Laureate Education Inc (LAUR) 2006 Q2 法說會逐字稿

Good day and welcome to the Laureate Education second quarter 2006 earnings results conference. [OPERATOR INSTRUCTIONS]

At this time, for opening remarks and introductions, I'd like to turn the conference over to Director of Investor Relations and Corporate Communication, Mr. Chris Symanoskie. Please go ahead.

Good evening, everyone and welcome to Laureate Education's second quarter 2006 conference call. Please note that a synchronized 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 these forward-looking statements. The following factors might cause such difference.

The company's operations can be materially effected by competition in target markets and among other factors by overall market conditions. The company's foreign operations in particular are subject to political, economic, legal, regulatory and currency-related risks. Additional information regarding these risk factors and uncertainties is detailed from time to time in the company's filings with the SEC, including, but not limited, to our most recent forms 10-K-A and 10-Q, available for viewing on our website.

Our speakers this evening are Douglas Becker, Chairman and Chief Executive Officer of Laureate Education; Rosemarie Mecca, Executive Vice President and Chief Financial Officer; also available for questions are Ralph Appadoo, President; Paula Singer, President of Laureate Online; and Bill Dennis, President of Latin America operations. Now, at this time I would like to turn the call over to Douglas Becker. Doug?

Thanks very much, Chris. We're all very pleased with the quarter and excited about the trajectory of the company. This quarter and the first half of 2006 gives us great confidence in the guidance that we've previously provided for 2006 full year and for that matter, great confidence in 2007 and you'll hear today the guidance that we're introducing for that, which very much puts us on track for the five-year plan that we've told you all so much about. This confidence is in large part a result of the strong year to date performance of the global portfolio of universities that we manage.

This quarter, Laureate's revenues increased 34% over $300 million, and as you'll hear more about from Rosemarie, that drove GAAP earnings of $0.77 per share, excluding the one-time events in stock option expense, earnings would have been about $0.75 per share. That's an increase of 25% over the same period last year. This strong performance is the result of strong enrollment and continued improvements in efficiency. And we are maintaining our guidance for the full year. Laureate report add year-over-year enrollment growth of 33% to 228,000 students worldwide.

While our campus-based institutions have no major intakes during this quarter, our strong student retention and long length of stay makes our enrollment very predictable. Campus-based enrollment increased 34%. That's 13% excluding acquisitions on a year-over-year basis.

It's important to note that acquisitions come in and out of our numbers and our formula and we always give you numbers excluding acquisitions so that you can see through any possible distortion. One year after something has been in our portfolio, we'll move it out of the acquired line item and into the base number.

Laureate Online, which enjoys multiple intake periods each year, enrolled 23% new students in the first half of the year, driving total enrollment increase of 27%, and I'll touch more on that in detail in just a few minutes.

First, I want to underscore that our international network continues to provide great diversification for us. Our total enrollment growth is led by Laureate Online and Mexico Central America. Yet we see strong growth in South America, led by Peru and Brazil will be a very meaningful part of the growth story in 2007, as it ramps up under our management.

Europe continues to grow and prove its value to the network with the potential of working adult to lift growth rates above the low single digits in the future. All of this enrollment growth puts us very much on track for our goals for 2006, 2007 and the 5 year plan. To support our growing international network, we've made some important management appointments and new hires, as we always do and will continue to do.

For example, the hiring of Dr. Barbara Heller, who has been a long-term friend of the company, brings expert attention to the very rapidly growing vertical of nursing. As Vice President of strategic initiatives for the nursing and health sciences programs, Barbara will be responsible for identifying, developing, planning and establishing new health sciences and nursing degree programs in our online division. She'll provide her expertise to our network of higher education institutions around the world.

Dr. Heller was most recently a distinguished professor of nursing at the university of Maryland. Prior to that, she was the Dean of the University of Maryland school of nursing for over 10 years and is one of the most recognized and respected figures in nursing education in the U.S.

In our campus-based operations, Ralph Peters was previously the Chief Operating officer of UVM and was recently appointed as the Chief Operating Officer of Anhembi Morumbi, which is our university in Brazil. So he and his family have actually relocated to south Paola.

Many of you had the opportunity to meet Ralph at our analyst tours in Mexico and on prior investor days. Prior to joining Laureate, Ralph was the President of one of Mexico largest pension management companies.

Anhembi Morumbi in Brazil, our university there, is already known for its quality and prestige, but Ralph is launching many of the appropriator processes and techniques that help UVM become one of the largest universities in Mexico.

Luis Lopez, another familiar face to many of you headed strategy and mergers and acquisitions for the Mexico-Central America region and was a member of our global business development team. Luis has recently been promoted to the Chief Operating Officer position in UVM, given Ralph's movement to Brazil.

Again, many of you have had the opportunity to meet with Luis on many indications and he's one of our most impressive executives and we're so pleased that he and his family are relocating to Mexico. I know Luis is going play a big role in continuing to expand UVM throughout Mexico.

To that end, we do have two new campuses, which we recently announced in the first quarter. Mexi-Cali in Puerto Varerta that are currently enrolling students for the primary intake this fall. That brings the total number of campus locations in Mexico to 23. There are still 14 new markets left that will support at least one campus of UVM.

Luis was the key executive in charge of identifying and analyzing that's market opportunities and now he'll be out there implementing them as well. We are excited to announce that we're now enrolling students for our new lower price point 4 year degree program, which we call [Universidad que la profesional desarrollo de Mexico]-- we call it UPRO for short. That's basically the university for the professional development of Mexico.

This institution operates in a completely different market segment from UVM at approximately half the price point of UVM and we think as a result, it will allow us to address a large untapped market that we really are excited about.

We're going to apply the model that we have worked so successfully on in Chile of operating in multiple market segments within each country and in Mexico the biggest unaddressed segment would be at a price point underneath UVM and that's what we're doing.

In Brazil, the preparations for the big intake, which starts in late 2006 and runs into early 2007, those preparations are proceeding very well. We're implementing our normal step ladder Laureate approach as we enter each new country and we expect to get the same results that we've had in the great successes that we've had in many other countries.

