Laureate Education Inc (LAUR) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to this Laureate Education third-quarter 2005 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations and Corporate Communications, Mr. Chris Symanoskie. Please go ahead, sir.

Thank you, Operator. Good morning, everyone, and welcome to Laureate Education's third-quarter 2005 earnings conference call and webcast. Please note that this call may include information that could constitute forward-looking statements made pursuant to the Safe Harbor provisions to 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 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 Company's operations can be materially affected by competition in 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 is detailed from time to time in the Company's filings with the SEC, including but not limited to our most recent Forms 10-K and 10-Q, available for viewing on our website.

This morning, our speakers are Douglas Becker, Chairman and Chief Executive Officer of Laureate Education; Rosemarie Mecca, Executive Vice President and Chief Financial Officer. Also available for questions today are Raph Appadoo, President, and Paula Singer, President of Laureate Online Education.

And now at this time, I would like to turn the call over to Doug Becker. Doug.

Thanks, Chris. We are all very pleased with the strong financial results in this quarter, which is seasonally low and by the very robust new and total student enrollment results that we reported today. The recently-completed intake at our Northern Hemisphere universities really did exceed our expectations, and I look forward to explaining that in a little bit more detail in just a few minutes. This strong enrollment coupled with the industry-leading length of stay that we enjoy and high retention continues to offer us great predictability and visibility into next year and beyond.

We will speak about these exciting and important developments in just a few minutes. But first, I'd like to take this opportunity to introduce Rosemarie Mecca, who is our new Chief Financial Officer and our Executive Vice President. Many of you saw her recent press release in which we announced Rosemarie's appointment to this position. This is a great opportunity for all of you to meet her for the first time. And I know she will have the chance to get out and meet many of you in person.

Rosemarie really is a great example of what we are modeling for in our new executive appointments that we're making throughout the Company. As our Company enjoys so many growth opportunities, the ability to provide systems and discipline is of paramount importance. And in Rosemarie's case, she brings a tremendous background in finance and also in IT and certainly at a very international level.

Those of you who saw the press release on Rosemarie knows that she has a great career and background in a number of finance and general management roles at AlliedSignal, which became Honeywell, and then most recently at Shell Chemicals, where she was the Executive Vice President and CFO and also led IT.

So without any further ado, I would like to introduce Rosemarie Mecca.

Thank you very much, Doug, for the kind introduction. Good day, everyone. I'm very excited to be the new Chief Financial Officer of Laureate Education, and I see tremendous opportunities for this rapidly-growing international Company. Rising demand for higher education in limited supply are a global reality. Laureate is the undisputed leader at addressing this challenge. The strategy of linking local accrediting universities to a broader international network represents a long-term strategic competitive advantage and is an important differentiator in the marketplace. The growing strength of the Walden brand and the online focus of addressing underserved, defensible niche markets should enable Laureate Online Education to continue strong performance.

Additionally, I believe Laureate has the right management approach, attracting new management talent for large multi-national corporations, developing very strong international management teams at all levels. During my first 3 weeks, I have seen first-hand the broad capabilities of this management team. The team is capable of managing a business much larger than exists today, a team that investors and customers alike entrust to deliver and create value, growth and opportunities.

I have witnessed first-hand the efforts of a dedicated and talented staff. Our employees know the mission and can articulate the core values of the organization. This gives me great enthusiasm for the Company's future.

While Laureate is effectively and successfully executing on a clearly-defined strategy, I am sure I will bring additional best practices to this organization. I look forward to meeting all of you in the coming weeks and to reporting on our financial and operational successes in the quarters and years to come.

To that end, I'm pleased to report another strong quarter, which as you know is seasonally quiet. Many of our Laureate schools are out of session in the quarter. We are very encouraged by our latest enrollment intakes, which will be discussed in much greater detail in the coming moments.

But first, we will review the financial results. For the quarter, the Company generated revenues from continuing operations of 199.2 million. This represents a 36% increase over the quarter last year. Year-to-date revenues increased similarly over last year at 37%. This was driven primarily by a year-over-year total enrollment increase of 27% to 38% year to date over prior year. Operating income increased 18% quarter over quarter. Thus, we have reported fully diluted earnings per share from continuing operations at $0.23, in line with our previously-issued guidance of $0.21 to $0.23.

Campus-based revenues grew 38% over last year to 153.4 million. While some of the growth came from acquisitions, we're pleased to report strong organic growth for our existing businesses. Latin American revenues increased 40% to 131.6 million, driven by strong enrollment gains.

In Europe, revenues increased 26% to 21.8 million, driven by enrollment increases. Operating margin in Europe decreased 93 basis points to a -35.1%. This decrease is primarily the result of the acquisition of the IFG business, where the student population like many of our other European institutions, is on summer holiday in the third quarter. Recent enrollments in the European regions support the full-year and the fourth-quarter margin improvement. Lastly, a small non-strategic business in our European region was classified to discontinued operations in the quarter.

Online revenue increased 30% to 45.8 million, driven by very strong enrollment growth. Laureate Online Education reported operating margins of 15.6%, in line with guidance and roughly flat with the same period last year, as Walden University continues to make additional investments in brand.

Our Mexico and Central American region revenue in local currency excluding acquisitions increased 19% year over year. Excluding acquisitions, the Andean Region revenues increased 16%, and the European region revenues increased 2% in local currency year over year.

We've continued to invest in people and in performance-based compensation programs, which have variable components. This has impacted the Q3 G&A. We expect the G&A for the full year to be within guidance. Our tax rate this quarter was approximately 14% lower than our previously-issued guidance of 15 to 17%. If we excluded this effect, our EPS would still have been the $0.23 per share in the quarter. We have had the tax benefits of growing the Latin American businesses, where we have lower tax rates.

