U.S. Markets closed

Edited Transcript of BEDU.N earnings conference call or presentation 23-Apr-19 12:00pm GMT

Q2 2019 Bright Scholar Education Holdings Ltd Earnings Call

FOSHAN Apr 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Bright Scholar Education Holdings Ltd earnings conference call or presentation Tuesday, April 23, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Derek Feng

Bright Scholar Education Holdings Limited - CEO

* Dongmei Li

Bright Scholar Education Holdings Limited - CFO

* Ruby Yim

Bright Scholar Education Holdings Limited - IR Counsel

================================================================================

Conference Call Participants

================================================================================

* Hyun Jin Cho

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Melissa Chen

China Renaissance Securities (Hong Kong) Limited, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and thank you for standing by for the Bright Scholar's 2019 Second 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 Council. Please go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, operator. Good morning, and good evening. Welcome to Bright Scholar's 2019 Second Fiscal Quarter Ended February 28, 2019, Earnings Call. Joining me today are 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 this call. By now, you should have received a copy of our press release that was distributed on April 22, 2019, after market close Eastern Time. If you haven't, it is available on our 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 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 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 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 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 CEO, Derek Feng. Derek?

--------------------------------------------------------------------------------

Derek Feng, Bright Scholar Education Holdings Limited - CEO [3]

--------------------------------------------------------------------------------

Thank you, Ruby. Thanks for everyone who is joining our call today to review 2019 second fiscal quarter results. Now let's get started.

For those who are new to our company, we have included in our earnings presentation a brief corporate introduction from Slide 3 to Slide 9, which you can download from our IR website. Again all numbers in RMB, and all comparisons refer to year-over-year, unless otherwise stated.

I will start today's call with the performance highlights, then share some of our key strategic developments before turning over the call to Dora for financial review. After the remarks, we will take your questions.

Please turn to Slide 11. Let me start by saying that we were extremely pleased with the outstanding results across all of our businesses and the investments we have made to accelerate our future growth. This, in turn, positions us very well to achieve the high-end of our financial guidance range. Our revenue growth for the quarter was 57.5% with 24.3% from organic growth and 33.2% from acquisitions.

Let's look at a detailed breakdown by business segments on Slide 12. The top line growth of our respective business segments continued to increase for the quarter with revenue of International Schools, Bilingual Schools and the Kindergartens grew over 23.3%, 20.2% and 25.3%, respectively. Our complementary business in the quarter has expanded considerably as we started to recognize revenue contributions from Foundation Global, Chengdu Yinzhe and the Hangzhou Impression in addition to Can-Achieve. A fast-expanding school network supported by strong enrollment growth, steady increase in ASP and utilization have been the main catalysts driving our organic growth.

Please turn to Slide 13 and 14 for more details. As of April 22, 2019, with the addition of Bournemouth School, we have a total of 69 schools, including 6 international schools, 15 Bilingual Schools and 47 Kindergartens, covering 9 provinces in China and 1 Overseas School in U.K. Our school portfolio has a total capacity of 59,326 seats. Our strategy to maintain a competitive pricing across all school segments to optimize utilization has been paying off. Compared to the first half of the last fiscal year, the average student enrollment for the first half of fiscal 2019 has increased by 22.7% to 42,035 with blended utilization increased to 71% from 60.4%.

Improving academic outcomes remains the number one priority for Bright Scholar. I'm proud to introduce this year's academic accomplishments.

Please turn to Slide 15. As of April 22, 2019, 89% of our 2019 graduating students participated in AP, A level and DP programs have received over 670 offers from the global top 50 institutions, including 4 from Oxbridge and 2 from University of Chicago and 5 from UC Berkeley. Over the years, we have consistently been able to deliver remarkable academic performance. Again academic excellence represent the very essence of our brand as a premium education service company.

Continuing on to Slide 16. For the recent updates on our acquisitive growth initiatives, strategic investments are pivotal to accelerate our business scale, expand our national and global footprints and broaden our educational service offerings. We have achieved a great deal since becoming a public company with 7 completed acquisitions and 3 in progress, which has been an important period in Bright Scholar's development as a world's leading premium education company.

