Laureate Education Inc (LAUR) 2017 Q4 法說會逐字稿

Welcome to the Fourth Quarter 2017 Laureate Education Earnings Conference Call. My name is Victoria, and I'll be your operator for today's call. (Operator Instructions) And please note, that this conference is being recorded.

I would now turn the call over to Adam Morse. Adam, you may begin.

Thank you, Victoria. Hello, everyone, and thank you for joining us on today's call to discuss Laureate Education's fourth quarter and year-end 2017 results. This is Adam Morse. I'm the Senior Vice President of Finance and Head of Investor Relations for Laureate. Joining me on the call today are Eilif Serck-Hanssen, Chief Executive Officer; Ricardo Berckemeyer, Chief Operating Officer; JJ Charhon, Chief Financial Officer; and Victoria Silbey, Chief Legal 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'll be referring to on today's call. The call is being webcast today and a complete recording will be available for you after the call.

I'd 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 the 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 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-K filed with the SEC.

With that, let me turn the call over to Eilif for opening remarks.

Thank you, Adam, and thanks to everyone on the line for joining us on today's earnings call. 2017 was a transformational year for Laureate. We made some very important changes to the management team, including the CEO transition from Founder Doug Becker back to myself; promoting Ricardo Berckemeyer to -- at the title of President to his COO responsibilities; and bringing in JJ Charhon as our new CFO and Victoria Silbey as Chief Legal Officer. I also want to note some important internal moves, including Paula Singer taking the role of CEO for our Online & Partnerships segment and Rick Patro taking the important role as Chief Information Officer for the network. Both Paula and Rick are long-time Laureate veterans with proven track records of execution and building scale platforms.

Other important milestones for 2017 include our reentry to the public markets and total revamping of our balance sheet. We reduced the net debt-to-EBITDA leverage ratio by 1.7 turns to 3.1x leverage at end of 2017 when pro forma adjusting for the announced divestitures. We refined the strategic direction of Laureate and launched a set of actions designed to drive increased levels of free cash flow conversion while also working to create a more scalable enterprise. These initiatives were incorporated under our Accelerator Plan, which we announced in May of last year, and we accomplished our stated goals of simplifying the business, streamlining our operations, improving margins and driving greater innovation through better use of technology.

Let me highlight some of the specific accomplishments that the new leadership team actioned during 2017. In terms of cost actions, we launched what we call EiP actions and process wave 2, which is expected to drive $75 million to $100 million in annual cost savings by the end of 2019. 2017 run rate cost savings from this program reached over $50 million. Additionally, we have rationalized our organizational structure and generated significant cost efficiencies from these actions.

For portfolio rationalization, we signed and announced the divestiture of 6 non-core markets at very attractive valuations of approximately 14x trailing EBITDA in aggregate, generating approximately $650 million in gross proceeds. These transactions will result in 0.6x turns of deleveraging when closed during the first half of 2018, showing further progress on our financial goals while also allowing us to focus our resources on our most strategic markets.

We made great progress on our balance sheet in 2017. In addition to the paydown of debt from asset sales close to date and a complete refinancing of our corporate debt obligations at lower costs, we also executed over USD 200 million equivalent of local financings in the fourth quarter as part of our liability management strategy of better matching debt with our cash flows.

Pro forma for the announced asset sales, net debt at end of 2017 was 3.1x. Our hybridity initiative continues to be going very well with 20% of our campus credit hours being taught online during 2017, positioning us very well to meet and possibly exceed our goal of 25% hybridity by end of 2019. This, along with deleveraging and cost-saving initiative, are driving improved free cash flow conversion, which is a key strategic priority for us as we look out to 2018 and beyond.

The business continues to perform very well organically. On an organic constant-currency basis, we delivered strong results in 2017, with revenues reaching $4.4 billion, an increase of 5% versus prior year. Adjusted EBITDA for 2017 was USD 832 million, growing 11% as compared to 2016, resulting in adjusted EBITDA margin gains of 100 basis points.

