Laureate Education Inc (LAUR) 2005 Q4 法說會逐字稿

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

Thanks, Matt. Good morning, everyone and welcome to Laureate Education's year end conference call. Please note that a synchronous slide presentation is available for webcast participants and all presentation materials for today's call are available for download in the "Investor Relations" section of our website. Today's call may include information that could constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements may involve risks and uncertainties.

Although the Company believes that the expectations reflected in such 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 may 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 Securities & Exchange Commission, including, but not limited to, our most recent forms 10-K and 10-Q, also available for viewing on our website.

Today 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 of Laureate Education; and Paula Singer, President of Laureate Online; and Bill Dennis, President of Latin American operations. Now at this time I'd like to turn the call over to Doug Becker.

Thanks very much. Again, we do have a slide presentation for those of you that would like to follow along. And our first slide is a listing of the highlights in 2005, which we really feel was a spectacular year. It's been a great experience for all of us to see the Company's strategy and execution converge to deliver these really outstanding results. We ended the year with 217,000 students. That was a 41% increase in total campus-based enrollment, and a 27% increase in total online enrollment. Our Latin America region continues to deliver beautiful results for us. New enrollment growth of 25%, that was 30% including acquisitions, total enrollment growth of 17%. That's 43% including acquisitions.

We were very excited about our entry into Brazil after almost seven years of preparation and careful consideration when we announced our 51% acquisition of the University called Anhembi Morumbi, and we are very pleased about the progress we're making there. We did enter Honduras with a terrific University there, called UNITECH. We opened a new campus in Torreon, Mexico and we acquired, through our build versus buy program, a fantastic campus in Hermosillo, Mexico, as well. So lots of activity in the Latin American region.

In Europe, we had new enrollment of 36% and total enrollment growth of 6%. Those are actually very strong numbers for what has historically been a much sleepier region for us. In fact, total enrollment growth in Europe was 29% if we include acquisitions. Our main entry in Europe this year was a small but strategically very important country, and that was the acquisition of Cypress College in Cypress, which we see as a key to future entry into the Turkish and Greek markets that interest us a great deal. In the online arena, we had new enrollment growth of 37%, and as I mentioned earlier, 27% in total enrollment growth.

Walden University led the way with a 41% growth in enrollment there, and that was offset by continued declines in some of the programs that we've been discontinuing with partners other than Walden. In terms of network and management initiatives on the next slide, we had a number of very successful network initiatives, and this is really where we're building competitive advantage, so as an example, we've now launched duel degree programs throughout Latin America where students can get a degree that's recognized in their home country and also get a degree, a second degree that would either be a U.S. or a Spanish program, and we think that's getting a lot of interest from students.

We converted and upgraded a number of our tourism and hospitality programs to include the programs from our Swiss Hospitality school called Glion, and we had lots of study abroad activities, over 750 students who actually left their home country to go study at another Laureate university. Now, that is a very expensive proposition for many of our students, and for every student that does it, there are many, many students that read about it and they're very excited about it, so we're pleased. That brings to over 2,000 the number of students so far that have studied abroad within the network.

We also had some great successes in best practices, where we now have so many very strong schools around the world that we can pick strengths in areas like marketing or operations or technology and propagate that throughout the network. One of the main focus points for me this year was making sure that we are building our bench strength. We have a plan, a very creative plan, to build a very big company and a global company, and we know that that's going to require the strongest management team of anybody in the industry, and that's what we are working hard to build. This year that included the appointment of a new board member, Isabel Aguilera. Isabel actually was just recently made the President of the Spain and Portugal region for Google, and before that she was the Chief Operating Officer for a large hotel chain in Europe.

We have our new CFO, Rosemarie Mecca, who you'll hear from in a few minutes, Dan Nickel, I know a number of you have met, who joined us to oversee the human resources functions. Dan had prior to this been the No. 2 HR Executive in Motorola globally, and then we did appoint a President of our Andean Region, this would be Chile, Peru and Ecuador. This is somebody who has already worked for us and with us, Jorge Selume, was one of the founders of UNAB, our very fine university in Chile that's been a great success for us, and Jorge's had a tremendously distinguished business career in Chile and and we're lucky that he's agreed to increase his duties within the Company.

And you'll hear more in 2006 about other important steps we're taking to build such a strong management team as we grow our business around the world. We also wanted to make sure that we were improving the quality and reputation of our universities and not just the size and financial results, and we have lots of great metrics that prove that this has been the case. In the case of Walden, for example, we have this just phenomenally low cohort default rate of 1.2%, that's the official rate. We believe that rate is actually coming down.

In UVM, we had a number of great accomplishments, including being recognized for now having the second highest number of program level accreditations in addition to the university-wide or institutional accreditation, and we now have 23 out of 34 of our programs accredited by independent agencies and only one other university in that country has more than that. We've had lots of other reputational successes, moving to the next page for example, UVM, continuing with UVM, was ranked for the second time within the top 10 best universities in their listing, which encompasses almost 900 universities in Mexico and the feelings of employers about those universities.

In France, we have a very fine engineering school, ECE, which was ranked by a magazine within the top 10 graduate engineering schools. We have seen a lot of success in the new countries that we've entered, Brazil with Anhembi Morumbi, I mentioned UNITECH in Honduras, and Cypress College in Cypress, these are all very, very high quality institutions. Other things that have taken place in the campus-based division, we have had the working adult programs continue in their growth. Now for us this includes both working adult undergraduate programs, which tend to be very, very new offerings in the countries that we serve, as well as graduate education programs, masters and doctoral programs and when you add all of those students up, it's now about 16% of total campus-based enrollment and growing fast, so we're excited about that.

This is an area in which we are the innovator, we're the first mover in most markets, and this program, these programs for working adults should produce very good results for us financially because we're leveraging existing investments in facilities and staff and program content. And most importantly, we think that the advent of working adult programs and enthusiasm for working adult programs really is the precursor for online initiatives all over the world, and we think that's where some of our strongest competitive advantage will come into play in the years to come. Of course, all of these new successes come on top of very, very strong organic growth in the campus-based division, excluding acquisitions, we grew our revenues by 19% last year.

In our online division, we also had lots of great successes. I mentioned the low cohort default rate. We made lots of investments, as we did in management and in campus-based, lots of investments in the online area. We opened a new center for enrollment advisors in Phoenix, which has been successful for us. We made a lot of investments to build the Walden brand, and we're really looking to build it as the top choice for students looking for a graduate education, and also to really identify the Walden brand with the helping professions, areas like teaching and nursing and psychology and health and human services.

Along those lines, we're pursuing some very important professional accreditations and we're very committed to meeting the standards necessary to achieve those. They include CCNE for nursing and CEPH for public health, and CACREP in the counseling and education area. We launched four important new programs in EDD for teachers with a specialization in administration, and MSN, this is a master's in nursing. It's an RN to MSN track, and a master's degree in mental health counseling, and a bachelor's degree in early childhood education.

The next slide really shows the progress that we've made. In the year 2000, the network, the Laureate Network, which was then the Sylvan International Universities Network, was really just getting started. We were in five countries with five institutions. We had 15 campuses and about 54,000 students. As the next slide shows, we have made a tremendous amount of progress in the past five years. Now in 15 countries with 24 different institutions, 51 campuses, and a very extensive online presence, and, of course, over 217,000 students. So we're very, very proud of this and very focused on the implications for continuing competitive advantage in everything we do.

Now, the results in building the global network have driven the financial results as the next slide would show. You can see that as you would expect in a financial model like ours, enrollment growth drives even faster revenue growth because we're able to raise prices in addition to growing enrollment. Now mix over time can make-- can help or hurt that, but certainly in the past five years the combination of a relatively stable mix and strong price increases have allowed us to grow revenues at 37%, on top of a 32% enrollment growth rate.

Operating income, as we've taken advantage of leverage, the leverage of campuses that are, that start out as new and then fill up and overhead, overhead at the country level and at the corporate international headquarters level drives operating income for that five-year period up 46%, and that's, I think, a great testament to the model, and I'll talk a little bit about where that will take us going forward. The characteristics of our business, the things that we spend a lot of time thinking about in order to ensure that we can take full advantage of this really six or seven-year running head start that we have over everybody else, first has been to invest heavily in the global network in our brand.

As of the past couple years, we've been building that Laureate name, and while most of our universities are known by their strong local brand, in many of our countries now people have heard about Laureate and they're asking about the advantages that come from being with the Laureate University as opposed to anything else in the local market. We do seek accreditation or licensure at the highest level in every market that we operate in, and when new levels of accreditation, voluntary or government-sponsored, become available, you'll always find us to be among the first seeking to obtain that accreditation.

