Laureate Education Inc (LAUR) 2002 Q2 法說會逐字稿

Please standby. Good day and welcome to Sylvan Learning Systems second quarter 2002 earnings results conference call. This call is being recorded. At this time, for opening remarks and introduction I would like to turn the call over to the Manager of Investor Relations, Mr. Chris Simonovsky. Please go ahead sir.

Thank you, Lorie. Good morning everyone and welcome to the Sylvan Learning Systems second quarter 2002 earnings release conference call and webcast. Before I introduce the management, I would like to review two administrative matters. First, just a reminder that today's press release as well the audio replay of this call can be accessed through our investor relations website, www.sylvan.net. Secondly, I would like to call your attention to the safe-harbor language listed in the press release and remind you that both the release and this call may include information that could constitute forward-looking statements made pursuant to the safe-harbor provision of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements may involve risks and uncertainties; political, economic, currency, tax, regulatory, technological, competitive, and other factors that could cause actual results to differ materially from those anticipated in the forward looking statement. Additional information regarding these risk factors and uncertainties is detailed from time to time in the company's filings with the Securities and Exchange Commission, including but not limited to our most recent form 10K and 10Q available for viewing on our website. This morning, I am going to introduce Doug Becker, Chairman and CEO of Sylvan Learning Systems, secondly Sean Creamer, CFO of Sylvan Learning Systems, Peter Cohen, President and Chief Operating Officer of Sylvan Learning Systems, and Bill Dennis, the CFO and Chief Operating Officer of Sylvan International University. Also available to answer questions during our Q&A session is Chris Hoehn-Saric, Chairman and CEO of Sylvan Ventures, and Raph Appadoo, President of Sylvan International Universities. Now at this time, Sean Creamer will present our short financial results for the quarter. Thanks.

Thanks, Chris and welcome to the call. As promised we are in a position today to update you on a number of issues that we discussed in detail during our first quarter conference call in addition to reviewing our very strong operating results for the quarter. While I will admit that the press release is a bit dizzy and contains a lot of information this quarter, I think it can be summarized fairly easily by breaking it down into its significant components. The first and foremost, the operating results from our learning centers Online Higher Education and Sylvan International Universities segments were very impressive, and as we have continuously deployed cost containment efforts to offset incremental investment spending incurred to position ourselves to capitalize what we view to be significant opportunities that No Child Left Behind at present at Sylvan. Continued favorable trends in the divisions, both domestically and abroad are very encouraging. Doug, Peter Cohen, and Bill Dennis will provide some additional color on these later on the call and as mentioned, Chris Hoehn-Saric and Raph Appadoo will be available to answer questions on developments within Sylvan Ventures and SIU.

Secondly, we completed the transitional impairment test of goodwill mandated by FAS 142. As of the beginning of 2002, we had approximately $300 million of goodwill in our books. The analysis indicated impairments of certain of the goodwill relating to our WSI business. Specifically, the company reported a non-cash charge of approximately $76 million after tax or $1.91 a share. This entire charge relates to the WSI operating units and consists primarily of impaired goodwill relating to our struggling operations in Spain, which we have been discussing with you for a number of quarters and certain amounts originally paid for franchise rights and corporate center operations in other countries. The writedown represents roughly 20% of the goodwill balanced on our books at the beginning of the year, but nearly of the WSI related goodwill.

Finally, we discussed last quarter that we will be conducting a review of our WSI operations in Spain with a goal of reaching a solution for addressing what has been a drag on the business for earnings related to those results. At that time, our options included a major restructuring of the business in Spain or an outright sale. Our conclusion was that while we believe that the business can be ultimately be turned around, it would be a distraction requiring a disproportionate management of time and attention. Therefore, the company with the approval of our board has decided to sell the Wall Street Institute business in Spain and in fact expects to conclude the transaction shortly. Given the current condition of the business in response to our decision to dispose of that, we have written off the remaining assets of the business. This resulted in $11 million after-tax charge for the quarter, which included the operating losses and writedowns associated with the business. During this quarter, we have reported the results of WSI, Spain by itself in the English Language instruction segment. The results of WSI excluding Spain, are now included in our SIU division in effect as a separate campus. These presentations are consistent with our previously discussed strategy of combining these businesses and consolidating management responsibility under the SIU gene. We believe that there are compelling cross-selling opportunities between the two businesses that will allow us to reposition Wall Street Institutions as a distribution network in programs as well as a leader in the English Language Instruction business.

With that background information, I would like to review this quarter's results and discuss our guidance for the third quarter and full year. Unless I otherwise indicate, the results exclude the losses associated with the WSI Spain business that I mentioned, as well as the results from Sylvan Ventures. In addition in comparing our results to the prior year figures, we have adjusted the 2001 figures to add back goodwill amortization reflected in those periods to present the fairest and clearest comparison for 2002. The second quarter total revenues from continuing operations were $153.9 million and increased at 22% versus a $126.2 million in the same quarter last year. Still operating income decreased 19% from $23.6 million to $19.8 million again on an apples-to-apples comparison basis. Income from operations after tax for the second quarter is $134.4 million or $0.30 per share on shares outstanding at $47.6 million. This compares to $10.9 million or $0.26 a share on shares outstanding at $45.5 million for the same period during 2001. The driver behind the strong results is clearly SIU and very impressive sales in Sylvan Learning Centers business. Sylvan's net loss for the quarter including the impact of Sylvan ventures was $6.6 million after tax and the $11 million after tax loss relating to WSI Spain business was 5.1 million for a loss of $0.13 a share. This compares to a loss of $0.35 a share in second quarter of 2001.

