Laureate Education Inc (LAUR) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2017 Laureate Education Inc. Earnings Conference Call. (Operator Instructions) And as a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Adam Morse, Senior Vice President of Corporate Finance and Treasurer.

Thank you, operator. Hello, everyone, and thank you for joining us on today's call to discuss Laureate Education's third quarter 2017 results. Joining me on the call today are Doug Becker, Chairman and Chief Executive Officer; Eilif Serck-Hanssen, President 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 be referring 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, 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 opening remarks.

Thank you, Adam, and thanks to everyone on the line for joining us on today's earnings call. Before running through the highlights for the quarter, I wanted to discuss a very important management transition, which we announced during the quarter but which was the culmination of a multiyear succession planning initiative by myself and our Board of Directors.

Effective January 1, 2018, Eilif, my very good friend and colleague for the past decade, will become the next CEO of Laureate, and my other very good friend and colleague for the past 15 years, Ricardo Berckemeyer, our Chief Operating Officer, will assume the title of President of Laureate in addition to his COO role. These are 2 of the most impressive and experienced executives that I know. I have the utmost confidence in them, and I'm so proud to see them take on these highest roles in the company.

One of the most important duties of a Board of Directors is to plan for succession, and for me as a founder, to think about how to ensure that this company, which means so much to me and that I've run for 28 years, would end up with the sustainability to last and thrive for many more years. And this required a really thoughtful and serious approach to succession planning.

We're a public company now, but the fact is for the past 10 years, we were a private company. Before that, for 13 years, we were a public company. These decisions don't have anything to do with being public or private. The company has to have its own set of long-term priorities, of which leadership succession and talent planning must be paramount.

Approximately 4 years ago, we started a process that included exploring external candidates, and I'm very happy that in September of this year, the board agreed to appoint Eilif as CEO to lead this company forward. Internal succession provides for continuation of the values and culture of our company, while also allowing for new ideas for how to take this company forward very successfully. For these reasons, I'm very confident in what the future holds for Laureate under its new leadership.

For me personally, I'm proud and grateful for the opportunity to have founded and led this remarkable company, which is helping so many students around the world achieve their dreams. I'm also honored that the board asked me to continue as its Chairman as that will give me the chance to continue to be helpful to the team as the company progresses.

This company still faces challenges, but we've made terrific progress in leveraging the benefits of our scale and strengthening our balance sheet. In Eilif and Ricardo, we have a team that's proven that it will take bold and aggressive action to ensure that the company's on the right track to achieve its objectives while also ensuring our commitment to quality and mission.

Now let me turn the call over to Eilif for a review of the results for the quarter.

Thank you, Doug, and good afternoon, everyone. Just to add to what Doug said, I am honored to have been selected as Laureate's next CEO and I'm very excited for what the future holds for this great company.

We are a mission-driven organization committed to expanding access to high-quality education worldwide, and I look forward to further advancing our goals through accelerated investments in technology and innovation. Thank you, Doug for all your support over the years, and for everything you have done for Laureate. And your vision, passion and commitment to building a truly one of a kind company that has the enduring and lasting impact on the students and the communities that we serve.

Now let me move to the results for the quarter. As we discussed during last call, we are reorganized in a manner to streamline and improve the efficiency of our operating model and lowering for faster decision-making and more cost-effective operations. As a result, now we have 6 reporting segments: Brazil; Mexico; Andean & Iberian region, which includes Spain and Portugal; Central America and U.S. Campuses; EMEAA; and Online & Partnerships.

The new reporting segments became effective during the third quarter and I know reflected in our earnings release and the third quarter 10-Q. Additionally, to help our investors better understand the historical trends in each of these segments, we filed an 8-K last week with historical results by segment back to 2015.

To give some context on the segments themselves, most of our larger segment represents developing markets which are experiencing growing demand for higher education based on favorable demographics and increasing participation rates, resulting in continued growth of students in higher education.

Traditional higher education students have historically been served by public universities, which have limited capacity and often underfunded, resulted in the inability to meet growing student demand and employer requirements. This supply and demand imbalance has created a market opportunity for private sector participants, including Laureate, which helps explain the track record of growth that we have experienced throughout these segments.

Despite strong secular macro trends, our business is subject to near-term economic and regulatory conditions. And where relevant, we will provide appropriate context at the segment level during this call.

As I run through the results for the quarter, I'll provide a context for the key drivers for growth and variances for each of the key performance indicators for each segment. However, before doing so, I just want to remind everyone of the seasonality in our business, which is referenced and illustrated with additional slides in the appendix.

For Laureate, the first and third quarters represents our 2 largest intake periods, which account for approximately 80% of total new enrollment activity for the year, but are seasonally low from a P&L perspective. Thus the financial results we are reporting today are for a seasonally low period. Conversely, the second and fourth quarters generate the majority of revenue and EBITDA for the year but are not large enrollment intake periods. With that context, let me run through the highlights starting on Slide #4.