Great example of that would be this year when we earned accreditation for UNAB in Chile, and in Chile they always had a licensure method, but didn't have a pure review-driven accreditation program, and when they did, they opened it up for all the universities to consider, and only three private universities were granted accreditation in the first round, and UNAB was one of them and was by far the youngest of all the universities to attain that, and I think that's emblematic of the way we're approaching quality and accreditation.

Diversification continues to be very important to us. We are very enthusiastic about each of the countries that we serve, but we're even more enthusiastic about delivering to investors a broad and diversified range of products and services so that no matter what happens in any part of the world, we will continue to be strong and to have the advantage everywhere we operate.

First mover continues to be very important to us. Brazil was a great example. We literally spent seven years looking at the market, planning market entry, meeting government officials and talking to dozens and dozens of private universities, and when we made our selection to partner with Anhembi Morumbi you can be sure it was the most measured and carefully considered decision, and that's just not an advantage that somebody else could ever recreate in less than the five, six, or seven years that it took us to accomplish that, and you could really extrapolate that out to every new country we enter.

We're now, I think, in our fifth year of having had fulltime employees in China, where we continue even to this day to have hardly any revenues, but we're very excited about plans for China. I'll talk more about that in just a minute. I talked about management team, and I'll always talk about management team because in our business there's nothing more important than making sure that we have the strength and the execution that comes from a very, very seasoned and very, very experienced executive team all over the world, and I just couldn't be prouder of the team or more grateful to my Board for allowing me to never have to settle for second best in the type of people that we go out and hire, and that impacts the Company.

We've hired a lot of people that come from much bigger companies and in the process of investing in that cost, we think it's one of the best returns on investment that we could ever have. And of course, one of the things that has always been the case for Laureate, we really enjoy this industry-leading retention. We keep our students for the longest period of time because the majority of our students are enrolled in undergraduate bachelor's degree programs that typically take four or five years. Most of our students arrive with no transfer credit at all, and we have very low attrition rates compared to anybody else in the industry, and we know that it's not just how many students you get, but it's how long you keep them, and we want to measure our success, increasingly you'll see us incenting managements all over the world to make sure that we recruit students, that we graduate those students, and that those students then go on to refer to their friends, and if we can do those three things, we're going to continue our success for many years to come.

Moving forward, as we think about 2006, we have a lot of expansion of capacity in some important markets. We're building out a new campus that we will consolidate some other older campuses into in Paris. We are expanding our campus in Lima dramatically, based on the results that we've seen, just spectacular results that our Peru team at UPC has delivered. We're building a new campus in Ecuador. We'll actually be vacating our old campus and moving into a new campus. We think that that's well deserved, again, strong results. That entire campus funded out of cash flow from that local operation.

And then of course, continued capacity build in Mexico and Central America, where we have such strong enrollment growth where it's necessary. I think it's a fair statement that we'll be expanding capacity almost everywhere, but these are the primary areas.

In terms of new campuses, we do expect at least three to four new campuses as has become our practice. We will always look first to see if we can buy something and reflag it before we build from scratch, but in many cases, we just can't, or the economics still warrant a DeNovo build. We have two brand new campuses under construction right now in Mexico and more to come.

China continues to take a lot of focus for us, and we think it's an investment that's worthy. I remember this time last year, I actually did this earnings call from China, which is actually a pretty hard way to do an earnings call, Raph Appadoo was with me. I'm glad to be doing this call from Baltimore, but I can tell you, we might as well have been in China because we've all been spending a lot of time mapping our entry, and all of the indicators in terms of regulatory and political welcome and the relationships that we've built with key institutions that we'd like to have join us, that's all going very well.

We're going to be be very careful to not predict an actual official date as to when we think we'll have a major acquisition in China because it's just too hard to predict, but we certainly set out for ourselves a goal that we should have a partnership to announce of some magnitude, and we'd like to see that happen this year. It may be that we are in a position to do this, but it actually materializes next year, and that's okay, too.

We want to launch new network programs. This will be the expansion of study abroad programs and more of these double-degree programs. Double-degree programs are very difficult for competitors to emulate because it requires a deep understanding of the regulatory limitations on both sides of the two countries from which the degrees are emanating, and the more of these we can build, I think it's a competitive fortress that will serve us well for many years to come. We also want to increase programs with shared curriculum. For example, the Glion curriculum coming into Mexico resulted in hospitality education becoming one of our fastest growing specific lines in Mexico.

Now, Brazil will probably be the biggest beneficiary of the new network launches in 2006. As many of you know, we bought into Brazil when they were already very far along in their new enrollment campaign, so we really didn't have much of a chance to influence 2006 enrollments, but as we get to late 2006, the introduction of lots of new network programs should position us for very, very strong enrollments that will help us in 2007.

And then lastly, we will continue to introduce online initiatives all over the world because in our five-year plan, five years from now online needs to be one of our fastest growers outside of the United States and not just in it.

Moving now to the next page, our 2006 financial outlook, we're expecting between $1.08 billion and $1.15 billion of revenue in 2006. That would be somewhere between 23% and 31% in growth over 2005. Driving that, 14% to 16% growth in campus-based total enrollment. That is excluding acquisitions, but it does expect that we will open a couple of new campuses either buy versus build, and underlying that 14% to 16% number, the growth leader in campus-based will be Mexico/Central America. After that, South America, which is how we will increasingly refer to Andean and Brazil, and Europe should both continue to show good growth this year, but certainly the growth leader will be Mexico/Central America.

As Brazil really comes up to speed going into 2007, I think we would expect South America, that combination of Brazil and the Andean Region to probably pull ahead and be the fastest specific region within campus-based.

Online we're expecting about 25% total enrollment growth this year, and that's, I think we feel very good about the results that we've seen, but we also realize that the online environment is the one where there is the greatest competition, and like everyone, we're watching very carefully to see where the strength in leads is coming from and what the cost of leads are, and we want to be cautious to not overpay for leads.

So we think that's a good growth rate where we can build a great business without stretching ourselves too much. And then we would expect in the 4% to 5% price improvement range on a blended basis. All of that should drive margin improvement of somewhere between 60 to 120 basis points. I would say based on our propensity for making investments, especially in the management team, that it's probably not likely that we would obtain the high end of that margin range, but it could certainly happen and it's early in the year. Certainly, we're committed to margin expansion this year.

Online should be a star in margin expansion. As we had promised last year, we made a lot of investments in 2005 to position us for margin expansion in 2006. 2006 we expect at least 200 basis points of margin improvement, which should be the beginning of a steady march towards very, very nice margins in Online. All that should drive earnings per share in the $2.05 to $2.15 range from what we know today, as best we can tell. That's a 23% to 30% increase over 2005. We did raise our guidance by a nickel from the $2 to $2.10.

We've put out our guidance in April of last year, and as you can imagine, an awful lot has happened since then, but in general, there's been more good than bad, and that's allowed us to raise the guidance, and you'll hear more about that from Rosemarie in just a minute. We do want to point out the FAS 123R charges, we're expecting that to be $0.10 to $0.12, a couple pennies more than we thought this time last year, and that will now this year flow into our income statements and Rosemarie will talk more about that.

I wanted to mention that our 2007 outlook, we're going to announce with our July second quarter earnings release. Now, in the past we've done a separate release in the April timeframe on forward guidance, and I think it's phenomenal that we did that and that we met and exceeded all of our expectations. As we've become a bigger and bigger Company, I think that we want to make sure that we continue to drive the highest quality with those outlooks that we provide, with the guidance that we provide, and we think that in July we can deliver even higher quality guidance than doing it in April. It's still a tremendous testament to how much visibility we have in our business that we can do that.

And then the last slide before I turn things over to Rosemarie, I want to put everything into context. We are not building a business for 2006 earnings or 2005 earnings. The management team and the Board are firmly focused on what we're building out into the longterm. We have a 2010 vision. The Company should be in excess of $2 billion of revenue. That would be essentially double our current '06 revenue level. Operating margins of 20%. That is essentially 100 basis points per year of growth in margin between '05 and 2010. That should drive a $5 per share EPS number. That's up 25% compounded growth number driven by 18% to 20% revenue driven by 13% to 15% enrollment, and this is the battle plan.

We know we've got the opportunities to do it. The important thing is to do it in a way that builds for strength and reliability and most importantly that in 2010 we don't want to do a victory dance and then have exhausted all of our growth potential going forward. So to me, the greatest opportunity will deliver to you these results, and in 2010 have the Company positioned for continued earnings growth rate of at least a 15% to 20% level. We would expect in 2010 that our highest growers will be Asia campuses, the international activities of our online group and working adult activities worldwide.

