Laureate Education Inc (LAUR) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Laureate Education, Inc. Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Adam Morse, Vice President, Corporate Finance and Treasurer. Please go ahead, sir.

Thank you, operator. Hello, everyone, and thank you for joining us on today's call to discuss Laureate Education's Second Quarter 2017 Results. Joining me on the call today are Doug Becker, Chairman and Chief Executive Officer; Eilif Serck-Hanssen, President and Chief Administrative Officer and serving as Interim Chief Financial Officer until a replacement is named; and Ricardo Berckemeyer, Chief Operating Officer.

Our earnings press release is available on the Investor Relations section of our website at laureate.net. We have also posted a supplementary presentation to the website, which we will refer to during today's call. The call is being webcast and a complete recording will be available after the call. I would like to remind you that some of the information we're providing today, including but not limited to our financial and operational guidance, constitutes forward-looking statements within the meaning of applicable U.S. securities laws. Forward-looking statements are subject to risks and uncertainties that may change at any time, and therefore, our actual results may differ materially from those we expected. Important factors that could cause actual results to differ materially from our expectations are disclosed in our annual report on Form 10-K, filed with the U.S. Securities and Exchange Commission on March 29, 2017, and our quarterly reports on Form 10-Q filed with the SEC as well as other filings made with the SEC. In addition, all forward-looking statements are based on current expectations as of the date of this conference call, and we undertake no obligation to update any forward-looking statements. Additionally, non-GAAP measures that we discuss are also detailed and reconciled to their GAAP counterparts in our press release and are included in our Form 10-Q filed with the SEC.

With that, let me turn the call over to Doug for the review of the quarter and an update on the business.

Thanks very much, Adam, and thanks to everyone on the line for joining us on today's earnings call. During our call this afternoon, we will be highlighting the results from the second quarter, giving more details around our accelerator plan and providing updated guidance for the year. In addition, Ricardo is going to discuss how we've realigned the operations to flatten the organizational structure, which will result in improved decision speed and operating effectiveness. Lastly, I'll provide some updates on key regulatory matters before we turn the call over for the Q&A session.

Now, moving to the results for the quarter on Slide #4. For the second quarter of 2017, revenue increased 8% compared to the second quarter 2016 on an organic constant-currency basis to $1.3 billion. Adjusted EBITDA of $342 million increased 22% on an organic constant-currency basis and, when excluding the $23 million one-time charge associated with our debt refinancing in April of this year.

During the quarter, we did have some favorable timing impacts versus prior year, and later in our prepared remarks, Eilif will provide more details on those items. Through year-to-date, enrollments results are on track with expectations with new enrollment growth of 2% and total enrollments increasing 3% on an organic basis. As a reminder, we're coming up on our large intake cycle for the Northern Hemisphere in September and October and we'll be reporting results from that intake during our third quarter earnings call later in the fall.

I'll now turn the call over to Ricardo to discuss our new operating structure.

Thank you, Doug. We have reorganized the business to create a more streamlined and efficient operating model, which assures appropriate oversight and most effectively supports our global operations. The principles that we have established to execute the operating strategy include the following: number 1, creating and fostering a structure to continue to drive efficient spans of control and a healthy balance of oversight, along with demand for nimble and agile decision-making capabilities; number 2, ensuring that our educational mission and mandate to deliver high-quality educational outcomes remains a central pillar of our organizational design; and number 3, building a geographically focused organizational structure that is also capable of leveraging best practices, innovations and commonalities regardless of their origin. As a result of the operating model, we are changing our current 3 reporting segments into 6 segments as illustrated on Slide #5. Latin America will be divided into the following reporting units: Mexico, Brazil, and Andean & Iberian, which will include Spain and Portugal, and Central America, which will be combined with the U.S. campus base; EMEAA, will stay the same except for Spain and Portugal; the sixth segment will be Online & Partnerships. We have a deep and talented management team with broad experiences and a demonstrated track record of success across our network to lead these business units. The individuals leading these 6 new business units are already in similar roles with the organizations, some of whose scope won't change and others who will be taking additional responsibilities. These new reporting segments became effective during the third quarter and will be reflected in our third quarter 10-Q when filed.

Eilif, I now turn it to you for operating results.

Thank you, Ricardo, and good afternoon, everyone. I'm going to start by providing an overview of our enrollment performance by segment and then give some additional commentary on our second quarter 2017 operating results. After that, I will provide more details around the accelerated plan and updated guidance for the year.