Revenue in the third quarter of 2017 was $983 million, a 6% increase compared to the third quarter of 2016 on a reported basis. Adjusted EBITDA was $87 million in the third quarter of 2017, a 12% decrease compared to the third quarter of 2016 on a reported basis.

Year-over-year results for the third quarter were impacted by the Mexican earthquake on September 19, which resulted in many scheduled classes and related $12 million in revenues being pushed into the fourth quarter from the third quarter, along with approximately $3 million of onetime expenses relating to repair works needed on our facilities.

Foreign currency continued to trend in our favor during the third quarter and benefited revenues and adjusted EBITDA by $23 million and $5 million, respectively, during the quarter versus last year. On a timing adjusted organic constant currency basis, revenue increased 5%. But adjusted EBITDA was down 5% compared to third quarter of 2016. The latter due primarily to seasonality and expense timing variances.

Operating loss for the third quarter of 2017 of nearly $6 million represented a deterioration of $18 million versus the third quarter of 2016 due in part to the impact from the earthquake in Mexico discussed earlier as well as timing and seasonality. Net loss for the third quarter was $103.5 million compared to net income of $81 million in the third quarter of prior year, with prior year results favorably impacted by $155 million gain on the sale of our French institutions.

Basic and diluted loss per share was $1.02 per share for the third quarter of 2017, including the effect of an $84 million charge to earnings per share related mainly to the accretion on Series A preferred equity instrument.

For year-to-date results. On an organic constant currency basis, revenue increased 5% and adjusted EBITDA was up 12% as compared to the results for year-to-date 2016. These results reflect strong performance against what has been a year of significant natural disasters in key markets for us, including the flooding in Peru back in March of this year and the recent earthquake in Mexico.

New enrollments through year-to-date September 2017, excluding asset dispositions, increased 3% compared to our new enrollment activity through year-to-date September 2016. Total enrollments at September 30, 2017, grew 3% compared to same period in prior year.

Let me now spend a few minutes discussing results by segment for 2017 on Slides 8 through 16, touching on key highlights. As I go through the results, I'm going to be discussing our performance and growth rates on an organic constant currency basis, which is how the slides are prepared as we believe it's the best indicator of the operating trends in the business. The detailed reported results for each segment as well as year-over-year bridges can be found in the appendix.

Additionally, in our business, there are often timing impacts affecting year-over-year comparability related to items such as academic calendar and timing of expenses. We also have extreme natural events like what we have seen this year with natural disasters, such as floods and the earthquakes. For timing items that are material, we try to call those out so you can understand some of the trends on a more normalized basis.

The most significant timing items impacting year-over-year results are shown on Slide #9, and those items have been adjusted for the following slides as noted in pro forma adjustments in the segment reporting.

Moving on first to Brazil. Results for Brazil remain strong building on the recovery and momentum we saw in the market during the first half of the year when during the large intake, new enrollment growth was high single digits. Brazil just completed, during the third quarter, their smaller secondary intake representing approximately 35% of Brazil's annual new enrollments. The results are very robust for new enrollments, increasing 22% versus third quarter of prior year with strong growth of 12% in face-to-face learning while our distance learning business was up 90% year-over-year.

Financial performance through September year-to-date includes some timing impacts, which are skewing the EBITDA results as well as additional marketing expenses that helped drive our strong secondary intake. For the full year, we expect to see growth in margins and EBITDA commensurate with the revenue performance trends to date, as the Brazil market is performing very well for us.

Moving on to Mexico. Results for Mexico were impacted by the earthquake and related shifting of revenues and classes from third quarter into the fourth quarter as well as the onetime expenses related to repairing our facilities after the earthquake. The earthquake had a significant impact on the people of Mexico. And unfortunately, there are families and students that no longer can afford or are able to attend universities.

We estimate there were approximately 4,000 to 5,000 total students that didn't enroll with us due to the earthquake. Half of those were realized during the third quarter and the remaining in the early part of the fourth quarter.

This will result in lower-than-expected new and total enrollments for this segment as well as reduced fourth quarter revenue run rates versus our prior expectations for the Mexican market.

In addition, as discussed on prior calls, there is significant fatigue among consumers that adversely affects the consumer sentiment in Mexico due to the uncertainties related to NAFTA and U.S. trade policies. This is starting to make its way into the macro trends in the Mexican market with flat GDP growth and relatively high inflation. And these factors are also weighing on enrollment trends in that segment. Despite the earthquake and macro impact, both revenue and margins are trending very well year-to-date due to solid pricing and strong cost management.

Let's move to the Andean & Iberian segment. As a reminder the Andean & Iberian regions includes our institutions in Chile and Peru in addition to Spain and Portugal. Our Spanish institution is a nice complement to the premium brands we operate in Chile and Peru with very similar characteristics and potential product and revenue synergies.

Results in this segment were strong with solid enrollment growth in all markets, except for Chile which was down slightly year-over-year due to regulatory challenges that occurred in the country during 2016 and which we discussed on the second quarter earnings call. Excluding Chile, year-to-date new enrollment grew by 4%. Year-to-date revenue and margins are also showing very strong results as we have traded lower-yielding students for higher-priced programs, as well as exercising very tight expense management.

