Bright Scholar Education (NYSE:BEDU) Q4 2018 Earnings Conference Call November 8, 2018 8:00 AM ET
Ruby Yim – Investor Relations Counsel
Jerry He – Chief Executive officer
Dora Li – Chief Financial Officer
Sheng Zhong – Morgan Stanley
Tianli Wen – Blue Lotus
Nicky Ge – China Renaissance
Alex Huang – First Beijing Investment Limited
Robbie Lee – Generation Capital
Good morning, and thank you for standing by for Bright Scholar’s Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] Today’s conference is being recorded. I would like to turn the meeting over to your host for today’s conference, Ms. Ruby Yim, Investor Relations Counsel.
Thank you, operator. Good morning, and good evening. Welcome to Bright Scholar’s 2018 fourth fiscal quarter and full fiscal year-ended August 31, 2018 earnings call.
With me today on the call is Mr. Jerry He, our Chief Executive officer; and Ms. Dora Li, our Chief Financial Officer.
As a reminder, today’s conference call is being broadcast live via webcast. In addition, a replay of the call will be available on our website following the call. By now, you should have received a copy of our press release that was distributed on the November 7, 2018 after market close Eastern time. If you haven’t, it is available on the IR section of our website.
Before we get started, let me review the forward-looking statements regarding this conference call. Certain statements related to future, not past events, often address expected future business and financial performance and financial condition, and often contain words such as will, estimate, project, predict, believe, expect, anticipate, intend, potential, plan or goal. Bright Scholar may also make written or oral forward-looking statements in other reports, in presentations, in material delivered to shareholders and in press releases. In addition, Bright Scholar’s representatives may make oral forward-looking statements.
Forward-looking statements by their nature address matters that are to different degrees uncertain, such as statements about the company’s goals and strategies, its future business development, financial condition, and results of operations. This ability to retain and grow its customer base and network of schools, the growth of, and trends in the markets where it serves in China, the demand for and market acceptance of its brand and services, competition in its industry in China, relevant government policies and regulations relating to the corporate structure, business and industry, fluctuations in general economic and business conditions in China.
Further information regarding this and other risks is included in Bright Scholar’s filings with the Securities and Exchange Commission. Bright Scholar undertakes no duty to update any forward-looking statements, except as required under applicable law.
During this call, we’ll be referring to GAAP and non-GAAP financial measures. We use certain non-GAAP measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures have limitations as analytical tools and investors should not consider them in isolation, or as a substitute for the net income attributable to the company or other consolidated statements of comprehensive income data prepared in accordance with U.S. GAAP.
Please note all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. With that, I’ll turn the call over to our CEO, Jerry He. Jerry?
Thank you, Ruby. Good morning and good evening to our investors calling in for our fourth fiscal quarter and the full fiscal year 2018 earnings call.
For those who are new to our company, we have including our earnings presentation a brief corporate introduction from Slide 3 to 9, which you can download from our IR website. Again all numbers are in RMB and all comparisons refer to year-over-year, unless otherwise stated. I will start today’s call with the performance highlight, then update you on recent acquisitions, key initiatives and the further priorities before turning the call to Dora for financial review. After remarks, we will take your questions. Bright Scholar delivered a solid fourth quarter in 2018 growth, exceeding our expectations.
Let’s go to Slide 11 for our financial performance highlights. For the quarter, revenue grew by 41.5%, adjusting operating income up 101.9%, adjusted EBITDA of 270.8%. And adjusted net income of 692.2%. For fiscal 2018, revenue grew by 29.4%, which exceeded the high-end of our revised guidance, adjusted operating income was over 40.1%. Adjusted EBITDA up 33.6% and adjusted net income up 44.9%.
Next in Slide 12. You can see that our efforts in ramping up utilization and strategic investments to expand our school network and our complementary business have paid off. The top line growth of this segment continues to expand off a large revenue base for fiscal 2018. As International Schools, Bilingual Schools and the Kindergartens grew over 16.6%, 29.2% and 28% respectively. Our Complementary business grew by 101.3% as a result of the strong performance of our summer camps, steady growth in enrollment and the contribution from expenditure.