As a reminder, the first and third quarters represents our 2 largest intake periods, which accounts for approximately 80% of total new enrollment activity for the year. The second quarter is a smaller quarter from an enrollment perspective and we have a couple of intakes, some of which spill over from the first quarter and some that straddle second and third quarters, thus we frequently experience some enrollment cutoff volatility during this relatively smaller second quarter from an enrollment perspective.

As a reminder, for new enrollment reporting purposes, we report year-to-date enrollment results to better capture the underlying performance trend of our business.

Turning to Slide #6. For Latin America, new and total enrollment both grew 3% year-over-year -- June 2016 year-to-date. New and total enrollments grew in all markets except for Chile, which was slightly down year-over-year due to regulatory changes that occurred in that country during 2016. For the EMEAA and GPS regions, enrollment results year-over-year were impacted by the sale of 2 business units during 2016, 1 in France, accounted for in our EMEAA segment; and 1 in Switzerland, accounted for in our GPS segment.

When discussing the results for these segments, I will be quoting organic performance to normalize for these divestitures. Organic new enrollments in EMEAA were down 3% versus prior year-to-date, whereas total enrollments increased 6%. As discussed on prior calls, new enrollments continued to be impacted by our continued planned shift in certain markets away from lower price and lower contribution programs to longer length of stay and more profitable programs, notably in Australia. We indicated in prior calls that this effect would continue into this year and is likely to have a small tail into the second half of 2017.

When we get to the financials, you will note that the revenue performance is strong in this region, in part reflecting the favorable mix shift benefits of this strategic decision.

Moving on to the GPS segments. Enrollments results on a reported basis were impacted by the timing of the summer intake, which occurred in the first part of July this year versus in late June of 2016. The results are presented on an actual reported basis but we are also showing it adjusted for the timing of this intake to allow for proper year-over-year comparability. On a timing adjusted basis, organic new enrollment growth was down 2% and total enrollment decreased 5% due to the previously discussed strategic decision at Walden and University of Liverpool to rebalance the mix of certain international markets to improve overall margin contributions. Again, when we review the organic performance for GPS in a few minutes, you will see that this favorable mix shift contributed to positive revenue and earnings growth for this segment during the quarter and year-to-date.

Before moving to second quarter revenue and EBITDA results on Slide #7, I wanted to highlight that in our first quarter call, we'd indicated that the refinancing of our corporate debt was likely to result in a one-time charge for loss on that extinguishment of $75 million to $85 million in the second quarter related to the call premium for the senior notes as well as the write-off of deferred financing expenses related to the old capital structure. When finalizing the accounting for the refinancing transaction, it was determined that the refinancing was largely a modification and not a full extinguishment. Thus, as opposed to taking the $75 million to $85 million charge below the line as debt extinguishment, under the accounting rules for debt modification, we took a $23 million charge above the EBITDA line, and a much smaller $6 million charge for debt extinguishment. As the impact on EBITDA is one-time and nonrecurring, when discussing the results, I'm going to exclude the impact from this item. Revenue in the second quarter of 2017 was $1.3 billion, a 4% increase compared to the second quarter of 2016 on a reported basis, but an 8% increase on an organic and constant currency basis. Adjusted EBITDA was $342 million in the second quarter of 2017, an 11% increase compared to the second quarter of 2016 on a reported basis. Year-over-year results were impacted by $12 million less in earnings from divestitures made in 2016 and a onetime charge of $23 million related to the refinancing of our debt in April that I just mentioned, and the $5 million benefit from foreign currency translation as FX is now turning around and becoming a little bit of a tailwind for us, and $30 million in favorable timing versus the second quarter of prior year resulting from second quarter 2016 results being artificially depressed due to the nationwide student protests in Chile, which pushed classes back from the second quarter of 2016 to the third and the fourth quarter of that year. On a timing adjusted organic constant-currency basis, and excluding the debt refinancing charge, revenue increased 6% and adjusted EBITDA increased 11% compared to the second quarter of 2016 and we believe that these growth numbers of 6% revenue and 11% EBITDA growth better reflect the underlying performance for the quarter.

Operating income for the second quarter of 2017 of $244 million increased by $33 million from the second quarter of 2016. Net income for the quarter was $117 million compared to net income of $349 million in the second quarter of prior year, with prior year results favorably impacted by $243 million gain on the sale of our Swiss businesses.

Basic and diluted income per share was $0.28 per share for the second quarter of 2017, including the effect of a $69 million charge to earnings per share related to the accretion on the Series A preferred equity instrument.