These strong results were driven by robust growth in our campus-based businesses as illustrated on Slide #6, with all campus-based segments increasing organic constant currency adjusted EBITDA by double-digits, except for Mexico, which was impacted by the earthquake in September of last year.

In Brazil, our business is performing very well, and we are now aggressively expanding in high-quality distance learning. We currently have over 400 licenses for distance learning centers, known as polos, and expect that to be a growth driver for us in the future. In the second half of 2017, we piloted the implementation of our common operating model in Brazil and Peru, and it's already paying significant dividends with strong margin expansion during the second half of the year in Brazil.

The Andean & Iberian segment continues to benefit from double-digit growth in Peru, along with stable topline performance in Iberia combined with solid margin progression. Our Chilean operations, in spite of challenging regulatory environment, had a very good year. Though volume was slightly down, our business in that market continues to drive efficiencies.

Mexico was, of course, impacted by the earthquake that struck that country in September of 2017. This resulted in 4,000 to 5,000 student reduction in that country. And that, combined with decreased consumer sentiment, weighed on our performance. But we still were able to deliver revenue and earnings growth in that market, albeit in the mid-single digits.

Central America and U.S. campuses performance was strong and driven by double-digit growth in the U.S. health sciences platform at the University of St. Augustine.

The EMEAA region experienced significant margin expansion in 2017, driven by scale benefits as well as favorable mix shifts in certain markets. This strong performance drove a record year for the company in terms of revenue and adjusted EBITDA generation. As we look forward, our objectives for the next few years will be continuation of the strong progress we made during 2017 to improve the financial attributes of our company.

We begin 2018 with our priorities well defined, with a focus on a further simplified operating model, strong execution and operational excellence, all of which, we believe, will create a more scalable organization with significantly improved free cash flow generation.

In addition, we are making very good progress on developing a robust technology platform that will further increase our benefits from scale economics as well as improved innovation pipeline. So with the strong 2017, a clear strategy for the next few years, I'm extremely excited for what the future holds for this great organization.

Now let me turn the call over to JJ for the financial overview of the quarter.

Thank you, Eilif. Before running through the financial results, I want to remind everyone of the seasonality in our business which, for reference, is illustrated on a couple of slides in the appendix.

For Laureate, the first and third quarters represent 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. Conversely, the second and fourth quarters generate the majority of the revenue and adjusted EBITDA for the year but are not large enrollment intake periods. More specifically, the fourth quarter we are reporting today represents typically about 40% of our full year earnings during any given year. In 2017, that contribution was 43%. With that context, let me run through you the highlights starting on Slide #9.

Revenue in the fourth quarter of 2017 was $1.3 billion, a 7% increase compared to the fourth quarter of 2016. Our adjusted EBITDA was $355 million in the fourth quarter of 2017, a 25% increase compared to the fourth quarter of 2016. Year-over-year results for the fourth quarter were impacted by certain timing and nonrecurring items. Foreign currency has continued to trend in our favor and benefit revenue and adjusted EBITDA by $30 million and $6 million, respectively, during the quarter versus the same period last year. On an organic constant-currency basis, excluding certain onetime gains, revenue increased 5% and adjusted EBITDA was ahead by 9% as compared to the fourth quarter of 2016. So by all measures, Laureate had a very strong quarter to close out the year.

Now let me spend a few minutes discussing in more detail our key operating metrics for the quarter, starting on Slide #10. Given that new enrollment activity for the fourth quarter isn't material, I'm going to focus on full year results for this metric. So for the full year of 2017, new enrollments on a comparable basis increased 2% year-over-year. This result reflects strong performance in Brazil, which was up 11% versus 2016 and also Central America and U.S. campuses, which increased 4%. In the Andean & Iberian segments, new enrollments grew in Peru, Spain and Portugal. That growth was partially offset by new enrollment declines in Chile as a result of the regulatory changes in that market. In Mexico, new enrollments were essentially flat versus prior year due to our estimated loss of 4,000 to 5,000 enrollments associated with the earthquake, which occurred during the month of September in 2017.