So that's really the vision for the Company, and I think you can see that '05 actual and '06 guided results would indicate that we think we're very much on track. As I said several times today, to accomplish this we need a strong team. We made great additions in 2005 to our senior team, and you'll see more in 2006. One of the pillars of building the strongest management team was going out and bringing in the absolute strongest and most experienced finance executive that we could find to come in as our Chief Financial Officer, and you all met on the last conference call, Rosemarie Mecca.

Many of you know Rosemarie joined us after a phenomenal career at Shell Chemical, a $15 billion company where she served as their CFO and also their Chief Information Officer. That IT skillset is going to be very valuable to us as we build systems as part of our operating plans all over the world.

Before that, Rosemarie had a phenomenal background in her experiences at Allied Signal in Honeywell, and I know that Rosemarie is building a strong team and really strengthening our finance team from what we consider to be already a very good group of people to something that can truly be world class. So on that note, Rosemarie, I'd like to turn the call over to you.

Thank you, Doug, and good morning, everyone. I am pleased to report a solid fourth quarter and full year 2005 results, both of which are in line with the Company-issued financial outlook. To reiterate, 2005 was a very successful year for the Company. We had strong enrollment increases and great performance from our existing campuses. We were able to open multiple new campuses and add strategic acquisitions in Brazil, Cypress, and Honduras. Having had the chance to travel around the world to see our businesses, I have been very impressed with the strength of our operations in management throughout the Company.

Today, you will hear about some of the steps I am taking in my new role to strengthen the already high quality of the Company's financial reportings. This includes the adoption of a new revenue recognition method which I will talk about at some length, and which I believe is a substantial improvement. I have other plans to improve the finance processes, systems and organizations which you will hear about over time. For the fourth quarter, we reported revenues of $277.8 million, an increase of 32% over the prior year and operating income increase of 47% to $70.5 million. Margins improved 260 basis points from 22.8% to 25.4%. Earnings were $0.91 per diluted share, an increase of 47% over the prior year's pro forma earnings of $0.62 per diluted share. This is the 12th consecutive quarter of meeting or exceeding earnings guidance since the restructuring of Sylvan, as we were then known, into a pure play post secondary Company in 2003.

This consistency is the result of our disciplined approach to growing and operating the business, the quality of products we offer, and the students we teach. Laureate continues to enjoy industry-leading student retention and program lengths of stay up to six years. As many of our campuses and online businesses continue to mature, operating margins will continue to expand. Also contributing to margin expansion is network development and the leverage we get as the Company introduces products across the network.

The successes in 2005 were based on a disciplined balance of execution and investment in growth. In 2005, we have invested an additional management capability, sales and marketing, program development, infrastructure, and continue to build physical capacity. The returns on some of these investments may take several years to materialize. We continue to benefit from the returns on investments made in prior years. Turning now to the full year.

Overall, the Company reported earnings of $1.65 per diluted share at the mid-point of the Company's increased financial outlook. This represents EPS growth of 29% over the 2004 pro forma earnings of $1.28 per share. Underpinning the excellent performance in 2005 was strong enrollment growth of 39%, margin expansion of 80 basis points from 14.1% to 14.9%, and a continued strength in the Latin American economies of Mexico and Chile.

For the full year, revenue increased 35% to $875.4 million. Revenue for the campus-based and online businesses grew at similar rates, 35% and 36%, respectively. Organic revenue grew by 22%. Operating income increased 42% to $130.4 million. In Latin America, margins increased 80 basis points from 23.7 to 24.5 as a result of continued leverage and campus maturation. In Europe, margins declined from 15.9% to 12.8% due to ongoing and additional investment in France Management and the lower margins in the ISG working adult business.

Weighted average price improvement for the year for the campus-based businesses was 3.9% on a composite inflation rate of 3.1%. Pricing was somewhat impacted by the introduction of additional working adult programs, which are priced lower than the traditional programs. Laureate Online showed impressive growth in revenue, 36% in operating profit, 34% increase while investing in the brand.

New student enrollment for the 12 months ending December 31, 2005 was up 37%. Online achieved its stated goal of maintaining 15% margins while growing revenues 36% to $184.4 million. Average price improvement was approximately 4% in the Online business. The new programs launched in 2005, and those launched in prior years will fuel the continued growth of this business.

Some additional comments on other matters of interest. The impact of foreign currency exchange on full-year results was $4 million. Earnings benefited from the timing, as well as the strengthening of the Mexican and Chilean peso. Consistent with our stated strategy, this gave us the opportunity during 2005 for additional investments in capacity, brand, and new programs. As for non-operating items, excluding the impact of the early repayment of the K-12 seller note, and the gain on the investment of the UEM land, interest income and other income increased $3.7 million. This was offset by a $2.8 million increase in interest expense, the majority of which was related to acquisitions, a combination of local debt, and interest on deferred payment obligations to the sellers. Continuing on, the effective tax rate for the year was 15.1%, in line with the guidance of 15% to 17%, but we should expect that this tax rate will decline in 2006.

During the second quarter of 2005, the Company recorded a loss of $3.1 million on the disposal of the WSI business, Wall Street Institute business. The Company is restating that loss to be $10.5 million. The adjustment relates to a reversal of a deferred tax asset for this business. This is reflected in our results for the 12 months ending December 31, 2005. As a result of this change, the Company is evaluating the impact of our assessment of internal controls relating to tax processes over non-core operations.

It is possible that the evaluation of our internal controls processes for how we handle taxes for this non-core operation will result in a material weakness designation by our auditors, specifically related to one-time tax adjustments. I have many strong professionals on the finance team at Laureate, but it's clear that we need to add some people to ensure that we keep up with the growth of the Company. I'm very confident that I can strengthen the team and the processes to address any deficiencies that may arise from this issue.

Some color to the balance sheet. The balance sheet remains strong with over $1.7 billion in assets, which includes cash and marketable securities of $110 million, and total corporate debt of $228 million. Estimated cash flow from operations for the year was $151 million and depreciation and amortization expense of $51 million are unaudited amounts at this time.

We will continue to invest in acquisitions in attractive markets in new countries while maintaining the quality of our current assets. We invest approximately 90% of the Company's EBITDA annually. In 2005, our CapEx was approximately $118 million, most of which was in high return gross projects. Historically, about 25% of our CapEx is mandatory maintenance expense, and this continued into 2005.

We do plan to raise funds through the issuance of additional debt to meet our 2006 cash needs, including CapEx, earnout payments, and our planned expansion. With strong cash flows and over $250 million in unmortgaged real estate assets, we expect to raise debt on attractive terms from new and existing sources. We will continue to provide EPS guidance independent of the effect of FAS 123R and separate guidance for the impact of FAS 123R changes. The estimated pro forma 2005 stock option expense would have been $0.07 per share, and in 2006 it will be between $0.10 to $0.12 per share.

This is a slightly upward revision of our previous guidance, as we have refined our calculations. Starting in 2006, all non-cash compensation, including the expense related to stock options and restricted stock will be reported and included in the financial tables. These expenses will be allocated to each business unit and reflected in the segment operating results in the financial tables of our press release. In 2006, we will provide segment profit operating numbers presented with and without the impact of 123-related expense.

I would like to take the opportunity to comment on the Laureate tax rate, and some other matters. Laureate continues to benefit from operations in investments and low tax rate jurisdictions, such as our operations in Latin America. For the foreseeable future, we intend to reinvest profits locally, which would preserve our low tax rate for the foreseeable future for the Company. Given the expected revenue growth in the 2006 investment plan, we estimate the overall corporate tax rate for next year will be between 10% and 13%.

A little bit more in terms of highlight around our tax status. Some of you will have recently read some of these items in our 8-K filings. As part of the normal course of business, the IRS periodically reviews and sometimes audits our federal income tax returns. In years with significant transactions, such as the divestments, the likelihood of such a review increases. Currently, we have several tax items outstanding with the IRS, the majority of which are related to the divestment of several businesses.

We have an outstanding item with the IRS regarding the treatment of a specific item in our 1997 tax return. The Company expects no material EPS impact from the outcome of this dispute. We've concluded discussions with the IRS with respect to the proposed adjustments related to transfer pricing and the timing of certain deductions in our 1998 and 1999 federal tax returns. We have been verbally notified by the IRS of a settlement which will result in no material financial impact to the Company. Additionally, the IRS proposed adjustments to the 2000 federal income tax return. These adjustments primarily relate to the divestment of the Prometric business.

The IRS claims the Company has $54.6 million plus penalties and interest. We believe that we calculated our 2000 tax payment correctly and we are prepared to appeal or litigate this matter, however, we are unable to predict the outcome at this time.

