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Bright Scholar Education Holdings Limited (BEDU) Q3 2019 Earnings Call Transcript

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Bright Scholar Education Holdings Limited (NYSE: BEDU)
Q3 2019 Earnings Call
Jul 19, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and thank you for standing by for Bright Scholar 2019 Third Fiscal Quarter Earnings Conference Call. [Operator Instructions].

I would now like to turn the meeting over to your host for today's conference, Ms. Ruby Yim, Investor Relations Counsel.

Ruby Yim -- Investor Relations Counsel

Thank you, operator. Good morning, and good evening. Welcome to Bright Scholar's 2019 Third Fiscal Quarter ended May 31, 2019 Earnings Call. Joining me today are Mr. Jerry He, our Executive Vice Chairman; Mr. Derek Feng, our Chief Executive Officer; and Ms. Dora Li, our Chief Financial Officer.

As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. By now, you should have received a copy of our press release that was distributed on July 18, 2019, after market close Eastern Time. If you have not, it is available on the IR section of our website.

Before we get started, let me review the forward-looking statements regarding this conference call, that is statements related to future, not past, events often address expected future business and financial performance and financial condition, and often contain words such as will, estimate, project, predict, believe, expect, anticipate, intend, potential, plan or goal. Bright Scholar may also make written or oral forward-looking statements in other reports, in presentations, in material delivered to shareholders and in press releases.

In addition, Bright Scholar's representatives may make oral forward-looking statements. Forward-looking statements by their nature address matters that are to different degrees uncertain, such as statements about the company's goals and strategies, its future business development, financial condition and results of operations, its ability to retain and grow to its customer base and network of schools, the growth of and trends in the market for its services in China, the demand for and market acceptance of its brand and services, competition in its industry in China, relevant government policies and regulations relating to the corporate structure, business and industry, fluctuations in general economic and business conditions in China.

Further information regarding this and other risks is included in Bright Scholar's filings with the Securities and Exchange Commission. Bright Scholar undertakes no duty to update any forward-looking statements except as required under applicable law. During this call, we will be referring to GAAP and non-GAAP financial measures. We use certain non-GAAP measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for net income attributable to company or other consolidated statements of comprehensive income data prepared in accordance with US GAAP.

Please note, all numbers are in RMB, and all comparisons refer to year-over-year comparisons, unless otherwise stated. With that, I'll turn the call over to our Executive Vice Chairman, Jerry He. Jerry?

Junli He -- Executive Vice Chairman

Thank you, Ruby. Thanks for everyone who is joining our call today to review our 2019 third fiscal quarter results.

For those who are new to our company, we have including our earnings presentation a brief corporate introduction from Slide 3 to Slide 9, which you can download from our IR website.

I will start today's call with update on our recent acquisitions, then pass to Derek to highlight our business performance for the quarter and to share some of our key initiatives in developments. So I'll then provide detailed financial reviews before we take your questions.

Please turn to Slide 11. We continued to make great progress in expanding our global footprint with two further overseas acquisitions, following the completion of Bournemouth Collegiate School, BCS in November 2018, we have entered into agreements to acquire 100% equity interest in St. Michael's School, an established UK independent school which offers day and boarding education from age 3 to 18. And Bosworth Independent College in England, which provides independent boarding education to students from UK and abroad from age 13 to 19. And CATS Colleges Holdings Limited, an international school network focused on provision of quality education services to international school in their seven campus and 10 international language schools across UK, US, Canada and China.

Over the course of the quarter, we have also completed two strategic investments in Sannew American Middle School and Shandong-based Qiqiaoban to expand our domestic network of international schools and the kindergartens.

Upon completion of this transaction, in addition to our domestic network of seven international schools, 15 [Phonetic] bilingual schools and 55 kindergartners. We have eight schools and 10 [Phonetic] Learning Centers outside of China, across UK, US and Canada. And the potential revenue contribution of this acquired asset was structurally changed our revenue mix. In fiscal 2018, the combined revenue of these overseas schools, including BCS was approximately GBP118 million or approximately RMB943 million compared to our fiscal '18 revenue of RMB1.72 billion.

