Laureate Education Inc (LAUR) 2003 Q2 法說會逐字稿

Please standby. Good day everyone and welcome to the Sylvan Learning Systems Second Quarter 2003 Earnings Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to the Manager of Investor Relations, Mr. Chris Symanoskie. Please go ahead sir.

Thank you. Good morning and welcome to Sylvan Learning Systems second quarter 2003 earnings release conference call and webcast. Before we begin, I'd 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 provisions of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements may involve risks and uncertainties. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the company's actual results could differ materially from those described in the forward-looking statements. The following factors might cause such a difference. The companies operations can be materially affected by competition in its target markets, and among other factors [prior to our] market conditions. The company's foreign operations in particular are subject to political, economic, legal, regulatory, and currency related risks. 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 Forms 10-K and 10-Q available for viewing on our website.

Our speakers this morning are Douglas Becker, Chairman and Chief Executive Officer of Sylvan Learning Systems; and Sean Creamer, Sylvan's Chief Financial Officer. Also available for your questions today are Raph Appadoo, President of Sylvan Learning Systems; Bill Dennis, President of Latin America Operations; and Paula Singer, President of Online Higher Education. Now at this time Sean Creamer will discuss our financial results for the second quarter of 2003. Sean.

Great, thanks Chris and welcome. I would like to spend sometime to provide an overview on what was a very eventful quarter for the Company. Back in October of last year we announced the commencement of a strategic review of our business with the ultimate goal of simplifying our story. This past March we announced, the review was complete and outline for investors what we internally coined the global solution. Specifically we announced that we had signed a definitive agreement to sell our K-12 Business to Apollo Management, the New York based private equity firm and disband Sylvan Ventures. In the process the K-12 assets are held by Ventures namely eSylvan and Connections Academy would go with K-12 sale; Walden and NTU, the two very promising post secondary assets acquired through Ventures would be retained and the remaining non-strategic assets held by Ventures would be sold to a third party. This past June, we closed the sale of the K-12 and completed the sale of the non-strategic Ventures assets. The goal we outlined and ultimately achieved was to end the process as a pure play post secondary company with an international campus space business and a domestic online offering, both were strong growth rates and highly visible business models.

It was a busy quarter but the global solution is now in place and we are very excited about the direction and the prospects for the company. Over the last couple of quarters we've also been really clear with investors regarding the ongoing review we are conducting of Wall Street Institute, our English language business. WSI, while it serves the working adult market, addresses a different segment; namely, the non-degree [graining] component. In addition, Wall Street Institute shorter program term does not the match the multi-year enrollment length [of] stay that our online and campus based businesses do.

Our goals to be viewed as a highly visible pure play post-secondary company required such us to make a difficult decision. In order to complete the transformation we started, we felt it was really important to resolve the question of investors and management had regarding the long-term strategic fit of WSI. So, today we are announcing our commitment to dispose the WSI. As a result, the Wall Street Institute's financial results are now reported as a component of our discops along with K-12 business. In connection with the decision the company reported a $25.5m pretax charge to write-down the carrying value of WSI to its net realizable value. Included in these charges roughly $10.4m loss related simply to the reversal of accumulated foreign currency translation adjustments. Year-to-date, -- WSI's operating loss, year-to-date, excluding the write-down and obviously certain exit termination costs resulting from the decision to move it to discops was roughly half a penny to our earnings. We've been real clear that the first and second quarter results were going to be clouded with these one-time items stemming from profit. In the second quarter, we recognized a pretax gain of 110 -- in excess of $110m on the completed sale of the K-12 business. In addition, there were a variety of transaction-related expenses, including a $4.6m non-cash charge stemming from the extension of the exercise period on invested options held by some of the K-12 employees who are going with that business. Both of these items along with the WSI losses including the write-downs are reflected in our results from discops.

Just a couple of quick items of note regarding the actual gain itself. First, as you all know, Apollo tendered back approximately $51m of its convertible debentures as partial payment, the purchase price for the K-12 business. At the time that we closed, the shares underlying the convert roughly $3.2m on that $51m face instrument, were worth approximately $72.5m. For GAAP purposes in computing the gain, the consideration is received is valued at face, so the gain is obviously understated from a GAAP perspective. In addition, we took back roughly $55m [seller] piece of paper with a 12% coupon and a six-year maturity. The note had payment in kind for the first two years and then was cash pay interest going forward. And again for GAAP purposes, we discounted that note to contemplate the pick components and record roughly $13.5m in original issue discount, which is actually accreted back into income as additional interest income over the term of the note. The additional interest income that will stem from that for the balance of this year is about 400,000. For 2004, it's estimated to be about a 1.2m. We also recorded a $22.2m non-cash compensation charge that we announced early relating primarily as a conversion of stock options granted to SIU employees that were converted into options in Sylvan. We previously estimated the charge would be approximately $25m based on Sylvan's stock price at that time. The total resultant non-cash compensation charge is going to be about $28.4m. The charge that we reflected in the second quarter relates to the vested portion of those grants. The remainder of the charge is going to be recognized over the vesting period, which extends through 2008. But for the remainder of 2003, the charge is approximately $700,000, and for 2004 it's estimated to be $2.8m. So for the balance of 2003, we do have these two anomalist items, the accretion of income for the [seller] note and the non-cash compensation charge, which affectively net out and therefore will not have any negative impact on our results.

And finally, as I mentioned before, a significant portion of the G&A that's properly attributable to K-12 which is roughly 60% of our total G&A run rate prior to the sale is included as is required under GAAP in our results from continuing ops even though the underlying income from K-12 is presented in disc ops. So again to help people wade through these challenging year-to-date GAAP results, we have also presented results on a pro forma basis as if the transactions had closed on January 1 of the year, and hopefully this clears away some of the distraction presented by the gains and charges and the mismatch of income and the G&A expense. In the body of the release itself, we provided a reconciliation of our second quarter and the year-to-date actual results through this pro forma presentation. With these extraordinary events, gains, and charges behind us, we have substantially improved the visibility and the transparency of our financial results. And these financial results are strong and are on track with the guidance we provided for the year in March and updated recently following our announcement of the Andres Bello acquisition in Chile. So at this time, we are reiterating our full-year pro forma EPS guidance of 85-88 cents.

