Laureate Education, Inc. (LAUR) Q1 2019 Earnings Call Transcript

Laureate Education, Inc. (LAUR -0.07%)
Q1 2019 Earnings Call
May. 09, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the first-quarter 2019 Laureate Education Inc. earnings conference call. My name is Brandon, and I'll be your operator for today. [Operator instructions] Please note, this conference is being recorded.

And I will now turn it over to Adam Morse. Adam, you may begin.

Adam Morse -- Senior Vice President, Corporate Finance, and Global Treasurer

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss Laureate Education's first-quarter 2019 results. Joining me on the call today are Eilif Serck-Hanssen, chief executive officer; Ricardo Berckemeyer, president and chief operating officer; and JJ Charhon, 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 on 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'd like to remind you that some of the information we're 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. Additionally, non-GAAP measures that we discuss, including adjusted EBITDA and free cash flow, are also detailed and reconciled to their GAAP counterparts in our press release or supplementary presentation. With that, let me turn the call over to Eilif

Eilif Serck-Hanssen -- Chief Executive Officer and Director

Thank you, Adam, and thank you everyone on the line for joining us on today's earnings call. Having just completed our large enrollment intake in South America, I am pleased to report that 2019 is off to a good start. In Brazil, we are rapidly growing our Distance Learning platform. As we bring this market segment to scale, we continue to improve the delivery model for our students, including the launch of a new Go Digital platform with new digital content and enhanced user interfaces and improved student services.

Growth in our face-to-face private pay students continue to help offset declining enrollment trends under the CS program. Although we were pleased with our favorable new enrollment trends in Brazil, the macro economic conditions remain challenging resulting in weak pricing power in a very competitive market. In the Andean region, our business is performing very well. In Peru, we continue to experience strong growth with new enrollments up double digit and pricing essentially in line with inflation.

New campus expansion continue to perform ahead of expectations, including a new campus open for our UPN brand in the Southern part of Lima, as well as expansion of our health sciences offering at our Lima center campus. In Chile, we continue to execute on our capital-light model for online hybridity, as well as improving mix and enhancing efficiencies. In the U.S., we are pleased that domestic new enrollments at Walden continue to deliver positive growth trends, although the markets remain quite competitive. Our competency-based learning offering, known as TEMPO, is yielding very strong growth, albeit from a relatively small base.

Our total TEMPO population has now reached approximately 2,000 students, and we plan to expand further our portfolio of programs. Our commitment to quality and student outcomes continues to be recognized. I'd like to highlight a few recent accolades from the 2019 edition of the prestigious Scimago Institutional Rankings publication, where Northern Chile was ranked No. 3 among the Chilean institutions, all private and public, and in Peru, our UPC brand was ranked second among all the Peruvian institutions.

Throughout the quarter, we continue to make strong progress on our plan to simplify our portfolio, including the closing and funding of the previously announced divestitures of St. Augustine University and operations in Thailand and South Africa. We are making good progress on our strategic priorities and remain focused on making Laureate an organization where scale is an enabler to drive strong outcomes for our students and create value for shareholders. I will now turn the call over to JJ for a more detailed financial overview of our first quarter.

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

Thank you, Eilif. Before running through the financial results, I want to remind everyone of the seasonality in our business. The first and third quarters represent our two largest intake periods, which account for approximately 80% of our total new enrollment activity for the year, but are seasonally low from a P&L perspective as classes our out session for most of those months. Conversely, the second and fourth quarters represent the majority of the revenue and adjusted EBITDA for the year, but are not large enrollment intake periods.

With that context, let me cover the highlights starting on Page 7. Revenue in the first quarter was $622 million. Adjusted EBITDA was a loss of $22 million, which was better than expectations. On a comparable basis and at constant currency, our revenue and adjusted EBITDA for Q1 grew 4% and 10%, respectively.

Moving now to a more detailed review of our operating metrics, starting with enrollments, which you will find on Page 8. Overall, we grew new enrollments by 8% for the first quarter as compared to the same period a year ago. Total enrollments on the other hand increased 3%. In Brazil, we continue to scale up our Distance Learning business with new enrollment increasing by 76% year over year.

