Laureate Education Inc
NASDAQ:LAUR
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Laureate Education Inc
Earnings Call Analysis
Q2-2024 Analysis
Laureate Education Inc
In the second quarter of 2024, Laureate Education reported a noteworthy performance, with revenue reaching $499 million and adjusted EBITDA at $187 million. This surpassed previous guidance, demonstrating growth in new and total enrollment volumes, which rose by 6% and 5% year-over-year, respectively. Particularly strong performance in Mexico was a significant driver, with a year-over-year revenue increase of 10% and an adjusted EBITDA boost of 21%. Overall, for the first half of 2024, revenue and adjusted EBITDA grew 5% and 1%, respectively, but when adjusted for academic calendar timing, both metrics showed a 7% increase compared to the previous year.
Mexico continues to be the star performer for Laureate. The company saw new enrollments increase by 4%, and total enrollments rose by 9% year-over-year. This robust growth was fueled by the popularity of fully online programs aimed at working adults. The year-to-date figures show a revenue increase of 9%, and when adjusted for timing, this jumps to 11%. The adjusted EBITDA has also shown impressive growth, up by 16% year-to-date or 25% when accounting for the academic calendar timing. The company is aiming to expand margins in Mexico to surpass 25% as part of its mid-range guidance, aligning with these strong financials.
In contrast to Mexico's strong growth, Peru is experiencing a more challenging environment. New enrollments fell slightly by 2%, while total enrollments saw a small increase of 1%. Revenue in the second quarter grew by 5%, although adjusted EBITDA only increased by 3%. The economic backdrop has led to a cautious stance, with the company providing discounts and scholarships to support students, resulting in flat pricing for the first half of 2024. However, there is optimism for a macroeconomic recovery in Peru, which is expected to drive stronger growth moving into 2025.
Laureate has maintained a robust balance sheet, reporting $129 million in cash against $233 million in gross debt, which translates to a net debt of $104 million. This positions the company favorably with a leverage ratio of less than 0.25 turns. The company is also committed to returning capital to shareholders, having repurchased approximately $72 million of its common stock under a previously announced $100 million share repurchase program, illustrating confidence in its financial health and future growth.
Looking ahead, Laureate has maintained its guidance for 2024, expecting total enrollments in the range of 467,000 to 473,000 students, reflecting a growth of 4% to 5%. Revenue is expected to be between $1.551 billion and $1.566 billion, reflecting a growth of 5% to 6%. Adjusted EBITDA guidance is set between $441 million and $451 million, indicating a 5% to 8% growth. The company anticipates significant margin expansion in the second half of 2024, driven by a return to growth in Peru and improvements in operational efficiency.
With the recent elections in Mexico, Laureate remains optimistic about potential regulatory changes under the incoming administration. The new president's focus on public-private collaboration and fiscal prudence indicates a likely supportive environment for private higher education. Laureate views this as a promising opportunity to enhance its role in the Mexican education landscape, especially given the anticipated partnership opportunities that align with the country's economic growth strategies.
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Good day, and thank you for standing by. Welcome to the 2024 Second Quarter Laureate Education Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Adam Morse, Senior Vice President of Corporate Finance. Please go ahead.
Good morning, and thank you for joining us on today's call to discuss Laureate Education's Second Quarter 2024 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.
Non-GAAP measures that we discuss including, and among others, adjusted EBITDA and its related margin, adjusted EBITDA to unlevered free cash flow conversion, total debt, net of cash and cash equivalents and free cash flow are detailed and reconciled where applicable 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. Today, I am pleased to report solid operating performance for the second quarter. We remain on track to deliver on our 2024 commitments on a constant currency basis. In addition, our strong balance sheet and significant cash flow generation support our continued emphasis on returning capital to shareholders. For the first 6 months of this year, we have repurchased over $72 million worth of shares. Later in our prepared remarks, Rick will discuss the impact from the recent weakening of the Mexican peso, which is causing us to make a slight downward adjustment to our outlook on a spot FX basis.