Turning very quickly just a summary of the financial results themselves, for the second quarter total revenues from continuing operation were up roughly 36% to a 116.2m versus 85.2m in the second quarter of '02. The campus-based businesses' revenues grew from 63.7m last year to 88m for the quarter this year, an increase of 38%. Online, which, to remind people, will now include Canter, Walden, and NTU, revenues were 27.8m for the quarter, a 30% increase from the same quarter in 2002.

At the operating profit line, for campus-based businesses operating profits were 12.7m for the quarter, up 41%; online operating profits were up approximately 27% roughly 1 -- a little over $1m year-over-year. This despite the NTU losses incurred as expected in the second quarter of '03 of roughly $900,000. Pro forma after-tax income from continuing ops for the quarter was $9.2m or 21 cents a share on pro forma diluted shares outstanding of 45.8. Again, this is from continuing ops. If the operating loss from WSI were factored in, it would be about a half a penny, negative to that 21 cents.

Turning now to the year-to-date results for the six-month period ended July -- June 30, total revenues from continuing ops were 211 -- in excess of 211m, an increase of again 36% over the last year's 155.8m. Campus-based revenues year-to-date 165m versus about 125m for 2002, a year-over-year increase of 20 -- 32%, excuse me. Online revenues were for year-to-date 45 and change million -- a 49% increase from the same period of 2002.

Quickly balance sheet perspective, just total cash and marketable securities at the end of the second quarter was about $190m while corporate debt was roughly $92m inclusive, excuse me, exclusive of the $44m of convertible debentures that remain outstanding following the closing of the K-12 transaction. And for the quarter, our change in cash primarily reflected the roughly $110m in pretax proceeds received from the K-12 transactions, and approximately $34m in cash paid for the previously-announced acquisition of UNAB, the newest university in Chile. At that time, we assumed an additional $40m in debt, which is included in the number I referenced above. The tax liability itself for the K-12 sales estimated to be around $50m, obviously we're still continuing to work that. Roughly $25m estimated tax payment will be required in September of this year proposed to help model out the cash balances for us. With that, I will turn it over to Doug for your comment.

Thanks very much, Sean. I know you must be very happy to come to end of, what we hope is, our series of complicated quarters, and we have told everyone our goal is to get this transaction concluded in the second quarter and to move to very straightforward simple earnings releases going forward and it's a watershed event for us to be on the cusp of that. Just a few more minutes left of complexity and then we'll look forward to our next earnings release. I am very delighted to be in a position to have concluded this transaction associated with the sale of K-12 business and the changing of our venture's model. This ultimate transformation of our company into a pure play post secondary company; has really been a dream for us for months and months now. I am also delighted with the financial performance which puts us right on track for the full year guidance that we've presented earlier, our pro forma guidance of 85-88 cents which we had raised when we made the UNAB acquisition and that puts us right on track with the 2004 guidance. We had originally expected that about 12 next year and with UNAB we raised that by 10-11 cents. UNAB have been a Chile acquisition we recently announced, so that would bring us to that about $1.22 for next year. Obviously, that is predicated on favorable enrollment growth which we would be announcing in our third quarter.

In terms of the Wall Street Institute decision and our plans to [divest results] of that business, I think you will find us all a zealous converts to this of idea simplicity and focus. We love the post secondary business. We love the multi-year enrollments and the degree granting business model. In our case it really revolves around primarily a four year undergraduate enrollment model. And while the Wall Street Institute business is a very good business which I think has great prospects; it is a much shorter course duration and it just does not have the kind of visibility that we have in the rest of our business. So, we are very pleased I think that we could make this difficult decision and move ahead to build our great business in post secondary education. I do think that Wall Street Institute has strong prospects. We've recently brought in a new CEO, Tim Daniels (ph.), who has actually done some great work for us elsewhere in Sylvan, and we think that under Kim's guidance that Wall Street has good prospects, and we expect that there will be very strong interest from buyers. We intend to take the full year available to us to make sure that we're able to conclude the most favorable transaction, which provides us the greatest gain and which ensures a good smooth transition for our employees and franchises and customers around the world.

I'd like to move my comments to a discussion of the international campus based business that business continues to deliver fantastic results, as Sean said 88m in revenue for the quarter, 38% growth and that drove operating income growth of over 40% compared to the same period last year. If you exclude anything that wasn't in the previous period, which in this case would have been [Gleo], which is a school that we brought around this time last year and UNAB this new Chile university that we acquired, and if also exclude the India and China startup work that we're doing which is very modest expense, but if you take that out you would get about a 22% year-over-year revenue growth and about 34% operating income growth, so really no matter how you look at it, this business is performing, it's executing well in identifying and integrating highly profitable acquisitions, but it's also delivering in this case mid 30s organic operating income growth, which is we think just fantastic and from what we can see sustainable, and we are delighted with the performance of our team. The best results that we saw in this quarter came from Chile and Spain. While Spain benefited from foreign exchange, which internally we tend to ignore and we like to adjudge our businesses in local currency. They also actually were able to generate strong operational profits and that is -- even though they had very modest top-line and enrollment growth. They've managed their expenses very well, and they have a very high flow through margin on any incremental revenue. Chile's results were purely enrollment driven; we know that they have been just the heroes of our business in check driving enrollment growth and that give us great momentum for the rest of this year and for -- really for years to come. We saw good results in Mexico, but Mexico was more impacted by currency. And I think the net result of currency is our European businesses were benefiting, the Mexico business was hurt by currency in the short term, Chile was modestly hurt, and when you add it all up it was pretty much a wash. We -- Our goal is to have let's say less than $0.5m of swing, either positive or negative in any given quarter associated with currency, and for many quarters now we've been able to achieve that goal and this is another quarter that really validates the concept of this balanced basket of currencies in our portfolio, and I'm really happy about that as well.