Then moving on to Central America and our U.S. Campuses. In Central America, which encompasses Costa Rica, Panama and Honduras, and U.S. Campuses, of which University of St. Augustine is the primary institution, we experienced low to mid-single-digit volume growth, which resulted in mid- to high-single-digit revenue growth due to increases in revenue per student from both pricing and mix. Double-digit EBITDA gains resulted from rapid scaling of some of the smaller assets in the segments combined with tight expense management.

Then moving to the EMEAA segment. New enrollment in the EMEAA segment for Q3 and year-to-date are up 7% and up 2%, respectively, due mainly to timing of certain intakes in that region. Adjusted for timing, new enrollments were essentially flat year-over-year consistent with prior year quarters as we continued our planned strategic shift in certain markets away from lower-priced and lower-contribution programs to longer length of stay and more profitable programs, most notably in Australia.

You will note that the revenue performance is very strong in the region, in part reflecting the favorable mix shift benefit of this strategic decision. And the margin growth is robust due to more profitable programs and tight expense management.

Moving on to Online & Partnerships. New enrollment results for Online & Partnerships is down 22% during third quarter and can be explained by 2 different drivers. First, as previously discussed, we made a strategic decision last year at Walden and the University of Liverpool, to rebalance the mix of certain national markets to improve our overall margin contributions. This has resulted in lower volumes but higher revenue per student, and has proven to be an accretive decision for us although it resulted in approximately 6 percentage points decline in new enrollments for the third quarter.

Secondly, and more significantly, the weak enrollment results for the third quarter was due to a 17% decline in domestic intake for Walden University. We made a decision that in hindsight didn't work out for us, to prioritize marketing efficiencies through improved conversion rates but overestimated the effectiveness of these tools, which have worked for us in this past couple of years.

And while enrollment conversion rates are up versus prior year, this efficiency trade-off wasn't large enough to deliver volumes in line with our internal plans as well as prior year. Further, given the lead time required to ramp up lead generation pipeline, we expect the negative trend for online new enrollments to continue during the fourth quarter, albeit the rate of decline is likely to diminish as we have increased our marketing investment for online leads since we experienced significant declines in the third quarter.

Despite this disappointing volume reduction in our online segment, strong cost controls have kept EBITDA relatively flat versus prior year-to-date.

Let me now spend a few minutes on guidance. On Slide #18, we are providing updated guidance for the full year, and have highlighted for you the items that have changed versus our prior guidance expectations.

Based on the current spot FX rate, our expectation for full year 2017 are now as follows: Starting with total enrollments, we are lowering guidance to 1.5% to 2% organic growth in total enrollments, reflecting the estimated 4,000 to 5,000 student loss in the Mexico from the earthquake and the enrollment declines experienced in the U.S. online segment for the most recent intake.

Overall foreign currency had been moving in our favor for much of the year. Recently, the dollar has strengthened against the many of the key currencies and is now creating a slight drag on adjusted EBITDA for the year as the fourth quarter is seasonally a high-earnings period for us.

Revenues are now expected to be approximately $4,345,000,000 for full year 2017, which is the bottom end of the previous range also reflecting the impact of the Mexico earthquake and the weakness in the recent U.S. online intake.

No change is expected -- or I should say, no material change is expected in the EBITDA guidance on a constant currency basis due to tighter cost control and increased efficiencies from our accelerator plan is offsetting any revenue deterioration.

We are, however, adjusting our guidance down by $6 million from previous guidance due to the FX impact from the recent strengthening of the U.S. dollar. We anticipate adjusted EBITDA in the range of $780 million to $789 million, inclusive of the $23 million in charges for the corporate debt refinancing that impacted us during the second quarter. Excluding this onetime impact, adjusted EBITDA is expected to be in the range of $803 million to $812 million for full year 2017.

We expect CapEx to be approximately 6% to 7% of our revenues for the year, which is about a 1 percentage point reduction from previous guidance due partially to timing with some of our CapEx spend for the fourth quarter is being pushed into 2018, but we are also seeing improved results and effectiveness of our hybridity initiative, which is making our business model more capital-efficient.

On Slide 21, we also wanted to remind you of the specific information previously disclosed regarding capital structure and share count, and I will leave this for you to review on your own.

While we are still on the topic of guidance, I also wanted to comment on potential run rate implications for our business based on trends through September year-to-date.

First, our Accelerator Plan is working. We are on track to deliver on our commitments for 1.5 to 2 percentage point margin expansion from cost efficiencies by the end of 2018 on a run-rate basis. And the divestitures for the 5 to 7 markets are also on track with the original schedule. And we expect to have SPA signed for most markets by the end of the fourth quarter.