Turning quickly to year-to-date results, for the six-month period ended June 30, 2002 revenues from continuing operations were $288.3 million, an increase of 19% over the same period in 2001, desk revenues in 2001 were 242.5 million, operating income for the period was at 34.6 million and that compares to $28.2 million in the same period last year for an increase of 22%. After tax income for the six-month period ended June 30, 2002 prior to the cumulative effect of the FAS 142 asset impairment charges of $76 million was $19.2 million or $0.44 a share on diluted shares outstanding at $47.3 million. This compares to 16.3 million or $0.40 a share on diluted shares outstanding at $45.3 million for the same six months period last year. Taking into account Sylvan Ventures and the losses related to the WSI Spain business, the six months loss from operations was $5.5 million. This includes approximately $12.1 million of after tax losses for Sylvan Ventures and $11.5 million of after tax losses resulting from the WSI Spain writedowns and associated losses. Earnings before interest, taxes, depreciation and amortization or EBITDA excluding Sylvan Ventures and the WSI Spain charges was $27.6 million and $42.7 million for the quarter and six-month period respectively. On some foot balance sheet note, total cash at the end of the quarter was approximately $176 million and total corporate debt was approximately 46 million net of the $95 million convertible debenture. Quickly covering guidance, as a reminder the third quarter is a seasonally weak quarter because most of our universities with the lone exception of UDLA at Chile are closed for some portion of the quarter for the summer break. This is followed by our strongest quarter, the fourth quarter, which is the only quarter that all of our universities are in session during the entire quarter.

The company anticipates total revenues of $116-119 million in the third quarter of 2002, which will be an increase of at least 15% of our last year. Third quarter operating income for 2002 is expected to be at $11-12 million, an increase of 17-28% over last year after adjusting the 2000 results to add back goodwill amortization. On an actual reported basis not adjusting for goodwill amortization last year, the projected increase on a reported basis would be 72-88%. G&A expenses are projected to be around $6 million and we currently believe that we will achieve earnings per share of $0.16 for the quarter, an increase of 23% over last year, again after adjusting to add back goodwill amortization. On an actual reported basis, the projected increase is 78%. And again, we mentioned in the press release, we are reiterating our full year guidance of $0.93 to $0.95 per share. With that, I will turn it over to Doug for his comments.

Thank you very much, Sean. We again acknowledge that it was a confusing release and a lot of information, but we are actually incredibly excited about the performance of the business and while we know that the non-recurring and mostly non-cash charges tend to crowd the understanding of how our company is doing, we are really going to do our best in this call help investors peel the onion and see why we are so pleased with our performance. First and probably and not a surprise to anyone, continued very strong performance in our post-secondary businesses. With roughly 30 plus percentage revenue and operating profit growth in our post-secondary businesses across the board, that is for us SIU, the Sylvan International Universities business and OHE, our Online Higher Education business which today is canter, but is expected to include some of our other Online Education businesses down the road. With continued essentially, almost entirely organic growth rate in the 30% rate, these post-secondary businesses are performing as well or better than their peers, yet we believe are in much earlier innings in their own development than most of the US post secondary stocks and investors that you are familiar with. Our strategy in post-secondary has really been the pick niches where other people are not, and to take full advantage of first mover advantage and in our case, the International University is clearly a worldwide leader and I am just incredibly proud of the revenue and operating profit growth that their showing, and Online Higher Education is, sort of our SIU of the future. It is the next big business opportunity for us coming down the pikes. I am very, very pleased about that.

I think that the surprise for many investors will be the incredible increase in performance in our K12 business driven by Sylvan Learning Center and you will hear a little bit more about that from Peter Cohen, but we actually had a same-store growth rate from Sylvan Learning Center of 21%. Since I have been the CEO of Sylvan, which is over 10 years, we have had maybe, one or two quarters in our history where we had same-store growth rate at that level. Our same-store growth rate has always been somewhere in the kind of high single digits or low double digits. And in this economy, a 21% same-store is incredible and given that that talks about how we are stirring up the pipeline with new students, it really, I think, augers even better for future quarters. And so we are really thrilled and Peter will amplify about how that was accomplished and how pleased we are with that. So in terms of our overall business performance, I think we are extremely excited. We feel like we are on track, we have now for several years since the introduction of [INAUDIBLE], we have been providing guidance. We have met or exceeded guidance every time that we provided it and we feel that this quarter puts us very much on the track for the rest of the year. We have in this quarterly release provided Q3 guidance, which means that simple math will allow you to understood what Q4 is likely to be as you back out the first two actual quarters of Q3 for guidance from the full year guidance and I think it all just shows a trend and a track in a very stable direction and very much on track and on plan. And that is something we are very pleased about.

In terms of one-time charges and the confusing array of numbers that we all have to try to understand our business, I think Sean and his team have put together an incredibly fair approach towards peeling the onion and helping investors understand our numbers. While we do use ProForma message that help investors understand our numbers and that includes excluding things that we think are confusing and non-recurring. For example, our ventures losses, which we are showing in this quarter, have been cut essentially into half and which, I have stated in the past, I think, can be cut half next year. So we view that as certainly not long-term and in that regard, net recovery and certainly for the purpose of net recording excluding the affect of these one-time charges that occur in the second quarter and in the first half of the year. But on the other hand in order to be fair and provide the most crystal clear apples-to-apples comparison, we have also added back items that had we not chosen to do so, would have made us look like we are doing even better, because in the second quarter of last year we had charges associated with caliber which Sean has added back and we have also added back the effect of goodwill, which we amortized last year and has not been amortized this year. So I think that the way the press release and the way Sean has just described the numbers give investors an incredibly fair and accurate insight into what the actual growth in the business is and we think it is an impressive performance.

The previously announced charge, when we announced our first quarter results, I was extremely explicit in making sure that investors understood that there were two charges coming. With respect to FAS 142, we made it clear that with over $300 million of goodwill in our books, almost any percentage that we would choose to writedown would be a material number and in this case, with roughly a quarter of our goodwill being written off, I think that is proving to be the case, that is the $76 million after-tax charge which is obviously a large one. $11 million charge pertaining to the disposition of Spain, I do want to take a moment to comment on that. Many of you have heard us talk for a couple of years now about how we believe that our Wall Street Institute business was performing relatively well, but that its performance was crowded by the problems in Spain. Spain, which was the country where Wall Street Institute was essentially started, has too many English Language schools. Wall Street Institute alone has even today over 140-150 locations. We have one direct competitor who has approximately the same number of locations and our belief is that Spain, and the good news is that Spain is really unique in the world in this regard, is so much over saturated with supply that it is going to be a long and painful process of closing centers to rationalize the market in order to make sure that the centers in business can return to profitability. And frankly given all the opportunities we have to grow our business, our decision is, we are going to let somebody else do that. And we have two offers for people who are willing to take on the business. They will mostly pay for the business based on its future performance as opposed to paying up anything material upfront, which is why we ultimately decided to write off essentially everything that we have invested in that business and I think that will really bring to close a painful and confusing chapter... so Spain now gone... that leaves the rest of Wall Street Institute small enough to really not be worth a lot of independent reporting, either in financial reporting or in management reporting, and from our perspective that is why we have decided to bring WSI International underneath SIU and at this point, not to report on any further on it as a single line item business unit because it is not just big enough to warrant that. So those are one-time charges and the promised resolution of the Spain situation.

