Good morning, and welcome to the Ser Educacional conference call to discuss the company's results for the second quarter of 2020. With me today are Jânyo Diniz, Chief Executive Officer, João Aguiar, Chief Financial Officer, and Rodrigo Alves, Investor Relations Officer. We would like to inform you that this event is being recorded, and all participants will be in a listen-only mode during the company's presentation. After the presentation, we will start the Q&A session for analysts and shareholders, where further instructions will be provided. Should any participant need assistance during this call, please press star zero to reach the operator. The event will also be broadcast live, audio and slides, via the internet at ir.sereducacional.com. You can also access the webcast audio and slides through tablets and smartphones equipped with the iOS or Android systems.
The replay of this event will be available soon after its conclusion for a period of one week. Before proceeding, we would like to make clear that forward-looking statements may be made during this conference call relating to the business prospects of Ser Educacional, as well as to its operating and financial forecasts and targets. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions in the industry, and other operating factors may also affect the future performance of Ser Educacional and could lead to results that differ materially from those expressed in these forward-looking statements. I would now like to turn the conference over to Jânyo Diniz, Chief Executive Officer, who will begin the presentation. You may begin, Mr. Jânyo.
Hello, everyone, and thank you very much for coming to our second quarter 2020 earnings conference call. Let's start on slide four, where we present the evolution of the action plan to combat the effects of COVID-19, presenting the latest results we got. We completed practically all the action plans, which required a lot of our team because there are challenges and emergencies in different areas. We prioritized the safety of our students and employees while we contributed to the society in combating the pandemic and its side effects, all without neglecting our goal of resuming our value generation cycle. In the third quarter, we carry out the last step that will try to fine-tune each of our units in operation.
In slide five, we detail all the work we did in addition to being able to carry out 100% of the theoretical classes that could be concluded via Sala Ser Digital, which proved to be an extremely effective tool and allowed our students to keep in touch with their teachers, which led our academic routine to be maintained. We are now conducting practical classes at colleges that could be reopened. We carried out a broad work of social support with extensive participation of our academic community. Close to 950 teachers and more than 20,000 students together with our corporate team managed to donate more than 20 tons of food and productions of meals that are made by our gastronomy and nutrition classes.
In addition to extensive efforts to donate safety equipment such as masks and hand sanitizers, highlight for the creation of 20 respirators, 100% developed by our engineering teachers and students. Our human resource team acted decisively in preserving the health of employees. We were able to transfer virtually all administrative activities to home office through the month of July. When face-to-face administrative activities were resumed on a rotating basis during the entire period of this crisis, our team has been campaigning for awareness and prevention, which included intense work of our human resource teams in identifying and supporting contaminated employees and their families throughout the period of the pandemic. In slide six, we show that we did not leave aside our focus of generating shareholder value and successfully completed the launch of our new line course, which we call the Digital Distance Learn course.
This is a new format for offering courses with a very dynamic portfolio focused on offering programs with the greatest demand in the market. Students will have their undergraduate or postgraduate diploma at an accelerated pace of graduation, which does not need re-enrollment and is 100% offered and taken digitally. We are very confident with the launch of the Uninabuco Digital brand in the market and the new UNAMA and UNINASSAU postgraduate course in particular because we are able to beat our goals for the first official months of these operations now in July. During this period, we also tested GoKursos, our marketplace for open course that now has two important partnerships.
The commercial partnerships offer courses related to sports management and health at the Barça Innovation Hub universities exclusively in Brazil, and the partnership with iG to offer our course through one of the most successful portals in Brazil. On slide eight, we present the evolution of our semester intake process, which, as discussed since March, was impacted by the COVID-19 and that there was no resumption of face-to-face classes until the end of the semester. We have reduced the volume of new enrollment and re-enrollment, which ended up reducing the student base during the semester. On slide nine, we analyzed how our student base was by segment and average tickets. It is worth noting that our health student base remains very solid and represents 52% of our total base of students. The average ticket, in line with the one disclosed in Q1 2020, managed to recover in Q2 2020.
Since the base for technically students was low in the quarter, and the effect of the reduction in the average tickets resulting from the promotional price of BRL 19.49 and BRL 99 for technically students in the third quarter, it no longer impacted the ticket, resulting in a more comparable effect for the semester as a whole. These are my initial comments, and now I'll give the floor to Aguiar to talk about the financial results for the quarter.
