Laureate Education, Inc. (LAUR) CEO Eilif Serck-Hanssen on Q1 2022 Results - Earnings Call Transcript

May 08, 2022 4:00 AM ETLaureate Education, Inc. (LAUR)
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Laureate Education, Inc. (NASDAQ:LAUR) Q1 2022 Earnings Conference Call May 5, 2022 8:30 AM ET

Company Participants

Adam Morse - Senior Vice President, Finance

Eilif Serck-Hanssen - President and Chief Executive Officer

Rick Buskirk - Chief Financial Officer

Conference Call Participants

Jeff Silber - BMO Capital Markets

Shlomo Rosenbaum - Stifel

Operator

Good day and thank you for standing by. Welcome to the Q1 2022 Laureate Education, Inc. Earnings Call. [Operator Instructions] I would now like to hand the conference over to your host today, Adam Morse, Senior Vice President of Finance. You may begin.

Adam Morse

Good morning and thank you for joining us on today’s call to discuss Laureate Education’s first quarter 2022 results. Joining me on the call today are Eilif Serck-Hanssen, 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’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, 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. Furthermore, non-GAAP measures that we discuss, 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 Eilif.

Eilif Serck-Hanssen

Thank you, Adam and good morning everyone. We recently completed our enrollment intake for the first quarter, which includes the primary intake cycle for Peru and a smaller intake for Mexico. I’m very pleased to report that 2022 is off to a great start. New enrollments increased 9% year-over-year, and total enrollments were up 11%, continuing the solid momentum for the growth agenda that we initiated last year.

Our first quarter results were ahead of expectations and very encouraging. On the strength of our Q1 performance, we are increasing our full year 2022 guidance with top line revenue now expected to grow double digits. We continue to benefit from the COVID recovery in Mexico and Peru and are seeing positive results from our investments in new programs as well as digital offerings.

Growth in digital learning in Mexico and Peru is driven by increased student demand, new instruction methodologies designed for the online medium and growing employer and regulatory acceptance of degrees obtained through online and hybrid modalities. Going forward, we expect to provide between 40% and 60% of our taught hours online across our five institutions, which we believe will allow us to continue to grow in a more capital-light manner as greater numbers 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 careers and lifelong achievement. Our strong brands and highly reputable institutions in Mexico and Peru uniquely position us to deliver on that promise.

A few recent examples that I’d like to highlight are as follows: First, UPC has been recognized as the university with the best reputation in all of Peru for 2021, according to a recent study conducted by Merco reputation ranking. UPC ranked first in the education sector and was ranked #17 overall among all organizations across Peru. This incredible achievement is the result of the tireless work done by our teachers, academic leaders, deans and staff, and I wish to congratulate them all.

Secondly, we have active applied research at all of our institutions. This month, we will inaugurate our first outdoor clean energy laboratory at one of our UVM campuses in Mexico. In addition, through our internally developed set of algorithms and scientific sensors, UVM is playing a leading role in the water leak detection project that will be launched in Mexico later this year.

We continue to invest in our institutions to ensure that we provide high-quality education. Our institutions and programs regularly earn some of the highest accreditations available in our markets. As a result, the Laureate brands are highly differentiated and position us for continued success in Mexico and Peru. In addition to driving our growth agenda, we continue to prioritize return of capital. We have been active with our stock buyback program this year. Through the first 4 months of 2022, we repurchased approximately 14 million shares at what we believe to be very accretive levels for our shareholders.

We currently have approximately $40 million of remaining share purchase authorization from our Board, and we expect to utilize this capacity during the remaining 2022. 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 these amounts are released from the escrow. Our cash accretive business model as well as our strong balance sheet provides us with a lot of flexibility as we continue to think about return of capital going forward and shareholder value optimization efforts.

That concludes my prepared remarks, and I will now turn the call over to Rick Buskirk for a more detailed financial overview of the first quarter 2022 performance as well as further details on our improved 2022 full year outlook. Rick?

Rick Buskirk

Thank you very much, Eilif. Before running through the results, I want to remind investors that higher education is a seasonal business. The first and third quarters represent our two largest intake periods, which account for more than 80% of our total new enrollment activity for the year. From a P&L perspective, both are seasonally low periods as classes are out of session for most of those months. In contrast, the second and fourth quarters are not large enrollment intake periods that generate higher revenue and adjusted EBITDA for the year.

Let’s now move on to the strong financial performance for the first quarter, starting on Page 11. Revenue in the seasonally low first quarter was $210 million, and adjusted EBITDA was $27 million. Both metrics were ahead of the guidance that we provided 3 months ago. Outperformance versus expectations was led by a more favorable enrollment intake cycle as well as some timing of expenses.

