Bright Scholar Education Holdings Ltd (BEDU) 2019 Q1 法說會逐字稿

Good morning, and thank you for standing by for Bright Scholar's 2019 First Fiscal Quarter Ended November 30, 2018, Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. (Operator Instructions)

I would now like to turn the meeting over to your host for today's conference, Ms. Ruby Yim, Investor Relations Council.

Thank you, operator. Good morning and good evening. Welcome to Bright Scholar's 2019 First Fiscal Quarter Ended November 30, 2018, Earnings Call. Joining me today are Mr. Jerry He, our Chief Executive Officer; Mr. Derek Feng, who will succeed Jerry as CEO following this call, officially on Monday; and Ms. Dora Li, our CFO.

As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay 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 January 17, 2019, 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, such as 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, its ability to retain and grow its customer base and network of schools, and growth of and trends in the market for its services in China, the demand for and market acceptance of its brand and services, competition in its industry in China, relevant government policies and regulations relating to the corporate structure, business and industry, fluctuations in general economic and business conditions in China.

Further information regarding this and other risks is included in Bright Scholar's filings with the Securities and Exchange Commission. Bright Scholar undertakes no duty to update any forward-looking statements, except as required under applicable law. During this call, we'll be referring to GAAP and non-GAAP financial measures. We use non-GAAP measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for net income attributable to company or other consolidated statements of comprehensive income data prepared in accordance with the U.S. GAAP.

Please note, all the 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?

Thanks, Ruby. First and then foremost, on behalf of Bright Scholar, we wish everyone, every happiness, good health, and prosperity in 2019. And thanks to everyone who is joining our call today to review 2019 first quarter results.

Before we start reporting our performance, I would like to welcome Derek on board. He will succeed me as the CEO effectively on next Monday. As you may note from our press release yesterday, Derek has extensive experience in the education sector. I can think of no one better to lead the Bright Scholar and looking forward to working with Derek through the transition process and continue advancing our next phase of organic and acquisitive growth. And now, I would like to pass the call to Derek to say hello, and then make a few remarks. Derek?

Thanks, Jerry. Good day everyone and Happy New Year. It's a privilege to have the confidence of the board and be selected as Bright Scholar's next CEO.

Bright Scholar has a strong portfolio of businesses that distinguishes itself in the market by delivering increasing and lasting value to students and stakeholders. Jerry has been instrumental in driving the exponential growth of the company, and his team has accomplished memorable achievements in the past few years.

As you know, private education is rapidly growing and is evolving, impacted by recent regulations. Every time, there are changes, there are opportunities. Bright Scholar is well positioned to continue the growth with its standard strategy, strong businesses and ample capital. I'm honored to assume this position and confident to continue to unlock the vast potential from our portfolio of businesses. I look forward to contributing my experience to lead the company's next phase of growth and to continue delivering superior value to our shareholders.

Let me take this opportunity to congratulate Jerry on his promotion to Executive Vice Chairman, and look forward to working closely with him and the talented team to maximize long-term value and together to take Bright Scholar to greater level of success. And I look forward to speaking and meeting all of you as we continue to provide updates and discuss our opportunities ahead.

Without further delay, I turn the call back to Jerry. Jerry?

Derek, thank you for your kind words. Again, welcome aboard.

Now let's get it started. For those who are new to our company, we have included in 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 highlights, then share some of our key strategic initiatives and developments before turning over the call to Dora for financial review. After remarks, we will take your questions.

Please turn to Slide 11, Bright Scholar continues to successfully succeed to execute against our strategies. In the first fiscal quarter, we delivered a revenue of RMB 649.9 million, which represented 39.7% year-over-year growth. Adjusted gross profit up 37.6%. Adjusted operating income up 39%. Adjusted EBITDA up 34.7%. And adjusted net income up 39.9% for the quarter. Our high growth is driven by increased traction in our core business, and an increase in revenue contribution from our new business segment.

Let's look at the detailed breakdowns of respective segments on Slide 12. Our focus on ramping up our schools are providing return from our acquired business and delivering premium education service to our students is continuing to drive our strong performance. The top line growth of our respective business segments continue to expand for the quarter as the International Schools, Bilingual Schools and Kindergartens grew over 25.2%, 24.7% and 29.7%, respectively. Our complementary business grew by 244.7%, as a result of the strong performance and the contribution from Can-Achieve.