Second, we expect our campus-based operations to deliver growth and scale benefits consistent with prior expectations. The earthquake in Mexico may cause our growth rate in this segment to temporarily slow down for the next few quarters, but we have exceptionally strong brands in Mexico that have proven in the past to be very resilient, and we expect this performance to continue in 2018 and beyond.

However, given the magnitude of new enrollment shortfall in our online business, even if corrected by first quarter of 2018, it will cause a reduction in our growth rates for 2018 versus what we otherwise would have expected.

During our earnings call for fourth quarter and the full year 2017, we will provide more detailed guidance for both the first quarter of 2018 as well as the full year of 2018's outlook.

In the meantime, we will be laser-focused on improving the performance in our online segment as well as continuing to deliver on our growth and margin commitments, as for our international university businesses and implement our technology initiatives and deliver on the Accelerator Plan.

Today, we also announced the appointment of our new Chief Financial Officer who is going to be Jean-Jacques, he goes by JJ Charhon. And he will join the company on the 1st of January of 2018. He brings a wealth of experience, including in corporate finance, financial planning and analysis, internal controls, risk management and strategic planning. He has also extensive backgrounds in international business, change management and technology-enabled business transformation initiatives, which, of course, are key to the next chapter in Laureate's development.

JJ will be a member of the Executive management, and I'm thrilled to have him on my team. I will be response -- he will be responsible for overall financial strategy, financial reporting, controllership, financial planning and analysis, tax, Treasury and Investor Relations. JJ brings nearly 30 years of experience in corporate finance and operations, largely from Fortune 100 companies, including GE, HP and Novartis. Most recently, JJ joins us from Purdue Pharma, where he was the CFO.

With that, I'll hand over to Doug for a couple of comments before we start with the Q&A.

Thanks very much, Eilif. And also I'm sure all of us will want to extend our welcome to JJ. Very excited for him to join us, and to free you up to do all the other things that we know you need to do.

I wanted to make a couple of comments about the situation in Chile. I know there will always be questions for that. It's a very important market for us, and we have just a tremendously important institutions in Chile that are affiliated with Laureate. So just some facts on the current elections in Chile that I think will be helpful for all of you.

On November 19, which is very close, the elections will be held for the President and Congress. It's important to note that they will be reelecting the entire lower chamber, what they call the Chamber of Deputies, and half of the Senate, and that is that way they do their periodic reelections of their Congress, and they will also be voting for President.

The first round for Presidential elections will take place on November 19. There are 8 candidates running but there are 2 with very substantial leads. If no single candidate obtains 50% of the votes, which is often the case, then there would be a run-off, a second round of Presidential elections for the 2 candidates with the highest number of votes. This would take place on December 17. And then the inauguration for the new government and the elected Congress will be on March 11, 2018.

So at the moment, the center-right candidate, the former President, Sebastián Piñera, is leading very strongly in the polls with, I'd say nearly double the preference of the next biggest candidate. But that may not be enough to win in the first round, in which case we would look at the second round where again, the polls do predict his win.

Of course, sitting here in the U.S., we realize polls are not always right, so we follow this very closely. I think it would be fair to say that we believe that Piñera's policies would be very good for Chile, very good for the education field and good for our company. So we are hopeful for this election, and I wanted to just give you the insight into that because I'm sure many of you would be asking about it soon.

I think with that, operator, maybe we could open up for questions, please?

(Operator Instructions) Our first question comes from the line of Peter Appert with Piper Jaffray.

So the performance in Brazil is obviously very impressive. Can you just add some color in terms of specific drivers that you see there?

I think this is -- Peter, this is Eilif. I think the biggest driver is the fact that the economy has turned around 2015 and 2016. Brutal, brutally difficult years for the Brazilian economy. It was a deep recession. There was political turmoil. And the consumer was fatigued. That, combined with the government having to significantly cut back and shrink its Fies program made the operating environment in Brazil very difficult in '15 and '16. And Laureate has much lower reliance on the government student loan program, so that part has no -- virtually irrelevant for us. And we have great brands. And we are seeing a recovery in the consumer confidence, seeing positive GDP growth, and that is translating into very robust enrollment numbers for us. So we are very, very pleased with the performance.

Great. Thank you. And then on the weakness at Walden, Eilif, you highlighted, obviously, the marketing issue. But talk about the competitive environment because the overall market does seem to be shrinking. Do you feel that's part of the issue as well?