Ralph Peters will be bringing the best practices that we established at UVM to Anhembi Morumbi and we expect to replicate that success in Brazil. While expanding Anhembi Morumbi throughout the state of south Paola, we also have an interest in acquiring entry into other important states within Brazil and you'll see us move pretty aggressively to pursue that. Last, but not least is China.

Many of you know we've worked very hard for many years on China and I feel that our entry steps to China are proceeding very well. We've identified and screened many high quality prospects. We have great relationships in the university and business community, and with the government as well. We have our short list of the best universities that we would like to partner with and we would like to arrive at an agreement with at least one of these.

Our challenge, as many of you know, will be the process of getting government approval. While we know that everything we're requesting is within the law, we expect to be one of the first people to test this law by asking for approval and we just don't want to move too quickly.

We want to make sure that we allow ourselves the time to move at the speed that is comfortable to the Chinese government, and we'll just see how that works out for us. Moving on to the online division, this is an area that I know investors have been focused on, so I want to spend a little bit longer than usual under this topic. You see that we did post 23% new enrollment growth.

As is our convention, that's a cumulative number, so that includes the first half of the year. I'll come to that in just a few minutes and that drove total enrollment growth of 27%. I want to comment a little bit on leads and lead quality.

In second quarter did show a marked improvement in the volumes of leads, up almost 20% over the first quarter and in line with our plan. This increase came as expected from a number of sources, direct mail, referrals, on the ground sales activities, and more targeted web vehicles.

The web does remain and will remain a major piece of our integrated marketing approach, but we'll be using it increasingly in a more audience-focused manner with less reliance on the more commoditized education portals and more focus on targeted professional sites.

Equally important, lead quality showed significant improvement during this period. We measured lead quality in a number of ways, including lead scoring and ranking analysis and the analysis of the time it takes a lead to move through certain steps in this customer's decision-making process.

All of our indicators show lead quality to be up. We're encouraged by this, given the increased competition for leads in the sector. Lastly, I want to add that we piloted the use of TV in Q2. While this is a new channel for us and we still have much to learn about its appropriate use, we're very pleased with the initial results and many of you know that Paula and I and some of our colleagues have a lot of experience with TV from our days in the Sylvan learning business.

TV did produce leads that were of the same high quality as other channels and brought in inquiries for programs where direct mail and web leads have not always been sufficient. We believe that over time this will become an important addition to our integrated marketing strategy.

We also have other aspects of expansion that relate to new programs. We are going to launch a masters in education in leadership and a masters in early childhood development. These are previously announced programs that are going to be a big focus for us.

Kendall college is going to be our partner for early childhood development activities and many of you know Kendall is a north central accredited college that Laureate has an option to acquire.

They happen to have the ideal accreditation and reciprocity standing to allow us to use them for undergraduate education and early childhood development, much in the way that Walden has been used for graduate education. We do have new programs that we can announce today. Masters in public health, which will come from university of Liverpool, and a doctorate in nursing, which will come from Walden. We do expect Walden international activities and the university of Liverpool to continue to post very strong growth.

International is today by far the fastest growing part of our overall online business. It is small, but we know that we can extrapolate it out to be an important part of our future. The next slide is really meant to just illustrate what a strong, great niche business that we have in our online business, especially in the U.S.

We know that a lot of investors have a lot of concern about the stability of just the online sector in general and we really believe that our online business is the gem in the industry, the most well-positioned to do well in a competitive, difficult environment. Now almost 30,000 students in this division, as many of you know almost all of them graduate students, masters, and about 20% of them at the Ph.D level.

We are expecting for the full year about a 20 to 25% increase in total enrollment, so still very strong, even with the competitive environment. Typical price increase of around 4 to 5 %, and as you all know, the absolute benchmark in the industry, the lowest cohort default rate and enviable bad debt rate in the industry. Our attrition rate, we believe is a leader shall the-- in the industry and we have the strongest forms of accreditation, including at the program level.

A good example of that would be the CCNE accreditation that we obtained and announced in the last quarter for nursing and as a result, nursing was one of our top growers in the most recent intake as students recognize the desirability of that CCNE accreditation. Again, international today, around 8 or 9% of total, and important growth factor for the future.

Just wrapping up on online, many of you know that at the end of our Q1, and our Q1 conference call, we wanted to bring to everyone's attention our concern about lead quality and our reliance and frankly the reliance of the whole industry on some of the commoditized aspects of the web lead sourcing area and that would be the web portals and we came out and said that we were going to take some pretty strong steps this year to diversify away from those aspects of web lead development or generation.

We announced that we expected our new student enrollment in the second quarter to dip from the 20s to the high teens. Now, you'll notice that we reported 23% today. That's a cumulative number. If you look at just the leads, excuse me, the new students generated in the second quarter, that was up about 18%, pretty much exactly where we said, high teens. We think we're very much on track for the new student enrollment target that we set for the third quarter, which we said would dip to the low double-digits.

I do want to point out something that I think is important, and that is that one of the intakes that last year occurred in the third quarter is actually going to fall in the fourth quarter this year, and there are 9 intakes that we have in the third and fourth quarter and one of those intakes has moved from the third quarter to the fourth quarter and that is part of why you're seeing that dipping to the low double-digits. If you adjusted for that, it would really be the mid double-digits. So it really isn't as deep of a dip as I think people had thought.

Then we expect in the fourth quarter back up into the high teens or low 20s for new student enrollment and at that point we really think we will have managed the transition towards this more diversified lead sourcing and integrated marketing plan very effectively and that should allow us to farewell in the competitive market in '07 as well.

We do continue to expect strong margin improvement in the online division, about 200 basis points in 2006 and that's from improved conversion rates, getting returns on investments that we previously made, leveraging our fixed costs over a bigger student base, and this is towards a long-term goal where we think we can have stainable margins in the mid-20s for this business.

That will be against increase investment from the international side of online, which will hurt margins for a few years until it becomes a part of the growth story, profit growth story of the company. My last point before I turn the call over to Rosemarie relates to the 2007 financial outlook, and we did introduce that today. We're expecting revenues in 2007 of about 1.275 billion to 1.375 billion.