Now if I go back to the business performance itself, it is obvious that the trends in our business are very positive. The learning centers are on the same store trends, the enrollment growth in learning centers, in SIU, the Online Higher Education business we showed in our press release that Online Higher Education at Canter, which is mostly a mass-education program for teachers was up 23% in its enrollment. This is just a fantastic continued performance by Canter, one of our best performing, longest, most productive of all businesses. We are very proud of that. Interesting enough, you all know that Ventures is incubating a couple of businesses that one day we hope to fold into Canter so that we have a true robust Online Higher Education platform and we actually have in Walden University, which is one of the main businesses we hope to do this well, they are beginning in to trend in fantastic direction. Last quarter, we reported that they had a very strong increase in enrollments while there are new starts in Walden University in June, we have seen over 100% growth in their main programs, which are [INAUDIBLE] master degree programs. So we are really just thrilled about that. We have also seen incredible growth of almost 200% in the Walden business. So Sylvan is bringing its marketing capabilities and we are seeing real results. And when Ventures and Sylvan believe that Walden, a national technological University, or the other piece inside our ventures is ready, we will draft a plan sometime in the next year to pull out all of our Online Higher Education businesses into one business unit that we believe ultimately could be just a standalone company, we think, in a world where investors continue to have such enthusiasm for University of Phoenix online and the whole friction-less predictable beautiful business models that entails, we think it will be great to have our own Online Higher Education business.

Lastly, you will hear us repeatedly refer to our SES, Sylvan Education Solutions business. This business, which has been flat in its performance is investing heavily to be ready for the No Child Left Behind to Impact, which we expect to really hit us in 2003, and that is where schools will, many schools-1000 schools have a mandatory requirement to pay for supplemental services from firms like Sylvan for a kid in failing schools. So that is something that we can be very excited about as well. Final brief comment, obviously our stock performance has been disappointing and because so much of that has happened in the few weeks running up to our earnings release, we are really uncomfortable in making any comments or pre-announcements or really even talking to investors much. So we sort of have to watch our stock fall without being able to say or do anything. So we are very pleased to be unbound and talk about our business and its performance in the most correct and professional fashion. I think that the bottomline is that we have great confidence in our business performance. We have obviously in the first quarter and second quarter and with the affirmed third quarter guidance shown that we are very much on track for our guidance for the year. And on a year-over-year, apples-to-apples comparison basis, our annual guidance is for operating income to be up about 26%. So you can set aside anything that is confusing on either side of the 2002 or 2001 number. And just to come down to that number, I think that it is the clear sense of how our business is performing and how it is going. Now obviously, a sign of confidence that any company can send is interest in shares, repurchasing shares. In Sylvan's case, we do not use a share repurchase to send a signal. We use a share repurchase to buy back shares and we demonstrated that in 2000 when we bought back about 13 million shares which was at that time, a quarter of the outstanding shares of our entire company. At today's prices, Sylvan's cash and debt capacity would allow us to buy back a massive share in the company, if that is what we are choosing to do. I believe that we probably wont have the opportunity to do so, because our stock has been trading on such low volume and as a result, what we have decided to do is to start with a fairly modest share repurchase program rather than the tenders we have used in the past. We have chosen an open market approach. The board has authorized management to repurchase up to 3.5 million shares in the open market following all the appropriate rules to ensure that can happen.

We do have to respect windows as to when we can trade in our stock just as you would expect and so we will have conditions that will impact when we can deal in the market, which we are really not at liberty to discuss right now, but it is important to note that we cannot always even when we want to. But I am pleased that the board sees this as a great investment of investors' money, our money, to repurchase shares, and I am pleased to be authorized to do so. So that is really my comments for today. What I would like to do is, turn over for some brief comments on K-12 and SIU starting with Peter Cohen who is the President of Sylvan and heads our K-12 business unit and then he will turn it over to Bill Dennis, the CFO and Chief Operating Officer of SIU, and after their remarks, we will open up for Q&A. Peter...

Thanks and good morning everybody. Well, K-12 unit is what consists of the Sylvan Learning Center businesses... it has been around for 22 years in our education solutions institutional businesses. The combined revenues for the second quarter were $60.5 million which as mentioned earlier was a 17% increase over last year and our operating profits were just under $15 million, which was a 21% increase over last year. Quickly touching on some highlights of the Learning Center Units in this quarter, as has been mentioned previously we had continued strong results in our same center revenues at the 21%, which is actually a doubling of the growth rate we had in Q1. I think this growth rate has been supported mainly by our continued successful national advertising campaign and the continued acceptance of our new payment option program for students. The benefit of these new payment option programs has allowed parents to actually purchase all of the tutoring services their children really need, thus increasing what we call our length of stay per student; the amount of time they actually stay in Sylvan program. Parents have been able to support not just a program in math, or a program in math, or a program in reading, a map, writing, or a program in SAS prop. So it has really helped us in our academic success for students. In addition to our very strong results on a same center basis, we have also opened 14 new additional franchise centers during the quarter and we have acquired two centers from our franchisees for our corporate operations for areas that are adjacent to our existing corporate centers. And this development program is on track for the year. Our corporate centers alone also had an excellent quarter. Same store increases for them were 15% and total corporate center revenues with our acquisitions we announced in the first quarter were up at 43% over last year giving our total Sylvan Learning Center division an increase in profit of 21% over last year.

