We'll go ahead and get started. David Morse, very good with Third Point Advisors. Next company, it's Laureate Education. This is a really good example of kind of how we find ideas to present at this conference. A good friend of ours in Dallas, a very smart investor, mentioned it as an idea at a lunch that we had. Then we did a call with management, a small group of investors, and really fell in love with the story last year. Unfortunately, I didn't buy it, which was a shame, but.
Not too late. Thank you so much for hosting us. Really proud to be here. Rick Buskirk, CFO, Adam Morse, Senior Vice President of Finance and Treasurer, is with us. The Laureate story today is a lot simpler than it used to be. Laureate is focused today on two countries, Mexico and Peru, where the largest operator of higher education services in Mexico and Peru by a significant margin. We are twice the size of our nearest competitor in Mexico and more than 25% larger than the nearest competitor in Peru. Our motive is really to deliver quality and scale hand in hand in order to deliver a high-quality transformational educational product to our young students in Mexico and Peru. We are listed on NASDAQ. We have $1.6 billion in revenues.
We are growing at about 10% organic clip per year, and we have now reached close to 30% EBITDA margin. We have 50 campuses, so about 10,000 students per campus. Each of the operating units are at scale. All of our products are where we believe tomorrow's jobs reside. We are focusing on business, health sciences, engineering, STEM products, and we are delivering the product in a combination of traditional campus environment in the classroom, as well as hybridity and fully online. The fully online product is really for our working adult students, the 25 to 45 year olds. Close to 500,000 students. We have 30,000 faculty and staff members, and we are operating in an environment where we have close to 100% private pay, which is very, very important because it makes the regulatory environment much easier. How do we attract students?
In Mexico and Peru, 55% of all university seats are provided by the private sector. That is important because the government and the regulators really rely on the private sector. The public sector, about 45%, and half of that is really good. If people can get into the high-quality public sector, they should go there. The problem is that 8 out of 10 students do not get into that high-quality public capacity. That means that if you do not get into the high-quality public capacity, and if you have a lot of money, then you would either go to the US or you will go to very selective, prestigious private institutions in Mexico and Peru. That is the top of the pyramid. The pyramid describes the private selection criteria for the private segment.
If you have a lot of money, you go to private universities in the U.S. or expensive local universities. It's a very small part of the market. We are not operating there. If you do not have a ton of money, but you have some money, you enter the space where we are operating. We have segmented the market in three ways. We have the premium product in Mexico and Peru that is UVM and UPC. The average cost of that premium segment is about $4,500 per year or about $16,000-$17,000 for a degree. If you do not have $4,500, but you have $2,200-$2,300, we are offering you the value segment. In Mexico, that is UniTech, and in Peru, that is UPN. I should say it is identical academic delivery.
All of our universities will have medical school, dental schools, veterinary school, nursing, business, STEM, engineering, all of the areas where tomorrow's jobs reside. The difference is that in the premium segment, there are 25 kids in the classroom. In the value segment, there are 45 kids in the classroom. In the premium segment, you will have gyms, sports facility, cafeteria, green space, while in the value segment, it is more like an office building where you have classrooms, a library, and laboratory. That enables us to deliver the same quality product, but at vastly different price points, but with the same margin. Also in Peru, we segment the market below that.
If you do not have $2,200, but you have $1,200, then we are selling you a technical vocational degree, which is a two-year degree, in mechanics, electrician, technical nursing, et cetera. That is how we are segmenting the market. This is important because it gives us enormous productivity in our cost of acquisition, our recruiting expenses, because we are casting the net pretty wide. If we segment the market and the prospects to the capacity of their buying power, and then for the students that cannot afford our products, you are getting into the mass market. That is where the low-quality part of the public capacity resides, down in the bottom blue, as well as what we call mom-and-pop universities, universities with questionable quality, no brand recognition, and typically pretty weak outcomes. That is how the market works. You see our institutions in Mexico.
Again, UVM and UniTech are the two brands, both universities with over 100,000 students each for each of the brands. In Peru, it is UPC with 80,000 students, UPN with 125,000 students, and Cibertec with a little over 20,000 students. All of our universities are benefiting from the highest accreditation and high ranking and rating. Just as a couple of examples, UPC in Peru is ranked the number one university in Peru, but it is also ranked the number 11 consumer goods brand in the country. We are just behind Google and Nestlé in terms of brand equity and ahead of Microsoft and Toyota. That shows you kind of the strength of the university brands that we are operating. We are also segmenting the market in addition to the segmentation through affordability. We are segmenting between young students and working adult students.