Now let me spend a few minutes discussing the results by segment for 2017 on Slides 9 through 14. As I run through these results, I'm going to be discussing our performance and growth rates on an organic constant-currency basis, as we believe that is the best indicator of the operating trends in the business. Adjusted for timing of the Chilean class disruptions in 2016, Latin America revenue increased 6% and adjusted EBITDA was up 16% for the second quarter of 2017 on an organic constant-currency basis as compared to the second quarter of 2016.

EMEAA revenue was up 8% as compared to the second quarter of 2016, and adjusted EBITDA increased 16%, again, on an organic constant-currency basis. These results are being favorably impacted by our shift to longer length of stay programs with higher average price points in that region.

Despite the volume reduction of approximately 5%, GPS revenue was up slightly as compared to the second quarter of 2016 and adjusted EBITDA was essentially flat on organic constant-currency basis due to certain Q1, Q2 timing items. Revenue growth in our U.S. Institutions was offset by revenue declines from international fully online students due to our deliberate mix shift discussed earlier to improve margins and revenue contribution per student. Excluding the $23 million onetime charge related to the debt refinancing, corporate expenses increased by $9 million in the second quarter of 2017 versus same period prior year, primarily due to additional legal and accounting expenses relating to being a public company as well as a $4.5 million one-time charge related to a settlement transaction with a former minority partner.

Through year-to-date June, we're normalizing for start times in Chile and Peru given 2017 flood and 2016 student disruptions, the organic constant currency revenue growth was 5%. Similarly, organic adjusted EBITDA increased 16% compared to year-to-date results for June 2016 when excluding the debt refinancing charge. These results include some favorable timing of expenses, which we expect to reverse out in the second half of the year and that will be evident when we provide the full year guidance later in the call.

With the operating results covered, now let me turn your attention to our accelerator plan. As a reminder, the plan we developed is aimed at simplifying the business by exiting 5 to 7 of our smallest markets, flattening the organization and increasing the use of technology as an efficiency enabler. This will in turn allow us to further accelerate margin expansion, improve our free cash flow conversion generation and in the future, create a more scalable operating model that can more quickly integrate accretive M&A transactions. In terms of the planned divestitures, we've made very good initial progress. We have identified the markets for sale and have engaged advisers to run the sales processes for us. Detailed information memorandum are complete and we expect to be in the market with these deals in the coming days.

In terms of sizing, the expected dispositions would result in run rate reduction in revenues of $200 million to $250 million, with an average EBITDA margin profile of 10% to 15%. Assuming we are satisfied with the commercial terms, we anticipate contracts to be signed by year-end and the closings to be concluded during the first quarter of 2018.

On the component of the plan that we call EiP Wave 2, we have completed our analysis in terms of savings opportunity and onetime costs associated with achieving these savings. As shown on the table on Slide 16, we continue to anticipate $75 million to $100 million in run rate savings by end of 2018. Those savings will come from 2 areas: G&A streamlining and technology-enabled efficiency solutions. Of the total run rate costs, we expect to realize $10 million to $12 million of benefits in the P&L during the second half of 2017, increasing to $50 million to $60 million realized during 2018 with full annualized benefit in our P&L of $75 million to $100 million during 2019. To achieve these savings, we will have $100 million to $125 million of onetime operating expenses associated with severance and restructuring expenses as well as cost related to technology investments. The severance and restructuring investments will be largely front loaded in 2017, with the technology costs spread over a 3-year period.

With the plan now quantified, let me spend a minute on the business outlook and the guidance, which has been updated to reflect the details behind the accelerator plan, starting on Slide #18. Please note that we are not adjusting guidance to reflect any potential divestitures, but we do plan to update you on those transactions as they are completed.

On Slide #18, we are providing updated guidance for the full year and I've highlighted for you the items that has changed versus our original guidance expectations. Our expectations for the full year 2017 are now as follows: total enrollments, we are reiterating 2% to 3.5% organic growth in total enrollments. Foreign currency has been moving in our favor and is now providing a slight benefit, thus we're bringing up our forecast a bit for this change in trend; revenues to be in the range of $4,345,000,000 to $4,386,000,000, a slight increase in the bottom end of the range; adjusted EBITDA to be in the range of USD 786 million to USD 795 million inclusive of the $23 million charge for debt refinancing, excluding this onetime impact, adjusted EBITDA to be in the range of $809 million to $818 million, reflecting a $10 million to $12 million increase attributable to the accelerator plan, slightly favorable trends from FX and a tightening of the range for our operating results for the balance of the year given that we have first half of the year behind us and relatively stronger stability to the second half of the year.

