Good morning, and welcome to Ser Educacional conference call to discuss the company's results for the fourth quarter of 2019. 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 question and answer session for analysts and shareholders when further instructions will be provided. Should any participants need assistance during the call, please press star then zero to reach the operator. This event will also be broadcast live via the internet at ir.sereducacional.com. You can also access the webcast audio and slides through the 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 the conference call relating to the business prospects of Ser Educacional, as well as 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 call over to Mr. Jânyo Diniz, Chief Executive Officer, who will begin the presentation. You may begin, Mr. Jânyo.
Hello, everyone, and welcome to our fourth quarter 2019 earnings conference call. Before I start, I would like to let everyone know that Aguiar, Rodrigo, and I are working on a home office base, and that it may take us a little longer than usual to answer your questions properly. We will go directly to slide three of the presentation that we made available to you earlier, in which we present highlights of the quarter. The main highlight of the period was the integration of Uninorte, a transaction that we concluded on November of last year.
The quarter also had important developments, such as the consolidations of the Ser Digital project, which took improvement in the experience of our students, greater integration of our back office through the robotizations of process, and improvement in our distance learning platform, which in addition to academic quality, comes today with a solid content base.
From the point of view of organic growth, last year, we opened our new unit in Brasília, designed entirely in the Campus 2.0 concept and is operating today in a shopping mall. In terms of financial results, we had a 23% growth in our student base, 9% in net revenue, 32% in adjusted EBITDA, and a 3% increase in adjusted profit. The results were helped by the work we have been doing to keep the company balanced, combining our entry in distance learning with acquisitions, access into new markets, and operational and financial discipline during this long economic recovery process in Brazil. On slide four, we have the highlights of winter enrollment season, which was positive with a 50% increase in the total new enrollment of students, with positive evolution both in classroom and in distance learning.
In slide five, we have the evolution of student base, which now includes the addition of approximately 24,000 Uninorte students. Our student base grew 23%, and ex Uninorte about 7%. Note that our distance learning base had solid growth in the period as a result of all efforts that we have made to improve our platform, the student experience, the content, and the advances in our commercial area. On slide six, we present the evolution of the FIES student base and the average ticket. Note that FIES continues to decrease in our results, and this quarter represents around 19% of the total student base. The average ticket for on-campus students decreased due to the addition of Uninorte, which has a lower average ticket and only recognized two months in this quarter.
Note that excluding this effect, our average ticket would have been stable compared to last year, which in turn had benefited from the recognition of five months of revenue in the quarter due to the enrollment of about 100 medical students who enrolled in October, since the vacancies were released in September. Excluding this effect, the average ticket rose 1%. These were my initial comments on the operational results. I'd like to give the floor to Aguiar to comment on the financial results.
Thank you, Jânyo. Hello, everyone, and once again, thank you for coming. Moving on to slide seven, we have a summary of the results for the quarter that consolidated two months of Uninorte, an institution that completed the acquisition on November 1st, 2019. We can say that we had a more favorable quarter compared to the second and third quarters of 2019. The inclusion of Uninorte in the results certainly helped, but even when we exclude this acquisition from the results, we can say that there was an improvement. It is worth mentioning that the fourth quarter of 2018 has been the best quarter of 2018 in terms of financial results.
As a result, we ended the year with a stable EBITDA margin, but with a reduction in the net margin, mainly due to the lower cash position after the payment of extraordinary dividends and the acquisition of Uninorte. Moving on to slide eight, we present the non-recurring effects of the quarter, with the main one being the monetary correction of the balance payable on the acquisition of Uninorte in the amount of approximately 21 million BRL. This was after a long discussion in arbitrage referring to divergence in the calculation of the reimbursement of net indebtedness and contingencies that considered fines for breach of contractual clause and amounts of provisions made in the net indebtedness, which in turn were denied in court. Thus, generating the obligation to pay the installment in full, settled in January of 2020.
