Laureate Education Inc (LAUR) 2004 Q1 法說會逐字稿

Good day everyone and welcome to today's Sylvan Learning Systems First Quarter 2004 Earnings Results Conference Call. At this time for opening remarks and introduction I would like to turn the call over to the Manager of Investor Relations Mr. Chris Symanoskie. Please go ahead sir.

Thank you operator. Good morning everyone and welcome to Sylvan Learning Systems First Quarter 2004 Earnings Conference Call and Web Cast. Before I start I would like to remain listeners that both today's press release and this call may include information that could constitute forward-looking statements made pursuance of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements may involve risk and uncertainties. Although the company believes that the expectations reflected in such statements are based upon reasonable assumptions the company's actual results could differ materially form those described in the forward-looking statements.

The following factors might cause such a difference. The company's operations can be materially affected by competition and its target markets and among other factors by overall 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 are 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 Web site.

Our speakers this morning are Doug Becker, Chairman and Chief Executive Officer Sylvan Learning Systems and Sean Creamer Senior Vice President and Chief Financial Officer. Also available for questions today are Raph Appadoo, President Sylvan Learning Systems, Bill Dennis President of Latin America Operation and Paul Singer President of Online Higher Education. Now a this time I would like to turn the call over to Doug Becker. Doug.

Actually Sean is going to start off us today. Sean Creamer, the CFO.

Thanks Doug and welcome. I would like to take some time this morning to provide a quicker review on enrollment growth in total amplify on later, review our results and then talk about a lot of guidance information that we are providing today. As investors are increasingly aware the first quarter is a heavy enrollment period with our big news being the primary intake of Chile in business. Since this time last year we nearly tripled our total enrollments in the Chilean region from about 18,000 to about 53,000. On an organic basis and this is assumes that we owned all the Chilean universities for both period.

New enrollment grew 32% from roughly to 20,600 from about 15,600 and total enrollments grew out 30%. So we are obviously very pleased with that. We have also included in the release for the first time a current student census data for all our campus-based business, which may viewers have requested in the past. Total campus based enrollments were about a 113,000 at the end of the first quarter compared with roughly 93,000 for the same period last year which will take 22% increase if we add to that the total 18,000 online enrollments at this time. If you will be correct in solving the enrollment number roughly a 131,000 that's an increase of roughly 20% and includes students related to our recent acquisition of the KIT business.

For the quarter the company posted revenues from continuing opts of a 132 million representing a 39% increase over the same quarter last year and what is normally seasonally weak quarter due to our Chilean enrollment seasonality our operating income was 3.6 million versus a loss of 1.7 million in the same quarter last year. We achieved diluted EPS of 5 cents in the quarter. Turning to some divisional detail, campus based business, revenues grew to 39% over last year to 107 million. While some of this growth came from acquisitions, we are happy to report continued strong organic growth from our existing business. Specifically if you exclude the impact of the acquisitions and for this purpose its primarily UNAB and IF which were acquired in June of 2003 and Costa Rica and Panama which we acquired in November 2003. Revenues still grew 25% on a quarter over quarter basis. This organic revenue growth was driven by a combination of filed enrollment growth as well as pricing increases.

EBIT growth and margin trends require a little bit of an explanation as a result of the UNAB and IF acquisition. You will recall that the first quarter is seasonally weak for Chile as our institutions are out of session for this summer resets, while the raw numbers from Campus-based suggest a slight improvement in EBIT from 8.8 million to 9.4 million and a decrease in EBIT margin from a 11.3% to 8.8%, when you are comparing to the first quarter 2003, the underlying EBIT growth actually was quite strong on an organic basis. If you exclude the impact of UNAB, the Campus-based EBIT actually grew 44% and EBIT margins expanded from 11.3% to 13% in the quarter.

In addition, in the first quarter we were required to present the activity of our India initiative in discontinued operations following our decision to terminate the program there.

For the quarter, we reported roughly $1.1 million of expenses associated with the shut down of India. In the first quarter 2000, comparable number for India was around 200,000 and obviously, we are pleased with this growth, again driven by a combination of environment growth in pricing, Campus-maturation and acquisition. We will continue to open new Campuses and expand our existing ones and we successfully integrate our new acquisitions.

Turning to online revenues, the online division grew 41% over the same quarter last year to a total of 25 million, operating profit was around 200,000 versus a loss of 2.5 million for the same time of last year and the profit improvement was largely due to the higher flows from the margin from Albin whose involvement grew roughly 69% total and as well as reduced losses from NTU for the quarter.

As I mentioned, the 69% increase in total Walden students, as expected, this growth was largely offset by the anticipated 36% decrease in the non-Walden campus students. Remember, in 2003, Candid discontinued the third party University partnerships in favor of emphasizing, almost strategic partners including Walden. So in the short term, the overall OHT enrollment growth is negatively impacted. As we have been mentioning for sometime now that we believe that we are at the trop now and we should see accelerating growth through to balance of the year.

Despite some significant foreign exchange movements over the past year and currency, we continue to see only negligible impact to our bottom line as our natural hedge provides diversification and continued to effectively balance our currency portfolio in US dollar terms. As I noted earlier Campus-based revenues rough 39% in US dollars. On balance, currency was positive for the quarter contributing roughly 6.3 million to revenues versus the first quarter last year.