Of the 500,000 students that we have in the system today, 400,000 are young students and growing at about 5% in volume per year. We have about 100,000 students that are working adult, and they are 100% fully online, but the same brands, the same back office, and they are growing in the high teens per year. On a combined basis, the network is growing at 7%-8% in terms of volume and about 10% in terms of revenues when you include pricing out of mix. Health sciences has been a very important vertical. About 20% of our students and 25% of our revenues are coming from health sciences. This is important just to understand the quality of our institutions. We have 23 medical schools within our campuses. I said we had 50 campuses. About half of our campuses have a medical school embedded.
That provides enormous prestige. Although it's only 11,000 students or 500,000 students, it provides a lot of prestige and a halo effect to the entire health sciences program. In addition, we have nine dental schools and eight veterinarian schools. This is a very important part of our growth story because with the aging population, the jobs of the future are largely going to be in health sciences, STEM, and business. In terms of the overall market opportunity, Mexico and Peru combined population of 160 million people. There are 7.5 million university students in Mexico and Peru. Close to 60%, or 57% of the 7.5 million, are being served by private institutions. The biggest growth driver in our business is not demographics. Demographics is positive. It's not like in the U.S. where it's a drag, but it's not a big positive. It's slightly positive.
The biggest driver of growth is the rising participation rate. In Mexico and Peru, on a combined basis, only 36% of 18 to 24 year olds are participating in higher education. That's 62% or 63% in the U.S. It's 55% in the European Union. I think probably the natural steady state is close to 50% for Latin America. At 36%, there's still an enormous runway of growth from that rising participation rate. Why are we growing? Why are the participation rates rising so quickly? It is because if you have a university degree, you make 60% more in your lifelong earnings than if you don't have a university degree.
That creates a virtuous cycle that first-generation middle classers, the first thing that they want to do is to make sure that their kids are getting a better start and they are investing in their children's education. That, again, expands the middle classes. In terms of the growth ladder, the overall market growth is about 2%. Do nothing, 2%-3%. We are growing 2%-3% in volume by just kind of keeping the same footprint, maybe launching a couple of new programs and staying in the SIP cards where we are operating. Launching new campuses is going to, of course, drive growth. We have currently 50 campuses. We are launching two new campuses this year. We have two new in the pipeline for next year.
If we continue to grow at two new campuses per year, that will drive another three percentage points or so in overall growth. As I mentioned earlier, the working adult segment, the fully online segment is growing much, much faster than the overall market growth. That adds another two percentage points to our growth story. When you add these things together, we get a volume growth of 7%. We add pricing net of mix for that for high single-digit or low double-digit revenue growth. There are growth accelerators in our business. We can certainly add, as you will see on this chart where I am showing the maps of Mexico, map of Peru, focusing on Mexico as the largest market on the left-hand side. You see the red dots represent where we have our premium product. We are in 15 of the top 20 cities.
We should be in all top 20 cities. That means that there's another five large cities that we want to go to with our premium brand. The value brand should be in every city where we have our premium product. It is just like I like to use the airline analogy. If you have an aircraft, you want to segment that, having a business class up front and an economy class in the back of the bus. That gives you an opportunity to segment the market in a very efficient way. That's how we're thinking about it. Everywhere that you see a red dot, there should be a blue dot that will take us. If we expand to all of the 20 biggest cities, that means that there's another opportunity for 20 new campuses, five new UVM campuses, and 15 new UniTech campuses in Mexico.
There is an opportunity for us to significantly accelerate the growth by just launching campuses at a more rapid pace. Also in Peru, another growth accelerator is the technical vocational segment. We have built a very nice business with that two-year technical degree. That is where there is a massive shortage in terms of skills and from an employer demand perspective. We have built a very nice business in Cibertec that delivers great outcome at an affordable price. It is growing double-digit, and it is accretive to both EBITDA and cash flow. That is the business that we can step on the gas and grow faster, and we can also lift and shift that over to Mexico. That gives you some sense of flexibility for us in order to accelerate our growth algorithm. Just to give you a sense of sensitivity, what would that mean?
