Curro Holdings Limited (COH) Earnings Call Transcript

Okay. I think that's just on 9:30 on -- sorry, 10:30 on my watch. Good morning, ladies and gentlemen. Welcome to Curro's presentation on the results for the financial year just ended on 31st of December 2024. I'm going to provide a brief overview of Curro's highlights for this period. We're going to summarize 3 key features of the investment case for our business. And then I'm going to explain our strategic focus in the future. I'll then hand over to our CFO, Burtie September, to talk you through some key financial information. And as usual, we will take questions at the end of the presentation. So, what do these results show? Well, I think the results show Curro's commitment to excellence in education. Curro is guided by our core belief that every child matters, and we've built a resilient business that effectively balances our social purpose with investor returns. Our learner focus has guided us throughout nearly 3 decades of operations and continues to drive our success. Current economic headwinds temporarily impacted learner growth, but we believe these challenges are cyclical in nature. The strength of Curro's fundamentals is clearly demonstrated in these financial results, reflecting the solid foundations that we've established over the last few years. The team's commitment to operational excellence, to innovation and to financial discipline has allowed us to navigate very challenging times. We maintain our high standards of education while simultaneously improving financial returns. But beyond the financial metrics, beyond that, our deep integration into the communities that we serve are evident. And you can see it in the achievements in the areas of academics, in sports, and of course, in cultural activities. And these achievements show that our relationships with our stakeholders are not merely transactional. They create lasting bonds, which we think will withstand temporary economic fluctuations. So, I'm going to share some highlights with you. I think the first highlights are financial in nature, and it talks to an increase in our revenue to ZAR 5.1 billion or about 8%, an increase of about 9% in EBITDA to ZAR 1.2 billion. Our operating margin increased to over 18% from 17.8% in the previous year and recurring headline earnings increased by 13%. And during 2024, our average number of learners increased by about 1% to 72,758 learners. Cash generated from operations exceeded the CapEx required for continued investment by about ZAR 200 million, and this is a continuation of the free cash generation trend from last year. So these results show the resilience and the fortitude of Curro in a strained economic environment. It was a remarkable year for Curro's learners. We're very proud of them and we saw some exceptional achievements. We recorded just about our most successful year ever in the areas of matric results, a wide range of sporting achievements and record participation in cultural and community activities. Curro's mission is to create more opportunities for our learners and schools are ambitiously expanding the academic and extramural activities on offer to prepare versatile learners for bright futures. I'm going to share a short video with you, which showcase the many opportunities that Curro created over the last year and which shows you how our learners excelled. [Presentation] So, indeed, a remarkable year full of success for our learners, the learners who inspire us and drive us forward. This is a dynamic, energetic, exciting business, and I hope you got a sense of that with that video. Frustratingly, Curro's successes in 2024 did not translate to learner growth in 2025. So, investors have asked me for insight about enrollment trends. And so I share this new exhibit with you. It's a new slide, which unpacks the number of leavers and the number of new joiners over the last 2 years. In other words, from February 2023 to February 2024 and then February 2025. As a business, we are often viewed as a bellwether, kind of sensitive to economic cycles. And so this modest enrollment challenge, I think, really reflects the broader economic reality facing South African families. So we have 1.4% less learners at the start of 2025 than when we started 2024. But we were resilient in an extremely constrained consumer environment. If you compare the information, the standout features are as follows. We specifically provide exit information to you about the number of Grade 7s and Grade Rs because we regard that as similar to matric. We have a number of freestanding primary and pre-primary schools, which do not necessarily have a school or Curro school adjacent to them where learners would conveniently and naturally progress to. We had our biggest matric group ever in 2024, nearly 5,000 learners, and that resulted in about 700 more learners exiting the business in matric than the previous year. Total leavers, excluding the matrics number, were lower in all categories in 2024 than in 2023. In other words, Curro's retention improved in 2024. This improved retention, even during economic hardship, demonstrates that our customers trust us and trust the quality brand to which they have become loyal. The overall improvement in retention in a very constrained climate also endorses our strategy to create even more opportunities for our learners, even more experiences, even more advantage, and it shows that parents trust us to deliver excellent education. We will continue with our disciplined approach to balance educational excellence with financial sustainability. Curro enrolled 14,600 new learners in 2024, and that's about 1,000 learners less than the 15,600 learners that we enrolled new in 2023. Consumer spend remains constrained and enrollment did not benefit yet from moderating inflation and