Nord Anglia Education's (NORD) CEO Andrew Fitzmaurice on Q2 2016 Results - Earnings Call Transcript

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Nord Anglia Education Inc. (NYSE:NORD)

Q2 2016 Earnings Conference Call

April 26, 2016 08:00 ET

Executives

Vanessa Cardonnel - Corporate Finance and Investor Relations Director

Andrew Fitzmaurice - Chief Executive Officer

Graeme Halder - Chief Financial Officer

Analysts

Gary Bisbee - RBC

Ryan Leonard - Barclays

Henry Chien - BMO

Trace Urdan - Credit Suisse

Brandon Dobell - William Blair

Mariana Kou - CLSA

Operator

Good morning and welcome to Nord Anglia Education’s Second Quarter Fiscal 2016 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Vanessa Cardonnel, Corporate Finance and Investor Relations Director. Thank you. You may begin.

Vanessa Cardonnel

Thanks, Christine and thank you all for joining us on today’s call to discuss Nord Anglia Education’s second quarter fiscal 2016 results which were released this morning. Our earnings press release is available on our website, nordangliaeducation.com, under the Investor Relations section. We have also posted a supplementary presentation to the website which we will refer to during today’s call. The call is being webcast and a complete recording will be available after the call. Joining me are Andrew Fitzmaurice, Chief Executive Officer and Graeme Halder, Chief Financial Officer.

I would like to remind you before we begin that some of the comments made on today’s call, including but not limited to our financial guidance, constitute forward-looking statements within the meaning of applicable U.S. Securities laws. Forward-looking statements relate to events involving certain risks and uncertainties and actual results may differ materially from the views expressed. Information contained in this conference call is subject to and qualified in its entirety by information contained in our public filings with the SEC, including our most recent Annual Report on Form 20-F. In addition, all forward-looking statements are made as of today and Nord Anglia Education does not undertake any responsibility to update any forward-looking statements based on new circumstances or revised expectations. You are cautioned not to place undue reliance on any forward-looking statements.

We use EBITDA, adjusted EBITDA, and adjusted net income as supplemental financial measures of our operating performance. These supplemental financial measures are not standard measures under IFRS and should not be considered in isolation or construed as alternatives to cash flows, net income or any other measure of financial performance. The reconciliations of EBITDA, adjusted EBITDA and adjusted net income to the nearest IFRS measure, being profit or loss for the period, are included in our press release available on our website.

Now, with the formalities out of the way, I will turn the call over to Andrew.

Andrew Fitzmaurice

Thank you, Vanessa and welcome everyone to our second quarter fiscal 2016 earnings call. Nord Anglia Education is the world’s leading premium schools organization. And we currently operate 42 schools in 15 different countries with over 35,300 students. The current capacity within our schools is 49,400 seats, providing us significant room for growth.

We are a truly global organization, which allows us to offer our students a global learning experience. This is unique among premium schools and gives us a competitive advantage in each of our markets. The global experience is very important to our families who want the 21st century education for their children delivered by a trusted and established brand. Through our Global Campus initiative, our students extend their learning beyond the classroom through online, in-school and worldwide experiences. Students are part of something much bigger than just one school that they learn alongside pupils at Nord Anglia Education schools around the world and develop a truly international perspective. This includes unique online experiences, such as our global creative writing competition; school-based challenges, where an entire school participates in a global challenge, such as the recent science-based project or our worldwide programs that bring students together at our dedicated facility in Tanzania or our summer leadership program at Oxford University.

We had a good second quarter and our overall results were in line with our expectations. The number of full-time equivalent students increased by 55% to 34,737. We increased our total capacity by 54% to 49,000 seats. Our revenue increased by 55% on a constant currency basis and adjusted EBITDA increased 46% on a constant currency basis to over $67 million. And adjusted net income and adjusted EPS improved by 17% and 10%, respectively.