That revenue growth is in line with the roughly 18 to 20% that's in the five-year plan that we've rolled out in the past. Enrollment growth for the company, we expect total enrollment to be up 13 to 15%. Again, very much in line with the five-year plan. Online will be higher than that 13 to 15%, probably high teens or low 20s in terms of its growth of total enrollment and campus-based will be a bit lower and the average will be 13 to 15 for the company, from what we see today.

Margin improvement, we do expect between 50 and 100 basis points of improvement for the whole company. This will be based on improvement in both online and campus-based, and all of that should drive an increase of, at the midpoint, about 25% in earnings per share. We're putting out a range of 259 to 267. That's 245 to 255, if you take out the FAS 123R expenses. In 2007, we expect the growth leaders in the company to be the online higher education group, to be our Mexico and Central America business, and we're very excited about Brazil. We really see things going very well there.

Obviously new country entry and especially the chance to announce something in China would be a highlight for 2007 as well. At this point, I'd like to turn the call over to Rosemarie Mecca, our Chief Financial Officer. Rosemarie?

Thank you, Doug, and hello, everyone. I'm pleased to report another strong quarter from an operational and financial perspective. As many of you know, this quarter is seasonally the strongest quarter, seasonally the second strongest quarter for our business. Except for UVM, the company's largest school, the majority of our schools are in session for the quarter. I'm going to give a revenue recognition reminder, so bear with me for a minute.

Before we discuss the second quarter in detail, I'd like to remind everyone, as we discussed in our last year's press release, that we announce a new weekly revenue recognition methodology effective January 1, 2006. This voluntary adoption has been reviewed and supported by our external auditors, Ernst & Young, who issued the required profitability letter, which you can find along with the first quarter 10-Q in the Investor Relations section of our website.

In response to investor requests, tomorrow we will be filing an 8-K-A in which you will find the 2005 and 2004 representing quarterly financials displayed at the segment revenue and operating profit level in response to many of your requests. The company achieves fully diluted earnings per share on an income from continuing operations of 77 on 53.1 million shares outstanding.

Included in the results are two material nonrecurring items related to the continued liquidation of Sylvan Ventures. During the second quarter Ventures received 9.3 million in proceeds relating to the settlement of a contingent note on the 2003 sale of a Chancery Software business, which this been held in our Ventures business.

As a result certain deferred tax asset within Ventures were adjusted down to their estimated realizable amounts. The net results on EPS, the net result on EPS was a favorable $0.04 in the quarter. Excluding this event and the $0.02 negative impact of FAS 123R, earnings per share were $0.75 on an adjusted basis representing a 25% increase over the prior year EPS of $0.60.

For the quarter, the company generated revenues of 303 million, a 34% increase over second quarter 2005 revenue. Top line growth was driven by an increase in total student enrollment of 33%. Excluding the impact of acquisitions completed within the last 12 months, the second quarter revenue increased 19%.

On to campus based, our campus based revenues grew 37% to 248 million from 101-- from 181 million in the same period of 2005. Key drivers were enrollment growth of 34% coupled with the weighted average price increase of 5.4%. This was slightly offset by program mix. Both the Latin American and the European segments continue to demonstrate strong revenue growth organically and with acquisitions.

On a quarter over quarter basis, Latin American revenues increased 45% to 191 million and for the 6 months ending June 30, 2006, revenues increased 46% to 313 million. Organically, revenues grew 24% in the quarter and 23% on a year to date basis. The Brazil acquisition contributed 26 million in the quarter and 44 million for the 6 months.

On a year-over-year basis, Latin American revenue was benefited from foreign currency by 6.8 million for the quarter and 11.8 million for the six months, primarily due to the strengthening of the Chilean peso. This was very slightly offset by unfavorable foreign currency impact in our European revenues, which is around $500,000 in Q2 and about 5.6 million for the 6 months, primarily due to the weakening of the Euro.

Our European institutions grew revenue 14% to 57 million for the quarter and 10% to 117 million for the 6 months ending June 30, 2006. Our cyprus acquisition contributed 4 million in the quarter and 9 million on a year to date basis. Organically, revenues grew 7% in the quarter and 2% on a year to date basis. In local currency, organic European revenues grew 10% for both the quarter and the 6 months. We're delighted to say that our online revenues grew 21% to 55 million in the quarter compared to the same quarter last year and 27% for the first half of 2006.

Key drivers were enrollment growth of 27%, coupled with the weighted average price increase of 4% and slightly offset by program mix. This growth has been fueled by continued emphasis on enrollment conversion, on lead quality, as well as the successful partnership programs and new degrees, which you heard Doug mention as the CCNN-- CCNE and early childhood degrees. A bit about operating profits. Our operating income grew 28% to 57 million for Q2 and 23% on a year to date basis versus last year.

The favorable effect of foreign currency for the quarter was approximately $0.04 and $0.01 on a year to date basis. Some additional details on our income. For Latin America, operating profit margin decreased in the quarter from 32 to 31%. This decrease was related to the acquisitions of Anhembi Morumbi, and [Unotec] and the adoption of FAS 112, which I will explain in more detail shortly. Acquisitions typically have lower margins and our core operations in the first year. We would expect to improve these margins over time. Excluding these items on a year-over-year basis, margins increased 147 basis points.

European operating margins declined in the quarter from 13 to 12% as a result of the acquisition of cyprus college and FAS 112 expense. Excluding these items, year-over-year margins increased 169 basis points. A bit of color about online. Our online operating profits increased from 12% to 15%, or 310 basis points in the quarter. From 8% to 12%, or 390 basis points for the six months as a result of increasing enrollment and programs, leverage of our fixed cost and prior investments in brand. I'll talk a little bit about FAS 112.

For those of who you are familiar with FAS 112, it comes under the accounting guidance for accounting for post employment benefits. As I've mentioned in the past, since my arrival to Laureate we have proceeded to review and implement best practice approaches. In the second quarter, we adopted FAS 112 accounting for post employment benefits. The company record add 1.5 million severance liability for countries where there is a statutory requirement for payment on terminations without cause. This requirement exists in some of our countries in Latin America and Europe. This is obviously impacted our margins in the second quarter. Some commentary on G&A. Our corporate G&A increased by 5.6 million to 11.4 million in Q2.

