Laureate Education, Inc.

Good day and welcome to Laureate Education's fourth quarter and year-end 2023 results 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, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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 Lard Education's fourth quarter and year-end 2023 results. Joining me on the call today are Alex Sarkanson, President and Chief Executive Officer, and Rick Buskirk, Chief Financial Officer. Earnings Press Release is available on the Investor Relations section of our website, We have also posted a supplementary presentation to the website, which we will 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 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 day 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 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 presentations. Let me now turn the call over to Ailis.

Thank you, Adam, and good morning, everyone. I'm pleased to report another strong year for L'Oreal in 2023. We delivered on our commitment to all stakeholders. Our financial performance for the year was robust with double-digit growth in revenue and a margin profile which is at a historic high for our company. In addition to favorable financial results, our cash-accreted business model and strong balance sheet enabled us to return $110 million of capital to shareholders through a special cash dividend in the fourth quarter of last year. And today, I am pleased to announce a new $100 million stock buyback authorization underscoring our ongoing commitment to shareholder value creation. During 2023, we also strengthened our academic offerings through further investments in our leading digital capabilities. And we also expanded our health sciences portfolio, including opening a new medical school in Peru and securing seven new medical school licenses in Mexico. We are the largest private provider of higher education in Mexico and Peru, and our institutions continue to be recognized among the best universities in their respective countries and consistently lead the way in academic excellence. Today, I'm very proud to announce our latest ratings from QS Stars, a leading independent university ranking and rating organization. All our universities in Mexico and Peru are now five-star rated, the highest rating attainable in the categories of employability, online learning, inclusiveness, and social responsibility. I would like to thank our faculty and staff for this tremendous achievement. In addition to QS star ratings, each of our institutions continue to be recognized in the local markets for their academic achievements. A few examples of this past year include in Peru, for the third consecutive year, UPC was ranked the number one education brand in the country by Merco. And even more impressively, it was ranked number nine among all foreign and domestic consumer good brands. in the country. And we ranked ahead of companies such as Scotiabank, Toyota, and Microsoft, and just behind Google and Nestle. And in Mexico, UVM was ranked the second best private university according to the Reader's Digest 2023 rankings, second only to Tech de Monterey. We remain confident in our future growth outlook. and believe that demand for quality higher education in Mexico and Peru will continue to grow in the years to come, 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 upskilling of the labor force. We expect the ongoing nearshoring trends to further accelerate this demand in Mexico, providing a compelling opportunity for higher education institutions like L'Oréal. During our year-end 2022 earnings call, we know that we will strive for continued organic growth momentum and for L'Oréal to deliver a financial profile over the next three to five years in which we pursue three key objectives. First, a target 8% to 10% compound annual growth rate in revenue on a constant currency basis. Secondly, we pursue a capital light expansion strategy with the objective of delivering 40% to 60% of teaching hours online, resulting in capex spending being below 5% of revenues. And finally, we target adjusted EBITDA margin of 30% and adjusted EBITDA to unlevered free cash flow conversion of more than 50%. In 2023, we outperformed our growth objectives. We achieved our online hybridity goals and delivered on our 50% free cash flow conversion when excluding certain cleanup items related to unwinding legacy laureate. Despite the near-term impact of an economic slowdown in Peru, we maintain our three to five year growth profile on a CAGR basis, given the strength of our brands and strong positioning in Mexico and Peru. And we target to deliver 30% adjusted EBITDA margin and 50% or greater free cash flow conversion by end of 2025. As for our 2024 outlook, we continue to see strong opportunities for growth fueled by favorable secular trends. However, we are experiencing different market conditions in Mexico versus Peru, which we believe will cause 2024 top-line growth to be slightly below our mid-term expectations. The macroeconomic backdrop in Mexico is favorable, with robust manufacturing and construction activities, growth in real wages, and increased private consumption. The nearshoring impact is starting to be felt across the economy. For L'Oréal, we expect to see increased participation rates in higher education, as well as higher demand for reskilling and upskilling of the labor force. The market dynamics in Peru are currently more challenged. Peru has been a strong growth market for L'Oréal for many years. In the second half of 2023, Peru encountered an economic downturn as a result of political and weather-related events. These conditions are expected to persist through the first half of this year. However, most economists are forecasting an economic recovery in the second half of 2024, which is aligned with our outlook. As a result of these differing market dynamics, we expect higher growth rates in Mexico versus Peru this year. Our guidance calls for L'Oreal's consolidated revenue to grow 5% to 6% on a constant currency basis for 2024. However, as we enter 2025, we do expect to be at a higher growth rate, which is more aligned to our steady state targeted growth profile. That concludes my prepared remarks, and I will now turn the call over to Rick Bosker for a more comprehensive financial overview of the fourth quarter and the full year 2023 performance, as well as further details on our 2024 outlook. Rick? Thank you, Ilas.

