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Bright Scholar Education Holdings Limited  (NYSE:BEDU)
Q2 2019 Earnings Call
April 23, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and thank you for standing for the Bright Scholar 2019 Second Fiscal Quarter Earnings Conference Call. At this time all participants will be in a 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. Please go ahead.

Ruby Yim -- Investor Relations Counsel

Thank you, operator. Good morning and good evening. Welcome to Bright Scholar's 2019 second fiscal quarter ended February the 28th, 2019 earnings call. Joining me today are Mr. Derek Feng, our Chief Executive Officer; and Ms. Dora Li, our Chief Financial Officer.

As a reminder today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following this call. By now you should have received a copy of our press release that was distributed on April the 22nd, 2019 after market closes Eastern time. If you haven't, it is available on our IR section of our website.

Before we get started let me review the forward-looking statements regarding this conference call. That is statements related to future, not past events often address expected future business and financial performance and financial conditions, and often words such as will, estimate, project, predict, believe, expect, anticipate, intend, potential, plan or goal. Bright Scholar may also make written or oral forward-looking statements in other reports, in presentations, in material delivered to shareholders and in press releases. In addition, Bright Scholar's representatives may make oral forward-looking statements.

Forward-looking statements by the nature address matters that are to different degrees uncertain such as statements about the Company's goals and strategies, its future business development, financial condition and results of operations, its ability to retain and grow its customer base and network of schools, the growth of, and trends in the markets for its services in China, the demand for and market acceptance of its brand and services, competition in its industry in China, relevant government policies and regulations relating to the corporate structure, business and industry, fluctuations in general economic and business conditions in China.

Further information regarding this and other risks is included in Bright Scholar's filing with the Securities and Exchange Commission. Bright Scholar undertakes no duty to update any forward-looking statement except as required under applicable law. During this call, we'll 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. This non-GAAP financial measures have limitations as analytical tool and investor should not consider them in isolation or as a substitute for net income attributable to Company or other consolidated statement of comprehensive income data prepared in accordance with US GAAP.

Please note, all numbers are in RMB and all comparisons referred to year-over-year comparisons unless otherwise stated.

With that, I'll turn the call over to our CEO, Derek Feng. Derek?

Derek Feng -- Chief Executive Officer

Thank you, Ruby. Thanks for everyone who is joining our call today to review 2019 second fiscal quarter results. Now let's get started. For those who are new to our Company we have included in our earnings presentation a brief corporate introduction from slide 3 to slide 9 which you can download from our IR website. Again, all numbers are in renminbi and all comparisons referred to year-over-year, unless otherwise stated.

I will start today's call with the performance highlights, then share some of our key strategic developments before turning over the call to Dora for financial review. After remarks, we will take your questions. Please turn to slide 11.

Let me start by saying that, we were extremely pleased with the outstanding results across all of our businesses and the investments we have made to accelerate our future growth. This in turn positions us very well to achieve the high end of our financial guidance range. Our revenue growth for the quarter was 57.5% with 24.3% from organic growth and 33.2% from acquisitions.

Let's look at a detailed breakdown by business segment on slide 12. The top line growth of our respective business segments continued to increase for the quarter with revenue of international schools, bilingual schools and the kindergartens grew over 23.3%, 20.2% and 25.3% respectively. Our complementary business in the quarter has expanded considerably as we started to recognize revenue contributions from Foundation Global, Chengdu Yinzhe and Hangzhou Impression in addition to Can-Achieve. A fast expanding school network supported by strong enrollment growth, steady increase in ASP and utilization have been the main catalysts driving our organic growth.

Please turn to slide 13 and 14 for more details. As of April 22nd, 2019 with the addition of Bournemouth School, we have a total of 69 schools including six international schools, 15 bilingual schools and 47 kindergartens covering nine provinces in China and one overseas schools in UK. Our school portfolio has a total capacity of 59,326 seats. Our strategy to maintain a competitive pricing across all school segments to optimize utilization has been paying off.

Compared to the first half of the last fiscal year, the average students enrollment for the first half of fiscal 2019 has increased by 22.7% to 42,035 with blended utilization increased to 71% from 60.4%. Improving academic outcomes remains the number 1 priority for Bright Scholar. I'm proud to introduce this year's academic accomplishments.