Thank you, Jânyo. Hello, everyone. Once again, thank you for coming to our conference call. On slide 10, we present the summary of the financial results from the second quarter in the first half of the year. As you can see, our net revenue started growing again, mainly due to the entry of UniNorte in our results, and the growth of distance learning student base. The cost and expenses structure performed well in the second quarter due to the action plan that we implemented since March, in which we renegotiated rents, reduced marketing activities and non-essential expenses during the period, as well as the inclusion of employees who had absolutely face-to-face activities in Government MP 936 of 2020.
What weighed more on our results for the quarter was the bad debt, which also increased because of the lower volume of re-enrollments in the semester, which in practice is also an effect of the pandemic. It is worth mentioning that during the quarter, we had a good generation of operating cash, despite the delay in the process of adding Fies registrations and payments during the period. On slide 11, we have the breakdown of results between on-site, new units, UniNorte, and distance learning. Once more, we note that our distance learning presented itself again at a very favorable pace, both in terms of improving profit sharing and growth in EBITDA margin, reaching levels even above our consolidated result for the semester, as highlighted in the charts.
UniNorte, on the other hand, which despite all the hit cuts in COVID-19, and in its turn, the suspension of non-essential activities presented as a positive result, reflects once again the synergy gains generated by the restructuring we are carrying out after acquisitions. On slide 12, we include an analysis of our net income segregating the effects of IFRS 16 from our results. See how this accounting effect ends up reducing our profit by BRL 15.5 million this semester. Something that we believe is important to present as this change in practice was relevant. From the point of view of return on the business, the impact on net income has been greater than demonstrated. Moving on to slide 13, we have an analysis of our average collection period, which went from 107 to 121 days in this quarter.
The main reason for this increase is related to the impacts of COVID-19 on our student base, especially Fies, which had its process delayed during the semester due to the difficulty of students leaving their homes and being served at the Caixa Econômica Federal to carry out their enrollment addition process. With regards to out-of-pocket students, also due to the pandemic, although we had strong cash generation in the quarter, we had reduction in payment punctuality, which we are working to mitigate its impact in this re-enrollment process. On slide 14, we present our CapEx, which, as with our costs and expenses, was reduced due to the impossibility of carrying out works and certain investments, and thus closing the semester around 4% of the net revenue. On slide 15, we present our operating cash generation, which shows a substantial improvement in the semester.
We understand that this improvement is due to the combined effect of maintaining relevant punctuality payment rates for students at the base, associated with the measures we have taken to reduce operating costs and expenses, as well as the use of government support measures to combat the pandemic. As our CapEx also increased in the period, our conversion of EBITDA into operating cash remained solid, even in such an unusual period. On slide 16, we have a more detailed view of the company's financial health, which was prepared to go through this most critical period of the crisis.
Even so, to ensure we will be firm in the market, we have raised significant resources that protect us even if it lasts longer, or even to be used in acquisition as we have now done with Facimed, which will be commented by Jânyo, to whom I will pass the floor back to your final comments.
Thanks, Aguiar. Let's please go to slide 18 and 19, where we have the rationale for the transaction, Facimed. We announced a few weeks ago. It's our positioned institution in the state of Rondônia, in the north region of the country, with a medical course that has 75 annual seats. That is 90 annual seats, if we include ProUni and Fies. The institution already has a solid medical students base. It's about 440 students, and have the advantage of already having its structural center, including internship programs in the city. The transaction was BRL 100 million in cash, with an additional BRL 50 million paid in equal annual installments. In addition to medicine, it has a solid tradition with other health course, such as nursing, dentistry, pharmacy, and veterinary medicine. The rationale for the transaction is very clear and in line with our history.
We are interested in being a strong player in the northeastern and northern regions of Brazil, and we are recognized as a strong player in the health segment, where we have 52% of our student base. In addition, the state of Rondônia has shown a solid historical growth driven by agribusiness and Cacoal is one of the cities most benefited by this cycle in its region, which covers a population of around 400,000 people. We have opportunity for synergies in the current structural faculty, where we can generate operating margins to bring the transactions to be in a multiple post synergy in the range of 6x-7x EBITDA. In addition to potential growth through the offering, of course, already created by the institutions. That should become a university center later this year.
As well as entering the activities of distance learning, something that is in the initial stage at Facimed, and that we can add with our expertise. Moving on to slide 20, we conclude our presentation with a quick review of our value leverage for the future. Our distance learning, which as we have shown, is evolving well in the traditional model. From the third parties on our partner onward, we have new initiatives in the digital segment with the launch of the GoKursos, Uninabuco Digital, UNINASSAU, and UNAMA, postgraduate digital brands, which also mark our entry in a more assertive in the continuing education segment. In this segment, we go beyond introducing new routes for organic growth.