If you exclude the impact of currency for the quarter, the revenue increase was 31%, FX has contributed roughly 700,000 in the EBIT for approximately 1 half of 1% of our consolidated revenues with actual bottom line impact being even smaller as you just out for the relative minority interest and income tax impacts.

Mexico revenues were up 22% in US dollars and 24% in local currency, UBLA's revenue were up 71% in US dollars and 41% in local currency. Now, this analysis for UBLA excluded Ecuador, which is a US dollar currency and was not known consolidated revenues in the first quarter of 2003. But it is worth noting that while a strong Chilean Piso helped the US dollar revenues for the quarter, given that we loose money in the first quarter since they are out of session, a strong Chilean Piso actually had a negative impact on our EBIT for the quarter and is contemplated and considered in the 700,000 number I mentioned earlier.

UVM's revenues in Spain were up 18% in US dollars and about 1% in local currency, hospitality revenues were up 9% in US dollars and were roughly flat in local currency. So, while, again, it's not a perfect hedge, our diversified portfolios of currency is continued to prove effective in sheltering up from significant volatility based on currency movements.

Some quick balance sheet information, we end the quarter remaining in a very strong cash position, was about a 115 million in cash in mortgage securities and total corporate that of approximately 93 million.

As I mentioned on our last call, earlier this year, we received indications that the buyer of our K12 business were rich in re-financing our debt and paying us back early the 55 million, the 12% coupon seller notes that we took back as partial consideration for the sale in K12 assets. It now looks likely this detainment will impact the quarter, occur most likely during the second quarter and potentially more eminently while we clearly predicated on their satisfactory completion, the re-financing. It's worth noting that this would result in an increase to our available cash of approximately 60 million, which includes sales volume for the crude interest today in given the high number of high return projects in our pipeline, we are confident in our ability to re-deploy this capital effectively and efficiently should we get repaid.

I would like to cover quickly some guidance information. As we noted in the release, we are introducing our guidance for the second quarter 2004, as well as our full year 2005 guidance and upwardly revising our 2004 full year guidance to reflect our performance in the quarter.

For the second quarter, we anticipate total revenues of 145 to 160 million and general administrative expenses for the quarter is expected to be around $5 million. We anticipate diluted earnings per share of 30 to 32 cents for the quarter and our full year projection for diluted shares outstanding is 47.7 million. Breaking down into a little bit more division, or detail in the second quarter guidance, our Campus-based division anticipates total revenues between 115 and 125 million for the quarter with operating margins between 18 and 19%. Online Higher Ed. anticipates revenues between 30 and 35 million with operating margins between 14% and 15%.

Again, just to reiterate on seasonality, and consistent with the past years, we would expect the second and fourth quarters to remain our strongest quarters in 2004. We will generate approximately 55% of our revenue in those two quarters but that will account for roughly 70% of our operating income for the year. So, the second and fourth quarters remain very, very critical and we feel very comfortable coming out of this enrollment in Chile and our ability to meet those numbers.

We are also increasing our full year EPS guidance by 2 cents to a new range of $1.24 to $1.26 to reflect the results from first quarter. As noted in the press release, the quarter benefited relative to our guidance while the required reporting of our India operations in discontinued operations.

And for 2005, we are introducing guides for EPS from continuing of $60 to a $65 per share an increase of approximately 30% from our upward revise of 2004 guidance. Driving this growth are anticipated increases in total enrollment of 15% to 20% and weighted average price increase of around 5%. Now all of these figures are based on the assumption of $55 million sale on that I mentioned. That means outstanding throughout 2004, 2004 and 2005 and then on matures in 2009 and as I mentioned earlier carries to 12% coupon on as you may recalled of the values of note and that was reported on our books at a discount reflecting applied interest and in finance for closure, towards the third party we would require as a return on a similarly subordinated piece of paper from a comfortable without quality credit. Which in fact ended up being, close to the 18% versus the 12% base coupon.

On the GAAP that this discount is required to be credit back into the income over the termed loan. To the extent we pay back prior maturity and even remaining discount is recorded as interest income in the period of re payment. So, to the extent we re pay early we will have a one time acceleration of our future years interest income on that note into the quarter where it is re paid.

At the end of the year, the note was on our books at roughly $45 million, so the implied numbers somewhere between 10, $12 million at the incremental interest income that we would recognize in the year of re payment, depending on the date we actually received the re payment. So, bear in mind that what, once we're, re paid we will no longer be accruing any interest on the node

We are confident, that we can re deploy the capital by the end of the year, in all replace the last interest income in 2005, clearly the interest income will report on the re payment will more than cover as that offset in a fact, result in an, in some accretion to our 124 to 126 guidance for 2004. Again we are confident, we can re deploy the capital by the end of the year. This could include, re paying certain higher into higher and shrink debt that we currently we have or increasing our ownership stakes in some of our existing universities, where we currently have the right to do so.

So, with that I will turn it over to, Doug Becker for some amplification on comments on some other items.

Thanks very much Sean. We are just thrilled with our financial performance and the enrollment performance in the company and it just keeps coming together so much along the lines of what we has helped in dreams for when we decided to re-position the company as a purely pro secondary litigation company, this idea of a simple formula of focusing on multi year enrollments and opening a couple of new capital this year and retaining our existing students and all of that, plus solid price increases, producing this extremely predictable income strength and as we said down and work through our 2005 guidance, the level of confidence and enthusiasm inside the company was just fantastic for me and really gave -- certainly gave me the essence that we have made such a great decision in focussing on this business.

