Bright Scholar Education Holdings Ltd-ADR (NYSE:BEDU) Q3 2020 Results Conference Call July 23, 2020 8:00 AM ET
Ruby Yim – Investor Relations
Junli He – Executive Vice Chairman
Wanmei Li – Co-Chief Executive Officer
Zi Chen – Co-Chief Executive Officer
Dora Li – Chief Financial Officer
Conference Call Participants
Sheng Zhong – Morgan Stanley
Christine Cho – Goldman Sachs
Good morning, and thank you for standing by for Bright Scholar’s 2020 Third Fiscal Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks there will be a question-and-answer session. Today’s conference is being recorded.
I would now like to turn the meeting over to your host for today’s conference, Ms. Ruby Yim, Investor Relations Counsel.
Thank you, operator. Good morning, and good evening. Welcome to Bright Scholar’s Third Fiscal Quarter ended May 31, 2020 Earnings Call.
Joining me today are Mr. Junli He, our Executive Vice Chairman; and Ms. Wanmei Li, our Co-CEO; Mr. Zi Chen, our Co-CEO and Ms. Dora Li, our Chief Financial Officer.
As a reminder, today’s conference call is being broadcast live via a webcast. In addition, a replay will be available on our website following the call. By now, you should have received a copy of our press release that was distributed on July 22, 2020 after market closed Eastern time. If you have not, it is available on the IR section of our website.
Before we get started, let me remind you that today’s call may contain Forward-Looking Statements within the meaning of Section 21E of the Securities Exchange Act of 1934. As amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, without limitation, the Company’s business plans and development which can be identified by terminology such as may, will, expect, anticipate, aim, estimate, intend, plan, believe, potential, continue, is, shall, unlikely to, or other similar expressions.
Such statements are based upon management’s current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the Company’s control, which may cause the Company’s actual results, performance or achievements to differ materially from those in the forward-looking statements.
Further information regarding this and other risks, uncertainties or factors is included in the Company’s filings with the U.S. Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.
During this call, we will be referring to GAAP and non-GAAP financial measures. We use certain non-GAAP measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures have limitations as analytical tools and investors should not consider them in isolation or as a substitute for net income attributable to a Company or other consolidated statement or comprehensive income data prepared in accordance with the U.S. GAAP.
Please note, all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. With that, I would turn the call over to our Executive Vice Chairman. Junli He. Junli.
Thanks, Ruby. Good morning and good evening. Welcome to Bright Scholar’s third quarter fiscal 2020 earnings call. During this difficult time with the continuation and the resurgence of COVID-19 around the world ourselves and our visitors affected by this unprecedented crisis. We extend our sympathies to those who are suffering personally from the impact of the pandemic and our business gratitude does help fighting the pandemic on the front line.
In the instance of so many challenges, I’m incredibly proud of our teams around the globe showing exemplary dedication in ensuring our students education journey to the list of disruptive.
Let’s begin our earnings report, for those who are new to our company, we have, included in our earnings presentation, a brief corporate introduction for Side 5 to 13, which you can download it for our IR website. Again, all numbers are in RMB and all comparisons referred to year-over-year and as otherwise stated.
I will go through the prepared remarks on behalf of the senior management team. Then I will turn the call over to Dora to provide a more details to our financials before we take your questions.
Please turn to the Slide 15 for the highlights of our third fiscal quarter and the nine-months performance with detailed breakdown by the second business inside of 16 and the 17. Despite the disruptions and the short-term impact from the COVID-19 pandemic Bright Scholar’s performance during the third fiscal quarter has demonstrated our continued progress in executing our growth strategy and the heighted a resilience of our underlying business. The revenue of the quarter was RMB739.4 million, representing a year-over-year increase of 6.7%.
Our net income was RMB68 million, which was negatively impacted by the mandatory closure of our schools, kindergartens and the learning centers. For the nine-month period, the revenue was RMB2.714 billion representing a year-over-year increase of 46.6%. The adjusted gross profits, adjusted operating income, adjusted EBITDA increased by 41.9%, 23.9% and the 37.3% year-over-year, respectively.
We are confident in the strength that our well positioned growth platforms, namely domestic K-12 schools, overseas schools, complimentary educational services, and education technology. We are building good momentum as we accelerate the execution of our more mature growth strategy, a brief updates as follows.
