Laureate Education Inc
NASDAQ:LAUR
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Laureate Education Inc
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Welcome to the Fourth Quarter 2019 Laureate Education Inc. Earnings Conference Call. My name is Paulette and I will be your operator for today’s call. [Operator instructions] I will now turn the call over to Adam Morse, Senior Vice President of Finance and Treasurer. You may begin.
Thank you, operator. Hello, everyone and thank you for joining us on today’s call to discuss Laureate Education’s fourth quarter and year end 2019 results. Joining me on the call today are Eilif Serck-Hanssen, President and Chief Executive 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 to the website which we will be referring to during today’s call. This call is being webcast and a complete recording will be available after our 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 Form 10-K filed with the U.S. Securities and Exchange Commission this morning. 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, adjusted EBITDA margin 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.
Thank you, Adam and good morning everyone. I am very pleased to report strong fourth quarter results that rolled out a very successful year for Laureate. Both margins and free cash flow performance came in ahead of initial expectations and we are delivering on our commitments to investors with a simplified business model, improved capital structure and focus on shareholder value creation. In the past 2 years, we have significantly transformed our organization by focusing on large markets where we have scale and established in-country networks. This strategy has resulted in strong operating platforms within each country and the ability to leverage shared infrastructure, technology, curricular and operational best practices within those country networks.
The operating performance improvements have been tangible. Over the past 2 years, we have increased margins by approximately 2 percentage points and the business is now generating strong and sustainable free cash flows. Both these metrics, along with other important key performance indicators, are anticipated to further improve during 2020. In addition, following the completion of the asset sales and loans over the past 2 years, our leverage profile is now below 2x. This allowed us to reassess our capital allocation strategy and pivot towards investments that maximize shareholder value creation. Consequently, during 2019, our Board approved a total of $300 million in share repurchases, all of which have now been fully executed.
Although we have made significant progress, management believes further value can be unlocked for our shareholders. We announced on January 27 our decision to explore strategic alternatives for each of our business units. This strategic review will help us determine if we can accelerate our path to value creation for our shareholders. We have improved our company-wide operating performance through significant cost and efficiency initiatives over the past 2 years and we are thus taking these strategic actions from a position of strength. Specifically, we have already initiated exploratory sales processes for our businesses in Peru, Mexico, Australia and New Zealand and we are actively preparing similar processes to evaluate options for all the business units. As we progress on our strategic plans, we will provide timely updates as appropriate.
I will now turn the call over to JJ for a more detailed financial overview of the fourth quarter, full year 2019 and our outlook for 2020.
Thank you, Eilif. Before I go over our reported results, let me remind everyone that campus-based higher education is a seasonal 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 are out of session for most of those months. Conversely, the second and fourth quarters generate the majority of the revenue and adjusted EBITDA for the year, but are not large enrollment intake periods.
Let me now go over the highlights of our performance in the fourth quarter starting on Page 8. Revenue in the fourth quarter was $883 million and adjusted EBITDA was $244 million. On a comparable basis and at constant currency, our revenue and adjusted EBITDA for Q4 grew 3% and 14% respectively. Consequently, our EBITDA margin were up almost 300 basis points in the fourth quarter and reflect the acceleration of our cost reduction initiatives across all segments and at corporate. For the full year, revenue was $3.25 billion and adjusted EBITDA was $647 million. On a comparable basis and at constant currency, our revenue and adjusted EBITDA for the full year grew 3% and 10%, respectively. Our adjusted EBITDA margin was up 135 basis points year-over-year are remarkable improvement when compared to our historical performance over the last few years.
Now, let’s review in more detail our key operating metric by segment, starting with Page 10. Overall, we grew new enrollments by 10% for the year, while total enrollments on a comparable basis increased 4%. In Brazil, our Distance Learning business continues to scale quickly with new and total enrollments, up 69% and 59% respectively. Total enrollment for our face-to-face segment continued to be negatively affected by the unwinding of the FIES program, which was only partially offset by the growth of new enrollment for private payers. In Mexico, performance continued to be mixed with our UNITEC brand growing mid to high single-digits, while we are still experiencing softer enrollment at our premium brand, UVM.