Moving on to Slide 13. In addition to continuously broadening our service offering to enrich students’ learning experience, we have expanded our school network and also intensified the marketing initiative to step up our enrollment efforts. As of August 31, 2018, we have a total of 65 schools at a total capacity for our 57,000 students. Our growth in average student enrollment was strong, up 23.3% for the year, which also exceeded the top-end of our guidance. In addition, we maintained a steady increase in ASP for our Bilingual Schools and the Kindergartens as shown in Slide 14.
In Slide 15, you can see a recap of our remarkable academical performance in 2018. Bright Scholar provides our students with superior educations service, that have consistently delivered excellent academic outcome, with admissions to top domestic and global institutions. In China’s high school entrance exam, the Zhongkao, 80.3% of grade nine graduates from our Bilingual Schools were accepted into top public high schools in their respective regions. We see international exam results, 92% of the students from the 2018 graduating class were admitted to global top 50 institutions, with 22 admitted to top 50 institutions in the U.S. and three to Oxford.
Let’s continue on to Slide 16. Our acquisition and partnership provide us with the both the growth impact impetus and the operating platform to expand our footprint in educational service offerings. Over the course of the fiscal 2018, we completed four acquisitions, including Xinqiao and Can-Achieve, Foundation Global Education and Zangxing and expect to close the transaction on Zhejiang-based art training institution by the end of November 2018.
We continued our investments history – new talk in the first fiscal quarter 2019, first and 85% of equity interest in the top of company for total the consideration of RMB 70.5 million. The company managed chain of eight Kindergarten in Shandong province and that has a total capacity of 2,310 students, which is blended into a utilization of 66.7%, as of June 30, 2018.
Average tuition fees were around RMB 18,000 per year in 2017. Second, is 75% equity interest in Chengdu Yinzhe for a total consideration of RMB 202.5 million, with option to acquire additional 15% of equity interests in the future. Chengdu Yinzhe is a primary engaged in providing online Korean and mentoring services to overseas Chinese students under the brand name DreambigCareer. Since its establishment in 2015, it has successfully helped overseas Chinese students obtain over 4,000 offers, including interviews, internships and a full-time job offers across the globe.
In the first half of 2018, the company has a total revenue and the net profit of RMB 30 million and RMB 6.8 million respectively. Bournemouth Collegiate School, BCS, in the United Kingdom, it’s an established independent school that offers day and boarding education to approximately 600 students for age 2 to 18, including local students and international boarders from more than a dozen countries. BCS will be our first call outside China as we seek to build a global network of schools.
Please turn to Slide 17 for update on our strategic partnership and collaborations, which are increasingly important in a dynamic education services industry. Our partnership with Country Garden allows us to grow our school network with an asset light model. We recently signed a contract to operate 12 Kindergartens and the one Bilingual Schools, with total capacity of approximately 5,000 students. The collaboration with Fettes to build an International School in Guangzhou is progressing well, with a tentative opening date of September 1, 2020.
Beijing Normal University is opening their campus for our Recruitment event in October and the collaboration to be the Huiyan International Education College is scheduled to open by September 2019. Underscoring our confidence in the company’s prospects, we have been stepping up our share repurchase since the announcement of the share repurchase program in April.
Please refer to Slide 18 for a recap of recent announcements. As of October 31, 2018, the company have repurchased about RMB 3 million of these American depositary shares, for average repurchase price of approximately $37 million. We successfully raised the $190 million from the following the public offering earlier in the year, which put us in a very strong financial position as we ended the fiscal 2018 with $463 million in cash.
Going into fiscal 2019, we’ll continue to grow our Kindergarten segment to build business scale, focus on light asset model for strategic expansion in K1 to K9 segment and expediting investment to grow our global footprint and the Complementary business. We are energized in the confidence that we are making further progress against our strategic priorities for fiscal 2019, and are fully committed to creating sustainable value for our shareholders through operational performance, accretive strategic acquisitions, continued execution of our growth strategies and intelligent share repurchase.
So at this point, I would like to turn the call over to Dora to discuss our financials. Dora, please.
Thank you, Jerry. Please be reminded that all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis.
