Nord Anglia Education's (NORD) CEO Andrew Fitzmaurice on Q3 2016 Results - Earnings Call Transcript

| About: Nord Anglia (NORD)

Nord Anglia Education Inc. (NYSE:NORD)

Q3 2016 Earnings Conference Call

July 26, 2016 8:00 AM ET


Vanessa Cardonnel - Corporate Finance and Investor Relations Director

Andrew Fitzmaurice - Chief Executive Officer

Graeme Halder - Chief Financial Officer


Ryan Leonard - Barclays Capital, Inc.

Gary Bisbee - RBC Capital Markets

Jeffrey Silber - BMO Capital Markets

Trace Urdan - Credit Suisse

Mariana Kou - CLSA

Brandon Dobell - William Blair & Co.


Greetings and welcome to the Nord Anglia Education Third Quarter 2016 Fiscal Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms.Vanessa Cardonnel, Corporate Finance and Investor Relations Director for Nord Anglia Education. Thank you. You may begin.

Vanessa Cardonnel

Thanks, Melissa and thank you everyone for joining us on today’s call to discuss Nord Anglia Education’s third quarter fiscal 2016 results which were released this morning. Our earnings press release is available on our website,, under the Investor Relations section.

We’ve 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 start 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 third quarter fiscal 2016 earnings call. We had a strong third quarter with results in line with our expectations. Revenue increased 53% on a constant currency basis to $254 million. Adjusted EBITDA increased 44% on a constant currency basis to $70 million and adjusted net income and adjusted EPS improved by 24% and 18% respectively.

The number of full-time equivalent students or FTEs increased by 48% to 35,300 and we increased our total capacity by 43% to 49,400 seats. All of our schools are now on summer break and preparing for the start of the academic year. We'll be updating you on starting enrollments to 2016, 2017 in October, but I would like to touch on some of the recent trends and highlights now. We started fiscal 2016 with 34,177 FTEs and ended the academic year in June with 35,327 FTEs.

Excluding the students we took over from a small school in Switzerland in February. This equates to in-year organic enrollment growth of 2.6% for the academic year. This is in line with our target of 2% to 4% although down slightly from last year's growth of 4.2%. As a reminder we've been capacity constrained in the Middle East since the beginning of FY2016 and this is the primary reason for the in-year growth difference this year versus last year.

From the end of fiscal 2015 to the end of fiscal 2016 our total organic enrollment growth was 9.4%. During the summer break we're expanding our capacity by approximately 5,400 seats for the 2016, 2017 academic year. We are adding 1,950 seats to our existing schools and in addition we are moving the British International School Houston to a brand new state-of-the-art 2,200 seat campus which creates an extra 1,200 seats.

We're also opening a new 2,250 seats school for Chinese Nationals in Shanghai. We see inquiries and visits as key lead indicators for our organic growth. Compared to last year inquiries are up across our five regions this year with visits either ahead or broadly in line on a like-for-like basis. Another topic I wanted to briefly address is the potential impact on Nord Anglia Education of Britain leaving the European Union following the Brexit vote.

As a reminder we do not have any schools located in the U.K. and only around 12% of our overall students have British Nationality. International Schools generally have a very diverse cohort of students. Our schools educate students of more than 100 nationalities with most of our schools having more than 60 nationalities. We do not currently think that for the Brexit will maturity impact our demand.

As I have said in the past, we are particularly encouraged by the demand we have experienced for our new dual-curriculum school, the Chinese nationals opening in Shanghai this September. The starting enrollment has exceeded our expectations and we anticipate that the school will be around EBITDA breakeven in year-one. We believe that this success is due to the strength of the Nord Anglia Education brand in China and the differentiated educational offer that we provide.

The combination of our strong brand, academic outcomes, and collaborations with world leading education institutions such as Julliard and MIT appears to be valued highly by Chinese parents. In addition to the very encouraging enrollment trend at our new school, we are seeing a significant number of inbound opportunities to open more dual-curriculum schools in China. We are actively assessing these opportunities and we will keep you updated as our plans develop.

We believe that as part of Nord Anglia Education schools, students, parents, and staff achieve more. We do this by leveraging our market leading position to create unique opportunities. During the third quarter, we announced our latest collaboration with MIT to develop and implement science, technology, engineering, arts, and math program across Nord Anglia Education schools worldwide.

The program includes the development of the series of in-school challenges for students aged eight to 12 years old which focus on into disciplinary learning between the subjects. In addition to the in-school challenges, students across the Nord Anglia Education family will travel to Massachusetts to participate in the Cambridge Science Festival sponsored by MIT Spring providing them with the opportunity to learn directly from lectures and students at the world’s best University.