the gradual easing of interest rates over the last few months. We've responded proactively to these enrollment challenges with targeted initiatives, continuing our focus on operational efficiency and on enhancing our value proposition. So, this is a long-cycle business, and we are confident that the quality of our educational offering will be compelling and will result in learner growth. We've built up significant growth momentum, and the next 3 slides exhibit 3 key features of Curro's investment case. In the first place -- and this is a slide we always show. In the first place, Curro has strong expansion potential based on the rollover from one grade to the next. So as an example, in 2024, we have nearly 7,000 Grade 8s, and we have 5,561 matrics. So roughly about sort of 600 more than what we had in 2024. The rollover of learners across grades builds Curro's academic momentum, particularly in high school, where we still see very keen enrollment interest. Affordability is a challenge for families in the younger grades, and we are driving various operational strategies and adjusting our pricing architecture to recapture market share in the early schooling years. Secondly, Curro has the physical capacity constructed and available to increase shareholder returns. We've invested about ZAR 14 billion in aggregate to establish the existing footprint across Southern Africa since 1998. We created different school models that are relevant to different market segments and at different price points. And this exhibit shows the headroom capacity we have across each of our models to accommodate thousands more learners within Curro's current facilities. Overall, Curro has available capacity to accommodate as much as another 30,000 learners, and that would be at a lower additional marginal cost. For the second consecutive year, we have generated more cash than what we deployed on CapEx, demonstrating the increasing maturity of our business model and the real opportunities for investors as we fill this excess capacity. CapEx is orientated to enhance the optimization of our existing facilities. This graph shows the gradual reduction in CapEx over time relative to the increase in operating cash flow generated in orange versus blue. And we've really reached a stage in our business model where we are consistently generating more cash than what is required for CapEx. We're confident that this trend will continue, as you can also see from this period following on last year. I'm going to briefly recap Curro's strategy, which is clear and unwavering. We are managing a high-quality business with a mission to offer excellent education. Curro generated strong growth momentum and is focused on achieving the operating leverage that is available in our business model. This means driving up operating profit and cash flows by growing revenue, by improving our operating margin and by containing CapEx. Revenue growth, that's the first objective is a function of both learner growth and the increase in the fees charged per learner. There is sustained support for the quality education offered by Curro and the educational advantages we offer to learners are compelling. Generally, tuition fees for 2025 increased by 5.5% per learner. Operating margin, in our opinion, is a measure of business excellence. Where other bellwether indicators like retail sales or new vehicle sales have struggled to grow in real terms in recent years, Curro expanded its operating margins over the last few years, despite prevailing weak conditions. Slowing total fee revenue growth for the 2025 year does inject some negative operating leverage, and I do expect a slightly lower operating margin for this year. While we expect the constrained consumer environment to persist in the near term, our focus on our operational efficiency positions us well to benefit as economic conditions improve. We will manage costs closely, but we will not curtail ambitious and high-quality education programs for our learners, in line with our commitment to every child. Cash generated from operations should consistently exceed the CapEx required therefore, and that would be on a like-for-like basis, in other words, excluding any material acquisitions. CapEx is well controlled and excess cash must go to shareholders. Our dividend is higher by 13% this year, and we continue to buy back shares. And this reflects our confidence in the sustainability of our business model and our commitment to shareholder returns. And maybe just to give some color to that, Curro is in a healthy financial position. Our business operations are resilient. And so, we are confident that buying back shares is a smart capital allocation decision and that it will enhance shareholder value permanently over the long term. In total, Curro has now acquired and canceled about 26 million shares for about ZAR 270 million over the last about 2.5 years. So in closing then, Curro built significant momentum over the last decade. We've established a brand of quality education across different platforms. Our models are efficient, they are scalable, and they give us opportunities to optimize service and profitability. We are unwavering in our commitment to quality education and to driving up investor returns. A thriving education business is essential to delivering sustained investment in education in this country, and this year's results validate this approach. The slight decrease in learner enrollment in 2025 throttles the pace at which we can achieve our return objectives over the medium term, but this business is resilient, and we remain on track to increase shareholder returns. Our learners recorded many remarkable achievements in 2024 and there's much, much more to come. So Burtie, with that, I'm going to hand over to you to address the financial details. Thank you.

