Laureate Education, Inc.

Good day and thank you for standing by. Welcome to the second quarter 2023 Laureate Education, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's 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 and you will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Morse, Senior Vice President, Corporate Finance. Please go ahead.

Good morning, and thank you for joining us on today's call to discuss Laurier Education's second quarter 2023 results. Joining me on the call today are Iliff Sircanson, 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've also posted a supplementary presentation to the website, which you will 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 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. 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, followed with the U.S. Securities and Exchange Commission, our 10Q 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-GET measures that we discuss, including, among others, adjusted EBITDA and its related margin, total debt, net of cash, 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.

Thank you, Adam, and good morning, everyone. Today, I'm pleased to report strong second quarter performance with operating results ahead of our expectations. Year-to-date new and total enrollments continue to trend well, increasing by 13% and 9% respectively compared to June of last year. In addition to favorable volume growth, pricing for our enrollment cycles completed in the first half of the year has been in line with to slightly head off our realized cost of inflation. We also continue to drive operating efficiencies and are on track to deliver more than 100 basis point improvement in adjusted EBITDA margins for the year. In addition to strong operating performance, we are benefiting from favorable currency trends. The Mexico peso and the Peruvian sol have appreciated by 12% and 5% respectively versus the US dollar during the first six months of the year. This is resulting in higher than expected revenue, adjusted EBITDA, and free cash flow generation. Based on these positive operating and foreign currency trends, we are raising the full year 2023 guidance at the midpoint by $70 million for revenue, and $21 million for adjusted EBITDA. L'Oréal's strategic focus on the high-growth markets of Mexico and Peru continue to deliver impressive results and is supported by three key factors. First, the steady increase in participation rates, driving robust demand for higher education in both countries, underpinned by the attractive wage premiums for individuals with higher education degrees and the affordable cost to get them. Second, the vital role of the private sector in advancing higher education due to limited government resources, with private institutions now providing over 50% of the combined university seats in Mexico and Peru. And third, substantial demand for the upskilling of the labor force. We expect the ongoing nearshoring trends to further intensify this demand in Mexico, providing a compelling opportunity for higher education institutions like L'Oréal. L'Oréal institutions are recognized leaders in affordable, quality higher education in both Mexico and Peru. And we distribute our products through face-to-face, online, and hybrid delivery mode. we remain committed to pursuing a financial profile within the next three to five years as follows. First, maintaining our organic revenue growth momentum of at least eight to 10% on a constant currency basis. Second, pursuing a capital light expansion strategy where 40 to 60% of our taught hours are delivered online and thus resulting in capital expenditures as a percentage of revenues to be below 5%. And finally, delivering adjusted EBITDA growth in the low teams on a constant currency basis. This in turn will help drive adjusted EBITDA margin to over 30% on a consolidated basis for L'Oréal and adjusted EBITDA to unleveled free cash flow conversion of 50% or more. Our growth agenda is supported by our leading brands and an unwavering commitment to academic excellence and innovation reflected in a program portfolio designed to meet the job requirements of tomorrow. At Laureate, our dedication goes beyond just academia, and we aim to make a meaningful and positive impact on society. Just to touch on a few recent highlights, UBC has been recognized as one of the top two universities in Peru working towards the United Nations Sustainable Development Goals, according to the latest impact ranking by Times Higher Education. Furthermore, La Republica recently reported that UPC has the highest number of graduates with the best paid careers in the Peruvian labor market. This validation comes from the Ponte and Carrera platform, which is promoted by the Ministry of Labor and Employment as well as the Ministry of Education. In Mexico, we are delighted to introduce our new Institutional Rector at UNITEC, making history with the first woman to hold this prestigious position at that university. Also at UNITEC, our ATICIPAN campus received a certificate of responsibility at the Diamond Award level for environmental balance in the academic institution a category. This accomplishment makes Unitec the first university in Mexico to achieve this level of award. These accomplishments demonstrate our commitment to delivering outstanding educational outcomes and furthering our positive impact in the communities we serve. Let's conclude by prepared remarks, and I will now turn the call over to Rick Bosker, for a more detailed financial overview of the second quarter and year-to-date performance, as well as further details on our improved 2023 full-year outlook. Rick?