Nord Anglia Education’s teachers will also benefit from unique professional development through our new workshops and ongoing training with MIT staff. With outperforming arts curriculum developed by the Julliard School and this exciting collaboration with MIT, we ensure that staff and students at our schools learn from the best.

With respect to the Julliard collaboration, we are rolling out the music curriculum to a further 28 schools this coming September. A more rollout dance and then drama in the following two years. We have also partnered with King's College London to offer a Master's in International Education degree course to our teachers. This is a fantastic professional development opportunity and a great way to demonstrate our commitment to recruiting and retaining the best teaching talent.

To support our program to create a Global Campus for our students, we have established an Expedition Centre in Les Martinets, Switzerland. The campus set in the Swiss Alps and provides the unique opportunity to Nord Anglia Education students to develop their leadership skills in a spectacular environment.

Nord Anglia Education is focused on preparing our students for the challenges of the 21st century. We believe that these programs are key parts of our superior educational offer and support our continued delivery of strong organic growth.

I will now pass you over to Graeme.

Graeme Halder

Thank you, Andrew. Looking first at the Group performance for quarter three of FY2016 compared to quarter three of FY2015, total revenue increased 53% on a constant currency basis and 49% on a reported basis to $253.8 million. The increase was driven by acquisitions, strong enrollment growth, and tuition fee increases.

Average revenue per FTE increased 4.7% on a constant currency basis and 2.2% on a reported basis to $7,200. This was driven primarily by tuition fee increases and the mix effect of the Meritas acquisition.

Gross profit increased 49% to $101.3 million and gross margin decreased 20 basis points to 39.9%. The decrease in gross margin was primarily due to the additional rent of our new school in Chicago, which opened in September 2015, a new employment related taxes in China from September 2015.

SG&A expenses increased 71% to $48.5 million and SG&A as a percentage of total revenue increased 250 basis points to 19.1%. The increase as a percentage of revenue was mainly due to the acquisition of the Meritas schools, which operated in an SG&A percentage of over 17% compared to just under 12% 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 been largely unchanged. Adjusted EBITDA increased 44% on a constant currency basis and 40% on a reported basis to $69.9 million and adjusted EBITDA margin decreased to 190 basis points to 27.5%. Included in adjusted EBITDA is the negative impact of our startup schools in Chicago and Aubonne of $2.3 million in Q3, FY2016.

Net financing expense increased to $19.2 million from $9 million in the third quarter last year. The increase was the result of additional debt raised to fund last year’s acquisitions and an unrealized FX loss of $2 million from the revaluation of our $200 million of Swiss bonds. Adjusted net income increased 24% to $28 million and adjusted EPS increased 17.8% to $0.28.

Slide 10 of our presentation shows a bridge for premium schools revenue from Q3, FY2015 to Q3, FY2016. The bridge highlights premium schools revenue growth, splitting out the impact of FX acquisitions and organic growth. Of the 73% increase, 11% was organic and 62% was from the schools we acquired in fiscal 2015.

Revenue increased 11% on a constant currency basis. Sorry, looking now at each of the regions, in China revenue increased 11% on a constant currency basis and 6.4% on a reported basis from student enrollment growth and tuition fee increases. Average FTEs in China increased 11.4% to $5,902 and average revenue per FTE decreased 4.5% to $9,600. The decline average revenue per FTE was due to the strengthening of the U.S. dollar and relatively stronger growth in lower price points schools.

Adjusted EBITDA margin decreased 470 basis points to 43.6% due principally to $1 million in new employment related taxes and the mix shift to lower margin schools. We expect a similar mix impact to continue into fiscal 2017 due to stronger growth in lower margin schools as well as the impact of our new school for Chinese nationals in Shanghai during its ramp up pace.

Our organic enrollment growth in China this year has been strong at approximately 7%. Although, current levels of inquiries are ahead and visits are broadly in line with the prior year. Excluding our new bilingual school in Shanghai, we do not expect organic growth in our expat schools in China to be as strong as in FY2016.

Turning to Europe, revenue increased 71.9% on a constant currency basis and 69.9% 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 47.6% to $6,871 and average revenue per FTE increased 15.1% to $9,200. The increase in average revenue per FTE was primarily due to the positive mix impact of Collège du Léman partially offset by the negative currency translation impact from the strengthening of the U.S. dollar.

Adjusted EBITDA margin increased 390 basis points to 24% due to the acquisition of Collège du Léman as well as the lower losses from our startup school in Aubonne as that school ramps up. Inquiries and visits year-to-date in Europe are marginally ahead of prior year and we expect this moderately encouraging trend to continue.