Few other comments on the international campus based business. We've made some organizational changes for Sylvan overall, as Chris mentioned when he introduced people. Raph Appadoo now joins me in the corporate offices as President of Sylvan Learning Systems; Bill Dennis, previously the CFO of SIU is going to be the President of our Latin American businesses, which are fantastic growth engines for us. Paula Singer continues to run our Online Higher Education business, and I'll be working with Paula to build our U.S. business including exploring brick and water opportunities in some select niches that we find interesting. We also were pleased to announce the appointment of David Graves as our Chief Marketing Officer for our campus-based business and some of you may remember David who had been the Vice President of Marketing for Sylvan Learning Centers, and he was really highly involved in building Sylvan to the brand that it is today, and we think he is going to do a great job in helping us build our post secondary businesses well.

Couple of other viewpoints. By the end of this year, we will have opened four new campuses, which was the plan; two of them in Mexico, one in Chile which is in Concepcion, and one that we didn't talk about previously is a downtown Madrid campus and this will be operational for the new enrollment cycle which concludes in the September-October timeframe and that is focusing really purely on working adults, and what's interesting is while our undergraduate enrollment in Spain have been very low in terms of growth, our post secondary enrollment in Spain -- the working adult phenomenon really appears to be coming on to full strength and we've seen high growth rates -- 50-100% growth rate in post graduate enrollment. So by opening a downtown campus in Madrid, closer to where people live and work that will be our customer, we think we can achieve some good results. That would bring to 30 the total campuses that we have in the FIU, international campus network, not including our new vocational, technical business in Chile.

In terms of new countries, we will be entering India as planned. We're launching our South Asia institute in August. It's expected to be a very modest launch. Small number of students and a relatively low burn rate as we learn that market, but a great investment for the future. We were planning to open a campus of our hospitality school in China. We did delay that because of the SARS situation, and if we see that situation continue to maintain the current stable favorable trend, we'll happily open that campus as soon as possible. But we want wait a little bit and make sure that SARS is not coming back in the fall, as some people fear.

In terms of acquisitions, we continue to be active with acquisitions. We've been very focused on the integration of UNAB; we are very proud of this; a very fine university in Chile. It brings us to a great level of critical mass in Chile. But we have acquisitions all over the world. Our pipeline continues to be very robust. And we've been very focused though on finding some niches that would give us U.S. acquisition opportunities and European acquisition opportunities because we are very focused on maintaining this balanced portfolio in terms of geography and currency, and we think that has helped us so much so far so we're going to continue that.

So to summarize in the international university side of our business, we're going full strength in growing on a same-store basis, expanding existing campuses, recruiting more students, opening more campuses. Again, that'll be 4 campuses this year. Probably three or four new campuses next year. Mexico and Chile again being the leaders in that arena and watching our fledgling efforts in India and China as seeds that we can plant that will really blossom four or five years from now, and ensure that we can maintain high growth rates for years and years to come. I do want to just give you an enrollment update on the SIU, international campus-based business. As many of you know, we announced our enrollments two times a year, in the first quarter when we can announce our Southern Hemisphere or Chilean enrollments and in the third quarter when we can announce our Northern Hemisphere or Mexico and Europe enrollments and I can't obviously tell you what our third quarter release is going to be because we're right in the middle of those enrollments right now and I wouldn't want to guess where they're going to end up and be wrong. But I do want to at least give you a rubric for how we're thinking about enrollment, our plans, our guidance for this year were based on generating about an 18-20% growth in total students in the SIU business in the campus-based business, and because we grew at over 40% in total students in Chile, we only need to generate in the 12 or 13% range in terms of total enrollment growth in the third quarter in order to have rounded out to that full 20% growth rate or 18-20% growth rate, which would bring us over 70,000 students before we talk about UNAB this new acquisition. And that I think again, we certainly believe that we are on track for that, we are right in the middle of these enrollment periods in our discussions, but the whole point is that we are shooting for at least a 12% or 13% increase in total enrollments in the third quarter. And if we exceed that, it's obviously a great sign. And if we achieve that, it means we are absolutely on track, and that's the plan.

I would like to move my comments over briefly to the Online Higher Education business, which is our U.S. adult education [ranking] business. As many of you know, the two big revenue drivers there are Canter business and our Walden business, and they are becoming increasingly indistinguishable because we have been driving a lot of our growth in Canter through Walden. And that has also entailed actually canceling some of our relationships with some of Canter's previous partners in favor of the work that we do with Walden and in favor of stronger relationships with a smaller number of Canter partners. We did have good results, about 30% growth rate in the Online Higher Education business on a 17% increase in enrollment. That was impacted favorably by NTU's revenues, but NTU as planned did lose money in the quarter. And I want to just mention that loss rate, which for the year is expected to be let's say $4-5m, is expected to have been curtailed by the end of the year. So to the extent that we've succeeded in bringing NTU to profitability by the end of this year and I think we are on track to do that, we will have presented a major opportunity for profit improvement in the online business going into next year.

In terms of other elements in the Online Higher Education business, Walden did get approval from the North Central Commission to launch two new degrees; a master in public health and a doctorate or PhD in public health. That's very important. We are very focused on health. Many of you know that we're launching our own nursing school, probably as part of Canter at this point and a number of other health care verticals that we think will drivegreat growth, and we're doing it also in our campus based business. We now have medical schools, for example, in Chile and in Mexico. And we think the health sector is going to be very important for us. And of course our education vertical continues to be really the model and we are launching a PhD with a specialization in community college leadership. And we actually think that's going to be very strong. We're getting a lot of demand for that. So I think things look pretty good for the Online Higher Education business.

The enrollment commentary that I would give you vis-à-vis Online Higher Education, and this is very important, because we're phasing out some of Canter's partners, it will impact or crowd the enrollment numbers for OHE over the next several quarters. This 17% growth that we saw for Online Higher Education really understates the growth that Walden achieved in the second quarter where Walden's enrollments would have been up in the, you know 80% plus range for the quarter. So when I say 17% overall, but Walden is up 80% the reason is a; Walden is becoming bigger and bigger and it is going to impact the overall numbers more favorably and b; that we are actually decommissioning, we are phasing out some of the Canter's partners and that negatively impacts that number. That impact will grow in the third and fourth quarter this year. I would expect Online Higher Education's overall enrollments to slow down to probably in the sort of single-digit growth rates in the third and fourth quarter. That will then begin to bounce back in the first quarter of next year; and by the third and fourth quarter of next year, I would expect us to be back in the 20s-30s% range in overall enrollment growth for the Online Higher Education business. Underlying all of that change, you'll be seeing 60, 70, 80% enrollment growth in Walden; and as that becomes a bigger and bigger part of our business, that should [auger] extremely well as I say for the end of '04 and going into '05 and beyond. All of that has been taken into account in our guidance. So, none of that is a surprise to us, but we thought it was important as we come into the spotlight with our pure play post-secondary company that we provide some enrollment commentary.

