Nord Anglia Education, Inc. (NYSE:NORD) Q1 2016 Results Earnings Conference Call January 26, 2016 8:00 AM ET
Vanessa Cardonnel - Corporate Finance and Investor Relations Director
Andrew Fitzmaurice - Chief Executive Officer
Graeme Halder - Chief Financial Officer
Paul Ginocchio - Deutsche Bank
Gary Bisbee - RBC Capital Markets
Anjaneya Singh - Credit Suisse
Henry Chien - BMO Capital Markets
Mariana Kou - CLSA
Greetings and welcome to the Nord Anglia Education First Quarter 2016 Fiscal Results Conference Call. [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. Please go ahead.
Thank you, Melisa, and thank you to everyone joining us on today’s call to discuss Nord Anglia Education’s first quarter fiscal 2016 results which we released this morning. Our earnings release is available on our website, nordanglia.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.
This 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’d like to remind you 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 US 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 to 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 those formalities out of the way, I will turn the call over to Andrew.
Thank you, Vanessa, and welcome everyone to our first quarter earnings call. As many of you know, Nord Anglia Education is the world’s leading premium schools organization, and we currently operate 42 schools across 15 different countries with nearly 35,000 students.
The current capacity within our schools is 49,000 seats, providing a significant room for growth. We are committed to delivering the highest quality education, and we expect all stakeholders, including students, parents, employees, and investors to benefit from being part of Nord Anglia Education.
We acquired 10 schools in 2015, and this combined with the successful opening of our new school in Chicago and strong organic enrollment growth in the first quarter of fiscal 2016 consolidates our leading position in the global premium schools market. Great schools are built on high quality teaching, and we believe that the Nord Anglia Education brand continues to attract the best talent available in the profession.
At our teacher recruitment event in London earlier this month, we received over 11,600 applications for 300 vacancies within our schools. This represents an average of 40 applications for each teaching post advertised, an increase of 30% per vacant position over last year. Teachers are attracted by our ability to provide ongoing professional development through Nord Anglia University, which offers a wide range of training courses.
Our collaboration with world-leading organizations such as Juilliard and King’s College London allows us to offer unique development opportunities for our teachers. We believe that our ability to attract, retain, and develop teaching talent is a key differentiator for our schools over our competitors and ensures we are able to achieve continued improvement in our high quality academic outcome as we grow.
Our commitment to quality continues to translate into strong financial results, and we had a good first quarter. The number of full-time equivalent students increased by over 72% to 34,255 students. We increased our total capacity by 84% to nearly 49,000 seats. Our revenue increased 68% on a constant currency basis; adjusted EBITDA increased 64% on a constant currency basis to over $64 million generating an adjusted EBITDA margin of 26.3%. Adjusted net income and adjusted EPS strongly improved, increasing 37% and 28% respectively.
We started fiscal 2016 with organic enrollment growth of 11% over the prior year and have achieved further enrollment growth in the year-to-date. As of January 24, we have 34,784 full time equivalent students. This equates to in-year enrollment growth year to date of 607 FTEs or 1.8% compared to 558 FTEs or 2.8% for the same period in FY15. The difference in the percentage growth between this year and last year is primarily due to reduced growth in the Middle East caused by capacity constraints as many campuses are now full. We’re working to remedy this position.
We continue to target in-year enrollment growth of between 2% and 4% and believe we’re on track to achieve this. This in-year growth is supported by continued positive trends for enquires and visits. Across our five regions, enquiries are up compared to the previous year and visits are broadly in line with or ahead of the previous year on a like for like basis. We see enquiries and visits as the key leading indicators for our organic growth into FY17.
Graeme will discuss the numbers from each region in a moment, but let me provide you with some high level commentary on what we’re seeing in China. We continued to achieve organic enrollment growth in China and retain the ability to increase prices by 1.5 to 2 times inflation. Our like for like organic enrollment growth is 7% and we implemented average tuition fee increases of just under 4% in China for FY16.
Whilst growth rates vary from school to school, six out of seven of our China schools are ahead of last year’s enrollment. This coupled with encouraging trends in our leading indicators of enquiries and visits gives us confidence that we would deliver strong results in FY16, FY17, and beyond.