Turning to the Middle East, revenue increased 21.9% as a result of strong organic growth across the region. Average FTEs increased 19.3% to $5,314 and average revenue per FTE increased 2.1% to $4,900 due to tuition fee increases and the mix impact of stronger growth in higher per FTE schools in the region. Adjusted EBITDA margin increased 300 basis points to 23.2% due to fee increases and higher utilization, including the impact from the ramp up of our Dubai school.

As we highlighted on our Q2 call, we’ve seen some softening in the demand in Doha in recent months, but we do not expect this to impact our FTEs in FY2017 due to the capacity constraints in these schools. We continue to see strong year-on-year growth in inquires, visits, and student numbers in the UAE and although we are still somewhat capacity constrained, we are looking forward to the expected opening of our new school in Abu Dhabi in September 2017.

Moving onto Southeast Asia, revenue increased 16.2% on a constant currency basis and 11.7% on a reported basis due to organic enrollment growth and tuition increases. Average FTEs increased 14.5% to $7,650 and average revenue per FTE decreased 2.4% to $5,000. The decrease in average revenue per FTE was primarily due to 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 margin increased to 100 basis points to 32.3%, primarily due to increased utilization and tuition increases across the region. There remained significant upside in the Vietnamese schools which were acquired at low utilization and are still ramping up. Across the region we are seeing excellent trends in inquiries and visits compared to prior year and expect to see these trends continue.

In North America, revenue increased 214% due to student enrollment growth, tuition fee increases and the schools acquired in the U.S. and Mexico. Average FTEs increased 236.7% to $9,572 and average revenue per FTE decrease 6.7% to $7,200. The decrease in average revenue per FTE was principally driven by the mix impact of the acquisitions.

In particular the school in Mexico which has a much lower revenue per student on the average for the region. This was partially offset by tuition increases across all our schools. Adjusted EBITDA margin decreased 550 basis points to 31.9% due to the new Chicago school the acquisitions in the U.S. and Mexico and the impact of the sale and leaseback.

Inquiries and visits are up year-to-date compared to prior year for the region. We expect that this will lead to continued moderate enrollment growth in North America. In quarter three we completed the sale and leaseback of the three school properties in the U.S. that we acquired as part of the Meritas transaction in 2015. The sale of Windermere Preparatory School completed on April the 1, and the sale of the North Broward Proprietary and Village School properties both completed on May the 31.

As a reminder of the sale and leaseback transactions raises rent expense and negatively impact EBITDA by approximately $5 million in fiscal 2016 and $16 million in fiscal 2017. In addition the opening of our new state-of-the-art campus in Houston is expected to increase property expenses by another $8 million in FY2017. We anticipate using the net proceeds from the sale and leaseback to invest in accretive acquisitions over the coming months and we're working on a number of opportunities.

Slide 17, of our presentation shows our summary cash flow for the quarter to May the 31, 2016. We ended the period with a cash balance net of our pulled overdraft facility of $260.5 million. In Q3 FY2016, we used $16.9 million of cash in investment activities on capital expenditures and $7.2 million for acquisitions. Including consideration for the students we acquired in Switzerland and deferred consideration on the Vietnam acquisition. We received an inflow of $167 million from the sale and leaseback transaction.

Our net debt position at the end of May was just over $900 billion, which translates into net leverage pro forma for the Vietnam and Meritas acquisitions on the sale and leaseback of 4.8 times down from 5 times at Q2 FY2016. We expect net leverage to decrease to below our target of 4 times or less by Q4 FY2016. This is in line with the seasonality of our cash movements, with Q4 being the cash five points of the year. As in prior years we've increased tuition by 1.5 to 2 times inflation for FY2017 which will positively impact our cash balance in Q4 FY2016.

As we disclosed in our Q2 FY2016 call in March 2016, we swaped a $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.

Turning to our outlook for fiscal 2016 with only one quarter remaining in the Company's fiscal year we are tightening the outlook ranges from revenue, adjusted EBITDA, adjusted net income and adjusted EPS. These ranges are now as follows; revenue of $850 million to $855 million. Adjusted EBITDA of shows $6.5 million to $8.5 million adjusted net income $67 to $68 million adjusted diluted EPS of $0.64 to $0.65.

This assumes the diluted weighted average share count of 104.1 million shares and an effective tax rate of 27% excluding the impact from any unrealized gain or loss from the revaluation of our non-U.S. dollar debt. Our guidance does not include unannounced acquisitions.