The market dynamics remain favorable for private higher education in both of our geographies. Mexico continues to present a compelling growth story driven by robust manufacturing and construction sectors, higher minimum wages, record-low unemployment and increased consumer spending.
In addition, nearshoring is further bolstering growth prospects. Presidential elections were held during June in Mexico and early indicators from the new administration are encouraging. The incoming Sheinbaum administration is emphasizing fiscal prudence, industrial policy, public-private collaboration, increased digitalization and enhanced security as key pillars to strengthen the Mexican economy.
The new President will assume office on October 1. The market anticipates some possible foreign exchange volatility during the transition period, which we will be monitoring closely. Peru is already seeing a recovery from the economic downturn, which began last year. Peru's economy expanded more than expected for the second straight month in May. And both the Central Bank and the Finance Ministry are now expecting GDP growth of around 3% this year compared to a 0.6% contraction last year.
We anticipate this macroeconomic recovery to benefit our smaller secondary enrollment intake in September and more fully get us back to normalized growth rates in 2025. Our growth agenda is supported by our leading brands and steadfast commitment to academic excellence and innovation. I'm proud to announce that recently UVM in Mexico was ranked the #2 private university in the country in the latest Guía Universitaria rankings by Reader's Digest.
And in Peru, UPC was ranked the second best institution in the country for human medicine by the Times Higher Education World University Rankings, while maintaining its number one, overall university ranking by Morrocco. In addition, we are very proud and excited for the 9 students and 3 graduates from UVM and UPC who are representing their countries as the Olympic and Power Olympic games in Paris this summer. We wish them all the best, and I know they will represent their countries well, showcasing their dedication to supporting excellence on the international stage.
I will now turn the call over to Rick Buskirk for a more detailed financial overview of the second quarter and year-to-date performance as well as further details on our updated 2024 full year outlook. Rick?
Thank you, Eilif. As a reminder, campus-based higher education is a seasonal business, although the second 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. In addition, the timing of the start of our classes can shift year-over-year depending on various factors, such as when holidays occur. This, in turn, affects the timing of revenue recognition and quarter-over-quarter comparability.
In 2024, the beginning of class is for working adult programs in Peru and health science programs in Mexico started later versus 2023. This will shift approximately $13 million of revenue and $11 million in adjusted EBITDA from the first quarter to the second half of the year. The second quarter was not affected on a consolidated basis. However, there were some minor timing impacts by segment that offset each other. I will provide additional details on the timing impact as I discuss our operating results.
Let me now move to the second quarter performance, starting on Page 10. Following the trends we experienced in the first quarter, we continued to see strong growth in Mexico and resiliency in Peru. New and total enrollment volumes increased 6% and 5%, respectively, when compared to the prior year quarter with growth led by Mexico. Revenue on a seasonally strong second quarter was $499 million, and adjusted EBITDA was $187 million. Both metrics were ahead of the guidance provided 3 months ago with adjusted EBITDA outperformance aided by timing of expenses. On an organic constant currency basis, revenue for the second quarter was up 7% year-over-year and adjusted EBITDA increased by 6%.
When combined with the first quarter, on an organic constant currency basis, our overall performance for the first half of 2024 resulted in revenue and adjusted EBITDA growth of 5% and 1%, respectively. Adjusting for timing of the academic calendar, both revenue and adjusted EBITDA grew by 7% versus the prior year period.
Let me now provide some additional color on the performance of Mexico and Peru, starting with Page 13. Please note that all comparisons versus prior year are on an organic and constant currency basis. Let's start with Mexico, where both our premium and value brands are contributing to top line growth and improved levels of profitability. Mexico's new enrollments increased by 4% through June versus the prior year period and were up 6% through the end of the enrollment cycle that was completed in July. Growth was led by working adult-focused fully online programs. Total enrollments were up 9% versus June of the prior year due to the favorable primary intake last fall and growth in new enrollments.
For the second quarter, Mexico's revenue grew 10% versus the prior year period due to strong volume growth and adjusted EBITDA increased 21%. On a year-to-date basis, Mexico's revenues grew 9% or up 11% when adjusted for timing of the academic calendar. This growth was driven by a 9% increase in average total enrollments and 2% of price mix.
