Laureate Education, Inc. (NASDAQ:LAUR) Q1 2023 Earnings Conference Call May 4, 2023 8:15 AM ET
Adam Morse – Senior Vice President, Corporate Finance
Eilif Serck-Hanssen – President and Chief Executive Officer
Rick Buskirk – Chief Financial Officer
Conference Call Participants
Jeffrey Silber – BMO Capital Markets
Good day and thank you for standing by. Welcome to the Laureate Education Incorporated First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] 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 begin.
Good morning and thank you for joining us on today’s call to discuss Laureate Education’s first quarter of 2023 results. Joining me on the call are Eilif Serck-Hanssen, President and Chief Executive Officer, Rick Buskirk, Chief Financial Officer.
Our earnings press release is available on the Investor Relations section of our website at laureate.net. We’ve also posted a supplementary presentation to the website, which 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 disposed 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 among others, adjusted EBITDA and its related margin, total debt, net of cash and free cash flow are also detailed and reconciled to their GAAP counterparts in our press release or supplementary presentation.
Let me now turn the call over to Eilif.
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. 2023 is off to very good start. New enrollments increased 17% year-over-year and total enrollment were up 8%, continuing the growth momentum that we have been experiencing over the past two years.
In addition to favorable volume growth, pricing for the intake cycle was also in-line with our expectations. We are very encouraged by the strength of the first quarter intake, despite the headwinds from the macroeconomic conditions. It highlights that the consumers in Mexico and Peru are prioritizing higher education when allocating the discretionary spending, even the life-changing impact of such education.
Today, we are announcing an upward revision to our full-year 2023 guidance. Notably, we have increased the lower end of the range for revenue and EBITDA on a constant currency basis following the strong Q1 results, as well as increasing our overall guidance to reflect more favorable foreign currency rate.
Our strategic decision to focus exclusively on the high growth markets of Mexico and Peru continued to deliver strong results for Laureate. Specifically, we are benefiting from three structural tailwinds. First, the steady increase in participation rates, which drives robust growth in demand for higher education in Mexico and Peru. The enabler for this increased demand is a significant wage premiums earned by people with higher education as well as the affordable cost to get such degree.
Secondly, the private sector is critical for the advancement of higher education, given limited government resources. On a combined basis, over 50% of the university fees in Mexico and Peru are provided by the private sector.
And the private sector accounts for the majority of the growth in the market. And thirdly, there is significant need for upskilling of labor in both Mexico and Peru. Laureate is a recognized leader for affordable, quality higher education in Mexico and Peru and we distribute our products through face-to-face, online and hybrid delivery modes.
We remain committed to striving to achieve a financial profile within the next three to five years, in which, first and foremost, we maintain our organic revenue growth momentum of at least 8% to 10% on a constant currency basis, secondly, pursue capital light expansion strategy, where 40% to 60% of our taught hours are delivered online and thus resulting in capital expenditure as a percentage of revenue to be below 5% and finally, deliver adjusted EBITDA growth in the low teens on a constant currency basis.
This, in turn, will help drive the adjusted EBITDA margin to over 30% on a consolidated basis for Laureate and adjusted EBITDA to unlevered free cash flow conversion of 50% or more.
All success continues to be underpinned by our unwavering commitment to academic quality and innovation, along with industry-leading approach to designing strong academic offerings and delivering attractive student outcomes.
Laureate is committed to make a positive impact to society. We recently published our 2022 impact report and I encourage you to go to our website and download a copy to learn more about the impact that our students, faculty and institutions are having on their communities in Mexico and Peru.
Just to touch on a few highlights. UVM and UNITEC have both been recognized as socially responsible companies by the Mexican Center of Philanthropy for the 14th and 13th consecutive year, respectively. UPC is among Peru’s top two most sustainable universities according to the 2022 MERCO ESG Responsibility Ranking, which evaluates Latin America’s top 100 sustainable companies based on environmental, social and corporate governance criteria.