We started fiscal 2016 with organic enrollment growth of 11% over the prior year and we have achieved further in-year enrollment growth. As of the April 24, we have 35,341 full-time equivalent students. This equates to in-year organic enrollment growth year-to-date of 2.7% compared to 4.4% for the same period in FY 2015, which is in line with our 2% to 4% in-year organic enrollment target. In addition, at the end of February, we also took over 256 students from a small school in Switzerland which decided to close. As a reminder, we are capacity constrained in the Middle East, which grew by 53 FTEs this year versus 355 FTEs last year. Across our five regions, inquiries are up compared to the previous year and visits are either ahead or in line on a like-for-like basis. We see inquiries and visits as key lead indicators for our organic growth into FY ‘17.

We recently launched the student recruitment process for our new 2,250-seat bilingual school in Shanghai opening in September 2016. We are very encouraged by the demand we are seeing for this school and we have made excellent progress in getting the school ready for the planned opening later this year. In addition, our new 2,000-seat campus in Houston is on track to open for September 2016. And enrollments at the new campus are in line with our expectations.

Turning briefly to the sale and leaseback of the three school properties in the U.S. that we announced in early April, we completed the sale of the Windermere Preparatory School property on April 1 and subject to customary closing conditions expect to complete the sale of the North Broward and Village School properties by May 31. The aggregate sale price for the properties is $167 million. And the schools will lease the properties back from W. P. Carey for a term of 25 years at an initial annual rent of $12 million, the equivalent of a 7.2% yield subject to annual CPI increases. We expect to pay additional annual property taxes of approximately $4 million.

In fiscal 2016, the impact on adjusted EBITDA is expected to be approximately $5 million. And the impact on adjusted EPS is expected to be approximately $0.02. Importantly, the purchaser W. P. Carey has committed to investing up to $128 million in the three properties to expand both day and boarding capacity over the next four years. $12 million to $13 million of this investment will be utilized in the fiscal 2016 for construction, which is already underway at North Broward and will add approximately 400 seats of capacity to that school. This will reduce our expected capital expenditure in fiscal ‘16 from $110 million to approximately $97 million. The net proceeds from the sale and leaseback plus the expansion CapEx in fiscal 2016 to be funded by W. P. Carey rather than North Anglia is now expected to be $171 million. This is slightly higher than we previously announced and is based on a capital gains tax that is lower than our original projection. We expect to use these proceeds to invest in accretive acquisitions over the coming months and we have a deep pipeline of opportunities that we are working on.

I will now hand you over to Graeme to take you through the financial results in more detail.

Graeme Halder

Thank you, Andrew. Looking first at the group performance for quarter two of FY ‘16 compared to quarter two of FY ‘15 as summarized on Slide 9. Total revenue increased 55% on a constant currency basis and 49% on a reported basis to $243.5 million. The increase in premium schools revenue was due to strong enrollment growth and tuition fee increases at our existing schools and the impact of our acquisitions in Vietnam, China, Mexico, Switzerland and the U.S. last fiscal year.

Average revenue per FTE decreased 2.3% to $7,000 due to adverse FX movements. On a constant currency basis, revenue per FTE was up 1.8% versus the prior year’s quarter. Gross profit increased 46% to $98.7 million and our gross profit margin decreased 80 basis points to 40.7%, primarily due to the additional rent of our new school in Chicago, which opened in September 2015 and new employment related taxes in China.

Selling, general and administrative expenses increased 69% to $46.4 million. The increase was primarily driven by the acquisitions in Vietnam, Switzerland, China, the United States and Mexico in fiscal ‘15 as well as the new school opened in Chicago in September 2015. SG&A as a percentage of revenue increased, mainly due to the acquisition of the Meritas schools, which have SG&A of over 17% of revenue compared to around 11% for the rest of the company. Excluding acquisitions and the impact of opening our new school in Chicago, SG&A as a percentage of revenue would have decreased.