First, our domestic K-12 business, the demand of our K-12 education has continuously been strong in-spite of the pandemic, as shown in slide 18, in comparison to the nine-months of last fiscal year, the average student enrollment increased by 10.6% year-over-year.
Underpinning the strong demand for our K-12. education services are consistent industry leading and timely performance as you may refer to in slide 19.As of May 22, 2020, 93.6% of students in the 2020 graduating class of our international schools in China have received the offers from the top 50 institutions, including three from Oxford, three from Cambridge, four from the University of Chicago and 12 from University of California Berkeley.
One of our key growth strategy is to expand our nationwide network with asset led models through our strategic partnerships and deep collaboration with kindergarten. As of the release date ,we have entered agreements with kindergarten and other partners to add 61 kindergartens in eight schools to our school network. As a total capacity of approximately 35,500 students in China.
Second, our school business. As with our educational service providers. The business in the third quarter was impacted by COVID-19 related school clothing, mandated by government mainly with a result of boarding in the middle seat.
While full impact of this global pandemic remains uncertain for our overseas schools, we have taken measures to minimize disruptions and also putting an initiative in place to reduce costs to improve the efficiency of the business during this challenging time in anticipation of any potential resurgence for extended periods.
Our global network schools of our student options to complete their study at different locations in the coming school year, along with our virtual global schools.
Third, our complimentary education services has adapted a business strategy and taking actions to help mitigate any adverse impact on business and operation during the COVID-19 pandemic. We are pleased to report that class reduced it to a close to 80% for some of the business units. In addition we have realized and exact resources to – market of which pandemic has been content to expand our business. Really believe in times to capitalize on post pandemic market opportunities with new products and services for the summer.
Fourth, education technology. Our new business segment has shown in Slide 13, the adoption of the emerging technology has a profound impact on education industry. And for students enter the company Bright Scholar has continuously been evolving to mitigate changing needs of our students. As well navigate unprecedented situation COVID-19. Where this changes presented challenges in the short term, we are focus on this opportunities presented to us by new technology and then learning behaviors.
In the quarter, we added back two strategic initiatives to capitalize on those opportunities. Early in May, we announced the acquisition of 61% of the equity interest in main institute. Main institute to provide high quality and outcome focused online service including academic Olympia, the comprehensive selection of academic courses as well other work recognized international courses. In June we announced the launch of our virtual future global school with online, offline OMR model, which will be operation from the beginning of a fiscal 21.
The virtual school will deliver high quality international curriculum, interactive and then intelligent learning management system. It creates a new blended learning experience combining the best of a classroom and online education that offers human connection between teachers and the students around the world.
They especially our service offerings, utilizing technology to enhance access the high quality education where further strength our market leadership is the face of pandemic. As we offer a new age of learning.
While the pandemic is causing uncertainty and the near term impact our revenue and profit continuous growth in their first three quarters and long-term goals and the strategy remain unchanged. We expect most of our business will bounce back stronger post COVID-19. Secular trends driving our business remain intact and we may committed to balancing operations discipline with continued to invest in the key strategic areas to drive long-term growth.
I’m prudent the financial management enabled us to have financial flexibility to continue to invest in our business and the return value for our shareholders. The Board of Directors have approved – declared the cash dividend of $0.12 per ADS, a 20% increase from the last fiscal year.
With that note I would turn the call over to Dora.
Thank you, Derek. Let’s turn back to our financials. Please be reminded that all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to our earnings press release for detailed information of our comprehensive – comparative financial performance on year-over-year basis.
Please turn to Slide 21. Although heavily impacted by COVID-19, we still delivered solid results with top-line up 6.7% to 739.4 million for the quarter and up 46.6% to 2714.4 million for the nine-months of fiscal 2020.
The change in revenue is primarily contributed by an increase in overseas schools revenue, which was acquired in July of 2019, partially offset by the decreased revenue in kindergarten due to the temporary mandatory closure of schools.
Domestic K-12 schools include international schools, bilingual schools and kindergartens was down 24.8% for the quarter and up 3.7% on a nine-month basis, as mentioned primarily due to decrease in boarding and annual fees revenue for K-1 to K-12. And the tuition revenue decreased for kindergarten as a result of mandatory school closure impacted by COVID-19.
For our international schools, revenue for the quarter was up 7.6%, primarily due to 12.9% increase of students enrollment. On a nine-month basis, revenue was up 17.7% due to 13.9% increase in student enrollment.