On an organic and constant currency basis, revenue increased 9% year-over-year and adjusted EBITDA grew 37% year-over-year. When adjusting for timing of the academic calendar in Mexico, revenue was up 13% on enrollment volume growth of 11%. Revenue performance was led by Peru, which experienced 17% year-over-year constant currency growth. Peru’s strong year-over-year performance was driven by favorable retention rates in the second half of last year as well as their primary new enrollment intake in Q1.

To add further light to the recent primary intake performance, Peru’s 49,000 new enrollments were very impressive. On a year-over-year basis, growth was 5%, however, last year had the benefit of a COVID-19 recovery. To put this intake into better context, Peru’s Q1 new enrollments were 19% greater than their pre-COVID Q1 2019 intake. Mexico’s revenue growth for the quarter of 6% on a constant currency basis was impacted by the timing of class starts.

Adjusted for timing of the academic calendar, Mexico’s revenue growth was up 13%. This was driven by the annualization of last fall’s strong primary intake as well as the 15% growth in new enrollments achieved during their smaller secondary intake in Q1. The $18 million increase in adjusted EBITDA for the quarter was the result of corporate G&A savings, operational efficiencies and a non-cash FAS 5 charge we incurred in Q1 of 2021, partially offsetting those favorable impacts were incremental costs incurred during the quarter as we prepared our campuses for reopening.

Let me now briefly discuss our balance sheet position illustrated on Page 16 of the earnings presentation. As of March 31, we were in a net cash position of $138 million. In addition, $74 million of the Walden sale transaction was paid into an escrow account. This amount will be released in full or in part to Laureate in August 2022 pursuant to the terms and conditions of that agreement.

Now let’s move to our updated outlook for 2022, starting on Page 18. As Eilif alluded to in his opening remarks, we continue to execute on our growth agenda. The strong intake during the first quarter gives us the confidence to increase our outlook for 2022 at the midpoint by 3,000 students, $16 million for revenue and $5 million for adjusted EBITDA. Our updated guidance incorporates the anticipated impact from increasing inflationary pressures in Peru and Mexico.

As Laureate is a services business our main exposure to rising inflation rates on the cost side is labor expense and contractual relationships with vendors. For both components, the impact is expected to be very manageable in 2022 as the majority of our wage increases and inflation indexed contracts were already set at the beginning of the year. For the smaller remaining portion of our cost structure, our increased top line expectations and additional efficiency actions undertaken are expected to offset any potential impacts.

Based on current spot FX rates, we now expect total enrollment to be in the range of 410,000 to 416,000 students, reflecting growth of 6% to 7% on an organic basis versus 2021; revenues to be in the range of $1.190 billion to $1.206 billion, reflecting growth of 9% to 11% on an organic constant currency basis versus 2021; and adjusted EBITDA to be in the range of $326 million to $334 million, reflecting growth of 22% to 25% on an organic constant currency basis versus 2021 or an increase of 29% to 32% on a reported basis, which includes the effect of the non-cash FAS 5 charge in 2021.

As discussed on our prior call, our guidance for 2022 reflects a significant increase in profitability. Let me quickly remind you of the 3 main factors driving our guided margin accretion: First, we have significantly right-sized our corporate operations at the end of last year. You can see this benefit starting in Q1 and will continue through the year, driving significant cost savings. Second, incremental flow-through margin associated with, first, the annualization effect from last September strong primary intake in Mexico as well as the flow-through margin benefit from incremental new students in 2022 in both markets. Lastly, as we return to face-to-face operations in 2022, we will experience incremental costs related to facilities and cost of service and that will be a bit of an offset to previously noted margin gains.

Eilif, I am handing it back to you for closing comments.

Eilif Serck-Hanssen

Thank you, Rick. I continue to be very encouraged by the trends in our business. We are seeing positive growth momentum in all segments as well as strong returns from our efficiency and innovation investments. The favorable secular trends for higher education in Mexico and Peru will continue to drive increased demand for higher education, and we believe that Laureate is uniquely positioned to serve these markets through our strong brands, leading digital capabilities and focus on quality as well as student outcomes.

Operator, that concludes our prepared remarks and we are now happy to take any questions from the participants.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Jeff Silber from BMO Capital Markets. Your line is now open.

Jeff Silber

Thanks so much. On Slide 9, you talk about the percentage of teaching hours delivered online and you talk about 2022 and going forward of 40% to 60%. Can you just remind us where you are now? I know students have been returning to campus. I am just curious what that looks like now and what kind of trends we should expect going forward?

Eilif Serck-Hanssen

Hey, good morning, Jeff. This is Eilif. When we opened up the campuses in a face-to-face post-pandemic, the economic model was geared to that 40% to 60% depending on the institution. So, we are today where we would like to be going forward.

Jeff Silber

And is there any issue – I know in the U.S., we are starting to see some cases, some COVID cases rise in certain areas. I am not as close to the story in both Mexico and Peru. Can you just tell us what’s going on there?