As a reminder, our fiscal year runs from September to August, and our academic school year runs from September through to June. As a result, the majority of our earnings are recognized over the first 10 months of the fiscal year to June. This means that our fourth quarter results including the one-month for revenue and cost of sales for three months of selling, general, and administrative expenses. These results in significantly reduced operating profit for the fourth quarter compared to the first three quarters of the fiscal year.

I’ll now hand back to Andrew to wrap up.

Andrew Fitzmaurice

Thank you, Graeme. We are very pleased with our results in Q3. Strong enrollment driven by both acquisitions and organic growth led to increased revenue and adjusted EBITDA in the quarter. Our lead indicators remain positive and we look forward to providing you with an update on our starting student numbers and initial guidance for fiscal 2017 in October.

We have a significant cash balance and are working on a number of opportunities to add high quality schools to our family. We are opening our new bilingual school in Shanghai in September and very pleased with the strong demand for this school.

As I said earlier, we have seen an increasing number of inbound opportunities under developing a robust plan to further access the premium dual-curriculum school market in China.

Operator, please open up the call for Q&A now.

Question-and-Answer Session


Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.

Ryan Leonard

Hi. This is Ryan filling in for Manav. Just want to touch on I know you are going to give student enrollment in October, but I know in the past you've mentioned that about 80% of students reenroll to start any given year. I just want to see if you can add any commentary there if you're seeing that is still the case and if any regions are kind of above or below that mark?

Andrew Fitzmaurice

Yes. Thank you, Ryan. The numbers are pretty consistent in terms of the enrollments and reenrollments from year-to-year. You do get small variations in different markets at different times, but overall that they do tend to be pretty consistent.

Ryan Leonard

Okay. And then on the partnership front, is this a thing where with the MIT and Juilliard, are you looking to add maybe another partnership every year and is there anything that you're currently targeting or is two kind of the right number there? And then if you could help us out with any of the financial impact or whether it's more about branding that would be helpful?

Andrew Fitzmaurice

Yes. So what we're trying to do with our partnerships is to make sure that students and teachers learn from the best and we also want to provide our students with a differentiated education that prepares them for the 21st century. We believe that the challenges they’re going to face are going to be very different from the ones that previous generations have faced particularly in terms of employment.

So we believe that introducing them to Juilliard and to the musical and cultural influences, broadening them and unlocking the creative key for them to learning is really important. And we also believe that I might see what's happening with MIT in using technology in a very practical way to solve the world's problems is going to be a fantastic opportunity for our students.

So we really think those two are really wonderful collaborations and we would be quite happy to just make the most of Juilliard and MIT and certainly at the moment that’s very much our plan. We've got some way to finalize rolling out the Juilliard not just music curriculum, but also the dance curriculum and the drama curriculum, which we're going to be putting into our schools over the course of the next two years.

And then with MIT, we've got it in 13 schools and we want to roll it out into another 13 schools is our immediate plan. So we've certainly got our work cut out with those existing collaboration's which we believe the absolute highest order, MIT recognized the world's best university and Juilliard is the world's preeminent performing arts and school, so very pleased with both of them. It's very much about that what happens in the classroom and what happens in the schools.

So it really isn't about branding and I think the people who were setting out to make a difference with, which is our teachers and our students and in turn making an impression upon our parents. They’re very quickly see through these things, if they were just branding exercises and if they weren't really making a big difference in the classroom in the way that our students were learning and in terms of the kind of outcomes that our students were delivering.

So it's not really about the branding, it’s really about making a real difference to the way and that the things that our students learn and really turning them into global citizens as well. Making sure they collaborate across schools, we think that's incredibly important that in the future work, challenges are not going to be challenges just based upon a local community or even a particular country that solutions are going to be about collaborating across discipline and also across the world to solve things and the things that we're doing with our students and very much aimed at that.


Thank you. Our next question comes from the line of Gary Bisbee with RBC Capital Markets. Please proceed with your question.

Gary Bisbee

Hey. Good morning, guys. Graeme in your prepared comments, you gave a little color on how you're thinking about each of the segments for next year and I guess I heard China has somewhat slower expat growth. The question on that is that largely just having filled up Hong Kong and so that not being as much a driver or are you seeing beyond that some change. And then it sounded like all the other segments your comments weren't dissimilar from what the organic growth has been this year. Was that the right way to interpret it or are there some others you'd call out as well? Thanks.

Andrew Fitzmaurice

Hey, Gary. It's Andrew. On China, as you know we don't like to talk about individual schools, but directionally you're right with full and getting full in the lower margin schools. We've got a bit of a period while we're finding extra capacity for them whilst we've got the capacity in some of the schools that where we're not growing. So that's the issue that in terms of the different organic growth rates, so you're absolutely right on that.