Turning now to 2006 and our new revenue recognition methodology. After careful evaluation and with continued emphasis on implementing best practices, Laureate has voluntarily adopted effective January 1, 2006 an improved weekly revenue recognition method across its traditional campus-based institutions. While our prior revenue recognition methods were deemed acceptable, there were some differences in method between various parts of our business, although most used a monthly convention. We believe the new weekly method is a better approach and we will apply it across our -- all our traditional campus-based institutions.

This voluntary adoption has been reviewed by our external auditors, Ernst & Young, and Ersnt & Young will issue the required preferability letter in connection with the filing of our first quarter 10-Q. The effect of this adoption will have no material impact on future earnings per share, however, it does impact the quarterly seasonality. For illustrative purposes on Chart 20, best practices revenue recognition, 2005 revenue and operating profit have been presented under both methodologies. To the left of the chart, you will note the immaterial change in full year revenue and operating profits. On the right of the chart, you will see that the adoption of weekly revenue recognition would have impacted the 2005 quarterly seasonality by reducing profit in Q1, Q3, and Q4 and by increasing profit in Q2.

Again, I wish to emphasize that this change does not materially impact full year EPS. The Company will be providing quarterly financials for 2004 and 2005 re-presented for comparative purposes on the Laureate website and in an 8-K filing today. We believe you will find this information clear and transparent. I recognize that some of you may have questions on this change, and I am prepared to answer them during the Q&A portion of the call.

Let me turn now to the 2006 outlook. Based on current conditions, we are looking forward to a very strong 2006, and in fact, we are increasing our 2006 earnings guidance by $0.05 per diluted share. The Company believes that it will achieve a 23% or more increase in revenue to between $1.08 to-- pardon me, to $1.08 billion to a $1.15 billion for the full year 2006. We expect operating margin improvement, including corporate G&A, of 60 to 110 basis points, and we anticipate earnings per share approximately $2.05 to $2.15 per share, excluding stock option expense for the year. This represents EPS growth of 23% more in 2006.

Weighted average shares outstanding are expected to be 53.6 million for the full year 2006, increasing due to the expected exercise of some stock options which would otherwise be expiring this year. This increase is an expected share count at year end compared to prior year has a dampening effect of $0.08 on EPS, which is offset by a lower tax rate and strong business unit performance.

For the first quarter of 2006, we estimate total revenue to be $215 million to $235 million. Operating profits pre-FAS 123R are estimated at 3% to 4% for campus-based, and 7% to 8% for Online. We anticipate G&A expense of approximately $9 million and are projecting diluted earnings per share before the impact of FAS 123R charges of negative $0.01 to negative $0.03. You'll note that the Q1 '04 to Q1 '05 increase in G&A is approximately $2.3 million. This will be slightly below the Q1, 2005 represented EPS of $0.03.

Consistent with the prior year, the first quarter is the seasonally weakest quarter. As you'll recall, our Southern Hemisphere schools, which showed strong growth in 2005, lose money as they are out of session for the summer, and as they have grown in size, so do the respective losses in Q1. The stronger Chilean peso also hurts our Q1 results compared to last year. We continue to expect that the second and fourth quarters will generate roughly 55-plus percent of the revenue and 85-plus percent of the operating income.

Second quarter guidance will be released with the Q1 press release in late April, and we are looking forward to releasing our first quarter enrollment statistics at that time. The Q1 estimate for FAS 123R is negative $0.02 to negative $0.03, bringing the expected EPS, including FAS 123R, to a negative $0.03 to negative $0.06. In conclusion, I would like to emphasize my commitment to Laureate and how pleased I am to be part of the management team, which delivered on its goals for the quarter and the full year.

I appreciate the patience and understanding of many of you through my initial transition. If our success to date is any indication of future performance, we have many exciting years of growth and expansion ahead. At this time, I would like to turn the call over for questions.

Operator, at this time we can start questions, thank you.

Thank you, sir. [OPERATOR INSTRUCTIONS] We will pause a moment to assemble our roster. We'll take our first question from Mark Marostica with Piper Jaffray.

Hey, thanks and good morning. First question relates to the revenue recognitions change, and I'm wondering, why make the change now? What prompted it? And tied to that, excluding the change and stock-based compensation, what would Q1 EPS guidance have been?

Rosemarie?

Let me answer the second part of your question, Mark, and then go I'll back to the first. If you were to look at the first quarter of 2005, and you'll see this also in the charts we put in the 8-K, as well as our website, so I urge you to have a look at that, you'll see that the $0.08 which was reported for the first quarter of 2005 would be represented as $0.03.

Okay.

Additionally, in attempting to add some color to your question around revenue recognition, around the change in revenue recognition methodology, I think it's important to note that the Company continually looks at its processes also as part of our future view of systems, and in looking at this, we came to the conclusion that we were a) mature enough to move to a process that gives additional maturity, and thus decided to move from monthly recognition to weekly recognition.

Mark, it's Doug. I think I can put this in a little bit of a broader context, which is, in general, what we've done, which I think was the right decision, is we've gone into these countries, when we acquire universities, and we've tried to respect an awful lot of what they already do well, systems that they use and processes that they use and people and everything, and I think that as we've built our confidence in our business, we realize that we can continue to do that, but we can strive for some greater consistency around the world.

So while we were permitted to do some different recognition methods in different parts of the world because there were differences between the business that would justify it, that didn't mean that we had to do it that way, and it actually made it harder for us to manage the business. So we came to the conclusion that this would be one area where standardization would make sense, and I think, frankly, going forward, there will be more of that. We're never going to just impose complete standardization on all of our universities. That would cause us to fail, but I think in the area of systems, for example, that would be sort of let's say a less visible externally, but very consistent theme where we would like to have more consistent systems around the world, as well.

Thanks for the color there, and just a point of clarification. So would Q1 guidance have been a nickel higher on the top and bottom end of the range then? Is that what you're suggesting, Rosemarie?

Yes, that is correct.

Yes.

And one last question and I'll turn it over, given the time here. Regarding Online, I'm wondering if you could give us some indication of trends on cost per lead in the quarter and perhaps any change in trending on conversion rates and attrition? And I'll turn it over. Thank you.

You want to comment, Paula?

Yes, sure. This is Paula. As you well know, there is increasing competition in the market for leads and for students; however, we still are quite confident about our ability to stay on top of this challenge. As you know, we invested a great deal in our recruiters last year and we're seeing great maturation in both our internal and our external recruiters, those out on the field are producing very well for us.

We also had something very interesting going on in the sense that we have an increasing number of alumni, which we have not had in the past. Last year we graduated about 9,000 students. This year we'll graduate about 10,000 students. That gives us a base for referrals that we have not enjoyed before, and of course, we prefer that cost per inquiry over any other cost per inquiry that we have. We're pleased about that.

We also have another opportunity, I think as a point of distinction for us, working with our international campuses and knowing what we do now about international marketing, we're able to take some benefit from marketing recruitment out of our Liverpool operation for our Walden University. So those three things are some of the things that we're doing to offset any increase in cost per inquiry that might be changing the overall cost per enrollment.

Any comments regarding attrition in the quarter, in terms of how it trended?

I think for the most part we're pretty stable with that. We have, as you know, very different models, and all of those programs that have been "Laureateized," as we talk about them, remain pretty steady. We do have a couple programs where increasing enrollments have led to some attrition issues and those programs we're now in the process of reviewing and putting a Laureate stamp on those.

I think I'd summarize by saying that I think we are seeing both increasing cost per leads and small changes upward in attrition, but we find that to be something we compensate for with very strong progress in the cost of conversion, and so in general, I think we still feel very comfortable with the short-term and longterm view for the business.

Okay, great. I'll turn it over. Thank you.

Thank you, Mark.

We go next to Matt Litfin with William Blair Company.

Yes, good morning and let me add my congratulations, as well.

Thank you.

I wanted an update on Kendall College. What are your plans there? How have the recent results been? What's baked into the guidance for 2006?

Sure. Well, Kendall, as many people know, is an independent entity. It's a non-profit. We have an agreement with them where they became the U.S. partner for Les Roches, which is one of our Swiss hotel management brands, and we're building that partnership and building out their hotel management programs in the U.S. I think it's fair to say that we've made pretty slow progress there. They've been completely consumed with moving into their new campus, which they did throughout the course of last year, and as many of you who have been there can attest, it's a first-rate campus, but it's everything that that very small institution can do to get their arms around it.