Just a few other points before I wrap up and open for questions; I wanted just to remind everyone our business model, we've really strived for a simple business model. The approach that we are taking is in essence 18-20% enrollment growth for a blended overall rate for our company. That's generally going to be a 10-15% growth rate in same store benefiting some from new store, and then 5% or more in price. And all of that will drive revenue growth rates in the 20s. We have a lot of built-in operating leverage in our business; if we grew our revenues in the 20s, we should be able to grow operating income at roughly double that rate or in the 40s and that's how our '04 guidance is dealt, and none of this includes the acquisitions and UNAB -- I'll comment in on -- I already did comment on separately, but certainly other acquisitions that we would work on above and beyond that. Just a few more points on guidance, we do have the third quarter where we're coming up on the third quarter that is our seasonally weakest quarter because most of our universities with the exception of those in Chile are closed for some portion of the quarter for summer break. This is followed by our strongest quarter, the fourth quarter which is the only quarter in which all of our universities are in session for the full quarter. Are we reiterating our recently increased full year pro forma EPS guidance of 85-88 cents, stemming from the announcement of the UNAB acquisition.

As we continue to expand internationally, another point, we stand to benefit not only from these strong operating results, but also from lower tax rates in many of the countries where we currently operate. Our current estimated tax rate of 28% is already considerably lower than our domestic counterparts. But as we continue to grow our international business, we expect our tax rate to trend even lower. We are currently evaluating how the Chile acquisition will impact our rate and we expect we may benefit from a reduction in rate to the tune of a couple pennies in the third quarter. Our accretion projection [not] contemplated some of this benefit, so we are not raising guidance right now until we evaluate this impact further. We'll have more to talk about that in the third quarter.

Just a few more points about the third quarter, we anticipate total revenue to be between 100-105m for the third quarter. That will be about 39% increase over the previous year. We expect campus revenue to be in the 75-80m range in the third quarter with operating margins of 10-11%. Online revenue to be 24-25m in the third quarter with operating margins of 16-17% and remember that continues to be impacted by NTU losses. So they are really generating great margins even with that impact and as NTU's losses trend to zero by the end of the year as planned, we'll really see a nice pickup in margins in that division. G&A expected to be about 2.5m for the third quarter and diluted earnings per share at this point is expected to be between 14 and 15 cents for the third quarter; and again, we'll see what the impact of tax rate reduction could have as a potential upside to that. And again, all of that would then drive us to our original plan of about a 40% growth on our original guidance that would have given us 1.12 next year, and then we add about 10 cents for UNAB to about 1.22 next year.

Just two final points. I do want to mention that our partners in Apollo Management, investors in Sylvan, and Board members are really in many ways winding a lot of their activities in Sylvan down. I certainly want to thank them, they have been extremely helpful and helping us think about our business and grow our business. Many of you know they started with over 5m shares in Sylvan, they have tendered back over 3m shares as part of the acquisition of K-12 and based on the current trading value of their shares, I expect their convertible debenture -- if everything continues as our current stock is trading -- their convert should convert out on the common stock in the next couple of weeks. And that will really end any of the, sort of, rights or privileges or special positions that they've held and certainly I want to thank them for helping us grow our business and we expect that will certainly not be highly active going forward in our business.

Lastly, I want to draw your attention to the fact that we will be announcing a new name for Sylvan Learning Systems; everybody knows that we have a year to change our name from the closing of the K-12 sale, but we would certainly like to see that happen before the end of this year, and we are working hard on that and if any of you know any good names that have a vowel in them, please give me a call because it looks like just about every other name's been taken. So we are working hard on that too. With that operator, if we could open it up for questions I would sure appreciate it.

Thank you Mr. Becker. The question-and-answer session will be conducted electronically. If you would like to ask a question please do so by pressing the "*" key followed by the digit "1" on touchtone telephone. For those of you using a speakerphone, please make sure that your mute button is turned off to allow your signals to reach our equipment. Once again that is "*" "1" to ask a question. We will take our first question from Bob Craig with Legg Mason.

Good morning everybody; congratulations on the quarter.

Hi Bob.

Just couple of questions, Doug, did I hear you say before that you would be interested in perhaps purchasing some U.S. brick and mortar?

Well I think the main point for us is that we want to maintain a great balance of geographic and currency revenue profits. And our Latin American businesses are just tigers, they are doing so well that we need to be very open to U.S. and European acquisitions in order to make sure that we maintain this balance this currency, natural currency hedge that we've developed while not perfect has performed incredibly well for us and so it really forces us to think about U.S. and European revenue. As we all know, the assets in the U.S. are pretty pricey, and I hope many of you know that Sylvan's pretty cost conscious in terms of what we pay for acquisitions. So for us to accomplish any sort of brick and mortar acquisition in the U.S. it will really be based on finding something that's different from what other people are doing that we can get into in an affordable way and generally the kind of growth and accretion that we are accustomed to.

Yeah, I appreciate that clarity. You mentioned before the expectation of 12-13% third quarter growth in Northern Hemisphere schools to meet you earlier guidance. Can you comment on any measures of visibility that you might have on those numbers, either based on inquiry levels, lead flow, and some people use the term book futures and so on.

Yes, it is a great question. We do only have one major intake per year but that intake is not an overnight activity. So we have months and months where we are in process and where the numbers are flowing. I tend to be very cautious about either what I believe or what I say because much like the closing of political polls, if you extrapolate the wrong point in the cycle, you can be really wrong and end up with Dewey winning the presidency. So I try to be very careful about not saying look we are half way through and I can extrapolate at this point. But we do have leading indicators certain inquiries are an important indicator. In some countries, there is a pretest required for enrollment, applications, we have lots of indicators. And I would say our indicators certainly would indicate to us that we are on track to achieve the goals that we have. It's often not exactly each campus as you expect, but when you wash it all together, it certainly looks fine from what we can tell today.