As a result of timing of expenses, increased compensation costs associated with incremental staff, as well as performance-based compensation, including 123R charges. Minority interest expense increased 6.5 million from the prior year due to campus-based operating performance, including the Brazil acquisition, which as a reminder is owned at 51%. Excluding the Chancery gain there, are three components of non-operating income. Interest expense, interest income and foreign currency. The net positive effect from the non-operating items is 1.3 million in the quarter.

Cash balances have remained higher in 2006, but have been offset about interest expense related to acquisitions and local debt. A little bit about our tax rate for the quarter. Excluding the nonrecurring items, which is the Chancery Software sale, our corporate tax rate was 8.9%, driven by continued strong performance of the businesses, particularly those businesses in lower tax jurisdictions.

The company continues to estimate that the full year tax rate will be between 10 and 13%. Some color on the balance sheet, the balance sheet remains strong with over 1.8 billion in assets, which includes cash and marketable securities of 119 million, and total company debt of 227 million.

For the year, cash flow from operations was 85 million and depreciation and amortization expense was 30 million. Capital expenditures were 97 million, which is approximately 32 million in the first quarter and 65 million in the second quarter.

The company currently has over $250 million of unmortgaged assets. These estimates at this point are unaudited. We noted in the first quarter our plans to raise funds through the issuance of additional debt. In the third quarter of 2006, Laureate Education intends to secure $250 million reinvolving credit multi currency facility.

This facility has a five-year term and is at a LIBOR based interest rate. This line of credit is expandable up to an additional $100 million under the original terms. The financial covenants are routine for this type of debt. Proceeds will be used primarily to fund our acquisitions and working capital needs. The company's existing $120 million facility will be repaid. There is currently a $30 million draw on this facility and the current facility will be cancelled in conjunction with the closing of the new credit facility.

Again, there is no impact to the current 2006 guidance. The interest expense related to the new revolver is included in our guidance EPS for 2006 and for 2007. On to third quarter guidance, turning to the third quarter guidance, for the third quarter of 2006, we estimate total revenue to be between 240 million to 265 million. Operating margins pre FAS 123R are estimated at 8 to 9% for campus based and-- which are low, obviously, because our European sessions are out of school for most of the third quarter, and 20 to 22% for online. We anticipate G&A expenses of approximately 10 million. Minority interest is estimated to be approximately 34 to 36% of campus-based operating profits. Diluted earnings per share before the impact of FAS 123R charges are estimated to be $0.19 to $0.21 for the quarter.

This estimate is entirely consistent with the 8 to 11% seasonal EPS range, provided in February when 2006 guidance was issued. Though at the midpoint of the range, we-- and at the midpoint of the range. Additionally consistent with our previous guidance, third quarter estimates for FAS 123R is negative $0.02 to negative $0.03, which is in line with our annual guidance of negative $0.10 to negative $0.12, bringing the third quarter EPS, including FAS 123R charges to a range of $0.16 to $0.19.

Again, I will reiterate that the company is on track for the year and anticipates full year EPS of between $2.05 to $2.15 per diluted share excluding FAS 123R charges. All of which is consistent with the guidance given in February 2006. In conclusion, we are pleased with the second quarter and with the financial results and the progress on a year to date basis. We're hard at work to have this continue in the third quarter. I'll now turn the call back to Doug.

Thanks very much, Rosemarie. Just a few more comments before we open up for questions.

In terms of priorities and objectives in 2006 and really they are pretty much the same for 2007, a lot of our expansion of enrollment requires us to expand our campuses and we intend to grow the enrollment and the campus size at existing campuses. In particular, I'll draw your attention to where we'll be adding capacity. Mexico and Central America, because we have such strong growth there, as well as Peru and Ecuador. Paris' expansion, we have an important campus that's beg expanded there for our ECE engineering school.

In terms of new campuses, this year and next year, we would expect 3 to 4 new campuses. This year we've already announced two that were-- that are already enrolling for September, but we would like to add more if we can between now and the end of the year.

Brazil, I think, is important to highlight because we are seeing such good early success with our work with Anhembi Morumbi and we're seeing such great response from other Brazilian universities that would like to become a part of Laureate, so we'll continue to work hard on that and of course work hard on our preparations for entry to China.

Moving to the next slide and just to wrap up, the '07 plan that we've announced today has, I think, as its primary importance, the clarity that it shows of our being on track for the five-year plan, which takes us to 2010. And again, many of you know the goal is to get the company to approximately double our 2006 size. That will be about 2 billion of revenue.

We would like to expand our operating margins by 100 basis points per year and that would get to us a 20% operating margin and a 25% compounded growth rate in EPS to $5 per share.

I think most important to the members of the management team is that in 2010, we should not have depleted all of the growth prospects of the company and that we will need to have invested to insure that we're positioned for continued earnings growth beyond 2010. We think the hottest growers in 2010 will be campuses in Asia, the international aspects of our online division, and working adult activities all over the world.

So with that I'd like to ask the operator to open up for questions and we will look forward to answering them as best we can.

Thank you. [OPERATOR INSTRUCTIONS] And our first question will come from Mark Marostica with Piper Jaffray.

Thank you, and good afternoon.

Hi, Mark.

First of all, the guidance for campus-based operating margin for Q3 of 8 to 9% was a bit below what I was modeling. I'm wondering, is there anything unique to this quarter outside of the fact that Europe is out -- that potentially impacting those margins more this year than last?

I guess I would point out two things, Mark, in answer to your question. Our margins in the third quarter continue to be impacted by our acquisition investment. So, for example, our losses in cyprus in the third quarter are contributing to our overall losses in Europe and in Europe, you'll remember that most of our-- the majority of our schools are out of session.

Also, Brazil is out of session in July and this continues to impact our Latin American margins in the third quarter. You'll also note that there was I think in the-- we've talked a bit about some of the impact of margins in the second quarter. I think we are clearly on track for our full year margins, so this just happens to be the phenomena of the third quarter margins for campus-based.

I think the bigger we get, Mark, by definition, the bigger the impact of the loss is when we're out of session. So I think over time, you could see your first and your third quarters getting weaker just the bigger we get and your second and fourth quarter getting stronger. Seems like that would be the general direction.