Good morning, ladies and gentlemen. Thank you for that, Cobus. I'll provide commentary on the financial results and key drivers thereof in this period. In particular, I will provide commentary on revenue, operating expenses, explain the status of our trade receivables, review the earnings of the business for the period before reflecting on funding and CapEx. We provide quarterly perspective of the financial results to support your analysis of Curro's performance. For Curro, to sustain its quality education system, we must balance educational excellence with financial sustainability and resilience. Importantly, the 2024 results show Curro is a resilient business that creates value for parents, learners and investors while fulfilling its mission to ensure that every child matters. Curro continues to demonstrate strong financial discipline with our operating margin improving 3.9% since 2021, reflecting our commitment to efficiency and growth. Over the same 4 years, the return on capital employed for Curro improved by more than 3%. As responsible custodians of shareholder capital, we proactively review assets and its valuations to ensure that they align with both our ongoing performance and the ever-evolving risk landscape. In 2024, we processed impairments of ZAR 460 million in lieu of slower learner growth, reinforcing our commitment to transparency and resilience. The impairments reflect our prudent approach to asset valuations, particularly for campuses affected by local economic challenges. These non-cash items do not impact our strong cash generation or our ability to invest in our schools and drive investor returns. For the second year in a row, we've generated more cash than we've invested in CapEx, showcasing our business model's maturity and potential for investors. Curro's weighted average number of learners increased by 1% in 2024 to 72,638 learners. Total revenue increased by 8%, driven by learner growth, coupled with the annual school fee increase in the beginning of 2024 and then also by higher ancillary revenue. Fee revenue is the main component of Curro's revenue and increased by 7% in total for 2024. Average fees per learner increased by about 6% at the beginning of 2024. The process of granting discounts is discerning and disciplined and this expense reduced by 3% since 2021. Ancillary revenue consists of non-tuition revenue lines being rentals, boarding schools, bus services, aftercare income, rentals and other income. Ancillary revenue increased by 12% on last year. We are pleased that ancillary revenue has more than recovered over the last 2 years, with growth over the last 5 years now correlating with growth in total school fee revenue. Learner growth and activity at schools are the major drivers of operating expenses. This slide provides operating expenses per quarter. Total operating costs increased by 8% from 2023. The new schools opened at the beginning of 2024 added costs in this period. Total staff costs constitutes about 2/3 of operating expenses, and this increased by 6.2% in 2024. Curro's mission is to create as much opportunity as possible for our learners as we continue to expand school activities. Learning engagement in sports, tournaments, leagues and comprehensive range of cultural extramural activities across our schools are rising impressively. We are very pleased with the enthusiastic levels of participation and proud of our education enrichment for our learners. Facility costs increased by 9% to ZAR 435 million in 2024. We do not expect a meaningful improvement in our learner-to-teacher ratio in 2025. While we expect the constrained economic environment to persist in the near term, our focus on operational efficiency and disciplined financial management positions us to benefit when economic conditions improve. Group's costs are well managed and Curro's operating leverage will be a powerful driver of future profitability. Gross receivables increased to ZAR 546 million from ZAR 438 million on 31 December 2023. The steep increase in our debtors' balance is due to account terminations processed at the end of 2024, which resulted in an increase in the balance of the inactive debtors' book. Consumer spending is constrained in a challenging low-growth economy, directly influencing the rate of our account terminations. Expected credit loss provision is now at 42% of the gross receivables, up