UVM was the only university recognized in the 2022 Companies Transforming Peru initiatives by providing over 44,000 preventive health services to Puente Piedra, one of its poorest communities in Lima, Peru. We are very proud of all of our institutions and the positive insights they are having.
That concludes my prepared remarks, and I will now turn the call over to Rick Buskirk for more detailed financial overview of the first quarter performance as well as further details on our improved 2023 full year outlook. Rick?
Thank you, Eilif. As a reminder, campus based 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 but generate higher revenue and adjusted EBITDA for the year.
Let’s start with page 12, which highlights our operating and financial performance for the first quarter. During the intake cycle just completed, we continued to see resiliency in demand and pricing despite the challenging macroeconomic conditions.
New enrollment and total enrollment increased 17% and 8%, respectively, when compared to the prior year quarter, with strong growth in both markets and across all five brands. In addition to strong volume growth, pricing for the intake was in line with our expectations. Specifically, pricing recognized in both markets was in line to cover our realized cost of inflation on our expense structure.
Let’s now move on to the financial results. Revenue in the seasonally low first quarter was $251 million, and adjusted EBITDA was $33 million. Both metrics were ahead of the guidance we provided three months ago. Revenue and adjusted EBITDA outperformance was driven by higher new enrollment volumes as well as some timing items.
On an organic constant currency basis, revenue for the first quarter was up 12% year-over-year. Adjusted EBITDA for the first quarter was up 3% due to revenue flow-through and cost efficiencies, partially offset by return to campus expenses and fixed costs during a largely out-of-session quarter.
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 quarter are on an organic and constant currency basis. Let’s start with Mexico. The first quarter represents a smaller secondary intake for Mexico. Their large intake occurs each September and follows the Northern Hemispheric calendar.
During the first quarter, Mexico’s new enrollments increased 22%. We saw double-digit growth across both brands as well as across both our campus-based and fully online programs. Total enrollments were up 9% versus the first quarter of prior year due to the favorable primary intake last fall as well as the robust new enrollments realized during the first quarter.
Mexico’s revenue for the first quarter increased 16% compared to the prior year period due to a strong value growth. Adjusted EBITDA for the first quarter was up 17% year-over-year with productivity gains more than offsetting increased costs for return to face-to-face operations at our campuses.
Let’s now transition to Peru on slide 15. The first quarter represents the primary intake for Peru as they are a Southern Hemispheric institution. During the quarter, Peru’s new enrollments increased 14%, with all three brands contributing double-digit growth.
Total enrollments were up 8% versus the first quarter of prior year. Peru’s revenue for the seasonally low first quarter increased 6% year-over-year. Please note that the first quarter of the prior year benefited from a high level of summer classes as students who stepped out during COVID were catching up with their study.
Adjusted EBITDA for the quarter was a loss of $6 million primarily due to increased costs for return to face-to-face operation at our campuses and higher fixed costs during a largely out-of-session summer period.
Let me now briefly discuss our balance sheet position. Laureate ended March with $131 million in cash and $266 million in gross debt for a net debt position of $136 million. Our strong balance sheet position equates to less than 0.5 turn of net leverage.
Moving on to our improved outlook for 2023, starting on page 17. We are increasing the overall guidance range for revenue and adjusted EBITDA to reflect more favorable currency rates. We are also raising the low end of the range on a constant currency basis by $10 million for revenue and $2 million for adjusted EBITDA as a result of our strong first quarter intake results.
Based on current spot FX rates, we now expect full year 2023 results to be as follows. Total enrollment to continue to be in the range of 447,000 to 455,000 students, reflecting growth of 6% to 7% versus 2022, revenues to now be in the range of $1.412 billion to $1.427 billion, reflecting growth of 14% to 15% on an as-reported basis and 9% to 10% on an organic constant currency basis versus 2022, adjusted EBITDA to now be in the range of $398 million to $406 million, reflecting growth of 17% to 20% on an as-reported basis and 13% to 15% on an organic constant currency basis versus 2022.
