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Edited Transcript of BEDU.N earnings conference call or presentation 19-Jul-19 12:00pm GMT

Q3 2019 Bright Scholar Education Holdings Ltd Earnings Call

FOSHAN Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Bright Scholar Education Holdings Ltd earnings conference call or presentation Friday, July 19, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Derek Feng

Bright Scholar Education Holdings Limited - CEO

* Dongmei Li

Bright Scholar Education Holdings Limited - CFO

* Junli He

Bright Scholar Education Holdings Limited - Executive Vice Chairman

* Ruby Yim

Bright Scholar Education Holdings Limited - IR Counsel

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Conference Call Participants

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* Hyun Jin Cho

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Yiran Sheng

Morgan Stanley, Research Division - Equity Analyst

* Zhenting Li

China Renaissance Securities (US) Inc., Research Division - Hong Kong Analyst

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Presentation

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Operator [1]

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Good morning, and thank you for standing by for Bright Scholar's 2019 Third Fiscal Quarter Earnings Conference Call. (Operator Instructions) Today's conference is being recorded.

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

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Ruby Yim, Bright Scholar Education Holdings Limited - IR Counsel [2]

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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, such as 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 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 statement except as required under applicable law. During this call, we'll 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 substitute for net income attributable to company or other consolidated statements of comprehensive income data prepared in accordance with U.S. 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?

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Junli He, Bright Scholar Education Holdings Limited - Executive Vice Chairman [3]

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Thank you, Ruby. Thanks to 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 included in our earnings presentation a brief corporate introduction from Slide 3 to 9, which you can download from our IR website.

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

Please turn to Slide 11. We continue to make great progress in expanding our global footprint with 2 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 U.K. and abroad from age 13 to 19. And the CATS College Holding Limited, an international school network, focused on provision of quality education services to international students in their 7 campuses and the 10 international language schools across U.K., U.S., Canada and China.

Over the course of the quarter, we have also completed 2 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 these transactions, in addition to our domestic network of 7 international schools, 11 (sic) [15] bilingual schools and 55 kindergartens, we have 8 schools and 10 learning centers outside of China across U.K., U.S. and Canada.

And the potential revenue contribution of this acquired asset will structurally change our revenue mix. In fiscal 2018, the combined revenue of these overseas schools, including BCS, was approximately GBP 108 million or approximately RMB 943 million compared to our fiscal '18 revenue of RMB 1.72 billion.

Our multi-year strategic investments are pivotal to scaling our business, expanding our global school network, enhancing education quality and broadening our educational 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 balanced 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.

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Derek Feng, Bright Scholar Education Holdings Limited - CEO [4]

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

Let me start with the highlights of our business and operational performance in Slide 12. We had 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 CNY 692 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 9-month period, revenue was CNY 1.814 billion (sic) [CNY 1.8514 billion], 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 segments. 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 complementary services segments were over 26.3%, 20.6%, 21.1% and 38.3%, respectively. On a 9-month basis, they grew over 25.1%, 22%, 25.1% and 163.2%, respectively. In November 2018, we completed acquisition of 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 9 provinces in China and 1 overseas school in U.K. 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 4 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 9 months of the last fiscal year, the average student enrollment increased by 26.5% year-over-year to 44,632 with blended utilization rate 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 deliver 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 4 from Oxbridge, 3 from University of Chicago and 5 from UC Berkeley.

Over the last 6 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 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'd like to turn the call over to Dora to discuss our financials. Dora?

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Dongmei Li, Bright Scholar Education Holdings Limited - CFO [5]

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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, until -- 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 CNY 692.8 million, up 28.1%. On a 9-month basis, our revenue was CNY 1,851.4 million, up 39.3%. Revenue from our international schools for the quarter was CNY 225.9 million, up 26.3% as compared to CNY 178.9 million. For the 9 months, revenue for international school was CNY 590.7 million, up 25.1% as compared to CNY 472.2 million. Revenue contributions from Sannew for the quarter and for the 9 months was CNY 5.6 million. Revenue from bilingual schools for the quarter was CNY 195.1 million, up 20.6% as compared to CNY 161.7 million. On a 9-month basis, revenue was CNY 519.6 million, up 22% as compared to CNY 425.8 million. Revenue for kindergarten for the quarter was CNY 157.4 million, up 21.1% as compared to CNY 129.9 million. On a 9-month basis, revenue was CNY 386.6 million, up 25.1% as compared to CNY 309.1 million.

Revenue contribution from Xinqiao and Qiqiaoban kindergartens was CNY 20 million for the quarter and CNY 38.1 million on a 9-month basis. Revenue from BCS, our first overseas school for the quarter was CNY 17.7 million and on a 9-month basis revenue was CNY 33.3 million. Revenue from Complementary Education Services for the quarter was CNY 97.2 million, up 38.3% as compared to CNY 70.4 million. On a 9-month basis, revenue was CNY 321.2 million, up 133.2% (sic) [163.2%] as compared to CNY 122.1 million. Revenue contribution from acquired business, including Can-Achieve, Foundation, Hangzhou Impression and the DBC was about CNY 58.2 million for the quarter and CNY 209.1 million on a 9-month basis.

On 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 9-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 9-month, 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 CNY 318 million, up 38.8% (sic) [36.8%]. Gross margin improved from 43% to 45.9%. On a 9-month basis, gross profit was CNY 764.9 million, up 46.6%. Gross margin was 41.3%, up from 39.2%. For international schools, gross profit up 37% to CNY 109.9 million for the quarter, with gross margin improved from 44.8% to 48.7%. On a 9-month basis, gross profit up 30.5% to CNY 252.2 million, with gross margin improved from 40.9% to 42.7%.