Online & Partnerships experienced enrollment declines year-over-year, reflecting a planned shift for our international fully online enrollments to longer length-of-stay students with higher revenue and contribution margins. Although results were also impacted by the softness in Walden third quarter intake, we are very encouraged by the improvements in new enrollment trends we experienced in the fourth quarter at Walden. Total enrollments for the full year grew 2% compared to 2016. Growth was led by strong performance in our campus-based segments, notably Brazil and Andean & Iberian.

Now moving to our revenue and adjusted EBITDA results, which you will find on Page #11. On a comparable basis, fourth quarter revenue increased 5% versus the same period a year ago. Earnings grew at 2x the pace of revenue, with adjusted EBITDA up 9% on an organic constant-currency basis, reflecting 100 basis point improvements in margins.

Turning now to Slide #12 and net income results for the quarter. Net income results for the quarter and for the year were impacted primarily by 3 factors: first, strong operating results as we discussed earlier; second, a 22% reduction in interest expense resulting from our lower debt levels and reduced cost of debt; and lastly, a $138 million tax benefit attributable to the change in U.S. tax regulations. Also included in these results were the $49 million increase in our EiP investments versus prior year due to the implementation of our EiP Wave 2 initiative that is already generating significant run rate savings as noted earlier by Eilif.

Now let me comment briefly on our 2017 full year performance, which you will find starting on Slide #13. As Eilif noted in his opening remarks, 2017 was a strong year for Laureate. We achieved record levels of revenue and adjusted EBITDA, thanks to our productivity initiatives and the continued margin accretion associated with our topline growth. As you can see illustrated on the slide, our adjusted EBITDA margins improved year-over-year by 100 basis points for the second year in a row. Our campus-based operations, including G&A, performed particularly well. They grew revenue 9% and adjusted EBITDA, 18%. Our Online & Partnerships segment contracted slightly in both revenue and profitability due to the enrollment softness experiences in the third quarter of 2017 and increased marketing expenses in the fourth quarter for supporting the improvement of our student enrollment for 2018.

Let me now turn our focus to the improvement of our capital structure illustrated on Slide #17 which, as Eilif indicated, was another significant highlight of our performance in 2017. Our strong operating results, combined with the benefits of our recapitalization activities completed in the early part of 2017, yielded a more than 20% reduction in our net leverage. Even more impressive, on a pro forma basis, including the benefits of our announced asset divestitures, the net debt leverage reduction year-over-year was 1.7 turns or a 35% reduction versus our position at the end of 2016. As a result, we expect at least a 30% year-over-year reduction of our net cash interest expenses in 2018.

Moving now to free cash flow on Slide #18. Unlevered free cash flow in 2017 increased 18% versus 2016 and is now at 8% of revenue, a 100 basis point improvement versus 2016. And as indicated during our Investor Day, we expect to continue to improve that metric over the next few years as a result of margin accretion and our capital intensity reduction initiatives.

Now let me cover guidance, which you will find on Slide #20. Given our fourth quarter results, we are reaffirming the guidance for the full year of 2018 we provided during our Investor Day earlier this year. Let me remind you that the guidance communicated at that time was on a pro forma basis and adjusted for the full year effect from asset disposal and the potential deconsolidation of our non-for-profit operations in Chile.

Total enrollments are expected to end 2018 between 955,000 and 959,000 students. This would represent a year-over-year organic growth of 2% to 2.5%. Revenue based on current spot rates is expected to be between $3,885,000,000 and $3,920,000,000. This would represent a year-over-year organic constant currency growth of 3% to 4%.

Adjusted EBITDA based on current spot FX rates is expected to be between $763 million and $770 million. This would represent a year-over-year organic constant currency growth of 7% to 8%. We also expect CapEx to be approximately 7% of our revenue in 2018.