They're great people there, and they're working very closely with our people and I think we're making good progress, but the hospitality initiative, which is really the key to wanting us to make this part of our Company, is really just getting started. One of the great steps that they recently took was to bring in a new dean. This will be the dean for their hospitality school, which I don't believe they had a dean before for that position, and they were able to recruit the former dean of the Lausanne school, and that would be perhaps the most famous hotel management school in the world, and it's based in Switzerland.

I think our two Swiss hotel schools would probably argue with me as to whether it's more famous than we are, but it's pretty famous, and being able to recruit their dean, that's Jeffrey Catrett is his name, to come into Kendall as their Dean of Hospitality is just terrific. At this point, Kendall does operate as a separate Company. The monies that we advanced them to help them with their campus are carried in our books as a loan. We don't record any of Kendall's financial results. We do record some interest income from the loan we made to them.

It is expected at this point that if everything goes right, we would probably exercise our option to own Kendall, which is on a pre-set price, and that that would happen some time in the second half of 2007, but we have to reserve the right to do that sooner or to defer it later as conditions warrant, but at the moment, that would be my guess, and we do have the contractual right to do that, and we know that we have the support of their board and management, should we decide to do so. So that's the up-to-the-minute report.

Thanks, Doug. One more for Rosemarie. What are the plans for CapEx in 2006?

Matt, our plans for CapEx in 2006 will be largely consistent with our plans for CapEx in 2007, I mean 2005. So you would expect that about 60% of our CapEx would be spent on growth projects. Growth projects of, with high return, and about 25% or so of our CapEx would be spent on maintenance, most of which is mandatory.

So is it just the mix that's similar to '05 or is it-- what's the dollar amount in '06 relative to '05?

Well, I don't know that we've ever given out an exact number, and part of that is because throughout the year we sometimes green-light additional CapEx projects where we think that there's a good reason to do so. In general, what we've said was that we expect to invest approximately 90% of the EBITDA generated by the Company, and I think that's consistent with our current view. I think it's fair to say that CapEx projects in Chile have slowed down as that business has matured, and it's performing very well, but we know it's moving more towards a growth rate that's in line with the growth of the market. CapEx has increased in some of our very high growth markets in the Andean region, Ecuador and Peru, and then certainly in Mexico, Central America. It's probably pretty stable with what it's been in the past. We have very strong growth continued in that region, as well.

Thank you.

Thank you, Matt.

Thanks, Matt.

We'll go next to Howard Block with Banc of America Securities.

Good morning. This is actually Matt in for Howard.

Hello.

I have a quick question on Online. Based on the growth and the enrollment that you gave for Walden, it implies that the remainder into you was down a little bit year-to-year. I wondered, first of all, if that was a fair interpretation there, and it's been about a year since NTU merged with Walden. I was also wondering if you can you give any general observations or growth tends on how NTU's done since it's been merged in there?

I'll answer to begin and ask Paula to comment on NTU. I actually don't think NTU has much to do with the numbers. As many folks here will know, we started with third-party universities that provided the accreditation for our online programs because we didn't have our own accredited university, and as we brought Walden into the fold and then acquired 100% of Walden in 2004, we have since discontinued, or gradually phased out, many programs with other universities now that we have our own accredited university. So really the growth that we report, you could take the Walden growth of 41%, what was it, 27%, 28% growth for the overall division, and the difference is the continued shrinkage in the non-Walden third-party university relationships.

Let me just add one thing, Matt. This is Paula. We also had kind of an anomaly this year with the University of Liverpool. With the University of Liverpool, we ended up graduating significantly more, almost double what we had planned to graduate. This anomaly was really caused by a backlog of students who were in the dissertation process. For the U.K. system, they go through courses, and when they complete those courses, they need to complete dissertation.

When we acquired Liverpool in 2004, we found that they were way behind that backlog of the dissertation piece, and we put steps in place at the beginning of this year, 2005, hired some new people, put some new processes in. I was very concerned if they did not get through the dissertation and get their degree, we would have a lot of dissatisfied students, and we worked on that and, lo and behold, we were actually much more effective at getting through that backlog than we had anticipated. If we had not done so well, we would have been over 30% in total enrollment for the year.

I think the biggest single contributor, though, still would be the phase-out of those third parties, and that other point is another, smaller contributor. I do want to add, you used the term, so people wouldn't be confused, we didn't acquire University of Liverpool, but we acquired a company that had the international rights for University of Liverpool, and University of Liverpool is one area where we will continue to have a partnership with a third-party university because we cannot own a British degree-granting entity, so we will partner with one. Paula, do you want to just briefly comment about NTU, that was the other part of the question?

You're absolutely right, last-- a year ago first quarter we did merge NTU into Walden. That went very well from an accreditation standpoint. It was a small school, as you all know, and what we did at the time of the merger was also to eliminate some programs that were not as cost-effective for us, so we did have some attrition issues around NTU as we limited those programs and then made sure that we guided those students to our ex-partners for completion of the degree program.

All right, thanks very much. And then a quick one for Rosemarie. I wondered if you could offer any sort of guidance on how minority interests might be affected in 1Q, '06, given the amplification of the seasonality, and also if you're prepared to give any rough guidance on how the SFAS expense may break down by campus and online, and the different line items there throughout the year?

Okay, Matt. Let me see if I can take your questions one at a time. In answer to the first quarter question on minority interests, you could use an estimate of approximately $1 million worth of expense for minority interest in the first quarter.

Okay.

And in answer to your second question, which is can we break down the FAS 123R expense into its various components, the answer is yes, we've got it in our budget, but we're not prepared to do it today, and we'll come back to you and give you that breakout because we can in fact provide it, we just don't have it here with us this minute.

I think it's a good point that 123R charges will show up in the business unit in which the people who receive those options are employed, but I think it would also be-- you could make a broad statement that the majority of option holders in the Company, in terms of by value, would be either corporate-- would be corporate employees either in the corporate G&A or in the campus-based G&A line item, so while we will push it down, the vast majority of it will not be relevant to being pushed down.

Very helpful. Thanks very much.

Thank you.

And we'll go next to Trace Urdan with the Robert W. Baird Company.

Hi, Trace.

Thank you, good morning. Just a point of clarification. It wasn't clear to me whether there was any bit of Brazil in the fourth quarter numbers at all. Can you just clarify that?

Very small amount.

Small amount of both Brazil and Cypress, before minority interests.

Okay. So immaterial?

Immaterial.

Yes.

Okay, thank you. Doug, it sounds like, you know, you're not prepared to be rash with respect to China. Maybe that's a fair characterization. I'm wondering if there's any other activity around the world that would be sizable, either in terms of new country entry or, I think at one point you had talked about opportunity that you saw in France for consolidation there. Can you sort of comment on the rest of the world, besides China, in terms of activity in '06?

Sure. I think our main priority is the geography that we're in. We see lots of continued growth for expansion and new campuses in the Mexico/Central America region, in the other smaller countries in Latin America that we've gone into.

We've now learned that we can go into small countries or countries in Latin America that are adjacent to other countries at a fraction of the effort and expense of going into a truly new geography, so the exercise for us to enter, just as an example, an Argentina from Chile, or an Ecuador from Chile, or a Central America from Mexico, the effort to us was so much less and was so much greater certainty and quick results compared to an altogether new market like a China is just massive.

So I think you'll see us look to do more contiguous geographies in Latin America and in Europe. I think we're optimistic about that. I do think we've invested in a very strong team in France. We do believe in the market there, both for working adults, as well as for consolidation, as you pointed out, in that market.

That said, I think that China-- one of our strategies is that we are optimistic enough to believe that China will be part of our future in the short-term, and as a result, we're trying to be very careful not to spread our efforts over too much geography, and so China for us, all of Asia is really depending upon building out China at this point.

If in a year we were to decide the things in China were just going slower than expected, we have lots of other countries in Asia we could branch off into, but for now, I'd much rather the management team's attention be on China because there's just no other country that could come close to it in terms of the results it can generate, and of course, the effort to build relationships, political and regulatory, and to understand the regulatory framework is the same for a big country, pretty much the same for a big country, as it is for a small country.

In the mid-term, we are watching India very carefully, and we actually see some progress in the regulations. As a matter of fact, some progress in the regulations. As a matter of fact, the accession into WTO has required India to open up to foreign universities, and we'll be watching that very, very carefully. If I think about our next five-year business plan, we could achieve our five-year business plan with very small effect from China or India.

I think China and India are a bigger part of making sure that the five years that comes after are as good as the five years that come now. So that's really, I hope, helpful. There are lots of other smaller countries that we're looking at, but we're trying not to get distracted. In fact, one of the things we've done is to create a separate group to look after some of the smaller countries that could be interesting, but just can't compare to the Chinas or Indias or Brazils of the world. Just to talk about Brazil for a second, we are so excited about what we've seen and the results that we've gotten in the market since we announced our partnership.