As a reminder, higher education is a seasonal business. Although the fourth 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 11, which highlights our strong operating financial performance for the fourth quarter. Revenue in the fourth quarter was $409 million, and adjusted EBITDA was $131 million. Both metrics were ahead of the guidance we provided three months ago, driven operationally by slightly higher enrollment volume, as well as favorable foreign currency rates. On an organic constant currency basis, revenue for the fourth quarter was up 10% year-over-year, driven by 6% growth in total enrollment volume and favorable price mix. Adjusted EBITDA for the fourth quarter was up 28% year-over-year on an organic constant currency basis with a strong flow-through margin on revenue growth. Now moving to page 12 in full-year results. For 2023, new enrollments increased 10% versus prior year, and total enrollments were up 6%. Full year revenue was $1.484 billion, and adjusted EBITDA was $419 million. This resulted in an adjusted EBITDA margin of 28.2%, which is a historic high for Laureate. On an organic constant currency basis, revenue for the year increased by 11%, and adjusted EBITDA was up 15%, resulting in 110 basis point improvement in margin, led by a nearly 250 basis point increase in Mexico. Let me now provide some additional color on the performance of Mexico and Peru, starting with page 14. Please note that all comparisons versus prior year are on an organic and constant currency basis. Let's start with Mexico. New enrollments increased 11% for the year, driven by strong primary and secondary intakes. We experienced solid new enrollment growth across both our premium brand at UVM and our value brand at Unitec. We also continue to see double-digit growth in our fully online offerings. Mexico's revenue for the fourth quarter increased 11% compared to the prior year period. Adjusted EBITDA for the fourth quarter was up 40% year-over-year due to strong operating leverage on revenue growth and a continued focus on efficiency initiatives. For full year 2023, revenue growth of 13% was driven by a 10% increase in average total enrollments and 3% of price mix. Adjusted EBITDA increased 26% in 2023 versus the prior year period driven by revenue flow through and productivity gains, partially offset by final return to campus expenses. Mexico's margin increased nearly 250 basis points during the year, ending at 22.6%. We believe that our strategy to expand margins in Mexico to above 25% continues to be well underway. Let me now transition to Peru on slide 15. New enrollments increased 9% for the year. This was primarily driven by the strong enrollment performance during the first quarter's primary intake cycle. However, as noted in our prior earnings call, Peru entered an economic slowdown in the second half of 2023, which resulted in pressure on the consumer, impacting their secondary intake this past September. As a result, we did observe an increase in attrition particularly during the second half of the year. The impact was felt across the entire sector. Revenue growth for the fourth quarter increased 8%, driven primarily by volume growth as well as pricing mix. Adjusted EBITDA for the fourth quarter increased 18% year-over-year. For full year 2023, revenue in Peru increased 10% over the prior year, driven by a 6% increase in average total enrollments and 4% of price mix. Despite the macroeconomic conditions, we still delivered strong top-line growth in 2023 due to a solid primary intake earlier in the year and a disciplined pricing approach. Adjusted EBITDA was up 5% in 2023 versus the prior year with a decline in margins as expected as incremental revenue flow through was partially offset by expenses associated with the final return to face-to-face classes at our campuses. Let me now briefly discuss our balance sheet position. Laurier had ended the year with $89 million in cash and 167 million in gross debt for a net debt position of $78 million. Our strong balance sheet position equates to less than a quarter turn of net leverage after returning 110 million of capital to shareholders or 70 cents per share in the fourth quarter through a special cash dividend. Today, we further reaffirmed our commitment to returning capital to our shareholders with a new $100 million stock repurchase authorization. Our confidence in announcing this new buyback authorization is supported by our strong balance sheet and significant cash flow generation. For year end 2023, our adjusted EBITDA to unlevered free cash flow conversion was 49%, very close to the 50% target we announced as one of our strategic priorities. Now let's move to our outlook for 2024, starting on page 17. As discussed earlier, the macroeconomic backdrop is robust in Mexico, while Peru faces a more muted growth environment with market expectations for recovery in the second half of 2024. The guidance we are providing today reflects these market trends. Based on current spot FX rates, we expect full year 2024 results to be as follows. Total enrollments to be in the range of 467,000 to 473,000 students, reflecting growth of 4 to 5% versus 2023. Revenues to be in the range of 1.553 billion to 1.568 billion, reflecting growth of 5 to 6% on an as-reported basis and 5 to 6% on an organic constant currency basis versus 2023. Adjusted EBITDA to be in the range of 441 million to 451 million, reflecting growth of 5 to 8% on an as reported basis, and 6 to 9% on an organic constant currency basis versus 2023. This will result in an increase in adjusted EBITDA margins of approximately 40 basis points at the midpoint of our guidance on a reported basis, or approximately 50 basis points on a constant currency basis. We anticipate further margin expansion to be driven by Mexico, as well as lower corporate expenses, partially offset by a slight decline in margins in Peru due to pricing pressures related to the current environment. Lastly, for 2024, we expect adjusted EBITDA to unlevered free cash flow conversion in the high 30% range on a reported basis. As we have discussed on prior calls, we are still in the process of winding down legacy Laureate and noted that those activities would run through the end of this year. Our 2024 cash flow expectations include one-time legacy Laureate payments of approximately $45 million, primarily related to deferred taxes. Absent these Laureate cleanup items, our adjusted EBITDA to unlevered free cash flow conversion is expected to reach approximately 50% in 2024, on par with the level we achieved in 2023 in our stated target profile. As a reminder, our cash flow seasonality is heavily weighted towards the second half of the year due to the timing of tax payments and collections. In 2024, that impact will be more pronounced due to some of these legacy cleanup items, which we expect to occur in the first half of the year. Now moving to the first quarter guidance and starting with three key points. First, Just a reminder that Q1 is a seasonally low quarter as classes are largely out of session in January and much of February. Second, we have a shift in the academic calendar of one to two weeks for certain programs in both Mexico and Peru. We anticipate that this will move approximately $12 million of revenue and $10 million of EBITDA from Q1 to later in the year. This is just an entry year timing item. Third, we anticipate $5 million of one-time restructuring charges during the first quarter in Mexico related to our margin optimization plan, which is going very well. For the first quarter of 2024, we expect revenue between $266 million and $271 million, adjusted EBITDA of approximately $23 million to $26 million. That concludes my prepared remarks. Iliff, I'm handing it back to you for your closing comments.

Thank you, Rick. The secular trends for higher education remain strong in both Mexico and Peru. As the largest private provider of higher education in both markets, we are well positioned to capitalize on growth opportunities with our leading brands, strong digital capabilities, and focus on academic quality and student outcomes. Our growth-oriented business model is distinguished by durable and recurring revenue and cash flow generation, and we have a strong balance sheet and a track record of returning excess cash to shareholders, which will continue to be a priority for us. As an established emerging market company with a developed market governance, we are looking forward to another strong year in which we continue to create value for all stakeholders. Our focus remains on transforming the lives of students and communities in our markets by providing greater access to affordable, quality education. Operator, that concludes our prepared remarks, and we are now happy to take any questions from the participants.

Thank you. At this time, we'll 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 for our first question. Our first question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Thanks so much. You talked about the expected economic recovery in Peru in the second half of the year that will hopefully impact your business in a positive way, but I'm just curious Should there be some sort of lag? I mean, you know, the minute the economy starts to pick up, do students automatically go back to school on day one or do they kind of have to rethink it and then decide a little bit later? Just curious on your thoughts.

I think what we have experienced over the last six months or so is unusual concerns by the Peruvian consumers, given the political disruptions in the first half of last year. as well as concerns about this linear weather event for the first quarter of this year. We are seeing the economy, there was a recession last year, negative GDP of about half a percent. And we are seeing no pickup and recovery. And most economic forecasters and banks are projecting a robust recovery in the second half. So we do expect what we call the C1 intake, the main intake in Peru this year to be a little softer, reflecting the economic conditions. But we do expect this smaller secondary intake in September to reflect more normalized economic environments.

All right, fair enough. In your prepared remarks, you talked about the favorable price mix. led to higher revenue per student. I'm assuming it was a mix to more premium brands. Can you talk about how your portfolio is doing between the premium brands and the other brands?

Yeah, I think in general, it's doing well. The premium brand in Mexico, in Mexico, both brands, UVM, our premium brand, and Unitec, are doing very well. We saw very high performance in both brands in terms of traditional undergraduate, as well as we saw double digit growth in fully online. In Peru, we saw a little bit more pressure last year in the third and fourth quarter in the premium brand, as we saw some students potentially trading down into the value brand. But we saw a little bit higher in the value brand in Peru last year.

All right, and one final question. You talked about this year the margin accretion, mostly driven by Mexico's continued margin optimization, and they've got a goal of 25%. How do we get from where you are now to that 25% number?

Yeah, sure. So first off, incremental operating leverage on incremental revenue is significant, over 50% given our capacity in our campuses. that we have in Mexico right now. And then the secondary aspect of it is we continue to optimize our real estate experience in Mexico. We've announced some optimizations in the fourth quarter of some campuses, and that will contribute. And we're also doing a restructuring event in the first half of this year, which we called out in first quarter. of around 5 million, and that alone will contribute 50 basis points plus of margin contribution. So it's a combination of operating leverage, very healthy flow through on incremental revenue and experiencing good growth in Mexico. And the secondary impact of it is cost efficiency initiatives, including real estate optimization.

I'll just add that we have high confidence level in achieving this. These are either annualization benefits of actions that we have taken or actions that are in flight, but we have high experience level in, and that gives us the confidence level in achieving our margin goals in Mexico.

All right. Thanks so much for the call.

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

Hello. Thanks for the space. We have two questions. The first one is related to the medium term target you released that it implies a higher growth rate for 2025 onwards compared to this year. And will it be more related to the recovery in Peru or the nearshoring trends in Mexico? And also, how much of the nearshoring impact is visible at this point? The second question is related to capacity. You're still in a phase of maturing the campus occupancy and online education, but will you start to consider expansion in the next years?

Great. Thanks for those two questions. The higher growth rate, the normalization back to high single-digit, low double-digit growth rate for L'Oréal, that's really just getting the normalization from Peru. Peru is in a recession, and our guidance is more in a steady-state economic cycle. So any reassuring benefit might be an upside. Just underscore nearshoring is going to really to come in two forms for us one is increased participation rate which is going to Just be direct benefit to our you know traditional undergraduate business and then additional Tailwind will likely come from short courses more technical expertise geared directly to what businesses need our industry need in order to facilitate the transition of the supply chain from Asia to Mexico to serve the United States. So that latter part is not really built into our projections because that isn't part of the core business. I'll pause there and see if that answers your question.

Yeah, is it possible to comment a bit on the potential campus expansion plan? More towards the medium term, what we're longing for.

Sure. I think that was your second question on capacity. And you know we have gotten a bit of a capex holiday in 2020, 2021, and 2022. into 2023 because of the increased hybridity percentage. It's given us an ability to really get more throughput from existing physical plans. And hence, we have a robust growth over the last several years without any new campus developments. In 2024, we will start developing a couple of new campus projects for launch in 2025. So there will be new fiscal footprint coming on board in late 2024 into 2025 and beyond. But I want to underscore that these new campuses that we are building is much more capitalized in nature than our historical campuses, because again, they are heavily dependent on hybridity and digital learning. So that means that the ROIC on these new campuses are very, very attractive.

Very clear. Thank you, Alice.

Thank you. That does conclude the question and answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.