If we launched four campuses instead of two campuses, that will take CapEx as a percentage of revenue up from 5% to 8%. That will take growth up from high single-digit, low double-digit to low mid-teens. That would take free cash flow conversion from currently 50% down to low 40s. Still, even by taking the growth rate up a significant step, there is still an enormous amount of free cash flow being generated in this business that will be returned to shareholders. In terms of financial profile, let me just summarize as follows. We are $1.6 billion in revenues. We are growing high single-digit, low double-digit. We have a margin guidance for this year of over 30%. 50% of our free cash flow converts—sorry, 50% of EBITDA converts into free cash flow. It is our plan to continue to return that excess free cash flow to our shareholders.
Since 2019, we have returned $3 billion of capital to shareholders, $1.3 billion in stock buyback, and $1.7 billion in dividends. A lot of that capital has been generated from simplifying the business, exiting non-core businesses. This year's guidance on EBITDA is $480 million. That means that about $235 million of free cash flow is going to be generated. It is our intent to return that to shareholders. I'll pause there and happy to spend the rest of the time just informally for the management team and myself to answer any questions.
Rich, could you talk a little about what happens in a recession given it's all private pay? How much the slowdown is, what the degradation has been in revenues and in margin during the last couple of downturns?
Great. Absolutely. We are different from the U.S. In the U.S. and in markets where there are student loans, higher education tends to be acyclical. We are in a private pay market, which means that we are loosely correlated with the economy. In good economic times, when GDP is above 3%, we are everything. We are humming on all eight cylinders. We have inflation plus pricing. We have very robust volume growth, and we will be growing top line in comfortable double-digit. In softer economic times, when we are between 1% and 3%, which is kind of the typical operating environment that I'm thinking about, then we are having, as I said, a volume growth of 7%, revenue growth of 9% plus minus, and about a 30 to 40 basis point margin expansion through scale and leverage benefits.
In a recession, and with two good examples of recent recessions in 2023, 2024 was the first recession in Peru in 20 years when you exclude the COVID volatility. It really was a pretty shallow, V-shaped recession. It hit in the second half of 2023, and it was done in the first half of 2024. We basically saw during that period that volumes were flattish. Revenue maybe grew 1% or 2%, and we had a little bit higher step-out or attrition, which means that our bad debt increased a little bit. We had about a 50-75 basis point drag on margins. It was pretty quick. The former recession hit to be experienced in our business over six months. From the recession was over, we saw the students coming back. It was about six to nine months.
Very similar experience in 2008 during the financial crisis. Of course, Mexico was more impacted by the financial crisis because it is more closely linked to the U.S. economy than that of Peru. Peru did not really have much effect of the financial crisis at all. Mexico had a shallow recession back then. We saw exactly the same thing. We saw our premium brand was hit hardest. Students were trading more down to the value brand. Overall volume was flattish, slightly positive. We lost a little bit of pricing power during 2009 and early 2010. We returned back again to maybe a point, point and a half in margin degradation due to softer pricing and higher bad debt during COVID.
Just to go a little further, the bad debt expense, what is it normally and what is it during tough economic periods?
You want to take that?
Sure. I mean, just to give you context of our billing and our collection cycle, because I think that'll help. We are private pay. Students, the average tuition is around $3,000 per year across our premium brand and our value brand. And students pay in installments during a cycle. When you're in first semester, you pay in five installments in the first half of the year. When you're in cycle in the second half of the year, you pay in five installment cycles. You don't re-enroll unless you're fully paid out. It's a natural, nice true-up function that happens. O;bviously, in tougher economic—so before I go there, that leads us to a really nice working capital neutral position because we're steady in terms of cash collections and payables out the door. In good economic times, we're in the mid-twos in terms of bad debt.
Two and a half percent.
Two and a half percent. In bad economic times or tougher economic times, like we saw in the recession in Peru, we can get above 3%. We saw the first recession in Peru, as I noted, in 20 years in the last year. We did go above that amount as we gave some allowances to students to extend their installment payments. We saw more pressure in the lower economic type of value brands.
Fairly manageable, 2.5%-3% bad debt.
A couple of questions. One, what's your expansion strategy into other Spanish-speaking countries? The second, how much dilution do we have per year as a stock options, expense-wise? If I see that $100 million is starting to look quite bad, how much do you think?