On Slide 19, we are providing guidance for the third quarter of 2017. Our expectations for the third quarter are as follows: revenues to be in the range of $961 million to $980 million, reflecting a 2% to 4% reported growth rate net of the timing shifts discussed earlier; adjusted EBITDA to be in the range of $61 million to $77 million, a reduction versus the third quarter 2016 due primarily to timing of the Chile classes disruption, which artificially boosted the results during the second half of 2016 through shifting revenues and earnings from the second quarter of that year.

On Slide 21, we also wanted to provide some specific guidance regarding capital structure and share count. On August 2, we notified the holders of the $250 million of 9.25% replacement senior notes due 2019, which we referred to as the exchange notes, that the condition precedent had been met and these notes would be exchanged for Class A common stock. The exchange would result in 18.7 million additional shares of Class A common stock being issued to the holders of these notes on August 11, 2017. This will increase our basic shares to 187 million shares outstanding. The Series A preferred equity has not yet converted, but we anticipate that it will occur sometime between now and February 2018. Upon conversion, we expect that will result in the issuance of up to 36 million more shares of Class A common stock. Until the conversion occurs, we will continue to recognize the accretion charge to EPS as shown on Slide 21, with $80 million for the third quarter and $107 million for the fourth quarter assuming no conversion.

Lastly, I wanted to provide an update on our hedging strategy to better match currency exposures on our debt liabilities with our cash flows from key markets. The company is targeting to swap over $400 million of corporate U.S. dollar denominated debt into local currency debt either through local borrowings used to repay U.S. dollar denominated debt or synthetic hedging instruments. Local banks have been engaged in all target markets and we anticipate completion of the project before year end.

Doug, now back over to you for regulatory update and a wrap up before we take questions and answers. Thank you.

Thanks, Eilif. Before we turn the call over for Q&A, I did want to provide an update on 2 markets in particular. As a reminder, earlier this year, we disclosed that in Turkey, as part of an audit, the Turkish regulator was questioning the operational services and network fees that we charge to our university in that country. Laureate provides very valuable services to all of its universities around the world, whether they're structured as for-profit or nonprofit institutions. These service charges have been routinely evaluated and upheld by governments in countries all over the world and we've always been able to demonstrate the value of those services, which is why we filed an appeal with the regulator in Turkey. The appeal process can take up to 60 days, which for us, has now concluded. Since we didn't receive a response, this means that under their rules, the appeal is deemed to have been rejected. However, it's not surprising that we haven't heard from them given that it's summer period and it's still possible that we would hear from the regulator soon. Should that not occur, we have the opportunity to litigate this matter in administrative court as provided by Turkish law. We have until September 7 to commence litigation and we're prepared to move forth in that manner unless in the interim, we come to a conclusion with the regulator. So given our track record in demonstrating the value and validity of those services all over the world, we believe we'll prevail in the courts, but of course that can't be assured. Secondly, I wanted to provide an update on Chile. In Chile, the higher education bill that was proposed last year and modified this year was finally debated in Congress through their Chamber of Deputies, which is the Chilean equivalent of our House of Representatives and that Chamber did pass that bill, and is now sending it to the Senate. Through the process in the chamber, there were 16 constitutional challenges placed against the bill and the bill will now go to the Senate for debate. The Senate in Chile is very deliberative and they will carefully consider all of the 16 constitutional challenges, which could be resolved by modifications to the proposed law. New challenges can also be proposed by Senators. If the bill passes the Senate and any constitutional challenges remain unresolved, the bill will go to their constitutional court, which will rule on those specific challenges and make a final and binding decision on those matters within 30 days, which has the effect of modifying the law. So, there's been some movement in Chile, but the fact remains that the current government has a very low approval level. The bill appears to have much opposition, including the 16 constitutional challenges, and it still has to make it through the Senate and any constitutional challenge before it would affect us. I should also note that the Senate has a very limited time period to pass this law given the upcoming Presidential and Congressional elections being held in November, and the need to pass a budget bill, which will take precedence over any other legislative matter pending at the time. I should also note that the center-right candidate, the former President Sebastian Pinera is still leading in the polls. Based on our interpretation of the current form of the bill, assuming the full passage of the bill and all challenges denied, adjusted EBITDA for our company on an annual consolidated basis could be reduced by approximately $50 million, representing approximately 40% of our current adjusted EBITDA from Chile. Based on our understanding of the bill, we also believe that there would be a 2- to 3-year implementation window before these regulations would take full effect, although we would review our consolidation of any VIE entities affected by any final law that's passed in Chile. We also believe that we have other legal avenues to pursue that could minimize the impact and further reduce the $50 million EBITDA exposure. I wanted to provide that context for you to make sure that you have the most current information on these matters and we'll make sure to keep you updated on any relevant developments.