So Peter, it's Doug. I think this is still more of a finding the right balance of efficiency and volume in marketing. It is a competitive market. As a result, we certainly don't expect to see a lot of growth in Walden, but we also haven't experienced significant declines, it's been pretty infrequent. And I think certainly personally, I still feel that we have the tools necessary to hold our own and post stable or modest growth in the future for Walden, but it didn't happen this last quarter. And I think the color I would give you -- you have followed the industry for a long time, I would just say in general, 5, 6 years ago, we needed 1 million leads a year to support the volume that we wanted at Walden at a time when Walden was smaller than it is today. Today, we can accomplish bigger volume with maybe 1/4 of that number of leads. So the good news is we do -- we are able to convert much more efficiently, we and many others in the industry than used to be the case. The downside is we have had to do that because the cost of leads has grown so much that it was a necessity and survival for everyone to improve the efficiency. So I just want to make sure that the stakes are very clear to everybody. Why would we experiment so aggressively with pushing for efficiency. We actually planned this year that we would have a slight modest amount of growth in Walden with a fairly meaningful decline in marketing spend. That's an aggressive assumption. We really felt we needed to push the envelope and not just accept the ever-rising costs of marketing. And that attitude has worked for us for several years. In this most recent quarter, though, it just didn't work for us. And we -- I won't go into a lot of the details of exactly where in the marketing channels it didn't work. But I would say the bottom line is to find the right balance, we needed to spend a little more, and we needed to spend it better. And, so we are now pivoting to adapt to that and have already increased our spend in the fourth quarter. And while it will take a couple of quarters, I'm sure for this to improve, we do expect -- I do expect that this will improve. It's tough, I think, you make a point, this is a very, very competitive market there but I also want to point that the place in the market where Walden competes, which is mostly masters and doctoral programs, it is a competitive the space. But there are -- the majority of universities in the U.S. can't offer those credentials. And those who can offer those credentials that have prestigious brands, typically are expecting a much higher tuition price than our student would typically pay. So we think there is a niche in the price-value equation for Walden, and we will continue to defend that and I think it's very rare that we've had a stumble like this. I can -- I remember in the first quarter of 2016, we had a stumble like this, and we were able to quickly recover from it. In the prior years before that, I think, we generally didn't have that kind of volatility, and I think the team is on it and is going to get this improved and we will all notice improvements soon. But that doesn't mean it will go from a negative to a positive overnight. Does that answer your question?

Yes. That's very good.

And our next question comes from the line of Manav Patnaik from Barclays.

This is Ryan for Manav. I guess just to jump in on that point, I mean, can you maybe give us a sense of how much there was a reduction in ad spend? And is there any correlation with just a really strong job market particularly in the U.S. making that level of higher ed less attractive to prospective students?

I think what we're really trying to do is to go to the primary driver. I would tell you I think there are many drivers and one of our jobs in explaining to you and in managing the business is to not confuse everyone with many drivers. I think you're right. I think that, that certainly saps some of the demand for some, some not all of the professions with people seeking these degrees. I don't really believe that, that would account for that much of the impact. I would tell you, by the way, I actually think that the natural disasters in the U.S., the hurricanes actually took place during a key part of the enrollment process. And we believe that some hundreds of students were impacted by that. There are lots of factors. What we're just trying to do is drive to the biggest factor. And the biggest factor for us was really marketing execution and that balance of efficiency and volume. I don't think we want to give any specifics about the marketing reduction, but it was a meaningful marketing reduction. And for the first couple of quarters, it was working for us. We were getting enough leads, and we were getting a good-enough conversion rate to make it a decent bet in the third quarter that all really just stopped working. And the volume of leads was less. The volume was less in the specific channels where we tend to have higher conversion so that was an impact for us as well. There are other factors, too. We closed down a program that is really the only program that Walden had that wasn't -- didn't have a good score under the gainful employment. That would have accounted for several hundred students. But again, I just don't want to pepper you with 11 different reasons. The main reason, marketing execution and efficiency. If we need to accept a very modest level of growth or no growth in Walden, in order to keep marketing spend under control, I think, that's a trade we've been willing to make in the past. But when we see it go negative, this negative, we realized it's basically been overdone. And our plan is to increase the marketing spend and to correct this issue.

Got it. And the just a follow-up, you mentioned on Chile just some of the hesitation maybe from new enrollments on -- with some of the regulatory overhang. What exactly is the feedback you get from prospective students on -- do you think that regulatory natures would impact their college decision-making? Any color you could give us there?

I think in Chile, it's a little bit like in the U.S. when the U.S. was under siege in the press for the for-profit education in the U.S. and gainful employment. It was harder to attract students. And I think in the last couple of years, there's been a very deliberate campaign against some of the private educators in Chile, and Laureate has been at the center of that storm. It's very interesting and very encouraging to know that, that sentiment is now turning around a little bit. If you are following the news articles in Chile. There are not much more people that are recognizing that Laureate has withstand -- has been able to withstand enormous pressure. And we have been focusing on outcome, we are focusing on quality, and we have adhered to all relevant laws in the country. So a number of investigations have been shut down. And now we're seeing people coming up in the public, in the press to our defense. And I think that is also then giving a more reason for students to select the Laureate institutions. So we're seeing although there has been a decline due to free education, there will be -- when it's free, it's going to be first priority, and then we are competing for a shrinking pool of students that are paying, and we are competing incredibly well in that pool, and we've been able to get pricing power. We've been able to get preferences. We have some wonderful rankings and quality seals recently, including entering the Shanghai 800 rating by our Andrés Bello (UNAB) University, which is our largest university in Chile. So again, we are doing well because of quality, focused on outcome and extreme adherence to compliance.

