallet in sale transaction value was paid into an escrow account, which will be released in full or in part to Laureate later this month pursuant to the terms and conditions of that agreement. As previously mentioned, we plan to distribute these proceeds in the second half of this year once the amounts are released from escrow. Over the past two years, we've returned more than $2 billion of capital to our shareholders, of which $1.4 billion have been through cash distribution and the balance through stock buybacks. Let's now move to our updated outlook for 2022 starting on page 19. On the strength of our first half results and the positive momentum we are currently seeing in the business, Laureate is increasing its outlook for the full year 2022 at the midpoint by 3,000 students, 14 million for revenue, and 3 million for adjusted EBITDA. As discussed earlier, revenue performance in the first half of the year included the carry forward effect from last fall's high levels of returning students in Peru following the COVID recovery. Our results for the second half of this year will be driven by the strong intakes already completed and our expected favorable results for the larger intake in Mexico and secondary intake in Peru occurring this September. We anticipate organic constant currency revenue growth of 8% to 10% for the second half of the year, which is in line with our medium-term growth expectations shared with you during our prior earnings call. This will result in another very good year for our company. Based on current spot FX rates, we now expect Total enrollment to be in the range of 413,000 to 419,000 students reflecting growth of 7 to 8% on an organic basis versus 2021. Revenues to be in the range of 1.206 to 1.218 billion dollars reflecting growth of 11 to 12% on an organic constant currency basis and on a reported basis versus 2021. and adjusted EBITDA to be in the range of $329 to $337 million, reflecting growth of 23% to 26% on an organic constant currency basis versus 2021, or an increase of 30% to 33% on a reported basis, which includes the effect of the non-cash FAS5 charge in 2021. Iliff, I'm handing it back to you for closing comments.

Thank you, Rick. I remain encouraged as we enter the second half of 2022 and our next major enrollment intake cycle. Mexico and Peru are attractive markets with favorable growth dynamics and we are operating leading brands in both countries. We continue to see positive signs from a market perspective and are well positioned to continue to deliver on our growth agenda given our differentiated product offerings. And we have a strong balance sheet and a cash-accretive business model. We expect to continue to generate strong returns for our shareholders. Operator, that concludes our prepared remarks, and we are now happy to take any questions from the participants.

Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press star 1-1. Please stand by while we compile the Q&A roster.

We have a question from Jeff Silver from BMO.

Your line is open.

Thank you so much. With all the talk about an economic slowdown worldwide, I'm not an expert on what's going on in Mexico and Peru, but maybe you can talk a little about what's going on there and what would be the theoretical recessionary impact on your businesses in those two countries, specifically the different brands and segments you have there. Thanks.

Hey, Jeff, this is Eilif. I'll kick it off and Rick will join in. L'Oreal and our brands have fared pretty well through the cycles in the past. We are a very resilient business. And when you look back to the 2008-2010 financial crisis, as well as the challenges in 2020 and 2021 during the pandemic, I think you can conclude that we are loosely correlated to the overall economic environment. So in good economic times, we are doing extraordinarily well, both in terms of volume growth and price mix. And in weaker economic times, we are still performing solidly. A little lighter on the volume growth, but still delivered growth during the financial crisis of 2008 to 2010. And we also see a little bit of a mixed shift where the value brand is performing greater than the premium brands. But as a portfolio, the business is performing really well. So that's it. how we expect the business to continue to perform through the cycle. But clearly we are, you know, very focused on being prepared for an environment with much higher price inflation. And we are building in a lot of productivity initiatives into our operating model so we can continue to provide an affordable education solution to our customer.

Okay, great. My follow-up question is regarding tuition levels. I know last year you had some discounting and scholarships. Can you just talk about where we stand on that this year in terms of pricing and what we should expect going forward? Thanks.

Rick, do you want to take that?

Yeah, sure. Thanks for the question. I would say overall, we're very pleased with our pricing. As you recall, and we've said this before, we generally looked at price at our implied inflation each year. Note our implied internal inflation is really lower than headline inflation that you see in the market because that's heavily impacted by energy and food, as an example. Additionally, remember that the majority of our costs in 2022 were locked at the beginning of the year and last year. And a big focus of our pricing this year was, I think, what you're alluding to, which is on Mexico, particularly on our premium brand at UVM, where we had a higher amount of discounting and scholarship during the pandemic. And to this point, our pricing has been in line or slightly above our expectations in Mexico. So overall, we're pleased with our pricing that we're seeing in the market this year.

And going forward, is there a range we should use in terms of calculating revenue per student?

On average, we have around $3,000 average revenue per student. That obviously differs between our – it's a weight between our value brands and our premium brands in each of the markets, but that's on average what we are looking at.

And changes in that going forward, again, you said within line with implied inflation internally. I'm just curious what that is roughly.

This year our inflation that we had was a bit less than 4% on our model. So obviously we're looking at what potential inflation will be next year in Mexico and Peru, much as everybody is. and we'll analyze that inflation and understand what we can pass through to the consumer and keep that affordable and drive the right volume amounts. We don't have a final point of view on that because I think everybody's looking at inflation and what it's going to end up landing at in 2023. But I think Isla's point is the most relevant point, which is we believe we'll pass through some inflationary effects on pricing. We hope we put through implied inflation, but if we aren't able to put through implied inflation, we have plenty of productivity initiatives that we think that we can put in place to continue profitability, particularly in our Mexico business.

Okay, great. That's really helpful. Thanks so much.

Thank you. I'm going for our next question. And our next question coming from the lineup, Javier Martinez-De Ocas from Morgan Stanley.

The line is open.

Hi, thank you. So obviously you did a pretty good job resizing G&A. You did it fast, efficiently. I was wondering, where are we in the process? Is the process over? And also, I was wondering if this reduction in corporate costs has maybe generated any issue, operational issue, control issue that we should be aware of.

Rick, do you want to take that?

Yeah, I'll take that. Thanks for the question, Javier. We went through quite a transformation of rightsizing the Laureate corporate headquarters last year, as you've mentioned. We have not seen, and we are at $90 million of approximate G&A We're targeting around a $50 million reduction. That is going very well. We do have a little bit higher costs that are one time this year in winding down the Laureate Network, but we feel very comfortable about getting to the right size run rate effect of the downsizing of the G&A structure. And to your point, we have not seen any friction in the business. We continue to perform very well. Obviously, we are very focused on maintaining our control environment and the cadence of our operations, and it's gone very, very well.

Fantastic. Thank you very much. And as a reminder, ladies and gentlemen, to ask a question, please press star 1-1. I am showing no further questions at this time.

And ladies and gentlemen, that does conclude our conference for today. We thank you for your participation. You may now disconnect. Good day.