Adjusted EBITDA in the quarter increased 40% or 46% on a constant currency basis to $67.3 million. And our adjusted EBITDA margin decreased 170 basis points to 27.6%. Q2 adjusted EBITDA includes the negative impact of our startup schools in Chicago and Aubonne. The negative impact from startup schools in Q2 ‘15 and Q2 ‘16 was $0.7 million and $1.8 million, respectively. Financing expense increased to $23.6 million from $7.4 million in the second quarter last year. The increase was the result of additional debt raised to fund last year’s acquisitions and an unrealized FX loss of $6 million from the revaluation of the $200 million of Swiss bonds. Adjusted net income in the quarter increased 17% to $28 million and adjusted EPS increased 10% to $0.27.

Slide 10 shows a bridge for premium schools revenue, which sets out the impact of FX, organic growth and acquisitions from Q2 FY ‘15 to Q2 FY ‘16. On a constant currency basis and excluding revenue from the schools we acquired in Vietnam in Q2 last year, premium school revenue increased $101 million or 71% to $242 million. Of the 71% increase, 10% was organic and 61% was from the schools we acquired in fiscal ‘15.

Slide 11 shows the mix of FTEs, revenue and adjusted EBITDA by region. As you can see, the mix has changed significantly over the past year. And this is driven by the acquisitions we made in Europe, Southeast Asia, and North America, as well as the strong organic growth in the Middle East and Southeast Asia. These shifts are in line with our expectations. Looking at China, revenue increased 8.9% on a constant currency basis and 4.3% on a reported basis. The increase was driven by student enrollment growth and tuition fee increases. Average FTEs in China increased 11% to $5,793. Average revenue per FTE decreased 6% to $9,300 due to the strengthening of the U.S. dollar and relatively stronger enrollment growth in Hong Kong, Guangzhou and Chengdu, which have a price point lower than the average for the region. The adjusted EBITDA margin was 43.5% compared to 47.4% last year due to $1 million in new employment related taxes and relatively stronger growth in lower margin schools.

Turning to Europe, revenue increased 67% on a constant currency basis and 55% on a reported basis due to student enrollment growth, tuition fee increases and the acquisition of Collège du Léman in Geneva as part of the Meritas transaction. Average FTEs increased 44% to $6,626. And average revenue per FTE increased 8% to $8,900 due to the positive mix impact of Collège du Léman offset by the negative currency translation impact from the strengthening of the U.S. dollar. Adjusted EBITDA increased 66% to $13.3 million. And the adjusted EBITDA margin increased 140 basis points to 22.5% due to the acquisition of Collège du Léman as well as lower losses from our startup school in Aubonne as that school ramps up. As Andrew mentioned earlier, at the end of Q2, we acquired 256 students from a school in Switzerland which decided to close. We expect an immaterial contribution from the acquisition in FY ‘16 and a small contribution in FY ‘17. We paid net cash of $1.5 million in connection with this transaction.

Looking at the Middle East, revenue increased 25% to $25.9 million. We experienced strong growth as a result of excellent organic growth across the region. Average FTEs increased 22% to $5,316. And average revenue per FTE increased 2.5% to $4,900 due to tuition fee increases and the mix impact of stronger growth in higher revenue per FTE schools the region. Adjusted EBITDA increased 33% to $6.1 million due to fee increases and higher utilization, including the impact from the ramp up of our Dubai school. This resulted in 150 basis points increase in adjusted EBITDA margin to 23.4%. Whilst we have seen some softening of demand in Doha in recent months, we continue to see strong year-on-year growth in inquires, visits and student numbers in the UAE. And we are looking forward to the expected opening of our new school in Abu Dhabi in September 2017.