from 32% at the end of 31 December 2023. In addition to the provision for expected credit losses, Curro also incurred other bad debt-related costs like collection fees. The total bad debt-related costs, expressed as a ratio to turnover, increased to 4.3% in this period from 3.3% in 2023, and we continue to improve in this area. Trade receivables are split between active debt where learners are still enrolled in our schools and inactive debt for learners who have left Curro. The debtors book consists of ZAR 193 million of inactively enrolled accounts and ZAR 353 million for learners that have left our schools and indicated as inactive accounts. The increase inactive accounts balance was due to our proactive approach to managing overdue accounts. The number of account terminations was slightly more at the end of 2024, but with much higher average account balances than in 2023. This graph tracks the changes in trade receivables and provisions in the first and second halves of 2023 and 2024. Gross receivables increased by ZAR 108 million from 31 December 2023 to 31 December 2024 by more than the 8% increase in revenue. Curro wrote off ZAR 123 million of debtors and sold this non-performing portion of the debtors' book, which relates to learners who have left Curro. The expected credit loss provision increased by ZAR 89 million in this period after writing off the oldest account balances against both the debtor and the provision thereof. We managed credit risk prudently and adjusted our provision policy higher for inactive accounts. This slide confirms the earnings per share numbers. Recurring headline earnings increased by 10% to ZAR 469 million from ZAR 426 million in 2023. Earnings per share in 2024 includes a profit on sale of assets of ZAR 1 million net of tax and the impairment on school assets of ZAR 365 million net of tax, but are excluded from the calculation of headline earnings per share and recurring headline earnings per share. The group's balance sheet is well positioned and structured to support our growth ambitions. The total net debt decreased by ZAR 81 million to ZAR 3.1 billion on 31 December 2024 from ZAR 3.2 billion on 31 December 2023. The global credit rating company maintained the good long and short-term national scale issuer ratings assigned to Curro. The group's revolving credit facilities are due for repayment at the end of 2025, and we intend to refinance this in quarter 2 of this year. Overall, we plan to at least maintain the current debt levels over the medium to long term. Net finance costs increased to ZAR 314 million from ZAR 274 million in 2023. The increase in interest costs is due to the high interest rates, higher phasing of average debt levels, less interest capitalized against the construction of schools and higher lease liabilities. Cash generated from operating activities in this year was ZAR 866 million, very similar to 2023. Curro repurchased and canceled 10.7 million of its shares for ZAR 120 million in 2024. The group also purchased an additional 2.4 million Curro shares for ZAR 24 million during the period. This will be used to settle the group's future vesting obligation in terms of its long-term incentive scheme. Cash reserves funded a dividend payment of ZAR 83 million in this period. Curro invested ZAR 669 million in its business in 2024, which included the following: ZAR 60 million on the development of new schools; ZAR 286 million was used to expand capacity in classrooms and facilities; ZAR 4 million on curriculum development; ZAR 341 million on CapEx for refurbishment, maintenance and replacement; ZAR 49 million on water and energy-related projects; and we received proceeds on the disposal of assets for ZAR 70 million. Our objective is to increase capacity utilization at our existing facilities. CapEx were funded from operating cash flows and Curro's unutilized revolving debt facilities. Thank you, ladies and gentlemen. Cobus and I will now take questions.

Are they having mic available there? Okay. So, we're going to take some questions. There may be questions in the audience. So, we'll take that with the mic so everybody can hear. I haven't seen any online questions yet. So, are there any questions in the audience? There's one there.

Can you just expand on the pricing relook for the lower grades. Just touching on how you look to regain the market share in the lower grades?