I’d now like to turn to our schools in the Middle East and Houston which rely to varying varying degrees on demand created by the oil industry. Year on year, we have seen organic enrollment growth of over 25% in the Middle East, although as I’ve mentioned, our in-year growth has slowed due to capacity constraints.
Most of our Houston schools continue to generate organic enrollment growth and we remain excited by the opportunities created by the opening of our new campus in September 2016. To date, we have not seen any impact on our student numbers, or levels of enquiries and visits as a result of weakness in the price of oil.
We have regularly stated that we look to profitably grow through same-school expansion, Greenfield openings, and acquisitions. As communicated on our November call, this year we plan to deploy approximately $68 million in capital towards same-school and Greenfield growth.
On the same-school expansion side, we expect to spend around $27 million to add approximately 1,400 seats across all five regions. This includes some expansion which we will fund ourselves rather than through our landlord, with all expansions expected to pass our return on investment target of greater than 50%.
With respect to Greenfield schools, we expect to spend $40.5 million in FY16. This includes the completion of our new school in Chicago that opened in September 15, a new state of the art campus in Houston opening in September 2016, our new school for local Chinese students in Shanghai opening in September 2016, and initial funding for the new Greenfield we recently announced in Bangkok scheduled to open in September 2017. All Greenfields are expected to pass our return on investment target of greater than 70%.
We expect to announce further Greenfield projects for 2017 and 2018 in the coming months. We also have a deep pipeline of acquisition opportunities which is an important element of our growth strategy. We typically pay around 7 times EBITDA for a single school acquisition and a small premium for groups of schools.
As highlighted on the November call, we expect to generate approximately $225 million of available capital in fiscal 2016 from the planned sale and leaseback of the three schools in the United States and cash generated from operations. These funds provide us with the capacity to make accretive acquisitions.
I will now hand over to Graeme to take you through the financial results in more detail.
Thank you, Andrew.
Looking first at the group performance for quarter one of FY16 compared to quarter one of FY15, as summarized on slide 9, total revenue increased 68% on a constant currency basis and 60.9% on a reported basis to $244 million. The increase was driven primarily by a 71.3% increase in premium schools revenue on a constant currency basis or 64.1% on a reported basis to $242.9 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 Vietnam, China, Mexico, Switzerland, and the US last fiscal year. Average revenue per FTE decreased 4.1% to $7,100, due to adverse FX movements the mix effect of acquisitions and stronger growth and lower revenue per FTE schools.
Gross profit increased 62.8% to $96 million and our gross margin increased 50 basis points to 39.4%, due primarily to tuition fee increases in excess of cost inflation and increased FTEs within our schools, partially offset by the adverse impact of our start-up school in Chicago.
Adjusted EBITDA in the quarter increased 56.6% or 64.3% on a constant currency basis to $64.1 million and our adjusted EBITDA margin decreased 70 basis points to 26.3%. Q1 adjusted EBITDA includes the negative impact of our start-up schools in Chicago and Aubonne. The impact from start-up schools in Q1 2015 and Q1 2016 was $1 million and $2.7 million, respectively.
Financing expense increased to $16.6 million from $7.2 million in the first quarter last year. The increase was the result of additional debt raised to fund last year’s acquisitions. As a result, adjusted net income in the quarter increased 36.7% to $26.3 million and adjusted EPS increased 28.4% to $0.25.
On slide 10 we have set out a bridge for premium schools revenue from Q1 FY15 to Q1 FY16, which sets out the impact of FX, organic growth and acquisitions. On a constant currency basis, premium school revenue increased $101.1 million, or 71%, to $242.9 million. Of the 71% increase, 10% was organic and 61% was from the schools we acquired.
As a result of the acquisitions we made in Europe, South East Asia and North America and the strong organic growth we achieved over the last year in the Middle East and South East Asia, the regional breakdown of our revenue and EBITDA has changed quite significantly as highlighted by the pie charts on slide 11.
In Q1 last year, China contributed greater than 35% of premium schools revenue and more than half of premium schools’ adjusted EBITDA, whereas this has reduced to 23% of revenue and 32% of adjusted EBITDA in Q1 this year. Conversely, the contribution from North America has almost doubled as a percentage of revenue to 27% and the percentage of adjusted EBITDA to 27% following the Meritas acquisition.