Moving onto Southeast Asia, revenue increased 37% on a constant currency basis and 29% on a reported basis. This was achieved as a result of organic enrollment growth and tuition increases as well as our acquisition of four schools in Vietnam in 2015. Average FTEs increased 37% to $7,487. And average revenue per FTE decreased 5.8% to $4,900, primarily due to the mix impact of the four schools acquired in Vietnam as well as the negative currency translation impact from the strengthening of the U.S. dollar against Southeast Asian currencies, partially offset by tuition fee increases in excess of inflation. Adjusted EBITDA increased 23% on a constant currency basis and 16% on a reported basis, primarily due to increased utilization and tuition increases across the region and the acquisition of the schools in Vietnam. Adjusted EBITDA margin decreased to 33.5% due to an exceptionally strong quarter in the prior year. There remains significant upside in the Vietnamese schools which were acquired at low utilization and are still ramping up.

In North America, revenue increased 209% to $66.8 million. Average FTEs increased 239% to $9,515. And average revenue per FTE decreased 8.7% to $7,000 due to the mix impact of the Meritas schools acquisition, in particular the school in Mexico, which has a much lower revenue per student than the average for the region, offset by tuition increases across our schools in the region. Adjusted EBITDA increased 204% to $22.7 million due to the acquisitions in the U.S. and Mexico and organic growth across the region, offset by the impact of our startup school in Chicago. Adjusted EBITDA margin decreased 70 basis points to 33.9%.

Slide 17 shows our summary cash flow for the quarter to February 29, 2016. We ended the period with a cash balance net of our pulled overdraft facility of $155 million. In terms of the seasonality of our cash movements, the cost base is relatively constant within the financial year. So the changes in inflows and outflows in each quarter are largely driven by the timing of tuition fee receipts. Q1 has very low receipts and is therefore our biggest quarterly outflow of operational cash. Term two fees are collected in December, made by through Q2. And term three fees are collected in Q3. Q2 is invariably our cash low point. In Q2 ‘16, we used $14 million of cash in investment activities on capital expenditures. Our net debt position at the end of November was just over $1 billion, which translates into net leverage pro forma for the Vietnam and Meritas acquisitions of 5x, slightly up from 4.9x at Q1 FY ‘16. This is in line with the seasonality of our cash movements, with Q2 being the cash flow points of the year. We expect net leverage to decrease in Q3 FY ‘16 before reducing towards the end of fiscal 2016 to below our target of 4x or less.

As you know, significant portion of our earnings are in currencies other than the U.S. dollar, while most of our debt is USD denominated. We therefore decided, subsequent to the end of Q2, to swap $120 million of our USD loans into offshore Chinese renminbi and $90 million into euros in order to reduce the exposure of our balance sheet to currency movements. This also provides some protection against volatility in our earnings from FX movements due to better matching of interest expense to earnings. Based on current FX rates, we expect this hedging program to increase interest expense in fiscal ‘16 by approximately $1 million. We are updating our guidance for fiscal ‘16 to include the impact of the following items: the sale and leaseback of the three U.S. properties that was announced in April, a reduced contribution from our learning services business, additional expenses at both the corporate and regional level to manage growth and compliance and the cross-currency swaps that we entered into in March.

We expect overall revenue in the range of $845 million to $855 million. On our Q1 FY 2016 results call, we highlighted that the impact of foreign exchange movement this year meant that we expected adjusted EBITDA at the bottom end of our previous guidance range. The expected impact of the sale and leaseback is approximately $5 million. The impact from a reduction in expected learning services contribution is approximately $2 million and the impact of increased central and regional expenses is approximately $3 million. This means that we now anticipate adjusted EBITDA to be in the range of $205 million to $210 million in fiscal ‘16. We expect our effective tax rate, excluding the impact from any unrealized gain on the revaluation of our non-U.S. dollar debt to be approximately 27%.

Our expected adjusted net income will be in the range of $67 million to $70 million, including the expected $1 million increase in interest expense associated with entering into the cross-currency swaps. With respect to share count, we project 104.1 million shares for FY ‘16, which gives adjusted EPS of $0.64 to $0.67 or 50% to 59% growth. As always, our guidance does not include unannounced acquisitions. Although we do not generally provide quarterly guidance, as a result of the changes we have highlighted to our expectations for fiscal ‘16, we expected adjusted EBITDA in Q4 FY ‘16 to be positive $5 million to $10 million compared to a loss of $5 million in Q4 FY ‘15.