So the Learning Center Division is really having a very fine quarter and everything appears to be track for the rest of the year with our marketing strategy in place and a lot of emphasis on improving our selling skills for the second half of the year to further increase our student enrollment. Our education solutions business, which is our institutional business, generates most of its revenue from a board array of funding sources that include really mostly Title 1 program, some specialized day program and some local dyslexic spending. I should note that in comparison to some of the other K-12 businesses, most of our funding comes from the Title 1 program, which as you know has increased by about 18% over last year as opposed to state tax dollars which in many cases have been decreasing compared to last year. So we really have not been impacted like the other K-12 businesses have by a reduction in local spending program. As Doug has mentioned, we have been busy investing for the introduction of the supplemental services in the No Child Left Behind Act, which requires failing schools to develop programs for students in private tutoring starting in their third year of a failing school. There is about 9000 schools that are realized in their second year at this point and at least 3000 schools that are in their third year that come the fall should be requiring services for their schools from supplemental educational providers. The states around the country have been putting a request or proposal to solicit providers for these programs and we have been responding to those proposals and designing programs specifically designed to resource education outcome within the limited budget that are actually available on a per student basis. So we are very excited about the future of that program and look forward to good success in that program in 2003.

The outlook overall for K-12 services continues to be very bright. The consumers are responding to our message in our market place, they are purchasing as many services as they can afford for their students to improve their self-confidence and academic success. Recently, you probably heard an announcement from ETF about the modifications of the SAT test, which includes a new writing section and more math and statistics, which will take place in three years or so. That program will probably improve the sales of our SAT program and correlates directly for Sylvan's emphasis on reading, math, and writing program. So we are excited about that program in a couple of years out from now. In our institutional business, as we said the general increase in Title 1 funds, the emphasis on improving outcomes for all students in every socioeconomic group and a specific targeting of supplemental services for students in failing schools, provides a very healthy environment for future growth. In addition to these upsides we see in our core business, we also continue to show and development in our internet delivery business, our e-Sylvan business which is delivering reading and math programs through the internet and is managed by our Sylvan Ventures business. We are focussing in that business on our fall enrollment period and they continue to show increases in their student enrollment. We also have business development in Europe. Our European units continued on track with our centers in Germany and our continued development in UK, France, and Spain. So we are overall pretty excited about the future. It seems like things are going very well this year. The outlook is strong both on the institutional side and the consumer side and continues to project positive upside for next year. And with those brief comments, I will be available for questions afterwards. I would like to turn this over to you, Bill Dennis, our Chief Operating Officer and CFO for SIU.

Yeah. Thanks very much, Peter. Good morning again and as Doug said earlier on, we are very pleased with our progress and particularly the financial performance in this quarter. Our revenues were up 305 from $56 million in the last year's second quarter to $73 million this year. Overall, we have had substantially improvements at every single one of our business units with a particularly strong showing in Chile where our UDLA University there, enrollment has been 50% versus last year. They have done a terrific job. Revenues for the six-month period showed also a 30% increase year over year reaching $145 million for the first half of the year. We are pleased with that. That is up $33 million over last year and our business is for the six-month period, and so obviously we are strong across the board. Operating earnings or operating profit increased 31% in the quarter to $28.5 million and for the six-month period it was up 59%. If you exclude the acquisitions of companies that we did not own during the first half of last year, our revenues increased 25% for the first six months of this year and our operating earnings were up 48%. On the same basis, for the second quarter alone revenues were up 25% and operating profits were up 20% versus last year. If you look at our portfolio of operations, you will know that we are located totally outside the US. All of our business operations are in Europe and in Latin America and it is very important to note that our earnings were not materially affected by currency fluctuations during these reported periods. That is with the European operations benefiting from the improvement in the Euro and our Latin American operations were hurt slightly by depreciation of their currencies, they are essentially offsetting. Again, overall, there was no material effect of currency fluctuation within the reported period.

Some other highlights that I would like to make quickly before closing, first of all on May 1, and this was mentioned in our press release in great detail, on May 1, we increased our ownership in Chile from 60% to 80% in that University and we exchanged it for $6.5 million in cash. You can get additional details again from the press release. Our enrollments, as has been our practice we report our enrollments at the primary enrollment cycle. For eg., the first quarter of our fiscal year we report Chile's results because that is their primary enrollment cycle and in the third quarter we will reports of results for other universities. We do not provide specific data at this time of the year, because we want to complete the enrollment process and it is too early to give that data out. However, we are very pleased with the progress we are making. We are very much on track with blended enrollment such that we feel very comfortable that we will be able to meet the earnings guidance required or as provided by Sylvan. Our acquisition pipeline continues to be very, very strong and we are working on several promising opportunities in Latin America, Europe, and Asia. Our business has been growing. You can see it in the financial data that we have published. We are very pleased with that and as a result continue to work very hard to build out our management team. We are in the process right now of conducting a search for WSI international, it having being recently a part of our operating organization. We have representatives present there who can help us integrate this English Language strategy with the rest of SIU. We have some ideas there that we will be having in the future and we are very excited about that opportunity. We are also conducting a search for general counsel, someone that has strong solid experience in M&A activity as well as public reporting. We think we have identified some candidates and will soon be able to bring someone on board and announce that. Those are my comments, Doug. I am here also to help on the Q&A. I will just turn it back to you.

Thank you very much and just a few final comments and we will open up fro Q&A. I think Bill's point that they had such organic growth without the benefit of acquisitions really proves the value that we are adding at SIU. I think the story last year was, we were integrating acquisitions and showing extraordinary growth because of them. Now with those acquisitions integrated, we are showing great growth without the need to make further acquisitions. Now that means we are ready to make some more acquisitions and so the pipeline is good and certainly over the next year I think you will see good progress there. Two last points, one is, we obviously worked very hard on the FAS 142 issue. I think it is fair to say that everything that we thought had any reasonable chance of impairment was written off as goodwill change of accounting and as a result I think we have the highest possibility of little or no future impairment in goodwill and I think that is what any company going through this process should really be looking for. And then lastly, I know investors who would love to see Sylvan simplify by dividing into several companies, continue to express a lot of interest in our thoughts about an SIU-IPO. We continue to feel that is the right strategy. We mentioned in the last quarterly call that we were thinking about looking at something later in this year in order to allow us or you take advantage of its strong forecasts for the next year. At this point, obviously the stock market and the IPO market are terrible. We are really not putting any time into that. But we are ready and if and when the market opens, our board will obviously have to make the final decision at that point, but everything that the company would need to do to be able to pull the trigger to take advantage of that has been done. That would really conclude my comments. I want to thank everyone for your patience and now open up for questions, operator, if we could.