Most recently, we've entered into agreements to acquire 25% equity interest in Start Camp Education and 80% controlling interest in Sannew School. Start Camp provides one-stop solutions in camp layout and program design and has contributed to the opening of Bright Scholar's first Outdoor Camp this quarter. Sannew is a very first American-style private boarding school in Wuhan and the proposed acquisition represent an excellent strategic fit with Bright Scholar's family of schools, building up prominence in Central China. We expect to complete both transactions by May 2019 and continue to expand our business globally.

Staying on the slide for another update -- for other updates. Our close collaboration with Country Garden is crucial to the expansion of our school network. As of the release date, we have entered into agreements with Country Garden to operate a total of 25 Kindergartens and 2 Bilingual Schools with a total capacity of approximately 11,000 students. We are pleased with the continuous performance of our expanded portfolio in our overseas' students consulting services. Foundation Global Education provides consulting services for the students pursuing study in top-tier overseas boarding schools and universities. In 2019 application season, 44.7% of its students applying for U.S. boarding schools gained admission to leading boarding schools, including Philips Exeter Academy, St. Paul's Schools and Milton Academy, and 56% of its students applying for U.S. universities were accepted to the U.S. News ranking's top-ranking institutions, including Yale, Cornell and the University of Chicago.

Can-Achieve now represent over 900 prestigious overseas universities in U.S., Canada, U.K. and Australia to recruit students from China. It helped over 6,000 Chinese students to pursue higher education overseas in 2019 (sic) [2018]. An update on our share repurchase program, as shown in Slide 17, we have been very active since the inception of this program in April 2018. As of April 17, 2019, the company has repurchased approximately 6.48 million of its American depository shares from an aggregate purchase price of approximately USD 75 million.

In concluding my remarks, Bright Scholar delivered another strong quarter. I'm proud of our team for maintaining its focus on students, improving their academic success, which in turn, contributing to the ongoing improvement of our financial results. We will continue to execute on our organic and acquisitive growth strategy, optimize operating efficiency, drive synergies from acquisitions and to reward our shareholders with a profitable growth business.

So at this point, I would like to turn the call over to Dora to discuss our financials. Dora?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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 year-over-year basis.

Please turn to Slide 19. Our revenue for the quarter was RMB 508.8 million, up 57.5%. On a 6-month basis, our revenue was RMB 1,158.6 million, up 47%. Revenue from International Schools for the quarter was RMB 146.3 million, up 23.3% as compared to RMB 118.7 million. On a 6-month basis, revenue was RMB 364.9 million, up 24.4% as compared to RMB 293.3 million. Revenue from Bilingual Schools for the quarter was RMB 130.6 million, up 20.2% as compared to RMB 108.6 million. On a 6-month basis, revenue was RMB 324.5 million, up 22.9% as compared to RMB 264.1 million. Revenue from Kindergartens for the quarter was RMB 91.5 million, up 25.3% as compared to RMB 73 million. For 6 months, revenue was RMB 229.2 million, up 27.9% compared to RMB 179.2 million. Revenue for BCS, our first overseas school for the quarter was RMB 16.1 million and same for the 6 months.

Revenue from Complementary Education Services for the quarter was RMB 124.3 million, up 445.8% as compared to RMB 22.8 million. On a 6-month basis, revenue was RMB 223.9 million, up 333.3% as compared to RMB 51.7 million. Revenue contribution from acquired business, including Can-Achieve, Foundation, Hangzhou Impression and DBC was about RMB 80.2 million for the quarter and RMB 150.9 million on a 6-month basis.

On Slide 20, cost of revenue for the quarter accounted for 70.5% of total revenue as compared to 77% -- 77.6% in the same period last fiscal year. For 6 months, cost of revenue accounted for 61.4% as compared to 63.3% in the same period last fiscal year. Teaching staff cost, the primary cost contributor, was 47.8% of total revenue for the quarter as compared to 56.8%. On a 6-month basis, staff cost was 40.3% of total revenue as compared to 45.6%. Average student teacher ratio was 8.9 for February 28, 2019, as compared to 8.8 of same period last fiscal year.