Please turn to Slide 20. Our revenue for the quarter was RMB 389.7 million, up 41.5%. On a cyclical year basis, revenue was RMB 1,718.9 million, up 29.4%. Revenue from International Schools for the quarter was RMB 117.4 million, up 22.9% as compared to RMB 95.5 million.
On a fiscal year basis, revenue for International Schools was RMB 589.6 million, up 16.6% as compared to RMB 505.6 million. For the reporting fiscal year, average students enrollment for International Schools increased about 17%, with utilization rate improved from about 42% to around 49% for fiscal 2018.
Revenue for our Bilingual Schools for the quarter was RMB 108.2 million, up 30.1%, as compared to RMB 83.1 million. On a fiscal year basis, revenue from Bilingual Schools was RMB 534 million, up 29.2% as compared to RMB 413.4 million.
For fiscal year 2018, average student enrollment for Bilingual School increased about 18% and AFT increased about 9%. Land date utilization for our Bilingual school was about 67%, for fiscal year 2018. Revenue from Kindergartens for the quarter was RMB 90.1 million, up 35.8% as compared to RMB 66.4 million.
On a fiscal year basis, revenue was RMB 399.2 million, up 28% as compared to RMB 312 million. Xinqiao Kindergartens contributed RMB 8.8 million of revenue for the quarter and RMB 21.6 million for the reporting fiscal year. For the reporting fiscal year, average student enrollment for our Kindergarten segment increased about 33% and the blended utilization for Kindergarten was around 72%.
Revenue from Complementary Education Services for the quarter was RMB 74 million, up 143% as compared to RMB 30.5 million. On fiscal year basis, revenue was RMB 196.1 million, up 101.3%, as compared to RMB 97.4 million. The revenue for élan English learning centers has increased by 6.1% to RMB 16.9 million for the quarter and the increase 18.7% to RMB 84.6 million for the fiscal year.
Revenue from Can-Achieve contributed RMB 26.2 million for the quarter and RMB 62.5 million for the fiscal year. Revenue from our camps and study tour business contributed RMB 10.4 million for the quarter and RMB 11 million for the whole fiscal year, while revenue from Foundation Global Education contributed RMB 6.7 million for the quarter and the fiscal year.
On Slide 21, cost of revenues for the quarter accounted for 72.6% of total revenue as compared to 75.2% in the same period last fiscal year. On the fiscal year basis, cost of revenue accounted for 63.4% as compared to 64.8% in last fiscal year. Teaching staff cost, the primary cost contributor was 49.5% of revenue for the quarter, as compared to 55.5%. For the fiscal year basis, staff cost was 43.8% of total revenue, compared to 46.5% for last fiscal year. Average students-teacher ratio was 8.8 for August 31, 2018 as compared to 9.4 for the same period last year.
Moving to Slide 22. Gross profit for the quarter was RMB 106.7 million, up 56.2%, gross margin up from 24.8% to 27.4%. On a fiscal year basis, gross profit was RMB 628.3 million, up 34.2% and gross margin was 36.6%, up from 35.2%. For International Schools, gross profit up 618.5% to RMB 23 million for the quarter and margin improved from 3.4% to 19.6%. For the fiscal year, gross profit for International Schools, up 48.5% to RMB 216.2 million with margin improved from 28.8% to 36.7%.
The reason for the increase in margins for International School is due to the quick ramp up of International School lead to the top line grow of 16.6% and the improved of operating efficiency with cost of revenue only grew by 3.7% on a year-over-year basis. For our Bilingual Schools, gross profit up 14% to RMB 30.6 million for the quarter and gross margin decreased from 32.3% to 28.3%. For the whole fiscal year, gross profit for Bilingual School, up 23.8% to RMB 187.1 million, with margins decreased from 36.6% to 35%.
The margin dilution for our Bilingual School sector was mainly due to the impact from the first year newly opened Bilingual School. For our Kindergartens, gross profit up 40.7% to RMB 34.8 million for the quarter and gross margin improved from 37.2% to 38.6%. For the whole fiscal year, gross profit for Kindergartens up 32% to RMB 175.8 million and the gross margin improved from 42.7% to 44%. Our Complementary Education Services, gross profit up 35.2% to RMB 18.3 million for the quarter, with margin – gross margin decreased from 44.5% to 24.8%.