Let me give you little bit more information about what is going on in the campus based business and then I would comment a bit on the, on line businesses as well, they are really a both, bit trending in very, very stable direction.

In captive business of course the big losers Chile enrollments as their primarily raw materials in the first quarter all of over other universities primarily, in the third quarter and that's we will announce it. But in Chile, of course we not have two institutions and a third ULBA which is our original university has always been such as fast grow, for us as expected, it was the fastest growing component of Chilean business in terms of total environment, UNAB which is the university, we acquired last year and aims at a higher income level customer and there is a little bit more of selective in its admissions requirement.

UNAB did extremely well, because they have historically had a lower growth rate, their new enrollments were very strong and the total enrollments were at or above we hoped for and then we have a technical occasional training business for the Chile as well. So all three business units matter exceeded plan, the weight at ULBA grew was by opening well first by growing sense of the existing campuses but they did open a new campus that was just open for the first time for this environment period in a account called (inaudible) they also introduced some new programs, continue to emphasize the working adult market place which is still a small but increasingly important component for them, actually about 15% of their new students at ULBA came from that new working adult segment which is really just not in pursued by anyone with any vigor in that market in the past and they also introduced some very innovative student financing programs, almost all of which pertained to third party financing organizations, we don't do much financing ourselves but these prove to be very attractive students and they are good number students avail themselves others.

So that's how Oula has continued its growth. We are now focused on lot on integration, this is a new University to Sylvan and we really feel that we were just welcomed with open arms by the management team of that University they really bring extraordinary academic credibility and really good business judgment for the table may have done a great job. They have introduced a whole series of new programs to emphasize the teaching of English.

They have introduced a new vetienary medicine school to compliment their strength in health sciences and their medical school which is quite good and they also introduced some new nutrition programs that were linked to the medical school as well and again, I think they did exceedingly well. So, we are very happy about that. That's the Chile picture. In terms of Mexico, we announced a few months ago that we are opening a new campus in Guadalajara that's a very important city in Mexico the second largest city in Mexico after Mexico city we will be opening at least one other campus this year in times of the September school year, we have selected aside and probably another may be coming as well, but we have announced the locations to these sites publicly yes.

So that continues to move exactly where we hope and of course all eyes internally are turning to our Mexico enrollments which will begin to accumulate throughout the summary that's pivotal and very strong group for us working on that in a number of analyst visited our Mexico University, I know they shared our enthusiasm for the strength of the team and normally the opportunity I think, probably, the inmost interesting statistics that came out of the visit to our Mexico University UVM, UVM is historically focussed only on the Mexico city area and if we had the same market share outside of Mexico city as we had in Mexico city we will have about 4 times the current numbers students that we have which are today in the 43,000 plus range. So, literally a 180 or 190,000 students, if we can just replicate that market share, I'm confident that can happen, the question is how many years will they take to accomplish and we got a great pain to make that happen.

Looking forward in the rest of Latin America, we are looking for continued growth through cautious occasional entry into neighboring countries that will allow us to leverage the management and centralized resources that we have in our big business units in Mexico and Chile. Examples of that would be Chile is opening in management of a very successful campus in Keto, Ecuador and the acquisition last year of the University of Inter-Americana in Panama and Costa Rica which we mange as part of our Mexico region and we can continue to do that, we can do it to our low cost acquisitions that will allow us to really manage our risks so that we are not taking on too much risk or more risk than if necessary.

I mentioned that working adult is something that is surprisingly strong, it's new to the region, they really earn a lot of Universities often working it at our programs in Latin America for that matter outside of the US at all but not only we have done exceptionally well in Chile, but we have been piloting these problems in Mexico and while it is still early, I think we are very pleased with the results and could be a big business there as well.

Moving the Europe, the working adult train continues our major business in Europe, of course we have our Spain University UEM and we also have a hospitality business, which I will talk about in a moment. In Spain, we are making an announcement, we have an acquisition, a small but I think strategic acquisition of an organization called IEDE, which is a really well regarded business school in Madrid. And Iede IEDE, it's a small school about 200 students with a roughly 20,000 to 25,000 euros provision level. It is offering one year MBA programs and it will really polish and donnish our image and give us a lead offering to add to the offerings of our UEM university in Madrid. Iede was purchased directly by Sylvan, not by our Spanish university although they will grow and work together and is 100% owned by Sylvan, approximately 4 million euros in purchase price revenues in 3.5 to 4 million-euro range.

We are continuing to look for more sites in Spain, we are also looking for more schools to acquire in France. We wanted to continue to build upon the presence in mass that we have in those two countries and we are also looking at some new countries as well, the new entrance into the European Union in eastern and Southern Europe continue to attract our interest however, I think as all of our industries are here to stay, our guidance does not require us to make acquisitions anywhere at any time. '04 or '05, I almost have to say even '06 given the growth opportunity available to us in the existing countries where we operate.

Asia, as obviously Asia has not been a big part of our financial picture but it continues to preoccupy us as a great opportunity in the future. We were disappointed to have to pull in our owns in India. I am convinced that one day we will be in India doing business profitably and supporting and serving students in that market. We are really waiting for more favorable regulatory environments. China, on the other hand has introduced tremendous reforms as part of their accession to the World Trade Organization and that has really made China much more attractive. Our low risk way of entering China was to open a branch of our Leros Hotel Management from Switzerland in China. Now Leros and Jing-Jang are hotel schools, due get a very large percentage of their students, say almost half of the students from Asian markets and so open the school in China, we know that the demand is there and we know that many students would like to go to a school that can afford to fly and live in Switzerland.