Yes. I think we had a, let's call it, a scientific look at our pricing. And I think it's important to appreciate, we have different models with different price points and each school and each grade is unique. So, there's not a -- it's not a general menu. It's unique per school. And I think we got to a point where we really kind of looked very closely at that. We made some adjustments in 2024, and we came out with our fee structure for 2025 earlier than ever before. I think we announced it early in August. We normally do it early in October. That included a reduction in fees in some instances, a freezing of fees in others. We considered family kind of discounts and those kind of processes. And by and large, we can see -- and then one of the other things we considered is the step-up between kind of grades. So, by and large, the work we did yielded an impact. We saw benefit from that. And we will continue sort of fine tuning, if I can use the word, to try and find that sweet spot with our families. Of course, we have an operation that has invested a lot of capital and we must yield a return on that. So, there's this constant challenge also to say, well, you can give it away for free and have lots of learners, but then you can't justify going through the effort. So, there's a sweet spot there. I mean, I think families are under pressure, and it's heartbreaking when you lose kind of learners out of your system. I think another aspect is that we've really looked closely at the facilities and the offerings in those schools, and we have invested in a few instances where we felt we needed to improve infrastructure and facilities. So I think it's something that takes a bit of time. I'm pleased that the kind of strategies, both from a marketing perspective and otherwise are really kind of starting to show. It's not that evident in this set of results. And I would -- and it's frustrating, because a lot of work has gone into this area. But I think we kind of would -- it's a little bit early in the economic, let's just say, kind of turn. I'm kind of hoping that things will pick up a bit and that families will find it a little bit easier. I mean, incidentally, just for what it's worth, I'll take another question there. Incidentally, we've started like a really exciting process to work with community early childhood development centers. We've hosted remarkable sessions in our school halls where we invite anybody who wants to come and attend sort of a master class on good practice and good strategy to kind of develop young learners. And we've been overwhelmed with interest, and that's very exciting because it's a very powerful way to contribute in our society. So that's another example just of an initiative. There's a question here.

Cobus, just related to that topic. So, to the extent that you've, let's say, lost share in the lower grades, I mean, do those kids then just revert to the government school system? Or what typically happens if they're not coming to Curro?

Look, it's a good question, and I don't have the answer. In some instances, certainly, I would -- in most instances, I would expect that they would go to the public sector. But this is a competitive space, and it's quite possible that they also visit or attend other schools. We see a lot of relocations for young families where they move to other parts of the country and/or to other family members. So there's that kind of disruptive effect as well. But by and large, yes, I would say there would be a -- from a financial perspective, certainly a kind of a push to the public sector. Alright. Okay, while you ponder your questions, I'm just going to have a look at what's going on online here. So, there's a question here. What is your projected CapEx spend for 2025 and how much of this -- I can't really see the full question, sorry. How much of this is on maintenance and how much of this is on maintenance CapEx versus expansion CapEx? So, sorry guys, I'm just battling with the screen. You practice these things, and then when you're in front of everybody, the fun starts. Okay, here we go. Okay, so the first question is, we believe in the future. So we are looking to invest about ZAR 660 million in CapEx in 2025. That CapEx is predominantly orientated on existing facilities. I would say the maintenance element of that. And by maintenance, I think we must confirm that would also include the replacement of assets. So replacing a bus, replacing a computer, those kind of items, a little bit of furniture replacement and so on. So maintenance CapEx would be touching about ZAR 400 million. And the balance then would be about extending facilities, expanding facilities and/or addressing risk. So we've got tens of millions of rands that we are kind of spending on issues of water and energy to make sure that our school experience is a sustainable one; and operationally, an effective one. So, you get those kind of elements that land on top of. Then, another question here. What is Curro doing to retain their parents at schools by making their kids schooling experience smooth, efficient, parent-friendly, hassle-free while focusing on producing excellent academic outcomes? It sounds like my wife sent this one in. I'm going to have to talk to her afterwards. But look, I think -- I mean, it is an art. It really is, to communicate effectively with tens of thousands of people and to do it in a manner where the unique experience of every learner and every parent matters and is considered. So, one of the things we did this year, as an example, is we've -- in 2024 is we rewrote our whole enrollment process. We've made it about 2/3 faster and easier. Now, if you've ever had to enroll for a school, I think you'll understand what an obvious task that is. And that's an example of the kind of things we're doing. There's other kind of initiatives in our schools to really drive that efficiency. So, I think there's a host of -- as a national business with the kind of scale that we have, we