On Slide 21, gross profit for the quarter was RMB 150.3 million, up 108%. Gross margin improved from 22.4% to 29.5%. On a 6-month basis, gross profit was RMB 446.8 million, up 54.6% from 38.6% (sic) [36.7%]. For International Schools, gross profit up 27.8% to RMB 34.9 million for the quarter with gross margin improved from 23% to 23.9%. On a 6-month basis, gross profit up 25.9% to RMB 142.3 million with gross margin improved from 38.5% to 39%. For Bilingual Schools, gross profit up 45.9% to RMB 30 million for the quarter with gross margin improved from 19% to 23%. On a 6-month basis, gross profit up 33.5% to RMB 117.3 million with gross margin improved from 33.3% to 36.2%. For Kindergartens, gross profit up 23.2% to RMB 24.2 million for the quarter with gross margin decreased slightly from 26.8% to 26.5%. On a 6-month basis, gross profit up 29.8% to RMB 93.9 million with gross margin improved from 40.4% to 41%. For Overseas School, gross profit was RMB 2.1 million with gross margin of 13.2% for the quarter and the 6-month basis.

Complementary Education Services, gross profit up 1,171.2% to RMB 59.1 million for the quarter with gross margin improved from 20.6% to 47.4%. For 6 months, gross profit up 479.7% to RMB 91.2 million with gross margin improved from 30.6% to 40.7%. The increase was primarily due to contributions from acquired business, including Can-Achieve, Foundation, Hangzhou Impression and DBC of RMB 42.8 million for the quarter and RMB 72 million on a 6-month basis.

Moving to Slide 22. Adjusted SG&A expenses for quarter accounted for 26.8% of total revenue, up from 25%. For 6 months, adjusted SG&A expenses accounted for 21.7% of total revenue, up from 20.5%. The increase in selling, general and administrative expenses was primarily due to the increase in the compensation and the benefits incurred for additional general and administrative staff members, employee stock ownership plan related expenses to retain talents and increase in marketing expenses for brand promotion, also the cost associated with acquisitions and other professional services to support the business growth as a listed company as well as the incremental SG&A expenses incurred from acquired businesses.

Continuing on Slide 23. Adjusted EBITDA for the quarter was RMB 49.3 million, up 98% from RMB 24.9 million. Adjusted EBITDA margin was 9.7%, up from 7.7% in the same period last fiscal year. On a 6-month basis, adjusted EBITDA was RMB 266.7 million, up 43.1% from RMB 186.3 million. Adjusted EBITDA margin was 23% compared to 23.6% in the same period last year. Adjusted net income for the quarter was RMB 32 million, up 991.2%. Adjusted net margin was 6.3% compared to a loss of 1.1% in the same period last year. On 6-month basis, adjusted net income was RMB 199.6 million, up 71.8% from RMB 116.2 million. And adjusted net margin was 17.2% compared to 14.7% in the same period last year.

Please refer to Slide 24 for the condensed income statement and Slide 25 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 26. As of February 28, 2019, the company's cash and cash equivalent and restricted cash totaled RMB 2,522.9 million or USD 377 million as compared to RMB 2,428.3 million as of November 30, 2018. We're reaffirming our guidance for fiscal year 2019 with a recap on Slide 28. For fiscal year 2019 ending August 31, 2019, we expect our guidance for the total revenue to be between RMB 2,300 million and RMB 2,350 million, representing a year-over-year growth between 34% and 37%. We expect our average student enrollment to be between approximately 41,600 and 42,000, representing a year-over-year increase between 13% and 15%. We also expect new kindergartens openings for fiscal year 2019.

This concludes my financial update. Now I will turn to Derek for his closing remarks.

--------------------------------------------------------------------------------

Derek Feng, Bright Scholar Education Holdings Limited - CEO [5]

--------------------------------------------------------------------------------

Thank you, Dora. Looking ahead to the remainder of fiscal 2019, we are encouraged by the strong growth this year in every part of our business and are pleased to provide a very positive outlook in growth. Underpinning the strength of the business is commitment and efforts of our talented and dedicated employees, who have worked hard to increase utilization, optimize our cost structure and leverage our core competencies to improve the performance of our fast-expanding business portfolio. This success combined with our strategic investments position us well for the future. Last, but not least, our unwavering commitment to make substantial investments in the recruitment and development our teachers -- of our teachers, broadening the service offerings, improving processes and operational infrastructure to meet our students' aspiration for academic excellence.

That's all we have in the form of prepared remarks, and we will now turn it over to question-and-answers. Operator, please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question today comes from Cho Christine with Goldman Sachs.