And our next question comes from the line of Jeff Silber with BMO Capital Markets.

Just want to make sure I have a little bit more clarity on the impact of the earthquake in Mexico. So the roughly $12 million in revenues, what -- do you expect to recoup all of that? Are these students in essence lost, so to speak? And over what time period do you think you will get that back?

So we added a chart, I think, it was Page #9, where we are showing that this is a timing item. We do expect the $12 million to be recovered. That was just a shift from third quarter to fourth quarter because we -- many of our campuses particularly in Mexico City, were shut down for the last 2 weeks of September because of the earthquake. So those classes couldn't start. They got pushed. However, in addition to that, we have lost about 4,000 to 5,000 students, which are going to impact our 2018 run rate and our fourth quarter performance in Mexico. Because those are students where their family lost their homes, or they lost their job because of the earthquake and simply couldn't be in a position to start university this year. And that may -- those students may come back next few years, but we do expect revenue and earnings implications for 2018 and a smaller impact for fourth quarter.

All right. I appreciate you clarifying that for me, Eilif. And I know you're not giving official guidance for 2018. Are there any timing or seasonality-related issues that you want to call out now that we should compare it when we are comparing '18 to '17?

No, the good news is there are a lot of timing items intra quarter. But because of -- most universities shut down for the December holidays and New Year's, so very unusual if there are any spillover in seasonality from fourth quarter to first quarter. And we will be sure to note those in the future if there are. But as a guiding rule, the seasonality is within the quarters of the calendar year.

Okay, great. Let me just stick one more in. I haven't had a chance to go through the 10-Q in detail. Is there any update on Turkey that you'd like to tell us about?

It's Doug. I'm happy to answer that. There really hasn't been any action there. As everybody knows, we are in the process of pursuing our rights through the administrative court system to argue over the decision of the regulator to raise questions about whether we can charge the fees that we have charged for so many years in Turkey. And we continue to feel confident in our legal case. We also continue to really seek a fair settlement of this matter with the regulator and continue to have an active dialogue with them to that effect as well. So really no news right now. We just continue to work through this. We believe in the correctness of our position on this. But we also realize we have an important regulator who we need to help them get to a point where they are as confident in our position as we are.

And of course, the Turkish-U. S. bilateral relations are not making anything easier.

You actually -- until recently, wouldn't even be able to go because of the lack of visas. So that certainly hasn't helped very much but we'll get past that.

And our next question comes from the line of Jeff Meuler with R.W. Baird.

Nick Nikitas on for Jeff. Just one more, I guess, on the Mexico impact and the guide. So Q3, even with the pushout in revenue and EBITDA, had still had some nice upside and then just looking at the Q4, it looks like it's a little bit below where consensus was. So that's mostly just taking into account the 4,000 to 5,000 in students that were not in the Q3 number and that will be impacting Q4? Or is there anything else there that we should think about?

There are 2 things impacting fourth quarter, it is the Mexican earthquake the 4,000 to 5,000 students and related revenues and contributions. And then it is a significant shortfall in enrollment at Walden. The 20% -- or close to 20% reduction in volume at Walden for third quarter, that's a couple of thousand students, and you compound that with the smaller impact for the fourth quarter is going to have some impact for the fourth quarter and, of course, for next year. Those 2 events were the driver for us to take our enrollment guidance and the revenue guidance to the lower end of the bottom of the range. However, from an early perspective and EBITDA perspective, given tight cost control and that the accelerator plan is really working for us, we are still very comfortable with the guidance we have given on EBITDA.

Okay, great. And then thanks for the update on the accelerator plan and still kind of on track with the asset disposals. Given that you're kind of further along in the negotiation process, is there anything you guys can say as far as, like, the potential range of multiples you'd expect for the business and then is the expectation that proceeds will still be used for deleveraging?

This is Doug. I think the only comment I'd make is we have generally said on this topic that we do believe that these -- entities will be more -- will trade at a better multiple than we do. That's about as much guidance as we've provided. So we do think it will be accretive to the company. But we don't have -- we don't want to give any more specific guidance than that. We are really pushing hard to maintain this time line that the transactions should all be under contract by the end of this year and closed by the end of the first quarter. Obviously, if 1 or 2 smaller entities go more slowly than that, it's not that big of a deal. But so far, it seems like it's going very well. And then in terms of use of proceeds, Eilif, what would you say?

It is, as guided earlier, this is to delever the balance sheet.

Okay, great. Just one last one for me. On the CapEx revision to -- for '17, how much is that is timing? I guess, in '18 should we be thinking more in kind of the 8% to 9% range? And then just longer term, any change to your thoughts on the CapEx profile?

I think you should maintain your -- the numbers for 2018. There is some that are being pushed from '17 to '18. But on the other hand, our hybridity program is working better than we had expected. So I do think in 2018, the benefits from our hybridity initiative is going to be able to offset the timing impact as we are pushing some CapEx from Q4 to Q1. So I'm still confident with the guidance on run rate CapEx spend of about 7.5%.