Thank you. The Q&A session will be conducted electronically. If you would like to ask a question, please press the * key followed by the digit 1 on your touchtone telephone. We will take as many questions as time permits and we will take the questions in the order we receive them. Again, if you would like to ask a question, please press *1. And we will pause for just a moment. Okay our first question will come from Howard Block with Banc of America securities.

Thank you very much. Actually this is John Heeling calling in for Howard Block this morning.

Hi! John. How are you?

Good. How are you? Firstly, I was trying to dig into the P&L a little bit and I was hoping to find out what was the WSI portion of the revenues that does not include Spain... basically the portion that was added to the SIU.

It is actually in the release in the table in the back. That number is for the quarter, $9.6 million and that would exclude Spain.

I am sorry. I didn't see that before. Secondly, could you provide the operating expenses associated with the Spain portion that does not include the impairment charges?

Of the $18 million in pre-tax charges, close to 16.5-17 million of that was writedown of assets. So, a modest million dollars plus loss there.

Also, I am trying to get a better understanding of the online business. And I want to find out how many of the 10,800 students were Canter are actually receiving internet delivered educational services. It was kind of my understanding that there were some students that were still sitting in classrooms with the new partnership colleges.

Actually none of the Canter students sit in classrooms at all, although I can understand how you might think that. We have partnerships with universities because until we acquired Walden through Ventures we did not have our own accreditation. So we have a net work of 16-17 excellent partner colleges, but those colleges provide mentoring and registrar type services to the students and do not provide any physical facility at all. All of our students are being taught at a distance. Some of that instruction is self-phased and some of that instruction is online, but none of the students are sitting in a University classroom of any kind.

Okay. If some of them are self-phased what is the breakout of the 10800 that are actually being taught through the internet.

It is a little bit like saying how much reading do you trim out when you go into the University of Phoenix Online Program. It is all blended. They can communicate with their instructors online. They can communicate with other students online. But the fact is that most people do not like to read on a computer screen and so we send them printed materials to read off line and we send video-based material because teaching is such a visual subject that, although we will permit them if they want to, to get digital video, most people check a box if it is check-me-video. Personally I do not really think that that is material and I think the issue if there are distance-learning students and they are growing and they have incredible completion rate and it is just a wonderful business for us.

Thank you. Are you able to provide a kind of a total snapshot of the enrollment for SIU systemwide versus just the Chile?

Well, the Chile was only a recap of what was reported in the first quarter because basically the primary enrollment is usually around the summer season and summer in Chile happens in the first quarter and summer in the rest of the businesses stretches essentially between the second quarter and third quarter. So at this point, we report enrollment for Chile at the end of the first quarter results and the enrollment for others in the third quarter.

Okay. Final question. I was trying to kind of dig in to see if I could figure out what the cash flow from operations was in the business if you exile the ventures portion of it as well as the pre-cash flow number?

We talked about an EBITDA number which at this point are surrogate for that and for the quarter, it was 27.6 million of EBITDA, and for the year-to-date $42.7 million.

In our case, if you think about EBITDA, we have very little mandatory capital expenditure in our business. Almost all of the capital expenditure in our business is expansion-related or added to in terms of building the core business. So I think the EBITDA is probably... we also essentially have no debt, so EBITDA is probably a better metric for us than it is for probably a lot of other companies that are using it in publishing it.

Thanks for taking my questions. Bye.

Thank you. Our next question will come from Peter Appert from Goldman Sachs.

Hey Doug! These Walden numbers are great obviously. Can you talk about what you are doing differently in that business. How you guys have changed the structuring since you bought it. Maybe give us a sense of the scale of that business currently and its profitability, and then could you talk about, if you could, what's up with NTU so far under your leadership?

Terrific, thanks Peter. I am going to ask Chris Hoehn-Saric who had some ventures to respond to that.

Peter, just to give you a little bit of clarity. We took over Walden about a year or so, and then formally took over the company in terms of the majority equity position just fairly recently within the last two quarters. What we have really done is to refocus and the supplies equally to NTU although it is earlier stage with NTU. We are really building a vertical business unit in areas of psychology, health care, technology, and business. And what we have done is really put in place a management structure that has business leadership in each one of the areas that involve marketing product management and other characteristics the necessary functions that is really going to lead it as a business unit coupled with strong academic leadership in each of those areas. And that was sort of a change from the way historically the business is done. We also have placed in marketing expertise in terms of expanding the basic [INAUDIBLE] going forward and increasing internet and other media-delivered marketing and against that we have seen really strong improvements in the lead flow, coming in, as Doug mentioned, not quite 200% of lead flow going forward, which we think will have significant impacts going forward resulting in the short term on about an 100% increase in Walden new enrollments. With NTU, we are a little earlier in that process having just gotten involved with the business. What we have done there is the same thing. we have brought in some additional management capabilities that will help in the business process management and have started the marketing programs there that we will begin to see I think, early results in the fall and more than likely, full results around the turn of the year as there is generally three to six months kind of delay between the initial lead in the business. But we are seeing very, very positive results across the board and I think, what you see is a business that today on a combined basis... I do not have the specific numbers... but already moving towards a point of self-sustainability and not turning capital to the point where you will see real growth going forward and additional profitability coming from that in the next year.

... and Peter, this is Doug. We always want to remind investors who do not know. If and when Sylvan completes the process of bringing Walden 51% stake or NTU 100% or Canter 100% together in the one company, which clearly is the plan. That company would be by far today the number 2 player in the Online Higher Education business after the University of Phoenix Online, which is why we are trying to give people sort of tit-bits on how Walden is developing. It is a little bit too early to say much about NTU, although we think it is a great platform, we have not officially closed our ownership on it, which will happen immediately. I think sort of the simplest answer to why Walden is doing so well is I think we have applied a lot of the lessons and some of the same people that we learned or obtained through the Canter business to Walden and that is working very well for us.