For campus-based operations, new enrollments increased 2%. Our Andean segment continues to deliver strong performance with new enrollments up 8% led by continued double-digit growth in Peru, particularly at UPN. Finally, in our Online & Partnership segment, our domestic new enrollment grew 2%, which was more than offset by the contraction of our international partnership business, which has been deemphasized since last year. Now let's review our financial performance, which you will find starting on Page 9.

On a comparable basis, our first-quarter revenue was up 4% versus the same period a year ago, which is in line with our expectations. As indicated already, adjusted EBITDA was up 10% on a comparable basis, thanks to the full-year benefits of our cost containment actions initiated during the second half of 2018. Let's now turn the focus to our cash flow performance, which you will find on Page 10. As a reminder, please note that our cash flow statement includes the impact from continuing and discontinued operations.

Improving our cash flow generation is and will continue to be a top priority for management. Our performance in Q1 built on the strong momentum we established in 2018. Free cash flow in the first quarter increased $64 million when compared to the same period a year ago, mostly thanks to improvement in our operating performance and capital structure. Finally, let me cover our earnings guidance starting on Page 12.

We are maintaining our full-year guidance before we adjust for the impact of the sale of UniNorte in Brazil. Assuming we close on the sale of UniNorte by the end of June, we expect the following impacts to our full-year guidance: total enrollments will be reduced by 25,000 students for a revised full-year guidance of 865,000 students; revenue based on current spot FX rates will be adjusted down by $20 million making our revised guidance between $3,300,000,000 and $3,365,000,000. Adjusted EBITDA still based on current spot FX rate is expected to be impacted by about $5 million making our revised guidance between $640 million and $650 million. Please refer to Page 12 for a complete reconciliation of our guidance in light of the anticipated sale of UniNorte.

For the second quarter, our expectations are as follows: revenue is expected to be between $990 million and $1 billion; our adjusted EBITDA is expected to be between $280 million and $290 million. If you combine this second-quarter guidance with our first-quarter results, you will notice that most of our full-year adjusted EBITDA growth is expected to happen in the second half of this year. This back ended profile is happening primarily for three reasons. First, as you may recall, our G&A cost reductions associated with our ways to divestitures will predominantly occur in the second half.

Second, there are some one-off items impacting newer year-over-year comparability, which together amount to about $14 million. This is not a new development and was also factors in our full-year guidance. Finally, the pricing environment in Brazil continues to be challenging and has not yet improved versus 2018. We believe it is prudent to assume that this trend will not improve in the second half and have therefore decided to further accelerate the transformation of our operating model in Brazil and the reduction of our G&A footprints.

All these cost reductions are being executed throughout the second quarter and are expected to be completed by the end of June. Eilif, now back to you for the wrap up.

Eilif Serck-Hanssen -- Chief Executive Officer and Director

Than you, JJ. 2019 is off to a solid start following our South American intake cycle. We continue to drive toward our stated strategic priorities, including an improved margin profile for the company. Our network institutions are performing very well providing affordable, quality, higher education to our 900,000 students.

Our quality and outcome metrics continue to be very strong, and we are being recognized and rewarded with favorable rankings and reaccreditations in all of our markets. Management remains committed to creating value for our shareholders during 2019 and beyond, and we will be exploring all possible options and opportunities to unlock value. Operator, that concludes our prepared remarks, and we are now happy to take questions from the participants.

Questions & Answers:

Operator

Thank you. [Operator instructions] And from Barclays, we have Manav Patnaik. Please go ahead.

Unknown speaker

Yes. This is Ryan on for Manav. Just curious if you can kind of flush out the macro challenges in Brazil, and why you think it's prudent to cut costs now versus -- and could you maybe talk about investments in the Distance Learning in the context of some of these cost reduction?

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

Hi, Ryan, this is JJ. The -- what we've observed during the first intake, as I said in my prepared remarks, is that the pricing environment has really not improved versus the second half of 2018. And so therefore, it is prudent to assume that that will continue during the second half. The cost actions in Brazil are really the next wave of our operating model transformation, which targets both the academic delivery, as well as our overall infrastructure.

As you may remember, this is a portfolio that still is going through the integration of the back office and the standardization of their practices across the portfolio. So this is a set of initiatives that we had in the pipeline, we just accelerated them. And then on the DL business, we continue to invest. This is a really going to be a source of growth for us in the future.