Okay. Doug, you mention also that the lead quality for online showed some improvement. I'm wondering if you can give us a little more granularity there. Could you give us a sense whether or not conversion rates showed improvement from lead to applicant and then if you could comment on the same rate trending from applicant to start.

Well, I'll ask Paula to comment. I think we said to give you good color, but we also are in a very competitive market, so we want to be cautious about how much information we do put out. Paula, do you want to comment on that?

Sure, I would be happy to. We were very pleased with second quarter and I just want to make a couple comments. We were pleased in three ways with the improvement in inquiries. We were pleased by the fact that we were able to improve volume of inquires.

We were pleased about the quality of leads, which we measure in a number of ways and that includes, as Doug was mentioning, the scoring and ranking that we do, the speed with which they go through the decision-making process, and we did see some improvement in conversion, although I will tell you I'm always saying it's too early to say what the full conversion improvement will be because these leads usually have about a two-year life for us. So we look at that.

The other thing that we're very pleased about, Mark, that is important to us is mix, and so what we've also seen, and we've been seeing it over the last 6 or 7 months, is improved ability to direct leads to specific programs, and that's going to be an important aspect for us as we move forward.

Okay, and then one other question on online and then I'll wrap up with a housekeeping question. And that is relative to the new student online enrollment growth, high teens, low 20s in Q4, what would you expect as you round the corner into first quarter, second quarter fiscal '07? Should we see it kind of stabilize at that level, or what are you embedding in your plans?

Well, I think we put out today an expectation that was 20 to 25% for the year, so basically the consume la-- that's total. The cumulative effect for the full year, and we're saying that new students would have come to in essence high teens or low 20s. So you could still actually have the phenomenon of total growing a little faster than new and we all know in the long-term that evens out.

So I think for next year, we were talking about online enrollment growth rates that would be in the high teens or low 20s. So I think it shouldn't be that much of a change really as we round the corner in the next year.

Okay. Last question and I'll turn it over. That's the tax rate guidance. I know for '06, I think you mentioned that 10 to 13%. What's embedded in the '07 guidance for tax rates? Thanks.

Shouldn't be that different.

It won't be that different.

Okay. Thank you.

Operator, next question, please.

Next question will come from Howard Block with Bank of America.

Good afternoon, everybody.

Hi, Howard.

Nice job on the quarter. I wanted to follow up on Mark's question. Sounds like it was a pleasant surprise on the lead volume and quality front. Would it have been reasonable to have expected maybe an upward revision in the online growth outlook, considering the somewhat moderated expectations following the last quarter?

Howard, think we're really right on plan and I would just remind folks that, you know, the enrollment for third quarter, enrollment we have for third quarter is basically, is based-- the majority of that enrollment is based on inquiries from Q1. So we do have that kind of lagging phenomenon that happens, but I would say to you we're right on plan.

I think that's a very important point. We know, when you put all this on paper it looks very strong, and it is very strong, but when we gave the plan out, these were the underlying numbers. If we were ahead of plan, we would say we're ahead of plan. I think we feel like we're on plan. And we think it's a good plan.

Actually we'll end the year with I'm sure the strongest stainable growth rate of anybody in the industry, but it's tough to get through this lead diversification initiative without beating up the enrollment growth rate too badly.

Okay, and as you look across your sort of integrated marketing approach, are there certain media or medium within that approach that are doing significantly better in terms of either volume or quality?

Well, what's interesting, Howard, is that it really depends on the program and that's what we're trying to be very expert at, is that we have direct mail that works better for a particular programs. We were very pleased to find that DRTV for us helped with several programs for which we were not happy with the level of leads from direct mail or from web. So this diversification is important for us in terms of programs and overall volume.

Okay. Is there any-- Rosemarie, is there any level you can speak to in terms of the interest expense around the credit facility that is in the '07 guidance? Or perhaps the expanded-- to what extent that facility is anticipated to be utilized in '07?

Yes, I think, Howard, what I would-- in answer to your question, how I would comment is if you looked at a company with the premiums that Laureate has and those premiums are obviously sustainable cash flow profitability, stability, and the basic fact that today we have very, very low debt, if almost no debt.

Net debt.

Net debt. You know, you would expect that we would be at rates of LIBOR somewhere between 150 and 200.

I think you were asking, though, how much--

Yes, that's right.

-- not what the interest rate would be.

Right.

I think the answer, it's actually a very hard question because a big part of that line is meant to support our needs for acquisitions and we try to put very little, if any, acquisitions in our model when we build our plan for next year. So I think there is-- we have picked a number as to what percentage of the line we think will be drawn on average next year and we've built that interest rate into our plans and to the extent that we draw more, it will be because we buy more and to the extent that we buy more, we should earn more. So I can't say that we have guessed it exactly right, but I think we've guessed it as well as it can be estimated at this point in the process.

Okay. Let me just sneak one last little one in. It's about-- is it about the one-year anniversary, I forget, on that dual degree program, and if so, either way, I was just wondering how it's doing.

Yes, I think it's a little less than a year.

We will know at the end of August how we've done the second year.

Do you want to comment a little bit on that?

Mexico, talking about the Mexico--

Right, right, right.

The Walden one. I think university will be end of August we'll know that, so you'll-- you would get the numbers in October. We also have a double degree with--[inaudible] and that's also something we are watching. So overall, they are good programs, but we are right in the middle of enrollment right now.

Okay.

I think it would be fair to say that the most important aspect of that dual degree is how attractive it has made UVM, even for students that aren't, that don't have the English level yet to want to enroll in that degree.

So when we talk to students, they say it's one of many things that differentiates UVM from competition and it is a very, very challenging operational program to figure out how to provide the support to the students, the curriculum, the language skills, and actually I'm glad because if it were easy, I think other people would be able to knock it off pretty easily.

It's been really hard to operationalize it and think that we're building something of real competitive advantage in the process.

Great. All right. Thank you very much.

Thank you.

We'll next hear from Matt Litfin with William Blair and Company.

Hi. Congratulations on a solid quarter.

Thanks, Matt.

So you're now enrolling the lower product offering in Mexico. Do you have separate locations, or will those be taught in your UVM facilities for a while? How's that going to work?