And our next question comes from the line of Marcelo Santos with JPMorgan.

My question is the first one is about Laureate expansion plans for Brazil. So the economy is improving. You're posting very good results even compared to the local peers. And most of the peers are planning to launch several new campuses, distance learning units. So I just wanted to know what you have planned, if you think expanding would be an interesting option. And the second question is about the Central America. Just wanted to get a better plan -- better idea of which markets you are kind of working better there to help the results in that division?

Great. So on Brazil, we are going to certainly continue to expand in Brazil. We have some fabulous brands, and we are going to focus on organic growth in the near term. We are going to optimize the utilization of existing facilities. We are going to selectively expand existing campuses, add new campuses and new ZIP codes under the same brand and management, so that's going to be a priority for 2018. In terms of Central America, the 3 countries in Central America, Costa Rica is the largest one for us. Then we have very strong operations in both Panama and in Honduras and those businesses are doing really well for us on organic growth. Largely the efficiency through expanding the classrooms on existing campuses. So that is -- that drives really good flow through margin. Also in that segment, we have our U.S. campuses, that's part of the resegmentation. It's really 4 countries in that segment. And the most important and significant U.S. asset is a university called University of St. Augustine. It's a health sciences school. It's growing really, really rapidly, high quality and has a nice quality standards. Incredibly low cohort default rate and a really, really popular institution in the United States.

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

Doug, is there a similarity between the stumble in 1Q '16 on enrollments and what you saw in the third quarter that gives you confidence that spending more money will make that -- make this turn around? What -- did you have a similar type thing that all of a sudden what you were doing just didn't work and it was the exact same thing that's happening right now?

No. It's a really good question. Actually, what happened in that first quarter was more I'd say sales execution than marketing execution. In that case we're implementing a new CRM. And that, I think, to some extent unavoidable for an institution that has an intake every quarter. You can't pick a quarter to implement your CRM where you don't have an intake. Unlike our other institutions, which usually have several quarters where they don't have an intake. So that was more of the issue there. And plus, I think, we could have just done it better and didn't. But no, I will say we've had many smaller instances, much smaller, in just the constant effort to accomplish the yield that we're looking for. And there is no doubt about it that these are levers that can be pulled. And that we were very aggressive in how much we hoped to reduce the marketing spend, again to just sort of stave off what seems to be this sort of accepted constant inflation in the cost of marketing. And I still think we can do that. I think we've been very attentive to this efficiency area. And I encourage us not to be spooked by this. I think it is still is the right overall approach, but we overdid it. But I am a very confident that this will get better. The exact amount of how much money it will cost, and the exact amount of time frame before we get to a much lesser decline or positive numbers, obviously, I don't want to speculate on that. But to your question, does prior experience give us the sense that if you spend more in certain channels that you can stimulate the results? No doubt. For sure it does. So that's kind of the best I think I can do with that question.

And as a follow-up just what does a few thousand less students mean in revenue? Because there are much higher paying students than the kind of equivalent students in Brazil and elsewhere.

It has a significant impact, and that's why I'm -- in my earlier remarks, I cautioned the impact for fourth quarter and for next year because of this. The average tuition at Walden is about 3x the average of the system. And of course, these are marginal students so the incremental cost of delivery is not so great. So there's going to be a run rate implication and hence we are cautioning 2018 growth rate from the drag -- from missing a couple of thousand students this quarter at Walden.

I think the approximate average is about roughly $12,000 in revenue per Walden student, more or less.

And our next question comes from the line of Anj Singh from Crédit Suisse.

This is Katie Tryhane on for Anj Singh. In light of the segmentation changes, we were just hoping that maybe you could give us some high-level guidance on how we should be thinking about the growth, retention rates, maybe pricing trends through the different segments? We really appreciated the historical data but some forward-looking guidance would also be helpful.

So during our guidance for 2018, which we're going to give to you in March of next year as well as first quarter guidance, we will consider being a little bit more specific segment-by-segment. But given where we are today, I think, what you should just look at historical trend and the pricing power by segment before, there's so much more visibility by giving segment data back to 2015. I think a good starting point is just to assume what you have seen in the past as a good proxy with one important footnote. And that's, of course, a recovery in Brazil that is helping us both from a volume and from a pricing power perspective.

And our next question comes from the line of Hamzah Mazari with Macquarie.

This is Kayvan Rahbar filling in for Hamzah. Forgive me if I missed it but, I think, you guys mentioned in the past that you had 20% EBITDA margins when the company was private. Can you maybe walk us through how realistic it might be to get back at the 20% EBITDA run rate? And especially with regards to some of the M&A scaling in the back-office consolidation that's a part of all the accelerated plan?