Pricing at the branded product level was at or above inflation for our traditional students offset from a mix perspective by higher growth and working adult and fully online. Adjusted EBITDA increased 16% year-to-date versus the prior year period or 25% when adjusted for timing of the academic calendar. This was driven by revenue flow-through and productivity gains.
We believe that our strategy to expand margins in Mexico to above 25% over our targeted mid-range guidance period is progressing well.
Let's now transition to Peru on Slide 14. As a reminder, the primary enrollment intake for Peru was completed this past March and results were in line with our expectations. New enrollments declined slightly by 2% for the intake cycle, while total enrollments increased by 1% compared to the same period of prior year. For the second quarter, Peru's revenues grew 5% versus the prior year period, and adjusted EBITDA increased 3%. On a year-to-date basis, Peru's revenues grew 1% or up 3% when adjusted for timing of the academic calendar.
Growth was driven by a 1% increase in total enrollments and 2% of price mix. As discussed during our prior call, Peru's 2023 economic downturn had lingering effects into the first half of this year. This led to relatively flat primary enrollment intake volume. Additionally, we provided essential support to our students during this recovery in the form of enhanced discounts and scholarships.
This resulted in essentially flat year-over-year pricing for the first half of the year. Following the anticipated macroeconomic recovery during the second half of this year, we expect a return to stronger growth in 2025.
On a year-to-date basis, adjusted EBITDA decreased by 7% compared to the prior year or down 4% when adjusted for timing of the academic calendar. The decline in adjusted EBITDA was a result of enhanced discounts and scholarships that provided support to our students during this recovery period as well as higher levels of bad debt provisioning resulting from the softer macroeconomic conditions in the first half of the year. Our target run rate margin profile for Peru is approximately 40%. We do expect full year margins in 2024 to be slightly below that level due to the macroeconomic factors just discussed.
Let me now briefly discuss our balance sheet position. Laureate ended June with $129 million in cash and $233 million in gross debt, resulting in a net debt position of $104 million. Our balance sheet remains strong with less than a 1/4 turn of net leverage. Gloria repurchased approximately $72 million of its common stock during the first 6 months of the year under the previously announced $100 million stock repurchase program, we continue to prioritize return of capital for our shareholders.
Moving on to our outlook for 2024, starting on Page 16. We are maintaining the constant currency full year revenue and adjusted EBITDA guidance that was previously provided during our first quarter earnings call on May 2. We are adjusting our outlook on a reported basis to reflect updated foreign currency rates impacted by recent volatility in the Mexican peso. Based on current foreign exchange spot rates, we expect our full year 2024 results to be as follows: total enrollments to remain in the range of 467,000 to 473,000 students, reflecting growth of 4% to 5% versus 2023.
Revenue is to be in the range of $1.551 billion to $1.566 billion, reflecting growth of 5% to 6% on an as-reported and organic constant currency basis versus 2023. Adjusted EBITDA is to be in the range of $441 million to $451 million reflecting growth of 5% to 8% on an as reported and 6% to 9% on an organic constant currency basis versus 2023.
We do anticipate significant margin expansion during the second half of 2024 compared to the prior year. This is anticipated to be driven by the return of growth in Peru cycling out of the academic calendar timing impact from the first half of the year and recognizing benefits from our continued operating efficiency initiatives.
We expect adjusted EBITDA to unlevered free cash flow conversion to be in the high 30% range on a reported basis for 2024. 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 onetime Legacy Laureate payments of approximately $45 million, primarily related to deferred taxes. A large portion of that was action during the second quarter, while the remainder will occur in the second half of the year.
After these 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 and our stated target profile.
Now moving to the third quarter guidance. For the third quarter of 2024, we expect revenue to be in the range of $358 million to $362 million, adjusted EBITDA of approximately $69 million to $73 million, which includes the shifting of expenses from the second quarter to the third quarter. Eilif, I am now handing it back to you for closing comments.