As we alluded to earlier, cash interest expense will be approximately $250 million, reflecting the improvement in our capital structure. Cash taxes are estimated at approximately 22% of EBIT. Historically, this is an area where we express this metric as a percentage of EBITDA. Given the new U.S. tax code and the number of changes to our funds flow, we believe it makes more sense to express it now as a percentage of our earnings before interest and taxes.

Free cash flow, defined as operating cash flow less CapEx, is expected to be around $100 million for 2018, which would be a significant improvement year-over-year of more than $260 million.

Finally, let me remind you that reported earnings per share in 2018 will be affected by an approximately $57 million noncash charge to earnings per share in the first quarter of 2018 related to the accounting for the noncash beneficial redemption and conversion features due to the term of our Series A Preferred Stock. By the end of the first quarter, the accretion impact from that instrument will be fully recognized.

For the first quarter of 2018, we are providing guidance at current spot FX rates and on as-reported basis, which includes all of our Chilean operations for the first quarter as well as the stub period for the asset divestitures we closed in January, which includes Cyprus, Italy and China.

Revenue is expected to be between $865 million and $880 million. This would translate into a 2% to 3% growth rate on an organic constant-currency basis versus the first quarter in 2017.

Adjusted EBITDA is expected to be between $30 million and $40 million, reflecting the revenue seasonality in our business during a largely out-of-session quarter in the Southern Hemisphere. As a reminder, our first quarter typically delivers a low single-digit share of full year earnings due to the out-of-session months. We expect our first quarter in 2018 to be typical in that regards.

Let me now turn it over to Eilif for the wrap-up.

Thank you, JJ. 2017 laid the foundation for the future direction of our company. We refined our strategy and have a new management team fully onboarded and ready to execute. The next few years will be a continuation on our focus on being operationally excellent. We are committed to deliver strong financial attributes, including being very focused on further improving free cash flow conversion, with our goal for unlevered free cash flow margin to be 11% by the end of year 2020. In addition, we have positioned ourselves for the future through technology leadership. The scale platform we developed to harvest synergies and network benefits will also enable us to deliver industry-leading digitalized student experiences that we expect will be the new standard in the global education industry.

As the newly appointed CEO of this company, I'm committed to deliver value for all stakeholders, including our investors. We will do so by focusing on our core markets where we have clear competitive advantages, leveraging technology for improved efficiency and enhanced student experiences and our continued unwavering commitment to academic quality and superior student outcomes.

Victoria, that concludes our prepared remarks, and we're now happy to take questions from the participants.

(Operator Instructions) And it looks like our first question comes from Jeff Silber from BMO Capital Markets.

It's Henry Chien calling in for Jeff. So I was wondering if you could talk a little bit more about the margin improvement this quarter. It seemed like there's quite a jump in EBITDA over what you were previously guiding, just if you could give any more color on some of the drivers of that.

Jeff, this is JJ. There are a number of factors that are driving our EBITDA improvements as -- the first thing is all the productivity initiatives that we are realizing. As you may remember, we have implemented a new country operating model in Brazil. Some of those actions were taken between the end of the second quarter and the beginning of the third quarter so, obviously, we had the full quarter impact of those actions. And then I think, in general, we have tight cost management across all of the markets, and that contributed to, really, the strong margin that you saw in the first quarter -- in the fourth quarter.

Got it. Okay, that's helpful. And it's Henry Chien speaking, by the way, calling in for Jeff.

Sorry, Henry.

Yes, no worries. Yes, the other question I had is on Walden. I know you guys were putting some more -- I guess, some more focus on marketing there. I just wondering if you could share any color on whether you've seen any improvement in marketing there?

Hey, Henry, this is Eilif. We are very pleased with the progress that we are making in Walden and the online segment. We gave a robust update at the Investor Day at end of January. The trends that we shared with you there is still the guidance that we're going to give you. We're very encouraged with where we are. We're very confident in the outlook and the recovery of the business performance of Walden. And of course, we will be giving more information during our first quarter earnings call in April. But from where we're sitting today, we are very encouraged by where we are in the important first quarter enrollment cycle for that business.