And yes, I think with broadly looking at things, we are probably continuing to feel that we're tracking along the same lines in terms of the organic growth across the other regions. We are always trying to do better in particular market, but certainly our lead indicators are suggesting that we should be okay to continue with very positive trends that we've had on organic growths in the different markets.

Gary Bisbee

Great. Thanks. And then a follow-up on Meritas when you acquired it clearly had I guess as you say it today higher SG&A and just a different cost structure in some ways and you talked about the opportunity to make them more like the way you run your existing schools. I guess it was also pricing issue as well. When we think of fiscal 2017, how much progress do you think you can make in right sizing both the cost structure and getting the pricing more like you've done in your quarter. Is it still several years or can you make good progress next year? Thank you.

Andrew Fitzmaurice

We are certainly making progress in terms of tuition and the tuition increases because of the success of those schools are continuing to track up. We're certainly looking at sharing resources across the region. The regions got bigger, we leverage that central cost that we've got and we're also looking to use strong schools to share some resource across other schools, so that we make the most of our costs.

Certainly when we look at that the cost base that we have across with schools, we are improving in terms of our efficiency with that and we would expect that to continue. In terms of kind of going in and reducing the numbers of administrative in the schools, we're not really looking to do that. It's more driving efficiencies by not adding so much cost as we increase enrollment which we’ve continued to do in most schools.

Particularly now as we’re looking to unlock capacity with the sale and leaseback arrangement that we've entered into with W.P. Carey as we've said in the past those Meritas schools are pretty full and they need more capacity and it's going to be good to have that - the capital in order to do that from W.P. Carey.

So partly through that and also partly through sharing resource and you know being smart about the way that we do that, we are getting some efficiencies but we're not really going in and making dramatic reductions in terms of the number of people that we have in any campus.

Gary Bisbee

Okay. Is that going to be enough to partly offset the higher costs related to Houston Nord or should we think of it is more incremental modest changes over time? Thanks.

Andrew Fitzmaurice

No I think that Meritas schools are performing really well and Americas performing well, the performance there is good, but there's a big headwind next year. We've got $16 million cost of sale and leaseback in North America. And in addition to that we've got $8 million of additional Houston rent so that I don't think we're going to overcome that $24 million headwind immediately it's going to take a while to do that.

Gary Bisbee

Thank you.


Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question.

Jeffrey Silber

Thanks so much. I wanted to go back to some of the color that you mentioned on the call from next year. I know you are not giving official guidance, but I just want to make sure I did hear something correctly. Did you say that you expect or you think that margins in China could also decline next year on a year-over-year basis did I hear that correctly?

Graeme Halder

I mean yes what we said was we've obviously got the employment taxes – those affected us this year against last and we expect those to continue and we have seen stronger growth as Andrew just mentioned earlier to Ryan’s question in the schools that are lower price point and therefore a lower margin and so you know that will probably continue to drift down because of that stronger growth.

Andrew Fitzmaurice

In addition Jeff we've got big local school now that the new Shanghai dual curriculum school and that's going to be quite sizable revenue. But as we've said we're around breakeven on that. So that's also going to be a drag on the margin.

Jeffrey Silber

Got it, okay. And again forgive me if I misheard something was there any other color on margin direction in any of the other region that you talked about?

Graeme Halder

No, I think we just talked generally about trends in sense of inquiries and visits which through size is pretty much in line, obviously excess specific that Andrew just mentioned on North America where we got the $16 million for sale and leaseback additional rents and property expenses and the $88 million rent for the Houston school.

Jeffrey Silber

Okay great. And then on the tightened outlook for the current fiscal year I know you don't give quarter-to-quarter guidance, but the numbers were actually seem to be better than what most people were expecting for the quarter that you just reported. Any reason for the tighten outlook in the fourth quarter or is there something specific going on we need to know about?

Graeme Halder

No, I think we feel it was a good quarter maybe slightly better than we’re expecting there was a bit of time in maybe, but nothing significant. I think we were just comfortable to leave the fourth quarter in midpoint for last quarter its $6 million plus so if you work out what we’ve done here today against where we are the midpoint to that guidance and that's pretty much in line with where we've said previously.

Jeffrey Silber

Okay great. And again…

Graeme Halder


Jeffrey Silber

I am sorry. I know you are not giving guidance for next year. Is there anything going on a quarter-to-quarter basis next year that we need to be aware about?