Our partner in China and many people know having a good partner is critical to success in China is a group call Jing-Jang. The school, which is in Shanghai, is a partnership with Jin Jang and Jing Jang is the largest hotel headed company in China. They have a 128 hotels in 20 provinces, we are very proud to be working with them as well.

And lastly on Campus-based, I will comment on hospitality. I don't view hospitality for us as a European business. It currently has its campus activity in Switzerland and one campus in Spain in Madeia but it is really a worldwide business, they recruit their students from all over the world, from 80 countries around the world and we need to increasingly brand hotel management, tourism, and hospitality high end culinary offerings of that nature to the rest of the world. We did it to Spain with Madeia, we are going to do it in Mexico, we are doing it in China and I think it is a pivotal opportunity for us just to bring it to the United States as well. Many of you know we are very connected to the hotel management industry, we are lucky enough to have the President of Four Seasons on our board as an example and our market research would tell us that there is a great opportunity for a strong high reputation school in the US, in a high and hospitality tourism mix.

Now, moving to online hotel, excuse me, few online higher education, our online group, we had I think very important success in this group as well. The story for investors in OHE has been watching a low total in students, total student enrollment growth rate over the past two or three quarters and we announced and I think in the second quarter of last year, that we were planning to discontinue some partners that we felt, were not adding value to the relationships in favor of emphasizing our abilities to defend students to revolve and a few other strategic partners.

And that brought our total environment growth in OHE down to single digit in the third quarter and the fourth quarter and now again in the first quarter. But what we you haven't seen in the past, was such strong growth in new student enrollment and with a roughly 35% increase in new student enrollment in OHE, clearly that is the precursor to a increase in total enrollments and we mentioned my role is that by the end of this year, the OHE group will have the highest total enrollment growth rate of any operating unit inside of Sylvan. And that, as it should be that sort of friction less on line business really lends itself to that kind of growth rate. And I think that this 35% new enrollment growth augurs well for us being on track to accomplish that.

A few other important elements of news in OHE, probably the most important thing was our decision to move OHE into the international market and we did that through the acquisition of an Amsterdam based company called KIT. KIT, we bought for approximately $9.5 million with a contingent earn out based on performance. They have with us 1700 students, they offer an MBA and a M.Sc in IT, in Information technology Arena. These are two-year programs at about 10,000 euros of tuition. So it is a very, very important high, high revenue and very high quality program.

Now, the product that KIT has been offering is the British degree. This is very important because as you think about the needs of the world, we are proving that in Mexico, people may be interested in American degrees, but the majority people want a Mexican degree and same in Spain and France and Chile and all the other places we operating.

We find great interest and demand for the British degrees around the world. But, they are really is not today, on the credit in British University of the Sylvan, could acquire or any body acquire, they are in essence all public or large establish non-profit institutions in Britain. And so, the KIT people is very, very important partnership with the great university, University of Liverpool in England, Liverpool is what is called a Russel group University which means it is a very well respected high academic standard University in UK and KIT is having great relationship with them.

Well Liverpool brings their creditability and the foundation, but has really allowed KIT to have the flexibility in the way programs are implemented to make them successful. KIT found a ready audience for online degrees in UK, in the Netherlands, in Germany, surprisingly in Canada and even in the US to some extent. But they actually have students from 80 countries represented and KIT and the Amsterdam office will become the European and probably International marketing head quarters for all our OHE activities and products and we are excited about that and very excited about the relationship with the University of Liverpool. Canter, as expected completed the phase-out of partners that we sort to move out and really have done a great job of marketing the Walden programs.

I want to emphasize, seeing Walden grow so fast and Walden, and Canter shrink in its enrollment. It's not because Canter is doing poorly and Walden is doing well. A lot of Walden's growth comes from students that are recruited for them by Canter and so these organizations are working throughout together as partners.

Walden is also growing extremely well in it's own non-Canter programs. NTU, I think it's still very new and young and I am not a big part of our earnings picture this year and frankly, we are very conservative in how we projected for the next year as well. We ended last year on a break-even run rate, that business could continue to have some modest losses and we are just again, we are not going to push it any faster than necessary. We want to make sure that we build a great footings and foundations for that business before we open it up for high growth as I am sure will be the case.

Lastly on the OAG (ph) group, as we position them to be the highest growth rate division in Sylvan, we want to add to their management as well. Policing there has made two very important extremely senior higher to the management team, a CFO who comes from very extremely impressive background in working with some large banking organizations and telecommunications organizations. Meanwhile we hire and also a very important higher, a former Disney Executive Mean Like cruise (ph) will be joining us to head up the product management function which I would sort of say in essence the Chief Marketing Officer role for the online higher education group.

Interestingly, now both Larry and Leslie lived and worked in Latin America, and they both speaks Spanish, Leslie also speaks Portuguese and I think it's indicative of the international foundation that we are building in our company and the desire to build management that can add value not only in their division, in online higher education but also their ability to support Campus-based activity in increasingly I think you will see synergies between Campus-based and the online activities well.