Our next question comes from Jeff Meuler from Baird.

Yes. I was -- I appreciate the comment on Walden, it sounds like sustaining in the Q1 new enrollment. Can you also, just given how late we are in the quarter, give any sense of has the strong growth in Brazil sustained from a new enrollment growth perspective into Q1? And then, in Mexico, does it feel steady state after the earthquake? Or does there seem to be a hangover from the earthquake impact on new enrollment that's continuing beyond Q4?

Jeff, this is Eilif again. We are very encouraged about where we are during this very important first quarter enrollment cycle for the Southern Hemisphere in addition to online as I just mentioned. We will be providing comprehensive update for Q1 and guidance for the full cycle that's [pertaining to] April during our Q1 earnings call in early May. But I just want to underscore we are very pleased with where we are at this moment in the enrollment cycle. As for Mexico, the large enrollment cycle of quality in the fall in Northern Hemisphere environment or country, and we have a small intake in the first cycle. And the aftermath of the earthquake is largely behind us. We have done the structural work that needs to be done on the buildings. We have done the repaired work, and we are ready to welcome students into our network in Mexico in the large enrollment cycle in the fall.

Okay. And then is there any, I guess, further update on Chile a couple of months post passage? And I guess what I'm wondering is, as you negotiate exactly what services you're going to be providing at what rates for the ongoing operations in Chile, just are you feeling better about things? Is there any change in your thinking?

Well, first and foremost, our contractual arrangements are in place, and there are no immediate changes to those as those are grandfathered in. The law has not been implemented yet. We are waiting for the outcome of the review of new higher education law by the constitutional courts. And beyond that, we don't really have anything more to update you on.

Okay. And then just, I guess, a comment, but it would be very helpful if you guys could give us the quarterly historicals by segment pro forma-ed for the divestitures.

Sure. We'll provide that.

Our next question comes from Hamzah Mazari.

This is Kayvon, I'm on for Hamzah. Could you give us a sense of how to think about tuition increases in 2018 and beyond?

Tuition increase is done market by market and really program by program. And what we have said in the past, and I think it generally is true for the network, is that we price at/or above inflation in most market. However, in markets where there are disruptions, such as in 2015 and 2016 and maybe into 2017 in Brazil, given the very deep recessions they were facing while, at the same time, dismantling the student loan program, during that period, we were much more cautious with pricing, and we priced probably a couple of points below inflation. And absent those very specific events or situations, we typically are at/or above inflation.

All right, thank you.

Our next question comes from Marcelo Santos from JPMorgan.

Good afternoon, thank you for taking my questions. I have 2 actually. The first, I would like to understand a little bit better the $17 million gain that you had in Brazil when you explained the variance components in the EBITDA, you singled that out as an other. I just want to understand what this other was? And the second question is regarding distance learning online. I mean, you have a substantial experience in the U.S., now you are growing substantially also in Brazil. Based on these experience you accumulated, when you look to the other markets that you see, where do you see the biggest opportunities? What are the main hurdles for distance learning or online to develop there? I mean, what are the opportunities in -- that it could exploit in the future? They are the 2 questions.

So I would ask JJ to take the first question, and I'll pick up on the second.

So as you may remember, as part of our acquisitions, we always evaluate contingent liabilities. And we have, in most of our share repurchase agreements, actually indemnification mechanisms just in case there are some tax liabilities associated to the period of ownership of the prior owners. In this case, we revaluate both the liabilities as well as the indemnification mechanisms every quarter. In the fourth quarter of 2017, we had to readjust those liabilities. And the way it works mechanically is that you have to break down that liability into the individual components. And there is a big interest and inflation components that we record in interest where the indemnification asset is above the line. So it creates a little bit of a mismatch at the adjusted EBITDA level, but it's a complete wash at the net income level. And that's the reasons for the unusual item in Brazil in the fourth quarter.

Perfect.