Andrew Fitzmaurice

Nothing different to this year Jeff or rather than that that the stuff that we've just been talking about there and the color grains given on the different regions and you know calling out the sale and leaseback and cost of Houston.

Jeffrey Silber

Got it. Okay. Thank you so much.


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

Trace Urdan

Thanks very much. I was hoping we might be able to discuss your Brexit comments a little bit more in-depth. 12% of students as UK Nationals does not an immaterial number and I definitely heard you're confidence that it's not going be a problem, but I'm wondering if you have any indications at this point I imagine contracts have been due from families.

Do you have any understanding of how the tuition payments from those 12% breakdown to what extent they're covered by expat benefits that the parents are receiving and to what extent they're sort of paid out of pocket and just anything else that can support your confidence that there's not going to be any sort of disruption resulting from the currency disruption in the UK.

Andrew Fitzmaurice

Yes. So the Brits are everywhere, Trace. They are all over the world as you know…

Trace Urdan

I'm concerned about the ones that are translating from sterling income to pay your tuition?

Andrew Fitzmaurice

Yes. The majority of our Brit expats are getting the tuition paid for by the government. We've got recently strong presence in China of Brits and they get paid by their employer. And typically if you think about where we are geographically, we haven't got any schools in the UK, our split at the moment is around about 63% expat, 37% local probably trending to 60-40 expat local. So with that that local mix that the Brits are pretty much all in the expat percentage, so they're much more likely to be employer paid.

Trace Urdan

And on the flip side would it be too much to expect that you might have a benefit in terms of recruiting British teachers to work in the schools given that those have been an effective salary bump relative to what they might anticipate earning in the UK?

Andrew Fitzmaurice

We always say that we pay in local currency and we have our fees in local currency, so we'll continue to do that and we don't pay them less when the currency improves and we don't pay them more when the currency deteriorates, so we've always just said that the salaries paid in local currency, it’s fixed in local currency, it's based on the local market and that perhaps what you get. It might mean that for the people in the UK that’s our jobs and we got a lot of them these days. We employed 8,000 people across the organization that our jobs become more attractive, so we would get a benefit there.

Trace Urdan

Okay. I’ll let you move on. Thank you.


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

Mariana Kou

Hi, management. Thanks for taking my question. I think my question is more on a two-, three-year view. I know we have on the Investor Day already talked about the same-school expansion for summer 2016. Just wondering if that's similar type of like scale that we should be expecting on an annual basis. And I guess, also, on new – from a new builds perspective, is that pretty much the lead time that we should expect, like, one to two years? So, that means pretty much for the next few years, which you have pretty good visibility if we're expecting what you have announced. I think that would be my main question.

Andrew Fitzmaurice

Yes. Thanks, Mariana. That’s a good question. So in terms of the existing network, we're growing as we talked about. I think on the Investor Day, we're talking about growing our schools at around about 6% to 7% on a same school basis excluding the Greenfield’s. The organic growth from the same school is about 6% to 7%.

So if you take 35,000 students and you times that by 7% then I think you're getting to the 2000 and change kind of number and that’s if you look at it that’s pretty much what we’re doing in terms of bolt-ons in the existing networks. So I think that's the kind of number to expect in terms of bolt-ons just adding capacity to the existing network.

Further to Gary's question earlier, trying to be smart about it so that we are putting capacity into schools where we've got demand and we can see the demand coming and we're growing and obviously now adding capacity where we’ve already got space in the school. So I think you've got that kind of a number that would be typical around about the 6% to 7%.

In addition to that we've got these one-off at the moment, which is Houston and I think Houston was a particular set of circumstances and the facility in Houston wasn't up to our standards. It was somewhat poorer than other schools that we have been in North America. And we had the opportunity to do a large new school in what's a very strong market force there in Houston. So we took the opportunity it was a one-off and we decided to build a 2,200 seat school.

Because we believe that over time that that school is going to deliver a fantastic performance and a very high return on capital, but it is going to be something which isn't going to work in terms of the next two to three years, it's going to be something that's a bit further out and it will be in four-year to five-year time when we're getting the higher returns from Houston than we were getting from the old site.

So probably something in Houston where we could see a fantastic opportunity, but it's also whenever we improve an existing school like that, it's also defensive in the barrier to entry now in Houston is incredibly high. So if anyone wants to come in and compete with us in Houston, we've got two superb schools in the village school there and in the British International School there with great facilities producing fantastic academic results is going to be very hard to compete.