We are maintaining an adjusted EBITDA margin improvement of 100 basis points at the midpoint of our guidance. The main drivers of our anticipated margin improvement are increased revenue flow from volume growth, efficiency initiatives primarily in Mexico and further reduction in our corporate expenses. Partially offsetting those drivers is the final material annualization effect of return-to-campus expenses, which will impact the first half of 2023.
As a result, the net margin improvement in 2023 are expected to be realized in the second half of the year once we lap those return-to-campus expenses. Additionally, for 2023, we continue to expect adjusted EBITDA to unlevered free cash flow conversion to be in the low to mid-40% range, aided by our margin improvement and continued capital-light growth model.
Finally, for our full year 2023 guidance, there are two important points regarding seasonality that I want to call to your attention. First is regarding the first half versus second half revenue expectations. In Peru, we anticipate revenue growth for the first half and second half of 2023 a similar year-over-year growth rate.
In Mexico, however, we anticipate revenue growth for the first half of 2023 to be higher than the second half. This is driven by last year’s very strong primary new enrollment intake that was partially aided by students returning from COVID step-outs as well as timing for other revenue, including graduation fee. We expect to see a more normal first and second half growth pattern for Mexico in 2024.
Lastly, as discussed during our prior earnings call, our cash flow seasonality in 2023 will differ from what we experienced in 2022 with a heavier weighting towards the second half of the year due to the timing of tax payments in the first quarter and the seasonality of capital expenditures.
Now moving to the second quarter guidance. For the second quarter of 2023, we expect revenue to be in the range of $433 million to $440 million, adjusted EBITDA to be in the range of $147 million to $151 million, which includes the final material annualization impact from return-to-campus expenses.
That concludes my prepared remarks. Eilif I am handing it back to you for closing comments.
Thank you, Rick. I continue to be very encouraged by the trends in our business. Laureate is experiencing positive growth momentum across both markets and in all of our brands. We are well positioned to capitalize on the growth opportunities in Mexico and Peru through leveraging our leading brands and strong digital capabilities and through our focus on academic quality and student outcomes.
Operator, that completes our prepared remarks, and we’re now happy to take any questions from the participants.
Thank you. [Operator Instructions] Our first question will come from the line of Jeffrey Silber with BMO Capital Markets. Your line is now open.
Thank you so much. My first question is actually a two-parter. You’ve been posting very impressive strong new enrollment growth. Can you share with us some data even at a high level how the market is growing? And I’m assuming you’re gaining share. And if that’s the case, what do you attribute that to?
Hey, Jeff, this is Eilif. Good morning and I apologize to everyone for static on the line during our prepared remarks. We have now switched lines. So hopefully, you can hear us better now.
In terms of your question for market growth, the market is growing because of the increasing stock of 18 to 24 year old as well as the increasing participation rate, i.e., the percentage of 18 to 24 year old that are participating in higher education increasing. That drives 2% to 3% growth in the market.
Then the second big driver for our growth is online expansion, where Laureate is absolutely the leader in digital education in both Mexico and Peru. And that creates new market opportunities for us. We’re really expanding the market because we are serving customers that wouldn’t otherwise have access to quality higher education without that mode of delivery.
And then I would say, to your point, we are also taking share in the traditional undergraduate segment. We have superior brands in Mexico and Peru, both in the premium and traditional space as well as the value brand segment. And we are also the innovation leader in terms of launching new product and product expansions, which are enabling us to take market share.
Okay. That’s helpful. And then on online, I know you’ve got a goal to get to 50% to 60%. Roughly, where are you and how long you think it will take you to get to that goal?
We are within that — all of our universities are within that 40% to 60%, and we are averaging just below the midpoint.
Okay, that’s helpful. I’ll jump back in the queue. Thanks so much.
Thank you. [Operator Instructions] At this time I’m showing no further questions at this time. I would now like to end the conference call. Thank you for your participation today. You may now disconnect. Everyone, have a wonderful day.
Thank you all.
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