We have one dedicated campus for-- that's under construction in a part of Mexico City called [Centros De Abastoes] right now and we expect that campus to be open, enroll students sometime in September. So we're not going to mix those students with UVM students on UVM campuses or with the UVM brand. It's really meant to be a completely separate, contained endeavor.

Okay, and where do you stand on the prospects and your plans to roll out online internationally with local brands and maybe you could give us a little time line there of what you're thinking at this point.

Well, I'll comment and Ralph or Paula may have other points on it. He think this is something where we're doing everything we can to get our universities ready. In terms of the market's readiness, we in mind to be very much linked with the market's acceptance of working adult. So working adult, which is growing very nicely for us in places like Chile and Mexico, is still, though, a very small part of our business and still very early. So there is this sort of chicken and egg issue, where we can be ready all we want with online, let's say a UVM online degree in Mexico, but the people that would want a fully online degree would be working adult students. The existing UVM students might be interested in some hybrid programs where they can take a few courses online for convenience or novelty. We are doing some of that in Chile. So it's still very much in the early days, I think, but it's getting a lot of attention and effort because we think it's another thing. It's going to be hard. It's going to take years and it will give us a real advantage for a long time. Anything you would add to that, Paula?

I would just add that in Chile, we have just completed a training and certification process for significant number of faculty in the Chilean territory, in order to make sure that they are well prepared to handle the online, the online entry and we see the online division being helpful in that way, of training certified and quality controlling.

I guess the other way I would put it is the growth in the next couple years for online internationally will probably be the global brands. What I mean by global brand would be a British degree from Liverpool, a U.S. degree from Walden, possibly a Spanish degree, things that can be operated and delivered outside of the home country. I think the local brands online, we're going to need a couple years for the working adult programs to really get to the momentum that we anticipate.

Okay. Lastly, I saw the management changes and promotions. Have you lost any senior management at all?

Not at all, not a single one.

No.

We are all here at the table. Bill Dennis is in Brazil busy. So we are all here. In fact, we are in the next 2 months, you'll hear some additions from bright people that we are able to bring in. So it's very positive on that front.

Great, Ralph. Thank you, and congratulations on the quarter again.

Thanks, Matt.

We'll now hear from Mark Hughes with SunTrust.

-- looks like the weekly revenue recognition methodology had a very positive effect on the year-ago 2Q '05. Is there some reason the second quarter of the year, particularly benefits from the change?

Yes, Mark, when you look at it, I think the second quarter benefit, it gets more benefit than the first quarter for obvious reasons, which are in the second quarter all of our students are all-- all of our students for the most part are in session.

Right. So is that to say it accentuates the seasonality in the business?

It does.

Exactly right.

Right. And then in the-- for the reported number for new online enrollments in '05, it was 9702. As you go back and add up the new enrollments you reported in Q1 and Q2 last year, that number adds up to be a little bit higher. Did I misread that, or is there a disconnect there?

Are you seeing a big difference?

It's 10014, if I add up the two that you reported and I didn't know whether there was a difference in the dates or something like that that might have accounted for it.

Why don't we work on that while we take the next question and if we get our calculators done in time, we'll come back to you on that.

Okay. One final question, though. Organic campus growth in the quarter, same currency, did you give that?

I think it's in the release. Organic growth?

Yes. You're asking on, for the campus-based?

Yes, exactly. Just campus revenue growth organically seeing currency.

Yes, 20-- same currency, one moment.

I've stumped you twice. I win.

No, it's right here on the press release. So if you look, you'll see both the USD and the currency for Central America, USD is 24%, with constant currency of 25%. South America is 24 and 14% in constant currency. Europe is 7% in USD and 10% in constant currency and online is obviously 21% no matter what. And that's for the 3 months ending June 30th.

Right, and we have the information also for the 6 months as well. I don't think it's actually totaled for campus because you don't want to average the currencies, but I think everything you would need is going to be right there on that page.

Okay. Thank you.

Thank you very much. Operator, next question, please?

We'll move on to Jerry Herman with Stifel Nicolaus.

Stifel Nicolaus. Good afternoon everybody. Question about Mexico and the lower priced program, Doug. How is the student profile different? My concern is cannibalization obviously. How do you keep that program from cannibalizing UVM?

You know, Bill Dennis on the line. He's actually in Brazil. If he has a good connection, maybe, Bill, you could comment on that.

Sure, Doug. I guess I would say that our UVM profile, socioeconomic-- first of all, on the traditional side, there is typically 18 to 24-year-old and they are not necessarily working.

You have seen them when you have been with us on tour of some of those campuses, that they attend school here during the day and that our executive working adult program at UVM is someone that has a job and is taking a program at a discount and at night.

What's different from those two at UPRO is that we're going down market in the socioeconomic segments. Example, UVM has some A's, a lot of B's and C's, C-plus and C's, social economically. When you look at UPRO, you're going to see wonder people in the traditional sense that, is 18 to 24-year-old, but you're going to see them in the C minus, D segment. Even in some cases maybe to E.

This is the largest, fastest growing segment in all of Mexico and the demand for seats is in the millions and the number of universities that are trying to cater to this, and not with much success, are many.

So we've had incredibly positive response from the Mexican government to uncourageous to go forward with our academic model, to cater to this lower socioeconomic segment at a price point that's well below 50% of UVM today and that's the reason you're going to see essentially no cannibalization.

I would just add to that, I think that the-- if you were to look at how students make their decisions, many of the low cost universities would be at the, let's say even half of the price of what UPRO is going to charge. There's a lot of very inexpensive and very low quality stuff. We think the hole in the market is somewhere between them and where UVM is. And that's where we've priced this. I think if economic times get hard, you might find some UVM students who go to UPRO, but at the same time-- 8 and 10,000 dollars universities-- that would be coming to UVM. So it's not something we're really concerned about.

Just to add, our schools are neighborhood schools and I think you've seen it where anybody who has been to Mexico would recognize that and we-- this UPRO will be in a very different neighborhood from our existing and, again, because of traffic and so on, people don't go from one side to another. So the cannibalization can only happen if we look at an existing UVM campus next to-- locating UPRO to that. So the demographics go by neighborhoods. D's live in-- in a neighborhood where you rarely travel outside. So the neighborhood concept is very important in Mexico and for that matter, Chile.