We have in our plans to generate new sources of income in the on-campus segment, especially in health, with course based on practical classes, but also to bring new fronts through acquisitions of specialized companies. Speaking of acquisitions, we still have one part process of gaining synergy from UniNorte, which had its integration 100% completed in June. Now we hope to carry out new activities now with everything integrated and prepared to move forward in the city of Manaus, in the state of Amazonas, where the brand is a leader in the region and has the potential to resume growth in classroom and distance learning.
Our acquisition pipeline continues to evolve, and are still working to make new moves in the market to continue our growth plan for our shareholders, associated with our focus on maintaining a solid financial position capable of giving us brace to go through crisis while focusing on our business. Those are my comments, and now I give the layout of the layout for the sections, questions and answers.
We will start the question and answer session now. Thank you. We will now begin the question and answer session for investors analysis. If you have a question, please press star then one on your telephone. If your question is answered during the session, you may remove it from the line by pressing the star two. The questions will be answered in the order they are received. We ask that you use the handset when asking the question in order to maintain excellent sound quality. Please stand by while we collect the questions. The first question today comes from Vinicius Ribeiro with UBS. Please go ahead.
Hey, guys. Good morning. Vinicius speaking here. Two questions from our side. The first related to the costs. That was a really good surprise this quarter. How much of the savings that you guys presented in this quarter is recurring, and how much is related to the benefits that the government gave to protect employment? The second question will be on the intake cycle. What is the strategy coming to starting the intake cycle, both for the distance learning and the on-campus operations? Thanks.
Well, if I understand correctly, you are asking about the recurrence of the reduction costs. Sorry. There were a series of initiatives. Some of them should stay longer as rent, that the negotiations are not only for a whole year at a time. As the new post-pandemic route, we are already renegotiating some rents and even returning some buildings that in the new context of the sector, more hybrid, it does not make sense to keep some properties. With regard to payrolls, we have had an effective of approximately BRL 10 million in the quarter. But on the other hand, it has not yet had the impact that should help in this line in the next semester since we are improving the training now, enrolling new students in class, already doing the work of operational leverage by optimizing the allocations of faculty and campus staff.
In the third quarter alone, we are unifying at least three units in cities where we operate. Margin, in fact, we believe that over time it will stabilize between 6% of net revenue in the range. Other expenses such as travel, accreditation expense, and service providers should not be normalized in this year and should not return at the same levels because we already have a large volume of accredited course and we have renegotiated many contracts with service providers. We are therefore very confident in our ability to adjust our operation and keep them well-conducted, not only during the pandemic period, but also going forward, thinking of course, that our business will be increasingly digital from now and distance learning will be increasingly relevant to our results and have attractive operating margins. I am sorry, I did not understand your second question.
Yeah, that is okay. My second question is on the second half intake cycle. So how is your strategy in terms of pricing, discounts, both for the distance learning and the on-campus segment, if I may?
Well, the intake in some ways advancing according to the pandemic. The season for us in general starts in line with the cities of São João that happens in mid-June, but this year it started to advance as the city started to reopen their face-to-face activities from mid-July. As classes should also start later and to be concluded after Christmas this year. In this sense, we understand that the process has always delayed, but performed much better than we had heard from the consultants in the pandemic. In terms of pricing, we are seeing the market perform discounts in line with expectations as the sector is looking to replace the student base. In distance learning, the trend is quite different. We are seeing the market quite heated, both in traditional distance learning and the new DL digital services platform we launched.
In terms of price, we see this, we are seeing the market reposition focus more to increasing ticket volume.
Okay, thanks. Thanks for the answer. It is clear. Thanks.
The next question comes from Marcelo Santos with JP Morgan. Please go ahead.
Hi. Good morning. Thanks for taking the question. I have two. The first one is regarding the new distance learning courses and initiatives. Could you please comment more what are your ambitions for next year and for the coming years on this front? How much should this be relevant to Ser? The second question is regarding the M&A strategy. Recently, as you discussed just recently now, you bought a medical school. What is changing in. Is something changing on your M&A view and what is changing? How do you plan to proceed going forward? Thank you.
Well—
Sorry, Marcelo. This is.
Go on, Rodrigo, please.
Rodrigo speaking here. I'd like to, about the M&A. Jânyo answered about the question related to the DL digital services. In terms of M&A, just so I don't seem so vague here.