I'll take the first.
I'm very good with dilution.
In terms of expansion strategy, let me first be very clear. Laureate had a very aggressive ambition of becoming global. That did not work. Higher education is a local business. It scales beautifully within a homogeneous regulatory environment. When you look at Mexico and Peru today, there are not a lot of synergies. The only synergies between Mexico and Peru operations is our $35 million-$40 million overhead burden. Where we are getting the synergies is within the country. We would say we are optimizing at the country level. In Mexico, we have one management team, one IT infrastructure, one back office, multiple brands, identical in Peru. What we share between the two countries are the playbook, how we are running the business, and sharing best practices. If there is an innovation in one country, we look and check with the other and so forth. There are some benefits.
When we went from 26 countries to two countries, we used the following factors. We want to be in big markets because this is a scale business. We want to be in markets where you can be number one and number two because the ask curve is pretty steep. We want to be in markets that have very favorable regulatory issues. We are operating at the behest of the government. We have a license and accreditation. We only want to be in markets for this. The laws on the books for higher education are crystal clear that it welcomes private participation. I want to see 40% plus or 30%-40% of the market at least being served by the private sector. I want to see close to 100% of the growth coming from the private sector.
The last thing, I want to be in a market where there are low participation rates, but expanding middle classes that are driving the growth. That took us from 26 to two countries. Could there be a third country one day? Potentially.
How do you exhibit from Uruguay and Argentina?
Once again?
Argentina, Uruguay.
Argentina, I do not like because the regulatory environment may change with the new regime. Currently, higher education is structured as not-for-profit. You can be a for-profit operator, but you are kind of turning yourself into a pretzel and I do not like that. I want to be very clear, very transparent. I do not want a changing government to come in and say, "We view it a little different." Colombia is another market that I love the market dynamics. Quite maybe not right now with the current government, but again, it is structured to be not-for-profit. I view there is so much growth opportunity in Mexico and Peru. We can do nothing scenarios. It is growing high single digit, low double digit, the great compounder. We have very interesting levers to take it in a very low-risk manner above that.
We can, I talked about the tech box segment, another very interesting growth accelerator for us where there's a lot of synergies. It is to unbundle our product and sell it to short courses to businesses for their upskilling needs. If you look at the nearshoring trends in Mexico, we're seeing a lot of demand from industry asking us to help them upskill or prepare them for their expansion plan, setting up new plans and training employees. I think there are other adjacencies and growth accelerators that are more exciting. I should never rule everything out, but I think the bar is very, very high on the third market. I should also say this management team has worked too long and too hard to take your money and your wealth and transfer that to others through undecreed M&A. We would be very, very disciplined.
I wouldn't put M&A into your base case.
One more thing, one more question. In regards to stock compensation, we run a very disciplined approach. Benchmarking Laureate with Meridian and others around the market is .com. Our stock comp expense is $10 million approximately per year, which is less than a third of 2%. It is very reasonable. The dilution effect is immense.
Maybe too low.
You made enough money.
Regulatory. Have you had any regulatory problems over the history of the entire country?
Mexico, Peru, no. Laureate experience, yes. That is why I'm so focused on the regulatory.
You actually did that. What was your problem?
The three biggest problems were Chile, Turkey, and India. Turkey was just like, "Listen, I do not like American investors being in here." They were constantly kind of changing the rules on us and making it just hard. In Chile, it was this not-for-profit structure. Actually, that is the same in Turkey. The common denominator for three countries was that universities had to be not-for-profit, but they permitted private ownership of the not-for-profits. Then you could service.
There's never been a question in Peru or Mexico about it.
The new higher education law in Mexico was put in 2016, 2017. When we put a new higher education law in, it's going to be like 50 years until we do it again. The preamble of that law says there shall be no discrimination between public and private participation in higher education. I couldn't ask for something clearer.
Different question. Your investment in expansion and increasing the CapEx, how much are you going to increase the CapEx in the next couple of years? You said that your free cash flow pay down, your free cash flow participation will go from whatever, 60 to 40 or whatever the number is. Talk to us about that.