That's great. One last one, I will turn it over. Can you describe some of the moves that you're making to improve the profitability at the NTU?

I am sorry, can you repeat that?

Yeah. Could you describe some of the efforts you are taking to improve the profitability at NTU?

I will do that. I actually just got a note that our webcast went down, and I'm guessing that for legal reasons we are actually being told we need to take a brief break until that comes back up again, so that we full disclosure for everybody that wants to participate. What I am thinking I might do, Bob is answer your question and then just repeat the answer. And hope that that's satisfactory from a legal perspective.

Sounds great.

I've got one of my most important lawyers here nodding and saying that that's seems like a good answer. So your question was, how is -- how are we improving the loss rates on NTU.

Yes.

Basically -- Paula, why don't you answer that? And then I will just recap when that when the webcast comes back up to talk about that.

I'd be happy to. One of the things that was a problem for NTU was it's satellite delivery was very costly for them, and satellite delivery has been shut down as of June 1 and is providing substantial saving for us as we go forward. We also have closed the office in Fort Collins and have consolidated that office in Minneapolis and there are savings associated with that. And I think as you know, we went in and took a very hard look at all of the employees and organizational structure there and made significant cuts and are really in a great position now, also renegotiated our contracts with our university partners, so that we have an economic model that is worth moving forward with. And I would say we are in really great shape for now, building the enrollment and actually have a model that's worth scaling.

That's great. I appreciate it, thank you.

Our next question comes from Mark Marostica with U.S. Bancorp Piper Jaffray.

Mark, again, I am going to take your question, and we will just repeat it. We hope people will bear with us once we know the webcast is back up again.

Okay, thank you. And again, congratulations on the quarter.

Thank you.

The question is regards to this enrollment cycle, which I appreciate your comments on how things are shaping up. Wondering if you look at this current enrollment cycle, particularly in Mexico, could you tell us -- interpret the number of campuses you currently have in Mexico, how that number relates to the year ago period? I'm trying to understand on a same store basis, how that's to shape up?

I think we only have one campus now that we didn't have last year.

We are going to have two new ones this year.

That's correct. There will be two new ones, that's right.

So the two new ones that we should take into account for modeling--?

Right.

Over and above the comparable year-over-year period?

Yes.

Could I ask my next question then?

Sure.

Okay. With regards to Walden, obviously a great growth there. In terms of mix of students by program type, where do you think you're getting your biggest source of enrollment growth?

Paula, you want to comment on that?

Sure. Our [enrollings] are growing in two areas; one, very happily is the PhD. We have seen phenomenal growth in that area and have really focused on the education PhD and the management PhD. So we are seeing significant growth there. We're also seeing significant growth in the other area of concentration, which has been our Masters in Education which we have done jointly with Canter, I think a good example of that is that when we began with Walden two years ago there were 80 students in the Master's Degree program for education; we have over 4,000 students currently enrolled.

Great and then for the quarter, I think last quarter you mentioned Walden was essentially at [probably] breakeven, is that case today or are we profitable with Walden at this point?

I think there was a modest profit in the quarter for Walden. So it is certainly made that turn and while we are investing heavily in growth, it certainly should be profitable going forward.

Okay, thanks. I'll turn it over.

Okay any again in, sort of, new -- are we back up -- so what I am going to do if I could is just recap for people who rejoined us on the webcast Bob Craig from Legg Mason asked how we reduce the losses at NTU. Those were 4-5m of losses for the year in '03 that we expect to have been reduced to essentially to zero by the end of the year, and the answer by Paula Singer was that we have transitioned away from the use of satellite as a primary delivery mechanism, which was very expensive, and we have also entered into more favorable economic arrangements with some of the academic partners, other Universities that NTU gets content from. Then we had a question from Mark Marostica from U.S. Piper Jaffray, asking how many campuses -- new campuses we had in Mexico, the answer being two, and asked in the Walden mix where the greatest growth was coming from and we indicated Ph.Ds were growing very nicely, education and management Ph.Ds, and also lots of growth albeit at lower revenues in the Canter joint venture that they have associated with Master's Degrees in Education, and with that catch-up and tip of our hat to the legal profession, operator, if we can take the next question.

And our next question comes from Jeff Silber with Harris Nesbitt and Gerard.

Hi, Jeff.

Good morning. How are you all doing?

Good. How are you?

Good. In the prior quarters you've been kind enough to give us sort of an organic growth in constant currency by your different countries and I was wondering if we can get the same information this morning?

Let's see what we have handy. In terms of organic growth taking out acquisitions, the only division that would have been affected by that was the FIU international campus growth and I did mention that earlier. What I said in essence was where their division showed 38% revenue growth and 41% operating income growth. If you take out anything that wouldn't have been in the previous period that revenue growth would have been 22% and that EBIT growth would have been 34%. Now that is still using dollar, so it doesn't answer your currency question.

Jeff, in terms of currency, the local currency year-over-year growth, Mexico is up about 23%, local currency, Spain up about 6-7% local currency obviously benefited from the strengthening Euro to U.S. dollars was up substantially more than that, and obviously, in Chile up roughly 47% on a local currency basis for the university we owned for both periods which is the way we are looking at it. And for the most part that tells the story from a local currency standpoint. France was up around 8% and in terms of bottom-line growth local currency for the quarter.

We didn't really break that out -- we haven't really broken out bottom-line by country.

Yeah. It's just a -- it's a comparable trend, obviously.

Excellent. I just needed the country numbers and I really appreciate that.

I also just want to reiterate the number I gave you in terms of dealing with acquisitions versus organic were only for the SIU side. The OAG side really -- I guess there was a small impact in NTU; I don't want to miss that. Basically in the quarter they were up 30% OAG revenues and if you take NTU out, they would have been up 21% in revenues. But they also increased their operating income in quarter and NTU lost money in that quarter. So in that case actually looking at it on a sort of an organic basis, we would have shown even more favorable operating income growth than we are reporting.

Okay right. Next question actually focuses on OAG. The 15 or so thousand students that you disclosed in terms of your online degree enrollment, can we get a rough gauge how that's broken down between Walden, NTU, and Canter?