On a fiscal year basis, gross profit for Complementary Education Services up 28.8% to RMB 49.2 million, with margin decreased from 39.1% to 25%. The decrease in gross margin for Complementary Education Services is mainly due to first gross margin decrease of our élan business and also the impact of Can-Achieve.
For Slide 23, the adjusted SG&A expenses for the quarter accounted for 27.7% of total revenue, down from 32.3%. On a fiscal year basis, adjusted SG&A expenses accounted for 19.7% of total revenue, same as last year. The increase in selling, general and administrative expenses was primarily due to the increase in the compensation and benefit paid to the additional general and administrative staff members and employee stock ownership plan related expenses to retain talents, as well as increase in marketing expenses for brand promotion, expenses relating to merger and acquisition and other professional services to support the growing business as a listed company.
Continuing to Slide 24. Adjusted EBITDA for the quarter was RMB 34.9 million, up 270.8% from RMB 9.4 million in the same fiscal quarter last year. Adjusted EBITDA margin was 8.9%, up from 3.4%. For the reporting fiscal year, adjusted EBITDA was RMB 408.8 million, up 33.6% from RMB 305.9 million.
Adjusted EBITDA margin was 23.8%, up from 23% in last fiscal year. Adjusted net income for the quarter was RMB 20.9 million, up 672.2%. Adjusted net margin was 5.4% as compared to loss of 1.3% in the same period of last fiscal year. For fiscal year 2018, adjusted net income was RMB 278 million, up 44.9% from RMB 191.2 million and adjusted net margin was 16.2%, up from 14.4%.
Please refer to the table in Slide 25 for the condensed income statement and Slide 26 for the reconciliation for SG&A, EBITDA and net income on a net to – on GAAP to non-GAAP basis. Also, a quick note on our cash and bank balance in Slide 27. As of August 31, 2018, the company’s cash and cash equivalent and also restricted cash totaled $463.3 million, as compared to $213.7 million for August 31, 2018.
For our guidance for fiscal year 2019, please turn to Slide 29. For fiscal year 2019 ending August 31, 2019, we expect our total revenue to be between RMB 2,300 million and RMB 2,350 million, representing a year-over-year growth between 34% to 37%. We expected average student enrollment to be between approximately 41,600 to 42,000, representing a year-over-year increase between 13% to 15%. We also currently expect to open five new Kindergartens during fiscal year 2019.
This concludes my financial update. Now I will turn the call back to Jerry for his closing remarks. Jerry?
Thank you, Dora. I’m very pleased that we have consistently and consecutively delivered strong results year-over-year that even exceeded our internal expectations. We ended the year on a high note, with a strong quarter on multiple fronts and very strongly – very strong financially, positioning us extremely well for the future. We end our fiscal 2019 with a focus on our core business by expanding our portfolio of services, increasing the utilization of our schools, empowering our students and teachers, and delivering superior academic outcome.
I’m confident that with our collaborative and inspired colleagues across Bright Scholar colleagues across Bright Scholar networks and the family of companies, unique expanding broad-based business, sows strategic investment in education services. We are well-positioned for success today heading into the future. That’s all we have in the formal prepared remarks. And we are now turning over to Q&A. Operator, please.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Sheng Zhong with Morgan Stanley. Please go ahead.
Hi, Jerry, Dora, thank you for taking my question. I have two questions. One – the first one is about our guidance. So this is purely based on the organic growth. Just wanted to double confirm and what’s the enrollment growth? And what the enrollment growth breakdown to different schools? And secondly, it’s about the Country Garden’s project because we previously have some pipeline from Country Garden’s project, so looking forward to what the pipeline looks like.
I’ll take the question on the guidance. So our current guidance is pretty much based on our existing revenue, which is our K12 business, our – including our Complementary, including Xinqiao, global foundation and also amount the current guidance we included the two acquisition we are expecting to close in November, which is the Zhejiang-based art institution and also DBC. So that’s basically what we have in our current guidance.