Our bilingual schools revenue for the quarter down 4.9% due to a decrease in annual and boarding fees. On the nine-month basis revenue up to 10.3%, mainly attributed to 11.8% increase in student enrollment.
Kindergarten, revenue for the quarter and the nine-month basis was down 96% and 26.7%. Primarily due to decreased intuition fees news as a result of mandatory closure. Overseas schools, overseas schools is important part of global strategy, the revenue was 210.4 million for the quarter accounted for 28.5% of total revenue. On a nine-month basis, revenue was 766.8 million accounted for 28.2% of total revenue.
Overseas schools grow 2,204% in revenue, and 2,467% in gross profit in the nine-month basis for fiscal 2020. Average number of students was 3219 from quarter, and 3246 for the nine-months basis. The year-over-year growth in revenue and gross profit was primarily due to the inclusion of the acquired overseas schools during the comparable period.
Revenue from complementary education was down 3.2% for the quarter due to COVID-19 impact on training business, including [indiscernible] impressions as well as study for and account’s business. On a nine-month basis revenue was up 23.1%.
On Slide 22, cost of revenue for the quarter was 60.5% of total revenues compared to 54.1% in the same quarter of last fiscal year. On a nine-month basis cost of revenue was 60.5% of total revenue compared to 58.7% in the same period last fiscal year. The increase in cost of goods sold for the quarter and the nine-months was primarily due to the inclusion of acquire overseas business on a comparable basis.
Teaching staff cost, the primary cost contributor accounted for 34.2% of total revenue down from 35.3% for the quarter. On a nine-month basis teaching staff cost was 32.8% down from 38.4%. Our domestic K-12 average student teacher ratio for the nine-months of fiscal 2020 was 9.0 compared to 8.9 in the same period of last fiscal year.
On Slide 23, our gross profit and the margin. Gross profits were down 8.2% for the quarter and up 40.2% on the nine-month basis and gross margin were down 6.4 percentage points to 39.5% for the quarter. And on the nine-month basis, gross margin was down 1.8 percentage points to 39.5%.
Continuing on Slide 24. For the third fiscal quarter adjusted SG&A as a percentage of total revenue was up to 26.9% from 19.5% in the same quarter last fiscal year. On the nine-month basis adjusted SG&A as a percentage of total revenue was 22.8% compared to 20.9% in the same period of last fiscal year. The increase in SG&A expenses for the quarter on nine-months was primarily due to the inclusion of acquired overseas business on a comparable basis.
Adjusted SG&A as percentage of revenue for domestic K-12 schools for the quarter was up 9.4% up from 8.4% in the same quarter last year, primarily due to the pre opening expenses for the new international school plan to open in the coming years. On the nine-month basis adjusted SG&A as a percentage of revenue for domestic K-12 schools was 7.7% down from 10.9% in the same period of last fiscal year.
As percentage of revenue adjusted and allocated corporate expenses, mainly headquarter expenses for the quarter was 5.5% up from 3.7%. On nine-months basis it was 3.6% down from 5.1%. Adjusted and allocated corporate expenses for the quarter was 40.4 million compared to 24.9 million last year due to a one time option expensive adjustment. On a nine-month basis, it was 99 million compared to 94.8 million in the same period last fiscal year.
To elaborate more on the adjusted SG&A expenses, please refer to Slide 25. Continue to Slide 26, adjusted EBITDA for the quarter was down 25.5% to 164.5 million, adjusted EBITDA margin was 22.2% compared to 31.9%. On a nine-month basis, adjusted EBITDA up 37.3% to 665.4 million adjusted EBITDA margin was 24.7% compared to 26.3%.
Adjusted net income for the quarter, down 70.9% to 46.6 million. Adjusted net margin was 6.3% compared to 23.1%. On the nine-month basis, adjusted net income down 7.3% to 333.6 million. Adjusted net margin was 12.3% compared to 19.4%.
On Slide 27, our cash and bank balance. As of May 31, 2020,our cash and cash equivalent and restricted cash totaled RMB2092 million as compared to RMB2433 million in February 29, 2020. We also have a short-term investment of RMB1966 million as of May 31, 2020.