And than my final comment on the, I am going to just comment briefly on guidance and then open it up to questions and appreciate your patience. I think the key massage in guidance is visibility and under graduate degree in Chile is a five-year program. Some students take six years to complete it. And we know that in Madrid, our programs are typically 5years and in Mexico, our programs can be as long as 6 years because some students start with us in the 10th or 11th grade of high school. So we have such a lengthy stay with students that gives this great visibility and that's why we can calculate based on Chilean enrollment and our minor secondary intake elsewhere in the first quarter and come to a high degree of accuracy in reaffirming our guidance for '04 and a very reasonably degree of visibility in '05 as well.

I think an important point because QA is such a high growth part of our business, the rest of the universities do not need to grow as fast as Chile for us to achieve our 18% target growth rate, 18% to 20% in total enrollment and as an example based on current new enrollments that we have now and current total enrollments, if our third quarter enrollments, new enrollments grow only at 12%, we will achieve the 18% total growth rate in a moment that we are expecting. So 12% increase in new enrollments in the third quarter gives us 18% increase in total enrollments, which is in essence the bottom end of our target range. And obviously we would like to think we can do a lot better than 12%. But it's important to understand how the math works, that assumes stable attrition and attrition frankly has been stable in our business as well.

Mix, mix is an interesting point, I think it's clear that our high growth in Latin America means that we have more and more students paying a lower average to vision then lets say US but what I think people might miss the picture on mix is what's happening in the US as online and KIT will become high growth rate businesses for us. They will actually begin the move to mix picture back towards higher situation levels and I think, mix is important to follow but certainly not they an execrable trend towards low retrusion our numbers. And I think I just conclude by saying we really have found and are completely devoted to the simple formula we want to recruit new students.

We do that by opening a couple of new campuses each year who want to introduce new programs that meet the need to the market often by transplanting them from other activities or institutions that we have around the world and we want to keep in satisfied our current students which I think we are doing a very good job of and then lastly and at our option occasionally and to a new country at the right time and the right place. And that's the formula is worth well for us and that surely will continue to service well for years to come and with that operator, we can open up for questions please.

Thank you sir. [OPERATOR INSTRUCTIONS]. We will take our first question from Mark Marostica of Piper Jaffray.

Thank you. Congratulations on the quarter, first question is related to operating margins in the online unit. You are guiding 40 to 50% this quarter and would you comment on NTU, I'm wondering is that a line added that we should expect to see expand sequentially throughout the year and if you can comment on peak margins as you see it some going forward for online, it will be helpful as well.

Yeah, in terms of the clearly looking for sequential improvement at OAT based primarily on the fact that last year, NTU lost more money and as we have indicated in our results for the first quarter, there was an improvement, there is some seasonality to end to I think, we ended the year at about a break even run rate but is clearly seasonality to that numbers and so there was a loss in the first quarter - it was just sequentially less than the last quarter and I think, that trend will continue and as a result you should see improvements in the margin as we advance each quarter throughout this year.

I guess my comment, Mark would be I think NTU is I think we are doing all the right things and I think it is going to be an important part of our long term gross picture but I would say it's certainly not something that will count in run to break out of the box in any material way in the next-certainly this year and probably not next year and I would like to position ourselves to be pleasantly surprised in that regard.

And then falling up in terms of peak margins for online, how do you see margins progressing at a peak level?

Yeah, I mean, and again, the timing of the peak margins is something we are going to continue to monitor but we feel like long term we should be in a 20 to 25% margin range business and I think, 2005 was very really so to see.

Great. And then I want to pose one last question on the third party loan or third party financing comment that you have mentioned in Chile being very innovative is that something that you are transplanting in other countries, do you see that as an opportunity?

We are able to describe that it is that in each countries in a different stage of consumer lending acceptance, from Mexico there isn't a lot of consumer lending and borrowing and so frankly, we would have the greatest impact by introducing something there but it's the hardest to do. Chile there is - it's a pretty sophisticated environment and so they are certainly open to for there has not been a lot of product out there. So I would say there was some, was not that hard to do and it had some nice impact on us. And then in Spain as an example it's fairly readily available and people are certainly able to access and there is not as much an opportunity for us to innovate there.

I would say the biggest thing we could pull off would be a unique approach to student financing in Mexico and increasingly in other countries like Mexico where there is not much of an option and none of our guidance or expectations are based on doing that because its at the very binary thing, but if we could pull that off it will be big deal. And I want to emphasis that they are always doing, I talked to people about that, we will not get into the business of lending money ourselves but we will be prepared to take small calculated risks if we need to in order to get other lenders to come into the market and that's something we really have not have to do much of now but are opened to do if that would make a difference.

OK thank you I will turn it over.

Thank you.

And we will go next to Bob Greg of Leg Mason.

Good morning everybody. One quick question here is just to make sure I am clear on this. The 10 to 12 million in essentially accelerated interest income that would be excluded from your current guidance for both the second quarter and the current year. Correct.

That's right. That's absolutely right. The current guidance assumes that no remains outstanding.

I just wanted to make sure that was the case. Also to with the availability of an additional 60 million cash I know you guys don't indicate what your capital expenditures are going to be. But might that not result in an increase over what you had started the year with in terms of the budget and capital expenditure figure.