For bilingual schools, gross profit up 29.1% to CNY 88.5 million for the quarter, with gross margin improved from 42.4% to 45.4%. On a 9-month basis, gross profit up 31.5% to CNY 205.9 million with gross margin improved from 36.8% to 39.6%.

For kindergartens, gross profit up 18% to CNY 81.1 million for the quarter, with gross margin decreased from 52.9% to 51.5%. On a 9-month basis, gross profit up 24% to CNY 175 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 CNY 8.9 million for the quarter, with gross margin of 51.4%. On a 9-month basis, gross profit was CNY 11 million with gross margin of 32.9%.

For Complementary Education Services, gross profit up 97.5% to CNY 29.6 million for the quarter, with gross margin improved from 21.4% to 30.5%. For the 9 months, gross profit was up 290.8% (sic) [292.8%] to CNY 120.8 million, with gross margin improved from 25.4% to 37.6%. The increase in margin was primarily due to the margin improve 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 9-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 talent, marketing expenses for brand promotion and cost associated with acquisition and other professional services to support the business expansion 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 9-month basis, it will be 19.7%.

Continuing to Slide 22. Adjusted EBITDA for the quarter was CNY 220.9 million, up 17.7%. Adjusted EBITDA margin was 31.9% compared to 34.7%. For the 9 months, adjusted EBITDA was CNY 487.6 million, up 30.4% and adjusted EBITDA margin was 26.3% compared to 28.1%. Adjusted net income for the quarter was CNY 160.2 million, up 10.8% from CNY 144.6 million. Adjusted net margin was 23.1% as compared to 26.7%. On a 9-month basis, adjusted net income was CNY 359.8 million, up 38% from 260.8% -- CNY 260.8 million and adjusted 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 equivalent and restricted cash totaled RMB 2,057.1 million or equivalent of USD 298 million as compared to RMB 2,522.9 million as of February 28, 2019. For the 9 months ended May 31, 2019, the company's capital expenditure was approximately RMB 105 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 RMB 2,390 million and RMB 2,460 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 the 3 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.

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Derek Feng, Bright Scholar Education Holdings Limited - CEO [6]

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Thank you, Dora. The consecutive quarterly and yearly growth results continue to demonstrate our commitment to generate a sustainable revenue growth. Our businesses -- 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?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Elsie Sheng with Morgan Stanley.

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Yiran Sheng, Morgan Stanley, Research Division - Equity Analyst [2]

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My first question is about the new proposed acquisition of the schools in U.K. 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 could share?

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Junli He, Bright Scholar Education Holdings Limited - Executive Vice Chairman [3]

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Yes. I will take the first question about the acquisition in the U.K. We laid out in our scripts, we made 3 acquisitions: Bournemouth and also St. Michael's and Bosworth were together and then we acquired CATS. And combined capacities about -- for CATS about 3,400; for St. Michael's and Bosworth, it's 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 -- have Dora to take the SG&A question.

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Dongmei Li, Bright Scholar Education Holdings Limited - CFO [4]

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For the quarter and for the 9-month basis, we have just mentioned 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 expected revenue is relatively stable around 16%. On a 9-month basis, the SG&A as a percentage of revenue actually stay at the same around 19.2%.

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Yiran Sheng, Morgan Stanley, Research Division - Equity Analyst [5]

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Okay. 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?

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Dongmei Li, Bright Scholar Education Holdings Limited - CFO [6]

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Would you want to repeat your question?

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Junli He, Bright Scholar Education Holdings Limited - Executive Vice Chairman [7]

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The SG&A trend.

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Yiran Sheng, Morgan Stanley, Research Division - Equity Analyst [8]

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

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Junli He, Bright Scholar Education Holdings Limited - Executive Vice Chairman [9]

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Yes. This is Jerry. I'll take that question. Typically, together we have the school business then we have the nonschool business. Typically, for the nonschool business, we have higher gross margin but also at the same time higher SG&A, okay? That's kind of the mix of the business. The school business have higher -- lower gross margin, but 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 3 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, it's higher than last year and also higher than the first couple of quarters, but I would do -- expect as the business continue to grow, the -- as a percentage it's slightly trending down.

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Operator [10]

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(Operator Instructions) Our next question comes from Christine Cho with Goldman Sachs.

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Hyun Jin Cho, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

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For the overseas school, the business actually is growing quite substantially with the recent announcement. 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?

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Junli He, Bright Scholar Education Holdings Limited - Executive Vice Chairman [12]

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Sure. I will take the question. Typically, when we look at acquisition overseas, we are looking at high-quality schools with self-sustainable financials, meaning they are actually profitable to begin with. But many 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. For example, from U.K. to China in terms of 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 margin for both operations in China and overseas.

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Operator [13]

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Our next question today comes from Kevin Li with China Renaissance.

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Zhenting Li, China Renaissance Securities (US) Inc., Research Division - Hong Kong Analyst [14]

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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?

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Dongmei Li, Bright Scholar Education Holdings Limited - CFO [15]

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This is Dora. So for your 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 stopped. And second question regarding the overseas target margins, I think, Jerry, just explained.

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Junli He, Bright Scholar Education Holdings Limited - Executive Vice Chairman [16]

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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 U.K., U.S. and Canada, you're somewhere in the teens and/or low 20s. But I can't say too much about what's our numbers yet.

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Operator [17]

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(Operator Instructions) As 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.

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Derek Feng, Bright Scholar Education Holdings Limited - CEO [18]

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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.

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Operator [19]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.