Back to our quarterly results, the operating momentum in the business demonstrates the quality of our institutions and the committed teams that lead them, all of whom have embraced our initiatives to gain the benefit of Laureate scale. The growing global demand for higher education, particularly in emerging markets, positions us well for continued growth in the future. That concludes our prepared remarks, and operator, we'd now be happy to take questions.

(Operator Instructions) Our first question comes from the line of Anj Singh, from Credit Suisse.

This is actually [Jeff], standing in for Anj. With regards to the new resegmenting, why weren't some of these changes done when you previously resegmented, when you combined Europe and EMEAA?

[Jeff], this is Eilif. We did this -- this is a result of the way we have reorganized the business to facilitate the accelerator plan, flattening the organization, increasing its decision speed and taking some layers of management out. So that was a decision that we made and -- as part of the implementation of the accelerator plan.

Okay, great. And then just one more, with the big boost in CapEx spending as a percentage of revenue versus prior years, can you give us some more color on what type of projects or campus expansions this money is going towards?

Sure. I'd have to give you a little bit more context. CapEx as a percentage of revenue has come down from 9% to 11% on a run-rate basis a couple of years ago, then we took it down to 6% of revenue in 2016 as we were focusing on addressing some of our balance sheet challenges and making sure that the company was ready to become a public company. Then we have said, our guidance for CapEx is approximately 7.5% of revenue on a steady-state basis, which means that we are increasing CapEx a tad versus 2016, but significantly below historical rates. And the reason why we're able to keep CapEx at about 2.5 points below historical rates is some of the very important innovations that we have done here at Laureate, hybridity, being one of the biggest drivers where we are digitally enabling our campuses, which enables us to get a greater throughput and a higher turn per seat of our physical capacity.

Our next question comes from the line of Jeff Silber from BMO.

It's Henry Chien calling for Jeff. Just a follow-up question on the reorganization. I understand some of it is to flatten the organizational structure and speed up decision making, is there any other more color that you can provide on how that changes the strategy of these respective institutions? Or how you plan to, if any, change capital allocation to these different institutions?

There's no strategic change in the way that we are operating the business. We are combining the Iberia segment -- the Iberia regions, Spain and Portugal, underneath our Andean region segment to better leverage those European assets into the Latin American franchise. But that's been a part of the strategy in the past and I think this is going to facilitate faster adoption of some of our best practices. But in terms of capital allocation and overall strategy, this flattening of the organization does not impact that overall strategy.

Okay. Got it, okay. And in terms of enrollment trends, I was wondering if you can provide an update on the environment in Brazil and whether the funding or the regulatory environment has seen any material or particularly relevant changes over the past few months?

We covered a lot of that in the first quarter. The first quarter is an important intake period for Brazil. 2016, of course, was very, very difficult first quarter, that made intake of 2016 was challenging both from an economic perspective but also the dismantling of the government student loan program called FIES. Then the market stabilized in the fall, or the -- August, September, October timeframe in 2016. But net for the full year, there were negative new enrollment trends in Brazil for us. But we were encouraged by the improvement in the back end of 2016 and we saw those trends continue in the main intake in 2017 and we reported a very strong enrollment results as a result in first quarter. And we're seeing that trend continuing despite FIES being further reduced, and at this point, FIES represents a very small part of our new intake, about 5%. So we are very encouraged to see that the -- that the private pay volume in Brazil is robust and the pricing is also robust.

Okay, great. And then if I could just squeeze one last one in, any updated thoughts on what you plan to do with the capital once you exit some of these markets?

Deleveraging.

Our next question comes from the line of Manav Patnaik from Barclays.

First question, just on the resegmentation, I understand, maybe it's just the resegmenting, but I was curious why Chile and Peru belong in the same spot as Spain and Portugal just because they seem like they are decent sized compared to Brazil and Mexico? Is there something to do with maybe you see some risk in Chile and that's going to get smaller, or how should I think about that?

This is Ricardo Berckenmeyer.

Go ahead, Ricardo.

Yes. It's about commonality. We have terrific assets in Peru and in Chile and we view Spain, that has a very similar characteristics, in that premium positioning of those institutions and we firmly believe that we can operate Spain at a much stronger level and the 3 institutions will benefit from each other.

Okay, all right. And then Doug, I appreciate the color you gave on the regulatory updates, maybe just on Turkey, it sounds like you just had under a month where maybe you've got to take this to litigation, but how should we think about the cost and time involved with that process?