Looking at China on slide 12, revenue increased 8.9% on a constant currency basis and 5.6% on a reported basis. The increase was driven by student enrollment growth and tuition fee increases. Average FTEs in China increased 11.4% to $5,744 and average revenue per FTE decreased 5.9% to $9,600, due to the strengthening of the US dollar and the mix effect of enrollment growth in Hong Kong, Guangzhou and Chengdu, which have a price point lower than the average for the region.
Adjusted EBITDA for the quarter was flat on a constant currency basis due to mix effects and $0.8 million in new employment related taxes and the adjusted EBITDA margin was 42% compared to 46% last year.
In terms of Europe on slide 13, revenue increased 74.7% on a constant currency basis and 60.1% on a reported basis, due to student enrollment growth and tuition fee increases and the acquisition of College du Leman in Geneva as part of the Meritas acquisition. Average FTEs increased 41.1% to $6,472 and the average revenue per FTE increased 13.5% to $9,700 due to the positive mix impact of the acquired school, offset by the negative currency translation impact from the strengthening of the US dollar.
Adjusted EBITDA increased 104.7% to $15.7 million and the adjusted EBITDA margin increased 530 basis points to 24.9% due to the acquisition as well as lower losses from our start up school in Aubonne as that school ramps up.
Looking at the Middle East, revenue increased 30.2% to $25.2 million. We experienced strong growth as a result of the excellent organic growth across the region. Average FTEs increased 26.5% to $5,282 and average revenue per FTE increased 4.4% to $4,800, due to tuition fee increases and the mix impact of stronger growth in higher revenue per FTE schools in the region.
Adjusted EBITDA increased 62.6% to $5.5 million due to fee increases and high utilization, including the impact from the ramp up of our Dubai school. This resulted in a 420 basis point increase in adjusted EBITDA margin to 21.8%.
Moving on to South East Asia on slide 15, revenue increased 129% on a constant currency basis and 109.9% on a reported basis. We achieved this strong growth 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 129.1% to $7,321 and average revenue per FTE decreased 10% to $4,500, due primarily to the mix impact of the four schools acquired in Vietnam as well as the negative currency translation impact from the strengthening of the US dollar against Southeast Asian currencies, partially offset by tuition fee increases in excess of inflation.
Adjusted EBITDA increased 101% on a constant currency basis and 81.3% on a reported basis, due to the Vietnam schools acquired and increased utilization and pricing across the region. Adjusted EBITDA margin decreased 310 basis points to 27%. There remains significant upside in the Vietnamese schools which required low utilization and are still ramping up.
In North America, revenue increased 213.8% to $66.1 million. Average FTEs increased 239% to $9,436 and average revenue per FTE decreased 7.9% to $7,000, due to the mix impact of the Meritas schools acquisition, in particular the school in Mexico which has much lower revenue per student than the average for the region. This was offset by tuition increases across our schools.
Adjusted EBITDA increased 165% to $20.2 million due to the acquisitions in the US and Mexico and organic growth across the region, offset by the impact of our start-up school in Chicago. Adjusted EBITDA margin decreased 540 basis points to 30.6%.
Slide 17 shows our summary cash flow for the quarter to November 30, 2015. We ended the period with a cash balance net of our pooled overdraft facility of $170.4 million. In terms of the seasonality of our cash movements, the cost base is relatively constant within a 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. Most of our annual and term one fees are collected in Q4. Term two fees are collected in December, midway through Q2, and term three fees are collected in Q3. From year to year, our cost base growth is the scale of our business increases, so the cash used in operations in Q1 2016 is higher than that used in Q1 2015.
In Q1 2016, we used $56 million of cash in investment activities, including $27.9 million final consideration of the Meritas acquisition and $28.7 million on capital expenditures, in line with our expectation of $110 million CapEx in fiscal 2016.
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 4.9 times up from 4.4 times at Q4 FY15. This is in line with the seasonality of our cash movements and we expect net leverage to increase in Q2 FY16 before reducing towards the end of fiscal 2016 to our target of 4 times or less.
Turning to slide 18, we’re reiterating our guidance for fiscal 2016. We expect overall revenue in the range of $850 million to $870 million, which is 47% to 51% growth over FY15. We anticipate adjusted EBITDA to be in the range of $215 million to $225 million, which is an increase of 61% to 68% over the $133.7 million in FY15. This includes a $10 million negative impact from our start-up schools in Aubonne and Chicago, a headwind of approximately $9 million from FX and an additional $3 million of new employment taxes in China.