Thank you, Isla. 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 pages 13 and 14, which highlight our operating and financial performance for the second quarter and year to date. Total enrollments increased 9% when compared to the prior year quarter. This was driven by year to date new enrollment growth of 13%, which included favorable results across all five brands. In addition to strong volume growth, pricing performance has been slightly ahead of expectations allowing us to cover our realized cost of inflation on our expense structure and providing some upside to our outlook. Revenue in the seasonally strong second quarter was $462 million and adjusted EBITDA was $175 million. Both metrics were ahead of the guidance that we provided three months ago. Revenue outperformance versus expectations was the result of favorable FX rates realized during the quarter and better volume and pricing during Mexico's secondary intake. Adjusted EBITDA outperformance followed the revenue trend and was additionally aided by more than $10 million of expenses that were shifted to the second half of the year. On an organic constant currency basis, Revenue for the second quarter was up 14% year over year and adjusted EBITDA increased 18%. When combined with the first quarter, still on an organic constant currency basis, our overall performance for the first half of 2023 resulted in revenue and adjusted EBITDA growth of 13% and 15% respectively. Let me now provide some additional color on the performance of Mexico and Peru, starting with page 16. Please note that all comparisons versus prior year are on an organic and constant currency basis. Let's start with Mexico, where our portfolio is working well. Both our premium and value brands are contributing to top line growth and improved levels of profitability. For the second quarter, Mexico's revenue grew 18% versus the prior year period, and adjusted EBITDA increased 73% aided by favorable timing impacts. On a year-to-date basis, revenue growth of 17% was driven by a 10% increase in total enrollments when adjusted for timing and 7% of price mix. The price mix benefit was the result of pricing that was slightly ahead of our cost inflation during the secondary intake, as well as the annualization effect from higher growth rates in undergraduate programs during our primary intake last fall, which created a positive mix effect. Adjusted EBITDA increased 36% year to date versus the prior year period. This was driven by revenue flow through productivity gains, and timing benefits partially offset by return to campus expenses. We believe that our strategy to expand margins in Mexico to above 25% in the next three to five years is well underway. Let's now transition to Peru on slide 17. As a reminder, the primary enrollment intake for Peru was completed this past March. and all three brands contributed to double-digit growth in new enrollments. For the second quarter, Peru's revenue growth was up 12%. Adjusted EBITDA increased 7%, reflecting the expected impact of return-to-campus expenses. On a year-to-date basis, revenue growth of 11% was driven by a 7% increase in total enrollments and a 4% increase of price mix as we were able to hold pricing at a realized cost of inflation during the primary intake completed in March. Adjusted EBITDA was flat versus prior year to date with a decline in margins as expected as incremental revenue flow through was partially offset by expenses associated with return to face-to-face classes at our campuses. Let me now briefly discuss our balance sheet position. LORAD ended June with $112 million in cash and $210 million in gross debt for a net debt position of $98 million. Our strong balance sheet position equates to less than a half turn of net leverage. Moving on to our approved outlook for 2023 starting on page 19. We are increasing the overall guidance range for revenue and adjusted EBITDA to reflect more favorable operating and currency trends. The improved outlook results in a $70 million increase in revenue guidance at the midpoint and a $21 million increase in adjusted EBITDA at the midpoint. Based on current spot FX rates, we now expect full year 2023 results to be as follows. Total enrollments to continue to be in the range of 447,000 to 455,000 students, reflecting growth of 6% to 7% versus 2022. Revenues to now be in the range of $1.483 billion to $1.495 billion, reflecting growth of 19% to 20% on an as reported basis and 10% on an organic constant currency basis versus 2022. Adjusted EBITDA to now be in the range of $419 million to $427 million, reflecting growth of 24 to 26% on an as reported basis and 14 to 16% on an organic constant currency basis versus 2022. We are increasing our adjusted EBITDA margin improvement to 110 basis points at the midpoint of our guidance. The 10 basis point increase in margin expectations versus prior guidance is driven by revenue flow through resulting from slightly better pricing in the recent secondary intake for Mexico. Additionally, for 2023, we continue to expect adjusted EBITDA to unlevered free cash flow conversion to be in the low to mid 40% range, aided by our margin improvement and continued capital light growth model. Finally, as discussed on our prior call, I wanted to once again highlight a few items related to seasonality in our full year 2023 guidance. First is regarding the first half versus second half revenue expectations. In Peru, we anticipate revenue growth for the first half and second half of 2023 at somewhat similar year-over-year growth rates. In Mexico, however, we anticipate revenue growth for the second half of 2023 to be lower than the first half. This is driven by last year's very strong primary new enrollment intake that was partially aided by students returning from COVID step-outs, as well as timing for other revenue, including graduation fees. We expect to see a more normal first half and second half growth pattern for Mexico in 2024. Lastly, we expect our cash flow in 2023 to be more heavily weighted towards the second half of the year. This is due to the timing of tax payments in the first quarter and the seasonality of working capital. Now moving to the third quarter guidance. For the third quarter of 2023, we expect Revenue to be in the range of $357 million to $362 million. Adjusted EBITDA to be in the range of $77 million to $81 million. That concludes my prepared remarks. Ilif, I'm handing it back to you for closing comments.