In terms of enrollment for our K to 12 schools, we are expecting right now roughly between 13% to 14%, as pretty much for each of our segments investments falling in that range. And your second question would be? The project, potential project with Country Garden. So right now, we forecast we are expecting over to open five new Kindergartens. That’s all within Country Garden, and the reported 13 new contracts is on top of that, but due to the construction plan from Country Garden, we do not have a detailed or very accurate operation timeline for the additional 13 we just reported in our release. But it will be in the next two to three years.
And also there will be, this is Jerry. So there will be more contract to be signed in this current fiscal year that we have not reported. We only reported the ones that we already signed.
Thank you very much, Jerry, Dora.
The next question comes from Tianli Wen with Blue Lotus. Please go ahead.
Hi. Thanks for taking my question. I have one question here. Could management help me to breakdown for SG&A this quarter? We see a decline on SG&A as a percentage of revenue for this quarter year-over-year. So could management give us more clear on that? Where will this trend go?
You can see as a percentage of revenue, SG&A as a percentage of revenue, on a quarter basis, if we take out the share-based compensation expenses, for the quarter is only around like 28% of the revenue, 27.7% to be exact. At the last fiscal quarter is almost 32.3%. So in other words, as a percent of revenue, SG&A expenses as trending down. It’s the same for the whole year. We just talked about that. If we keep that flat, 19.7% SG&A as a percentage of revenue, same as last year, even we have been invest a lot in talents, but we have been well-managed the total SG&A expenses, because as a growing company, we need to invest a lot upfront, like for instance our marketing, to support our build our branding. And also we have to invest a lot to our IT or system to support a long-term growing company.
This is Jerry. I’ll add to that. The SG&A as a percentage of revenue will continue – we expect to continue to trend down because the growth rate of our revenue. I think if you look at it, there is a page for that. Look at the combined annual growth rate of our revenues about 30%. Of course, our SG&A has been growing in absolute terms, but as a percentage, it’s not sustained. So basically we are capitalizing on the economies of scale. We expect the percentage of revenue continue to go down.
Okay. Thank you. Very helpful.
The next question comes from Nicky Ge with China Renaissance. Please go ahead.
Hi, Jerry, Dora, thank you for taking my questions. I have two questions here. Number one is about our guidance. Just want to know what is the implied AFT on tuition rate for the last year? And the second question is about our M&A strategy. We have done quite a few M&A in that last quarter. Just wondering what is M&A strategy going forward in next year?
Nicky, I’ll take your first question regarding the guidance on the AFT. If you look at our 2018 AFT trend, basically for International Schools for 2018 is flat and we have a healthy increase from Bilingual and also from our Kindergarten sector. As you know, our International Schools are still have a lot of vacancies. Although, at the end of 2018, we have a 49% utilization, but we still have a lot of room – a lot of vacancies. So the priority for International Schools is to increase utilization. And so we are not expecting a very high AFT increase from our International School and for our Bilingual School and the Kindergarten, we are expecting relatively moderate AFT increase for 2019. And the next question in terms of M&A, I will turn that question to Jerry.
Thank you for your question. For M&A, we are focused on a few areas. One is, if you look at the K12 space, if you look at K12 as Kindergarten one line and international education. Recent private education promotion law came out, we are very selective in terms of one line. So we’re going to focus on two ends. One is the Kindergarten, which is by current law, we can elect for full profit. So that’s where we’re going to focus in terms of domestic M&A and also be for the International will be most likely that’s not going to be from M&A, it’s most likely it’s going to be from Greenfield.
So another area of domestic acquisition will be the Complementary Education Services. For example, Can-Achieve and Foundation Global we acquired are really helping the student to apply to schools overseas and that’s an area and also recently announced the Zhejiang-based art institution really helps students to improve their profile as they’re well-rounded students. That’s domestic, and internationally, we are focused on K12 schools because we believe there is a tremendous benefit for our students and teachers to by having a global network of schools. So we recently acquired Bournemouth Collegiate School is one of those things. We would expect to continue to that, look at other countries and build a global network of schools.
That’s very helpful. Thank you, Jerry. Thank you, Dora.
The next question comes from Alex Huang with First Beijing Investment Limited. Please go ahead.