Slide 13 shows more details of our school expansion and the enrollment increase as the market demand for quality education continues to be very strong. As of November 30, 2018, we have average student enrollment of 41,423, an increase of 22.1% as compared to the first fiscal quarter 2018. Total school capacity was 58,619, with blended utilization at 70.9%. We also have 4,693 teachers, and instructors across all business lines.

Turning to Slide 14, we continue to maintain a competitive pricing across our network in all business segments to optimize the utilization and to drive organic growth of our business.

Moving on to Slide 15, our performance is a reflection of our commitment to quality education and to delivering the best academic results for our students. As of the release date, which is still early in admission season, approximately 60% of the students in the 2019 graduating class of our International School have received 356 offers from global top 50 institutions, including one from the University of Chicago and 4 from Oxbridge.

We expect that many more students will receive offers for these elite institutions as the admission cycle continues.

Our business operational front, please refer to Slide 16, we continue to progress on important strategic initiatives to expedite pace of growth, and I would like to provide a few updates before I hand over the call to Dora for details of our financial results.

To pursue organic growth is one of the key initiatives to build our business scale. As of January 17, 2019, we saw opening of 3 Kindergartens in Guangdong, Shandong, and Hunon. We have total of 68 schools, including 6 International Schools, 13 Bilingual and 47 Kindergartens, covering 9 provinces in China. It provides a total capacity over 58,619 seats. The guidance to open 5 new Kindergartens is still well on track.

After the teaching investments, which underpin our plan to accelerate business growth, I am pleased to report that, as of the release date, we have completed 3 strategic acquisitions, and each of them represents a major milestone as we expand our global footprint and further broaden our complementary service offerings.

First, our very first overseas school, Bournemouth Collegiate School in the U.K.; second is the renowned Zhejiang-based art training institution, Hangzhou Impression; and finally, the overseas career counseling company, Chengdu Yinzhe, which owns the famous brand "DreambigCareer". We continue to foster new collaborations and entered into strategic collaboration with Changchun Normal University. A second collaboration following Beijing Normal University. Bright Scholar plans to provide approximately 200 internship positions and recruit about 300 teachers in the next few years.

A deeper collaboration with Country Garden is crucial to fast expanding our networks in asset-light way. As of December 31, 2018, we have signed contracts to operate a total of 13 Kindergartens and 2 Bilingual Schools with a total capacity of approximately 6,900 students.

Our share repurchase program as shown in Slide 17, we have been very active since the inception of the program in April 2018. As of January 17, 2019, the company has repurchased about 4.4 million of American depository shares for aggregate purchase price of approximately USD 52.7 million.

In concluding my remarks, Bright Scholar has delivered another strong quarter with robust growth from our core business, and increasing contribution from acquired assets in complementary business. Acquisitions remain a strategic imperative as we accelerate investments to establish our global footprint and expand our domestic business.

With organic growth momentum-driven by strong traction across respective segments, we continue to make tremendous progress towards our business and the financial goals that deliver sustainable long-term value to our shareholders.

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

Thank you, Jerry, and many congratulations to your promotion, and also welcome to Derek on board. I look forward to working with the excellent team as we progress to our next phase of growth.

Let's turn back to our financials. Please be reminded that all numbers are in RMB, and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on year-over-year basis.

Please turn to Slide 19. Our revenue for the quarter was RMB 649.9 million, up 39.7%. Revenue from International Schools for the quarter was RMB 218.6 million, up 25.2% as compared to RMB 174.6 million.

Revenue from Bilingual Schools for the quarter was RMB 194 million, up 24.7% compared to RMB 155.5 million. Revenue from our Kindergartens for the quarter was RMB 137.7 million, up 29.7% compared to RMB 106.2 million. Revenue from our Complementary Education Services for the quarter was RMB 99.6 million, up 244.7% compared to RMB 28.9 million. Can-Achieve contributed RMB 62.4 million to our revenue for the quarter.