I think part of the problem is it's becoming -- it's not that we don't want to give you that. It's becoming extremely fungible. For example, at this point a large percentage more than half of all of Walden students come from the fact that we have now designated Walden as the preferred partner for Canter for many programs as opposed to other partners that we've had or intend to phase out. So it is becoming fairly fungible, and I think the reason why we have chosen to aggregate it is not to give you less information but to make sure that you have information that's actually meaningful. So, I think it's best to take it as one number right now. What I certainly can tell you because there is no [fungibility] to it and it is almost irrelevant is NTUs enrollments are extremely -- saw a very small portion of the total degree seeking students, Paula was?

About 300.

300 degree seeking students. NTU does have a lot of students that are not taking degree instead are taking continuing education but our focus is going to be on degrees.

Okay great, one more and then I will let somebody else jump in. And I just wanted to get a clarification, Sean you had mentioned at the beginning of the call that roughly about 60% of your G&A, which related to the K-12 business. The 5.9m in core G&A that you just reported, does that include that 60% or that's already been taken out?

No that includes, that's a 100% number and that's why in the pro forma statement table we're backing out that 60% to give you a run rate look at the company, but that's 5.9 is a full load including the K-12 overhead.

And actually if you take a look, Jeff at the press release on the table it actually shows 3.5m that's backed out to get to the pro forma number that would have been the 3.5m associated with the K-12 division.

Yes, that's why I thought, [but I sorted] the double check. Thanks a lot.

Thank you. Operator.

Our next question comes from Bradon Dobell...

Hi Bradon.

...with Credit Suisse First Boston.

Good morning guys. A couple of quick ones here. In terms of the online business, you know, also with the issues that kind of Canter, having this partnership goals and you guys were migrating that and doing a great job there. Do you anticipate any kind of similar issues with the NTU students and their partner schools, as you know the partners say, "Hey, now you are competing with us" before it was just kind of a peer partnership issue?

Well, they are very different kinds of partners, and Canters needed partners whose -- who would bring a accreditation to the table because when Canter was developed they didn't have their own accredited entity, well, now Sylvan owns two U.S. accredited institutions within OAG and we actually own two U.S. accredited institutions. Our Swiss Hotel Schools are New England accredited, so we have got plenty of way to deliver accreditations, per say and so what that means is on the Canter side we are not just picking partners that we think are doing a good job for us as oppose to having partners where we feel like we are forced to work with them, and that's -- but also Canters is a bigger business than NTU and a very profitable business and so even though we are convinced it's the right thing to do, it actually does hurt and will hurt for the next couple of quarters, enrollment growth for Canter as we phase out partners in favor of a bigger program in Walden, and a bigger program in some of our other partners where the economics front be more favorable to us. In the case of NTU it's very different, NTU has its own accreditation, their partners bring really a level of eminence and content to the table, so it's actually the exact opposite. In the Canter program, Canter brings the content and the marketing and the partner brings theaccreditation. In the NTU program, NTU brings the accreditation and the marketing and the partner brings the content. As a result, I actually think we're more unlikely to need and sustain and maintain a lot of partners for NTU. The engineering field having affiliations with people like UC Berkeley and many of the other well known engineering schools with whom NTU is affiliated is a real advantage, and I'd say that more is better. But we have called out some that didn't see the future of that business the way we did, but generally speaking we've really favorable relationships there, and I don't see any analog within NTU for the transitional change that we've described for Canter.

Okay. Fair enough. Then a couple ones -- quick ones for Sean. In terms of share count guidance going forward, what you guys are looking at for actually for Q3 and for the year and the debt figures you we were quoting earlier, does that include or not include any of the mortgage debt?

The debt figures, I quoted, excluded the convertibles, it included all of the mortgage debt. In total it's about $136m in debt, 44 of which is the convert, and the balance is virtually all mortgage debt.

And the convert we do expect again if I start trends the way it has been within another week or two under our agreement with [Paulo] that will convert to common stock.

In terms of share count, I think forecast again, pro forma as if the transaction occurred in the beginning of the year which is consistent with our guidance, we're in the $46m range.

Shares.

46m shares, sorry.

Okay, thanks a lot. I'll turn it over.

Thanks Bradon.

From SunTrust Robinson Humphrey, Richard Close, we have our next question.

Hi Richard.

Yes. Congratulations on another good quarter there. A question with respect to WSI, well in terms of the timing of that divestiture, Doug you said that you are looking that taking up to the full year. Can you just give maybe a little bit more details with that or you are just giving yourself a good amount of time or maybe just a status and what you think the real timing is on that?

Well, my guess is we've gotten calls really since the beginning of the year as people knows Sylvan has been doing a lot of deep thinking, from a lot of people think that's going to be a very valuable asset and so we want to make sure that we manage this process to find the best acquirer in a structure that generates the greater value for us. But on the other hand, I can tell it's not a division that's received much attention inside of Sylvan because of its own problems and lot of distractions and I think it needs some -- there are some things that we can do, and the new President, [Tim Daniels], who I have a lot of confidence in, can do that will really show what a jewel this asset can be for any buyer going forward. And I just want to make sure that we give ourselves the time to show it for what it is and get the value that we think is appropriate for that asset.

And just to clarify, the time line is predicated only on maximizing value. We have no pre-established period of time within which we need to complete the acquisition. It is our view that we will conclude that sale within 12 months, but we are going to do it within that period when we think we can maximize the value. And I think Doug's point was, it can take us a little bit of time, this not a fire sale, this is a quality assets that we need to market appropriately.

And then just a follow-up question that with respect to the G&A, how much was Wall Street Institute in that 60% of discontinued operations and how much was it?

No, WSI is a very modest user of domestic G&A. They obviously have a local country G&A, and so the corporate G&A that we talk about -- there is just really no significant component to support WSI out of Baltimore.

Okay, thanks.

Operator, next question please.

Jennifer Childe with Bear Stearns has our next question.

Hi Jennifer.

Hi, good morning. Couple of questions, back to WSI, I was under the impression that English language training was a major selling point at your International Universities, do you contemplate keeping some sort of JV relationships with WSI? And is there -- will there be a change in you guidance in terms of top-line, other operating income for WSI now that it's a discontinued op?