Moving on to Slide 29, underscoring the strong confidence in the company’s future prospects. The company continues to execute its second share repurchase program. And the recent insider purchase has been made from the open market by our chairlady, Executive Vice Chairman and Independent Director. Following the cash dividends of $0.10 per ADS in September 2019, the Board of Director has declared. The second cash dividend for $0.12 per ADS.
Continuing to Slide 30. We are reaffirming our revised guidance for fiscal year 2020. For the fiscal year ending August 31, 2020, we expect our total revenue in the range of 3.37 billion and the 3.47 billion representing a growth of 31% to 35% based on existing business and without potential acquisition.
We also accept average student enrollment to be between approximately 61,800 and 62,800 representing an increase of 11% to 13%. We are also in preparation to open 17 kindergartens and one International School for fiscal 2021. Beyond fiscal 2021, we have seven schools and 44 kindergarten contracted for operations. Please refer to table in Slides 32 and 33 for the combined income statement.
Slide 34 shows the reconciliations for SG&A EBITDA and an income on a GAAP to non-GAAP results. Slide 35 shows our balance sheet and cash flow statements and cash flow statements. For the nine-months ended May 31, 2020, the company’s capital expenditure was approximately RMB 107.3 million up 2.1% compared to the same period of last fiscal year. And Slide 36 shows our average students enrollment and average tuition fee across our network.
This concludes my financial update. Now I would turn to Junli He for his closing remarks, Junli.
Thank you, Dora. Our transformative business model, moderated growth strategy, global school network, diversified portfolio, technology enabled OMO offerings and most importantly our exceptional group of employees will enable us to fulfill our mission with distinction and position into the future. We look forward to keep you updated of our continued progress that we executed on our growth strategy to enhance value for both students and stakeholders.
This concludes our prepared remarks and we would like to open the call for questions. Operator.
[Operator Instructions] The first question comes from the line of Sheng Zhong with Morgan Stanley. Please go ahead.
Thank you for taking my question. I have two questions. First one, can you give us more color about your OMO strategies. What the OMO will be title on the floor or on the supplementary services. And the second question is, because of the pandemic a lot of institutions actually is in very difficult situation, do you see more M&A opportunity in this current state. Thank you.
Hi, Zhong, thank you for asking the questions. I would touch on both of them, this is Junli. For the OMO what we are doing right now, we are actually developing a platform that were opened for business for the first quarter of fiscal 2021. So that program were combine our experience for offline schools and also offer a mix of curriculum online for students around the globe.
For example, we are going to offer eight hour classes, so student anywhere, if they are in China or UK or another parts of the world can take class online. Of course for those who are in China they also have the advantage to take down the class offline in our physical schools.
For students who are attending to our UK school, for example because of the pandemic they cannot go back to the UK. They have the option to take some classes, online, with their teachers in UK, but also they can go sports and other things offline in our physical schools. So start with a level and English tutoring as well, but we intend to have a more broad selection down the road including a [indiscernible] as well.
But you also asked about the complimentary education, because of the pandemic we already moved some of those online already. For example, even as children we already moved online – most of the students are taking class online during the closure of the learning centers.
But the platform will recognize developing a more sophisticated than the tutors center would require, because learning management is interactive. So they actually can keep track of a students’ learning records across the entire school year or over the number of school years. That is for the OMO.
And also, you are absolutely right, this pandemic approved a lot of opportunities for position because many of the other businesses are suffering. Many of them actually end up brink of closing down there. We have been contacted by a number of organizations that are experiencing financial difficulties.
Without help, they are probably going to go through some kind of closure or bankruptcy process. We are actively looking into some of those opportunities, that we believe the best opportunity to take action, would be the next six or year not right now. And the validation would come – that force.
Understand. Thank you very much. So just a follow-up about the M&A opportunity, do you see more opportunity in the supplementary service side or you mean the school.
Actually both, to give you maybe some color, we try to work for hours of business in the UK in the U.S. for example, many of the private schools because they don’t have a strong balance sheet as we do, so I mentioned that we says cash and cash equivalents – net cash is a short-term investment. We have almost RMB4 billion which is somewhere about US$570 million or US$580 million. So we are going to be fine for to go through this pandemic and we don’t have any problem, but many of them don’t have expenses like that.
Literally without income, they are going to go down. So they are asking for help, those schools K-12 schools can be bought at I would say compared to last year, maybe half of the price in some cases or even less. So what we are on this fair footing, because our overseas business also impacted, we are taking opportunities to make it more efficient and a screen our business but once we go through these, because we are really in pandemic right now, but if once we go through this, we are on very strong footing. I think that’s a good time to take off to some opportunities overseas.