We're very encouraged by the launch of our new Go Digital platform and the impact it has had on really all the operating metrics. So we're clearly staying the course on that front.

Unknown speaker

Got it. Thanks. And then just on Chile, I believe the new superintendent comes in in May at some point. Just any updated thinking there in terms of the impact there or what the expectations you have for that country.

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

The plan remains the same. We have to comply with the new law by the end of May. We are working our existing contractual relationships with the not-for-profit institutions to be able to comply with the law. And are -- we are obviously in contacts with superintendents, regulation have not been issued yet.

But really no major change versus the fourth quarter of last year.

Unknown speaker

Got it. Thanks.

Operator

From Piper Jaffray, we have Peter Appert. Please go ahead.

Unknown speaker

Hi, everyone. This is Kevin in for Peter. My first question is about the Andean region, specifically Peru. Growth has been pretty impressive there, and I guess, I was wondering how sustainable you thought it was.

Have you been exploring more opportunities outside Lima?

Eilif Serck-Hanssen -- Chief Executive Officer and Director

Peru has been a very good market for us, and it continues to be. We have three brands in that market, the premium, the value and then the tech voc brand. Our growth has primarily been in the Lima city and the surrounding areas. So there is still significant growth opportunities for us with those three brands in Lima and adjacent areas, but of course, opportunities take those strong brands to the interior or the secondary cities.

I'd like to just note and recognize that the secondary cities in Peru are significantly smaller than Lima. But they are about half a dozen very interesting markets for us outside Lima that at the right time we will be entering into.

Unknown speaker

OK. Fair. Thank you. My second question is having to do with total enrollments in Mexico. I mean, year-end perspective, I guess, I was wondering how we should think about total enrollments, whether they'd be up, down or flat? Do you have any color on that?

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

Yes. This is JJ. We continue to see really a little bit of a Tale of Two cities in Mexico with our new tech brands continue to grow close to double digits and then the challenges remains with our more higher price institutions, UVM, where we've seen contractions in our total enrollment. So net-net, I think, you're looking at more or less flat dynamics when total enrollments is active in Mexico.

Unknown speaker

Thank you.

Operator

From BMO Capital Markets, we have Jeff Silber. Please go ahead.

Jeff Silber -- BMO Capital Markets -- Analyst

Thanks so much. I was just wanted to go back to your guidance update. I think it was Slide 12. Just so I understand, the only real change to guidance is just stripping out the impact of the sale of UniNorte.

Did you do -- make any other changes based on what you talked about in terms of Brazil?

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

No, we did not. You are correct. The only change to our guidance is reflecting the sale of UniNorte and the fact that for the second half of the year, they will not be part of our portfolio.

Jeff Silber -- BMO Capital Markets -- Analyst

OK. Great. And can you remind us in terms of the pending divestitures that you've already announced, what we should be expecting from this year? What will be leaving the portfolio and roughly when?

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

We're still -- we are on track for the asset sales that we've announced as part of our Q2 earnings in August of last year. We are still expecting to close our transactions for Spain and Portugal at the end of the second quarter. And we have line of sight into another -- our transaction in India and the others are progressing through the pipeline.

Jeff Silber -- BMO Capital Markets -- Analyst

OK. Great. And then -- sorry, just circling back to Brazil. You mentioned the pricing environment. Does that have anything to do with the Fies concept? Is it more of a competitive issue?

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

No. It's more a competitive issue. There is obviously in our reported numbers really two elements that are diluting what you could derive out of our financials. The first one is the continued contraction of the CS program as graduations are much lower than the new enrollments and that accounts for about 200 basis points.

And then of course, the dilution of our Distance Learning business, which is at about 25% of the price points of our face-to-face. So as we continue to grow fairly aggressively, you will see dilution in the overall revenue divided by total enrollment.

Eilif Serck-Hanssen -- Chief Executive Officer and Director

I think, Jeff, the one thing I would add to that is, with the unwinding of Fies program has caused significant amount of excess capacity in the market. That combined with very challenging economic condition over a prolonged period of time is forcing the consumers to be fatigued. So a fatigued consumer with excess capacity is causing unfavorable pricing power in that market.