--------------------------------------------------------------------------------

Hyun Jin Cho, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

I just have 2 quick questions. One is related to the Complementary Education Services where we saw a very big gross margin improvement in the second quarter. And I think you mentioned that a big part of that came from the acquisition. If you look at historical quarters, I think it's been roughly margin dilutive. What changed there? And will this current trend continue in the future? And then, secondly, I noticed that already your average enrollment exceeded 42,000, which is kind of the high-end of your guidance for the full year. How should we think about the second half in terms of enrollment?

--------------------------------------------------------------------------------

Dongmei Li, Bright Scholar Education Holdings Limited - CFO [3]

--------------------------------------------------------------------------------

Christine, this is Dora. Thank you for your questions. Regarding the first question on the Complementary part, yes, as we mentioned in earnings release, we started to consolidate all the new acquisitions from Complementary side, including Can-Achieve, Foundation Global, Hangzhou Impression and Chengdu DBC. All these Complementary Education Services, their margin is in the high-end above 60, and as we mentioned for the first half, they contributed over RMB 72 million in gross profit, that's half the blended gross margin for this sector. In the past, for the Complementary Education Services only include Elan and some part of our own study tour in campuses, which is just in their initiated stage. So for Elan, as we mentioned, before it has been impacted by the recent regulation, and it has some margin pressures from Elan, but we also see the margin improvement from Elan for this quarter. So that's why you see the blended gross margin for the Complementary sector, for this quarter it's been improvement and also improved for the first half.

And for your second question regarding the enrollment -- students enrollment, yes, on average basis, first half, we already are over 42,000. And for the second half, which means the Spring term for our school year, we definitely will keep the same trend and we may face a little bit increase from some kindergartens, but nothing material. But definitely -- you're right, we already hit our high-end for our enrollment forecast.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

And our next question comes from [Leslie Sangen] with Morgan Stanley.

--------------------------------------------------------------------------------

Unidentified Analyst, [5]

--------------------------------------------------------------------------------

I have 3 questions on behalf of (inaudible). First question is what is your full year EBITDA margin guidance? And your revenue guidance for the full year is 34% to 37%, but your revenue growth in the first half is much higher at 47%. Is the guidance is on organic growth? And the second question is on the overseas schools. The gross margin of the U.K. School is lower than the margin of U.S. schools in China. What would be the margin for the U.K. School for the full year? And what will be the normalized margin after capacity is fully utilized? The last question is just want to know the student enrollment number for the current semester?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

This is Dora. Your first question is regarding the EBITDA guidance. We only give guidance on the top line revenue environment, but you can see from the first half, we -- even if we have been invested a lot in our expanding team to support business growth, we're spending our investment in acquisition, but we can still maintain almost a similar level of our EBITDA margin compared to last year and we are expecting -- we can see some margin leverage going forward. Your second question regarding the top line guidance for fiscal '19, we wisth to reaffirm our guidance. The first half, you see the top line growth by 47%. It's pretty much because we -- for the first half compared to last year, we do consolidated some new acquired business. So you see some contribution from the 27 -- oh, from -- for the [47]%, almost 23%, 24% is coming from the acquired businesses. So for the full year basis, we still reaffirm our current guidance with 34% to 37% increase, but we are confident, as Derek just mentioned, to reach the high-end of our guidance.

Sorry, your third question, I remember, is regarding to the overseas schools. Margin profile for the overseas schools. I think, we have mentioned before, the overseas schools was operated by a charity organization before, and currently, it still has almost 100 vacant seats, which we're confident in the next 2 or 3 years we can bring in additional students to fill up the vacants and to improve the current margin.

--------------------------------------------------------------------------------

Derek Feng, Bright Scholar Education Holdings Limited - CEO [7]

--------------------------------------------------------------------------------

So let me comment a little bit. [This is Leslie,] how are you? So I think, as Dora mentioned, the BCS, the school we acquired in U.K., was from a previous owner was a not-for-profit charity organization. So therefore from operating efficiency perspective, we'll have improvement by itself. We're rather confident with our ability to operate, we would improve the margin by itself. And in addition to that, there are new students recruiting opportunities we can see not only by itself, but also with our school networks in China. So i.e., driving our students to BCS location and a second, putting together programs, taking BCS curriculum into our overall curriculum offerings, we can also attractive to more summer camp and study abroad programs. So with all these measures, as Dora mentioned, we're rather confident that the profit margin of this particular school will be in line with our other schools in our network. Does that answer your question?

