Laureate Education, Inc.

Q3 2022 Earnings Conference Call

11/3/2022

spk00: Thank you for standing by and welcome to Laureate Education's third quarter 2022 results call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. I would now like to hand the call over to Adam Morse, Senior VP, Corporate Finance. Please go ahead.
spk03: Good morning, and thank you for joining us on today's call to discuss Laureate Education's third quarter 2022 results. Joining me on the call today are Alex Sarkanton, 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 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 either take no obligation to update any forward-looking statement. Additionally, non-GAAP measures that we discussed, 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 GAAP counterparts in our press release or supplementary presentation. Let me now turn the call over to Ayla.
spk05: Thank you, Adam, and good morning, everyone. We recently completed our primary intake cycle in Mexico and our secondary intake in Peru. and I am pleased to report strong new enrollment trends in both of our markets. In Mexico, new enrollments increased 17% versus third quarter of last year with double-digit growth in both brands. In Peru, new enrollments grew 8% versus third quarter of last year with favorable performance at all three institutions. On the strength of these intakes, we are increasing our full year 2022 outlook. Later in our prepared remarks, Rick will walk you through the updated guidance for the year. We continue to believe that the best way to create value for all of our stakeholders is to accelerate our revenue growth through a highly focused set of growth initiatives supported by favorable secular trends for higher education in our markets, including the acceleration of digital learning. Our financial and operational results through the first nine months of the year demonstrate that our growth agenda is taking hold. We are on track to deliver on our medium-term forecast of 8% to 10% top-line growth following the completion of the recent intake, and we continue to drive margin expansion. L'Oréal's success is driven by three key factors. First and foremost, of market-leading brands and their commitment to academic quality. Secondly, a focused approach to two-scale markets. And lastly, our strong digital capabilities 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. In addition to delivering on our growth and quality commitments, we continue to prioritize return of capital for our shareholders. As of September 30th, our net cash position was $192 million. On October 12th, we paid a special cash distribution of $137 million, or 83 cents per share, related to the remaining net proceeds from the sale of Walden University. On October 24th, we announced $112 million, or 68 cents per share, special cash dividend to be paid on November 17th. Our cash-accreted business model and our strong balance sheet provide us with a lot of flexibility as we continue to think through future return of capital strategies and shareholder value optimization efforts. That concludes my prepared remarks, and I will now turn the call over to Rick Boskirk for a comprehensive financial overview of the third quarter and year-to-date performance, as well as further details on our improved 2022 outlook.
spk02: Rick? Thank you, Ilis. As a reminder, campus-based higher education is a seasonal business. The third quarter represents the primary intake cycle for Mexico, a northern hemisphere market and a smaller secondary intake cycle for Peru, which is a southern hemisphere market. Although the third quarter is a large intake period, from a P&L perspective, it is seasonally low as classes are out of session for much of the quarter. Let's start with page 12, which highlights our strong operating and financial performance for the third quarter. New enrollments increased 14% and total enrollments were up 10% when compared to the prior year period. Revenue in the third quarter was $301 million, and adjusted EBITDA was $73 million. Both metrics were ahead of the guidance we provided three months ago. Revenue outperformance was driven by new enrollment results, which exceeded expectations for the recent intake cycle. Adjusted EBITDA outperformance followed the revenue trend and was aided by the shifting of some expenses to the fourth quarter of the year. On an organic constant currency basis, revenue for the third quarter was up 11% year over year driven by the growth in total enrollment volume. Adjusted EBITDA for the third quarter was down 8% year over year as expected and as we had previously guided. This was due to return to campus expenses and a largely out-of-session quarter, as well as certain timing items. When combined with the first half on an organic constant currency basis, our overall year-to-date performance through September resulted in year-over-year revenue and adjusted EBITDA growth of 13% and 17% 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 just completed its primary intake for the year and the results were very strong. New enrollments increased 17% during the third quarter when compared to the same period last year. We experienced double digit new enrollment growth in both our premium brand at UVM and our value brand at Unitec. Across product lines, we saw double-digit increases in our face-to-face and hybrid offerings, as most students have now returned to presidential studies, and we continue to experience growth in fully online. Mexico's revenue for the third quarter increased 14% compared to the prior year period, and 10% when adjusted for academic calendar timing. The strong September intake will be fully realized in Mexico's revenue growth during the fourth quarter. Adjusted EBITDA for the third quarter was down 11% year over year as anticipated and guided due to return to campus expenses incurred during a largely out of session quarter and certain timing items. On a year to date basis, revenue in Mexico increased 12% compared to the prior year period and adjusted EBITDA was up 8%. Let's now transition to Peru on slide 16. We continue to have strong performance in Peru. New enrollments during Peru's secondary intake was up 8% in the third quarter compared to the prior year period. On a year-to-date basis, including the primary intake completed in the first quarter, new enrollments increased 7% year-over-year. Volume growth and favorable price mix drove a 10% year-over-year increase in constant currency revenue for the third quarter, or 12% when adjusted for the academic calendar timing. Adjusted EBITDA for the third quarter decreased 18% year-over-year as anticipated and guided due to return to campus expenses and certain timing items during a low seasonal quarter. On a year-to-date basis, revenue in Peru increased 15% over the prior year period. Year-over-year revenue growth for the first nine months of 2022 was aided by the high level of returning students in the second half of 2021 related to the COVID recovery. This benefit has now lapped the full-year impact, and going forward, we expect revenue growth in Peru to be more in line with our top-line growth targets. On a year-to-date basis, adjusted EBITDA was flat with prior years. with revenue flow through partially offset by additional costs incurred this year as we return to campus