Pardon me, Rodrigo, are you there?
Yes, I am. Hello, can you hear me now?
I can hear you, Rodrigo.
I can.
Oh, okay. Sorry, I was speaking, and somebody muted me. Just to re-answer the question about the M&A strategy. What we have been doing, and Facimed fits precisely in that strategy. We like the transactions related to the North and Northeast regions, with brands that are dominating in their own regions. Especially Facimed transactions have the two points, right? The healthcare, the potential to expand in the North region of Brazil comparable to what we have done to UniNorte. It has a very solid healthcare base that also has a good medicine course that is well-renowned in the region. We would like to do more of these transactions, and transactions that are related to mid-size and small transactions should be all focused within those regions. Larger deals can also be done, and outside of these regions, they have to be larger transactions.
The other part of the pipeline that we have been building in this year is also related to the continued education market. We like the idea of not only growing organically, the continuing education, but also to increase our presence in this segment by adding a player that are focused in market niches in continued education and also ed tech. We see that the market is changing, and it is going to be changing fast, and continued education will be important to the higher education sector, and we want to participate there through either M&A and also through organic growth. The part for the DL digital services is also related to the continued education strategy. I will turn to Jânyo to answer that portion of the question. Thank you.
Well, in the case of DL, our strategy of change would be to reach a good profitability, it was around 40%-45%, 50% growth per year, and we believe that we are reaching these goals. Now we are launching a new strategy to increase the growth of our DL, increasing the number of DL partners and repositioning our offer of 100% online course. We already launched the Uninabuco Digital DL, and we are expanding to the other brands we operate as we have already launched the post-graduation in UNINASSAU brand and UNAMA. We are expanding to the other brands. In addition, we launched our line of DL course, and our GoKursos is our marketplace to free course. We are expected to open from this year in 2020 around 50- 100 new DL centers.
Thank you. Thanks a lot.
Next question comes from Mauricio Cepeda with Credit Suisse. Please go ahead.
Good morning, Jânyo, again. Thank you for the time, for answering the questions. I think my question is pretty straightforward. First, to congratulate you the way you have managed the cost and expenses and have managed to keep the results on track. Going forward, we saw that there was an increase in receivables. We also see the discounts are increasing, the scholarships, et cetera, and the market has been a little bit traumatized about this kind of move because of other competitors doing this in the past. Now it's a hard situation to come out. What do you plan for the future to get back on track in terms of receivables or scholarships, or any other measures, to keep students while keeping a certain financial stability?
Hi. This is Rodrigo speaking. I think that what we had in this semester, considering all the effects from COVID-19, it's normal to expect to have some increase in account receivables. But if you look to the numbers, especially the aging, you will see that the increase in accounts receivables, the aging, is much more related to the short term rather than to the long term. This is related to the period that we will have from now on related to the re-enrollment season that is starting now. So we are expecting to resume collection from the students that have already dropped out, but also to be able to negotiate with students now. If you also see the health of our operating cash flow in the quarter and the semester, we think that we had a very good collection in the quarter.
Even more if you consider the impact of Fies. Fies was the biggest issue related to cash flow in the semester because Caixa Econômica Federal made a lot of effort to pay the BRL 600 per month that the government granted to the population. But they were not so intense in operating Fies as they would be doing in this semester. So the whole Fies program was delayed for the semester, and this explains a little bit the part of the accounts receivables, the stretch in the accounts receivables for the semester. Regarding pricing, I think what we have to keep in mind is that the industry is changing. So the industry now is under pressure because the on-campus segment faced the COVID issues and all the hurdles we have in the semester.
You also have to understand that going forward the sector will have the increase of the workload from 20%- 40% of distance learning in this segment. The industry will change, in our view, in a way that the chances for the industry to penetrate the 35 million people, that is the addressable market we consider, will be higher. Therefore, pricing will probably improve slightly after the COVID-19, but we are not expecting pricing to really change substantially back to what it was two years ago. Having that said—
Rodrigo has rejoined us.
Hi. We believe that we are very well-positioned. In one hand, we invested in technology and student experience over the last two years, so the platform is fully ready. Our new syllabus is ready to be deployed with the 40% DL workload in on-campus. We have created the Campus 2.0 strategy that is deploying smaller campus in shopping malls and in areas that will increase our chances to add students, not only students from the old downtown campus, but also now students in the metro regions and in the countryside. Ser is one of the companies most spread in terms of number of campus in our region.