Jeff Silber -- BMO Capital Markets -- Analyst

OK. Really appreciate the help. Thanks so much.

Operator

From Stifel, we have Shlomo Rosenbaum. Please go ahead.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Hi. Thank you very much. I just want to ask you if you could just parse a little bit in terms of the EBITDA expectation for next quarter where you're talking about it being range of negative 2% to plus 2%. Would you be able to just parse a little bit kind of the headwinds in terms of accelerating some of the programs in Brazil? The cost takeout, maybe some of the stranded costs that you're still working down from some of the divestitures.

And anything else that we should be considering in terms of kind of growth off of that base?

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

Hi. Shlomo, this is JJ. The second quarter will reflect more or less the same conventional dynamics that we've seen in the first quarter. As said in my prepared remarks because of the way the work was planned and designed, there is a lot more cost takeouts in the second half than the first half.

With those additional round of really initiatives that we've taken on the cost side in light of the environments we've seen Brazil, that obviously skews the second half even more so versus the first half. From a growth perspective, the guidance that we issued as for fourth quarter remains the same, 2% to 3% on the revenue side and 2% on total enrollments. Obviously, the dynamics by selling this all will be different.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

OK. And then, JJ, could you just explain a little bit the footnote on Slide 10 about a cash interest payment being reclassed under free cash flow. It just wasn't clear to me exactly what the point was? $12 million interest payment in 1Q term loan or something kind of that was accrued from 4Q?

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

Of course, first of all, one clarification. The $12 million is not taking out of the free cash flow calculation. It's just moved from one bucket to another. So it was moved from basically net cash interest to operations just because it was more working capital change.

So while we want to reflect on the chart, which is the $14 million associated for net cash interest is more the reflection of the change in the average debts that we have between first-quarter '19 and first-quarter '18. So about $700 million reduction in net debt. If you take 8% to 9% interest and divide it by four, you get to your $14 million.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

OK. So it was not a change in the free cash flow calculation like what's coming off the bat, the cash flow statement looks the same per se, just it's the bucket of where you're classifying that?

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

That is correct.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

OK. Thank you.

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

It was really timing between fourth quarter and first quarter.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

OK.

Operator

From J.P. Morgan, we have Marcelo Santos. Please go ahead.

Marcelo Santos -- J.P. Morgan -- Analyst

Hi. Good morning. Thanks for taking the questions. The first question is on portfolio management.

Strategically, does it make sense to keep Australian and Hawaiian operations? I mean, it's a different time zone, very far from everything else. I mean, so why does it help to keep that operation? And the second question would be, if you could provide a little bit more detail on the Chilean growth, which was also good and I wonder where is that growth coming from? Which of the brands are attracting more growth in that country?

Eilif Serck-Hanssen -- Chief Executive Officer and Director

Hey, Marcelo, this is Eilif. On Australia, I hear your comments, we are doing regular portfolio reviews and we are always assessing what is the right portfolio in the Laureate network. Beyond that, I'm not going to comment on any specific institution or market, but we are clearly focused on the scale. We're clearly focused on making an impact in the markets where we are doubling down on.

In terms of Chile growth, we have articulated in the past that we are very prudent in allocating any incremental capital to Chile. So we are focused on really the online and hybridity growth in that market. So we are delivering fairly decent growth rates through getting better utilization of existing capacity. We're also getting growth by optimizing our mix, and we have a terrific team in place that you see all of those levers to improve the student experience while at the same time also accommodating the increased demand for our products.

So it's really in all of the segments of where we are operating in Chile.

Marcelo Santos -- J.P. Morgan -- Analyst

OK. So there's no more consideration of technical vocational, there is no different growth rates in these segments between university and technical vocational?

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

I think, the performance is pretty good in all of our brands. The technical vocational did well and it's right to chase quality in our premium and value brands in Chile was also noted this intake.

Eilif Serck-Hanssen -- Chief Executive Officer and Director

It's really across-the-board.

Marcelo Santos -- J.P. Morgan -- Analyst

Great. Thank you. Thank you very much.

Operator

[Operator instructions] And from Goldman Sachs, we have Thiago Bortoluci. Please go ahead.