I don't think the cost is going to be that material. I think the important thing is to preserve our model and we have a model that we've been able to demonstrate consistently around the world, we have done a terrific job in improving the economic and academic viability of the Turkish University. We really believe there's lots of good reasons for the regulator to accept the model of how we provide services and charge fees. This litigation is essentially another form of appeal and I think at this point, the most important thing is we'd like to hear back from the regulator. Just because under the rules, if they don't respond, it means a denial, doesn't mean that that's actually their intention. So we think given the summer period, there's a reasonable chance that we will hear something from the regulator that will be helpful. They may just reaffirm their decision, in which case, we would go to litigation because we believe we have a good case, or they may come back with something that's more accepting of the model of what we've been doing for so many years and which they have reviewed in previous years without objection. So we really -- that's the process we'll go through with them. But I don't believe that the litigation process itself is -- that the cost of that is going to be the key driver. The key driver is defend our model and our reputation, which we feel very strongly about. In terms of length of time, litigation in an administrative court in Turkey could take literally a year or 2. And so it's not something that would be resolved quickly. Although again, during that entire period, the regulator would be free to accommodate some of our requests. So again, I would say, I feel confident that we're being given very serious consideration by the key decision-makers in Turkey and we'll just do our best to bring this to a positive resolution that we think reflects the quality of what we're doing.

Okay, got it. And just 2 quick ones for you, Eilif. First one with the identified 5 to 7, I guess, assets for sale. What is the associated CapEx spend in those regions right now?

It's -- the CapEx is similar to the overall network average. So I would -- for modeling purposes, you could probably put somewhere between 7% and 9% of their revenues -- 7% to 8% of their revenues.

And just on your guidance update, lastly, on EBITDA. I mean, your prior high-end was $74 million, you're adding $12 million from your accelerated plan, offset by $3 million of FX, but you are still lowering that range? What am I missing there?

You're probably missing the debt refinancing cost, which is $23 million of expenses that is accounted for in EBITDA, which we had anticipated being a debt extinguishment, in which case it would have been below the line but the way the deal actually worked out, it was a modification. So I think the right way of looking at it is that we're guiding on a like-for-like basis, $809 million to $818 million, versus prior range of $789 million to $804 million. So we lifted it by about $20 million, and you can see this bridge on Page 18, in the PowerPoint deck that we put up on the roadshow site.

Our next question comes from the line of Shlomo Rosenbaum with Stifel.

Doug, can you talk a little bit about where you saw a relatively stronger Latin American growth, you saw growth across all the geographies, do you want to just go -- if you want to give the growth for each one, but maybe just relative sizes where you had the strongest growth and maybe accelerating or decelerating order?

Well, the good news is that we will be providing a lot more information with the new segmentation, and that there were a few questions about segmentation, but I'm sure investors will see this as a much, much deeper level of information than has been available to them in the past. But since we haven't really done that in the past, I'm not going to break it apart now. I would say, look, in general, we've mentioned that we've seen encouraging positive trends in Brazil and you just heard earlier Eilif comment on that. And I would say that generally over time, Peru has been one of our strongest growth markets and we believe that will continue to be the case, but the results in that case were clouded by the effects of the floods that we discussed earlier before. And of course in Chile, you have the effect of free education, a small percentage of students who previously might have entered private universities are now able to go to certain private universities and many public universities for free and what that is certainly inhibiting growth in that particular market. And then Mexico, I think, overall, is generally a good market for us, but we realized that the consumer sentiment and the economy there hasn't been so strong lately. So -- but that if I was just to give you color, which I think is what you're asking for, that would probably be the way I describe it.

And where are we in hybridity now?

Hybridity has been great. It's something where the last time we reported a number, I think we were reporting approximately 16% of our teaching hours being delivered online in our campus-based institutions, and we find that to be something that students like. It helps our outcomes with students and of course it also gives us more turns per seat to improve the efficiency and utilization of our facilities. We had set a target to get to 25%. Originally, I think that was by 2019 was our plan, and I think certainly everything that we see tells us that that's very feasible and that there will be institutions where we think we can do better than that. And of course with the value segment, some of our less expensive universities, this could really be a helpful way to allow us to keep our costs at a very affordable level for a customer that would really benefit from that. So yes, I think it's going really well.

Okay, great. If I could sneak in one more. Just to follow up on the last EBITDA question, Eilif. I think last quarter, the commentary was there was a 1% headwind on EBITDA from FX and that's dissipated this quarter, so it looks like it would be an $8 million benefit. if I add that plus the $12 million from the accelerator program, it seems like the range would be at the top end, just slightly better than that the $818 million, I'm getting like $823 million. Is there any offsets or some kind of other investments or am I not looking at it right?