Doug, one other question. What prevents Spain situation from recurring in other WSI markets?

That is a great question and I am very comfortable that that is not likely to happen. We have about 450 Wall Street Institute sites in 26 countries around the world. A 150 of them, so 1/3 are all in one country, and that is Spain. The next biggest country... you have countries like France and Italy, which are each substantially larger than Spain. We have maybe 40-45 locations. So we just do not have any countries that have the kind of the saturation or over densification that we had in Spain and it was partly that we had too many centers in Spain already when we bought it, partly that we did not understand that we should not open more and open more and by the time we did figure out we should not open more, we had franchisees that had the rights to open more. They would not listen to us and they opened more. So we are not going to let that happen again. As I say, top density in a country, Spain, 150 centers with 39 million people, and next biggest density, France, 45 centers 55 million people. I feel very confident about that.

Okay. Great. Thanks, Doug.

Thank you, Peter.

Thank you. Our next question will come from Brandon Dobell with CS First Boston.

Good morning guys. Couple of questions. One, on the Canter business, what has been the response from your partner schools and I guess also of your students about the Walden transaction with NTU. Are you getting any pushback from any potential partners or existing partnerships on your relationship with them?

Actually, at this point, no. We worked very closely with a number of the universities and in doing so, we planned sort of the future growth and what their expectations are... so it has been done very cooperatively. We have launched some new program and new Manchester pre-programs in conjunction with Walden, and those have been really very, very strong rollers. So I think what we have seen overall is both student response has been terrific in terms of adding several thousand new candidates who are of the Walden relationship and we have really worked very cooperatively with our existing university base.

I think the key for us, Brandon, is that we did not choose to take students away from our existing partners. We in essence chose to pursue a lot of the growth through Walden. So nobody really had anything taken away from them. And in fact, in the case of some of our larger partners, they would have been hard pressed to even to take on any more students. They were so full of dealing with our students. So I think it is actually win-win for everybody.

Okay on the education solutions business, could you maybe address kind of what the market is feeling like right now in terms of access to funding, in terms of what schools are looking for from you guys. Are there opportunities to expand, what you are doing given the complexity of the recent regulations from the Federal Government. Maybe you can just give us what is the opportunities in the back half of the year, and if those opportunities are going to be better or worse, than you expect given the funding environment?

I think my gut reaction is that it is actually very favorable for us. The only down side for us is that we are putting all of our energy, in getting ready for this student's choice model, what is called supplemental services that is now law, but now a lot of schools are just learning about it and that they are going to need a couple of quarters to understand what their obligations are and to have their feet out of the fire to comply. There are thousands of schools that have now been identified as being in the list that requires them legally to offer third party tutoring solutions to their students and there are many states across the country that have now issued our fees so that they can choose the list of qualified vendors. In some states, anybody can qualify. In other states, we have been impressed how rigorous they are going to be as to who gets in and who does not. Our belief is that starting in the first quarter of next year that schools will understand and comply with their obligation and that we will be in a position to begin seeing some revenues from that funding format. That's all Federal funds and it has increased dramatically and is really not at all impacted or related to the tight state funding environment that has been hurting publishers and companies like Renaissance and others, we are not really seeing any of that. The downside is that we really not going to see any growth for the next couple of quarters, because the schools don't fully understand this obligation and we have not put the delivery infrastructure in place to deliver it yet. So the next couple of quarters are really building quarters to get ready and I think we have been appropriately cautious in telling investors that this is really a 2003 windfall for us. Peter, do you want to add anything to that?

Yes, just one little thing, Doug, there is going to be a lot of talk about the 9000 schools that are on in this, but I think actually the bigger opportunity might be the nearly 100,000 schools that want to stay off of this. For those schools they all have a population, and many of them have a population of students who are dragging down their averages, and providing supplemental services as we have in the past in core subjects as reading a map allows the students to improve their academic gains and keep those schools off the list in the first place, because one of the changes in the law is that in every socioeconomic sub-group you have to comply with the improvement standards to a group of students. So even though the school might have just a very small group of students through under-privilege or disadvantage, if those students are not doing well the schools gets on the list. So, we have the opportunity to go into those schools and provide our services to them, which is just continued emphasis that the schools have not had in the past. But I think that also in next year, as Doug pointed, out we gear up our forces to handle this new strategy would be very subjective growth. But we don't expect any great improvement in the second half of 2002.

Okay, thanks. One final question. May be Doug, if you could address the issue, in terms of compensation what you and your board have talked about in terms of the disclosures and I also have the 10-K, in terms of what the impact was last year on stock options expensing, if you have any idea of what it has been in the first part of this year and what it might in 2002?

Brandon, this is Sean. I can answer the first question. In terms of the impact it had in the last three years... in 2001, it was $0.18 impact, in 2000 it had been $0.16, in 1999 it would have been $0.09. Now the calculation is an extraordinarily complicated Black Scholes approach, which we do annually. So, we have not done this in the past, nor we have done it in this quarter on a quarterly basis. But, order of magnitude I think it is a sort of $0.15-$0.18 range seems to make sense. But that is information again that we have disclosed in our 10-K over the last two years.

I think it is shows what we are thinking about, I think, I don't personally have a problem with the idea of expensing stock options. I think that in many regards it's probably a good idea. What I don't like is how complicated the formulae is by which you are able to determine what the charge is. It is a very complex formula, and whatever guidance you give, you are going to be wrong, because the volatility in your stock would change and the balance of number of options outstanding would change and exercises will not occur, and it shows really a kind of maturity and everything changes and I think it will make for an incredibly difficult process for companies and investors. To the extent that other more sophisticated large businesses figure this out and show a roadmap for how this can be done, we would happily comply. I think our feeling right now is very little bit of a watch and wait, we give investors the information and I think for now, that is probably the best we can do.

Okay, I appreciate it. Thanks.

Thank you. Our next question will come from [Gary Bisby] with Lehman Brothers.

Hello.

One moment. Your line is open [Mr. Bisby].

[GARY BISBY]: Hi, thank you. A couple of quick questions, if I could. Was there any major difference in the stores in the same-store schools base for the Sylvan Learning Centers business that aided such a strong growth on a same-school basis this quarter?