Please turn to slide 15. As of April 22nd, 2019, 89% of our 2019 graduating students participating in AP, A Level and DP programs have received over 670 offers from the global top 50 institutions including four from Oxbridge, and two from University of Chicago, and five from UC Berkeley. Over the years we have consistently been able to deliver remarkable academic performance. Again academic excellence represent the very essence of our brand as a premium education service Company.

Continuing on to slide 16. For the recent updates on our acquisitive growth initiatives, strategic investments are pivotal to accelerate our business scale, expand our national and global footprints and broaden our educational service offerings. We have achieved a great deal since becoming a public company with seven completed acquisitions and three in progress, which has been an important period in Bright Scholar's development as the world's leading premium education Company.

Most recently we have entered into agreements to acquire 25% equity interest in Start Camp Education and 80% controlling interest in Sannew School. Start Camp provides one-stop solutions in camp layout and program design and has contributed to the opening of Bright Scholar's first outdoor camp this quarter. Sannew is the very first American style private boarding school in Wuhan, and the proposed acquisition represent an excellent strategic fit with -- Bright Scholar's family of schools, building our prominence in central China. We expect to complete both transactions by May 2019 and continue to expand our business globally.

Staying on the slide for another update -- for other updates. Our close collaboration with Country Garden is crucial to the expansion of our school network. As of the release date, we have entered into agreements with Country Garden to operate a total of 25 kindergartens and two bilingual schools with a total capacity of approximately 11,000 students.

We are pleased with the continuous performance of our expanded portfolio in our overseas students consulting services. Foundation Global Education provides consulting services for the students pursuing study in top tier overseas boarding schools and universities. In 2019 application season, 44.7% of its students applying for US boarding schools gained admission to leading boarding schools including Phillips Exeter Academy, St. Paul's School and Milton Academy, and 56% of its students applying for US universities were accepted to the US News Ranking's top ranking institutions, including Yale, Cornell and University of Chicago.

Can-Achieve now represents over 900 prestigious overseas universities in the US, Canada, UK, and Australia to recruit students from China. It helped over 6,000 Chinese students to pursue higher education overseas in 2018.

An update on our share repurchase program as shown in slide 17. We have been very active since the inception of this program in April 2018. As of April 17, 2019, the Company has repurchased approximately 6.48 million of its American depository shares for an aggregate purchase price of approximately $75 -- $75 million.

In concluding my remarks, Bright Scholar delivered another strong quarter. I'm proud of our team for maintaining its focus on students, improving their academic success which in turn contributing to the ongoing improvement of our financial results. We will continue to execute on our organic and acquisitive growth strategy, optimize operating efficiency, drive synergies from our acquisitions and to reward our shareholders with a profitable growth business.

So at this point, I would like to turn to the call -- turn the call over to Dora to discuss our financials. Dora?

Dongmei Li -- Chief Financial Officer

Well, thank you, Derek. Let's come 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 comparative financial performance on a year-over-year basis.

Please turn to slide 19. Our revenue for the quarter was RMB508.8 million, up 57.5%. On a six month basis, our revenue was RMB1,158.6 million, up 47%. Revenue from international schools for the quarter was RMB146.3 million, up 23.3% as compared to RMB118.7 million. On a six month basis, revenue was RMB364.9 million, up 24.4% as compared to RMB293.3 million. Revenue from bilingual schools for the quarter was RMB130.6 million, up 20.2% as compared to RMB108.6 million. On a six month basis, revenue was RMB324.5 million, up 22.9% as compared to RMB264.1 million.

Revenue from kindergartens for the quarter was RMB91.5 million, up 25.3% as compared to RMB73 million. For six months, revenue was RMB229.2 million, up 27.9% compared to RMB179.2 million. Revenue for BCS, our first overseas school for the quarter was RMB16.1 million and same for the six months. Revenue from complementary education services for the quarter was RMB124.3 million, up 445.8% as compared to RMB22.8 million. On a six month basis, revenue was RMB223.9 million, up 353.3% as compared to RMB51.7 million.

Revenue contribution from acquired business including Can-Achieve, Foundation, Hangzhou Impression and DBC was about RMB80.2 million for the quarter and RMB150.9 million on a six month basis.