On Slide 20. Cost of revenue for the quarter accounted for 54.4% of total revenue as compared to 53.4% in the same period last fiscal year. Teaching staff cost, the primary cost contributor, was 34.4% of total revenue as compared to 37.9% the same quarter last fiscal year. Average students teacher ratio was 9.0 for November 30, 2018, as compared to 8.7 of the same period last fiscal year.

Slide 21, gross profit for the quarter was RMB 296.6 million, up 36.8%, and gross margin was 45.6% compared to 46.6% in the same period last fiscal year. For international schools gross profit up 25.3% to RMB 107.3 million, with gross margin improved from 49% to 49.1%.

For our Bilingual Schools, gross profit up 29.7% to RMB 87.4 million for the quarter, with gross margin improved from 43.3% to 45%.

Our kindergarten, gross profit was up 32.3% to RMB 69.7 million for the quarter, with gross margin improved from 49.6% to 50.6%. Complementary Education Services, gross profit up 190.5% to RMB 32.2 million. Gross margin was 32.3% compared to 38.4% of the same quarter last fiscal year.

The decrease in margin for the Complementary Education Service sector is mainly due to incremental staff cost for opening 2 new centers, and also the increase in rental cost as to compliance with the recent regulation.

Slide 22, adjusted SG&A expenses for the quarter accounted for 17.7%, up from 17.3%. The increase in selling, general and administrative expenses was primarily due to the increase in the compensation and the benefits incurred from additional general and administrative staff members, employees' stock ownership plan related expenses to retain talent, also the increase in marketing expenses for brand promotion and cost associated with the acquisition and other professional services cost to support the business growth as a listed company.

Meanwhile, the incremental SG&A expenses incurred from -- also incurred from the acquired business.

Continuing to Slide 23. The adjusted EBITDA for the quarter was RMB 217.4 million, up 34.7% from RMB 161.4 million in the same fiscal quarter last year. Adjusted EBITDA margin was 33.5% compared to 34.7% last fiscal quarter. Adjusted net income for the quarter was RMB 167.5 million, up 39.9%. Adjusted net margin was 25.8% as compared to 25.7% in the same fiscal quarter last year.

Please refer to table in Slide 24 for the condensed income statement and also Slide 25 for the reconciliation for SG&A, EBITDA and net income on a GAAP to non-GAAP basis.

A quick note on our cash and bank balance in Slide 26. As of November 30, 2018, the company's cash and cash equivalent and the restricted cash totaled RMB 2,428.3 million or USD 349.1 million as compared to RMB 3,164.1 million as of August 31, 2018. We are reaffirming our guidance for fiscal year 2019 with a recap on Slide 28.

For the fiscal year 2019 ending August 31, 2019, we expect our guidance for total revenue to be between RMB 2,300 million and RMB 2,350 million, representing an year-over-year between 34% and 37%. We also expect our average student enrollment to be approximately between 41,600 and 42,000, representing an year-over-year increase between 13% and 15%. We also expect 5 new Kindergartens openings for fiscal year 2019.

This concludes my financial update. Now I would like to turn the call back to Jerry for closing remarks.

Thank you, Dora. Our continued performance is a result of deeper investment in expanding network, broadening education products and services that empower our students to achieve academic excellence.

Looking ahead, we expect to expedite our growth by executing along our 2 strategy pillars: First, to pursue our organic growth initiatives in optimizing operation efficiency; improving utilization; broadening service offerings and capitalizing synergistic opportunities from our acquired businesses. Second, to pursue strategic domestic and overseas investments and acquisitions for acceleration of our business scale. Bright Scholar has the right strategies, service portfolio and people in place to spur the next phase of our growth and we are fully committed to delivering sustainable long-term value for our students, employees, shareholders and other stakeholders.

Last but not least, I would like to take this opportunity to thank all of you for your continued interest and support for Bright Scholar. Fiscal 2019 is off to an outstanding start, and we look forward to building on this momentum as I pass the torch to Derek to focus on driving the organic growth, while I focus on accelerating the pace of pursuing investment opportunities in schools and the complementary business, both domestically and abroad.

That's all we have in the form of prepared remarks, and we're now turning over to Q&A. Operator, please.

(Operator Instructions) The first question comes from Christine Cho of Goldman Sachs.