We then come to the Greenfield’s and I think which we talked about and it's in one of the appendices, we show what we're looking at in terms of the kind of returns that we want, so typically, we're looking for high margin, high growth. We've talked about the school in Shanghai, which we believe it's high margin, high growth. And as I think, we explained at the Investor Day, if we find more high margin, high growth opportunities, we will be pursuing those, so the way I would think about things is the existing portfolio should be two, two and a half, 3,000 maximum in terms of keeping pace with the organic growth.

In addition to that, we will be opening Greenfield’s where we can get the ROI, return on investment of 70%-plus. And in particular, those where we're going to get 70%-plus and we're going to get it quickly, so we would be in the Shanghai school and the Chinese market opportunity as one that we would be particularly interested in.

In terms of timing, if we start from scratch, so we're going to build a new school, identify the site then you are probably looking at a horizon of two years and out. But what we have found in the past is opportunities to either convert or to refurbish an existing school to our standards and that means that sometimes that we can have a shorter period to market – shorter time to market perhaps is as low as 12 months or so. So I think that's kind of to give you an idea of how we're thinking about capacity.

Mariana Kou

Thanks. Just a quick follow up, though, on more of the leverage side. Are you quite comfortable with, like, the level you are at? And I think, obviously, because of your one-off larger, more major deals; you're definitely going above, like, the target average net leverage ratio. Would that be something that you'll also be considering going forward as well, because you kind of did it last time as well? So, I think, from a war chest standpoint, you do have quite a bit of financial resources to pursue more deals. Is that the right way?

Andrew Fitzmaurice

Yes. Yes, exactly. As we said, we are on track to get below four times for the end of this year and we would expect the leverage to come down further the following year subject to the deployment of this cash. As you've said, as Graeme as mentioned on the call, we've got a significant amount of cash at the minute and we expect that to expand over the course of the next quarter.

That means that we're going to have over $200 million to deploy into acquisitions. We believe that we can deploy that money effectively, but at the moment we don't believe that there's anything where we would have to step outside of anything that’s either we’re seeing or that’s attractive enough where we have to step outside of our existing capital structure to pursue an opportunity.

So our intention at the minute is that to get down below four times at the end of this year and then subject to that the timing of the way that $200 million goes out on acquisitions to either stay close to four times during the course of the year but certainly by the time we get to the end of next year even if we have deployed that $200 million to be well below the four times leverage. So I guess you know long answer to your question is from what we see at the moment, the answer is yes.

Mariana Kou

All right. Thank you. That’s helpful.


Thank you. [Operator Instructions] Our next question comes from the line of Brandon Dobell with William Blair. Please proceed with your question.

Brandon Dobell

Thanks. Guys given the outflow of capital on seats and facility et cetera in FY2016. How should we think about FY2017 relative to what we saw the past 12 months and it's kind of general direction on capital needs I guess and is there an opportunity for any more sale and leaseback transactions or any other kind of innovative things going on with the capital structure?

Graeme Halder

Yes. In terms of CapEx we’ll obviously give bit of color in October when we give our guidance in Brandon but just in terms of direction obviously we had a big year this year with the dual-curriculum school which as we disclosed costs over $30 million in CapEx subject to whatever might happen in that area.

For next year we're looking at maintenance to be around the $800 million we don't expect that to be sorry $800 per FTE, we don't expect that to be any different and then we obviously got a couple of Greenfield’s that we have talked about I mention that we open in September 2017 the Al Reem school in Abu Dhabi and the [Sorbonne] site in Bangkok, but those will be more in line with what we normally do on a Greenfield expat school.

And then we have a little bit of growth for where we want to just keep have the things but we’ve said we’ve had a having quite a bit of capacity for the current year and we can’t think of anything major in terms of significant outside of what we've mentioned.

Andrew Fitzmaurice

Yes. So I think our expectation Brandon to make sure is that CapEx to be a lot lower but we are just making the point that we've landed on this pretty good Chinese opportunity. Got a big 2,256 school there that we expect to be at around breakeven for the first year. Great price point, there's some amazing research around on China around that the propensity of Chinese parents to educate their children privately with the recent report by Frost & Sullivan that was suggesting that that could be as high as 21% of the school population. When we think about market in - by the UK where it's 7% and market is developed as UK in the scale of the UK in the scale of China.

So we are just kind of reserving the right if we find more of these fantastic opportunities in China along the lines of the one that we've got in dual-curriculum school in Shanghai to do more of them. Although, as we mentioned in the past, we did think that the cost of that school, that the first school was a bit of a one-off pretty much twice as much capital as we used to spending on a school of that size, but the reason we took the deal was that we thought that we could not only have our return target above 70%, but also that it gave us the speed to market to really to try out what we thought was going to be a very successful opportunity.