On slide 20, cost of revenue for the quarter accounted for 70.5% of total revenue as compared to 77% -- 77.6% in the same period last fiscal year. For six months, cost of revenue accounted for 61.4% as compared to 63.3% in the same period last fiscal year. Teaching staff cost, the primary cost contributor was 47.8% of total revenue for the quarter, as compared to 56.8%. On a six month basis, staff cost was 40.3% of total revenue as compared to 45.6%. Average students-teacher ratio was 8.9 for February 28, 2019 as compared to 8.8 of same period last fiscal year.

On slide 21, gross profit for the quarter was RMB150.3 million, up 108%. Gross margin improved from 22.4% to 29.5%. On a six month basis, gross profit was RMB446.8 million, up 654.6% from 38.6%.

For international schools, gross profit up 27.8% to RMB34.9 million for the quarter with gross margin improved from 23% to 23.9%. On a six month basis gross profit up 25.9% to RMB142.3 million with gross margin improved from 38.5% to 39%. For bilingual schools, gross profit up 45.9% to RMB30 million for the quarter with gross margin improved from 19% to 23%. On a six month basis, gross profit up 33.5% to RMB117.3 million with gross margin improved from 33.3% to 36.2%.

For kindergartens, gross profit up 23.2% to RMB24.2 million for the quarter with gross margin decreased slightly from 26.8% to 26.5%. On a six month basis, gross profit up 29.8% to RMB93.9 million with gross margin improved from 40.4% to 41%. For overseas schools, gross profit was RMB2.1 million with gross margin of 13.2% for the quarter and six months ended.

Complementary Education Services gross profit up 1,171.2% to RMB59.1 million for the quarter with gross margin improved from 20.6% to 47.4%. For six months gross profit up 479.7% to RMB91.2 million with gross margin improved from 30.6% to 40.7%. The increase was primarily due to contributions from acquired business including Can-Achieve, Foundation, Hangzhou Impression and DBC of RMB42.8 million for the quarter and RMB72 million on a six month basis.

Moving to slide 22. Adjusted SG&A expenses for the quarter accounted for 26.8% of total revenue up from 25%. For six months, adjusted SG&A expenses accounted for 21.7% of total revenue up from 20.5%. The increase in selling, general and administrative expenses was primarily due to the increase in the compensation and the benefits incurred for additional general and administrative staff members, employee stock ownership plan, related expenses to retain talent and increase in marketing expenses for brand promotion also the cost associated with acquisitions and other professional services to support the business growth as a listed company as well as the incremental SG&A expenses incurred from acquired businesses.

Continuing on slide 23. Adjusted EBITDA for the quarter was RMB49.3 million, up 98% from RMB24.9 million. Adjusted EBITDA margin was 9.7%, up from 7.7% in the same period last fiscal year. On a six month basis adjusted EBITDA was RMB266.7 million, up 43.1% from RMB186.3 million. Adjusted EBITDA margin was 23% compared to 23.6% in the same period last year. Adjusted net income for the quarter was RMB32 million, up 991.2%. Adjusted net margin was 6.3% compared to loss of 1.1% in the same period last year. On a six month basis adjusted net income was RMB199.6 million, up 71.8% from RMB116.2 million, and adjusted net margin was 17.2% compared to 14.7% in the same period last year.

Please refer to slide 24 for the condensed income statement and slide 25 for the reconciliation for SG&A, EBITDA and net income on a GAAP to non-GAAP basis. A quick note on our cash and the bank balance in slide 26. As of February 28, 2019, the Company's cash and cash equivalent and restricted cash totaled RMB2,522.9 million or $377 million as compared to RMB2,428.3 million as of November 30, 2018.

We are reaffirming our guidance for fiscal year 2019 with a recap on slide 28. For fiscal year 2019 ending August 31st, 2019 we expect our guidance for the total revenue to be between RMB2,300 million and RMB2,350 million representing a year-over-year growth between 34% and 37%. We expect our average student enrollment to be between approximately 41,600 and 42,000 representing a year-over-year increase between 13% and 15%. We also expect five new kindergartens openings for fiscal year 2019.

This concludes my financial update. Now I will turn to Derek for his closing remarks.

Derek Feng -- Chief Executive Officer

Thank you, Dora. Looking ahead to the remainder of fiscal 2019 we are encouraged by the strong growth this year in every part of our business and I'm pleased to provide a very positive outlook in growth. Underpinning the strength of the business is commitments and efforts of our talented and dedicated employees who have worked hard to increase utilization, optimize our cost structure and leverage our core competencies to improve the performance of the fast expanding business portfolio. This success combined with our strategic investments position as well for the future.