Hi, Jerry, hey, Dora. Thank you for the presentation and for the greater results, you have delivered. I have three questions. The first one is about our fourth quarter net income because we booked positive net income, which is good but also kind of unusual for our business because we have the summer holidays. So could you help me understand how did we achieve this result? And the second one is about our guidance. Could you explain the big GAAP between the revenue guidance and the enrollment guidance? And the third one is about our margin. Can we expect further margin expansion in 2019?
On the fourth quarter revenue net income, we have – during the fourth quarter, we have a contribution from our camps and study tour business, which we mentioned contributes almost RMB 10 million during the fourth quarter and also we have Can-Achieve – contributed around RMB 26.2 million revenue for the quarter. In addition to that, our core K12 business also have a very healthy increase. Our International School revenue increase around 23%, bilingual 30%, and Kindergarten almost 36%. That’s all helps us to have – to achieve a very good first quarter versus last year. And the second question is regarding?
The gap between the revenue guidance and the enrollment numbers. And I can explain that a little bit. Because the GAAP – the enrollment included not just schools – because the guidance for enrollment is only for schools – K12 schools, but as a percentage of revenue, nonschool business went up.
So that explains partially the gap. Also there’s a few acquisition with did last year in fiscal.
2018, now it’s going to do full year consolidation in 2019 as well.
Quick follow-up question about this. So how do we expect the organic growth of our new business for the next year?
You mean just schools?
Yes, K12 schools.
Because it’s how do we define organic? Because if we acquired in the past year, of course it’s going to be fully consolidated this year, so we consider that organic. So this guidance does not include any new acquisitions we are going to make.
I mean, how much can account for the Complementary service and how much is for the K12 school business about the growth?
Maybe we’ll give you the number roughly, because we never gave out this guidance.
Basically, the 34% to 37% top line growth, I will see in the roughly basis may be around 22%, 23% will coming from our core K12 business and the rest were coming from the Complementary. That is roughly a breakdown.
Okay, and the last question is about margin expansion.
You may notice that we only forecast expect to open five new Kindergartens during 2019, which means for 2019 our key focus will be ramping up our existing school. If you look at the model for K12 schools, when they pass their breakeven point, the margin will go up very quickly. And the good example is our International Schools segment. You can see that we increased our gross margin for International Schools from 28.8% to almost 37%. We have 36.5% for our International Schools. So we will see – we have a good opportunity to further improve our margin during 2019 as we will keep on – we’ll focus on ramping up our existing schools.
Okay, quick follow-up on this. In terms of margin, is the business – the Complementary business we have acquired accretion or dilution to our whole margin?
If you look at the whole year for 2018, we do have a margin dilution from the Complementary. Two major reasons, one is our existing élan business margin get a little bit decreased and also for Can-Achieve, their gross margin is compared to K12 is, because of the nature of the business, is between 25% to 30%, in that range. But for Can-Achieve, in terms of their bottom, I mean, there net-net margin is still in a very good profit range.
Okay, okay. Thank you, Dora. Thank you, Jerry.
The next question comes from Robbie Lee with Generation Capital. Please go ahead.
Hi Management, good evening. Just very quick follow-up on the previous question. So what’s your outlook for the margin for the International School? I think you talked about the market outlook in general. Could you please give me some specific color, on the margin for International School, because I saw a big jump for the International School margin in the fiscal year 2018. So how should we think about 2019 and beyond?
So I will take that question. If you talk about International Schools, so basically because our utilization is relatively low, meaning we have a lot of empty seats. So for school business, you tend to once you pass the breakeven point, your margin improves significantly because the margin cost of additional students is very low. You put more students in a not a full classrooms so you don’t actually have much improvement in the cost. That’s why for existing school, and assuming we are not opening any new International Schools, for existing ones, we will expect the margin will continues to improve significantly as we ramp up the enrollment.
Okay, okay. And also a question so previously you said, in terms of the revenue guidance that also includes the two acquisitions that will be completed in November. So they are also tied to the enrollment guidance because the guidance on enrollment?
This two are in Complementary business, so the enrollment is only for the K12 schools.
So it’s not included.
Again, this does not include anything let’s say, we make an acquisition in the second quarter, it does not include in any potential future acquisitions.
Okay, got it.
[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Jerry He for any closing remarks.
All right, thank you very much for joining the conference call. Please feel free to contact us if you have any further questions. Wish everyone a very good day.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.