Our balance sheet continues to be strong with total cash and marketable securities of approximately 104 million at September 30, 2005, while total corporate debt was approximately 120 million. Pending final reviews for the release in the 10-Q, the current estimated EBITDA is approximately 33 million and our CapEx is approximately 38 million. Approximately 75% of Laureate's CapEx is discretionary, and it is related to capacity expansion and growth projects; the remainder is related to maintenance. We continue to be encouraged by the wide availability of high-return projects, and the Company plans to reinvest a significant amount of its annual EBITDA.

As stated in today's press releases, our detailed fourth-quarter 2005 guidance indicates that we would expect an EPS of $0.89 to $0.94 per diluted share, thus leading us to a full-year EPS of $1.62 to $1.67, guidance that was increased by $0.02 in the first quarter of 2005. This bottom-line growth also represents an increase of 26% or more over full-year 2004 pro forma EPS of $1.28.

In the fourth quarter, we expect to see the benefits of increasing enrollments and our continued investment in brand and our program.

We reiterate our 2006 full-year EPS outlook of $2.00 to $2.10 per share, excluding the impact of stock option expensing. Finally, we believe the full-year impact of stock option expensing under FAS 123R to be between $0.08 to $0.11 per share for fiscal year 2006. This program of stock options is pending formal approval of our Board of Directors. This does not include restrictive stock compensation that is currently expensed in our operating results.

We plan to release our fourth-quarter and year-end 2005 results as our detailed full-year and our first-quarter 2006 guidance on February 16, 2006. Additionally, we have three schedules, UVM analysts to work for January 11 and 12 of 2006. An RSVP form will be made available next week. I'm looking forward to meeting all of our investors during this event in Mexico City.

Now, I will turn the call back to Doug Becker. Doug?

Thanks, Rosemarie. We are really excited to have you on the team. I'm going to start by just commenting on enrollments because that's obviously the biggest news that I think we have in what is otherwise a somewhat quiet quarter for us. We had very strong overall enrollment growth in the campus-based division; new students increased by 22%. That's 29% if you include acquisitions that we've owned for less than a year. Online grew new students at 35%, and the campus-based total grew 17%, which would have been 26% if you include acquisitions that we've owned for less than a year -- online's total growth of 28%. Those are all very, very strong numbers.

I want to spend just a few minutes providing a bit more color on enrollments in each part of the Company because I think there are some areas that might otherwise be misunderstood. Let me start by just commenting on the reporting conventions that we have adopted. And as we have invented and reinvented ourselves over the past few years, we've tried to make a constant set of improvements in the way we present. We had certainly got very good feedback from investors that they like our efforts to be as transparent as possible without providing so much information that nobody can understand.

In the case of enrollment, there are three important changes that have occurred since this time last year. The first is that we have moved towards a census approach, and we did announce this earlier in the year. It used to be that in Q3, we announced the primary intake of the Northern Hemisphere universities and then reiterated the previously-announced primary intake of the Southern Hemisphere's, which had come in the first quarter. Now what we're doing, which I think is clearer and simpler, is simply taking a point in time and giving you a census as best as we can determine as of a particular date. And we're generally picking for the first and third quarter the date of the day before the earnings release because there's so much enrollment activity -- new enrollment activity; we think that gives you the best snapshot.

In the second and fourth quarter, we're still using the end-of-the-quarter date because there really isn't as much that happens between that date and the date of the announcement. So that's the first approach is census. I think it is an improvement. It means it's a little hard for you to compare the results in this release with the results last year, which is why we've in essence calculated the census for the same point in time and done the year-over-year apples-to-apples comparison for you in this press release. And if you have questions about that, we will be happy to answer them.

The second approach has been this movement towards the use of regions for reporting. We are adding more countries and more countries, and we are going to get to the point where we are just providing a wall of numbers to investors and probably too much competitive information. And so, we've gone to the regions -- Latin America, Europe, and online. And over time, if we think it is appropriate to add additional regions, we will certainly do that.

And then the last important convention in the way we report enrollment is acquisitions. And we want everybody to have a very good sense of organic growth, and there is one complexity to this, which I will comment in a minute. But we do break out the new and total enrollments from any institution that's been held for less than a year. And then after a year, we move it into the core-reported numbers for that region. There is some difficulty because sometimes we're moving a university in that was acquired in the middle of a quarter, and sometimes we have some comparability difficulties on a year-over-year basis. But I think we've gotten it pretty good, and I think we've put it together in a way that it is clear and helpful to investors as we know how to do.

Let me go into the specifics of the regions, and I will start with Mexico and Central America. As many of you know, this is one of our growth powerhouses. And the numbers in this release, I think, could lead you to underestimate our performance here. We currently have 21 campuses in Mexico itself plus two in Panama, one in Costa Rica and the two new campuses of UNITEC in Honduras, which we announced today. We reported in the region that new enrollments have increased by 18%, excluding acquisitions for this region. This reflects all new enrollment activity from the primary intake over the summer, which ended in September, as well as the secondary -- and smaller secondary intakes that took place earlier in the year.

Our convention is to report existing and new campuses, by which I mean startups, in that base number and to break out acquisitions as I mentioned in a separate line item in the press release. Only one new startup campus in Torreon, Mexico is contributing to this 18%; whereas last year at this time, we had two new startup campuses, Guadalajara in Saltillo. The reason for this change in only having one new startup campus has to do with the buy-versus-build approach in this region, which I have mentioned before but which I would like to amplify for you now because we're finding it to be very successful.

As many of you know, we've identified 24 major cities in Mexico where we want to be, and we currently only have campuses in 11 of these cities. There are also another 8 or 10 cities elsewhere in adjacent small countries that we would like to serve from the operational hubs that we have built in this region. We've ranked and rated these cities and developed a game plan for entering them. In our plan, we expect to spend a certain amount of money to build each student seat of capacity. In our case, that usually equals around one times annual tuition; that is what it would cost us in a startup to build the ability to serve one student, a student seat of capacity. In Mexico, that is around $4,000, and that's about what our average tuition is; although, the cost to build a seat could be a little bit less or a little bit more than average tuition.