We expect our effective tax rate excluding the impact from an unrealized gain on the revaluation of the CHF200 million bonds to be approximately 27% and our expected adjusted net income will be range of $70 million to $75 million. With respect to share count, we project 104.5 million shares for FY16, which gives adjusted EPS of $0.67 to $0.72, or 52% to 64% growth.
Over the past three months, FX has become a bigger headwind. Our original guidance assumed a $6 million to earnings from FX. But at today’s rate, FX is around $9 million impact to fiscal 2016 earnings. We’re reiterating guidance today, but at current FX rates, we would expect to be in the bottom half of the guidance ranges. We will continue to monitor this and adjust our guidance according.
Our guidance for fiscal 2016 does not include any unannounced acquisitions or the impact of the sale and leaseback of the three US properties we acquired as part of the Meritas acquisition, which we intend to complete in fiscal 2016.
With respect to the quarterly phasing of 2016 results, in the 6-K we filed today, we have included our unaudited consolidated income statement and supplemental financial data for the four quarters of fiscal 2015 reflecting a reassessment in Q4 FY15 of how non-tuition fee revenue should be recognized across the year. In line with this phasing and taking into account the full year contribution of the Meritas schools, we expect a positive adjusted EBITDA contribution of $10 million to $15 million in Q4 fiscal 2016 compared to a loss of $5.1 million in Q4 fiscal 2015.
I will now hand back to Andrew to make some closing remarks.
Thank you, Graeme. We believe our investment in high quality teaching talent and our collaboration with world-leading educational institutions such as Juilliard and King’s College London further differentiates Nord Anglia Education schools from their competitors.
The success of our strategy can be seen through continued organic enrollment growth and our ability to increase tuition during various stages of the economic cycle. The growing strength of our brand is demonstrated by strong trends in our enquiries and visits and the deep pipeline of Greenfield and acquisition opportunities.
Operator, we’d now like to open up the call for Q&A.
[Operator Instructions] Our first question comes from the line of Paul Ginocchio with Deutsche Bank.
Andrew, I appreciate all the comments around China, in the Middle East, and Houston. You said that China was up six out of seven schools, 4% organic enrollment growth, what does that look like? Can you break out Hong Kong, which is obviously a faster growing school, does that organic enrollment growth still hold up ex-Hong Kong?
We don’t tend to give individual school, Paul, but in terms of Hong Kong, the school is reasonably full. So, across the schools, just pointing out that we’re seeing pretty uniform decent growth across our China business, really.
And then just looking at Europe and the US, in my model, I was pretty far off on the European margins, much better than expected, US was a little bit lower, is that all due to the acquisition in Europe and then Aubonne lower margins – lower losses in the Chicago start-up or is there anything else that’s worth mentioning that would have made it a little bit different than I thought?
The main reason in Europe, Paul, I’d say is on the acquisition, College du Leman is a big school and it’s got a relatively high price point on fees, it’s got boarding as well, which as you know tends to push it up. So as we said before, a big school tends to have better margins because it’s got economies of scale, so that’s probably where the main issue on the Europe side. On the US side, it’s almost certainly the drag of the new costs for the second Chicago campus, which we called out in terms of the adverse impact on the margin there in the short term as we ramped up.
Graeme, if I can get just one more clarification on the FX headwind, you said incremental $3 million, was that to profits or revenue?
It’s to EBITDA.
Our next question comes from the line of Manav Patnaik with Barclays.
This is [Ryan] filling in for Manav. Just on the organic growth, obviously for the quarter, we are kind of at the lower end of guidance. Is there anything that you could expect that would accelerate that or is that pretty consistent with your expectations for the full year?
If you pick apart that prior quarters, and where we’ve given the FTE growth, you would be able to see pretty clearly that it’s growth in the Middle East which is off a bit compared to last year, so I think we are at 1.8% compared to 2.8%. In the Middle East, most of those campuses are full in Doha and the UAE. And if you take out the Middle East, then we’re very much in line and we’re pleased with that in enrollment growth because we’ve added a lot of schools, we’ve got the schools in Vietnam, we’ve got the schools in North America, and we’re pleased with the performance of our existing schools that we owned before we made those acquisitions as well. So pretty uniformly, we’re pleased with the way it’s going this year, the slight issue compared to the comparison for last year was just a capacity one in the Middle East region.