I will now hand back to Andrew to make some closing remarks.

Andrew Fitzmaurice

Thank you, Graeme. We are pleased with our second quarter results and the trends across the business. Strong enrollment driven by both acquisitions and organic growth led to increased revenue and adjusted EBITDA in the quarter. Leading indicators remain positive and we continue to see good in-year growth. We are on track to open our new bilingual school in Shanghai in September. And the early demand trends for this school are very encouraging. We look forward to speaking about the business in greater detail at our Investor Day on May 13 in New York. And I will now hand back to Vanessa.

Vanessa Cardonnel

Thanks, Andrew. As Andrew just mentioned, our Investor Day will be held at the Julliard School in New York from 9:00 a.m. to 12:30 p.m. on May 13. Pre-registration is necessary for security purposes. So, if you would like to attend, please see the details on our website. And we look forward to seeing you there.

Thank you, operator. Please open up the call for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Gary Bisbee with RBC. Please proceed with your question.

Gary Bisbee

Hey, guys. Good morning. I guess, the first question margins pretty much across the board were weaker than I think in some cases the recent trends certainly than we expected. Can you talk a little bit about what’s going on in China? Europe didn’t rise as much as we thought it would from the acquisition. And then the other all being down, what – is it the $3 million of incremental cost, what else is going on there? Thank you.

Graeme Halder

So, Gary, it’s Graeme. I will pick that one up. So, if you go through the regions, I mean, China I think we have explained – I explained on the call. There is the taxes that we have called out, the extra $3 million a year in employment-related taxes, which are obviously coming off the margin. And we have had relatively stronger growth in Chengdu, Hong Kong and Guangzhou, which the revenue per FTE are quite a bit lower and therefore the margin are lower on that. So underlying, the schools are doing good returns. It’s just the ones that have slightly lower margins are growing more strongly. So, that’s really China. Southeast Asia, I mean, the margin doesn’t look very good year on year, but if you look against Q1 to Q2, the margin increased from I think it was around 26% in Q1 and it was 33% in Q2. I would say Q1 was disappointing and I would say Q2 was probably more in line. So, that one has gone the right way. Middle East margins, they haven’t really changed. They are not – they are pretty good and they were pretty good Q1 to Q2.

Europe margins, they were strong in Q1. We had a good Q1. They weren’t quite as strong in Q2. And that is relatively our lowest margin business. I would say again there is often noise in the quarters. I would look at the year to date for Europe and that’s probably fairly representative of where we think we will be. And then in North America, obviously, it’s got a lot of movement moving past there with some fairly significant increases from the Meritas acquisition. But I think the fact that the EBITDA margin increased – sorry, the EBITDA increase was pretty similar to the revenue was pretty good given the fact that we have got all that extra costs from the Chicago school that we opened. So, I think we were pretty pleased with the margin performance in New York albeit it doesn’t look so great against the revenue increase because of the drag of the rent and the extra costs of the South Loop school.

Gary Bisbee

Okay, great. And then the follow-up, the additional $5 million in excess of the sale leaseback that EBITDA guidance is declining. I guess learning services, is this going to zero this year or what’s the right way to think about revenue and the profitability of that? And then could you be more specific on the additional corporate and regional expense? Is that the accounting people you talked about hiring last quarter or what else is going on there? Thank you.

Andrew Fitzmaurice

Yes. So, I will pick up the learning services. So, learning services, yes, it will be close to zero contribution this year in terms of EBITDA. Because of the way the business is structured and the size of it, there is limited further downside to it. And we are hopeful now that we have made some changes that there will be some pickup on the business, but clearly, we are going to keep a close eye on it. In terms of the additional $3 million, I will pass over to Graeme to take you through where they are.