Now we have learned that we can often find in a targeted city a small stand-alone university that would like to be part of Laureate. And we can acquire that university for somewhere between 50 to 80% of what it would have cost us to build a new university campus from scratch but with thousands of students already enrolled, so we can get faster returns on capital at a lower risk. We've now done this twice in Mexico with Hispano Americano in July of '04 and with UNO in January of '05. These universities now operate as part of UVM, our flagship university in Mexico, and are showing absolutely fantastic results.

Because Hispano has been owned for more than a year, it's now moved from the acquisitions line item up to the baseline number. So it is included in the 18% new growth. But UNO is not in the number; although, it would have been had it been a startup campus rather than an acquisition. Had UNO been counted as a startup campus versus an acquisition, new enrollment growth in Mexico/Central America would have been 25% rather than the 18% reported, and total enrollment growth would have been 23% rather than the 16% reported.

So as we tend towards more buys versus builds whenever that is economically preferable, we don't want to be penalized in the way these numbers play out. And we will look for either better ways to report it or just provide you the kind of additional color that we've been providing today.

We are finding many willing sellers who are interested in re-flagging under the UVM brand in Mexico or affiliating with the Laureate brand in other Central American countries. And the risk weighted returns for us are much better than starting a new campus from scratch. So we will always try to buy and re-flag something at each target city before we build. In some cases, we've actually stopped a planned startup campus until we've satisfied ourselves that we can't buy and convert an existing school. This will also be the case in the small countries in the Central American region, where today's announcement of the purchase of a very fine university called UNITEC -- and I should mention that that is not related to the university in Mexico of the same name. UNITEC has two campuses, a strong team and a tremendous reputation and fits this same approach. I'm sure they will enjoy the same fantastic growth that we have seen with Interamericana in Costa Rica and Panama and with Hispano and UNO in Mexico, since they all joined the Laureate network.

I think our approach of breaking out acquisitions serves investors well, but it was intended to help filter out the impact of entering a truly separate new country, such as Brazil or China, and doesn't necessarily serve us well in addressing the buy-versus-build activities that I have referenced. We do have several startup campuses in process in Mexico and other buy-versus-builds in Mexico and Central America, which should open in 2006.

Let me move on to other parts of the business. The Andean Region is comprised of Chile, Peru and Ecuador. As all of you know, Chile has been one of our most successful countries and is by far the largest part of this region. Our success and large market share in Chile has resulted in slowing growth. Earlier this year, we posted new student growth for their primary intake of 11%, which drove total enrollment growth of 16%; that included Chile and Ecuador. Peru had not been owned for a year at that period, and so it was not shown in those numbers.

This quarter, you will see that these numbers have jumped to 28% and 21%. This comes from the effect of adding Peru into the base number, as we've now owned them for more than a year. Peru is growing very fast; it is a great example of how joining the Laureate network has just consistently produced very strong results.

In the case of the total growth, the 21% that you see is a real very apples-to-apples comparison. It is the result of actual census data for UPC in Peru in both periods, so it is very accurate.

In the case of new student growth, 2004 though only includes new students in the third quarter, which is when we acquired UPC, whereas 2005 includes all new enrollments year to date. So in this case, the 28% growth in new students for the Andean Region is probably overstated a bit. We are exactly following our convention of moving acquisitions into the base after 1 year, but it just won't always fit perfectly.

Over the next several years, we expect Chile to grow at market rates of growth, perhaps 6 to 10% per year. But Ecuador and Peru are growing much faster and can bring this number up a bit. So in this case, I think the right new student growth rate for the Andean Region is somewhere in the middle, between the 28% figure we reported now and the 11% that we previously reported for Chile.

While I am on the topic of the Andean Region, I'm very pleased to announce another very important executive employment, that of Jorge Salume (ph). Jorge is one of the founders of the very successful UNAB University, which we have owned in Chile and has been a traffic addition to the Laureate family. And Jorge is a very accomplished and respected business executive in Chile. He's now taken the position of President of our Andean Region. We are very excited to have him take on this responsibility; it's a very important region. With Jorge's help and with the very strong people that we have in place in UNAB, in UDLA and AIEP, we can focus more management attention on the impending opening of Brazil and other markets in Latin America -- so very excited about that.

Moving to Europe, I'm pleased to say that we've seen a nice uptick in new enrollment growth, up 14% excluding acquisitions. This was driven by a very good performance in Spain and in Switzerland. Total enrollment growth of 5% should come up over time, as the effect of new enrollment growth flows through. Between this effect and the growth that we expect over the next several years from our important investments in France, we can see Europe picking up to be a better contributor to growth in revenues and profits over the next several years.

Europe continues to play a very important role in providing content, services and grand effects for our overall Laureate network. We do intend to make some inroads in Southern Europe, where there are large future markets, such as Greece and Turkey, which are not quite ready for us from a regulatory perspective. But we really need to be positioned to take advantage of those markets in the future. You will hear more about that in the near future.

Finally, let me comment on Laureate Online, where we saw very strong growth in new students of 35% and total student growth of 28%. Underneath of this outstanding performance are a number of important factors. There still is a bit of an effect from the phasing out of third-party partners, as we are focused on Walden. While we have not really mentioned this effect very much since 2004, it still does have the effect of dragging growth down until the phase-out is complete. So Walden itself is growing faster than the overall numbers that I just quoted, which has been the case for quite a while.

On the other hand, our education programs for teachers, where we have a very strong market share, are becoming more mature so that would be an offsetting effect. On the other hand, we are seeing the positive impact of strong growth in other vertical markets, such as nursing, health and human services, and the doctoral segment overall. These programs are all very promising. And we are pursuing specialized accreditations in those specific areas that are not held by others in our peer group.

The whole approach for Laureate Online is to build a very high-quality institution in Walden that can rival traditional institutions in the quality of graduate education. These new important accreditations that we are working towards will help us achieve this goal. And I think our quality is demonstrated by the incredibly low cohort default rate, which has recently come out. We are now at 1.2% cohort default rate, which is absolutely unmatched by any one of our peer group.