Well, in terms of just the guidance question, we have not changed our revenue guidance since we acquired UNAB. So that's a plus. And now [we'll bring] Wall Street into discontinued operations and that's a minus and I think they are pretty comparable levels in terms of what remains for the balance of this year. So I would say it's probably going to wash, relatively speaking, in terms of revenue. In terms of -- Wall Street, just to give people a sort of sense of it, is a, let's call it, $45m per year -- $40m per year revenue business in that range. And so that will obviously come out in terms of top-line. Wall Street was not a bottom-line contributor, and in fact, as Sean mentioned, would have had a very small loss for the first of the year -- operating loss to the tune of, let's say, $400,000 or half a penny or something like that. So having Wall Street come out of our numbers doesn't really affect our guidance adjustment at all. With regard to English language, I really haven't worked my way through that question yet, it's a good question. In one of our universities, we use Wall Street extensively in the teaching of English. In our other universities we still do it in other ways and had kind of not gotten around to using Wall Street extensively and in a few places we're experimenting with Wall Street. So, I think whether we choose to embrace it or whether a buyer or Sylvan would prefer to have a cleaner break, I think we can go either way. We've got plenty of capability for the teaching of English to ensure that it is a core competency even after the sale of Wall Street.

Just to add something here, Jennifer, English and multi-lingual capability is fundamental to our model. This is how we differentiate ourselves against our competition. English, whether with or without Wall Street, is fundamental to what our students get from us and we have used it before, but as Doug said, the way you teach it, the technology or the model is the English language model, is pretty much a commodity, we can get it many any other ways.

Okay, Sean, what are your CAPEX expectations for the balance of the year and for next year?

Yeah, we haven't given formal CAPEX guidance other than to say it was our expectation that we will reinvest roughly 80-85% of our EBITDA sort of short-term. I think in a given year, particularly this year when there are a significant number of high return projects, it may be at the higher end of that, but over the balances of the next 3-5 years I would expect 80-85% of our EBITDA to be reinvested locally. But again, we do not at the beginning of a year approve a CAPEX budget. We approve on a project-by-project basis and so our view is as many 40% IRR projects to come to the table are going to get approved and we have the luxury right now of having a stack of them.

I think you are using 40% as a generic [inaudible] that obviously we look at a cost of capital and we look at country risk and project returns by country and by projects, and actually have different hurdle rates and those hurdle rates actually change based on us wanting to maintain at geographic diversification. So for example, right now, the hurdle rate to do a project in Chile is higher because we just did this UNAB acquisition, the hurdle rate in United States would be lower now then it would have been before because we want to encourage projects in the U.S. So it's a pretty fluid process for us. To Sean's point though about the CAPEX investment, I want to make the point we don't expect to spend more than, let's say, 20-25% of EBITDA on maintenance CAPEX. The majority of our CAPEX investments are all CAPEX that will build us more capacity, generate more revenues, and generate more profits. So--.

And/or our discretionary.

And/or discretionary.

Okay thanks. And then final question any thoughts, Doug, about disclosing students every quarter, not just the primary enrollment period?

We will think about that and we are thinking about that. What we are trying to do is we enter to a pure play post-secondary world is to figure out where should we be like everyone else and where should we be different because our model does have some important differences. We have different seasonality than the U.S. companies that you follow. We have fewer intakes than these companies and I just need to see some models which have been produced for me -- to see what kind of anomalies will come out of it if we suddenly show you our student counts after a big graduation period, and we haven't come into a [gripped] intake period where people who have had experience in following those trends misinterpret that data, for example. So we are working our way through that and frankly of all other kinds of ideas on how we could report that would make us easier to understand are appreciated. For example, I'll sort of throw out for people to think about we have wondered, does it really make sense first to break-out our individual performance by country? We do it right now because we think you want to know about currency, but when you get into Europe for example, all of our businesses either in the Euro or the Swiss Franc, which is essentially correlated to the Euro at this point. So we are giving a lot of though to the best way to present ourselves going forward. We've made a few decisions and changes in the way we have presented things today we'll do the same in the third quarter. If you have or anybody has input for us as to how you think, we could better present ourselves. This is a great time to tell us.

Okay. Thank you.

Operator, I think we have time for probably one more question.

And our last question comes from Trace Urdan with ThinkEquity Partners.

Hi Trace.

Hey, just in under the line, lucky me. I -- one housekeeping question for Sean. Sean, it looks like there are obviously some ventures' numbers included that were not divested and I guess you guys have suggested that at some point, maybe in the future, you might divest those. And I'm a little confused, are those -- is there a contribution expected from those ventures holdings in your guidance number?

No, and you shouldn't expect to see anything beyond this quarter. What we had is obviously ventures were in place until June 30 and we had some overhead costs. The assets have been written down in the first quarter. And so the P&L coming out of ventures is going to be nothing going forward. But our guidance has always been excluding ventures.

Okay.

The second quarter is just sort of the final pieces of it.

Great. That was I thought. I was just a little confused. Thank you for clarifying that. Second question is that are the startup costs included in SIU whether they are for the Greenfield sites or for the new campus openings. You know, how does those compare with what you might have spent in the startup category in the prior year? Are they comparable higher, any sense on that?

Well, we -- there are two types of startups. One for campuses and one for countries; for countries this is the first year we've talked about startup for countries. These are the ones we are isolating. In prior years we've had startup for campuses, we kind of don't make much of a difference and [nearly] about the same so they don't really change your growth for year-on-year very much.

I think the quick sense of it is that we are spending, let's call it a couple of million dollars on these long-term projects associated with India and China. They are other countries where we would intend to do Greenfield startup. And as Raph says, within a country when we open a new campus the losses from that new campus are just you know, sort of expected to be part of constituting business. India and China, we just feel that five years from now, if the rest of our business has begun to achieve more of a sort of a normalized growth rate that they would be explosive growth drivers for, lets say, the next five years after that and if it costs us $1-2m a year to do the research and lay the ground work for that, all the better, that's, you know it's [shame] to spend the money but it's a great investment.