Last but not least, our unwavering commitment to make substantial investments in the recruitment and the development of our teachers -- of our teachers, broadening the service offerings, improving processes and operational infrastructure to meet our students' aspiration for academic excellence.

That's all we have in the form of prepared remarks and we will now turn it over to question-and-answers. Operator, please?

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) And our first question today comes from Cho Christine with Goldman Sachs. Please go ahead.

Christine Cho -- Goldman Sachs -- Analyst

Yeah. Thank you. Thank you, Derek and Dora. I just have two quick questions. So one is related to the Complimentary Education Services where we saw very big gross margin improvement in the second quarter. And I think you mentioned that big part of that came from the acquisitions. If you look at historical quarters, I think it's been roughly margin dilutive. What's changed there? And will this current trend continue in the future? And then secondly I noticed that already your average enrollment exceeded 42,000 which is kind of the high end of your guidance for the full year? How should we think about the second half in terms of enrollment? Thank you.

Dongmei Li -- Chief Financial Officer

Hi, Christine. This is Dora. Thank you for your questions. Regarding your first question on the complementary part, yes, as we mentioned in the earnings release, we started to consolidate all the new acquisitions from complementary side including Can-Achieve, Foundation Global, Hangzhou Impression and Chengdu DBC. All this Complementary Education Services, their margin is in the high end you know above 60%. And as we mentioned that for the first half, they contributed over RMB72 million in gross profit. That's how the blended gross margin for this sector.

In the past, you know, for the complementary education only included Elan and some part of our own study tour and camp business which is just in their initiative stage. So for Elan, as we mentioned before, it has been impacted by the recent regulation and it has some margin pressures from Elan. But we also see the margin improvement from Elan for this quarter. So that's why you see the blended gross margin for the complementary sector for this quarter being improved and also improved for the first half.

And for your second question regarding the enrollment -- students enrollment, yes, on average basis first half we already on over 42,000 and for the second half which means the spring term for our school year, we definitely will keep the same trend. And we may face little bit increase from some kindergartens but not being material, but definitely you are right, we already hit our high end for our enrollment forecast.

Christine Cho -- Goldman Sachs -- Analyst

Thank you so much.

Operator

And our next question comes from Leslie Fang (ph) with Morgan Stanley. Please go ahead with your question.

Leslie Fang -- Morgan Stanley -- Analyst

Hello management. I have two questions on behalf of (inaudible). First question is, what is your full year EBITDA margin guidance and your annual guidance for the full year is 34% to 37%, but your revenue growth in the first half is much higher at 47%. Is it -- the guidance is on organic growth. The second question is on the overseas schools. The gross margin of the UK school is lower than the margin of US (ph) schools in China. What would be the margins for the UK school for this year? And what would be the normalized margin after capacity is fully utilized? And the last question is just on, want to know the student enrollment number for the current semester? Thank you.

Dongmei Li -- Chief Financial Officer

Hi, this is Dora. Your first question is involving the EBITDA guidance. We only give guidance on the top line revenue and enrollment. But you can see from the first half, we -- even if we had been invested, you know a lot in our expanding team to support business growth, we -- expanding our investment in acquisition, but we can still maintain a -- almost a similar level of our EBITDA margin compared to last year. And we are expecting -- we can see some margin leverage going forward.

Your second question regarding the top line guidance for fiscal '19, we reaffirm our guidance. The first half you see the top line growth by 47% is pretty much because we -- for the first half compared to last year, we do consolidated some new acquired business. So you see some contribution from the 27% from -- for the 27%, almost 23%, 24% coming from the acquired business. So for the full year basis, we do reaffirm our current guidance with 34% to 37% increase, but we are confident as Derek just mentioned to reach the high end of our guidance.

Sorry, your third question I remember is regarding to the overseas schools, margin profile for overseas schools. I think we have mentioned before, the overseas schools was operated by a charity organization before. And currently it has -- still has almost 100 vacancies which we are confident in the next two or three years, we can bring in additional students to fill up the weekends and to improve their current margin.