Our multi-year strategic investments are pivotal to scanning our business, expanding our global school network, enhancing education quality and broadening our education service offerings, that distinguish Bright Scholar as a global premium education service provider. We are proud of the progress we have made in building a balance portfolio of business with increasingly diversified revenue mix that creates sustainable value for our shareholders and the stakeholders.

Let me turn the call over to Derek. Derek, please.

Derek Feng -- Chief Executive Officer

Thank you, Jerry, Good morning, and good evening. We are very pleased to raise our full year guidance on the continued strong momentum in both the acquisitive and organic growth of our businesses.

Let me start with the highlights of our business and operation performance in Slide 12. We have an outstanding performance of strong year-over-year growth across all of our businesses in third quarter. Factoring in the contributions from Sannew, Qiqiaoban, Chengdu Yinzhe, Hangzhou Impression, Bournemouth School and other acquired companies, the revenue for the quarter was RMB692 million. It represents a year-over-year increase of 28.1%. The adjusted gross profit, adjusted operating income, adjusted EBITDA and adjusted net income increased by 37.9%, 13.8%, 17.7% and 10.8% year-over-year, respectively.

For the nine month period, revenue was RMB1.814 billion [Phonetic], representing a 39.3% year-over-year increase with 21% from organic growth and 18.3% from acquisitions. The adjusted gross profit, adjusted operating income, adjusted EBITDA and adjusted net income increased by 48.2% , 32.6%, 30.4% and 38% year-over-year, respectively.

Slide 13 shows you the detailed breakdown by business segment. The top line growth of our respective business segments continued to increase for the quarter with revenue of International Schools, Bilingual Schools, Kindergartens and a complimentary services segments were over 26.3%, 20.6%, 21.1% and 38.3%, respectively. On a nine month basis, they grow over 25.1%, 22%, 25.1% on 163.2%, respectively.

In November 2018, we completed the acquisition our first overseas school, Bournemouth. We expect the revenue contribution from overseas segment will increase substantially upon completion of respective transactions.

Please turn to Slide 14 for details on our rapid network expansion. As of May 31, 2019, with the addition of Sannew and Qiqiaoban Kindergartens, we have a total of 78 schools, including 7 international schools, 15 bilingual schools and 55 kindergartens covering nine provinces in China and one overseas schools in UK. The school portfolio has a total capacity of 62,446 seats. Our deep collaboration with Country Garden and other partners is crucial to the expansion of our school network. As of the release date, we have entered into 37 agreements with Country Garden and other partners to operate and manage 33 kindergartens and a four bilingual schools with a total capacity of approximately 17,200 students.

The sales and marketing initiatives and investments in maintaining competitive pricing, we made -- have generated substantial returns in student enrollments and a positive impact on utilization.

Please turn to Slide 15 for details. In comparison to the first nine months of the last fiscal year, the average student enrollment increased by 26.5% year-over-year to its 44,632 with blended utilization rates significantly increased to 72.9% from 61.8%. What unites our company is a commitment to excellence across all business lines in helping our students to achieve academic success. On this score, I'm very proud to report that our students consistently delivered remarkable academic results as shown in Slide 16. As of release date, 93.4% of our 2019 graduating students participating in AP, A Level and DP programs have received over 750 offers from the global top 50 institutions, including four from Oxbridge, three from University of Chicago, and a five from UC Berkeley.

Over the last six months, since I joined the company, my appreciation have deepened for the powerful ways BEDU have -- and our acquired business complement each other. We have a shared culture across the entire organization that values integrity, excellence and innovation with an unwavering commitment to provide a premium educational experiences for our students. The consecutive quarters of strong performance demonstrate our execution capabilities and position us for continued future success as a global premium education service provider. So at this point, I like to turn the call over to Dora to discuss our financials. Dora?

Dongmei Li -- Chief Financial Officer

Thank you, Derek. Let's turn back to our financials. Please be reminded that all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis.