Graeme Halder

Yes, it’s a lot of different – there is no one big issue on that, Gary. I mean, post the end of Q1 and obviously after the year end audit where we had the material weakness, I have got into the process of making the improvements. And I think from that we have really concluded that I am going to have to drive a SOX compliance program and that was really being kicked off now and that’s got some consequences on the business of just increased ongoing costs, including a higher audit fee as well within that. But, we also – we have got a lot of opportunity on the various greenfields and things. And so we have ramped up the other teams in the other parts of the business to really try and make sure we benefit from the opportunities that we have in the business. And that just means that we are going to be carrying more cost for the balance of the year than we were expecting.

Gary Bisbee

Okay, thank you.

Operator

Our next question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.

Ryan Leonard

Hi, thanks. This is Ryan filling in for Manav. Can you just talk about the weakness in Doha and whether or not that’s oil related and maybe any other impacts across that region?

Andrew Fitzmaurice

Yes, I think the economies that we serve in the Middle East, Qatar, is the most exposed to oil. It’s the most oil driven economy. And we just have seen – previously, we have said that we haven’t seen much of a change in terms of either the lead indicators or levers. I think we are starting to see some noise around that in Qatar, some weakness greater than we have seen previously. We don’t think it’s going to lead to much of a material change in our student numbers. As you know, we are pretty full in those schools in Doha. And we are not expecting any deterioration particularly. But given that we have been pretty resolute about the strength of all of the oil-related businesses, we just wanted to call that out as we have seen a small change there. Beyond that, in the UAE, where we have got schools in Dubai and Abu Dhabi, we have continued to see very strong demand both in terms of the lead indicators and inquiries and visits and in actual student numbers. But, again, in both of those schools of course, we are supply constrained in that we are pretty full.

Ryan Leonard

Okay, fair enough. Thank you. And so just on the revenue, the new revenue guidance, so this is more results just on the high end, the $15 million reduction I guess seems high given some of the commentary on the call. Is that – can you just flesh out the reason for the kind of new range?

Graeme Halder

Yes, just like we talked about being in the lower half of the range on EBITDA, obviously that would have – because of FX earlier on in the year Ryan, that would have meant we were in the lower half of the range on the revenue side. And obviously, the FX impact is that much higher up the P&L. And the rest of it is really just a reduction from learning services. Nothing else material has changed on that. So it’s the combination of FX and certainly reduced expectations for revenue on learning services.

Ryan Leonard

And just could you give the – I guess the new FX assumption that you kind of have incorporated in guidance, because I think it’s broadly gotten better for most names, so just I think we have previously had about 4% was the FX impact, what’s that new number?

Graeme Halder

Yes. It’s not materially different from that. I mean the dollar has weakened against most of our operating currencies compared with maybe a couple of months ago. But obviously for our results, a lot of our bad news headwind is already baked into the numbers. And we have got a couple of months at the end of the year where we actually have loss or very little contribution. So actually when it goes the other way, it means your loss is worse. So but overall, it hasn’t really changed. Obviously, if it continues at this level, we will have to keep an eye on that. But at this point, we haven’t really changed our expectation of the impact for the full year.

Ryan Leonard

Okay, thank you.

Operator

Our next question comes from the line of Henry Chien with BMO. Please proceed with your question.

Henry Chien

Hey, good morning guys. Just a question on the proceeds from the sale leaseback, can you talk a little bit more about what you plan to do with the capital and go a little bit more into the M&A pipeline that you mentioned? Thanks.

Andrew Fitzmaurice

Yes, thanks. So, we have got a good result we believe in terms of the outcome of the sale and leaseback. We believe that even though we didn’t have something immediately to place that money into, we thought that the – given the market and given the quality of the lender in W. P. Carey, 7.2% we thought was a good deal. So we wanted to take it at the time, take the cash, clearly that gives us significant firepower and a lot of strength on the balance sheet. We have got a deep pipeline of acquisition opportunities continued to have a deep pipeline of acquisition opportunities. But as we have mentioned previously, they are hard to time exactly, given the nature of the seller, normally families who are selling their schools. And we can’t make them happen exactly when we would like to or in line with when we receive certain funds. But we remain confident that we are going to be able to deploy that capital into accretive acquisition.