I don't think that we certainly didn't build our plans around having that extra capital or didn't really even feel that it was needed. I think our goal will be to replace the lost interest income from that and we could really do that in three ways. We could pay down some of our higher interest debts in low tax rate countries, we could increase our ownership stakes in countries where we have the right to do say or we could make acquisitions beyond what we might internally expect to do. Because our guidance never contemplates acquisitions. We are confident we could replace the income in one of the first two ways that I mentioned which I think that are entirely at our own digression and not predicated assumption or unknowable third party events.

And not necessarily the highest returns, which is some of the other alternatives, clearly it's their acquisitions out there and that are more compelling from the return perspective, they clearly would be the priority.

OK that's helpful

and Bob just a clarification obviously as we head in to the beginning of each year from a Capex stand point we are counting on the universities to be delivery cash flow sufficient to fund their own Capex. So one that we are relying on corporate cash balances sport their own organic growth plans. So the infusion of additional cash doesn't get your mark in the door of binary universities because they know that there were quiet to come up with their own cash for that.

OK that's very helpful. Results in Chile were certainly tremendous, is it possible they indicate where you stand right now in terms of capacity utilization in Chile.

That's a good question. I know what we generally have to deal with in our growing business is that when we hit around 85% utilization we start adding capacity as we don't want to be in a position of not being you would have take on students and so I would say we have probably always run pretty tightly in sort of upper 70s or lower 80s in ULBA (ph) operation because they were always growing and then it was time to bring on more supply and - the moments were be higher than that and then you open up new classrooms and suddenly you rebound to begin. I know there is important capacity at UNAB and then we bought UNAB we leased the properties, beautiful properties with excellent capacity in the, so there has not been as much capital spending or a need for capital spending on the UNAB side. Taylor, (ph) is there anything do you want to add on that?

No, I will say, may be one other thing and that is that of course, as you say when we get to 85% on a capacity model is like 85%, we kick it in on our projections reflect that. During the course of this year, we will be building at Oodla, because we are expanding as we go, in other words we never go in for the large up front investment and build for a lot of capacity and rate to fill it up. We are trying to stay ahead one year at a time.

So we do have a substantial amount of CAPEX that will come from internally generated cash flow at ULBA this year, in preparing ourselves for next March when they have their primary enrollment.

But substantial CAPEX certainly nothing greater than what we have done in previous years. The other thing I would just add is one of the most exciting aspects of the working adult program in ULBA is that they can typically can be fulfilled in evening hours where we have excess capacity in existing buildings. So to the extent of that becomes a greater and greater part of the mix, we may get a little bit less average tuition per students but we will-it we will be richly repaid for that by using existing facilities and I would certainly get that our CAPEX needs in Oodla actually will diminish overtime because of that factor.

Are the working adults a really sizable percentage of the total?

The only thing we have given so far was 15% new students this year and last year, we gave the number, worked out to be in the sort of little more than 10%.

Great, thanks a lot guys.

Thanks and that was just for Oodla by the way. UNAB in Chile does not have a working adult program yet, we actually think that's a great opportunity.

Right thanks.

Thank you.

And we will go next to Fred McCrea of Thomas Weisel Partners

Good morning everybody.

Hi Fred.

Given the - when you look at the Indian market which always has so much promise over the longer term and probably been compounded now at the problems on outsourcing, what are the key things that you guys really need to have in that market in order to think about a re-entry, is it 3, 5 or 7 years from now?

Well, the biggest issue in India is that the complete disconnect between federal policy and Sate policy. So you have state - for example, called Chattisgarh which had past lost that, really liberalized the rules around creating private Universities which is so forward thinking and appropriate, given the need for their country and there are something like a 100 private Universities that have been licenses to open and operate in Chattisgarh. And yet the federal government in essence is making all of that illegal and making it illegal in lots of ways, they have a Supreme Court decision that said that it's illegal to operate for profit in higher education in India, they have a Supreme Court decision that says that prices will be set locally by local magisterial panels.

We are just not interested in that, in that environment and what you will find is there will be some very smart operators in that country that will do very well by in essence bending the rule and we are not in a position even to do that. They got a speed, if the waiter win that you got to bend the rules, then they are going to win and we are not going to play.

So, that's fine, if the Indian government for example has rule that everybody in India will tell you all of them who never enforced those rules, we still cant go in. So we are waiting I think the biggest thing I want o see is you cant have a lack of ability to control you on pricing and you cant have a sort of flat admission on operating in full profit. The only exception in the way we might choose to go in that market will be to some sort of management contract similar to lets say what the hotel industry does where you say that someone else, OK you are the non profit, you own the assets, but you can hire us to run it and we do actually have a few people in India that we kept we think are extraordinarily talented and if an opportunity of that nature arose and someone want at Delhi university to be admitted in to the Sylvan family and have access to our program offering and our student exchange processing like that, that would be the way to crack the market and meet the needs of regulatory complaints that I described.

Right Thanks So much.

Thank you.

And we are going next to Trace Urdan of Think Equity partners.

hey good morning. I want to hear a lot more about shanghai. Can you describe what sort of capacity you will be building initially when you think it will launch what do you think you can charge there and maybe a little bit more about the terms of the partnership.

Well I am going to give to give you a center child and then graph may be you can add just a few more. Basically I would start by saying its small not expected to be a big part of our picture this year or next. Obviously we get this a lottery ticket that could grow up faster than we think and I think that and it will cost us money this year. It's interesting when share people will say Sylvan is relived of the losses associated with India, but there are losses associated with this start of as well. But we did take those losses in when last year we set our guidance. Because we knew we indented to open this year in china with that sort of preamble Raph, you want to just give a few facts about China.