Absolutely. Happy to do so. I think what I've said in the past that when we went private in 2007, we had EBITDA margin of 22%, and we were 1/3 of the size of where we are today. And today, our margins are in the ZIP code of 18%, so we have a 4-point shortfall. Just the Accelerator Plan in itself should add 1.5 to 2 percentage points and get us close to 20%, and we believe that there are about 50 basis points or so in margin expansion per year just from scaling the business and harvesting the benefits from the EiP Wave 1 program. So that should take us to 21% or so by the end of 2019 and into 2020. And I think there could be potential upside in margin beyond that from portfolio, pruning some of these assets that we are selling have been lower margin than the rest of the network. So exiting those on a pro forma basis will yield about another point or so in margin expansion. So all of that gathered together, I can see a very clear road map to margin profile in the low 20s.

And our next question comes from the line of Brandon Dobell with William Blair.

Maybe some color on how sustainable you think the momentum in Brazil is right now? If there's anything, especially in this couple of quarters that we should think about relative to the sustainability?

I think the fact is that we are growing robustly in both face-to-face and in the distance learning segment, we are underpenetrated in the distance learning, and we have a lot of white space to grow there. We have more (inaudible) that can be opened and will be opened to meet the demand in that market, so I think that is sustainable. I think there is a little bit of pent-up demand in the face-to-face environment just from a couple of years of very difficult economic conditions, where students in consultations with their parents, have decided to defer a university and that is benefiting us. But the fact that Brazil, as a market, is going to continue to grow and participation rates are going to increase if you take a decade view, I'm confident about. There will be bumps in the road but we are very bullish on Brazil. We are positioned incredibly well. We have, in my opinion, some of the best brands and very, very robust portfolio. We are in geographies that are attractive, so very positive on Brazil.

Okay. You kind of touched on maybe a little bit of different angle on hybridity. In terms of your enthusiasm relative to the progress you are making, is that because of how well Brazil is going? Or is that a broader comment? And maybe if you could put some metrics around that relative to sort of the metrics you shared initially when you guys went public about what your targets were for 2018 and '19 in terms of percentage of courses delivered or percentage of population that was accessing a hybrid program?

Absolutely. So we are very much on track with our plans. I think that yielding maybe a little bit more benefit as evidenced by the fact that we are spending a little less on CapEx. But overall, I will just say we are very much on track. 2016, we had 15%, 16% of our taught hours being delivered online within the campus-based environment. So at this point, we're excluding the fully online offerings. And we are -- we set a goal to be at the 25% by 2019, and we are on track to meet or exceed that goal.

And our final question comes from the line of Alex Paris with Barrington Research.

This is Chris Howe sitting in for Alex Paris. Most of my questions have been answered to this point, but I did have a question surrounding the partnership model. Just could you provide some update on where it's going? And the potential for new partnerships moving forward into 2018 and beyond?

So the partnership model for us has really been a couple of deep relationships with fewer brands. We have a very deep relationship with Liverpool, and that was really the start of that partnership business. Liverpool is -- the online -- we are running the online activities for Liverpool. And there is a lot of demand for that all over the emerging markets as well as both the developed European markets. We then expanded into another partnership with a value brand, a much lower cost brand in the U.K. known as Roehampton. And that was a business that was hard to get the retention rate at the price point. So that's been a one-off there. And we have been talking about we have been scaling back some of our online, our publisher volume that's been more in -- with that brand or in markets where the Liverpool brand went but the consumer couldn't really afford the offering. So but the core Liverpool business is doing well. And then of course, we have recently a couple of years ago developed a very interesting partnership with the University of Miami. And although it's a relatively early stages, we are very pleased with that partnership.

That's very helpful. And just to make sure I'm on the right track, all of the costs of -- all of the onetime costs and saving opportunities that you mentioned on the last quarter call, those all still remain in place with regard to the EiP Wave 2, correct?

Yes. So that was kind of a broad question, I want to make sure that I'm recall it correctly. Let me make a couple of statement and see if this does it for you. EiP Wave 1 is really the back-office that was $180 million investment to get $100 million in cash savings. The vast majority of that cash savings was operating expenses and hence, EBITDA, and we are, I would say, 85% to 90% complete with a value realization and maybe 95% complete by the end of this year in terms of the investment. The high success rate of that program gave us confidence to roll out what we call EiP Wave 2. EiP Wave 2 is also a big part of the Accelerator umbrella. It has about 4 different buckets of activities. The most significant savings are related to either further technology deployments for the mid-office and also a flattening of the organization, taking layers out of the management structure because we have better information technology systems and dashboards that facilitates faster decision-making and better oversight with less management. And that was the $75 million to $100 million in savings. We said we are going to deliver that by end of 2018 on a run-rate basis. We gave some very specific guidance on last quarter, how much is going to be the run rate by the end of this year, how much is going to be realized this year, and we are very much on track to deliver that. We feel that those savings from that $75 million to $100 million are very much within our control. We have already implemented and taken actions to realize those savings with one footnote that some of them, particularly those that are technology-enabled relating to changes in operating processes, is going to take a little longer, but the majority are related to organizational design and in process right now to be realized.

And this does conclude today's Q&A session. Ladies and gentlemen, thank you for participating in today's call. This does conclude the program, and you may all disconnect. Everyone, have a great day.