And I guess on that note, can you just talk about line of sight to capacity, and then going forward is that something you know at the beginning of any given year how much space you’ll need to build out just based on demand for 2017 and beyond, it’s obviously a pretty fast growing region, so just any type of color on your line of sight to the capacity needed in those type of regions?
Sure. What we do is every week we have an organization performance review, and as part of that we look at how all of the schools are tracking in terms of their growth, which schools are forecast to be full for next September, for us next September is September 2016, start of the new academic year, and then we look at it school by school basis about what we’re doing to add capacity, and we either have a green, amber, or red based on whether we’ve solved our capacity problems or not.
So the report we’ve got, the majority of it is green, some amber , and a couple of reds. I think the only thing with the Middle East is, as we know it, particularly in our school in Doha where we have prices which is set by the government, we have to get the government approval to increase our prices.
The other thing that we have to consider is whether it meets our 50% return on investment target. So not only do we have to be able to find the capacity, which we can almost invariably do, but it has to meet the return on investment target that we’ve got. And that would be the only comment I’d make regarding the capacity we’re putting in. But as we look forward in September 2016, pretty much everywhere we want to, we’re putting in capacity, but just the only thing I would say is that in Doha, in particular, we have got this issue about the return on investment due to the lower price point.
If I could sneak one in, on the leverage front, you mentioned going down to below 4 times by the end of fiscal 2016, can we make any assumption on the sale leaseback, is that entirely available for acquisitions or will any of that be used to delever?
It’s all available for acquisitions, provided we’ve got the right acquisitions. And as we said before, we’re looking to line them up so by the time we’ve got access to those funds, we’ll be able to deploy them.
But none of the sale and leaseback proceeds are counted within that target of getting down below 4 times. We’re not using those proceeds to help it to get down below 4 times. So we didn’t use the sale and leaseback for acquisitions, then it would further reduce leverage.
Our next question comes from the line of Gary Bisbee with RBC Capital Markets.
Let me follow-up on that last one, I realize the thought process on the sale leaseback as you try to time it fairly close to announcing an acquisition for reasons of not bringing on the cost before you bring on EBITDA, but is there a risk that by delaying that you’re going to see the terms that you expect to get deteriorate, I mean, it’s pretty dicey environment for debt financing at the moment and it feels like it’s getting worse, I guess, how do you think about that, you’re negotiating today or the terms still about what you broadly expected when you started talking about this six months ago?
I think the terms what we’ve talked about, we’re also hoping to perhaps stage some of the [indiscernible] sale and leaseback to proceeds so that we can further match it with any timing issues that we have. But as you know, we’ve pretty much proven over the years that we can find accretive acquisitions and we continue to see the same kind of price in the market that we’ve always guided people towards. And so we’d be pretty confident that not only can we get the sale and leaseback done, but also we’d be able to deploy the proceeds into acquisitions.
And then haven’t asked you this in a while, but it’s become much more of an issue in the last year, so have you thought about and how do you think about the potential to hedge some of the currency, I realize it’s largely translation and so maybe it’s not worth the effort, but it seems to have had a significant – one of the issues is that a significant impact on investor sentiment and I know there is some might say fringe view, but becoming more mainstream that there could be a much bigger devaluation in China in the next few years and that would hurt the business. Is that practical, is that something you’ve thought about, just any thoughts on the potential, whether it’s more broadly or China specific?
On China specific, I think if you look at slide 11 on the deck, [indiscernible] on China now than a year ago, but that said we still have very profitable business in China which could be impacted on a reported basis by a further weakening in the RMB against the dollar. We always make sure we have adequate headroom on our interest cover which is currently very comfortable, but we continue to keep it under review.
I think one of the things you have noticed is with what we did with rising debt for the Meritas acquisition and taking on some Swiss bonds, as we’ve seen the downside of the Swiss profits being worth less in the dollar, we also got the upside of the bonds being valued less as well. So that’s a nice match and we’re looking at other areas where we might be able to match that a bit at the moment. So that’s constantly under review.