The Andean segment had another strong quarter, which was yet again a record year for almost all of our institutions across the segments. Adjusted EBITDA for the full year was up 13% versus the same period a year ago, which is outstanding. 2019 will be the fourth year in a row that the Andean region delivered double-digit EBITDA growth in local currency. In our rest of the world segment, which is our institution in Australia and New Zealand, we continue to deliver great results with new enrollment, up 20% and adjusted EBITDA growing well into double-digits for the full year. Finally, for our Online & Partnerships segment, enrollment results continued to be impacted by the planned transition away from the foreign-based students. New and total enrollment for world and domestic segment were essentially flat for the year.
Now, let’s turn our focus to free cash flow starting on Page 14. Free cash flow generation for 2019 reached $166 million which is 15% ahead of our guidance of $145 million we communicated at the beginning of 2019. This result represents a 20% improvement year-over-year, which is even more remarkable when considering that it is net over $40 million headwind from the timing of our asset sales in Turkey and unfavorable effects.
Let me now conclude my prepared remarks with our 2020 guidance starting on Page 16. As a reminder, we typically do not provide guidance by segment, but believe that in light of our current strategic review we should share some color for the three distinctive parts of our portfolio, Latin America, Australia, New Zealand and Online & Partnerships, which starting in 2020 is essentially Walden. The main headline is that we expect very similar dynamic by segment in 2020 when compared to 2019 with a couple of notable exceptions. First, Brazil margin are expected to improve in 2020, thanks to the strong momentum we have built in the second half of 2019 when the margins were 20%. Second, we will increase investment at Walden starting this quarter to fund future growth. While we expect a rebound of our new enrollment trend already this year, EBITDA margin will contract by 200 to 300 basis points at Walden in 2020 primarily as a result of these investments.
More specifically, guidance for the full year in 2020 is expected as follows. Total enrollment of 910,000, which represents a growth rate of 4%. Revenue based on current spot FX rate between $3.130 billion and $3.170 billion. This represents an organic constant currency growth of approximately 2% to 3%. Adjusted EBITDA still based on current spot FX rate between $670 million and $685 million and would represent 8% to 11% growth on a constant currency basis. Finally, we expect free cash flow to be approximately $230 million in 2020, an increase of nearly 40% versus 2019.
For the first quarter which has been impacted by shifts in our academic calendar as noted on Page 19, guidance is as follows: revenue between $560 million and $570 million; adjusted EBITDA is estimated to be a loss of $18 million to $22 million, this is consistent with our historical earnings seasonality and reflect the fact that most of our institution are out of session for much of the first quarter. Finally, please note that the guidance we are providing today assumes that all entities currently reported in continuing operations will remain as such for the entirety of 2020. If and when any of these entities are required to be moved to discontinued operations during the year, guidance will be revised accordingly.
Eilif, now back to you for the wrap up.
Thank you, JJ. While improving Laureate’s financial profile remains a top priority, our core focus continues to be on our students. We put our students at the center of everything we do. 2019 was a very strong year for Laureate. We continue to execute well and we are delivering on our operational commitments. Critical deliverables for 2020 include completing our evaluation of strategic options for our businesses, while also staying true to our mission of delivering high-quality education at affordable prices. The management team remains committed to creating value for all of our stakeholders.
Operator, that concludes our prepared remarks and we are now happy to take questions.
Thank you. [Operator instructions] And our first question comes from Manav Patnaik from Barclays. Please go ahead. Manav, your line is now open. Can you check to see if your line is muted? Okay. We will go on to the next question. Our next question comes from Marcelo Santos from JPMorgan. Please go ahead.
Hi, good morning. Thanks for taking my questions. The first question would be about assets, the capital gains tax actually. Could you provide some view – some comments on what would you talk about the – how would we think about the taxes you would pay if you sell some operations or alternatively could you discuss how it happened in the previous divestitures? That would be the first question. The second question is about the Andean region, you mentioned strong performance on both pricing and volume. How does that – how can you attribute that to both Peru and Chile? Is the behavior similar or what could you talk about the behavior, especially given the social unrest in Chile? Thanks. That is the question.
Hi, this is JJ. I am going to address your first question and then I am going to let Eilif talk about dynamics in the Andean region. We are not going to provide any specific guidance on tax friction associated with the asset sales. The only thing I am going to say is I am going to have you refer to the 10-K, Page 177 and 178 which outlines our outstanding net operating losses. You will see there that we have about $530 million of net number, about 74% of that is really associated with our foreign operations, which leaves about 138 in the U.S. and most of that really is at the state level, so for all central purposes, our net operating losses for federal in the U.S. will be fully utilized by the end of this year.