The most important long-term growth for our online area is going to come from international; this will take years to develop. But it will be a powerhouse franchise, as we combine our expertise in online with our unrivaled knowledge and reach into international markets.

I'd like to make one final comment on business overall. We do continue to see benefits from currency. I am sure many of you follow the continued weakness in the dollar. This has allowed us to invest even more than we had originally planned in some of our key growth initiatives. And I just want to briefly comment on what those initiatives are. This includes new programs for the online division, new enrollment advisers. We operate an enrollment advising center now; it's basically a call center in Phoenix, which has been an investment for us. And enrollment advisers when you first bring them on don't have the same level of productivity until some time has passed and they have become more experienced so that is a cost and an investment.

We've had a number of international online initiatives that we are very excited about. But they are all just costs right now without any offsetting or much offsetting benefit.

In the campus-based areas, key investments include several new campuses that are in the pipeline, which we thought could have hit in '05 but are actually going to hit in '06. We are also investing even more heavily in readying our entry in Brazil and China, which we've talked a lot about. But we now have more people on the ground, and we're spending a lot of money to enter those markets in the right way and with the right momentum, and that is going very well.

We have an investment in a new lower-cost university concept, which we are very excited about. It is something that we will pilot in Mexico, but we think it has broad applications throughout all of Latin America. As we have increased the value of our service and raised our prices, we realize that we vacated an important market segment of less-expensive service, and we think that there is an opportunity there.

We are investing in more people and costs associated with the valuation and market entry planning for new countries. And then, we are making very important continued investment in senior executive management talent. You saw this early in the year when we recruited Dan Nickel from Motorola to be our Global Head of HR; of course the recent hiring of Rosemarie Mecca, having been the CFO of a 14 or $15 billion company to now come to Laureate; and my recent announcement that I just mentioned earlier about Jorge Salume in the Andean Region. So lots of investments in people and we think that's going to pay off handsomely in the future.

This concludes my remarks. And at this point, if we can open up for any questions, Operator.

(OPERATOR INSTRUCTIONS). Mark Marostica, Piper Jaffray.

Congratulations on the quarter. My question relates to the new students, the start growth in Mexico. And I understand your point -- talk about acquired startups versus launching them organically. My question relates to some of the newer markets that you've entered in Mexico and what the reception of the UVM brand looks like in those markets in terms of the growth profile of those campuses compared to the existing estate of campuses in Mexico City. Could you give us a sense for the growth profile differences between the two areas?

I think it's a good question, and it is a complex one. There are some parts of Mexico that are culturally different than other parts of Mexico. And there are also some parts of Mexico that are much less aware of UVM than other parts. So I can't say that it is consistent. There are cities that we've gone into where we picked a city because it was really underserved. They had some awareness of UVM, and we've just had tremendous results. And there are other cities where we've gone in, and initially there's a little bit of a cooler reception because we just do not have a base of awareness to build on.

I cannot say there is anything consistent. I would say that there's no city in Mexico that we do not think we should fail to achieve the market share that we have achieved in our other cities. We think we can get that market share pretty much across the board in any city; it will just take longer. I think in particular, there's a notable difference in expectations and customs in Monterey, which we have not yet opened, and in Guadalajara, and they would be different from what you'd seen in other parts of Mexico. And that may require even a difference in the product and approach that we offer in that particular city. Does that answer your question?

Yes, that does. Thanks. And then relative to your plans for the upcoming year, how many new campuses and new cities do you intend to move into in Mexico?

I think our practice in the past has been to go into each year shooting for two or three. And if we saw the opportunity and we could do a little bit more, we would. And I'll speak really of the region, not just Mexico. Because increasingly, we're really pursuing it in an unified way. And then, it's interesting though because the timing just can't be perfectly predicted. In this case, there are places where we literally have stopped the planned open of new campus from scratch because we've been so successful with these buy-versus-builds. So there are places where we have even bought land to open a new campus. And we are now thinking, maybe we will buy an existing school, re-flag it, and then just sell off the unused land that we had intended to use to purchase. So that has actually caused us to suddenly stop some of our development. And as a result, I think that will slip. This year, we would have opened more new campuses, and that will slip into next year.

So I think the summary of all that is, we probably will still be on track to do at least two to three for next year, but it is possible it could be a little bit more because of this sort of pent-up efforts that we've made this year. And that would be again for the region, not just for Mexico itself.

And then one last question and I'll turn it over -- what did enrollment guidance underpin as the $2.00 and $2.10 EPS guidance for next year?

I think when we gave that out, we gave a pretty broad range. And I think that range was 15 to 20%. I was asking Chris Symanoskie to make sure I'm getting that right. In the past, we've given a tighter enrollment guidance, where we said total enrollment would increase between 18 and 20% that was usually meant to exclude acquisitions. But that was before this whole buy-versus-build thing came in and sort of muddied the water of what is an acquisition. So it certainly excludes major new countries. But if we are going to do more buy-versus-builds, it probably includes a new campus whether de novo or purchased in that sense.

I think going to a wider range of 15 to 20% is a recognition of the fact that as we get bigger and bigger that certainly we don't need to be at 18 or 20% to drive the kind of growth -- revenue growth and margin expansion that we are anticipating. So I think the answer is 15 to 20%.

Matt Litfin, William Blair.

A question on the operating margin in Latin America. That has been flattish on a year-over-year basis the last few quarters. But now, you're expecting that to show an increase in Q4 of about 3 percentage points year over year. Can you explain to us why that is and how much visibility you think you have?

I think the effect on -- and I'm going to ask if any of my colleagues have any clarification on this -- Luis Lopez, who works in that region is with us as is Raph Appadoo. I think the effect there is really not much -- is not limited to Mexico. In the fourth quarter with basically no summer in any part of the world in the fourth quarter, you should see margin expansion in all of our campus-based operations.