Please turn to Slide 18. Our revenue for the quarter was RMB692.8 million, up 28.1%. On a nine month basis, our revenue was RMB1,851.4 million, up 39.3%. Revenue from our international schools for the quarter was RMB225.9 million, up 26.3% as compared to RMB178.9 million. For the nine month, revenue for international school was RMB590.7 million, up 25.1% as compared to RMB472.2 million.

Revenue contribution from Sannew for the quarter and for the nine months was RMB5.6 million. Revenue from bilingual schools for the quarter was RMB195.1 million, up 20.6% as compared to RMB161.7 million. On a nine month basis, revenue was RMB519.6 million, up 22% as compared to RMB425.8% million. Revenue for kindergarten for the quarter was RMB157.4 million, up 21.1% as compared to RMB129.9 million. On a nine month basis, revenue was RBM386.6 million, up 25.1% as compared to RMB309.1 million. Revenue contribution from Xinqiao and Qiqiaoban kindergartens was RMB20 million for the quarter and RMB38.1 million on a nine month basis. Revenue from BCS, our first overseas school for the quarter was RMB17.7 million. And on nine month basis, revenue was RMB33.3 million. Revenue from Complementary Education Services for the quarter was RMB97.2 million, up 38.3% as compared to RMB70.4 million. On a nine month basis, revenue was RMB321.2 million, up 133.2% as compared to RMB122.1 million. Revenue contribution from acquired business, including Can-Achieve, Foundation, Hangzhou Impression and the DBC was about RMB58.2 million for the quarter and RMB209.1 [Phonetic] million on a nine month basis.

Of Slide 19, cost of revenue for the quarter accounted for 54.1% of total revenue as compared to 57% in the same period last fiscal year. On a nine month basis, cost of revenue accounted for 58.7% of total revenue as compared to 60.8% in the same period last fiscal year. Teaching staff cost, the primary cost contributor, was 35.3% of total revenue for the quarter as compared to 37.1%. For the nine months, staff cost was 38.4% of total revenue as compared to 42.2%. Average student teacher ratio was 8.8 for May 31,2019, as compared to 8.5 for the same period last fiscal year.

On Slide 20, gross profit for the quarter was RMB318 million, up 38.8%. Gross margin improved from 43% to 45.9% on a nine month basis. Gross profit was RMB764.9 million, up 46.6%. Gross margin was 41.3%, up from 39.2%. For international schools, gross profit up 37% to RMB109.9 million for the quarter with gross margin improved from 44.8% to 48.7%. On a nine month basis, gross profit up 30.5% to RMB252.2 million with gross margin improved from 40.9% to 42.7%.

For bilingual schools, gross profit up 29.1% to RMB88.5 million for the quarter, with gross margin improved from 42.4% to 45.4%. On a nine month basis, gross profit up 31.5% to RMB205.9 million with gross margin improved from 36.8% to 39.6%.

For kindergartens, gross profit up 18% to RMB81.1 million for the quarter with gross margin decreased from 52.9% to 51.5%. On a nine month basis, gross profit up 24% to RMB175 million with gross margin decreased from 45.6% to 45.3%. The dilution of margin was primarily due to the newly opened kindergartens.

For overseas schools, gross profit was RMB8.9 million for the quarter with gross margin of 51.4%. On a nine month basis gross profit was RMB11 million with gross margin of 32.9%.

For complementary education services, gross profit up 97.5% to RMB29.6 million for the quarter with gross margin improved from 21.4% to 30.5%. For the nine months, gross profit was up 292.8% to RMB120.8 million with gross margin improved from 25.4% to 37.6%. The increase in margin was primarily due to the margin improved of Elan and the margin contribution from other acquired Complementary Business.

Slide 21. Adjusted SG&A expenses for the quarter accounted for 19.5% of total revenue up from 12.9%. On a nine month basis, adjusted SG&A expenses accounted for 20.9% of total revenue up from 17.4%. The increase in selling, general and administrative expenses was primarily due to the increase in the compensation and benefits incurred from additional general and administrative staff members. ESOP-related expenses to retain talents, marketing expenses for brand promotion and costs associated with acquisitions and other professional services to support the business expansion and growth as a listed company as well as the incremental SG&A expenses incurred from the acquired businesses. Excluding MA-related expenses adjusted SG&A expenses for the quarter accounted for 18.7% of total revenue and on a nine month basis it will be 19.7%.