We found that it is the case and so we are getting a lot of inbound opportunities at the minute of people wanting to partner with us and we are looking at those and if we find opportunities where we believe we can get the kind of returns in the kind of time that we got in Shanghai then we will be pursuing them.

Brandon Dobell

Got it. Okay and then I know you’ve made some comments about Doha school, it sounds like capacity is still now what it should be there, but broadly or more probably in the Middle East given all that's going on there. Maybe some color on I guess capacity, opportunities, pricing discussions with the local ministries and I just want to make sure I understand where you guys stand relative to all those oil markets and what they're going through these days?

Andrew Fitzmaurice

So as Graeme mentioned, what we're seeing is, we are still seeing strong inquiries and visit growth in the rest of that the region particularly in the UAE, and although Qatar has been a bit sticky in terms of inquiries and visits the fact that it was so full that means that we're not really expecting any impact next year. We call this fantastic opportunity in Abu Dhabi, where we’re going to open on Reem Island, the same area where they’ve got the Sorbonne campus there, and a number of other things. They've got planned for Reem Island. I believe there's a Guggenheim there as well.

So it's a real fantastic area within Abu Dhabi, tremendous amount of investment, we're seeing a lot of inflow with expats, we certainly can't scope with the demand at the minute in our existing British school that we've got there, and we're really excited about creating another world-class facility in Abu Dhabi that we're going to be able we believe to fill particularly quickly.

So I think we're still very excited about the Middle East. We believe it's a great opportunity for us. Already frustration of course is around pricing there where I think the – that the way that you have to get prices approved by the government does flow the potential growth that we would put into the market and we certainly want to make sure that we get clarity from the government on what our price point is going to be before we introduce more capacity. So I think that's the only drawback that we're already seeing in the Middle East, bit of oil noise in Qatar, but across the rest of the region the demand seems to be pretty strong.

Brandon Dobell

Okay. And then final one, Middle East, any uses of finding faculty administration and those kinds of things just given the political volatility there?

Andrew Fitzmaurice

No, we're not seeing. We're getting – continuing to get more and more applications for every position. The Middle East remains a very popular destination for us, so teachers who are applying for our jobs so I'm not seeing any problems at all.

Brandon Dobell

Okay, perfect. Thanks.


Thank you. Our next question comes from the line of Gary Bisbee with RBC Capital Markets. Please proceed with your question.

Gary Bisbee

Just one more follow-up, so I appreciate the opportunity in success today with the Chinese local student market, but can you talk through with us a bit just how the regulatory environment there differs from your other schools, it would seem to me probably a lot more will be holding the regulations from China which is pretty difficult for us to really assess and understand. How should we think about that? Is it a big deal, small issue what exactly do they regulate these school? Thank you.

Andrew Fitzmaurice

Yes. You're right, Gary. There is more regulation, but it sort of different level than that that we used to. So previously with the expat schools, we used to have to get a license from the Ministry of Education in Beijing and that would then relax slightly, so that now the major cities such as Shanghai, Beijing, Guangzhou are able to provide licenses themselves.

I think that the local school opportunities is slightly different in that, you don't get license at municipal level, so you don't get license at a city level, you get license at more of a county level or district level. So you're in the hands of a different level of regulator and that perhaps more aligned in terms of interested in providing things that the local community want and driving the economy locally as opposed to perhaps when you get either citywide or statewide or even national regulators who are perhaps more concerned with process.

So yes, there are a number of regulatory issues. I think what we see is we've been operating in China now for 15 years. We believe that that gives us a real advantage not just in terms of knowing our way around China and how China works, but also in the credibility that we have with Chinese regulators what they want as you know they want to know that the people that they're introducing are going to do a high quality job and that they're going to provide you know high quality education services and that the things that the people that living within their districts are going to appreciate.

So I think because we can tell a very good story there and also point to a lot of Chinese references there, we believe that we will be able to get a positive response from the regulators as we have been in Shanghai. And having said that you know that that we are going to be good it ourselves we do however think it will be difficult for others. So there will be a barrier to entry that others are going to find difficult that we will perhaps find easier.

So I think it's something there is not you know it's not come completely straightforward there's no doubt about that. Something that we believe that we can handle effectively, something we believe we can handle better than others and therefore you know provides us with a most around our schools that we establish there in China.

Gary Bisbee

All right thank you.

End of Q&A


Thank you. Ladies and gentlemen, we have come to the end of our time allowed for question. And that’s the conclusion of today’s conference. Thank you for your participation today. You may now disconnect your lines.

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