Thank you, Rick. I'm encouraged by our continued strong growth momentum in both Mexico and Peru, driven by our leading brands, strong digital capabilities, and focus on academic quality and student outcomes. We believe we are well positioned to capitalize on the growth opportunities ahead of us. Operator, that concludes our prepared remarks, and we're now happy to take any questions from the participants.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile the Q&A roster. Our first question comes from the line of Jess Silber with BMO Capital Markets. Your line is open.

Thanks so much and congratulations on another solid quarter. Just a couple of questions on the quarter. In your presentation specifically regarding Mexico, You talk about the impact of the timing of enrollment intake closes. Can you just remind us what that means? What impact? Was it last year? Was it this year? What you're looking for?

Hi, Jeff. This is Hailef. The intake last year for the C2, the smaller intake, during the quarter was up in Q2, while this year, just due to the calendar, went into the first week of July. So when you look at the full C2 intake, that is what we are referencing when we are saying timing adjusted. That's just the cutover of the calendar.

Okay. And roughly how many students are we talking about?

It's a relatively small cycle, Rick. Do you have that, Andy?

Yeah, it's around... 67,000? Yeah, 67,000.

Okay, great.

That's helpful. I'm sorry, go ahead. Sorry, it's around $3,000 to $4,000. $3,000 to $4,000, yeah. Okay, of course, I appreciate that.

I think, Rick, you talked about in your prepared remarks about shifting $10 million of expenses from the first half to the second half. Where was that? Why was that done?

Yeah, so thank you, Jeff, for the question. The majority of that shift was in Mexico. And the shift was occurring due to just expense seasonality shifts in professional services, IT projects that simply shifted from the later part of Q2 into Q3 and a little bit into Q4 as we looked at the timing of those projects that we were implementing in Mexico.

Okay, great. That's helpful. And in terms of the overall pricing environment, curious if you can remind us what price increases you've so far in the first half and what should we expect in the second half, specifically the large intake period in Mexico?

Sure.

Consistent with what we said at the beginning of the year, Jeff, we talked about, you know, in an environment like this of entering the year with inflation around 8%, our implied cost of inflation was much lower than that. at around on average 5% on the cost structure between Mexico and between Peru. Slightly higher pricing or inflation in Mexico because we own the real estate and lower inflation in Peru where we own the real estate. We lease in Mexico and we own in Peru. So we were really focused in an environment with heavy inflation and pressure on the consumer to simply pass around the cost of inflation of that 5% on our expense structure. And we were able to do that in the first half of the year with some slight advantage in pricing that we saw in Mexico in the smaller secondary intake, which is a reason for the favorability that we're passing through on the full year guidance on an FXN basis.

And that will continue in the third with the big intake period?

Obviously, we're early in on that intake in the C3, which is the main intake in Mexico and the secondary intake in Peru. But, you know, we don't have any expectations to differ significantly from that and what our expectations are factored into our full year guidance and second half guidance.

Okay. Fantastic. Thanks so much.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. One moment for our next question. Our next question comes from the line of Lucas Nagano with Morgan Stanley. Your line is open.

Hey, good morning. Thanks for taking our questions. The first question is related to Mexico margins. The expansion was higher than we expected. You mentioned that part of this was due to the shifting timing of expenses, but I just wanted to understand how much of these 600 basis points expansion was structural and how much was due to these particular effects of water.

Yeah, this is Rick. We continue to be, as we noted in our opening remarks, very encouraged about our opportunity to get Mexican margins at 25% plus in the next three to five years. We do see margin expansion, as we talked about, notable margin expansion occurring this year in Mexico. We're going to see that our expectation is around 22% plus. You saw a little bit heavier than that. occur in the first half simply because of the timing of expenses shifted a little bit into the second half. But overall, we're very pleased with our margin expansion progression in Mexico. We will see upside this year. You know, that's notable.

Thanks. And also on Mexico, you mentioned that there was a favorable impact from pricing mix. Could you explain again how the mix effect benefited growth?

Sure. So our portfolio in Mexico, you think about it from two dimensions, right? One dimension is we have value brands that are priced at about 50% lower than premium brands. And then we also have... face-to-face and and online which is similarly 50 discount versus one and then there's a third there's actually a third dimension which is what's really driving it we have undergraduate pricing um traditional undergraduate pricing versus um online pricing and what really happened um last year in in c3 as you recall we had a very significant um successful intake in Mexico in the high teens for our primary intake in Mexico last year. When that intake happened, we had a significant benefit in terms of the mixed effect of undergraduates, both in our value brand and our premium brand, particularly in our premium brand in UVM. And when you have that, the relative weighting of stronger undergraduate, including our premium brand, essentially creates a price-mix benefit where we get higher growth of essentially the enrollment growth that you see in a quarter or in the year-to-date basis.

That's very clear. Thank you, Rick.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. That concludes our question and answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.