The other impacts were similar to what we had during the year, such as adjustments in our team to adapt to the evolution of the on-campus students based in the northeastern capitals. Adjustment in Uninorte, recently incorporated into our results and expenses with the Ser Digital project and in M&A projects. Moving on to slide nine, we have the breakdown of results between traditional classroom, new units, distance learning, and Uninorte results. Note that distance learning again showed a solid result, and the new units are gradually reducing their negative results. The results of Uninorte were above what we should find in the coming quarters because the company that controlled Uninorte previously recognized the revenue according to the formation of the classes and not by contract as we do here at Ser. In that sense, the recognition of the revenues was slightly higher seasonally, but positively impact our results.
Moving on to slide 10, we have an analysis of our net receivable days, which went from 61 to 94 days, mainly due to the increase in the average receivables for regular students and FIES. As has already happened along the year, FIES payments were more punctual in 2018. However, this behavior didn't substantially affect operations except for this change in the cash flow behavior. Regarding the increase in the net receivables days from our out-of-pocket students, it's most related to the change in our provisioning methodology that we announced in the first quarter of 2019, which now incorporates the highest credit recovery index with more than 360 days in our provision for that full accounting calculation days. In addition, we have a regular student base that is growing 37% year-over-year.
In the graphs below, we illustrate these effects on our gross account receivables and comparing this increase with that of the ex-FIES student base and only the graduation base. Moving on to slide 11, we make a pro forma analysis of cash generation to facilitate the understanding of its behavior, which has been reflecting three important events. Delayed payment of FIES in the amount of approximately BRL 38 million in the year, higher volume of judicial deposits during the year that rose by BRL 13 million. The value of BRL 8 million of deferred tax assets booked in this quarter, which is a non-cash effect. Note that cash generation with these adjustments decreased by 8%, but when we analyze post CapEx, our recurring operation increased 5%. On slide 12, we represent our CapEx, which is already observed in the other quarters of the year.
It's falling from 7% of net revenue last year to 4% this year as a result of having already had a significant part of the expansion already contracted due to the investment in previous periods. Moving on to slide 13, we have our indebtedness, which as we can see, had a significant reduction of approximately 35%. The main variations in comparison with last year were payment of the penultimate installment referring to the acquisition of UNG of BRL 40 million, payment of the first series of our second issue of debentures of BRL 115 million, and liquidation of the acquisition of Uninorte in the amount of BRL 185 million. As a result, we ended the year with a lower but still very comfortable position with net cash to EBITDA in the year.
These were my comments on the results. I would like to give the floor back to Jânyo, who will update our business plan.
Thank you, Aguiar. Going to slide 15 to update our business plan. In the past 18 months, we have done extensive work to evaluate strategic opportunities. We have decided that as of the second half of this year, we intend to enter the continuing education segment more strongly.
It is a segment with a lot of synergy with our current activities since it uses the same on-site and distance learning structure that we provide for undergrad students, generating a virtuous cycle in our company through the generation of additional revenues on existing operations. Therefore, with a chance of generating solid operating margins as well. In addition, it is a market with lower regulatory requirements and which allow us to better explore the changes that have been occurring in the labor market. Our idea is to enter differentiated courses. For this reason, we will segment our operations through three segments: healthcare segment, STEAM or science, technology, engineering, and math, legal, business, and distance learning. With this, we intend to create specific courses for each segment in order to create courses with high added value for our audience.
We also intend to make acquisitions in this sector, which tends to be interesting since we have identified some players with significant differentials and who may have these differences implemented in our units, generating a potential multiplier effect. On slide 16, we show the benefits that we can generate from our operations when we enter the segment. Creation of a [channel] and on-site marketplace that increase the students' lifetime with us and allow us greater share in the disposable income of the students. We are there offering free extensions of our post-graduate course to maximize the use of our back office, which are well-integrated and robotized, thus incrementing the chance of having additional revenues with high profitability, high return on invested capital, and finally, better market timing.
That is, we will have greater flexibility in offering courses that have more traction in the job market and the ability to direct investments. On slide 17, the last of our presentation, we have a summary of our goals for 2020. We are focused on continuing our goals trajectory in face-to-face and distance learning segments with the opening of four new units in the Campus 2.0 model throughout the year, as well as continuing to increase the number of distance learning centers only if the economy allows, of course. We also aim to start the Uninorte ramp-up, which from the first moves we made between the end of 2019 and the beginning of this year. We believe that we still have potential to evolve in offering courses at this institution, as well as continuing the optimization work that we start.
As I mentioned in the previous slides, from the second semesters onwards, we will start our entering the continuing education segment, both organically and through acquisitions. In acquisitions in the undergrad segment, we have an interesting pipeline of opportunities that we believe we can exploit and which should generate good value for the business. In this segment, we analyze each acquisition carefully to understand their feasibility as a consequence of the current coronavirus crisis. Finally, we want to maintain our financial discipline that we have historically maintained in order to keep our company growing safely. Before closing, I would like to briefly comment on what is being done to minimize the impact of coronavirus and the current status of our intake process.
Regarding the coronavirus, we have not been conducting face-to-face classes on the entire network since March 16, and we intend to resume classes on the 29th if there is a clearance from the authorities or if society's perception is that this is already possible. If not, we extend this period for as long as necessary. Our employees, around 90% work in the home office, both in the corporate and the unit, and I believe that this will generate change in the way we work, as we can see that it was implemented with great success in our company. We greatly reduced marketing purchasing activities to avoid spending in a period of less activity. So that the residential classes are not totally paralyzed, we are using our [inaudible] , which is being very well accepted too by teachers and students.
Finally, we are intensifying our communication with our stakeholders to keep everyone with the best quality of information possible. We will continue to work to minimize the impact, but we understand that the situation is unprecedented, and we must also move and have new measures to minimize the impact as soon as possible. As you can see in the table below, the enrollment of students until March 16 was in line with what we expected. When we started to lose strength, which ended up taking us off the growth route of more than 5% on the same campus in on-campus undergrad segment that we had until then. In distance learning, we continue with a lot of strength, although we have felt the same effects.
We believe that with the return to classes, we still have a new round of intake activities in April, because one of the main obstacles to attract students is that most are the mid-semester academic tests, which will be postponed. In this sense that we are working on now is to do an intake and re-enrollment work now in March, taking advantage of the fact that our team is not focused on academics to try to return with force as soon as the situation normalizes. These are my comments, and I am available for the questions in the answer section.
Thank you. We will now begin the question and answer session for investors and analysts. 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 star then 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. Our first question comes from Marcelo Santos of JPMorgan. Please go ahead.
Hi, good morning. Thanks for taking the question, and good morning, Jânyo , Aguiar, Rodrigo. The question is about COVID-19. Could you please share a little bit about the behavior of the Campus 2.0 students? How is attendance going now that they are going to virtual classes? The second question would be also on this line. You mentioned you expect to resume intakes, to have more intakes in April? I did not really get that point. How are you preparing? How does this affect the second half's intake? When do you usually start the second half, and what kind of implications could we see there? Thank you.
Hi, Marcelo. This is Rodrigo speaking. We have been communicating a lot with students and the perception we have is that probably, as you know, in the country and worldwide, people are still trying to understand what is going to happen next. Obviously, there is concern among students given that they do not know about the employment economic behavior in the future. What we have done is to rapidly roll out our classes through video using the Microsoft Teams platform that has been very well accepted by the community. The teachers were the ones who most embraced the idea. We could see that students liked the idea to have something to be doing and maintaining their day-to-day lives by still taking the classes through the videos as something that could make them to keep their activities ongoing and avoiding them to be studying during the vacation season.
In terms of resuming the intake season, the sooner the classes resume and the day-to-day resumes, the better for us to resume intakes still in the summer season. Otherwise, what we believe that will probably happen is part of the intake will be postponed to the winter intake. This is all we know so far. We do not obviously, as you probably do not have enough information to really forecast what will probably happen over the next weeks.
Perfect. Just to follow on, are there any requests from students to be granted discounts since they're watching the classes digitally, or is that something that they understand?
Well, we have all sorts of requirements. We have people applauding the initiatives we are having. We have people concerned about their jobs in the future. We have a lot of movement in the social medias, and this is why we want to communicate. We want to let people know that the classes are happening online. We are communicating them the risks of the current pandemia and trying to give them a word of hope for the future, working at coaching as well. It's something that we don't really know. We have to really be patient by now, do things in a step-by-step basis and keep on working with the tools we have. Fortunately, we have a lot of tools to keep on doing.
What we cannot avoid is the fact that we have a lower movement in the general economy, and this reduced our intake process since March 16th.
Okay. Thanks a lot.
Our next question comes from Leandro Bastos of Citi. Please go ahead.
Yeah. Hi, guys. Good morning. I have a question, just if you could comment a little bit on the re-enrollment process for this window because you had that very strong intake during the second half of last year. So if you could provide some color in that sense in terms of re-enrollment, what do you expect and what are initiatives you have been adopting, I think that would be very helpful. Thank you.
The re-enrollment happened in the same way. As the market started to slow down, the day-to-day re-enrollment also has slowed down. But re-enrollment have a different behavior. So this is more related to the activity and the activity of the team with the students related to re-enrollment. So we will have to wait a little bit more to understand how this dynamic will play.
Okay. Thank you
Our next question comes from Susana Salaru of Itaú. Please go ahead.
Good morning. Thank you for taking our questions. Actually, we have two questions. The first one is related to the new commercial action that you guys took during the second half of 2019 in the distance learning, which yields good results. Could you elaborate a bit more what was done and what you forecast for this year? If you are going to continue to do some changes in the commercial activities specific for the distance learning? That would be our first question. The second question, if you could talk a bit more about the integration of Uninorte, what kind of synergies we can expect to be unlocked, what are going to be the priorities in the first months? Thank you.
Susana, I am answering the question related to the dynamics of the market, and Aguiar will answer the part related to the synergies. In terms of our intake process, we have worked a strategy very similar to what we have done in the retail intake, doing a guerrilla marketing strategy, changing prices in different seasons of the intake process. But the biggest difference is that we have to obey the process of enrollment in the summer is different than the winter, because you have the more ProUni intake. You have FIES is a little bit more important. You have the seasonality of the year-end parties. You also have Carnival and so on. But we used, in general, the same strategy. We saw that the market was very positive in late 2019 and early 2020.
Close to Carnival, as expected, the market slowed down a little bit and during March, we were seeing a pickup in the demand. Obviously, it was suddenly reduced after March 16. But we were expecting to have a positive intake in terms of growth close to double digits for the on-campus excluding Uninorte. So what we saw after the beginning of the crisis of the coronavirus was a gradual slowdown that started as of March 16.
Hi, Susana. Aguiar speaking. About the synergies of Uninorte, the idea is to make the company at least double its adjusted EBITDA margin. Considering an execution in three years, carrying out the integration of the institutions' curriculum matrix with ours, efficiency gains with the centralization of the structure, the timing of costs and expenses with suppliers too. To do this, we have an integration team with a solid track record of execution in previous transactions, such as UNG, UNAMA and whatsoever, which already formed by the clean team, analyzed everything that can be done in detail. Our scenario for absorbing these synergies would be 30% in the first year, 7% in the second year, and the remainder in the third year of consolidation. Working in a scenario in which the season shift would take place in December, at least in July 2020.
Sorry, Aguiar, can you repeat the main synergies level? You said suppliers, and what were the others?
Sure. Our efficiency gain is centralization of the structure, the timing of costs and expenses with suppliers, and also the integration of institutions' curriculums matrix with ours.
Okay, thank you.
Our next question comes from Thiago Bortoluci of Goldman Sachs. Please go ahead.
Yes. Hi, guys. Good morning, everyone, and thanks for taking our question. We would like to explore a bit more the COVID-19 outbreak situation. We would like to check in on what contingency plans management might have on the table, especially related to future dropouts, which could arise from financial constraints from students and also from academic engagement, right? We have been already hearing some companies talking about private funding or even access to unemployment insurance to its students. Although we completely understand this is a fluid situation, we are very interested to hear on what you guys are doing and thinking about it, and also curious to hear if there are any indications from the government in terms of ProUni or FIES. Thank you very much.
Hi, this is Rodrigo speaking. We are working in several initiatives. The first ones we launched were the initiatives related to communicating and to roll out the video classes because this keeps students busy and focused on studying, and this reduces their initiatives to think about leaving or to think about dropping out later or even during the course. So it is very helpful to keep students engaged and communicating with them and keeping them understanding that we are together in this is important in this moment. The second wave we are studying now. Basically, the initiatives you said are similar to what we are working on. The point on this is that insurance and the cost of funding for doing those initiatives are still unknown. We have to keep on studying and launching this as the event develops.
We don't know the extension of period we will have the economy in reduced activity. This is what we are working on in phase two.
And any indication from the Ministry of Education, Rodrigo?
We don't know anything about that yet. We are through the associations trying to reach the government.
Okay. That's clear. Thank you very much.
Our next question comes from Caio Moscardini of Morgan Stanley. Please go ahead.
Hey, good morning, everyone. Can you please provide some color on the behavior of the costs related to faculty during this period of no classes? I imagine that many of the teachers are paid by the hour. I am wondering if we could see some seasonality change on the cost combination related to teachers. Also, if you could give some comment on the PDA that has been diluting the past couple quarters, what has been the drivers here? Considering that we come to a normalized coronavirus thing, should we continue to see a potential PDA dilution in the mid to long term?
Hi, Caio. This is Rodrigo again. In terms of cost, what we are doing now is reducing obviously the day-to-day expenses. We have something around 90% of our personnel in home office, as we are all in this conference call. Therefore, the day-to-day purchases, the day-to-day marketing efforts, we have been reducing. There will probably have some shift in terms of cost of teachers from one quarter to the other as we resume full classes, especially the practical classes that require teachers and tutors in classroom to support those students. But the extension of these movements, we don't know yet, given that we don't know precisely when the economy will return, and the school will be able to have on-campus classes open. But what you have said makes sense.
Part of the cost will be avoided given that part of the day-to-day expenses won't happen, but part of the cost will be shifted from one quarter to the other.
Our next question is a follow-up from Marcelo Santos of JP Morgan. Please go ahead.
Hi. Thanks for the follow-up. Two questions. One is the intake for distance learning. Perception is that the impact of COVID seems to have been tougher on the distance learning because it was a segment that was growing much more last year. It seems that the deceleration was harder. Is this just because the maturation of the learning centers, which were ramping up intake last year and matured, this would happen anyway, or was there some particular reason, maybe a later intake in distance learning? The second question would be, what are your plans? How do you plan to take advantage of the new 40% limit of distance learning content in the campus curriculum? Do you plan to launch new products? Do you plan to incorporate that into your current products? How do you plan to use this?
Marcelo, it's very hard to listen to what you have said, so I'll try to answer what I understood, okay? For the distance learning, in one hand, you have the practicality of having everything being done online. This is true. On the other hand, usually the distance learning student is a lower income student. So it is important for us to understand going forward how the economy will impact those students who have a lower income. Usually they are hurt first. So in one hand, yes, I believe that distance learning will have a better perception of the overall market, especially now given that the on-campus students are doing video classes and the perception that distance learning is a good product will probably be enhanced. But on the other hand, we have to understand that economic impact.
For the additional workload that the Ministry of Education allowed us, we will be rolling out these new products in the second semester. We are adjusting this product, especially in terms on how to maximize the on-campus classes combining the students from the traditional on-campus with the 20% workload with the on-campus classes with a 40% workload. But this product is being worked out to be launched now in the winter intake season.
Thank you very much.
Once again, to ask a question, please press star then one, and please stand by once again while we collect the questions. That concludes the question and answer session for investors and analysts. I would like to pass the word to Mr. Jânyo Diniz for the final considerations. Mr. Jânyo, you may proceed.
Thank you all for participating in our earnings release and our investor relations area. Our relations area is on hand to help you with further clarifications. Thank you all and have a good afternoon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.