have the ability to drive functional and IT and all sorts of platform developments which are very powerful. We are, for instance, piloting a program in 12 schools at the moment, which deals with the issue of sports calendars, sports teams, venues, times and so on, results, all those kind of things. And so -- and we'll see how that goes and we're hoping we can kind of push that art to make some of that admin easier for parents and perhaps more transparent and more easier to plan to. Let's go to the next one. What do you see as your greatest growth lever over the next 5 years? Your outlook statement suggests the environment is still soft? I don't suggest it, it is, okay? So, the outlook on the environment is soft. But this is a long-cycle business. We've been here for 30 years. We're going to be here for decades, and we're managing for that future. And there will be bumps and there will be kind of moments and challenges. But we're managing this thing for a very, very kind of successful and long future. So I think if I look at the next 5 years, the fundamental opportunity sits in the cash flow statement and the ability to, even in trying times, generate more cash. It's a fundamental opportunity, and that's a function of our CapEx kind of profile, clicking more into maintenance mode. But it doesn't mean we're going to stop acquiring fantastic opportunities or kind of opening new schools where it's justified. So, those are opportunities for us to drive growth. I think within the whole realm of digital and kind of hybrid learning, there's opportunities to become even more efficient and fundamentally to present education at an even more affordable cost to many more learners out there. So, from where we're sitting, it is a tough trading environment, but it's not one that we kind of think is impossible. We think we will be able to achieve growth. But certainly, this year of 2025 is going to be throttled a little bit by kind of a low-ish revenue growth. And we will, as an experienced management team, do what we must do and the best we can with those cards. But I think as an operation, it's very, very exciting to kind of see the kind of excellence coming out of our corridors. It's very compelling. And we think that in the fullness of time, that will really kind of propel us forward. And maybe just to answer the question directly, if you say the growth lever, I think the growth levers are, and I explained it in my presentation, it must be revenue growth, it must be operating margin growth, and it must be cash generation. Those are the 3 levers. And while times are tough, in other words, revenue may be under pressure, there must be a focus on operating margin and on how you utilize cash. So, those are the kind of near-term mechanisms. But in the fullness of time, we have plenty of space for many more learners, and we can't wait for them to join us and to participate in the excellence that we offer. The next question is, could you please share what salary increases are for 2025 are expected to be? Any thoughts you can share on the trajectory of bad debt to revenue from here? So I'm not going to kind of give you the salary increase now because I haven't discussed it with my staff. So, it would be wrong for them to read in the newspaper. But I can tell you, we look at that very carefully in relation to revenue growth, and we will generally have a staff increase, which are kind of at or slightly below the revenue growth in our schools, okay? And dare I say, I think it's important also to appreciate that salary increases are performance orientated. And we've got some exceptional teachers and staff that's done an amazing job with our learners. So we have to look after our talent. Then the question on trajectory of bad debts. So, we had a kind of a big increase in this bad debt provision, particularly in the second half. And it's kind of frustrating because we -- if you kind of look at the trends and we present it every time and we talk about it, we didn't really sort of see that in the first half of last year. So, there was an increase, particularly in the -- not so much in the -- I mean, the average number of accounts that terminated in the second half of last year was only slightly more. It was about maybe 10% more than in the first or second half of 2023. The first half's number was lower than the first half of 2023. So the kind of trend kind of shifted, kind of turned around. The average value of the accounts were a little bit higher. And that's really where the thing kind of moved up. And we said, look, I mean, this is the position and we've provided extra for it. We think it's prudent. We certainly like to collect that cash. But from a bad debt perspective, we kind of are where we are as an economy and as a society and it's difficult to tell you where it's going to go, but it is tough out there. Make no mistake, it is tough out there. Maybe just another data point is that the total number of accounts that left our operation in 2024 for financial and/or bad debt reasons was less than what it was. So the number of accounts was less than what it was in 2023. So that's, I guess, positive, but the value kind of was higher. How many students do you have in schools that have been impaired? How many joiners did you get in this cohort? So, it's quite a -- it's a big question when you have 189 schools, okay, with 72,000 learners. But I think the way to answer that is, roughly speaking, over the last few years, we've impaired just less than 1/3 of our schools. But be careful now because it's not so much an absolute -- I'm talking in terms of learner count relative to, not so much in actual schools. And the schools that have not been impaired have grown and they keep growing. So I think it's not all bad. And particularly in our high school end, we saw positive growth again in that section for this year. Right. I think I've got through the electronic questions. Are there any more questions from the room? I've got one more.