So as we continue to grow, in essence our expenses grow and our losses in the summertime grows faster. And then the performance in the quarter, where there is no summer, grows faster. And that's really I think the key to driving margin improvement.

Is there anything else Luis or Raph that you think would drive --

It's also the right thing to expect from August with the new intakes, so as you get more of it in the fourth quarter than you would get elsewhere the --

So new effect from pricing that went into effect in August.

Just one other question if I might -- can you -- I do not know if you have it and tied down the exact penny yet, but can you give us an estimate of where cash from ops was in the quarter?

No, we are not at the point where we can do that. We can tell you, as we did in my remarks, what the EBITDA was, which we can reiterate it to 33 million. We are just not at the point that we are able to do that.

Mark Hughes, SunTrust Robinson Humphrey.

We should just mention that number will be in the Q.

The Hispano Americano acquisition you talked about, the September '04 where you're acquiring these schools at 50 to 80% of the cost of opening, what kind of returns on investments are you seeing in those cases?

I want to make sure that I got the date or that one of us got the date right. Hispano was -- it's July of '04.

I bet you are probably right.

No problem. In the case of the target returns for us, we are generally looking for returns that would be in the mid-30s, which is about what we have expected for new campuses as a whole. And so our highest return investments tend to be expanding existing campuses, where we target returns in the mid-40s and often do much better than that. But a new campus, the goal is return in the mid-30s.

Buy-versus-build can certainly help us get there. It can get there with lower risk and in some cases can allow us to get returns that would be better than in the '30s. But that is kind of our target.

In the Mexican region -- and you may have touched on this earlier; I may just be missing the math -- but the Mexico/Central America total enrollment is up 16%, starts were up 18, and then starts in Mexico last year up 29%. What is dampening that total gross number?

I think the main thing that is dampening it is that last year, we had more new campuses that were counted in the base number because they were de novo startups. And this year, we have instead of doing a de novo startup -- we only did one of those -- we did a purchase of an existing school. And that's why I gave those sort of added-back numbers that I think was -- (multiple speakers) 25% new and 23% total. And I think if you wanted to really compare apples to apples, you would look at those numbers instead.

Trace Urdan, Robert W. Baird.

First question, Doug, I don't want to be a nudge on this, but I am a little confused as to why the enrollments for the ground campuses should be so fluid here into October. Is it not the case that there is a natural semester start date for each of the ground campuses?

When you say fluid, you mean when is the cut-off date?

Yes, I mean like we're now doing the 19th, and before it was September 30th. And we are going to have two quarters, where the date is going to float and two quarters, where it is going to be fixed at the end of the quarter. I am confused as to why the dates should need to float.

I think the reason is that as we are having more -- well first of all, in the case in the first quarter, it is an even more pronounced effect. So we really adopted this convention in the third quarter more to be consistent that when we have a primary intake, we think we should do it the same way. In the first quarter, they are really still in substantial enrollment in Chile. And so there are thousands of students that come in after the quarter end. And we're just trying to give the best, most accurate information. So we went from a quarter-end date to the day before the press release, which is just the freshest information we can provide.

In the other two quarters, there really isn't much of a difference because you don't have a primary intake in the second or fourth quarter anywhere. And so we have gone to quarter end because we think that it just doesn't make much of a difference. We are open to suggestions. There's nothing -- we do a lot of debating about what would be best and most transparent. This is what we think gives the investors the best information.

Let me add something that are great. A lot of the activity, the heavy activity that continues or rather is heavy before the 19th; however, the approach we're taking is we only include as a new student or re-enrolling student as long as they've signed their registration form. So for example in Spain, in Europe especially, the students are now on campus, but they are not -- they are filling out their forms. And until they actually sign, we don't count them. That's why you see this fluidity.

It is an honest question from my standpoint because it just -- and maybe there's something I do not understand -- but don't the classes all started at the same time?

There are people who may be in classes but have not signed their registration form because of certain queues or certain documents they haven't deposited with us. So until the document is fully in our hands and signed, we don't include them.

And this is actually a much bigger and broader practice than you would expect, the number of students that are on campus. And we could count their noses. But since we insist on counting them by registration form, they just haven't finished their paperwork yet.

You still have some first graduate or working adult that come later in the -- and reflect (ph) them towards the end of the cycle.

I apologize for that housekeeping. I wanted to also ask Rosemarie a question. Rosemarie, welcome. I was curious as to know sort of where your comfort level was in terms of coming on-board. This is obviously a very complex operation with lots of assets in lots of different countries, lots of tax liabilities in lots of different countries. Is it your intention to sign off on the Q personally for this current quarter? And have you had an opportunity to sort of go through all of the various individual country balance sheet, if you will and get comfort with where everything stands?

Trace, let me see if I can answer your question, which I think is a good one directly and indirectly. Directly, I will not be signing the Q; that will be done by our Chief Accounting Officer.

That is Ed Cabanas (ph), who is here with us today.

That's Ed Cabanas, who is also here with us today and who is a CPA.

And he can count.

And if I keep going, I will get lost in help here to give you additional comments. Indirectly, I would say that it is quite a challenge in front of me to the kind of rigorous due diligence with the team in terms of the work that I would expect to do with the balance sheets at each of the universities, etc. In my 3 weeks here, the team has been just wonderfully welcoming and have taken me through an immense amount of detail; it has meant long hours for them. But we still have quite a bit to do.

I think it's also important that I do say that I came from a very large set of businesses that had also global operations, had the complexity of many minority shareholders and many joint ventures. So I have some experience doing this. But I will take my time along with the team until I think it is doing an outstanding job of handling to make sure I understand it in the type of detail that you would expect me to so that I can explain to you when I am asked a question.

Okay, fair enough. That is a very reasonable response. Just one more short one and I will let you go on. I wondered if you could give us an update on efforts to offload the loan portfolio in Chile.

I would be happy to do that. So I can cut off your next question, let me see if I can start. Our current loan balance in Chile is about 36.5 million. If we looked at this with currency rate at the end of June, the balance would be closer to 2 million. And the reason I mention that is I think that we have previously talked about trying to keep this at a cap of 35 million. We've begun to sell some of the portions of this balance in the third quarter. I think we're starting to be encouraged by the interest we've seen from several banks and retail institutions. But we are just at this point putting our feet in the water.

I think we have also said to you historically that part of our ability to be successful in doing this has been the passage of time with respect to really having a good history of what those default rates might or might not be. And I think we are starting to enter that phase. And so I think we are comfortable to tell you that we are in line with how we have capped it and that we are starting to execute our plan with respect to the loan balances.

A little bit more color on that, Trace, it's Doug -- which is one is that cap was a 2005 cap. And that number, the amount that we will provide in loans is really meant to be reflective of a sort of proportionate or pro rata to the size of that business. So that business is growing, and that number will go up. The offset to that will be our success in selling off a portion of the portfolio. I've actually been looking into that myself because I really want to make sure that we keep a very close eye on this. And I think we are getting offers that are getting much better but are still not at a level where we think they are reflective of the value of the portfolio.

So our confidence is sufficient that we're just not prepared to sell off portions of the portfolio just for the sake of bringing that balance down. And we are prepared to wait and see if those offers get better and sell them at a point where we think we've gotten the better economic result.

In the long-term, everything I'm seeing encourages me that we will see banks step into the breach. And over time, we will become less and less of a player in the lending business in Chile.

Gary Bisbee, Lehman Brothers.

Congratulations on a good quarter and good enrollments. A couple questions if I could -- first of all, Doug, when I look at the guidance for the fourth quarter -- the $0.05 range there -- I think in the last 3 years, the widest guidance range you ever gave was $0.02. I am wondering if there are any specific areas that are -- you're cautious about that are leading you to give a wide range. Or may this be a sign as a high end of that guidance -- is a bit of a stretch. Wouldn't you need everything to really click to come in?

I think it is fair to say that when you get to the very, very end of the year, you have a much better sense of what's happening. And in some ways, you would be able to go with a lower range or a narrower range. I think in our case, the number itself in absolute terms is very big. And even small fluctuations even in currency for example, you could account for that entire range based on a certain amount of currency fluctuation. We don't expect that so much, but certainly that could be an example of where volatility comes from.

So at this point, I think it's an appropriate range. I think that it would be fair to say that an awful lot has to go right to be able to get to the top or to exceed that range. But it is possible, or we would not have reiterated it. We would have just given you a narrower range if we didn't think that the full range of those $0.05 was possible.

Are you baking in any currency assumption? Or do you at the beginning of each quarter sort of assume where you end in the last quarter and then look at the year-over-year comparison?

We do use currency assumptions when we build a budget in the first place going into a new year. But then obviously as we see what the year offers for us, when we are reiterating guidance, we are doing it based on the present exchange ratios that we are seeing with the currency. So basically when we are giving this guidance, it is based on current exchange rates. And if those rates were to change, it obviously would cause fluctuation within that range.

Latin America, Central America now are two-thirds of revenue. And I know a couple years back, you used to talk about a 50-50 mix between U.S., Europe and then Latin America or other areas. And my sense was you used to talk about that as a risk reduction or at least a balancing move to have better balance. What is your take right now as to how the portfolio is and how you want that to look -- number one. Number two, do you think the business today with the current mix is any more risky than it was 2 years ago when you were more like 50/50? And then lastly, with the talk about entering Brazil and China, is this -- looks like it will skew a fair amount further away from U.S./Europe, and are you comfortable with that?

It's a great question. First of all, I think in the 3 months, Latin America is a bigger percentage because you have Europe and online business are much stronger in the fourth quarter. Even if you look in the 9 months, I think the Latin American revenues are -- they're a little bit more than 50%. It is 338 million out of let's call it approximately 600 million of revenues. So I don't think it is quite as pronounced as two-thirds if you look at it on a full-year basis. I would say in general, our goal 55% for the 9-month period.

And Chris, maybe if you can add in the fourth quarter and see what the effect would be for a full year of what Latin America would be as a percentage. So I don't think we are quite as far off as that one quarter would have you believe.

On the other hand, there's no question that geographic diversification is very important to us. And I think that China is probably -- China and online are probably the biggest forces that will allow us to keep Latin America into around a 50% of the total corporation.

Brazil, on the other hand as you say, will be an offsetting factor on that. So it is a constant battle. I think the most important answer I can give you is that our philosophy is driven by returns. So our management team and our Board, we are not going to just say, let's stop growing in Latin America in order to balance the portfolio. What we will do is we are going to manage our hurdle rates as to where we put our capital. And if Latin America is getting really big, we are going to demand higher returns for us to be willing to have them take a bigger and bigger percentage of the Company.

And if we really want to see more activity in Europe or in the U.S., we would be willing to tweak the hurdle rates on returns down a little bit. All obviously still well in excess of our cost of capital.

So that's I guess is best as I can tell you. It is not an easy thing to manage. But it is certainly our intention to provide a lot of geographic diversification.

One other point I would mention is when we speak about Latin America, Mexico and Chile are still the largest contributors. You've basically got two countries that are accounting for most of that Latin American revenue. And I would say while Brazil will certainly add to the presence of Latin America in our overall numbers, it will diversify us away from having dependence on those two countries. And I think I would say that is probably the most important thing to us -- is to have a very, very nicely diversified basket of countries, basket of regulatory conditions, basket of currencies. And I think we can accomplish that with the plans that we have presented.

And then just two quick cleanup questions -- it looks like G&A and I guess it's G&A if you include the non-cash stock to that -- was 2 million above your guidance from a quarter ago. Just wondering if there is anything material to that? And secondly, if you can tell us what that discontinued item in Europe was or discontinued operation, I would appreciate it. Thanks a lot.

I'll start on the discontinued operations. One of the businesses that we bought in Europe in the last year was in the English language teaching business. It's a very, very small business. And as many of you know, when we divested ourselves of the Wall Street Institute business, we do have an agreement that required us to divest ourselves of anything that was a stand-alone English language training business. So this is a very, very small English language training business that we are divesting in order to comply with the Wall Street Institute non-compete agreement. Does that answer your question on it?

Yes, definitely helps.

On G&A, I think the biggest contributors -- certainly there are important highers -- but the biggest contributor is that we do have a very extensive performance-based compensation program. And as we get thresholds in the third quarter, that would mean that people will earn either restricted stock or further cash compensation. That bumps that number up into third quarter, and I think it probably a bigger effect relatively in the third quarter than in the fourth quarter.

That is correct. I think also we would want to conclude that statement with making sure that you know that we feel comfortable with what we've given in our earlier guidance, which is the $0.25 to $0.26 full-year guidance range for G&A.

Howard Block, Banc of America Securities.

This is Matt actually. I have a quarter about the recruiting center in Phoenix for online. I wonder if you could talk about how that is ramping up and approximately how many enrollment advisers you have now.

Paula?

Yes, be happy to. Last year, a year ago actually in September, we began a pilot there to see if it would be appropriate to start another recruitment center out there. We were looking for experienced recruiters. We know we have a fair amount of them in that particular marketplace. We started with probably about 30 enrollment advisers. They have done very well there. And we have now expanded that operation to about 95 enrollment advisers in Phoenix. They are managed in conjunction with the enrollment advisers here in Baltimore. And they're working out very well.

Are you seeing improvement in conversion rates for online leads now as a result of this? Is it paying off immediately, or is that going to take a little time to kind of ramp up?

Well, we're saying that they are ramping just the way our new enrollment advisers had as we bring them in across the board. So we have historical tracking with expectations for how people will perform in the first 90 days, in the first 6 months, and so on. And I would say that they are tracking right to those expectations.

And are you still discounting nursing or any other online programs to grow the business? I think you mentioned that last quarter.

Yes, I did. Nursing, we did start our -- we launched the nursing program with a substantial discount for two reasons -- that was the first time we were in that particular vertical and we did not have some of the certifications that we thought would be important. We are on our way to obtaining those. And that discount is now phasing out, and there will be no discounts for 2006. And we're very happy with that decision because we've actually been able to within the first year of having nursing out on the marketplace, we have close to 800 -- 785 to be exact -- students in that program. And that's given us a lot of traction and momentum in that particular market.

And I wonder, will the spending increase on enrollment advisers? Or do you think we will be able to see year-to-year improvement in the online margins for your fiscal 2006? It looks like you're guiding improved margin in 4Q, and then I wonder if we can expect that to continue or if there will be heavier investment there if that is all behind us?

I don't think we gave any specific guidance on online margins for next year. But we did say that it was our plan to show real margin improvement in '06 as we get payoff from the investments that we made in '05 in brand and in enrollment advisers. So I think the answer is we've got -- you certainly can expect margin expansion in online next year if it performs the way we expect it to.

That is the plan, not the expectation.

Makes sense, thanks very much. And then just a real quick housekeeping one probably for Rosemarie. Do you have any clear guidance for the effective tax rate for 4Q or possibly 2006 at this point?

I think we would reiterate to you that we're going to be within our full-year guidance, which is the 15 to 17 (multiple speakers) -- that range. And if I would throw a dart, put yourself more towards the lower end of the range than the higher end of the range.

Colin McHugh (ph), Credit Suisse First Boston.

Actually, it is Brandon filling in for Colin. I have got a couple of quick ones. Maybe Paula, if you could give us some color on what you are seeing from two aspects -- one, on kind of the hangover transition from Walden or sorry from Canter into Walden, what the impact on enrollments might have been this quarter?

And secondly, if you could give us a feel for what you are seeing from a cost-per-lead, cost-per-start conversion perspective on some of your more mature I guess kind of more traditional programs versus the new ones. Just trying to get a feel for what the marketing spend might look like as you extend the degree programs in new areas?

Lots of questions in that one question. Let me see if I can tackle this in a way that might be more comprehensive for folks. Let me I think address what you're probably asking me and that is, are you seeing an increase in CPI or are you seeing an increase in CPE?

Let me just say to you that we actually have begun to see for the first time this quarter an increase in CPI. I think many of our peer groups has experienced that too. But for us, it's very much a calculated decision to spend a bit more on the lead generation. Let me explain that.

We are putting in a larger emphasis on our doctoral programs and lead generation for our doctoral programs. We think it is important for us to stay -- we would like to stay about 20% of our student population at the doctoral level. And we are frankly willing to spend a lot more on recruitment for these particular students. Because we have in this doctoral program, higher tuition rates, higher returns -- really a higher quality of student overall.

And we also experienced -- I think what's important to understand we're starting to launch new programs in verticals in which we haven't ever been before. Difference in education, where you are going to have a much lower CPE because you have a lot of credibility in that marketplace -- nursing specifically. That CPE has been a little bit higher as we still learn in that first year what the right mix is in terms of channel and we get our folks up-to-speed in terms of conversion.

But when I look at those very calculated decisions to spend more and to really dig into those areas, I'm pleased to say that that the doctoral programs is right now at about 22% of our student population. And nursing, as I explained earlier, is moving where it needs to for us, and it is a very good decision for us. So we watch that very carefully.

I think Doug mentioned earlier that we do have a trend of having our K-12 teacher degrees, or MSCD, programs slowing a bit. Those are very mature programs. We have thousands and thousands of students in this program. We have a great benefit of having those students retain them at about 90, 95% and graduate in big numbers. And so, you just have the law of large numbers kind of impacting us there with that mature program. The good news is that we have many other programs coming along that are going to make up for kind of that slowing growth in a mature market.

So I think you have to kind of look at all of those. And I would say, what is the CPI, CPE? It really depends on the maturity of the vertical we're dealing with on the kinds of revenue and returns we get and whether it is a new entry or not.