Jerry and Dora, and then welcome Feng. So I have 2 quick questions. So one is related to within the cost of revenue, we see that you've spoken out a new item called commission fee, can you just elaborate on what that item is, and what you think the outlook for that item going forward? And then secondly, I think the Complementary...

Go ahead.

And the second question relates to the Complementary Education Services, because it's actually growing in terms of importance and then I think Jerry mentioned, it's a part of the long-term growth strategy. Can you just elaborate on the correction? And also in terms of a margin outlook in that Complementary Education Services, please?

Christine, this is Dora, and let me answer your questions. First, regarding the commissions fee, in our cost structure, remember, we consolidate Can-Achieve into our Complementary Education Services. The commission fees is part of Can-Achieve cost element that's the commission they provide to their secondary agents.

Second question regarding the margin profile or expectations for the whole Complementary Education Services. As we mentioned, Can-Achieve, I think we mentioned last quarter already, due to the nature of the business, Can-Achieve's gross margin as compared to our core business, K12 business, is relatively in a lower range. So that's why it's also, you can see, on the gross margin -- blended gross margin this quarter, you can see, we have a relatively slow increase in terms of gross margin for the whole group. And also as Jerry just mentioned, we just completed 3 acquisitions, which, including the Zhejiang art training institution, Hangzhou Impression. And also, the career counseling services, which they will be consolidated starting from our second fiscal quarter. And their margin profile is at the bottom line, is pretty much, little bit lower, and in line in the 20s. Yes.

The next question comes from Sheng Zhong of Morgan Stanley.

Congratulations to Jerry and Derek. I have 2 questions. One is about the student enrollment. Actually you delivered very good growth of the student enrollment this quarter, especially on the -- in the International School. So what did you do to have the strong growth in International School? And do you think your full year enrollment guidance is too conservative at today's point of view? And secondly, it is also about the International School. At the same time, we -- you increased the capacity utilization -- sorry, about my background noise. So you increased the utilization rate. But it's the gross margin, is relatively flat with last year. So any known reason for this? And where do you see the margins trend?

Thank you for asking the questions. I will take the first one, and I will let Dora to take the second one. The first one is about the enrollment. So actually, 2 things we have done, I guess, in the last couple of years. And first one, because our students are getting better academic results. There have been to better schools. So our brand name has been better than in the past. So we have more student coming to our International School to apply. And secondly, of course, we have been ramping up our branding and marketing efforts. We have put more investment and people on the ground to run more walk-in campaigns to bring more students to our schools. So those 2 add together, so we have more enrollments than what we have done in the past. We would expect those trends will continue as our schools are getting better and better results, and also our brand is getting more better known in the market as well.

Sheng Zhong, this is Dora. I will take your second question regarding the blend in margin for our International School. You may noticed that the blended ASP for our International School is flat for this quarter. I think the major reason we have explained before, because except the Guangdong International School, the other 5 schools are still ramp up. So we normally or will not -- we didn't raise their -- our tuition fees for these 5 schools and also for Guangdong School, due to the local authority reasons, our application for raising the school fees was kind of in hold for this school year. So basically for Guangdong school, we didn't even raise the school fee this school year. And actually, for the rest of the International School, their individual growth margin has been improved, because of Guangdong kindergarten has stated an increase. And also, the one school in Guangdong we recruit more school -- most of them from the primary schools, which the fees for the primary school stage are relatively lower. So that impacts the margin for the Guangdong school. And on the blended basis, you can see the gross margin improved is relatively slow. But with the improve in the utilization from the other 5 new schools, we will see a better improvement in the future.

The next question comes from Jian Song of Industrial Securities.

I have 2 questions. The first is about the 3 new Kindergartens in this financial season. Could you tell me if these new Kindergartens have been affected by the policies, such as the condition for rounding the schools or the Huiyan policy? The second one is the complementary service. I realized that Elan's schools margin decline was part of the reason for the rental expenditure increasing. Can you explain the reason for that increase?