No, I think if you -- if I could direct you to Page 18, we've tightened the range a little. The prior guidance, we had organic growth of 8% to 10%. Given we have first half now behind us and pretty strong visibility, we have tightened this to 8.5% to 9.5%, and then the FX drag in prior guidance was about $9 million. Now it has abated a lot, but it's still $2 million or $3 million. So there was a $6 million pickup on FX and then there was a $10 million to $12 million pickup on the accelerator plan. So if you take the accelerator plan and of $12 million, less $3 million on FX, and then tightening the top end of the range from $74 million to $70 million, you're still up that $40 million, $50 million.

Your next question comes from the line of Hamzah Mazari from Macquarie.

This is Kayvon Rahbar, I'm filling in for Hamzah. How hard should we think about the current student retention rates and how has that metric trended over time? Can you give us some color on that?

Sure, this is Eilif. Our retention rate has been remarkably stable over the last several years. There will be a little bit of volatility in certain markets as you can imagine. Last year in Brazil was a little bit of a challenging environment due to the student loan program going away. We've seen a little bit of fatigue in consumer sentiment in Mexico, but not enough to move the dial and as you know, 1 market moving a little bit in 1 direction and another market in the other direction. And so net-net, our retention rates are very, very stable, plus/minus maybe 1 point.

If I could have a quick follow-up question on that. You mentioned that Brazil and the government loan exposure. Has there been any change that you've seen in how the operations are being done by yourself and your competitors?

So we have been very focused on private pay and we have not engaged in any on balance sheet financing. We've also been focused on innovating and differentiating and continuing to make the Laureate network an attractive educational alternative in Brazil. Some of our peers in the market has been willing to take on more balance sheet risk than what we have appetite for and so they have seen maybe in certain pockets in certain markets, a little bit more robust growth rate as they've taken advantage of that. But we are very pleased with our positioning and the level of growth that we are demonstrating consistently late -- the last intake of 2016, the large intake in 2017, the second intake in 2017 or a continued positive momentum without on balance sheet student loans and with sensible pricing dynamics. So we like where we are.

Our next question comes from the line of Marcelo Santos from JPMorgan.

I have 2, the first one is about distance learning opportunities in Brazil. We know that the regulation has been recently changed and we are hearing from other players that are willing to grow faster in these markets. I would like to know if anything changed to Laureate and if you see any kind of new opportunities in there? And the second question would be about EiP, the version 1 of the EiP. Have you already fully captured the gains of EiP and have all the costs and investments related to that been fully incurred? Or is there something left?

Let me suggest that we ask Ricardo to answer the first question about EAD in Brazil, the distance learning programs, and Eilif, if you finish up on EiP?

Yes, you're right. Legislation has been very positive on the front of the regulatory framework for opening new polos. It is based on your institutional academics score. We do have a very good academic scores and therefore, we have ample opportunities to increase those polos. And there is also an opportunity to offer programs that do not require a polos in Brazil, and those are available to us as well. We're taking the opportunity in DL seriously. Since last year, we've made -- been making very good and powerful strategic moves to position ourselves in that market and our results right now are very encouraging.

And then moving on to your question on EiP wave 1. The vast majority of that investment and those benefits are now in the business, we have 90%-plus of our revenues on the common platform, so a great, great traction. Last year, we had about $60 million, $65 million of the benefits in the business for 2016. We expect another $20 million-or-so to accrue this year, and then with a full $100 million in the business next year. We are still incurring some of the transformation costs of EiP this year. Approximately $30 million, $35 million of EiP expenses will be incurred in the business in 2017. And at that point, there will be a small tail, but relatively small numbers in 2018 as we are wrapping up that wave and moving into wave 2. I would just like to add, it is because of the success of EiP Wave 1 that we have high confidence in moving forward with the EiP Wave 2, which includes the flattening of the organization, getting more of a common operating model in the mid-office, including the enrollment process and self-service and student contact centers, et cetera. So we're moving into the second wave on the back of strong confidence of success from Wave 1.

Our next question comes from the line of Jeff Meuler from Baird.

First, can you just confirm that Turkey and Chile are the only sizable markets where you have VIE exposure?

It's a little bit of a longer question in that we have other countries that can be considered VIE but maybe for different reasons. So the definition of what's a VIE and where a country is what we would consider it to be a nonprofit structure, we have countries that we designate as VIEs but they're very different in legal structure from others. So at this point, Eilif, do you just want to run down the list? I know India and I believe China would also be included in those categories?