Henry Chien

Got it, okay. Thank you. And in terms of the revenue guidance, I know you mentioned that a lot of it has to do with FX, is there any change from your perspective of the different regional trends of – that’s baked into your guidance, if you can provide any color that would be appreciated? Thanks.

Graeme Halder

No, we are not seeing any difference in any of the regions other than that small thing in Doha that we have mentioned. But again, given that we are fairly full in Doha, we don’t believe that’s going to make a difference.

Henry Chien

Okay, great. Thank you.

Operator

Our next question comes from the line of Trace Urdan with Credit Suisse. Please proceed with your question.

Trace Urdan

Yes. Thanks. I wondered if you might comment a little bit on the enrollment process both in Shanghai and Houston, when are student contracts due, how much of the fall enrollment is committed at this point and when would you expect to see more or less a complete class for each of those schools and are they different, do they have different timelines?

Andrew Fitzmaurice

Yes. Thanks Trace. So first maybe if I take Houston, so Houston what we are doing, of course is we are transferring the students from the current site in Houston, the British school into a new site in Katy, better location, fantastic facilities and a much larger campus. Indications that we look at are that we are getting the transfer that we had hoped. We are not seeing anything different to what we normally see. It’s predominantly an expat school in Houston. So you do get that expat churn each year. In terms of enrollment, enrollments are very much on plan with what we would have hoped in Houston. And I think we are seeing inquiries and visits continue to strengthen as we go through the year and as people get more and more access to the site. It really is a stunning site. So I think in terms of where we are in Houston, very much on plan compared to where we would hope to be as we look towards September, majority of the commitments received from parents who are staying and in addition, good growth in terms of the number of parents who are deciding to join our school. So, that’s good. And then we still got a number of months to go. We will recruit right up and through September. And the lead indicators of inquiries and visits look good, so everything very much on track and on plan in Houston.

I think we are probably a little more excited about Shanghai, which is probably exceeding our expectations of where we would be at this stage. We are taking registrations and deposits for this school in September. We are seeing very strong interest in the school, right the way through in terms of inquiries, visits, the number of people who are applying to the school and then subsequently people that are paying their deposit. And all of those indicators are probably stronger than we thought we would see, certainly at this early stage. We are going to be marketing the thing for a couple of months. And of course as we sit now at the end of April, we have still got another four months to go before the start of the new term. So I think we are very encouraged by Shanghai and we were going for a new market there. So there was a degree of uncertainty, but I think better than we thought we were going to be.

Trace Urdan

Okay. And is there – I don’t even know if this is possible, so I apologize if this is a dumb question. But are there any students in your existing schools that are tempted to move over to the bilingual school?

Andrew Fitzmaurice

Yes. It’s a very interesting question actually because what we are offering there at the new school is not just something for local students, whereby you get Chinese curriculum, immersion in English and a gradual introduction to an international curriculum until you set the IB when you are 18 and therefore are able to access the world’s universities. But would also – looking at it through the other end of the telescope, if you like. It also gives expats an opportunity should they wish, to get the full benefit of an IB education, but also to get immersion in Mandarin and to become very fluent in Mandarin at an early age very quickly, which of course would be the best thing. Having said that, given the fact that the school is very new, we haven’t seen massive interest from the expat community, no and in fact we haven’t seen anything I would call significant interest from the expat community other than the curiosity of the new campus.

Trace Urdan

And will there be market – I mean do you plan to sort of expressly market to the expat community at some point?

Andrew Fitzmaurice

No, we are not really marketing to the expat community where they are – but we are not avoiding it. But really in the context of the opportunity, the expat market is a rounding error compared to the China market. So, it’s – if the China market is there, then you kind of – you wouldn’t really be focused at all on the expat market.