Continuing to Slide 22. Adjusted EBITDA for the quarter was RMB220.9 million up 17.7%. Adjusted EBITDA margin was 31.9% compared to 34.7%. For the nine months, adjusted EBITDA was RMB487.6 million up 30.4% and adjusted EBITDA margin was 26.3% compared to 28.1%. Adjusted net income for the quarter was RMB160.2 million up 10.8% from RMB144.6 million, adjusted net margin was 23.1% as compared to 26.7%. On a nine month basis, adjusted net income was RMB359.8 million up 38% from RMB260.8 million. And adjusting margin was 19.4% as compared to 19.6%.

Also please refer to the table in Slide 23 for the condensed income statement and Slide 24 for the reconciliation for SG&A, EBITDA and net income on a GAAP to non-GAAP basis. A quick note on our cash and bank balance in Slide 25. As of May 31, 2019, the company's cash and cash equivalents and restricted cash totaled RMB2,057.1 million or equivalent of USD298 million as compared to RMB2,522.9 million as of February 28, 2019.

For the nine months ended May 31, 2019, the company's capital expenditure was approximately RMB105 million up 52.8% from the same period of last fiscal year. We are raising our guidance for 2019 fiscal year with a recap on Slide 27. For the fiscal year 2019 ending August 31, 2019, we expect our guidance for total revenue to be between RMB2,390 million and RMB2,460 million, representing an year-over-year growth between 39% and 43%. We expect our average student enrollment to be between approximately 44,000 and 45,000 representing a year-over-year increase between 20% and 23%. We opened three new kindergartens during the 2019 fiscal year.

That concludes my financial update. Now I will turn the call back to Derek for his closing remarks. Derek?

Derek Feng -- Chief Executive Officer

Thank you, Dora. The consecutive quarterly and yearly growth results continue to demonstrate our commitment to generate a sustainable revenue growth. Our businesses -- our our students plays great value in our pursuit of excellence in our performance as we continue to accelerate the pace of scaling our business both organically and through strategic acquisitions. This concludes our prepared remarks, and I would like to open the call for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Our first question today comes from Elsie Sheng with Morgan Stanley. Please go ahead.

Elsie Sheng -- Morgan Stanley -- Analyst

Hi, management. My first question is about the new proposed acquisition of the schools in UK. Do you have any details about the schools to be acquired. For example, like the capacity and tuition fee level and your future plans for the schools? And my second question is about the SG&A expense, because SG&A as percentage of revenue has going up -- has been going up, and do you have any guidance for any more details on that you can share?

Junli He -- Executive Vice Chairman

Yes. I will take the first question about the acquisition in the UK. We laid out in our scripts, we made the three acquisitions: Bournemouth and also St. Michael's and Bosworth work together and then we've acquired CATS. And combined capacities about -- for CATS about 3,400; for St. Michael's and Bosworth is about 700. For BCS, it's about 700. In total, it's about 4,800. In terms of average tuition, if you do the math for the total round, we stated it's about 108 million. So divided by the number of students, you can get approximately what the tuition would be. So for the SG&A, I'll let Dora to take the SG&A question.

Dongmei Li -- Chief Financial Officer

Hi. For the quarter and for the nine months basis. We have just mentioned that we are investing on people and on marketing to support our long term sustainable growth. And you have noticed, we have acquired quite a few business expanded our top line. And if we separate the acquired business and also some acquisition related expenses for the quarter, our SG&A as a percentage of respected revenue is relatively stable around 16%. On a nine month basis, the SG&A as a percentage of revenue actually stay as the same around 19.2%.

Elsie Sheng -- Morgan Stanley -- Analyst

Okay. Thank you. Just follow-up on the SG&A. Do you expect the percentage of SG&A to stay at the 3Q level, because there are more acquisitions going forward? Or what's your view on the future trend?