Thiago Bortoluci -- Goldman Sachs -- Analyst

Yes. Hi, team. Good morning and thanks for taking our questions. I would like to understand a little bit more the drivers of your EBITDA margin in Brazil.

Your margin here was once again negative and significantly lower year on year. I understand this is a seasonally weak quarter, but could you break down the evolution of gross margin in the SG&A ratio in the region? And within the gross margin, I understand the dilution from a ticket perspective, but the scaling up of Distance Learning volumes shouldn't have helped margins here? Also still on the EBITDA margin discussion, looking to the medium term, how does this trend fit with your guidance of pursuing 20% margin here in the region? And if -- shouldn't this impact the timing of this long term -- this medium-term guidance at all, or are you keeping this perspective? And if I may a final one, would the sale of UniNorte here in Brazil imply that other assets in the region are also up for sale? Those are all the questions.

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

I'll start with the margin dynamics mix, and I'll let Eilif comment on the portfolio management of Brazil. First of all, on margin in Brazil, margin was down. As you know, the first quarter is seasonally low from a P&L perspective, so it's a little bit difficult to really look at dynamics. But in general, as we've highlighted, many of our cost actions in 2019 is really skewed toward the second half, and so that's why in light of the pricing environments margins in Brazil are weaker in the first quarter than they would be for the total year.

That's point number one. Point number two on the DL side, the dynamics are such that we're still investing in getting this business up to scale, in activating polos, investing in new programs. And so therefore, the contribution of the Distance Learning, particularly in the first quarter, is really not material to our bottom line dynamics, but it's certainly something that we're planning on changing in the future. With that, I'm going to pass it on to Eilif on the portfolio decisions.

Eilif Serck-Hanssen -- Chief Executive Officer and Director

Thiago, in terms of the UniNorte sales, UniNorte is located in Manaus, and that is 3,000 kilometers from our nearest other institution in Brazil. So consistent with the portfolio rationalization that we have done across the network, we want to focus on the markets where we have a right to win, where we have a strong presence, where we have scale. And so we looked similarly within the Brazil portfolio and applied the same principles. And that was why we explored and later executed on a SPA to sell our operations in Manaus.

As for all the portfolio actions, we are continuing to review all of our institutions in all of our network to make sure that it has a good strategic fit, and beyond that, I'm not going to comment.

Thiago Bortoluci -- Goldman Sachs -- Analyst

That's clear. Thanks very much, Eilif and JJ.

Eilif Serck-Hanssen -- Chief Executive Officer and Director

Just one other thing, Thiago. I did note, I think, on a prior call that we are excited about Brazil, we think we have a strong presence in Brazil, we have a huge opportunity in Brazil, but clearly, the near term for Brazil is going to be to strengthen the network, consolidate our back office and mid-office and improve the operating leverage and drive margin performance despite the challenging pricing environment. So that's going to be our absolute priority in Brazil for the foreseeable future.

Thiago Bortoluci -- Goldman Sachs -- Analyst

That's clear. If I may just a final follow-up on margins in Brazil. Does part of your cost revision initiatives involve somehow reducing the teaching staff or will it be more focused on SG&A?

Eilif Serck-Hanssen -- Chief Executive Officer and Director

We're going to be focusing on improving the quality at scale and all of the levers in the business is being reviewed to accomplish that. So we are going to evaluate the best way to deliver strong academic quality. We are looking at how to get scale in the product development, and of course, we are consolidating systems, which is going to improve the student experience, but also the effectiveness of the overall academic delivery. So it's all elements of the cost structure.

Thiago Bortoluci -- Goldman Sachs -- Analyst

That's clear. Thank you very much, Eilif.

Operator

And we have no further questions at this time.[Operator signoff]

Duration: 32 minutes

Call participants:

Adam Morse -- Senior Vice President, Corporate Finance, and Global Treasurer

Eilif Serck-Hanssen -- Chief Executive Officer and Director

JJ Charhon -- Executive Vice President of Finance and Chief Financial Officer

Unknown speaker

Jeff Silber -- BMO Capital Markets -- Analyst

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Marcelo Santos -- J.P. Morgan -- Analyst

Thiago Bortoluci -- Goldman Sachs -- Analyst

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