You can imagine that just about every credible, interesting university in that country that's thinking about how to position themselves strategically has been on the phone with us to talk about how they could be part of our strategy. So between Brazil and China and a place marker for India, contiguous growth in Latin America and Europe, and, of course, lots of global work on our Online division, that's pretty much more than we can say grace over. I started to mention that we have a small group that's focused on what we refer to as management contracts or management services.

That would be for smaller countries that don't really meet our standards for where we would put our own capital, but where very interesting things could happen or where we might get an invitation from local government where they're offering some concessions for us to come in, and the purpose of that group is to evaluate those opportunities and to lay groundwork without distracting the overall Laureate management team.

And one of the things in the next couple years that we'd like to do would be to evaluate whether that management contracts group should be expanded almost like a parallel path, because there are many small, interesting countries, or whether we would do better just to stick to our knitting, and that's what we're currently wrestling with, and I'm sure we'll make a good decision there.

Do you anticipate having a management contract in 2006?

It's hard to say. What I would say is in some ways it's a basis of a misnomer in that there are countries that are non-strategic that fall into that group, and whether we pursue those countries through a management contract as a mechanism or not is in some ways besides the point. It could be through joint ventures, it could be through a management contract. It's more, I would think of it as non-strategic geography, and you know the zeal of the convert and I'm very, very focused on focus for the Company.

So we have to figure out a way to make sure that if we do anything in these smaller countries, it doesn't defocus the Company. You asked about geography and opportunity.

We also see a real opportunity in Latin America for services at a lower price point than what we currently charge, and that is something that we're putting real money and management resources behind, whether we could introduce a new brand that would go after a lower end price point but still with a full bachelor's degree product, and that's something that we would probably start in Mexico, and we have some very strong management talent lined up working on that project, as well.

Okay. Just one more from Rosemarie, from I could. Rosemarie, I'm wondering, you mentioned in terms of your approach to the financial operations of the Company that, the growing scale and the sort of you know, it's time to look at some of the processes, I'm wondering if it's time to consider hedging as a strategy for Laureate? What your thoughts are on that, currency hedging?

Yes, it's clear.

Okay.

I think I was clear in our remarks in 2005 that the portfolio has given us the benefit in terms of what we've had, what we've been able to take, the $4 million or so, and reinvest in the business. To your point, though, as our businesses just start to grow and the sheer size of them starts to grow, it is something that I think we have to take in the future and evaluate.

I'd be careful with it, though, because our portfolio is starting to be, is starting to change its balance just as we expected that it would, so when we start to see our margins in Online get closer to the 17% mark, we're going to start to see a little bit different balance in EBITDA, granted though, that our Latin American operations are going to continue to have high growth rates. So probably a very long answer to say, yes, it's probably time to evaluate it, but maybe there really is nothing there for us once we look at the cost and the benefit of it.

I think we also need feedback from investors as to what you would rather see. Would you rather see results that are helped by hedge, which means that you could actually have currency moving against us, and yet it's not showing up in the short-term financial statements? And I think just as investors look at enrollments as a precursor to future financial results, I'm not sure that being hedged in the short-term would help us if currencies moved against us. You can't hedge out that far.

So I think we kind of need investors to tell us what would you rather have, a slightly simpler story as it is today where diversification is really the key to hedging, or actual hedge accounting on the books, and where you could actually have short-term no impact on the books but currency moving with us or against us somewhere in the world and harder for you to tell what direction it's actually going in? So I'll just throw that out there that as we're meeting with investors, we'd love your feedback on it and we'll just continue to look at it.

Okay, thank you.

Thank you, Trace.

We go next to Chris Gutek with Morgan Stanley.

Yes, thanks, good morning. Rosemarie, I don't know if you mentioned it, I might have missed it, but in the fourth quarter, the margins in Latin America were a bit below your previous guidance. I'm curious what the reason for that is, and then more generally, maybe it's related, maybe not, but can you also give us and update on the investments in hiring you've been doing,of-- kind of in country and you've also talked about hiring some new finance people at corporate, as well, kind of what those financial impacts will be over the course of this year?

I'll start with the second piece, which is the hiring. And this is Doug. Which is all of our guidance contemplates new positions, and some of these positions are Senior Executive positions in the field, and some of these positions are middle management positions really throughout the Company. So there are lots of, lots of roles that we're evaluating in general, Human Resources is an area that's getting a lot of attention in investment and upgrading all over the world. Finance is always an area where we're putting a lot of attention, because the way that we've had confidence in the results end controls of the Company is by having strong finance people, not just in the finance departments, but also in the operations of the business.

It was not an accident that when Bill and Raph joined me in the business, my first two senior hires in the business, they were both former CFOs who had moved in their own careers into general management. So those would be, I think, just a general way to look at where we're hiring, but all of that is contemplated in the guidance, and it's a big investment. Really, I think a great investment for the future of the business. Rosemarie, do you want to comment a little bit on Latin American margins? They were about 100 basis points below I think what people were expecting.

Chris, to answer your question, the Latin American margins were 32%. We guided at a margin range of 33% to 34%, so we were almost on top of it. If you wanted an explanation for the 1-point difference, I would largely say it's investment in new campuses, as well as investment in management.

Makes sense. Doug, real quick, I don't think you said it explicitly, but is Brazil performing in line with expectations? A little bit better, a little bit worse?

I think it's pretty much in line with expectations. I think we would have loved to have gotten our hands on the enrollment a month or two before we did, and it's actually-- I won't comment on any of our in-process enrollments. I will say that there is a big difference between how their enrollment has done from virtually the day we came in compared to how it was before we got there, so that's really the only thing I think we and our partner down there would have loved to have had us get our hands on enrollment earlier, but that said, we knew that at time, that's why we guided that there would be no accretion from Brazil this year, and that gives us the flexibility to make all the investments so that we can have strong enrollments later in the year when they have their primary intake that will impact '07 results.

Great, thanks.

Thank you.

We go next to Jerry Herman with Stifel, Nicolaus.

Wow, they said it right! Good morning, everybody.

How are you?

Good. The first question is sort of multi-faceted, it relates to the tax dispute. Since we're all here together, maybe Rosemarie could spend a little bit of time and give some color, including maybe some input on the following, the time line on what happens in this process, how closely the '97 and '99 disputes resemble the 2000 dispute? Does the WSI adjustment at all weaken your case? And finally, how do you think about guidance as it relates to what might happen with the IRS? How is it incorporated and maybe what it means for acquisition strategy? How's that? (LAUGHTER).

That's a lot. I'm going to work with Rosemarie on it, and I want to make sure we give you-- help with, but I think we want to try not to use up all the rest of the call on it. I think just a quick context. I think people know, in the year 2000, which is the biggest thing that's outstanding, we sold our per metric testing division for almost $800 million, and the dispute with the IRS, essentially, really comes down to how much of the sale proceeds result in U.S. income as opposed to international income, and it then gets a little arcane as to the specifics of what they're challenging, which has to do with one of the contracts that we had with ETS, and whether that contract was a services contract or not.

What I can tell you, because Rosemarie wasn't here at the time, but our General Counsel, Bob Zentz, and I lived it. We were incredibly careful about the way we approached allocation of purchase price and about the way we took counsel, on the way we handled our 2000 tax returns and we really feel we did it the right way. It is really complicated and not surprising that the IRS would have questions about it, and the net result is that that's going to end up going to appeal, and as Rosemarie stated, we believe from what we see right now that it would be appropriate to litigate it. It's a large amount and we think we did it right.

I don't-- there is nothing in our guidance that contemplates this. I think if there was any material payment or settlement with the IRS, it would certainly be outside of the context of guidance. I think because it relates to a one-time sale of what is now a discontinued operation, expecting that investors would not view that as having continuing impact on the Company, other than whatever the capital structure impact would be, and again, in our current position, we think we did it right and do not anticipate there being a cost associated with it, but it is impossible for us to predict. I'll also say one other thing and ask Rosemarie to fill in anything I missed. I don't think that the WSI issue has anything to do with that at all.

I think the WSI issue related to the timeliness of the way we put something onto our balance sheet and doesn't relate to the way we filed our tax return, and I do want to make the point, Rosemarie mentioned, it is possible that our lack of time limits in the balance sheet entry could result in a deficiency or a material weakness ruling from our auditors on that, and we just don't want to just gloss over that, but we don't think that would speak at all to the overall financial reporting of the Company or to the way we handle tax in the ongoing areas. This is somewhat arcane and relates to the way a discontinued operation would be handled. I'm going to stop and ask Rosemarie to fill in the blanks.