And this is Eilif on the expansion in online and distance learning we shared with our shareholders and investors in general in end of January during our investor meeting, the whole focus here are on what we call capital-light expansion. Online is a part of that. These SMART campuses that we have piloted in Australia and Mexico, a part of that, and DL in Brazil -- or distance learning in Brazil is an important part of that. And just to give you a quick reminder, the Walden technology and the Walden know-how for digital learning has been instrumental in Laureate rolling out what we call our hybridity approach, where about 20% of our credit hours are now delivered online in the campus environment. And so having had that history and legacy with Walden has enabled us to, in a very cost-efficient manner and a very confident manner, been able to roll out high-quality digital learning throughout the network. We have -- in addition to the hybrid teaching, we have rolled out fully online products in Mexico, in Spain and several other markets, we are in various states of rolling fully online out. And in Brazil, it is really the distance learning through these learning centers or polos, that enable us to really provide digital low-cost products throughout Brazil. And we are leveraging our strong brands. FMU is an important brand that we have been using for distance learning. And we have 400 polos and growing aggressively from a relatively small basis, but we are seeing growth somewhere between 35% and 55% momentum in distance learning in Brazil.

Our next question comes from Thiago Bortoluci from Morgan Stanley.

Yes, hi good evening everyone. Thanks Eilif and team for the presentation and for taking the questions. I have 2 follow-up questions. The first one is on Brazil prices. I would like to get some color on your intake pricing strategy for 2018 and on the nature of the discounts you are offering so we can have some more visibility on the seasonality of your margins here in the region. This is the first question. And I will also have a question on Chile. Your outlook for 2018 continues to assume the deconsolidation of the 3 units you have there. With the information we have so far, would you say it is reasonable to assume you could get some residual value from those assets or a reasonable base case would be just their full writeoff? These are the questions. Thank you very much.

Thank you for the questions. In terms of the pricing in Brazil, we are not going to give any specific guidance on that. During our first quarter, earnings call, when this intake is behind us, we will give much more color and insights. The only status I want to give you is very consistent with what I said earlier, we tend to price very close to inflation or slightly above. And as Brazil economy is recovering, that statement becomes generally true for that market as well but more guidance specificity on the Brazil intake during our first quarter report in May of this year. In terms of Chile outlook, there's nothing really more to say than what we have shared with you during the Investor Day. If the law is implemented, that will trigger a deconsolidation. And we gave you pretty specific guidance around what that would mean to us in terms of a noncash writeoff as well as a degradation in our revenues and EBITDA performance going forward. And there is no change to those estimates. And I refer you back to the January 31 investor presentation as well as, of course, the 10-K.

Thanks Eilif. If I may just a follow up on Brazil prices. Qualitatively speaking, would you say we're seeing competition catching up in general in Brazil?

Well, I'm not quite sure what -- how the competition is doing. I'd say in the middle of their own reporting, and I don't think anyone has reported first quarter yet. So I'm going to just stay with my prior answer and that we will provide you robust updates during our first quarter results that we will be delivering in early May.

We'll wait for that. Thank you very much Eilif.

Our next question comes from Manav Patnaik from Barclays.

This is Ryan Leonard filling in for Manav. Just want to make sure I understand the '18 guidance growth rates. At the Investor Day, you have revenue growth of 4.5% to 5.5%. I'm not -- I just want to make sure I understood, is organic constant currency kind of the tweak there? Or what -- how should I think about that?

So in terms of the guidance, I'll let JJ comment more. The guidance that we provided to you as of January in terms of absolute dollar numbers on a constant-currency basis has not changed. We have reaffirmed those numbers. Since our 2017 numbers came out slightly above guidance, that, by definition, took the growth rate down by a smidge. But we are reaffirming the dollar guidance as presented in end of January. JJ, anything else you want to add to that?

No. I think that's exactly right.

Ok, so even though...

Ryan, does that answer your question?

Well, so even though it's at the end of January, I mean, I guess, it's semantics, but I just want to make sure the growth rates in the business looking out to '18, I guess, are consistent, just off a higher starting point. Is that what you're saying?