Yeah. Right now, we have four campuses in development. Two that will open this year and two that will open in 2026. The lead time to build a campus is about two years, from 18-24 months, from going out, identifying the site, getting the zoning, building it, and then launching the program. For 2025 and 2025 guidance, we've said CapEx is going to be approximately 5% to support the two new campuses that we're opening this year. It might be a quarter or a little higher than that because we actually prepared some of the campuses to go on next year. We're going to give specific guidance on this on an annual basis.
The way that I'm thinking about the run rate of the business is 5% CapEx in terms of two new openings per year, and that gives us a momentum of ICM did it, Laureate did it. If and when we are ready to increase that rate, we will be guiding accordingly. Yes.
I know that your free cash flow is really high and there's really no working capital requirement. Just the level of debt, sea tides of the legacy debt left over.
Our net debt is basically zero. If you're factoring in leases, you might be factoring out leases on the balance sheet. If you take leases out of the equation for net debt, neutral.
We have capital leases, which is debt, and we can't get this debt. Operating leases, you have to look at operating leases are not being capitalized in the balance sheet, but also you have the asset on the balance sheet. If you include the debt, the liability, you should not include the debt balance sheets.
Bloomberg has shown you have significant net debt zones.
Yeah, because you get consideration.
Yeah, Bloomberg, yeah, there's a problem with Bloomberg. You can't take out the operating leases. It's kind of a weird no lease account. I don't know why you just got.
It's different from the U.S. gap and inverse.
It's just.
To state the obvious, the operating leases are already factored into our deficit equation.
Yes.
I was going to ask that question in the other direction. You guys have had more net debt in the past. Would you potentially think about redistributing and returning more capital?
I think the big learning from old Laureate is when you're operating in a multi-market, you have local currency earnings. You don't want a lot of US dollar denominated debt. That just kind of creates more risk and more volatility. Having a little bit of debt, I'd be comfortable with. We have so far decided not to take on more debt because we can't figure out a way to do it in a cost-effective way. If we take on US dollar denominated debt, it's not tax-deductible. If we're taking on local currency debt, we can't move it up to distribution and have it tax-deductible in the local market. We have decided right now we're going to be that way and then just use excess cash to replenish.
When you talk about the smaller part of the competitor set in Mexico, who's kind of next up on the scale and do they operate multiple brands?
Mexico market is very tight on this. We are twice the size of our nearest competitor. Nearest competitor is Tecnológico de Monterrey. They have two brands. They also have a premium and a value brand. Their price positioning is 4x that of ours. They are a competitor, but from operating because we can't deliver the kind of quality that we want to be associated with in that segment.
Do you guys have a peer or Peru currency or disposable currency?
We do not. If you look at our financials, we essentially have no foreign debt or structural debt where we would have and want to do a hedging instrument. What we have is translation risk, essentially. All of our revenue, with the exception of a small footprint of corporate, is in local currency and translated. The Peruvian soles, if you look at the Peruvian soles over the last five to seven years, have been incredibly stable. It is a commodities-based economy that largely follows things like copper. It has been around, if you look historically, it has been around that 3.4-3.8 mark with the exception of the recession and the political election that happened around a year and a half to two years ago.
Pretty much in support.
Yeah.
Yes. I think there's any taxation risk in these countries and the relevance by small margins?
I think the government is more focused on the cost of education. The regulatory tiers were treated as supportive, and excess and middle in. That is what we are standing for. We are in the business of spending the middle classes. In order to do that, we need to deliver quality education at very affordable prices so the students can get life-changing career opportunities. I think that changes in tax regimes is not because we are making too much money. It is because the government just needs to increase their revenue collection. We would be treated just like any other country. There is going to be no more risk to us than you did here. Any other questions?
Just another question. Those smaller scale operators, what are their margins like? I can't imagine there.
I think they are, it's tough selling. Not the private development. Their advantage is that they are probably willing to cut corners that we are not cutting.
Yeah. What do you see?
I think they might have the lower spending in innovation and student support, so their outcomes are much worse. It is very hard for them just because they do not have the scale that they have set for us. I am telling you, the cost of our back office would not be materially different if we had 50,000 students in Mexico instead of 250,000 students. Having that massive biggest investment, the systems and curriculum development, etc., having that advertisement for 250,000 students in each market is one of our key competitive advantages.
Excellent.
Very good. Nice group of people. Thank you.
Thanks, everyone.
Nice meeting you, Andrew. Thank you.
If anyone has any questions, feel free to reach out through the conference.