Not at all. We actually...that has changed to a number that takes our corporate owned centers and our franchise centers and averages them all together. So the only change that would have occurred that we did buyback a group of previously franchised centers, but they would have shown up in the calculation, in exactly the same way. So, whether it is franchise or corporate owned does not affect that calculation. So, there really is not anything that would skew that same store at all.

[GARY BISBY]: Okay, great. You have probably gone through this before being somewhat new to this story, I will ask it, probably it an obvious question, but what do you have to do going forward, if you want to move an asset from the Ventures portfolio to one of the core businesses like Walden or possibly e-Sylvan down the road, get the payout or some sort of return to the outside investors in ventures, can you explain how that might work?

It is actually a great question. We have not gotten a lot of that. It is from... most of it because the Ventures business has been only a couple of years old, and that's we have not crossed that yet. I think there are outside investors, the biggest of which is the Apollo Management Group, which is not the education Apollo, it is a Lee & Black's Private Equity Fund and they have about a 25% stake and then there are some management investors in Sylvan Ventures. There is a carried interest for management in Sylvan Ventures that would allow up to 15 or 16% of the gains of any of the investments in that portfolio to benefit the management team. However, that only occurs after losses have been made up and I think like many Venture portfolios, we certainly have enough losses that is not clear at this point, whether there is gain or how much gain there ever could be and obviously will keep a close eye on that from Sylvan's perspective, which really brings I think a specific answer to your question. I think the most important thing is that our board, the board of the publically traded Sylvan is in a position to completely manage this to make sure that it is done to benefit the Sylvan shareholders. The Sylvan Board is also the board of Ventures and controls, in a sense, everything that is done with Ventures and they will ensure that they receive appropriate outside advisory services that they get the appropriate fairness opinions, but there is no transfer of assets that are done in a way that they feel would in any way disadvantage the Sylvan shareholders, and I think at the end of the day it could be that shares are simply distributed to the investors in Ventures and that's one way that you get and in end of outside Ventures into Sylvan. It could be done through a purchase as you describe, we are looking through that now and I would say it is probably not of 2002 issue, but when we do it, it would have been done in most incredibly careful and thoughtful way possible, because obviously in today's world that is demanded.

[GARY BISBY]: Okay, great. One last question if I could, can you talk, again you have done this in the past. But can you talk a little bit about the operating cash flow and our free cash flow more specifically of the various divisions, if you would, break them out, and what I am wondering it that you sell the profitability of Sylvan's Learning Center Business has. Has that been generating cash what has been used to fund SIU, and is that the kind of thing that if you would spin off SIU, at least the historical cash flows would not have been real strong for that can you give me any color?

I think it is a great question. What I can say is other than acquisitions, SIU produces more than enough cash to fund its own capital expenditure, and its capital expenditure, thank goodness, is almost all capacity increasing... there is very little required maintenance. There is some, but it does not eat up much of the cash flow, really the majority of what SIU reinvest their money and is building more classrooms, building new campuses are all the things necessary to ensure continued growth at the rate, or even better rates than they have accomplished in the past. So, they do not need the cash flow of either Sylvan Learning Centers or the Online Higher Education business. The best way to look at this is, if you look at the table that was attached to our press release, there is a segment operating profit, that shows for example in the, can you look for six months, it shows K-12 operating profits of about 25 million, Online Higher Education of about 4.5 million, English language which is Wall Street of loss of about 20 which is in essence almost all the one-time charge associated with getting rid of it, and then SIU to about 16 million. I think that gives you, and this business is very fourth-quarter oriented, so you would not want multiply that by 2, because that will be better than that. So, I hope that gives you some sense to get to what you are looking for.

[GARY BISBY]: Yeah absolutely. I guess part of the reason I asked when I look at the post secondary providers in the US, you see that their capital spending, and again there is a lot of growth capital as I think you probably are spending as well, has range in order from 4 to as high as 12% of the revenue base. If you would use the high end of the range, it would not look like there has necessarily been a huge amount of free cash flow, but the way you are telling me is that you are producing more operating cash flows, then the level of capital expenditure on a same school basis.

I think that is exactly right. I think the big difference though is, there are a couple of big differences. First, we are much early in our development cycle for SIU. It is actually amazing that they have the margins that they have. They have for example SG&A structure. It is designed to support a company that is two or three times the size that currently is, because that's where it is going. So, I think we are earlier in the cycle. Secondly, I do think that the international model is more capital intensive, opening a new campus is more expensive that it have been in the US. But what get in return to that is a four or five year average length of stay for your students instead of a one and a half or two year stay in the US model. But the bottom line answer to the question is SIU produces enough cash to fund all of its expansion requirements, other than acquisitions which is why we would like to see SIU if possible be its own public company so that it would have even a currency to use for its own acquisition.

[GARY BISBY]: Great thanks a lot. That is very helpful.

Thank you.

Thank you our next question will come from Jeff Silber with Gerard Klauer Mattison.

Hi Jeff.

Hi, Doug. Good morning. Most of my questions have been answered. I was wondering if you guys can give us a little bit more color on your guidance specifically for the third quarter on a divisional basis?

We have not provided divisional guidance because with the possibility, with what we have perceived to be the impending opportunity to take SIU public, we were advised by counsel that would not be advisable to break it out, because if you break everything about SIU, people could see what SIU was. I think that from a business sense confusing and unfortunate, but I think from a legal sense it is the right decision. If we get to the point where we are able to pursue the IPO of SIU or we get to the point where we decide definitively that we are not going to do it, I think that then we can go back to providing quarterly guidance and I would hope that would happen very soon.

Which means the practice that we followed last year?

Up until the last year, we always provided quarterly guidance.

I am sorry, so counsel did not change anything now that it looks like the IPO might be on hold for a while.

I think our feeling is to the extend that we are ready to go and again always subject to our board's approval, but with what it has been in general support from our board, I think our feeling is market looks bad now. Market could look good three weeks from now, but better to stay safe, and be cautious in that regard.

Okay, that's understandable. This may be a nitpicking question. This question is for Bill. Bill, when you are talking about the revenue in operating income growth in SIU, it looks like in the second quarter that the operating income growth slowed relative to the first quarter and also relative to the revenue growth. I think that you can talk about that a little bit.