Now with the DL strategy the traditional DL that you are used to see that compete to the other players is not only behaving well and growing over 40% per year, but also the new DL strategy, the digital DL, has a normal potential to grow over time. Especially now that what we understand is that the students are much more interested and accepting distance learning than before. These are the comments we had about your questions. Thank you.
No, thank you. Very clear. Thank you.
Again, if you have a question, please press star then one. The next question comes from Thiago Bortoluci with Goldman Sachs. Please go ahead.
Yes. Hi, good morning, Jânyo, Rodrigo, and everyone, and thanks for taking our question. These are two follow-ups. The first one is also regarding distance learning. This has been clearly a key area of focus for you, but also for competition, right? How does the company expect to differentiate from the large competitors? Is it through the academic model, the location of the hubs, branding, prices? What is the overall strategy here? Still on this issue, you have just launched a new line of graduate DL digital courses. What are the implication of that for your core distance learning undergraduate program? Is it fair to say that you think that the 100% online model seems to be the best format to address your demand? This is the first question. The second question is also a follow-up on receivables.
In the press release, you mentioned that you see current levels appropriate given that negotiation typically happen at the end of the semester. That said, shouldn't we expect further pressures through collection until it gradually converge to 180 days? These are our questions. Thank you very much.
Hi, Thiago. Those will require longer answers. I think in the DL strategy, what we see as Ser doing different than the competitors is basically we now will have two sets of DL deployments. The first one is the traditional DL that competes with everybody else. But the difference we have is that our platform is very well advanced. Just to remind you, since 2018, we invested with Accenture probably something around BRL 20 million, not only in creating a better student experience, but to integrate the student experience with the on-campus in a way that we changed the way our campus behave, creating the Campus 2.0 concept. Moreover, what we are doing now is repositioning our 100% online courses to provide a pricing that is closer to what the competitors have been doing since the beginning of the year.
We are increasing the number of new DL centers, allowing smaller partners to join Ser and to provide a better capillarity in the regions we have. If we add that to the level of recognition we have with our local brands, being UNINASSAU brand, the most well-known and recognized brand in the Northeast. UNAMA, the most recognized brand in the state of Pará. UniNorte, the most recognized brand in the state of Amazonas. This together will provide us more room to grow distance learning. What is also important and different than the other is that our DL is not so mature. We believe to have space to grow DL going forward. The last advantage we believe to have is the deployment of labs in the cities we operate and how spread our 58 units are in the regions.
This is important because DL, when it comes to the hybrid DL, this is a difference between us and the local competitors, especially when they operate with DL partners that usually don't have the labs. The second part of the strategy, which is the DL digital services. This is a new line of courses that is much more aligned to what the youngsters want. Courses that are shorter, are 100% sold online or through the call centers or through social media. They are 100% sold through credit card in a way that if the students drop out in the middle of the process, we don't need to wait for them to re-enroll. The re-enrollment is automatic.
The timeframe for them to graduate is also faster because instead of waiting for two to three years to be graduated, they can have a graduation pace about 25% faster as compared to the traditional courses. This is also important because new ways of selling distance learning are being deployed. This semester, we launched the graduate courses that are 100% made through the Sala Ser Digital classroom. So you can create one classroom for each 200 or even 300 students per class. This will provide us to give not only access to interesting teachers, but also a very good number of students per class that will be 100% virtual. I think the DL strategy is being very well repositioned during this period of crisis, that we are hopefully moving forward as of 2021. About the account receivables.
We understand that for a COVID-19 period, everything we have passed through, to have it increasing a little bit is normal. Also what you could see in this quarter is that the level of bad debt has increased precisely to start covering the need to provision the bad debts for the period. It is quite probable that during the second half of 2020, our call center and negotiation team will be more successful to negotiate to collect students that were not being able to pay punctually during the year. Of course, to collect money from the students has been harder, and this is why we understand that the normal levels will be in 2020.
What we believe, on the other hand, is that in 2021, this peak of bad debt will probably be away, and this will enable us to have a better collection and probably to have the levels of accounts receivables to be normalized again.
That is very clear, Rodrigo. Thanks for the comprehensive answer. Thank you very much.
There appears to be no further questions. I would like to pass the call over to Mr. Jânyo Diniz for any closing remarks. Mr. Jânyo, you may proceed. Mr. Jânyo, you can proceed with closing remarks.
Sorry. Thank you for participating now of our disclosure of results and the press release in our IR. This on hand to help you with further information