Yes Trace, this is a joint venture with Jing-Jang the largest hotel group in China. Our facilities there will be on the site of the university of Shanghai, so we are not having to put up huge amounts of Capex to get going, we will have obviously a quantile payments and the arrangements with the university would be building by extending the existing buildings to accommodate this and as and when we want to grow we can expand and additional leasing arrangements. So we are in a good position we don't believe shanghai would be the only place though that we would have - we expect to be able to open one in Beijing, but most of the time we would be expanding for rented facilities as and when we need them so we have the leasing arrangement we have a joint venture arrangement with Jing-Jang but they will ask us to manage it and they would refer students to us for their own employees plus their own food, their own distribution, their own visibility in the country, so a lot of good things that come from that arrangement.

Thirdly it is an additional advantage to us which is that this school becomes a former feeder for our - school in Switzerland in the sense that after a year or two these student would move forward into Switzerland so there is lot of advantages for both sides and we expect that to be the entry point but not the end.

And Raph could you just comment on the credential the students get is that a Chinese diploma.

They get a local diploma 2-year diploma and they will also get some recognition from our Swiss school.

but if they want a bachelors degree they have to come to Switzerland.

Exactly:

and the price point for the local diploma roughly?

About $3500 a year to 4000.

and how does that compare that with other options they might be looking at?

Locally the options could be a bit less. But they wont get the sort of internationally oriented training that we would be giving them. Students will come out with some amount of English all they will have even better English so it depends on the own capability but it compares, it's a sort of not fully international price but at the same time not a domestic price level

OK and when you think the first start would be?

And we have, we have two types of in takes this year. We will be starting in the summer; we have employees of Jinjan (ph) and then in September we will get student who leave high school this year. So a b-to-b component and then the b to c component later.

OK. Great. And just one little short more additional question. The Third party financing that seems to have started work for you guys and should had you anticipate being able to offer something similar in Mexico or any other campus in the fall?

Well we are working on it straight, but we just don't know and in Chile these are really Chilean institutions doing the lending. But more being able to take their success and sit down with institutions in Mexico as an example of Costa Rica, Panama, Ecuador and say why don't you do the same thing.

I have got it. OK. Thanks. Let me move on.

And we will take our next question from Gary Besty of Lehman Bros

Raph Appadoo Hi Gary

Hi and how are you doing? Congratulations on a good quarter.

Thank you

I just want to, a question, you just you are paying a small earn out on this, on the International you know online high rate acquisition and in reading the recent 10-K, there was some talk about in due to share holders require companies and your balance sheet and unless they get 35 million as of December 31st but that in the foot note, it seems to grow to be substantial in more than that, I guess they wanted this sort of big picture question is in general. How do you think about earn outs when you do acquisitions and in specific to what you have done today, can you give me any essence, just you know what the likely future liability is going to be, you know how much bigger than the 35 million on the balance sheet and then how do you right that up every time? What the GAAP you know, always to, how you decide the 35 million is the right number to be on the balance sheet today?

Gary, what was on the balance sheet as due to share holders is actually are even reflected in our purchase price. It's the primary amount of that 35 is roughly 25 million, is they seller note we took back when we acquired UNAB and that purchase price is already been booked, that purchased price. The earn outs that you are talking about are not booked unless and until they are quantifiable and the reason that they are not quantifiable and really only talking about Chilean, EDLA in particular, that is based on an average result in the year 2004 and 2005 and calculated based on the ammo table comfortable to the multiple we give the original deal. But only on the growth, from the time we did the deal so that what because it is not worked on the balance sheet, I thought it was important to disclose what that number would be.

But I wasn't going to be, able to speculate on '04 and '05 are going to be. So the 40 million roughly numbers that shows up in the disclosure is estimated based on, if the 2003 result remain constant which is out in the 2004 and 2005. So in terms of how, is ultimately accounted for the subsequent pay out on any in and out is booked as additional purchase price as part of a step transaction and some few already gone through the exercise of allocating a risk initial purchase price through the tangible and identifiable and tangible assets. Any supplemental payments are booked at goodwill. Now, if the reference you made to the KIT deal is little different because that's cash is a $10 million potential based on certain performance but in no event cannot go higher than 10 million.

Gary, let me just add a little more color to that. So just to be clear, in the $35 million, on the balance sheet is selling notes not earn outs and they relate to UNAB we own a 100% of UNAB 80% of UNAB. But there is not earn out associated with UNAB at all. And then in UBLA (ph) we own 80% on UBLA and there is a an earn out associated with UBLA, there is no earn out associated with any of our other campus state institutions of any materiality that under work, so anything that and then the only other earn out is the one that we announce from KIT and again we capped it. I think our view is earn out's are really meant to be used when there is no other way to break the gap between the seller expectation and what we think it's there current value. We grow in earn outs, I think richly experienced in how they can, can work and for example we almost all we average financial performance over at least 2 years, so in ULAB it is the average of '04 and '05 EBIT.

So this is very, very hard for any body, this sort of a just pull in one years revenues into the target year of push expenses out of the target year and then we ever possible we capped and the KIT, one of the great example if they make that earn out all of us and all of you I think we will be applauding because that was, being just a great deal, as well. So that's the thinking on UNAB

Yes OK. That's great. And just one other clean up on I guess for Sean, could you give us any color of how we might try to forecast, this minority interest line, it seems the balance were analyzed and yet can be fairly material. So what the bottom line earnings are?