Raph is here and he would like to answer that.

Yeah, good question. Clearly, this is what we call flow-through. We watch very, very closely how every dollar of revenue flows to the bottomline to EBIT and so on. So, I just want to comfort you that this is the metric that we spend a lot of time on that. As you indicated, in the first half we are very, very happy with the numbers, 48% up in EBIT and a lot of the additional revenue consequently go to the bottomline. In the second quarter, what happens is, as you heard from Bill before, we have continued to build our business and there are a lot of one time cost in our view for acquisition, development, and Greenfield development which we have not touched on today, but we have a lot of development costs that depressed and in addition we have a lot of marketing expenses this year. When you are grooming your business every year, your marketing expense is eating, it is higher than the previous year. So, this is the quarter. A lot of marketing expenses are coming through, whether it is in Spain and Mexico. Clearly in a full year basis, you wont see much or you would see some very good bottomline growth, but the second quarter eats up lots of dollars for marketing expenses.

I think one of the things, Jeff I am sorry, is that June is also a month in which our University in Mexico is closed, and while in the first quarter Chile is largely closed, Chile is a much smaller university than Mexico. So, you pick up Chile being open in the second quarter, your biggest University has a full month when it is closed. I think that added to rest of Raph comments, probably give you pretty good picture of why you see the difference in previous two quarters.

Okay, just one more quick followup. I am sorry. You talked about the share repurchase window, can you tell us when the next window does open up?

I think the issue for us is going to be a combination of, it has to do with where we think we are on acquisitions and I think at this point, it is better we have not given any specific guidance, we are authorized by the Board to buy shares and as long as we don't think that there is some acquisition that could be close that we would be well advised to buy shares ahead of it. That's probably the biggest thing that we are going to watch for. But also a quick come down to exactly when we can ready to file for SIU, there is a number of different issues again in today's world, we would rather be exceedingly cautious and how we have that. I just want the people to know that they don't see us in the market buying, it is probably not because we don't want to buy, it is very well be because we feel that there might be some deal pending that rather not get ahead of or the SIU-IPO itself could be pending.

Okay, great thank you.

Thanks Jeff, operator we will talk one last question and then we need to wrap up.

Okay, our next question will come from Mark Marostica with Piper Jaffray.

Hi, Mark.

This is Mark Marostica with Piper Jaffray.

How are you?

Doing well. First question is clarification on the accounting treatment of WSI stand. It looks like the 3.3 revenue was included in the total revenue period. The operating losses were below the line. Could you help me understand the GAP treatment there?

Yeah. I am not sure I followed the question. You said that the revenues from Spain were included above the line and you are suggesting that the related expenses were below the line; they were both above the line.

The operating expenses.

If you take the table that was provided at the end of the press release, the operating expenses would be in divisional operating expenses. Right?

Okay.

The revenues would be in that, where is it... English Language Instruction.

It is in the revenue. I just did not see it in the operating expenses associated with WSI spending included in the bottomline. That's a million dollars that you talked about.

Actually included above the line is not just a million, it is $418.7 million loss which is mostly a pretax number, which is mostly cost associated with writing down all the assets. That's why if you look in the second quarter, it looks like operating income is only $4.898 million for the quarter, but to really see what it was essential you need to add back, if you go to the bottom of the page you see segmented operating profits for English Language Instruction sustain a negative $18.7 million and you have to have that back to the operating income to get a sense of what the actual performance of the company was.

Okay, and then a question for Raph or Bill, relative to lead flow as it relates to Mexico... understanding so well for August intake period, it is primary intake period and then in Spain it was the October intake period. What are you seeing in terms of lead flow, and then in tangent to that question, I am trying to get a feel for what your targets internally are for some school enrollment growth, I know last year Spain was a little bit depressed because of an entrance exam requirement came in at about 6% and Mexico, because in the low teens, but if you could review that, that would be helpful.

Mark, it is Doug. I would start by saying that Spain in general is never going to be in a position to perform like Mexico. I think that clearly Mexico has performed exceptionally well for us in the past and continues to do well, we have more favorable demographics in large and there is always some year-to-year anomalies. In Spain for example last year that admissions exam issue, but I think that other than sort of a general statement, it says you know we don't think Spain can do well as well as Mexico. I think we probably would not want to get any further ahead providing that kind of guidance. We put up full guidance for Sylvan, SIU was such a big percentage of Sylvan's overall profits, that if we did not think SIU was trending in the right direction, we could not possibly reaffirm full year guidance the way we have today and I think at this point it is probably as much as we should say on it.

Okay, and just to review the topline guidance for the year. [INAUDIBLE] was 568-592?

Yeah, that was full year revenue guidance. That did include WSI Spain revenues. So when the transaction completes we won't have the benefit of Spain revenues, which in the 568-592 was close to $17-18 million of revenues. You have to adjust that out to look at our run rate revenues would be after WSI Spain.

But from a bottom line perspective even though when we originally put out original year guidance, we thought that Spain was even going to be profitable, even without those profits we are still reaffirming that we can make our guidance, because the rest of the business is performing so well.

Just to clarify, the third quarter revenue of 116-119, already pulls out, any revenues that had been related to it.

Okay, for modelling purposes we should likely pull out our expectations of WSI Spain going forward on the topline.

Yeah.

Okay. Last question just to wrap up, you mentioned that UDLA would be accretive in the back half of the year, but it was not accretive in the Q2. Could you quantify that for us?

We have, the balance for the year, the increased ownership at pretax bottomline is in the neighborhood of the million dollars. But bear in mind that we are going to reiterate our full year guidance, we are carrying the water, if you will, for the first quarter loss from WSI Spain that when we set our initial guidance did not compensate for losing money. So, it really trades out that upside, because we are meeting $0.93-$0.95 despite the first quarter despite that $1 million loss.

Okay. Thanks you very much.

Thank you very much and thanks everyone for the patience for a long call. We certainly appreciate your interest in Sylvan and look forward to seeing and speaking with many of you. Good-bye.

That concludes today's conference. Thank you for your participation and have a great day.