Quick current events question for you, because Mexico's so important. The controversy and disruptions caused by the Mexican election, I know it's probably a tough gauge, but can you give any feel for any influence on the business lead flow, student inquiry, conversion?

I don't think there's been any--

Nothing on that front. I think it has been a calm more than anything since the election, so for all intents and purposes, the existing declared winner will continue and that's what we expect.

The markets, as you know, also expect the same thing. There was a big rally this week in terms of stock price. The base is trending, so I would say it's back to calm, but in our business, we haven't seen it. We are-- it is normal.

Yes, no impact.

Last question. You guys had a good quarter, better than expected, consensus beat your guidance, yet you didn't raise full year guidance. I guess the fourth quarter is the one that seems to differentiate relative to the early year guidance, but can I pin you down on that one?

Absolutely. Because I think it's important. We would raise guidance if we really thought we were ahead of plan. I think we went into the year with a strong plan and an achievable plan and a plan that was going to boost earnings by 25% or more. I think you know our philosophy is-- eek out an extra nickel here or there. We're always looking for what are the things we can invest in in terms of management, in terms of retention, in terms of international growth for online, all these other things are just very, very important to us.

When we give out guidance, we did give out a range as to how much earnings we would expect to fall into each quarter, and we didn't give a point. We gave a range. And so all of the guidance that we're giving you today still falls within those ranges. It just is a little bit different in those ranges than what I think analysts had.

So from our perspective we really do feel that we are on plan and we think that's great and we don't want people to take the message away that we're going to be ahead of that plan. I think we're going to achieve that plan. That's what we can see today.

Great. Thanks very much.

Thank you.

We'll move on to Brandon Dobell with Credit Suisse.

This might be a record. I think I might not be last in the queue this time. This is a first perhaps in two years or maybe I'm last. I don't know yet.

You got to be quicker on the draw here.

I guess I got slow fingers or fat fingers or something. A couple things. Wondered if you could update us on your thinking about the situation in Chile from two perspectives, one from a financial aid perspective and two, with the school that-- trying to figure out what the right look and feel is going to look like.

Yes, the school you're referring to is [IF]-- that is our vocational school, which operates at a lower price point and does not grant four-year dress. It's a two-year diploma school. I think everybody knows that's not Laureate's main business, but we're experimenting with it. I don't think that there's really anything that's changed. We have asked that management team with getting that business to profitability and convincing us that it's a model worth expanding, and that continued strong growth in enrollment without proving out the model itself of profitability doesn't really accomplish anything. I don't think anything's changed. We're watching it carefully. I think the two likely outcomes will be we either love the model and we decided to expand it or it's not a business we need to be in. It's immaterial to our business today. The only thing that would make it interesting is if we decided to keep it and expand it. That would be a good sign. In terms of Chile, I think that you were asking about-- what were you asking.

Financial aid.

Again, I don't think there's anything major that's changed there. I'm looking around the room. Bill, anything?

No, none at all. There's nothing new to report there and I would just go back and add that with respect to [IF], we are seeing the plans we put in place this year coming along very nicely and we're also continuing to analyze the possibility of the Mexican UPRO model and how the [IF] might be modified and how that might be consistent with trends in the market.

Okay. Kind of leverage that, that point, Bill, at the low end in the Mexican market, do you think you need to offer some sort of financial aid or a process or a guideline in place to think about how to fund those students because they might not have the same, the same kind of cash flow from their parents or from their jobs to keep up.

Well, there's no question that-- and it is not fully developed yet, but there are a lot of new movement, a lot of new movement in Mexico by some of the hiring universities, developing relationship and alliances with major banks in Mexico to provide student financing. We're watching that carefully and also talking to banks there, but so far we've done nothing. We've limited our experimental efforts there and student credit has been limited to Chile, but who knows. We hope in the future that that, that those opportunities and resources exist.

Okay, and then finally, Doug, you kind of mentioned 3 to 4 schools, or new schools in the '06-07 timeframe. As you think about what a school in Brazil might look like relatively to a school in Mexico or someplace else in Central America, should we assume the same kind of capital needs, same kind of construction times, that kind of thing, or is it going to be different as you try and expand in south Paolo?

The two most likely places where we will add campuses will be Mexico and Brazil and I think in the case of Mexico we have a very clear model and that's just replicating UVM. In the case of Brazil, we can replicate Anhembi Morumbi in the state of south Paola.

That's a big state that accounts for over half of all university students in Brazil. But if we want to operate in any other states, and we do, we will need to acquire somebody that has a license who has a license in those states, but it does make the model a little different. I don't think it's materially different, but it is a little bit different.

I think it's important to note that our approach when we open in a new city is we do the demographic research.

We figure out what city we want to be in, how badly, when and where in that city we want to go, but now, and this is something that's only really a factor over the past year or two, instead of just going in and starting construction, we do knock on the doors of other schools that would be situated where we might like to be and say this is how much money we're about to pour into the ground in concrete and steel and plaster and desk and computers, would you like to sell us your university and we will reflag it and operate it as our own. Yes or no. In cases the answer is no and we build our school and some cases the answer is yes because we can buy have a lower risk because we have the students on day one.

I think the model is very similar, but there is that little difference that in Brazil you have to buy at least one platform in each key state and there's some states that are too small for us to focus on, but there's some great states that we're working hard on.

Okay. Great. Thanks a lot.

Thank you very much. Operator, we're going to take two more questions, please.

Okay. We'll next go to Jeff Silver with BMO Capital Markets.

Thanks so much. I know it's late. Just one question about cash on the balance sheet. If I remember correctly, had you about an $82 million earn out payment that was due sometime this year. Has that been paid as of yet, and if not, when do you think that will be paid?

Sure. Well, the-- we're required to estimate for the, for our disclosures, but sometimes we have to estimate something that's hard to estimate. In the case of Chile, there's a very important process that we have to go through in order to agree with the seller how much that earn out payment is and, you know, they could argue it's more than the 82 million and we have argued and think we have very good arguments for why it's less. And we're engaged in a good negotiation and we're dealing with good people, but we may need some outside help to help us resolve this and there is a provision for arbitration in our agreements and we'll have to see where that goes, but frankly we have strong opinions about what, what it's worth and what our rights are and I know our shareholders expect us to follow this, those convictions. So until it's resolved, and if it goes to arbitration it, could be a year or two and it could be a year or two where we would take some of that money and post it as a bond or it may be that an arbitrator wouldn't require us to do that.