Okay. I will take both questions. First one about the Kindergartens. The opinion from the State Council was put out on November 15, 2018. So that will affect things about the source of the funding, and also merger and acquisitions. But it does not affect organic growth, opening new Kindergartens. So just to recall we are not affected by that at all. And also it depends on -- in general, it depends on where the Kindergartens are, if the property is owned by the government and/or jointly owned by the residents of a community, typically the government would put price a cap on those and put them in the low-cost Kindergartens zone. But if you actually own the land and own the building that's called private-owned Kindergartens, should not be affected by that. So most of our Kindergartens are in that category. So those 3 Kindergartens are not affected. That's about Kindergartens. Also about learning centers, because you're probably aware of, there are quite a few rounds of new policies and regulations against around or about depends on which way you look at, about learning centers, nationwide. So they're required to -- in lower than -- I guess, could be in the first 3 floors of any building. Also there are fire codes they have put into place. So some of our learning centers were -- we had to relocate to new locations that meet those requirements. Therefore, whenever you move, you have not just rent increase there is also moving expenses and potentially loss of students as well. That's why our margin for learning centers have gone down quite a bit because of all the rules about learning centers.

The next question comes from Tianli Wen of Blue Lotus.

I have 2 questions here. Can the management help us to breakdown the cost of revenue this quarter? And so could the management give out more color on what contains in the cost of revenue? And how about the growth rate of each other? And second question is, what is the average salary level of your teachers? And what's the average annual increase in their salaries?

Let me just repeat your first question is the breakdown of revenue by segment.

No, breakdown the cost of revenue?

Cost of revenue.

Oh, cost of revenue?

Yes, yes.

Yes, I think we do have that in our earnings release. Let me just repeat that for you. International School, first quarter...

I am sorry, I just want to know like the details of the salary, the salary fee of the teachers?

The average salary of the teachers, are you asking?

Yes, yes.

Well, the total cost -- teaching staff cost, I think, we reported a total teaching staff cost for the first quarter is around RMB 223 million for the first fiscal quarter. And we also reported the teaching and instructor number for the first quarter. So on average basis, we can do a easy calculation. It's somewhere around like 40 -- somewhere around like RMB 48,000 for the first quarter, then you divide it by 3, it's probably around like RMB 15,000 -- RMB 16,000 per month, that's on average basis. And the average salary increase is somewhere around -- beats the inflation, somewhere around like 6%, 7%.

The next question comes from Alex Feng of First Beijing Company.

I have 2 questions. The first one is about our pipeline. Could you tell us how many schools are in our pipeline and in which categories are they? And my second question is about the policy. Could you share us more lights on your thoughts of the policy? Do you think it would have any difference compared to the Shenghua.

First one is about the pipeline, of course, I can't disclose the exact numbers, but I can tell you, what are we looking at, we're looking at the K12 schools, both domestic and overseas, and probably more emphasized on overseas at this point of time. And we're also looking at complementary services more on the -- other than kind of a test drive or related to academic work at a school. So that's what we are looking at. It's very strong pipeline, but again, I can't talk about numbers. And in terms of policy, the Shenghua -- the second version actually did not come out as expected. There were -- earlier, they were saying the final version would have been -- would come out about end of 2018, but actually by the end of 2018, they came out with another draft for public opinion. And that -- of course, we're one of the institutions that provided our comments and opinion, and sent it back to the Department of Justice. So we don't know when it's going to come out. But compared to this version to the version we had, I would say qualitatively, it's -- I think it's slightly better, but not by much. So we wouldn't know for sure what the final version will be. But at least it tells me that they are very cautious about this, again. Because they come back again and again. Because theoretically after the first draft, if they can send it up to the upper management for signing off already, so they came back twice that means at least indicated that they were very cautious about the impact of the law. But like I said, what is the final version going to be, we wouldn't know yet.

Okay. And I see there are also 10 Kindergartens in your pipeline. So I want to know that -- do you think our organic -- our greenfield of Kindergartens is totally not affected by the new policy on Kindergartens?

So according to the current version of the opinion and the laws, they are not affected, because it is not related to any merger and acquisition, it is not related to property owned by the government. So it is a privately owned land and building, according to many of the local governments that we consulted with, it is a free market, we can register as for-profit then they're even not going to regulate on the price either. So that's what they told us for now, at least. So we think we will continue to develop a new size in that category not tied to getting into too much of the space where either the government-owned or the committee-owned Kindergartens.

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 this conference call. Please feel free to contact us, if you have any further questions. We wish everyone a good day.

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