Okay, so that's helpful, thank you. Doug, in the past I seem to recall you sort of down playing the role of working adults as you began to, you know, as SIU model began to emerge and now clearly you're seeing some vibrancy there in a couple of your markets. I'm wondering if it seems to sort of back the question of online education overseas, which I know that you've again down played in the past but if there is really this burgeoning demand for working adults, do you think that might be something you might move to sooner?

Well, it's something that we're watching. When we first came out with SIU, we were not at that time thinking of SIU and OAG as permanent sister companies. Remember we were thinking about SIU is going public on its own. And, so clearly our thinking has evolved, we are now one unified post secondary company; really all of the Polis online students are working adults. And, in Europe we are beginning to see demand for working adults and even in Chile with this [IF] acquisition that includes a working adult component. So, I would say you are absolutely right. You are detecting a trend, but I don't think, it is today a material trend, I think, the majority of our business outside United States is still traditional 18-22 year old undergraduate students and when that trend sort of picks up to the point where I think, it's really going to be a contributor in the material way and we will definitely, you know, pick up the level of discussion around it.

Okay. Fair enough. And, then last question, I wonder if you could just quickly review for us the impact of the migration away from Canter partners towards Walden, the impact that that has on the margins in that business?

Well, basically if we -- I used the term decommission, I think it's probably in the most political sense of way to put it. If we were to decommission partners that we think aren't really contributing or the way we'd like in Canter, in favor of investing more into the partners that we think are and especially into Walden, who has been a great partner. I think that the loss to us will be into tune of lets call it, you know 1500-2000 students range, but that doesn't come all at once, but it sort of phases in over several quarter periods, but against that period -- against that number you've got Walden growing as I said, you know, 60-80% enrollment and offsetting that and then the net result is we do still see positive total enrollment growth in online in the third and fourth quarter of this year. We think it will be in the sort of single-digit, may be then low-single-digit numbers and then it pops back out again in the first quarter as it might sort of get into the high-single-digits and then from there should really ramp back up into the high 20s or even 30s in terms of total enrollment growth in OAG by the end of '04, and obviously, I'm uncomfortable sort of being so explicit that I feel that this is such an important trend and could be so confusing to people that at the risk of you know putting out a lot of numbers for us to meet and beat, I think it is better to put that information out there very explicitly.

I got that message and thank you, but I was -- what I was asking was what's the net contribution of a Walden student as compared to the net contribution from Canter -- Canter student?

Thank you, I'm sorry -- I went into the wrong answer to the question. It wasn't because I was avoiding it, I just didn't understand it. I think that we basically tend to payout about 40-45% of revenue. Actually, it is not even showing up on our income statement. It is netted out before we even recognize the revenue, 40-45% of revenue goes to the partner institution typically, and that can range to a lo of maybe 35%, so, lets call it 35-45% goes to partners. Obviously, when that partner is Walden which is majority owned by Sylvan, there is a real pick up of benefit for us and our partner does make a profit on the duties that they perform, if they know how to do it right. So, I think that, you know, each student that we do pickup through Walden is worth, let's say, you know, 30-40% more than the student that we would have picked up at Canter.

Great. Thank you.

Thanks. Operator because we were offline for a couple of minutes there we would take one more question and then we will wrap up.

Okay, and that question is going to come from Howard Block with Banc of America. Mr. Block your line is open.

I think they might have not realized we are going to take one more question, so I do apologize for that. Is there anybody else in the queue?

Mr. Block, if you could check you mute button to make sure that you have turned that off. Hearing no response we will move on Fred McCrea with Thomas Weisel Partners.

Hi, Fred.

Maybe the same thing.

And Mr. McCrea if you could make sure your mute button is turned off so we can hear you speak sir.

Any others, otherwise I think we will cut it off operator.

Hello.

Hello.

[Are you here]?

Is that Fred.

Yes.

How are you?

Very well. Thanks.

Great, we just got you in at the end of wire.

Good, quick question on the Spanish School and what we really could see in terms of ramping it up there, in terms of how do we build the [inaudible], and what kind of levers can we push to get kind of get that back on track with the core campus?

Yes, Fred this is Raph Appadoo here, I'll answer the question. Clearly as Dough already said. Europe is a slower, a different environment than U.S. or Latin America. Our job going forward, we've had some slow growth last year, but going forward, we're putting a lot of more emphasis on post graduates and working adults. So, clearly it takes a bit of time to get there, but we have seen some very promising trends that will counterbalance the traditional. There is also another side to Europe. Spain is no different. The people get affected a bit more with very slow economic environment and this is an environment -- this is a continent where people are not used to paying for private education. So it does affect us. We expect growth to come back next year and as I said more importantly we expect to have working adult and post graduate to help us.

The only other thing I'd add to that Fred is that we are -- we had seen a lot of demand in our Latin American students going and studying in Spain and paying for that privilege and I'd say between those students and post graduate that's really going to drive growth in the next year or two. The traditional undergraduate market in Spain is a sort of, I would view it as a low single-digit grower, but we can get some price increases, we can get some single-digit growth in undergraduate and then we can juice that with post graduate and Latin American students, and certainly on a return on investment on IRR basis, we do great in Spain.

Our margins are good.

Do you think in terms of the [core] undergraduate level, is that where is the function of just lots available programs within that geographic area or is it?

No, it is something that we've talked about last year and the previous year, there is a test that people have to take hold [selectividad] at. That regime of [selectividad] when we have time we should talk more about that is coming to an end in 2005 or 2006. When that comes to end we expect to Spain to be -- to have the kind of growth that we like, it's just in the short-term the government has effectively restricted the size of the undergraduate traditional market.

That's great. Thanks so much, gentlemen.

The only other thing I would just add on that is that even when that collective [without issues] barrier is removed, Spain has enough of a negative demographic trend that it will probably never be able to match a lot of the other countries that we have in undergraduate. But their postgraduate business is growing beautifully and again it is a great hub for us to send our Latin American students to. With that, we want to thank everyone for your patience. Another long call, but we hope a lot of good information, and we hope you'll join us for a simple, quick, clean, third quarter call several months from now. Operator, thank you.

That will conclude today's question-and-answer session. The webcast listeners will be able to access the complete archive webcast shortly by visiting the Investor Relations section of Sylvan's website, www.sylvan.net. That does conclude today's Sylvan Learning Systems' second quarter earnings call. Thank you for your participation.