So it could be quite a while before that payment has to be made if we are able to come to an amicable resolution without the need for outside help, then obviously we would simply make whatever the agreed upon payment is at that time and be done with it. There is just as a reminder, our partners in that part of our business, there's an earn out associated with '05 and '04, which is paid this year, or due this year. There's an earn out, much smaller earn out associated with '05 and '06, which would be due next year and then that's it for earn outs. They do own 20% of our businesses in Chile and there are very attractive puts and calls that would allow us to buy that remaining 20% and that would be an accretive transaction, whenever that would take place.

So is there some sort of payment included in your guidance for either this year or next year?

We have made an estimate of interest expense based on what we think we should pay and when we should pay it. And that is embedded in our numbers. Obviously if it turned out that we had to pay more sooner, then we would have underestimated, and if it's later, lesser than we would have overestimated, but I think we-- I think we're pretty close.

Okay. Fair enough. I know a few months back you disclosed that the IRS was looking into in adjustments made from your [pro-metric] sell. Can we get around update on that?

Rosemarie, do you want to update?

I'm happy to update. There really is nothing there to update you on. Our status is still the same with respect to that issue. And what I would comment and say is that it's in it's very early stages, so that it may be sometime before we do hear from the IRS.

We're appealing basically.

Were appealing, so it may be sometime before we hear back from the IRS.

I think-- you might want to just mention payments made in order to allow us to appeal or litigate.

Since we're having the opportunity, let me take it and talk a bit about what we have done in the second quarter, which obviously will be included when we talk in detail about our tax issues when we file our 10-Q in the first part of August. As part of the-- you've heard us talk about our Italian back tax issue. In this case we've said in the first quarter to all of you that we're mitigating this.

We're mitigating the issue, not only in the Italian courts, but obviously in the European union courts. In order to get an expedited hearing in Italy, we paid some $3 million as a deposit. What that will do is it will give us a September hearing with respect to that issue, with the Italian taxing authorities.

Again, if the-- it's a situation where our case could be heard by both the Italian authorities, as well as the European authorities. What I would say here also is that if there is any P&L impact for this, it would be part of our discontinued operation, because this Italian vat issue arises from an operation that was discontinued. The other thing I would offer--

That was-- it was a 12 million-- what was the amount of that issue? With-- if there were a penalty assessed, I want to size the issue. That's a $12 million issue. Then just briefly touch on the other one because we--

Briefly I would say on our 1997 tax issue, as we've also told you, this is the issue that relates to the treatment of a contract termination payment. We tried to make a settlement, or an offer settlement with the IRS in January of '06. Unfortunately the IRS rejected the company's offer of settlement. We've made a subsequent decision to litigate in the U.S. court of claims. This particular court requires that we make a payment prior to trial. So we've made a $15 million cash payment, which is basically a payment of both tax and interest, because we would like the interest to stop accruing, and, again, I would tell you that we are at this point anticipating no impact to the P&L.

All right. I'm sorry I asked that. One quick numbers question.

Well, you would read it in the 10-Q. Now you've heard it verbally.

Great. In terms of stock base comp for the second quarter on a pretax basis, do you have roughly what that number was and then I'll let somebody else jump in?

Why don't we look that up. We'll take one last question and get you the answer to. That I still have one answer left for Mark Hughes and then we're going to wrap up this call so people can have dinner.

Quick-- the number's 1.4 million.

Great. Thank you.

And our last question will come from Jennifer Childe with Bear Stearns.

Thanks. Can you give us a breakdown of the acquired students by region?

No. I think we provide so much information that you heard, we just bored Jeff to tears and I just feel like one more number and we're going to have dead camels with broken backs all over the world. So I feel great about our level of disclosure, Jennifer. I'm sorry. The majority of it is Brazil.

Okay. Can you give us percentage of new versus developing campuses?

Percentage of new versus developing?

For the number?

We have that.

We have that.

And that is 25 fully performing, 20 developing, and 8 new. Now, that was-- that says-- that is as of when? Because it says for the fourth quarter.

That is as of this quarter.

That is as of this quarter.

Any change in the seasonal distribution of earnings in '07?

That is a great question.

Good question. Too early.

It's really too early, Jennifer, for us to give you an answer to that question because we've obviously put together our 2007 plan, but we haven't yet calendarized it.

I think the-- I think the curve and the ranges that we've given you will probably hold pretty well. I think that the movement within those ranges-- there will be I'm sure some movement within those ranges, but I think that curve-- it's actually in this presentation, is not going to be far off.

Okay, and last one, minority interest, Rosemarie, you indicated 34 to 36% in the next quarter. Is that what we should forecast going forward, it was a bit higher than we thought--

Jennifer, that's particular to the third quarter. Let me make sure that my comments are clear-- minority interest, it's approximately 34 to 36% of the campus-based operating profits. For the full year, you would want to continue with the guidance that we have already given. I'm going to get a reminder of that in a minute, which is 20 to 23%--

Of what, though? Of the whole company? Of campus-based.

Campus-based. Campus basined profits for the whole year.

Keep asking questions that we're allowed to give you answers to because I hate turning you down.

Okay. One more. So next year minority interest, same sort of calculations quarter by quarter?

I think it's probably-- again, what would change that much--

Brazil you've got now.

Yes.

I don't think it would be that material of a change.

Yes, we-- Jennifer, I don't think we could give you exact numbers for the full year, but I think you would be relatively safe if you looked at it the way that we looked at 2006, which was the 20 to 23% of campus based.

Okay. Thank you.

Thank you very much. We're going to wrap up the call. I want to comment that there was an open question for Mark Hughes. We're going to ask Mark to give us a call. He quoted some enrollment numbers that we just can't find. I'm sure if he can help us find them, we'll be able to get any questions there cleared up.

So we'll speak to Mark and I hope we were able to answer everybody else's questions. I want to thank everyone for their interest in Laureate and for your participation in the call today.

That does conclude today's conference call. Thank you for your participation.