I think I would just net it out by saying, I think that we can expect the cost to acquire students to gradually go up. But we have so many pent-up areas where we can have margin expansion, such as the maturing productivity of enrollment advisers and just the scale impact on the administrative overhead costs that we've got, that I think you will certainly see much more benefit than negative in that calculus. And I don't think we want to break out a specific number for the effect of the phasing out of old, non-Walden partners. But it certainly would be fair to say that Walden grew faster than the numbers we have presented today.

I think we can take two more questions, Operator.

Jeff Silber, Harris Nesbitt.

My questions are mostly housekeeping. Doug, at the beginning of your remarks, I think you had said something about what the impact on enrollment would have been had UNO not been in the same school numbers. Do you just mind repeating those data points?

Sorry, it's actually -- if UNO had been in the same school numbers --

That is what I meant, sorry.

In other words, since we bought instead of built, we think that you might want to look at it both ways. It would have been 25% in new enrollment growth rather than the 18% reported. And total enrollment growth would have been 23% rather than the 16% reported. And if somebody thinks that buying instead of building shouldn't get as much credit, you can pick a number in the middle. I think it's actually -- I can tell you from our perspective, we know what we are willing to invest to build a seat of capacity. And if we can it for less, why wouldn't we?

That is fair. And again, just to help us modeling going forward, when you report your enrollment with your fourth-quarter release I guess in February, what schools will be included in the acquired enrollment line item?

I guess the question is, what will have anniversaried?

Exactly (multiple speakers).

I think ECE and IFG, which are the French acquisitions that we made in the fourth quarter of last year. Is there anything else? (multiple speakers) and Julecet (ph), which is a very small single campus operation in Panama (multiple speakers).

So UNO will still be considered an acquired school?

UNO is January of '05, I believe? So it will anniversary in January.

And you were talking to your last question about the phase-out of some of the old programs in online. When will that phase-out be complete?

We anticipate that the bulk of that will be done by the end of 2006.

I just want to be a little bit clearer on that, which is, the bulk of it is done. But there is still enough to make -- it used to be that the difference in growth rate between Walden and the total reported number was let's say double. Walden was growing a double rate. The difference has shrunk a lot. The drag effect has shrunk a lot. But there's still several partners left that to the extent that we don't find them to be as interested in growth or flexible or supportive of us, we are not interested in continuing with them. And that's where I think -- what was the period you were saying for the rest of that that they (indiscernible) over the next--?

Well, 2006 is where we're hoping to have most of that done. And then, you still have some students that we would have to continue to teach out that had been enrolled during that period.

A much diminished effect.

Jennifer Childe, Bear Stearns.

The acquisition that you announced today, you didn't give us a revenue run rate.

It is very small, and we're not planning to break that out at this point. Approximate revenue for that business on an annual basis would be in the 8 or $9 million revenue range.

Are you seeing any competitors for your acquisitions these days?

I think we're seeing a little bit. In general, most of the universities that we are approaching are still people that have never even thought about selling their business, family-owned, often structured as non-profit with let's say the real estate owned separately. And when we come along, the idea that they would sell at all is something that takes them years to get to the point of even considering as opposed to let's say a full-blown auction where there's just a lot of activity around it.

So we now have situations where somebody that 6 years ago we met for the first time, who never would have considered selling, is now finally at the point where they would consider selling. And the 6 years that we have spent nurturing that relationship means that they wouldn't even really considering talking to anybody else. So I think we are in great shape.

That said, every once in a while, somebody else does crop up and either bid against us on a deal or create more of a competitive environment. And I would say in general unless it is an asset that we feel we really need to have and there aren't very many of those, we usually just move on to work with sellers that understand the value we can offer.

And I guess the last point I would make on that is, our most powerful advantage is that we usually allow the seller to keep an interest in the business. And they can now pick up the phone and call numerous sellers who kept 20%, and their 20% is now worth two or three times what the 80% was worth when they sold it to us. And they're just is not anybody else that could make that track record -- that could make that promise and prove it with a track record.

So I've got to say, I'm feeling better than ever in the competitive advantage that comes in the buying of new businesses for Laureate. I am sure over time that will get harder. But at the moment, we seem to have sort of hit a sweet spot where our efforts from 6 years ago and 5 years ago, even 4 years ago are really flourishing. And we're seeing that in China. We are seeing that in Brazil. We are seeing that all over the world.

Back to the fourth-quarter questions, I just want to expand upon that and maybe you can give us a little bit more in terms of your comfort level that margins will expand. Because looking back to the fourth quarter of last year, your campus-based margins actually contracted 50 basis points. So what is different about this year?

Well, first of all, I think in the fourth quarter of last year, we probably had some of the effect of the French acquisitions. IFG is pretty large and essentially breakeven. And we view it as a -- it is the absolute best platform for working adult education you could have for France. But it's going to take a while for that business to really perform for us and to get margins. So that probably was the biggest impact on margins in the fourth quarter of last year.

Now, it still is in here this year. But at least you're comparing against a quarter that had some of that same impact in it.

Will you have more mature campuses in the fourth quarter of this year versus say the fourth quarter of last year?

We do. And actually, Rich when I saw him, we had a listing of new -- let's see; we've got it here. The new is now -- well, this does not have fourth -- as of right now, we have seven new versus nine in the same period last year. We have 16 developing, which means basically more than 2 years old and less than 20% operating margins versus 11 last year in the same period. And we have 23 totally performing versus 21 in the same period last year. Totally performing for us means 20% operating margins or better irrespective of age. So that is part of what contributed to improving margins.

And one final question -- has your minority interest guidance changed at all for the year?

Minority interest guidance, I don't think there was anything that would have affected that (multiple speakers).

The impact of acquisitions.

Yes. The only thing is that what we have been buying has been very small. So I don't think there's any impact on it.

Thanks a lot.

Thanks to everyone for your time and attention today. And Operator, at this point, I think we can bring the call to a close.

Thank you. That does conclude our call. We do appreciate your participation. At this time, you may disconnect.