Dongmei Li -- Chief Financial Officer

Would you want to repeat your question?

Junli He -- Executive Vice Chairman

SG&A expense.

Elsie Sheng -- Morgan Stanley -- Analyst

I'm asking do you have any view on the future trend of SG&A expense, even that there are more acquisitions coming?

Junli He -- Executive Vice Chairman

This is Jerry. I'd take it that question. Typically, together we have the school business then we have the non-school business. Typically for the non-school business we have higher gross margin or so, at the same time higher SG&A. Okay? That's kind of the mix of the business. The school business have a higher -- lower gross margin, but it have very low SG&A as well. So it depends on the mix of the business, especially when you're looking at acquisitions. But in general trend, if you have -- see -- you could see from the last past three years as we scale our business, there is a economy of scale and it would go down. But for this quarter particularly because we have a lot of kind of MA-related and the structure-related costs. So for this quarter, it's higher than I would say, higher than last year and also higher than the first couple of quarters, but I would do expect as the business to continue to grow -- as a percentage it's slightly trending down.

Elsie Sheng -- Morgan Stanley -- Analyst

Okay. Thank you. I'm very clear.

Operator

[Operator Instructions] Our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho -- Goldman Sachs -- Analyst

Hi, thank you for the opportunity to ask the question. For the overseas schools, as the business actually growing quite substantially with the recent announcements. What are some of the key opportunities in this you see from here? And can you elaborate on the growth and margin potential going forward, given it's becoming a bigger part of the business on a forward basis.

Junli He -- Executive Vice Chairman

Sure. I will take the question. Typically, when we look at acquisition overseas, we are looking at high-quality schools with self sustainable financials. I mean, they are actually profitable to begin with. The remaining of the schools have a history, have high quality in their respective regional cities, but with global presence we have, we can leverage resources in other parts of the world to help them to enroll more students, also -- we can also leverage what they have in, for example from UK to China in terms of the teachers training, curriculum development and summer window camps. So it would be quite some synergy between the operations in China and also the operations in overseas. That will further increase our margins for both operations in China and overseas.

Operator

Thank you. Our next question today comes from Kevin Li with China Renaissance. Please go ahead.

Kevin Li -- China Renaissance -- Analyst

Hi, hello management. Thank you for taking my question. I just have a quick question on in terms of, do you have any thoughts on any share repurchase or dividend plans in the near future? So that's the first question. And the second question is, perhaps if you could sort of share with us the margin profile of the newly acquired entities, the recently acquired schools? And in terms of the margin trend going forward, what should we expect. Thank you.

Dongmei Li -- Chief Financial Officer

Hi, this is Dora. So the first question regarding share repurchase, well our share repurchase program has been completed and we will not have -- we do not have authorization from the board for any new program, it's stopped. And second question regarding the overseas target.

Kevin Li -- China Renaissance -- Analyst

Margins.

Dongmei Li -- Chief Financial Officer

Margins, I think, Jerry, just to explain.

Junli He -- Executive Vice Chairman

I can take that question. We are not in a position to disclose the numbers for our school now, but I can give you some general idea of what they are. Typically, if you -- we look at developed countries like UK, US and Canada is somewhere in the teens and/or low-20s. But I can't say too much about what's our numbers yet.

Kevin Li -- China Renaissance -- Analyst

Okay, thank you.

Operator

[Operator Instructions] And there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Derek Feng for any closing remarks.

Derek Feng -- Chief Executive Officer

Thank you very much for joining this conference call. Please feel free to contact us if you have further questions and we wish everyone a good day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Ruby Yim -- Investor Relations Counsel

Junli He -- Executive Vice Chairman

Derek Feng -- Chief Executive Officer

Dongmei Li -- Chief Financial Officer

Elsie Sheng -- Morgan Stanley -- Analyst

Christine Cho -- Goldman Sachs -- Analyst

Kevin Li -- China Renaissance -- Analyst

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