And moving to performance in the Andean region, starting with Peru, in Peru, we are clearly benefiting from having very strong brands in both the premium segment and in the value segment and innovation leadership makes us the preferred provider of higher education given the strong outcomes that we deliver. And 2019 was a record year in that regard for our business in Peru and new enrollment grew 17%. And Peru is a best in network in terms of financial profile for Laureate. And the only thing I would like to add to that is that we are of course in the middle of the main intake over Peru for 2020, which just points to another strong year for Peru in 2020. Chile is a different situation. We have really focused our growth and execution in Chile around online and hybridity. There has been no new investments for the last couple of years in physical plant in Chile. So the growth that we delivered last year of 7% in new enrollment really came all from just efficiency and innovation in digital delivery. Fourth quarter of last year was particularly challenging for Chile given the civil unrest and related disruptions that started in middle of October of last year. Our management team did an outstanding job in managing the complexities around that. We were able to complete all of our courses on time by shifting classes from physical presential delivery to online. And we also deployed significantly increased security to safeguard our infrastructure, our staff and faculty and our students. The disruptions in Chile continues, but at a more moderate level. The way we are seeing the disruptions right now in the first quarter is the overall enrollment process are being delayed. The national exams, known as the PSU exams have been rescheduled multiple times due to disruptions in the streets. However, that is now largely behind us, and we believe that the strong brands that we have in Chile will help blunt the impact on these disruptions. But clearly, the visibility in Chile is on new enrollments, it’s difficult right now just given the shift in the intake rhythm given these disruptions, but more to come on that during our first quarter call.
Thanks a lot.
Our next question comes from Henry Chien from BMO. Please go ahead.
Hi, good morning. I wanted to ask about the investments in Walden, can you talk a little bit about where you are investing in and what are the outcomes that you are looking to achieve? Thanks.
Sure. 2019 was a very good year for Walden. We have seen the domestic business in terms of new enrollment being stabilized and we have delivered strong momentum and improvements in retention, particularly in first to second term retention has improved by 300 basis point which resulted in a 150 basis point overall improvement in retention. So that kind of momentum has given us confidence to increase the investment levels at Walden in order to restart growth. And the investments are coming really in three categories: launching new programs, including accelerated launch of our competency-based products; secondly, making further investments in student experiences and the investment that – the more moderate investments that we made in 2019 in technology resulted in such a strong performance and retention. So that has given us confidence that we can and should make further investments in this area. And then thirdly, we are stepping up our investments in marketing and brand investment, which we believe is going to result in increased demand and an increased growth rate in our business. JJ, anything you would like to add to that?
No. I think you covered it.
Okay, great. Thank you much. And I guess just a follow-up given the state of markets and then coronavirus, I was wondering if you have seen any impact around the virus on your operations? Thanks.
No, nothing of any particular significance at this point in time. We are obviously monitoring the situation, which is fairly fluid, but there hasn’t been any material negative impact that has been included in the Q1 or the full year guidance.
Okay, alright. Thanks so much.
Our next question comes from Caio Moscardini from Morgan Stanley. Please go ahead.
Hi, good morning everyone. Thanks for taking my question. Can you please comment on the market dynamics in Brazil? We are going through the first and most important big cycle, are you being able to increase prices for the new students, how is the competition? And the second question regarding the share repurchase program which has already ended, do you expect to have any further repurchase programs throughout 2020 and how much can we expect? Thank you.
In terms of the main intake in Brazil during first quarter, we will give robust color and details around that during our Q1 call, but we are of course feeling very confident about our operations in Brazil. We made some very important changes during 2019. We have a new management team in place. We have aggressively implemented our common operating model. JJ commented on very strong margin performance in the second half of 2019, because of the actions taken which is going to give us further momentum from a run-rate perspective into 2020 as well as further initiatives that are underway. So we feel really good about our business in Brazil. The team is performing really well. We are three-quarter through the first intake and will provide full accounting of that during Q1 call. In terms of the initial stock buyback program, if and when we are launching any programs, we will be communicating that to the market.
Alright. Thank you.
[Operator instructions] And we are showing no further questions at this time.
Well, thank you everyone for participating on today’s call and we look forward to speaking to you again soon during our first quarter earnings release. Thank you.
Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating and you may now disconnect.