In China, particularly for K-12 schools there are also some opportunities, the evaluation as I mentioned kindergarten significantly compared to let’s say the same time last year. But China has reasonably controlled the pandemic. So I think most likely there maybe some particular areas, or cities, most of the country is going back to normal for this coming school year.
So there would be some opportunities, but the schools are doing fine as you know, even though students may not go back to school for boarding the meals, but it is continuing to enroll either online or offline for the school. So the school business is doing fine. So there are some opportunities to K-12 schools there as well.
But there are huge opportunities for complimentary part of it, because many of – I have to ask them we don’t have this – we have seen a lot of them potentially, I would say maybe I have them really experience province and we of course have seen some opportunities came to us at very attractive valuation in normal situation without pandemic.
Thank you very much. That is very helpful.
The next question is with Christine Cho with Goldman Sachs. Please go ahead.
Sure, thank you Junli and Dora. I have two quick questions. One is I know that that situation remains quite fluid with right plan, do you have a sense of kind of what you are expecting for the overseas schools in the next few quarters. And secondly, I know you are preparing for the opening of Fettes College in Guangzhou and I was wondering how the preparations are going for the opening in September, Thank you.
Sure. Again this is Junli, for overseas schools, we have seven schools in the UK and one school in the U.S., the seven schools in UK there are two buckets, three of them are independent schools. Most of our students are local student, and local means students are [indiscernible] UK. So they are a less impact, just like any local schools in most they may be stay at home, but still taking classes out in school, of course, just like in the school we have in China, you would not be able to charge them on boarding in the meals, but tuition is there.
And I think relative to the U.S. UK has done a better job in terms of controlling the pandemic, we are looking at – I just got update last week [indiscernible] has maybe 300 to 400 new cases a day and also by clusters. So of course, I don’t know that for sure, but most likely the schools are going to back to be opened in fall for the school.
So the independent schools, again, schools taken most students from UK, I think there are going to be fine. There are four schools that have take a mode of student as to the international students depends on where the students are. It is a hard to say they are going to come back.
I think if there are percentage of those students would not go back to the UK for school, but for those schools we have somewhere between 20% to 40% of students come here from China, if not going back to the UK, they can remain register and continue study in one of our campus in China.
So we would not lose those students, but somebody coming from, let’s say, Brazil or Russia, or we don’t have exact information on whether or not they would have come back or not. Of course we have some – already but given the situation in UK is fair and clear, we don’t know for sure yet, but we would expect there would be some losses of students for the coming quarter.
But relative other – to our competitors, many of them actually are shutting down. We are much better position because one we have our China campus to support our students from China then two, we have virtual schools to support students. And we also have other programs for the students as well.
The schools in the U.S. is a little bit troubling, actually in Massachusetts, but [indiscernible] also doing a better job than other states in the U.S. But it really depends on what are the actions that – taking from the U.S. government or local government or whether or not that school is going to open on not, or these students from other countries were back to the U.S. and remain again uncertain at this point of time.
We do expect out students would have come back given where they are. For example maybe in Brazil is actually the situation even worse than what it is in Massachusetts. Maybe they would come back. But most of the Chinese students may decide to go to school to our China campus or do that online.
But regardless, I would think that most of students will continue to study, maybe more than half at least a half of them were doing it online. But some of the students maybe lost, but I would think as the situation have become more clear we would have a better idea of where we are going.
But either way, we are prepared for a resurgence of the COVID-19 and prepared to take care of our students when they come to our campus. We have kept our parents posted as how we take actions to protect our student. We send out more than 50 pages of kind of procedure outline everything for [indiscernible], and students what happens if – what time we have to going to make sure that we take care obviously. We have launched a campaign called a WeCare. That is specifically for that.
For Fettes College Guangzhou, we just like to open that in September for sure. We are in the final inning of recruiting the students and then of course it pushes for the opening that is a definitive opening in September.
Okay. Thank you. That is clear.
[Operator Instructions] This concludes our question-and-answer session. I would like to turn the congress back over to Junli He for any closing remarks. Thank you.
Thank you. Thank you very much for joining the conference call. Please feel free to contact us if you have any further questions. We wish everybody a good day and stay healthy.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.