Jerry, let me just see if I can add a few points, and Doug did a very thorough job there of explaining it. For the 2000 tax returns, the next steps there are for Laureate to formally file its appeal. That appeal we will have probably up to 90 days to do that. We will get a 30-day extension, but once the IRS has that appeal, the timeline for that is basically up to the IRS. Likely that if we were to litigate, that process of litigation would be one that is fairly extended in terms of time, meaning well beyond 2006.

I do want to also emphasize that the WSI adjustment is not related to the 2000 federal income tax return, and then lastly, I think you brought up a point about '97 and '98 -- or '99, and in fact, what I did mention is the settlement of '98 and '99 federal income tax returns, some of that settlement involved royalty income that was associated with the Prometric business, but there were also other issues in those '98 and '99 returns that were settled, and again, those returns were settled with no material impact to the Company.

Just want to add to that, I think one of your questions is was, were there any related issues? I think that one of the underlying principles that we were arguing with the IRS in '98 and '99 is related to a core principle in their 2000 assessment, and so if it turns out that we're correct about that, then that's something that's important to us. With respect to the-- I guess the other point is that '98 and '99 did go to appeal, so the process of going to appeal is not unknown to us, and we feel that a very fair resolution was obtained on that.

Lastly, Jerry, we want you to bear in mind that these issues, they don't come from ongoing operations, they come from a period of time when the Company was re-energizing and revamping its portfolio, so we would not expect to have these kinds of things into our future.

Great. I know that with a a lot. I'll turn it over. Thanks.

Thanks, very much.

You're welcome, Jerry.

We'll go next to Gary Bisbee with Lehman Brothers.

Hi, guys. Couple questions. You mentioned that you're likely to issue debt this year, or you're going to need to, for all the growth initiatives. Can you give us some additional color or details in terms of timing? Are you planning to issue bonds or just borrow against your credit line? You know, the amount if you are likely to issue bonds? And I guess seems like you've got a pretty large, although you haven't said exactly what the number is, earnout due at the end of March. I wondered if No. 1, you would quantify what that number is, and No. 2, what you're going to do (INAUDIBLE).

I think in one of our prior filings we did size at the time, the estimated size of the earnout payment and I think that number was around $65 million.

Approximately.

I'm not sure if that also included the '07 earnout payment. No, it did not. But I should be very clear. We will be in substantial negotiations over that number, and there are views as to why that number should actually be considerably less than the $65 million, and there will certainly be views on the other side that the number should be more. So that will be a negotiated process that really will revolve around the, around the definition of what's recurring, because that's how we've operated that. That payment we would expect to be some time in the second half of '06, but we do have a partner in Chile and we will try to work this out as amicably as we can.

There is another, much smaller earnout payment that will be due in '07, and then they will continue to own 20% of the business, subject to a put/call arrangement, which I believe exercises in '09 or 2010, something like that. In terms of the overall treasury picture for the Company, Rosemarie and I are working very closely with a lot of our team here to come up with the right model here. We're looking at everything, including the issuance of bonds, the question for us is we want to be careful about things that can't be prepaid. We generate a lot of cash, and it's hard to know, it's hard to believe that over the next five years, I would hope that we have the opportunity to reinvest all of our excess cash.

That would be the greatest thing for me to think that that could happen, but it's likely that we will actually generate more cash than we can invest, so we're trying to find the right level of what kind of debt could be outstanding for a four or five-year period in a non-prepayable format versus what can can be, and I'm sure we'll probably end up with some combination of longer term capital versus shorter term revolver. We have put our estimates for interest costs into the guidance that we have provided to the Street, and I'm not sure what else I'm missing, but Rosemarie, do you want to add anything?

What I'll add, Gary, is that you know, I think we are also fortunate in terms of timing. Looking across at what's available to Laureate, given the fact that we have such low debt today in terms of various instruments, many of those are at very attractive prices today.

Basically mortgage financing.

And we would really like to make sure that we seize that opportunity.

So we'll look at all those different options. I think the one thing that we are-- a working thesis is that until we have a net debt that exceeds two times EBITDA, we're probably not going to be looking to the equity market, and I hope investors would view that as a pretty bullish sign that we don't think that we need to be issuing equity given the prospects we see for the future. Obviously, things can change and based on growth rate or volatility, we may reconsider that, but that's our current view.

I want to take exception with one thing you said, Doug. You just made a comment about you hope you can reinvest the cash. When I look at 2001 through 2005, after acquisition costs, you had negative free cash flow every year and even before acquisition cost, after CapEx, you really didn't generate any cash in the last five years. So I'm not sure what you're referring to, and maybe I can ask that in a different way, which is you've talked a lot about the 2010 vision. At what point between now and 2010 are you likely to really start to generate excess free cash flow after CapEx, after acquisitions, or at least after CapEx, you know, over the-- and still generate the kind of growth we're talking about?

I think the difference between the last five years and the next five years is profound. I think that in the past five years, we have taken the opportunity to invest in every good project that we could find where we had confidence in the management team and the local operations and in the project itself, and where we thought we could deliver returns that would be, let's say generally far above our cost of capital, all north of 20% kind of returns, and in many cases double that.

I think going forward, that will continue to be our approach, which is to say, if we really had all of our management teams around the world bringing us high-quality projects for new campuses, campus expansions, new segments to pursue, new country entries, et cetera, if the returns on that was so far in excess of our cost to capital, we would chase every one of those projects, subject to two limitations, our view of management's ability to execute on those projects, and whatever broad view we would have about whatever kind of diversification we want, so if we think we're becoming undiversified too much or too concentrated in one country, we might bump the hurdle rates necessary for them to get their projects approved in that particular market.

I think my comment about, I wish we could, but I'm not sure we can reinvest all our capital over the next five years, is just a belief that when we look at our projected cash flows, that in the next year or two, I can see the projects that could consume all those cash flows and it makes me very happy. When I get out four or five years from now and I see maturation in markets like Chile or five years from now certainly some maturing of the Mexico markets, then it's just at that point things would have had to change. We would have had to have a lot of new opportunities to absorb all that cash. So I hope that that answers your question.

Yes, definitely, and I'm not trying to give you a hard time. Just with the CapEx guidance similar, I guess I'm trying to get a sense, do you-- you've made the investments to date such that the growth can remain pretty substantial over the next couple of years, even if at some point you do ratchet back the spending a little bit.

I think that's right. Again, I just want to make the point though, and always open for investors to tell me if we're looking at this the wrong way. If we really believed that we could get 20%, 25% returns in low-risk countries, 30%, 35%, 40% returns in medium-risk countries, I would invest every penny we could get our hands on, including pennies above and beyond our earnings. But I think we've been very disciplined about, a limit on what we've done has been our view about how much management could handle or about diversification.

It's never been about access to capital because we could have levered up the balance sheet two years ago or issued equity two years ago and done twice as many projects as we even did, so I hope you'd have a lot of confidence that we've applied a lot of discipline around the decisions that we've made, and, by the way, I don't consider any of this giving me a hard time.

[LAUGHTER] If I could just sneak one last quick one in there. The tax rate, sounds like that's a real positive that that's going to be lower. It's a fair amount lower than I had been expecting. So I guess I wonder with the guidance going a nickel higher, it seems to me, at least versus where I was, that it was maybe a $0.10 to $0.20 impact, the lower tax rate, so do you feel like the guidance at this level is relatively conservative, or was I just off base, or is there you know, is there some sense maybe that there's more spending in this guidance than you had had before?

I think I'll take a crack at it and Rosemarie, please comment. I think it's actually a little bit more moving parts than that. I think share count-- if I go back to what I thought we were going to see in April of last year-- and by the way, I've got to tell you, I'm amazed at how the business has been what we thought it was going to be in April of last year, but of course some things change-- share count cost us probably $0.06 or $0.08 in there being more share count than we thought there was going to be. So that would be something that moved against us.

Some currencies have moved for us, but they hurt us in the loss periods, so for example, the Chilean peso's very strong. Well, that hurts us in the first quarter, but it will help us if it continues through the rest of the year. Tax is definitely better than we thought, and I think that that's probably a reasonable counter balance to the share count issue, and then there was a lot that went on underneath of the scenes with respect to operational guidance, but in general, I think it all netted out to probably where we thought it was going to be. So I don't know, Rosemarie, did I miss anything on that?