Yeah I mean I think the difficulty with that is we come up, sort of matrix to guide people on a full year basis, clearly there is seasonality at each of the University and that seasonality has an impact on our minority interest on a quarterly basis and the detail we might give to help people forecasted on their own require 4 hour training session, it should be very complicated and unfortunately, probably as too much details I will tell you the what that looks to be an normal sort of year over year comparison for the first quarter of this year versus the first quarter of last year. If you compare the minority interests to the campus state, EBIT is really and entirely related to the UNAB acquisition. It wasn't in the last quarter, but we, we estimate roughly on a full year basis, it's going to be about 20%,

20% of the EBIT?

I think its 22 % or 23%of the EBIT of the Campus based business. That's a short cut, but frankly if the short cut that works on the full year, the seasonality that I frankly just haven't come out with the better way to give you guys help without the aggravation of an extended tutorial.

For your full year model, I think your full year model is going to be very solid at 22 or 23% for campus

OK. Great, thanks a lot

Thank you.

And we will go next to Mark Hughes of Front Trust Robinson company

Thank you very much. The population growth guidance for '05 was 15 to 20%. Does that include both on line with campus enrollment in either way could you give us separate expectations for those two businesses?

It does include those, its obviously fairly wide range, I think what we are trying to do, we are in a bit of new character, Mark, in putting our guidance this is the second year we have done it, all putting our guidance so much further in advance than any of appears. That we just want to put out, guidance at the minimum of information and then add to that information as we have ability and reason to do so. So I think that's obviously, it's a wide range, it's a very conservative number and I think at this point we prefer to not to provide I think we are all ready providing more information then any body else when we put out our '05 calendar guidance in April, '04.

So, and the other important factor is guidance for 2005 obviously, the second primary intake in 2004 is going to have a bearing on what our 2005 year over year, so we have visibility but there is a certain amount of caution on our part and in evaluating and making sure everything comes out at the end of the year, the way we expected. So 15 to 20%, we feel very comfortable and it is, you look at the 15 to 20 % enrollment and in the roughly 5% waited average increase. It get you into the revenue range, I think we feel pretty comfortable at.

Right exactly. And then In terms of guidance for this year, the 18% to 20%, is the Chilean growth consistent with your original expectation, such that you talk about 12% number elsewhere to get to 18, is that as conservative more or less conservative than the original guidance?

What I would say, first of all, given that we also gave - I should have amplified that earlier, we also gave for the first time ever, I can think of - probably for the first time in - since the investor day may be, and that was the - 113,026 total campus space at the end of the first quarter and to the extent that that's running at 22% over previous year, clearly needing 18% for the year, feels like a pretty conservative number. So our point was 12% new would get to you to 18%, but we are obviously already running over 18% in total growth. I want to also tell you, your question about Chile. Chile came in almost exactly where we hope that we set our aggressive targets at them, probably a good reason for doing so and they came in just as we expected.

OK Thank you very much.

Thank you. Operator, I think we can take one more question.

Thank you Sir. We will take our final question today form Brandon Dobell of Credit Suisse First Boston.

Hi Brandon.

Hi, one last time here. Just one question on China, that I am not sure. I am not sure (inaudible) you talked about. Is the program that you guys going to be offering in conjunction with the university, is that a similar type of program that others still get in other schools across the country or is it something different and then how frequent is this that students would go to look at two year program and then go to a different 2 or 4 year program to get a Bachelors or an Advanced degree in hospitality.

I would start by saying I am not worried about any other foreign institution offering hotel management program in China. I think we are the first.

Yes, we are the first.

And to have a partnership, a site based with this - it is Shanghai Nomai university. I think it's the first. And to have them as the partner and Jing-Jang as a partner, I think adds a lot of prestige and so I would say I am guessing the students to graduate with a 2 year diploma will probably have more prestige than people that might come our of our 4 year bachelors degree from some other Chinese university that doesn't have the cache or program expertise in hotel management, tourism and hospitality. So my guess is, I don't think we expect a huge percentage of those students to go to Switzerland but it wont need to be a huge percent to possibly increase our census and facility utilization in Switzerland. Would you agree with that Raph?

Yes, exactly Doug, the two year program we will offering in Shanghai is modeled on - it's the first 2 years of our 4 year program, so its done in a way to facilitate transfer for those who want it. But the 2-year program in China will allow people to move into a hotel, get a job immediately, perhaps a supervisor. You wont get a job on day one as a manager but clearly as a supervisor, so it is an internationally oriented program. It's the same program we offer in Switzerland. So it's very attractive for the Chinese market.

And we started our Spanish operation in the same way and now you can either go to Switzerland or actually stay in Spain in Marbeia get you full Bachelors degree. So at some point, we may choose to let increase the program and let students get a Bachelors degree in china too but right now that is not part of the offering.

OK, I appreciate it, thanks.

Thank you and with that, I want to thank everyone for your patience for our call today and your interest in Sylvan.

Right now that's not part of the offering.

OK, I appreciate it thanks.

Thank you. And with that we want to thank everyone for your patience for our call today and your interest in Sylvan.

This does conclude today's conference call. Thank you for you participation. You may disconnect at this time.