Eilif Serck-Hanssen

There are cases, of course, in those countries just like we have in the U.S., but we are still operating the full face-to-face schedule and of course, taking precaution just needed for safety of our faculty and staff.

Jeff Silber

Okay, great. I am sorry. You had also talked a little bit about wage inflation, and I’m not sure if I got the gist of the remarks. Were you just talking about the contracts in Peru or was this something that you’re also seeing in Mexico as well?

Rick Buskirk

No. What we were talking about is when we look at inflation in our markets right now and what the impact is to our business as it relates to our full year guidance, we have the benefit as being a service company with Laureate that the majority of our cost structure, 70% of our cost structure is essentially contractual base with our labor agreements, with IT services and with the rent contracts that we pay in Mexico. Those contracts were set and locked at the end of last year, at the beginning of this year. So it provides us good visibility and a lack of exposure, the majority of our P&L, which makes our ability to react to inflation this year very manageable.

Jeff Silber

Okay, great. Then I will just ask one more and jump back into queue. I know you’ve got a large intake period coming up in the third quarter in Mexico. Can you give us any indications of how that’s going and what type of tuition increases are going to be embedded in that intake period? Thanks.

Eilif Serck-Hanssen

So C3 intake in Mexico is off to a good start. We are about 20%, 25% of the way on our curve, and we are executing as expected so far, but it’s really too early to conclude. We will provide a better update in the next earnings report.

Jeff Silber

Okay. And how about tuition increases, what are planned for this fall?

Eilif Serck-Hanssen

So, we continue to have price expectations as we have done in the first intake in Peru and Mexico at inflation or inflation plus for all of our brands. There is, of course, going to be a little bit of a mix shift between Mexico and Peru and also between the value brand and the premium brands, but that each of the institutions we have pricing at inflation costs.

Jeff Silber

Okay, that’s great to hear. Thanks so much.

Operator

Thank you. And our next question comes from Shlomo Rosenbaum from Stifel. Your line is now open.

Shlomo Rosenbaum

Great. Thank you for taking my questions. Hey, just piggybacking off of Jeff’s last question, can you discuss the level of discounting or scholarships in the Peru market that you had in your primary intake this last quarter versus what you had in the last couple of years? How different was it?

Rick Buskirk

Peru has – I mean, relative to Mexico, it’s just the structural way the market works. We have smaller discounts as a percentage of revenue. That discount and scholarship base in Peru was in line with prior periods and we felt pretty good about it. And as Eilif mentioned, we were able to price that inflation that we experienced on our cost structure.

Shlomo Rosenbaum

Okay, great. And then could you give us some thoughts on what to expect for this year’s free cash flow? And then also, with all the moving parts between COVID recovery and disposition of assets, can you provide just a little bit more color on seasonality of free cash flow of the business as it stands?

Rick Buskirk

Sure. Let me start with seasonality and – because I appreciate that last year at our full year results, they were consolidated to discontinued operations. So, the way we should take a step back and think about free cash flow with our remaining businesses in Mexico and Peru is they follow our intakes, right. So Q1 and Q3 are going to be our larger free cash flow intake, Q3 being larger. Q1 this year was impacted a little bit by the tail activities of our restructuring that we did, as we noted on our earlier call. So it’s a little lower than it will be on a run rate basis. Q2 tends to run a bit negative, just from a seasonality of our free cash flow and Q4 is positive but not as large as Q1 and Q3.

Shlomo Rosenbaum

Okay. And what about how to think about the free cash flow for the full year? Are there some basic parameters you could give us or just a range?

Rick Buskirk

Yes. I would say we don’t guide on free cash flow, but on a run rate basis, we are targeting to get to around 50% free cash flow conversion of EBITDA. And we will be lower than that this year due to the tail that we have, particularly in the first quarter of what I mentioned, plus a bit of higher tax expense due to the tail wind-down activities of the legacy Laureate.

Shlomo Rosenbaum

Got it. And then you mentioned something about favorable timing of expenses in this last quarter, could you just give us a little more color on what that was?

Rick Buskirk

Yes. Specifically, that was related to Mexico. And every year, the academic calendar shifts a couple of weeks potentially in some of our markets depending on the calendar. In this year, we had a few weeks in Mexico that shifted from Q1 into Q2. And that resulted in $8 million of less revenue being booked in Q1 this year, which – that’s why in the earnings presentation that you see that we basically – you need to adjust for the timing of the calendar shift and it’s around 13% when you adjust for that.

Shlomo Rosenbaum

Got it. Great. Thank you very much.

Operator

[Operator Instructions] And I am showing no further questions. This concludes today’s conference call. Thank you for participating. You may now disconnect.

Eilif Serck-Hanssen

Thanks, everyone.

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