No, the only thing I guess I would emphasize here is if you do look at the changing tax rate and we end up, you know, and we end up in that range or the higher end of that range, that's probably close to a $0.06 difference between the '05 tax rate and the '06 tax rate, and I think Doug has aptly pointed out that just our share count alone compared to the prior year is dampening it $0.08, but I do want to make sure that we end this on a clear note, which is we did, in fact, raise guidance by $0.05.

I think it would be fair to say that share count in tax is probably relatively offsetting and then operational performance allows us to guide to a little bit higher result.

Okay, that's helpful color. Thanks a lot.

Thanks. Operator, next question.

We go next to Jeff Silber with Harris Nesbitt.

I know it's late. I'll be quick. Can you just give us what your current debt capacity is and where you think that will go and also what kind of minority interest are you modeling for the entire year?

Well, debt capacity, I think we would have to make some assumptions about what you thought you could get, and I think frankly, we'll be more limited by our appetite than by what the market would make available to us. If you want to assume we would get call it three times trailing EBITDA, you could probably come up with somewhere in the $400 million range of net debt that we could add to the business, and of course, we do carry cash, which we keep where we think we need it around the world, so that's a lot more than where we currently are, and we would not anticipate running up against that number, and of course as we get later this year, trailing EBITDA will rise and that would lift that ceiling.

As I said, when we get above two times net debt, we would at least begin considering issuing equity just to make sure that we have the sort of cautious capital structure that we would like, so. And then your question was how much--

Minority interest. Jeff, for the calculation you'd want to use for minority interest for quarters 2 through 4 for 2006 is 20% of Latin American EBIT and 6% of European EBIT. Okay?

Okay, that's actually helpful. I'm sorry. On my debt capacity question, let me just rephrase that. What's available right now on your credit line?

About $150 million.

Is the total line, and how much is undrawn?

Available is about $90 million.

About $90 million is the answer to the question.

Great. Thanks for that.

We go next to Brandon Dobell with Credit Suisse First Boston.

I'll try to be quick, as well. n update on two things, one in the Online space, an idea of how much interest you're seeing from countries where you have locations, perhaps in Europe or in Latin America for U.S. degrees, and then maybe an update on where we stand with some of the financial aid initiatives or ideas or thoughts about how to drive that business maybe in Chile, Brazil, Mexico, where you might have an opportunity?

Okay. Paula, want to comment on the Online?

Certainly. Two answers here. Online, international Online enrollments are about 8% right now, and that includes both our Amsterdam, our Liverpool partnership, and our Walden organization, and we have a couple of major initiatives this year, one that I'm really pleased about is that we will be establishing a Walden recruitment group in Amsterdam. We have those folks training here in Baltimore right now, and so we will be able to begin to benefit from that investment that we made in Europe and in terms of handling marketing recruitment out of our international arm. We expect that to be very important for us.

In terms of our work with campus space, we're continuing to do a lot of work around the dual degree, and we'll be visiting Brazil actually in the next couple weeks to look at what the opportunity is there. We expect that to be a place where the campus base and online are working very closely together for impact on 2007.

In terms of student loan activities, I'll comment on this and see if Bill has anything to add, but of course, really the main country where the most activity takes place for us is Chile. Chile is that convergence of where the need and the interest is high, as it would be in Mexico and the interest is high as it would be in Mexico or Brazil, but where the credit culture and the regulations and the legislation all lends itself to loans coming about, and in Chile, we expected last year that we would see our student loans, what we would call longterm loans, and there's another definition of student loans that relates to loans that we carry for services that have not yet been rendered, but I'm going to focus on loans for services that are being rendered.

We had in the range of about $32 million before you take into account the impact of students coming into the 2006 intake. We would expect that number, and we had said last year we thought that number would get to about $35 million. In the fourth quarter, you have to separate out the students that are coming in for the 2006 period and those that are coming in related to 2005. So the number would actually then go from the 30s to probably somewhere in the 50s in terms of the outstanding balance, and probably throughout the year that number in the 50s is the kind of number that we may end up seeing.

We're comfortable with that. We're being very careful in how we manage that. Our goal is to learn as much as we can from this and continue to get as many banks into the business of making student loans as possible, and I think it's actually going pretty well. The government in Chile has actually introduced a major new student loan program, and we would love to see that take off because it would take a lot of pressure off us to have to provide any financing.

If the banks would step up and the governments would step up, we could sort of declare victory. We accomplished our goal, we got everybody into the business of providing these student loans, and we wouldn't have to be in that business ourselves. The rest of the world, I think it's happening very, very slowly. We're very conscious of it. It would be great for our business for there to be steps forward in student loan financing.

I heard about a very neat new program that was just launched in Mexico that we are considering participating in from a arms-length commercial bank that seems to be getting brave, and that would be really the first sign of life with respect to banks wanting to do anything innovative in Mexico with student financing, but it's just early days.

Okay, appreciate it. Thanks a lot.

Thank you.

Operator, we'll take two more questions.

Okay, our next question comes from Mark Hughes with SunTrust.

What's the range of the size of the entities that you're looking at in China and what's the typical revenue per student there?

I guess we're looking very hard, and we are trying to be pretty careful about not tipping people off to what we're doing over there, so we've got to be pretty careful about that. I think it would be fair to say that for us to make an acquisition or a joint venture that would have any material value to us as a platform, you'd be looking at something that would be at least 10,000 or 20,000 students, and some of the things we're looking at are considerably larger than that. Price point does tend to be low in China. I think you'd see an average price of at the better quality institutions around $1,000 a year. There are some specialized institutions that charge a lot more. I think with the combination of increased demand, the value that comes in the marketplace of having a degree, and the rising power of the Chinese currency, I think we're betting on the fact that that $1,000 goes up very nicely over the next four or five years.

Okay.

Operator, next question, please?

We'll take our final question from Jennifer Childe with Bear, Stearns.

Thanks.

Hi, Jennifer.

Hi. Can you hear me okay?

Yes.

Okay, can you just clarify that Chilean loan program is currently in the 50s or you expect it to be in the 50s by year end?

The Chilean loan program with respect to 2005 students was at around $32 million, Rosemarie, is that right? $32 million. As you begin to get the intake of new students and reenrollments into 2006, that number will bump up into somewhere in the low 50s. That's a pre-reserve number with approximately 20%, 20% to 25% reserves.

Net 23.

So it's a net 23%--

The debt number is $23 million.

Right, but if we go to the 50s, let's take a 20% to 25% reserve against that gross number I just gave you, and our expectation is that that number probably stays in the 50s for the rest of the year, but it could certainly, it could come down to the extent that banks step up and buy pieces of portfolio.

One of the interesting things is that we have enough confidence in the portfolio that we're not willing to sell it at crazy discount rates, and so I think in some ways, it's a little bit of a bullish sign that we have not brought that value down because we've gotten offers from banks that we think are just going to get better and better as the portfolio seasons.

Okay. And secondly, you mentioned something about a non-recurring component of Chilean EBITDA? Hello?

Oh, oh, okay, thanks. Yes, when we were talking about the definition of the earnout, the definition we use is recurring EBIT, and so that is our opportunity to analyze anything that we think is out of the ordinary course with respect to our negotiation over the earnout, so that's what we're referring to.

I guess without giving away, have there been non-recurring components?

I think what I would say is that there really isn't anything we can comment on that wouldn't get us right in the middle of the essence of what our negotiations will be with the other side. I don't think there's anything here, I don't believe there's anything here that investors would be concerned about. I think that this was intended to allow us to scrub everything when we go through the negotiation and discussions with our partners, and we're sure they're going to look at it and want to be equitable, and we do too.

With, Jennifer, with this-- this is Bill Dennis. With certain initiatives you might have within a particular period as part of the formula a front-end charge, a front-end expense that might not necessarily correspond to an ongoing basis, and that's the thing that Doug's talking about, because as we have built that business from 5,000 students to 25,000 students, we have had a lot of projects that they have hit in different accounting periods. And so you have to step back from the real tight specifics of an accounting period and try to get something that looks more like an ongoing operating basis, and that flexibility enables both sides to talk about what the financial data or what the financial statements, in fact, the audited financial statements are reflecting. So--

ut it can really run anything, like the management team there decides to what extent to pay bonuses to their executives, if we think they paid less than we would pay, maybe that's an example of something we may want to look at. If we think they paid more than we would want to pay, we'd have to have that discussion. It's a discussion that gets very granular very fast.

Got it. Okay. Thanks a lot.

Thank you. Well, we're far beyond the end of our timeframe. We appreciate everybody's patience, but we knew we had an awful lot of information to present, so with that, on behalf of the whole Laureate team, I'd like to thank everyone for participating in this call today. Bye-bye.

That does conclude today's teleconference. Again, thank you for your participation. You may disconnect at this time.