Laureate Education, Inc.

Good day and welcome to the Fiscal Year 2024 Laureate Education, Inc. earnings conference call. At this time, all participants will be 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. You will then hear an automated message advising your hand is raised. To withdraw your question, 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, Adam Morse, Senior Vice President of Finance. Please go ahead.

Good morning and thank you for joining us on today's call to discuss Laureate Education's fourth quarter and year-end 2024 results. Joining me on the call today are Isla 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 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 a 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 date of this conference call, and we undertake no obligation to update any forward-looking statements. Additionally, non-GET measures that we discuss, including and among others adjusted EBITDA and its related margin, adjusted net income and adjusted earnings per share, total debt, net of cash, and free cash flow, are also detailed and reconciled to their gap counterparts in our press release or supplementary presentation. Let me now turn the call over to Ilif.

Thank you, Adam, and good morning, everyone. I am pleased to report another strong year for Laureate in 2024. We continue to deliver on our commitments to all stakeholders. Through disciplined execution, we achieved robust operating results, driving our margin profile to a new historic high and further reinforcing our dedication to continued growth and enhanced profitability. Our cash-equitive business model and strong balance sheet enabled us to return more than $100 million of capital to shareholders in 2024. At the end of the year, we were essentially net debt-free and remained well-positioned to execute on our growth plans while prioritizing return of excess capital to shareholders. We are the largest higher education provider in both Mexico and Peru, and we have proven that excellence and scale can go hand in hand. In 2024, we continue to strengthen our academic offering and made further investments in our health sciences portfolio. This included the opening of six new medical schools at our campuses throughout Mexico and Peru, along with two new dental schools and one new veterinary school. Our institutions are consistently ranked among the top universities in their respective countries and recognized for their leadership in academic excellence. Today, I am proud to share our latest ratings from QS. QS is one of the world's leading independent university ranking and rating organizations. For the second consecutive year, all our universities in Mexico and Peru have achieved five-star ratings, the highest rating attainable in employability, online learning, inclusiveness, and social impact. In addition to QS star ratings, our institutions continue to earn recognition in the local markets for academic excellence and brand leadership. A few examples from this past year include, in Peru, for the fourth consecutive year, UPC was ranked the number one education brand in the country by Merco, and even more impressively, it was ranked number 11 among all foreign and domestic consumer goods brands in the country. And we ranked ahead of companies such as Toyota and Microsoft and just behind Google and Nestle. In Mexico, UVM was ranked the number two best private university according to Reader's Digest 2024 rankings, second only to Tech de Monterrey. Additionally, our value brands in both markets, UPN in Peru and Unitech in Mexico, are now ranked in the top 10 in their respective countries by the same ranking agencies. I extend my deepest gratitude to our faculty and staff for their continued commitment to academic excellence, and I congratulate them on these outstanding recognitions. Looking ahead to 2025, we see continued growth opportunities in our local markets, including building and outfitting four new campuses for our value brands, two of which we plan to open during 2025. This represents our first new campus launches since 2019. We are also expanding our reach through continued investment in digital education. We remain confident that the demand for quality higher education in both Mexico and Peru will continue to increase. This demand is fueled by rising participation rates, strong wage premiums for graduates, and the affordability of our programs. Additionally, the private sector, which accounts for over 55% of the combined university seats in the two countries, plays a critical role in the market due to limited public resources. Despite some geopolitical uncertainties in Mexico, particularly the recent tariff threats and the related trade complications with the United States, we remain cautiously optimistic. Mexico has strong historical ties to the United States that are important to both countries. Mexico also favors a more dovish monetary policy, and it maintains a strong fiscal discipline in its 2025 national budget. All these factors provide what we believe to be a solid base for growth in the coming years. In Peru, the economy has recovered from the recent recession which began in mid 2023. GDP growth for 2025 is expected to reach approximately 3%. Peru should benefit from a favorable macro backdrop, including low interest rates, stable inflation, and a currency that is highly correlated to US dollar denominated commodity prices. We closely monitor political and external developments in both markets, especially as the US and Mexico trade discussions evolve. We do expect continued volatility in the Mexican peso in the coming months. And based on current exchange rates, we anticipate significant foreign currency translation headwinds in our 2025 reported financial results. As a reminder, we are not exposed to any material transaction risks from foreign currency as our revenues and operating expenses are matched in local markets. But as a US dollar denominated reporting company, we are subject to translation impacts. Our guidance indicates that we will be flat to slightly down year over year in reported revenues for 2025. However, we still expect to deliver US dollar reported growth in both adjusted EBITDA and unlevered free cash flow due to the stability of the Peruvian soul, robust momentum in local currency revenue growth, and our continued margin expansion efforts. That concludes my prepared remarks, and I will now turn the call over to Rick Boskirk for a more comprehensive financial overview of the fourth quarter and the full year 2024 performance, as well as further details on our 2025 outlook.