Derek Feng -- Chief Executive Officer

So, let me comment a little bit. This is -- Leslie, hi how are you? So I think as Dora mentioned, the BCS, the school we acquired the UK was from a -- previous owner was a not for profit, charity organization, so therefore from operating efficiency perspective, we'll have improvement by the self aware rather confidence with our ability to operate, we would improve the margin by itself. And in addition to that, there are new students recruiting opportunities we can see, not only by itself, but also with our school networks in China. So, i.e. driving our students to BCS location and a second of putting together programs, take a BCS curriculum into our overall curriculum offerings. We can also attractive to more summer camp and study abroad program. So with all these measures as Dora mentioned we are rather confident that the profit margin of this particular school would be in line with our other schools in our network. Does that answer your question?

Leslie Fang -- Morgan Stanley -- Analyst

Yes. Thank you very much. Also on the -- one last question on the student enrollment of current semester, related...

Derek Feng -- Chief Executive Officer

Sorry, you're breaking out.

Leslie Fang -- Morgan Stanley -- Analyst

On the student enrollment number for the latest semester.

Dongmei Li -- Chief Financial Officer

I think, at end of February, end of our first half, we already have over 42,000 students as I just mentioned to answer the first question. We are very confident to maintain the current students enrollment levels for the second term which is the spring term, second half of the school year. And we may see some improvement for some kindergartens, but definitely we can reach the high end of our enrollment guidance.

Operator

(Operator Instructions) And our next question comes from Melissa Chen with China Renaissance. Please go ahead with your question.

Melissa Chen -- China Renaissance -- Analyst

Hey, Derek, Dora and Ruby, good evening. So I have two questions. So the first of all, the first -- so the first question is on the overseas school segment. So since we already have one UK school right now, so what's our following overseas expansion strategy? And second question is on the overall regulation like, can management share more colors on the -- like overall regulation, like should we expect more differences on the final version versus the pre-released version? And hopefully notice like one news (ph) on the kindergartens, the news that like -- the kindergartens -- the government overall still promote the private kindergartens. So like -- is that like a positive for us? Or can management share more ideas on that? Thank you.

Derek Feng -- Chief Executive Officer

Sure. Hi, Melissa. Let me take the first question. In terms of overseas acquisition or quick expansion strategy, yes, definitely we'll continue our efforts in driving overseas expansion/strategy. The strategy will be mainly coming from the following consideration. Number one, we'll be focusing in English speaking countries. I think, it would be unlikely we're going to Japan. So just joking. The second one is that we'll be focusing on two kind of acquisition opportunities. One is universities or schools that is unique. For example, some school you've got over 100 years of history with a solid reputation in certain areas. That's something that we would prefer and a second type would be companies or investments with large scale. So those are the consideration that we are pursuing actively right now.

With regards to the overall regulation, obviously nobody exactly knows what's the -- regulation would have come out of final form but based on our sort of intelligence or based on our discussions with the experts in the industry in the regulatory front, the rumor says that the final form at least right now people are expecting pretty consistent with the last revision. So that's number one.

With regards to kindergarten, I think obviously the new guidance from central government release a kindergarten have caused (ph) to certain debates and discussions or uncertainties. But at this point, what we think, our strategy expansion in kindergarten have not changed. We'll continue to look for growing up expansion opportunities to build new kindergartens. At this point, I think everybody would think of the main risk for kindergarten is really the price cap that a certain local government which as you know varies from one place to another would be placing on the kindergartens.

However with our operating experience and infrastructure, we are confident we would continue our current margin with our business model even with a price cap in certain areas. Does that answer your question?

Melissa Chen -- China Renaissance -- Analyst

Yeah, yeah. That's really helpful. And one -- just one quick follow up question on the UK schools. So, could you share, like the capacity for that schools?

Derek Feng -- Chief Executive Officer

Approximately 700. Little over 700.

Melissa Chen -- China Renaissance -- Analyst

Got you. Got you. Thank you so much.

Operator

(Operator Instructions) And this will conclude our question-and-answer session. I'd like to turn the conference back over to Derek Feng for any closing remarks.

Derek Feng -- Chief Executive Officer

Thank you very much for joining this conference call. Please feel free to contact us, if you have any further questions. We wish everyone a good day or a good evening, whatever that case might be. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 41 minutes

Call participants:

Ruby Yim -- Investor Relations Counsel

Derek Feng -- Chief Executive Officer

Dongmei Li -- Chief Financial Officer

Christine Cho -- Goldman Sachs -- Analyst

Leslie Fang -- Morgan Stanley -- Analyst

Melissa Chen -- China Renaissance -- Analyst

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