Ladies and gentlemen, thank you for standing by, and welcome to Laureate Education's Second Quarter 2020 Results Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Senior Vice President of Finance, Adam Morse. Sir, please go ahead.

Good morning, everyone, and thank you for joining us on today's call to discuss Laureate Education's second quarter 2020 results. Joining me on the call today are Eilif Serck-Hanssen, President and Chief Executive Officer; and J. J. 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'll be referring to during today's call. The call is being webcast and a complete recording will be available after the call. I'd like to remind you that some of the information we're providing today, including but not limited to, our financial and operational guidance constitutes forward-looking statements within the meaning of applicable U.S. securities laws. Forward-looking statements are subject to risks and uncertainties that may change at any time, and therefore, our actual results may differ materially from those we expected. Important factors that could cause actual results to differ materially from our expectations are disclosed in our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission; our 10-Q filed on May 7, 2020; our 10-Q filed earlier this morning as well as other filings made with the SEC. In addition, all forward-looking statements are based on current expectations as of the date of this conference call, and we undertake no obligation to update any forward-looking statements. Additionally, non-GAAP measures that we discuss, including Adjusted EBITDA 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. In the context of being in the middle of the COVID-19 pandemic, I am pleased to report a solid second quarter. Our Adjusted EBITDA results were ahead of expectations, in large part due to tight cost controls and the acceleration of certain productivity initiatives. The past five months have demonstrated the resiliency of our business model, enabled by our ability to deliver innovative and high-quality educational offerings at affordable prices. This has resulted in a relatively stable total enrollment base. Our liquidity position is strong, and we are seeing early signs of a reversal in some of the foreign exchange headwinds we experienced during the early stages of this pandemic. These factors are leading to an improved outlook for 2020, which JJ will cover in more detail when discussing our updated guidance. I want to thank our faculty and staff once again for their agility and commitment to deliver on our promises to our students during these challenging times. Laureate's top priority continue to be the health and well-being of our students, faculty and staff, while delivering high-quality educational offerings in a safe and responsible manner. As this crisis has unfolded, we have been carefully studying the emerging trends from across our network in comparison to what we experienced during prior economic shocks. Historically, as economies in Latin America have been unfavorably impacted by macro events, the primary negative impact to our business was felt at our premium institutions, while our value brands performed relatively well as students traded down to more affordable offerings. So far, through this pandemic, we are seeing evidence that the most vulnerable parts of society are hit the hardest. Consequently, there has been a greater adverse demand impact on our value brands versus our more premium brands. The…

Thank you, Eilif. As a reminder, campus-based higher education is a seasonal business, and the second quarter represents an important earnings period for the company. This year, that seasonality has been impacted by the COVID-19 pandemic, which resulted in the delay of a number of classes, and ultimately, some of them not being completed until the third quarter. Please refer to Page 7 for an illustration of the associated shift in our academic calendar. The financial impact associated with that is about $40 million of revenue, all due to be recognized in Q3. With that context in mind, let me now cover the financial results for the second quarter, starting on Page 8. Revenue in the second quarter was $792 million, and Adjusted EBITDA was $259 million. Adjusted EBITDA for the quarter was significantly ahead of the guidance we provided in May due to tight cost controls and the acceleration of a number of productivity initiatives we initiated in March. On a comparable basis and at constant currency, revenues for Q2 declined by 8%, while Adjusted EBITDA was up 1%. Adjusted for timing, revenue was still down 3%. This year-over-year decline in revenue was attributable to weaker new enrollments in Brazil and the Andean region as well as increased intra-semester attrition due to the COVID-19 pandemic. Moving now to first half results. When combined with the first quarter, still on a comparable basis and at constant currency, our overall performance for the first half resulted in a decrease in revenue by 6%, while Adjusted EBITDA was only down 3%. Adjusted for timing, revenues for the first half was essentially flat, at down 1%. And Adjusted EBITDA would have been up at least single digit versus 2019. Let me now provide more detail on our performance by segment, starting with Page…

Thank you, JJ. We are very pleased with the resiliency that our business model demonstrated in the second quarter. With a solid balance sheet, and with strong cash position, Laureate remains well positioned to deal with challenges, in these uncertain times. We will continue to be proactive in managing the business in a prudent manner during the pandemic, while opportunistically pursuing strategic transactions to further generate value for our stakeholders. Operator, that concludes our prepared remarks, and we are now happy to take any questions.