operations in Peru. Let me now briefly discuss our balance sheet illustrated on page 17 of the earnings presentation. The third quarter is a seasonally high cash flow period for Laurier. Strong free cash flow generation of $100 million in the third quarter combined with the collection of the final escrow payment related to LaSalle Walden resulted in a net cash position of $192 million as of September 30th. As I was noted in his opening remarks, we distributed $137 million of that cash to investors in October through a special cash distribution and we will distribute another 112 million to investors on November 17th via special cash dividend, which was declared on October 24th. Now let's move on to our updated outlook for 2022 on page 19. On the strength of Laurier's third quarter intake cycles, we are increasing our 2022 full year outlook at the midpoint by 6,000 students $15 million for revenue, and $1 million for adjusted EBITDA. The increase in our adjusted EBITDA guidance does not fully reflect flow-through margins on incremental revenue for two reasons. First, we are taking the opportunity to reinvest some of our revenue outperformance in the fourth quarter to set us up for a more favorable 2023 outlook. This includes investments in digital initiatives and the acceleration of efficiency projects. Second, we have some additional one-time costs associated with the corporate wind down that are impacting us in the second half of this year. This is resulting in a slightly slower ramp down in corporate costs versus initial expectations. However, we are still on track to achieve the corporate right sizing previously discussed with investors And you will see that reflected in our guidance for 2023, which will be provided in February. Based on current spot FX rates, our updated guidance for the full year 2022 is as follows. Total enrollment to be in the range of 420,000 to 423,000 students, reflecting growth of 9% on an organic basis versus 2021. Revenue to be in the range of $1.223 to $1.231 billion, reflecting growth of 12% on an organic constant currency basis and 13% on a reported basis versus 2021. And adjusted EBITDA to be in the range of $331 to $337 million, reflecting growth of 23% to 25% on an organic constant currency basis versus 2021, or an increase of 31 to 33% on a reported basis, which includes the effect of the non-cash FAS5 charge in 2021. Ilif, I'm handing it back to you for closing comments.
spk05: Thank you, Rick. Our year-to-date results demonstrate that we are on track to deliver on our strategic objectives. and I remain very encouraged by L'Oréal's future prospects. We have the right management team, the best brands, and a powerful omnichannel distribution network that we believe will allow us to drive revenue growth and support our vision of transforming the lives of students and communities in Mexico and Peru by providing greater access to affordable, quality education. Operator, that concludes our prepared remarks, and we're now happy to take any questions from the participants.
spk00: As a reminder, to ask a question, you will need to press star 1 1 on your telephone. Again, that's star 1 1 on your telephone to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jeff Silver of BMO. Please, go ahead.
spk04: Thanks so much for taking my question. The new enrollment results at Mexico were phenomenal, and I'm just wondering if we can get a little bit more color why that strength, and, you know, is it just easier comps, and is this type of momentum expected to continue?
spk06: Good morning, Jeff. This is Ilif. We're very pleased with our performance in Mexico, and we are particularly pleased that both brands are contributing to strong double-digit growth. You will recall in the past, Unitec, our value brand, was really the growth engine in Mexico, while UVM was a slower grower. Now we have been able to get both of these institutions to become robust and sustainable growth engines for the company. And we expect that to continue. However, the 17% growth in new enrollment during the quarter was somewhat aided by pent-up demand from 2021 when some of our students deferred due to the COVID pandemic. So that probably gave us a couple of percentage points in incremental growth in Mexico that I wouldn't project to continue.
spk04: All right, that's very helpful. You have a slide in your presentation about the progress that the company's been making in terms of teaching hours delivered online. Are you at that 40% to 60% target right now? If not, when do you think you're going to get there?
spk06: So we are largely at that 40% to 60% right now, depending on the brands, and expect to continue to be in that zone. What is really going on is Um, the working adult students, uh, have gone from, you know, largely face to face a couple of years ago to no being essentially fully online. Uh, post-grad is increasingly going online and, um, you know, young student, uh, is, um, uh, primarily face to face. Uh, but instead of being a hundred percent face to face, they are, you know, 70% face to face, uh, and, um, uh, 30, 30% in a digital format. So it's the combination of those three factors that are giving us that 40% to 60% mix of online delivery at our five institutions.
spk04: Okay, that's very helpful. If I could just sneak in one more. If we talk about the pricing environment, I know last quarter you discussed a little bit about some inflationary costs. I'm just wondering, are you able to price to recoup the inflation? I'm wondering how did that go to this semester and what should we expect going forward?
spk02: Yeah. Hey, Jeff. Thanks for the question. This is Rick Buskirk. We've talked about it before that we try to price through our implied inflation in general. And in good years, we try to do implied inflation plus. As I talked about on the last earnings call, we were fortunate this year that albeit we saw 8% inflation in our market, our implied inflation was significantly lower than that because we established labor rate increases in the prior year. And we had fixed costs associated with our real estate, mainly in Mexico, throughout the year. So our implied inflation was around 3% to 4%. We were successful in implementing implied inflation pricing in our intakes, and we met our exceeded expectations. So we're satisfied with how pricing went. And obviously, we're looking at how that will apply on a go-forward basis into 2023. All right.
spk04: That's great to hear. I'll jump back in the queue. Thanks so much.
spk00: Thanks, Kev. Thank you. Once again, to ask a question, please press star 1 1 on your telephone. Again, that's star 1 1 on your telephone to ask a question. Our next question comes from the line of Adam Parrington of Stifel. Please go ahead.
spk01: Hi, it's Adam Parrington for Stifel. How much longer do you expect the return to campus cost to last, and what is the expected cost over that time period?
spk06: We will fully back to operations during the second half of, during the third quarter. So there will be a little bit of annualization impact in the first half of next year before we have left the cycle. Okay. Thanks.
spk00: Thank you. This does conclude the Q&A session and today's conference call. Thank you for participating. You may now disconnect.
Disclaimer

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