Our next question comes from the line of Anj Singh with Credit Suisse.
Just a couple of quick ones. Wondering on the enrollment growth, if you can discuss what that looks like in your acquired schools versus let’s say the organic schools, are the acquired schools faring better, in line, worse than your organic schools? Is there anything that you would call out?
No, I mean, that’s performing well. I think the old schools are performing slightly better than double digit and the acquired schools are mid to high single digits. So we’re pretty pleased with the performance of both really.
Again, appreciate all the comments around China, but I wanted to dig into that a little bit further. Right now, I guess you’re primarily [expat] exposure there, what are you seeing with regards to market volatility, or any unevenness in the local markets that you’re soon to be participating in, is there anything that you see different there, trends there versus expat market?
The local market is growing much more strongly than some of the expat market. I think we’ve talked on the last call when we said about our September numbers that the expat market was low single digit at best to flat in terms of enrollment growth and we did a study in Shanghai in particular and the market there for local students in premium schools is growing at 20% and our expectation is that that growth will get stronger, if anything as time goes on. So there are two very different types of market. And the reason that we particularly like the local market is we believe that we’ve got the international brand and recognition with now an ability to operate a local school for local students.
So we’re really excited about that opportunity, it’s kind of back to the growth that we used to see in the very early stages of our expat schools when we launched in China. And of course, the scale of the market is just much, much bigger than the expat market. And the way it’s growing, the total market potential, I think we’re really excited about what we see with that opportunity, particularly as our expat schools are holding up very well in what isn’t a fantastic trading environment.
And one quick last one from me, the teacher recruitment figures you mentioned on your slide deck, it’s quite a considerable increase over the past few years in the number of applicants, just trying to get a sense of how much of this increase you think is just attributable to the number of schools you’re now operating versus when you went public or maybe attributable to some of the announcements you’ve made around professional development?
We measure it on applicant per vacancy and as well as the aggregate number of applicants increasing the applicant per vacancy, per job that we’ve got has increased by 30%. And what we’ve noticed as well is that pretty much everyone now is talking about wanting to join Nord Anglia Education as opposed to this specific school or that specific school.
And I think the thing that’s driving that is of course our investment in professional development, collaboration with Juilliard, King’s College, the fact that we’ve gone public I think has improved our brand recognition and also gives a real stamp of quality to the organization overall. I think the continued growth and success of the organization which in international schools we’re the market leader by some distance. I think that’s just all adding to the wheel effect that we’re getting of the power of the Nord Anglia Education brand and the number of applicants that we’re getting for each job and the quality of the applicant are both good indicators of that.
Our next question comes from the line of Jeff Silber with BMO Capital Markets.
It’s Henry Chien calling in for Jeff. I was just curious about your thoughts, there was an article in the journal about a month ago about China, the government reducing their international schools [indiscernible] international programs or reducing prices. Was just curious about your thoughts on the environment there and whether or not that changes your strategy in the region?
There’s been no government announcement that we’ve seen with regard to pricing in international schools. I mean, what we have seen is that the 13th five-year plan has been released by Xi Jinping and we think that’s overall positive for our operations in China. The plan highlights in a number of areas saying that education is a key area and that encouraged private sector investment in education. And so we think we’re in a pretty unique position there in China; we’ve been there for 14 years; we’re very well established in Shanghai, Beijing, Guangzhou, Chengdu and we believe that and our international brand means that we’ve got a really good opportunity with that market. So we’re continuing to see a very supportive government backdrop to what we’re doing. And I think the new license that we’ve got in Shanghai which is a K-12 license really shows the strength of the relationships and the track record that we’ve got there.
And just a follow-up, so you’re not seeing any pressure in terms of the government of China reduce international programs for local students, just to clarify.
I think what this government has done which again we think is a positive for us, is they’ve asked a number of state schools which have an international section to stop offering that international section and that means that students that want to do a more internationally based curriculum, want to follow a more internationally based curriculum have now no longer got that in these state schools or increasingly that’s been removed from the big state schools, so it means that organizations like us which open a new school with an international license can take the demand up. So we see that as a positive.
[Operator Instructions] Our next question comes from the line of Mariana Kou with CLSA.