Thank you, Rick. I remain confident as we enter the second half of 2024 and our next major enrollment intake cycle. Mexico continues to perform very well, and we are encouraged by the macro recovery we are seeing in Peru. We are in an enviable position as the leading high education company in Mexico and Peru, which we believe to be the 2 most attractive private education markets in Latin America.
We continue to see favorable sector growth momentum in both markets. This growth is driven by the expansion of the middle classes, which in turn is fueling the rising participation rates in higher education. We are well positioned to serve this growth with 5 highly differentiated brands, all with leading positioning in their respective market segments. We continue to focus on product innovation through program expansions, the rollout of our digital product portfolio for working adults as well as targeted campus expansions in new and adjacent cities.
Additionally, our operating cadence enabled by our best-in-class educational practices has resulted in a profitable, sustainable and capital-light business model with strong cash flow generation. I'm excited about our future. Operator, that concludes our prepared remarks, and we are now happy to take any questions from the participants.
[Operator Instructions] Our first question comes from the line of Lucas Nagano of Morgan Stanley.
I have 2 questions. The first is related to the results versus the guidance in Q2. There were both the guidance even with the impact on MXN and also the shift in academic calendar in Peru, you mentioned. Can you give more color on what drove this better-than-expected performance? And the second question is related to regulation in Mexico with the government transition, what has the administration commented about private high education? Do you expect any policy change or should things stay similar to the current condition?
Lucas, Rick will take the first question, and I'll address the Mexican regulations.
Sure. So Lucas, on your first question about the operational side, yes, we had a beat in the second quarter versus guidance. About 50% of that was operational related, around $6 million on both sides of the revenue and the adjusted EBITDA front. On the revenue side, the outperformance was driven by lower intra-cycle attrition and some timing of other revenue. And on the adjusted EBITDA, that was aided by the timing of some of the expenses that shifted to Q3, including some lease exit costs. Those costs will shift to the third quarter and are reflected in our guidance for Q3. That's why Q3 is down slightly year-over-year.
Lucas, can you hear us? We might have a technical issue here.
Yes, I can hear you.
Okay. Perfect. Thank you. Continue, Rick.
Lucas, I'll pause there and see if that addressed your questions.
Yes. Yes, that helps.
Great. And moving on to the Mexican reservation. Let me just give you some context. So the presidential -- president-elect Sheinbaum and the MORENA party won decisive victories during the elections in June. And the market was surprised by the magnitude of MORENA's victory, which is opening up for the possibility of judicial reforms that AMLO has advocated for. And in summary, that is the reason why the Mexican peso has weakened by about 8% since the election.
That said, we go to your specific questions around policy priorities. Laureate is very encouraged by the messaging that we have heard from president-elect Sheinbaum post-election. She has emphasized the following 4 key policy priorities for her president. Number one is fiscal prudence with a goal to reduce the '25 -- the 2025 budget deficit to 3% of GDP from currently at 5.5% to 6% deficit in 2024, which means that her ability to stand on public programs are going to be limited, and we believe that, that is going to cause a strong collaboration with private operators, including in higher education.
Second priority is to modernize her industrial -- modernize Mexico's industrial policies. And clearly there, it looks like she want to take advantage of the near-shoring opportunity and lift the growth rate for the Mexican economy, which is very encouraging for many sectors, including the education sector, of course, because to enable that, this human capital equation is critically important.
Thirdly, she has made a strong statement to strengthen the public-private collaboration in key sectors such as energy and infrastructure. And I think the partnership that the Mexican government has had with education providers over the last several years could be a very good module as you extend that public-private collaboration.
And then last, but not least, she's very focused on enhancing security and strengthen law and order, which is going to be a very important enabler for foreign investments into Mexico.
So in summary, Laureate believes that the quality private higher education players like Laureate, can and will play a major role in the execution of these policy priorities. We look forward to be working with the Sheinbaum administration, and we remain committed to expanding access to quality affordable higher education, which will significantly contribute to the modernization and the growth of the Mexican economy. I'll pause there and see if that addressed your question.
[Operator Instructions] I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.