Trace Urdan

Understood. Okay. Thank you.

Operator

Our next question comes from the line of Brandon Dobell with William Blair. Please proceed with your question.

Brandon Dobell

Thanks. Good evening. Maybe stepping into China again, how confident are you guys that you have got a handle or the right handle on the tax situation there or I know cost can kind of move around based on what local government officials kind of feel like doing sometimes, but how confident are you, do you have visibility on the cost structure looking out the next – I don’t know I guess academic year or so?

Graeme Halder

Yes. I think the tax change Brandon, was something to do with the equivalent of a national insurance charge that the authorities introduced for everybody. So it’s just a kind of a standard tax that was applied across the board. So I don’t think this is any – I am not seeing anything more sinister here. I am not seeing anything which is, is this going to lead to a much broader taxing or a different approach to taxing expatriates who are living in China. I just think it was something where they felt everyone should pay national insurance. The expats aren’t paying it. It’s been an anomaly. And they have put it right. So, I am certainly not seeing this as anything bigger.

Brandon Dobell

Okay. And it sounds like given the traction so far with the new bilingual school being at or above plan, does that change how you guys think about the cadence of the opportunities there? Are you going to change the schedule on which to go after further sites or has it changed the discussions you had with local authorities in different regions?

Andrew Fitzmaurice

Yes. I mean, clearly, given the strength of demand, it’s gotten our attention. What we have focused on though is we want to make sure that we open – with the student numbers in September, we really want the school to be a fantastic success. Particularly if we are going to open with strong numbers, we want to make sure that everything is perfect as far as the quality of education and the quality of the academic experience that the students get from day one there. So, we are incredibly focused on that. And we really do want to see the school operating and very strong enrollment before we decide to do anything materially different to what we are thinking at the moment. But we are – as a consequence, we have certainly started to look more closely into the market and the nature of the market opportunity that we have got there in Shanghai and in China more widely given the strength of the response that we are seeing to the offer.

Brandon Dobell

Okay. Alright, thanks a lot. Appreciate it.

Operator

Our next question comes from the line of Mariana Kou with CLSA. Please proceed with your question.

Mariana Kou

Hi, management. Thanks for taking the question. I just got a quick more housekeeping question on the tax rate and the interest cost that we should expect for this year and next year given that you are getting quite a big chunk of proceeds from the sale of the properties? Thank you.

Graeme Halder

Yes, in terms of our effective tax rate from the adjusted net income, we don’t expect a significant change from the sale and leaseback on that. We expect to be high 20s as we have said. I think 27% is the guidance I have given for FY ‘15. And I don’t really seeing that change – sorry in ‘16. I don’t see that change significantly certainly not on a short to medium term. It does depend a bit on greenfields and acquisitions and what countries and what the tax rates are, but directionally I think that’s a good number to go on. In terms of the interest expense, obviously, as Andrew said, we do expect to deploy the proceeds into accretive acquisitions. So, although it’s sitting on the balance sheet as of today, we will look to deploy that. So, we probably wouldn’t expect the interest rate to change significantly from where it is today.

Mariana Kou

Yes. And I just want to follow-up, I think last quarter on this slide, you kind of mentioned that there is like capital available after the potential sale and leaseback at about $225 million. How would that compare after the fact that now you already sold your properties? How would that compare to, like for – say, for like-for-like rough number that you can deploy in terms of capital?

Graeme Halder

Yes. So, that was based on obviously I think the midyear – the middle of the old guidance of $220 million. We have obviously come down on the guidance because of the impact of the sale and leaseback and the additional costs and reduced our last contribution we have talked about. But most of the other numbers will not have changed significantly. And therefore, I think it’s certainly in a similar sort of number. I think the calculation we came at was about $225 million. It will be a little bit less for the reduced EBITDA, but still in excess of $200 million.

Mariana Kou

Okay, thanks.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session and with that, the conclusion of today’s conference call. Thank you for joining us today. You may now disconnect your lines and have a wonderful day.

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