I just have two quick questions on China. I think the first one, you mentioned on the revenue per student was slightly down, I just want to confirm, I think you mentioned it’s bit of a mix due to Hong Kong and Chengdu, so just wondering how we should think about the upcoming school in Shanghai, would that also have an impact on the revenue per student? That’s my first question.
Maybe I’ll just go ahead with the second question, the second question is just on the curriculum. I believe the Chinese government has pretty much – targeting local students and Chinese students will have to study the Chinese local curriculum which I think you also mentioned on your press release, so just wondering technically how that may impact [indiscernible]?
Yes, so they won’t do the Gaokao, if you excuse my pronunciation, because what we’re going to do is we’re going to – compulsory education as you know is between the age of six and 16, so we’ll be offering that compulsory education, but we’ll not be taking them to the Gaokao at the age of 18 for admission to a Chinese university. What we’ll be doing is we’ll be taking them through the Chinese curriculum up to the age of 16 and then as they get older [indiscernible] through their education, but particularly as they get older, we will introduce more and more of an international curriculum so that when they get to the age of 16, they will do a three-year IV program and get an IV diploma with a view to going to university abroad.
In terms of the query on the revenue per FTE in China, as I said in my pie, it’s a mix impact of acquisitions and FX, combination of both of those two being pretty negative in the quarter against the quarter last year, so slightly stronger growth in the schools where we do have lower fees. If you go online, you can see the fees in Chengdu, Hong Kong, Guangzhou are quite a bit lower than our established schools in the big cities of Beijing and Shanghai. But as I think Andrew mentioned in the prepared remarks, we did put up fees by just under 4% on average cost to the region and that was fairly consistent across the region.
Just to follow-up [generally] expect any kind of significant mix in terms of – for example in Shanghai, the current schools in Shanghai versus upcoming schools in Shanghai or the tuition should be roughly the same, is that a fair assumption?
It will probably be a little bit less initially than the overall average of China, but not that much less. There will still be a premium price point, but it will be slightly off the average for China at the moment. But we see that school is having a very similar margin profile to the rest of the schools in China.
Our next question is a follow-up from the line of Gary Bisbee with RBC Capital Markets.
Just one quick one. A question I’ve been getting a lot from people as they think through the higher growth capital spending you’re doing this year is how do we think about the timing to payback or the timing to breakeven and then payback on the various types of investments, and so on same store investments, is that very quick? I know with the start-ups, or the Greenfields it depends if it is a local market versus an expat school to a certain extent, but how do you think about that?
That’s a good question, Gary, actually when we think about the existing schools, so on existing schools then we’re talking about quick profile to breakeven, one to two years and payback period in one to four years; three to six years to get to maturity, with six years being very much the outlier there and that’s normally because we’re putting in smaller chunks of capacity. So we’re putting in 300, 400, 500 seats at a time of capacity into those schools. So it’s much quicker to fill it, it’s a smaller total CapEx number and you get your cash back far more quickly typically. It does depend on whether on the total amount of capital that we are investing on the project, of course, but typically those are the kind of averages.
Our next question is another follow-up from the line of Paul Ginocchio with Deutsche Bank.
I’m just looking at slide 17 in your pro forma EBITDA through fiscal first quarter 2016 of $212.5 million, obviously your guidance is about 3.5% above that, $220 million at the midpoint, just trying to understand with the typical seasonal growth we see from the first quarter into the second and a little bit further into the fourth, and you’re talking about $10 million to $15 million EBITDA profit in the fourth quarter this year which is typically a loss for at least in the old accounting convention was, just seems like the midpoint of the guidance at only 3.5% above the current run rate seems pretty conservative. Am I missing something?
You got to build in the various headwinds that I listed out there, Paul, FX for example and that’s got varying impacts throughout the year. It was pretty significantly negative in Q2, Q3 and Q4 of last year and you got the headwind of the Chicago school which will be pretty much across all four quarters.
Ladies and gentlemen, that is the conclusion of our question-and-answer session. I’ll turn the floor back to Mr. Fitzmaurice for any follow-up material.
I’d just like to thank everyone for attending our Q1 FY16 call and wish you all the best for the remainder of the year. Thank you.
Thank you. This concludes today’s teleconference. You may disconnect your lines. Thank you for your participation.
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