[Operator Instructions]. Our first question comes from the line of Shlomo Rosenbaum of Stifel.

And certainly, looks like results are definitely better than expected given the operating environment on the ground. I wanted to just ask you a little bit more about the Chile write-down. And like, what does it mean for the outlook for the business? And can you give us a little bit more detail? It seems like -- what specifically drove it in the quarter? Was it that legislation that's progressing in Chile right now in terms of being more accommodative for tuitions during COVID-19? Is there something else going on? Like what -- and what's the outlook for that business like into the future?

Hi Shlomo, this is JJ. I'm going to give you a little bit more background as to the process we went through in the second quarter like we do in -- during every quarter. Each quarter, we evaluate whether there are any indicators of impairment for our reporting units. As you know, we need to value our assets at the lower value of the fair market value or the current value on the balance sheet. And during the second quarter, as part of the ongoing strategic review, we received and considered information regarding the market valuation for control of our Chilean operations, which caused us to believe that it was more likely than not that the fair value of our Chilean reporting unit was less than carrying value. And we've put into the 10-Q a number of drivers in the footnote that are behind that. Obviously, uncertainties that market participants have around the operating of higher education institute in Chile, for instance; the challenging politic and regulatory environment that we've experienced; and of course, the possibility that the new Chilean constitution could become effective as early as the summer of 2022. We're not going to be discussing specifically what information we received. However, using that information, we performed the impairment test, and that resulted in the impairment charge. So that's really the process we went through and really what triggered the impairment in Q2.

Got it. So what's the carrying value now for Chile?

We haven't reported that information specifically for Chile. There is obviously additional disclosures in the 10-Q that you will find around the net assets associated with all VIEs that we have. That includes also Honduras. And similarly, you will find additional disclosures around the unrealized FX losses, but we haven't disclosed the carrying value of Chile.

Okay. And then just -- is there anything else that we should be considering in terms of like an enterprise value for Australia? It's just a fantastic price that you're getting and seems like the assets are really good assets. Is there any debt or cash that's allocated there as well? In other words, if we're looking for an enterprise value, are you guys going to be absorbing some of their debt? Or are they going to be -- are you going to be leaving a significant amount of cash there? Or anything else we should be considering?

The price that we disclosed is a debt-free, cash-free valuation that really is the enterprise value. And the reflection of the prices -- Laureate has a track record of building really strong businesses, and our business in Australia and New Zealand is no exception to that. I'm very pleased with the business that we have built over the last decade or so and very pleased with the transaction as well.

Our next question comes from Ryan Leonard of Barclays.

I was just wondering, I guess, what -- I know you've given multiple scenarios in your guidance. But I guess, what are you assuming for specifically attrition in those numbers? And I guess how did attrition even trend through July, if you have any kind of data points there?

Yes. Ryan, this is JJ. For the guidance, we've really taken a look at all the key drivers of our business that we've experienced over the last 90 days. And what we've seen is enrollment dynamics that tend to favor the higher price institutions. Re-enrollments have been strong fairly across the board. But there's been definitely an uptick in attrition, particularly at our value price institutions. As I said in my prepared remarks, the students that are attending those institutions tend to be disproportionately impacted from a socioeconomical standpoint by the COVID-19 crisis. So although enrollments are in the middle of the range that was established by the low book ends of the second scenario, and the higher book ends of the first scenario, it is slightly lower than the first scenario and reflects really what we've said, which is that the return to face-to-face operations is going to be slow and only gradual. So that has been factored into the guidance. Obviously, it's offset by the positive mix that I was referring to in terms of our enrollment dynamics and then all the cost actions that we've taken proactively to mitigate the revenue-related impact. So that's why we were able to hold guidance actually higher than the midpoint of the first scenario, partially due to FX favorability.

Got it. Then just in terms of portfolio review, from a regulatory standpoint, do you think further consolidation in Brazil is possible today? Or do you think amongst the large players, the government may not look kindly on that?

We're not going to speculate on which business combinations will be permitted. But clearly there's been a recent trend in consolidation. The market remains fairly fragmented. So we believe there are significant opportunities for further consolidation as the macro trend in Brazil.

Our next question comes from Marcelo Santos of JPMorgan.