What we are saying is that the guidance for 2018 in dollar terms and constant currency are unchanged from what we gave you about 5 weeks ago.

Okay, fair enough. And Chile is included in the first quarter?

That is correct. Given that the law has not been enacted, most of the core actually will be reflected in our financials. Obviously, we can't speculate on what's going to happen between now and the end of the quarter. But we thought we would reflect what -- how the numbers are going to be actually reported at the end of first quarter.

Okay, fair enough. And I guess, just on that, I mean, is that something that could linger a little bit? I mean, are you kind of waiting for things to happen? And as a quick follow-up, do you still have the same access to capital from Chile? Or is there any changes from the deconsolidation? And then if I could just tag one more on there, is there any update on Turkey?

So in terms of Chile, we are required to consolidate as long as we control the entity and have our contractual arrangements in place, which is currently the case. If and when the law gets implemented post a constitutional review, then that will trigger -- that could trigger an event that causes deconsolidation. But consolidation is not an option, we have to follow the accounting rules in that regard. So just -- I'm just going to ask you to stay tuned as things develop in that market. But clearly, our guidance to you is that we expect to deconsolidate, so the guidance that JJ gave you for the year is assuming a deconsolidation of the non-for-profit universities in Chile. I think your second point was Turkey. But before going there, was there anything else on Chile, Ryan?

No. I guess, more from a -- I get the P&L aspect. More from a cash flow, I mean is that -- does that -- that eventually flows through, it's just that -- how it kind of comes through in the consolidated statement.

Yes. What we gave as very specific guidance on was the implications to EBITDA, and I think that gives you the ability to model. The CapEx, as a percentage of revenue for the total company, excluding Chile, will be about 7%, and the EBITDA that we are losing from deconsolidation event is approximately $55 million, and that's baked into the guidance. And also, JJ gave you very specific guidance on free cash flow and on taxes. So I think you should have the components there from a modeling perspective. If not, I suggest you reach out to Adam offline.

Fair enough.

Great! Then let's -- I think your second question was what's the status on the regulatory discussions in Turkey. And we continue to engage in productive discussions with the Turkish higher education regulator. And in parallel, as you may recall, to protect our rights, we have also an appeal pending in administrative court where we objected to the regulator's initial interpretation of Laureate's engagement with our affiliate university in Turkey. From a legal perspective, this process is a relatively slow process, and we have nothing new to report at this time. But we continue to engage productively with regulator and would update if and when we have any new news to report in that regard.

Our next question comes from Alex Paris from Barrington Research.

This is Chris Howe sitting in for Alex Paris. Most of my questions have been taken at this point, but I did have 2 left. One was in regard to the net leverage ratio and perhaps your expectations to end of year 2018. What would be a healthy target level for you? And the second question is in regards to the double-digit growth seen in Peru. What type of market dynamics are you seeing in Peru? And do you expect this growth to continue in 2018?

JJ, want to take leverage?

Sure. As we presented during Investor Day, the ending leverage for 2018 is going to be 3.1. You have to restate our ending levels at the end of '17 for the deconsolidation of Chile, so that gets us back up to 3.5. But when you make the adjustments for the divestitures and the Chile deconsolidation, it will be basically a reduction of 40 base of a point, of a turn of our net leverage, so going basically from 3.5 to 3.1.

Ok, that's helpful.

Okay. Alex, and I think your second question was on Peru. And Peru just is a classic Laureate market we're operating with 3 brands in 3 segments. We have what we call the premium segment, the value segment and the Tech/Voc segment. Today, we are largely a Lima company, where we have built brand and got footprint, and these strong brands that we have built over the years are now ready to be "exported" to the secondary cities. And we have over 5 large cities with over 1 million population where we are getting ready to start operations for these brands. So we believe that Peru is going to continue to be an attractive market for us for several years to come.

Thank you so much.

Our next question comes from Shlomo Rosenbaum from Stifel. Please go ahead.