Rick? Thank you, Eilith. 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 and financial performance for the fourth quarter. Revenue in the fourth quarter was $423 million, and adjusted EBITDA was $141 million. On an organic constant currency basis, revenue for the fourth quarter was up 10% year over year, driven by 5% in total enrollment volume and favorable price mix. Adjusted EBITDA for the fourth quarter was up 14% year over year on an organic constant currency basis, with strong flow through margins on revenue growth. Adjusted EBITDA for timing of the academic calendar, the comparable growth for both revenue and adjusted EBITDA was 8% for the fourth quarter, which includes a referral of some costs from the third quarter as discussed on our last call. Now moving to page 12 and full year results. For 2024, both new and total enrollment increased 5% versus prior year. Full year revenue was $1.567 billion, and adjusted EBITDA was $450 million. This resulted in an adjusted EBITDA margin of 28.7%, which is a new historic high for On an organic constant currency basis, revenue for the year increased by 7%, and adjusted EBITDA was up 9%, resulting in a 43 basis point improvement in margins, led by a 176 basis point increase in Mexico. Full year net income was $296 million, resulting in earnings per share of $1.92 per share. Today we are also introducing new non-GAAP metrics for adjusted net income and adjusted earnings per share for investors. We believe these metrics will provide a clearer picture of the company's underlying profitability and a more accurate reflection of our core performance, and help shareholders better compare our performance over time. The calculation and reconciliation of these metrics to their nearest GAAP counterpart can be found in our earnings release and earnings presentation. The core adjustments you will see for 2024, and which we plan to adjust for in the future, relate to discrete tax items as well as the non-cash FX gain or loss on inter-company balances. For 2024, our full year adjusted net income was $209 million, and adjusted earnings per share was $1.35 per share. We hope you find these metrics helpful as you evaluate our reported results going forward. 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 4% for the year, led by growth in fully online programs focused on working adults across both our premium and value brands. Pricing for the year was slightly above our cost of inflation for both traditional, -to-face, and fully online products. Mexico's revenue for the fourth quarter increased 15% compared to the prior year period. Adjusted EBITDA for the fourth quarter was up 29% year over year due to strong operating leverage on revenue growth and productivity gains. When adjusted for timing the academic calendar, fourth quarter revenue was up 12% and adjusted EBITDA increased 20%. For full year 2024, revenue growth of 10% was driven by an 8% increase in average total enrollment and 2% of price mix. Adjusted EBITDA increased 19% in 2024 versus the prior year period, expanding Mexico's margins by 176 basis points to 24.5%. We are on track to not only achieve but exceed our 25% margin target in that market. Let's now transition to Peru on slide 15. New enrollments increased 6% for the year driven by strong enrollment performance during the secondary intake cycle in September following Peru's macroeconomic recovery. In addition to pent-up demand from students who deferred during the previous intake cycle, we also experienced strong growth and fully online as we continue to scale up that model. Revenue growth for the fourth quarter was 5%. Adjusted EBITDA for the fourth quarter declined 9% year over year primarily due to the cost deferral from the third quarter that I referenced earlier, as well as higher bad debt associated with the tail effects of the recession from the first half of the year. When adjusted for timing of academic calendar, fourth quarter revenue increased 3% while adjusted EBITDA declined 11%. For full year 2024, revenue in Peru increased 4% over the prior year driven by a 2% increase in average total enrollments and 2% of price mix. Adjusted EBITDA decreased 1% for the year versus the prior year with decline in margins as expected as incremental revenue flow through was partially offset by enhanced discounts and scholarships from the first quarter intake and higher levels of bad debt provisioning both resulting from the softer macroeconomic conditions in the first half of the year and an increase in marketing expenses. Let me now briefly discuss our balance sheet position. LORI had ended the year with $91 million in cash and $102 million in gross debt for a net debt position of $11 million. During 2024, we returned $102 million to shareholders through accretive share of purchases and still have $98 million of unused authorization remaining. Since 2019, we have returned nearly $3 billion of capital to shareholders through share repurchases, cash distributions, and cash dividends. With a strong balance sheet and cash accretive model, we anticipate continuing to return excess capital to shareholders this year. Let's now transition to our discussion on guidance. LORI went through a significant transformation from 2019 through 2021. Coming out of that process, we were a different company and believed it was important to give investors insight into our new profile and growth trajectory. At that time, we outlined a targeted financial profile over a three to five year period with the objective of delivering a compound annual growth rate of 5 to 7% for total enrollment, a compound annual growth rate of 8 to 10% for revenue on a constant currency basis, adjusted EVITA margins at 30% or above, and adjusted EVITA to unloved free cash flow conversion of 50% plus. Based on the 2025 guidance we were providing today, we will have achieved that targeted profile, a remarkable accomplishment for our organization. At LORIET, we have built a strong foundation for revenue growth with an improved financial position and a continuing unwavering commitment to academic quality that aims to deliver strong outcomes for all our stakeholders. Having achieved our new financial profile and with LORIET now better understood by the market instead of providing a new three to five year targeted profile, we will focus on annual and quarterly guidance as noted on page 19. We remain excited about the growth opportunities in Mexico and Peru and expect continued operating momentum in both markets on a local currency basis during 2025. Before providing our specific guidance ranges, I wanted to note a few important factors affecting our outlook for the year. First, we have made good progress on our campus consolidation initiatives in Mexico. As a result of those initiatives, we do expect a one-time revenue loss in 2025 of $13 million or an approximately 1% impact to -over-year revenue growth. However, our more streamlined campus footprint will continue to allow us to be more efficient and you will see that reflected in our strong margin growth expectations for 2025. Second, as I with noted, we are closely monitoring political and external factors in Mexico, particularly in respect to the recent volatility in the Mexican peso. The peso continued to weaken in the fourth quarter with current spot FX rates approximately 12% weaker than the 2024 average, creating an expected translation impact on our as reported dollar guidance. With the significance of the movement in the Mexican peso, we do expect our reported revenue in 2025 to be flat to slightly down versus 2024. However, given local currency revenue growth, margin momentum in the business, and a stable Peruvian soul, we still expect to deliver growth in both US dollar reported adjusted EBITDA and cash flow based on current exchange rates. Lastly, we are anticipating an intro year shift in the academic calendar of both markets as further detailed on page number 22. In summary, approximately $27 million in revenue and related profitability is expected to shift from the first to the fourth quarter due to classes starting one to two weeks later this year as compared to last. Now let me move on to our guidance ranges. Based on current FX rates, we expect full year 2025 results to be as follows. Total enrollments to be in the range of 489,000 to 495,000 students reflecting growth of -5% versus 2024. Revenues to be in the range of $1.545 billion to $1.570 billion, reflecting flat to down performance on an as reported basis, but growth of -7% on an organic constant currency basis versus 2024, or -8% excluding the impact from campus consolidations in Mexico. Adjusted EBITDA to be in the range of $467 million to $477 million, reflecting growth on an as reported basis, and -13% on an organic constant currency basis versus 2024. This would result in an increase in adjusted EBITDA margins of approximately 150 basis points at the midpoint of our guidance. We anticipate further margin expansion to be driven by operating leverage from revenue growth, our campus consolidations in Mexico, and lower corporate expenses. Lastly, for 2025, we expect adjusted EBITDA to unlevered free cash flow conversion of approximately 50% on a reported basis, which would imply strong double-digit growth in U.S. dollar reported cash flows. Now turning to our first quarter guidance. As a reminder, Q1 is a seasonally low quarter as classes are largely out of session in January and much of February. In addition, our guidance reflects the interyear seasonality change I discussed earlier. For the first quarter of 2025, we expect revenue between $221 million and $226 million, adjusted EBITDA between negative $7 million to negative $4 million. That concludes my prepared remarks. Ilyf, I'm handing it back to you for closing comments.

ILYF KUZMURZEK Thank you, Rick. As the largest private provider of higher education in both our 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. And 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 the students in our markets by providing greater access to affordable, quality higher education. Operator, that concludes our prepared remarks and we're now happy to take any questions from the participants.

OPERATOR Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. One moment while we compile the Q&A roster. And our first question will come from the line of Jeff Silber with BMO Capital Markets.

JEFF SILBER Thank you so much. I wanted to start with Mexico. Ilyf, you just mentioned what's going on in the environment there. And I know, like specifically with some of the noise about tariffs, it doesn't really have a direct impact on your business. But, you know, has this made the economic environment a bit more uncertain and could this impact enrollment going forward?

OLYMPIA Good morning, Jeff. You are right that we are a local business and not directly impacted by the geopolitical discussions around tariffs and trade. However, in good economic times when GDP are strong and robust, you know, we do get some tailwind. And so what we saw in the latter part of last year, we saw a little bit of a slowdown in foreign direct investment and, you know, capex spend by, you know, foreign companies as they took a bit of a wait and see attitude towards the US trade discussions. That slowed down GDP a little bit from being, you know, in the first half of the year at about 3% to, you know, about 1% in the second half. And of course, that impacts our business somewhat as consumer discretionary also slowed down a little bit with the overall economy. But as we have proven, we are doing extraordinarily well during strong economic times and we're doing, you know, pretty good, pretty well in weaker economic time just because of the strong value proposition that we offer our customers. So hopefully that provides some additional color for you.

Yeah, if I could just drill down a little bit on there, are you assuming an acceleration in GDP growth in Mexico or just that the current environment exists for the rest of the year?

So we are, our guidance is based on the current consensus on GDP of about 1% GDP growth for 2025. So, you know, pretty benign economic environment in 2025. We do expect that there would be volatility in 2025 as the trade discussions are being wrapped up and we are, you know, more bullish for 2026 and beyond.

Okay, that's helpful. If I could just sneak in one more. You talk about returning excess capital to shareholders remaining a priority. Can we get a little bit more color on that and maybe we could just step back? What is your current capital allocation policy?

So we have talked about for the last couple of years an objective of delivering 50% free cash for conversion on our EBITDA on an unlavered basis. And there's been a little bit of noise in that number last year as we were wrapping up some TAY liabilities related to taxes on our legacy structure. That is no behind us and we expect to deliver, you know, free cash for conversion of 50%. And that is after supporting growth in the business of around 5% of revenues in capex to support our growth momentum of, you know, 5, 6, 7% volume growth. And so therefore you should take it that 50% of the unlavered free cash flow will be returned to shareholders. So 50% of our EBITDA or our available free cash flow will be returned to shareholders.

Okay, that's really helpful. Thanks so much.

Thank you. As a reminder, if you have a question, please press star 1-1. I'm showing no further questions in the queue at this time. Actually, we do have one from Lucas Nagano with Morgan Stanley. Your line is open.

Hi, I'm Rick. Thanks for the space here. I have two questions. The first is related to the tax rate. It decreased substantially in 2024 to high 30s, even if this could be the one-off impact from Q3. So do you see this level as the run rate for now? And the second question is related to the full intake. The first half intake of this year has kind of a similar baseline of the second half last year. And so given the positive performance last year, do you see the maintenance of this favorable environment for this primary intake? Thank you.

Great. Rick, do you want to take the tax rate and I can pick up on the prune take?

Yeah, good morning. On a reported basis, our book effective tax rate was around 29%. You're right. You do need to adjust for the non-cash FX gain loss on the pretax number. So that was over $70 million. And then you need to adjust for the reversal of an accrual of a discrete tax item of around $38 million on the tax side. If you adjust for those two, you get to around 40%, which is what we said our run rate is below 40% effective tax rate.

Great. And Lucas, in your second question, we are a little more than two-thirds through our main intake in Peru, which means that the next four to six weeks are very important period for us as we are wrapping up our commercial campaigns. The market is improving as evidenced by robust GDP expectations of 3% plus for GDP growth in 2025 in Peru. That said, we do see some lingering effects of the recession, particularly in the more price-sensitive value segment. Does that... Can you hear me? Thank you.

Thank you. Yeah, that's the third half. Thank you.

Great. Thank you.

Thank you. As I'm showing no further questions in the queue at this time, this concludes today's program. Thank you all for participating. You may now disconnect.