--------------------------------------------------------------------------------

Unidentified Analyst, [8]

--------------------------------------------------------------------------------

Yes. And also, one last question student enrollment of current semester related...

--------------------------------------------------------------------------------

Derek Feng, Bright Scholar Education Holdings Limited - CEO [9]

--------------------------------------------------------------------------------

Sorry, you're breaking out.

--------------------------------------------------------------------------------

Unidentified Analyst, [10]

--------------------------------------------------------------------------------

On the student enrollment number for the latest semester?

--------------------------------------------------------------------------------

Dongmei Li, Bright Scholar Education Holdings Limited - CFO [11]

--------------------------------------------------------------------------------

I think as of end of February and our first half, we already have over 42,000 students, as I just mentioned, to answer the first question. We are very confident to maintain the current students enrollment level for the second term, which is the Spring term, second half of the school year and we may see some improvement for some kindergartens. But definitely we can reach the high-end of our enrollment guidance.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question comes from Melissa Chen with China Renaissance.

--------------------------------------------------------------------------------

Melissa Chen, China Renaissance Securities (Hong Kong) Limited, Research Division - Analyst [13]

--------------------------------------------------------------------------------

I have 2 questions. So first of all -- so the first question is on the Overseas School segment. So since we already have 1 U.K. school right now, so what's our following overseas expansion strategy? And second question is on the overall regulation like, can management share more colors on the like overall regulation how -- like should we expect more differences on the final version versus the prerelease version? And, also, noticed like one news on the kindergartens, the news said like kindergartens, the government overall still promote the private kindergartens, so like is that like a positive for us? Or like can management share more ideas on that?

--------------------------------------------------------------------------------

Derek Feng, Bright Scholar Education Holdings Limited - CEO [14]

--------------------------------------------------------------------------------

Sure. Melissa, let me take the first question. In terms of overseas acquisition or expansion strategy, yes, definitely we'll continue our efforts in driving overseas expansion staff strategy. The strategy will mainly come in from following consideration. Number one, we will be focusing in English-speaking countries. I think we will be unlikely we're going to Japan. So just joking. The second one is that we'll be focusing on 2 kind of acquisition opportunities. One is universities or schools that is unique. For example, some school you have a 100 years of history with a solid reputation in certain areas. That's something that we will prefer. And a second type would be companies or investments with a large scale. So those are the consideration that we are pursuing actively right now.

With regards to the overall regulation. Obviously, nobody exactly knows what the regulation would have come out in final form, but based on our sort of intelligence or based on our discussions with the experts in the industry, in the regulatory front, the rumor says that the final form at least right now people are expecting pretty consistent with the last revision. So that's number one. With regards to kindergarten, I think, obviously the new guidance from the Central Government relates to kindergarten have caused certain debates and discussions or uncertainties. But at this point, we think our strategy expansion in kindergarten have not changed. We'll continue to look for growing expansion opportunities to build new kindergartens. At this point, I think, everybody would think the main risk for kindergarten is really the price cap that certain local government which, as you know, varies from one place to another will be placing on the kindergartens. However, with our operating experience and infrastructure, we are confident we would continue our current margin with our business model even with a price cap in certain areas. Does that answer your question?

--------------------------------------------------------------------------------

Melissa Chen, China Renaissance Securities (Hong Kong) Limited, Research Division - Analyst [15]

--------------------------------------------------------------------------------

Yes, yes. That's really helpful. And one, just one quick follow-up question on the U.K. Schools. So could you share like the capacity for that schools?

--------------------------------------------------------------------------------

Derek Feng, Bright Scholar Education Holdings Limited - CEO [16]

--------------------------------------------------------------------------------

Approximately 700. A little over 700.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

(Operator Instructions) And this will conclude our question-and-answer session. I would like to turn the conference back over to Derek Feng for any closing remarks.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you very much for joining this conference call. Please feel free to contact us, if you have any further questions. We wish everyone a good day or good evening whatever the case might be. Thank you.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

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