[Technical Difficulty] when you look at Adjusted EBITDA for the first half, it was the region that was hit the hardest. So if you -- perhaps you could discuss the results in terms of what happened in Peru and Chile? That would be the first question. And the second question is regarding the educational reform in Peru. If you could provide some comments on, if you think there could be any changes given the political reshuffle that's taking place there? So any color on that would be very helpful.

Marcelo, this is Eilif. I'll take -- I'll frame it from a big picture perspective, and then JJ will jump in and provide more details here on the numbers in Peru and Chile. But you are right, Peru and Chile have been hit as a segment by COVID. Peru probably more so than Chile because Chile has a student loan program that blunts the impact somewhat from an affordability perspective. But in Peru, it's 100% private pay, and we have found that our consumers are struggling. I mentioned that in our opening remarks, particularly in the value segment. And so just -- there's been an element of affordability where students just said, "Listen, in this -- in the middle of this quarter, I just can't afford to sign up." So they are deferring. We do expect there to be a pent-up demand, but probably not in 2020, it's probably going to be more in 2021. In terms of the educational reforms in Peru, I think it's just simply a reflection that consumers are hurting and the legislators are looking for ways to reduce the burden on students. There's been a lot of projects or proposed legislations in Peru as well as in other markets in Latin America. But to date, there's been no material price controls or other adverse legislation that has been -- have been enacted. The legislators are focused on affordability. Laureate is focused on affordability. So we are well positioned in that regard. And we are working very collaboratively with the policymakers and the regulators, and our students and their families, to ease the impact of the crisis in a way that makes sense for everyone. So I'll pause there. I should also say, although there has been no legislation passed that is causing material adverse impacts to our business, we are monitoring, of course, all of these various proposed legislations in Peru and elsewhere very, very closely.

[Operator Instructions]. Our next question comes from the line of Caio Moscardini of Morgan Stanley.

So can you please provide the main initiatives that you are taking in order to increase the cost efficiency of the company? So I was wondering if you are, for instance, reducing the number of campus that you have, I don't know, but maybe merging two campus that are close to each other? And the second question about the intake and re-enrollment dynamics in Brazil. I believe the intake cycle in Brazil already started. So if you could comment how is the environment there? And how the re-enrollment process is going?

JJ, you will take on the cost side?

Yes. Yes, absolutely. So on the cost side, the productivity initiatives are really associated, first and foremost, on all the cost expenses that are associated with the running our face-to-face operations. Obviously, there was a lot of opportunity to reduce on-campus expenses. We've also been proactively negotiating with all of our landlords, the reduction of rent and driving the acceleration of some of the return of buildings that were always part of our productivity initiatives for 2020. But clearly, there was an opportunity to accelerate that trend. As you know, in Brazil, there's a lot more flexibility in doing so given the way the leases are structured versus in some of the other markets. And then, of course, the ability to deliver mostly online also provides opportunity to drive educational productivity a little bit further. So that was the second bucket. And last, but not least, all discretionary expenses have been contained to a minimum. And that rounds up, if you want, the 3 big buckets of productivity initiatives that we've had that have obviously benefited Q2 and will continue to yield dividends in the second half.

And on the enrollment and re-enrollment cycle in Brazil, we are about 2/3 through, about 65% through the intake for Brazil for the year. Of course, the main intake was cycle 1, and that's fully behind us, and we are far along on cycle 2. And the trends are very consistent with what JJ and I have been saying as strong re-enrollment performance. We have had good collections. In terms of intra-semester attrition at the value segment, that remains a challenge for us. And also, the new enrollment trends are a little lighter than prior year as a result of COVID. I'd also like to just comment in Brazil briefly on DL and face-to-face. We grew DL very rapidly in 2019, and we have now taken a step back and done a couple of fine-tuning adjustments on that model. The model now is at scale. It is now accretive to our bottom line. But we are focusing on higher price points and more profitable programs. That has resulted in DL volume coming down about 25%-26% year-over-year for the first half, but revenue is growing robustly. ARPs are growing for the second quarter by approximately 15%. So we do believe that the steps that we have taken to optimize the DL model is working for us. And then face-to-face volume for the first half is down about 7% year-over-year, and that is really all due to the COVID crisis, the affordability particularly in the value segment. And we're seeing certain regions being more impacted than others. The South is a little bit harder hit than São Paulo and the Northeast.

And at this time, we have no further questions in queue. This concludes today's conference call. Thank you for participating. You may now disconnect.

Thank you, everyone.