Yes. So we have -- I mean this is disclosed in the financials, but Chile is the largest percentage of VIE, approximately 1/3 of all of our VIE -- actually, it's more than that. So Chile is the biggest, followed by Turkey, India, and China and Honduras.

Okay, and then within Chile, Doug, I appreciate the candor on the challenge. Anything else you can say, so I'm thinking things like, if their Senate is controlled by a different political party or any precedent for them passing bills, whether are constitutional challenges or how priority this is set to be in terms of getting through in a tight legislative window, any characterization like that?

I'll just add a little bit of color on that. I'd say that Congress -- Senate and Congress in general is mixed, and so the ruling government today is a coalition. And that coalition has fractures in it. So for example, the biggest coalition partner to the party, the socialist party that's in power, is the Christian Democrat party and they have actually decided to field their own candidate in the presidential election as opposed to combining with the socialists like they did in the last election. So it's -- it's clearly though -- the current coalition would clearly have the majority of the votes if their coalition holds. And in a very complicated matter like this, I expect that it will be very issues based. So in case by case, each point in the bill will be important to different constituents and that may appeal to different Senators or different coalition partners. So I wish I could give you a clearer answer than that. Obviously, we think it is possible that this could be passed by the Senate or we wouldn't be raising the issue. On the other hand, when we look at the time available between now and the election, and more importantly, between now and when they need to devote all their attention to passing their annual budget bill, which is a requirement, we think there is doubt as to whether there's enough time for this to happen, the polls favor the political party, the opposition party that we believe that has actually come out publicly and said that they're against this bill. So you really could see this going in either direction, and maybe even more likely in a direction where the bill is amended and improved, in which case, it would be much less damaging or maybe not damaging to us at all. So there's a wide range of potential outcomes. I think it was easier for us to give you guidance -- just sort of general views on it, but once it passed their lower house, we felt it was really important to give a lot more detailed information to investors and we expect the good news is it shouldn't take that long, the election is in November and if it's going to pass, it could in theory pass after the election, but that does seem to be much, much less likely.

Okay, that's helpful. And then just ahead of Northern Hemisphere key intake period, any commentary on how the earlier leading indicators are trending in both larger markets, so things like leads or outflow especially something like Mexico or U.S.?

I think it's better for us not to go into any more detail. I think we have given some more refined guidance for the year, which I hope is helpful, and then when we have the intake complete, we'll be happy to give you all the details.

Our next question comes from the line of Lucio Aldworth with Citigroup.

A very quick question down here. We noticed that FX neutral organic growth for you guys accelerated from 3% in the first quarter to 8% this quarter, and we would like to know how much of that is attributable to the Chile scheduling issue? And how much, if any, is attributable to better mix as -- the enrollment mix or tuition in the quarter?

Are you speaking of revenue or EBITDA?

Top line revenue.

So what I'd like you to do is just to recall that we have significant seasonality in our business. So just looking at a quarter alone is challenging, particularly in the first quarter for the Southern Hemisphere is largely out of session. And the best way of looking at the momentum in the business is on a trailing 12-month basis or at least looking at it on a year-to-date. But if you wanted to focus on second quarter, on Page 7 in the presentation deck, we are trying to adjust, as you've seen, the organic revenue growth on a FX normalized basis, it's 8%, but when you're stripping out the timing shift from Chile, you're at 6%. But still, there are certain other cut off academic calendar items. So the run rate of the business is that 5% to 6% revenue growth, which is consistent with what we're guiding for the full year.

Yes. So this is pretty much a transfer from 1 quarter to the next, correct?

That's correct.

Yes, okay. And a quick follow-up on Marcelo's question a few moments ago on distance learning with the new regulation in Brazil. The new regulation should ease or facilitate the opening of the DL centers down here, but outside of that, do you forecast any potential M&A activity in distance learning to leverage your hybridity efforts?

I would say first, I don't count this in the category of hybridity per se, although you're right that they're related. I do think in Brazil, the distance learning model allows universities to reach a very different type of customer than the main type of customer that they normally reach. So to me, it's a little bit different from hybridity but they are very closely related so I think your question is a very good one. I think in terms of M&A, I think it's something we wouldn't comment on. We are excited that the new rules will give us access to more site licenses, the polos that Ricardo referenced and I think we would be prepared to grow our business there on a purely organic basis and not comment on M&A at this point.

I'll clarify as well that our hybridity measure, as we report it, excludes fully online and excludes the DL basis model in Brazil. This is truly -- for us hybridity is truly the ability to get higher and better turns per seat in our campus-based environments, face-to-face.

And this does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen for your participation. You may now disconnect. Good day.