Hi. Thank you for taking my questions. A couple questions on Chile and I have one on Turkey. In terms of Chile, do you guys, at this time and, have access to the cash that might be in that business in Chile? And is that meaningful at all? And then, can you also help us with just modeling for the first Q of '18 what the revenue and EBITDA contributions do you expect from both Chile and the divested region, so we'll be able to model up the rest of the year and then kind of get a year-over-year for '19?

Yes, Shlomo, this is JJ. So I think on Chile, we've covered that. It's really hard to speculate at this time what's going to be the final version of the law that's going to be enacted. We did provide during Investor Day some adjustments to our debt leverage that reflects the impact that this would have on our net debt position should the deconsolidation be completed and did indicate that the impact would be basically a net increase of $110 million of debt. And that's a function of the cash that we have in those entities plus the proportion of the debt associated with the -- some of the affiliates that own the real estate assets for those not-for-profit institutions. So we don't really have more clarity at this stage than what we've already provided, and we'll wait for the law to be passed and to fully digest the implications for Laureate.

Shlomo, this is Eilif. If you want to go back to Page 14 of the Investor Day presentation from end of January, I think that has a pretty good summary of the impact of revenue EBITDA as well as the cash impact to the business. And when JJ, in a moment, give you guidance on leverage at end of 2018 at 3.1 turn of leverage, that is after taking into effect the loss of the EBITDA and loss of the cash that is in those non-for-profit entities.

Okay. And then what are the Turkey quota cuts in Slide 10?

So you may recall, back in April of last year when we announced that the Turkish regulator was challenging some of our operating arrangements in Turkey, they put a number of sanctions on us, including a 30% reduction in quota, which meant that we needed to reduce our new enrollment intake by 30% versus prior year. And while we were going through our mitigation and discussions and potentially legal process with the Turkish regulator, that quota limitation is staying in place. And the next time quotas are being issued for the September intake will be in second half of May, I believe, so we will know if that will be lifted for 2018 or not. Right now, we're assuming that, that quota restriction is not lifted. So if it's lifted, it will be good news.

Okay, thank you.

Our last question comes from Peter Appert from Piper Jaffray. Please go ahead.

Thanks, good evening. So Eilif, at the Investor Day, you talked a bit about the opportunity for margin improvement in Brazil. I'm just hoping you could give us a little more color in terms of your confidence in the drivers and the ability to deliver on that. I'm wondering if the distance learning initiative is the main factor there? Or is it contingent on a better macro environment in Brazil?

Peter, thanks for that question. There are several factors that are helping our margin momentum in Brazil. One is just an overall economic environment. The contraction in the market related to the dismantling of Fies caused enormous pricing pressure in the market. And we believe that that is now largely cycled through and behind us. So that makes for a more normalized environment. Secondly is we have implemented what we call the new operating model, which is an integrated back-office, mid-office and front office, where we have an integrated technology platform between finance and accounting and receivables and payables to the student information system, self-service to an academic delivery model, the whole way into the front office of having a common CRM system across all of our 9 institutions in Brazil. We are rolling this out over waves. This takes time. We started in the second half of last year. You already seen significant gains in terms of efficiency from both academic cost structure as well as back-office cost structure and G&A from that initiative, and more to come. Then the third lever is going to be distance learning. But in the near term, distance learning is a drag because we are -- in a startup mode, we are growing rapidly, which means that there are startup costs with opening up these new centers. So right now, that is not accretive to the story, but it will be helping the overall margin profile in Brazil when these centers are reaching maturity over the next coming quarters and years. Peter, did that answer your question?

Is -- do you think that the margins there could approach what you do in Mexico, say, over the next several years?

Yes. There's no reason why -- we are already at scale in Brazil, we have a very clear road map to get our Brazil network up to a system average.

Great, thank you.

Thank you!

There are no further questions.

If there are no further questions, Victoria, then I just want to take the opportunity to thank everyone for participating. Thank you for your interest in Laureate and the support of Laureate over the years. And please feel free to reach out to Adam, JJ or myself, if there are any follow-up questions. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect.