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Bright Scholar Education Holdings Limited (NYSE:BEDU)
Q3 2020 Earnings Call
Jul 23, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and thank you for standing by for Bright Scholar's 2020 Third Fiscal Quarter Earnings Conference Call. [Operator Instructions] After management prepared remarks, there will be a question-and-answer session. [Operator Instructions].

I would now like to turn the meeting over to your host for today's conference, Ms. Ruby Yim, Investor Relations Counsel.

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; Ms. Wanmei Li, our Co-CEO; Mr. Zi Chen [Phonetic], our Co-CEO; 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 the call. By now you should have received a copy of our press release that was distributed on July the 22, 2020, after market close, 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 US 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/are likely 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 these and other risks, uncertainties or factors is included in the company's filings with the US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new

Information, future events or otherwise, except as required under 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. 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 company or other consolidated statement or comprehensive income date prepared in accordance with US GAAP.

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

With that, I'll turn the call over to our Executive Vice Chairman, Junli He. Junli?

Junli He -- Executive Vice Chairman

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 resurgence of COVID-19 around the world. Our [Indecipherable] with those affected by this unprecedented crisis. We extend our sympathies to those are suffering personally from the impact of the pandemic and our deepest gratitude to those help fighting the pandemic on the front line. In front of so many challenges, I'm incredibly proud of our teams around the globe, showing exemplary dedication in ensuring our students education journey to be less disrupted.

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 from slide five to 13, which you can download from our IR website. Again, all numbers are in RMB and all comparisons refer to year-over-year, unless otherwise stated. I will go through the prepared remarks on behalf of the senior management team. Then turn the call over to Dora to provide more details to our financials before we take in your questions.

Please turn to slide 15 for the highlights of our third fiscal quarter and the nine months performance with detailed breakdown by respecting business in slide 16 and 17. Despite disruptions and short-term impact from COVID-19 pandemic, Bright Scholar's performance during the third fiscal quarter has demonstrated our continued progress in executing our growth strategy and highlighted the resilience of our underlying business.

The revenue for 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 profit, adjusted operating income, adjusted EBITDA increased by 41.9%, 23.9% and 37.3% year-over-year, respectively.

We are confident in the strength of our well-positioned growth platforms, namely, Domestic K-12 Schools, Overseas Schools, Complementary Education Services and Education Technology. We are building good momentum as we accelerate the execution of our [Indecipherable] growth strategy. A brief updates as follows: First, our Domestic K-12 business, the demand for our K-12 education have 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 is our consistent industry leading academic 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 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 light model through our strategic partnership and deeper collaboration with Country Garden. As of the release date we have entered agreements with Country Garden and other partners to add 61 kindergartens and 80 schools to our school network, with a total capacity of approximately 35,500 students in China.

Second, our Overseas Schools business. That's with our education service providers. The business in the third quarter was impacted by COVID-19 related school closing, mandated by governments, mainly with the refund of boarding and the meal fees. While the full impact of this global pandemic remains uncertain for our Overseas Schools, we have taken measures to minimize disruptions and also put initiatives in place to reduce costs and to improve efficiency of the business during this challenging time. And in anticipation of any potential resurgence for extended period. Our global network schools offers our student options to complete their study at different locations in the coming school year, along with our virtual global schools.

Third, our Complementary Education Services has adapted its business strategy and taking actions to help mitigate any adverse impact on business and operations during the COVID-19 pandemic. We are pleased to report that class resumed to close to 80% for some of the business units. In addition, we have realigned a redirect resources to domestic market of which pandemic has been contained to expand our business. We really believe its an opportune time to capitalize on post-pandemic market opportunities, with new products and services for the summer,

Fourth, Education Technology. Our new business segments are shown in slide 13. The adoption of emerging technology has profound impact on education industry. As a student-centered company, Bright Scholar has continuously been evolving to meet the changing needs of our students as we all navigate the unprecedented situation of COVID-19, While these changes present challenges in the short term, we are focused on the significant opportunities presented to us by new technology and learning behaviour.

In the quarter, we advanced two strategic initiatives to capitalize on those opportunities. Early in May, we announced the acquisition of 51% equity interests in Linstitute. Linstitute provides high-quality and outcome-focused online training services including Academic Olympiad, a comprehensive selection of academic courses, as well as other world recognized international courses. In June, we announced the launch of our virtual Future Global School with online-merge-offline, OMO model, which will be operational from the beginning of fiscal '21.

The virtual school will deliver high quality international curriculums through an interactive and intelligent Learning Management System. It creates a new blended learning experience combining the best of classroom and online education that offers human connection between teachers and the students around the world. The expansion of our service offerings in utilizing technology to enhance access to high quality education will further strength our market leadership in the face of the pandemic as we usher a new age of learning.

While the pandemic is causing uncertainty and near-term impact, our revenue and profits continued to grow in the first three fiscal quarters and our long-term goals and strategy remain unchanged. We expect most of our business was -- will bounce back stronger post COVID-19. Key secular megatrends driving our business remain intact and we remain committed to balancing operational discipline with continued investments in key strategic areas to drive long term growth.

Our prudent financial management enabled us to have the financial flexibility to continue to invest in our business and return value to our shareholders. The Board of Directors has approved -- declared a cash dividend of $0.12 per ADS, a 20% increase for the last fiscal year.

With that note, I will turn the call over to Dora.

Dora Li -- Chief Financial Officer

Thank you, Jerry. 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 -- our comparative financial performance on a year-over-year basis.

Please turn to slide 21. Although heavily impacted by COVID-19, we still delivered solid result with top line up 6.7% to RMB739.4 million for the quarter, and up 46.6% to RMB2,714.4 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 decreased revenue in kindergarten, due to the temporary mandatory closure of schools.

Domestic K-12 Schools includes 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 meal fees revenue for Q1 to Q2 [Phonetic], and tuition revenue decrease for kindergartens as a result of mandatory school closure, impacted by COVID-19.

For our International Schools, revenue for the quarter at -- up 7.6%, primarily due to 12.9% increase of students enrollment. On a nine-months basis, revenue was up 17.7% due to a 13.9% increase in students enrollment.

Our bilingual schools, revenue for the quarter down 4.9% due to decrease in meals and boarding fees. On a nine-months basis, revenue up 10.3%, mainly attributed to 11.8% increase in student enrollment.

Kindergarten, revenue for the quarter and nine-months basis was down 96% and 26.7%, primarily due to decrease in tuition fees, meals as a result of mandatory school closure.

Overseas Schools. Overseas schools is important part of global strategy. The revenue was RMB210.4 million for the quarter, accounted for 28.5% of total revenue. On a nine-months basis, revenue was RMB766.8 million, accounted for 28.2% of total revenue. Overseas Schools grew 2,204% in revenue and 2,467% in gross profit on a nine month basis for fiscal 2020. Average number of students was 3,219 for the quarter and 3,246 for the nine-month 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 Elan and Hangzhou Impression, as well as the study tour and the camps business. On a nine-months basis, revenue was up 23.1%.

On slide 22, cost of revenue for the quarter was 60.5% of total revenue, compared to 54.1% in the same quarter of last fiscal year. On a nine-months 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 the acquired overseas business on a comparable basis.

Teaching staff cost, the primary cost contributor, accounted for 34.3% of total revenue, down from 35.3% for the quarter. On a nine-months basis, teaching staff cost was 32.8%, down from 38.4%. Our Domestic K-12 Schools 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 margins. Gross profit was down 8.2% for the quarter, and up 40.2% on a nine month basis, and gross margin was down 6.4 percentage points to 39.5% for the quarter. And on a 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 a 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 and nine-months was primarily due to the inclusion of the acquired overseas business -- overseas business on a comparable basis.

Adjusted SG&A as a percentage of revenue for Domestic K-12 Schools for the quarter was up 9.4% from 8.2% in the same quarter last year, primarily due to the pre-opening expenses for the new international school planed to open in the coming fiscal -- in the coming school year. On a nine-month basis, adjusted SG&A as a percentage of revenue for Domestic K-12 Schools was 7.7%, down from 10.9% [Phonetic] in the same period of last fiscal year.

As a percentage of group revenue, adjusted unallocated corporate expenses, mainly headquarter expenses, for the quarter was 5.5%, up from 3.7%. On a nine-months basis, it was 3.6%, down from 5.1%. Adjusted unallocated corporate expenses for the quarter was RMB40.4 million compared to RMB24.9 million last year, due to a one-time auction expenses adjustment. On a nine-month basis, it was RMB99 million, compared to RMB94.8 million in the same period last fiscal year.

To elaborate more on the adjusted SG&A expenses, please refer to slide 25. Continuing to slide 26, adjusted EBITDA for the quarter, down 25.5% to RMB164.5 million, adjusted EBITDA margin was 22.2%, compared to 31.9%. On a nine-month basis, adjusted EBITDA up 37.3% to RMB669.4million, adjusted EBITDA margin was 24.7%, compared to 26.3%. Adjusted net income for the quarter, down 70.9% to RMB46.6 million, adjusted net margin was 6.3% compared to 23.1%. On a nine-month basis, adjusted net income, down 7.3% to RMB333.6 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 RMB2,092 million, as compared to RMB2,433 in February, 29, 2020. We also have a short-term investment of RMB1,966 million as of May, 31,2020.

Moving onto 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 have been made from the open market by our Chairlady, Executive Vice Chairman and Independent Director. Following the cash dividend of $0.10 per ADS in September of 2019, the Board of Director has declined the second cash dividend of $0.12 cents 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 RMB3.37 billion and RMB3.47 billion, representing a growth of 31% to 35% based on existing business and without potential acquisitions. We also expect average student enrollment to be between approximately 51,800 and 52,800, representing an increase of 11% to 13%.

We are also in preparation to open 17 kindergartens, and one international schools for fiscal 2021. Beyond fiscal 2021, we have seven schools and 44 kindergartens contracted for operation. Please refer to the table in slide 32 and 33 for the condensed income statement. Slide 34 shows the reconciliation from -- for SG&A, EBITDA and net income on a GAAP to non-GAAP results.

Slide 35 shows our balance sheet and cash flow statement. For the nine-months ended May 31, 2020, the company's capital expenditure was approximately RMB107.3 million, up 2.1% compared to the same period of last fiscal year. And slide 36 shows our average student enrollment and average tuition fee across our network.

This concludes my financial update. Now, I would turn to Jerry for his closing remarks. Jerry?

Junli He -- Executive Vice Chairman

Thank you,Dora. Our transformative business model [Indecipherable] 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 us well into the future. We look forward to keeping you apprised of our continued progress as we execute on our growth strategy to enhance value for both students and stakeholders.

This concludes our prepared remarks, and I would like to open the call for questions. Operator, please.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Sheng Zhong with Morgan Stanley. Please go ahead.

Sheng Zhong -- Morgan Stanley -- Analyst

Hey, good evening. Thank you for taking my question. I have two questions. First one is, can you give us more color about your OMO strategy? What this -- what the OMO will be applied on, on your school 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 stage. Thank you.

Junli He -- Executive Vice Chairman

Thank you for asking the questions. I would address both of them. This is Jerry. For the OMO, we are doing right now, we are actually developing a platform that will open for business for the first quarter of fiscal 2021. So that program will combined our experience from off-line schools and also offer a mix of curriculum online for students around the globe. For example, we are going to offer eight hour classes for students anywhere, if they're in China or UK or any other part of the world, can take class online.

Of course, for those who are in China, they also have the advantage to take some of the class offline offline in physical schools. For students who are attending to our UK school, for example, the -- because of the pandemic, if 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 do sports and other things offline in our physical schools.

We are going to start with A Level and English tutoring as well. But we intend to have a more broad selection of curriculum down the road, including AP curriculum as well.

You also asked about the Complementary Education. So because of the pandemic, we already moved some of those online already. For example, English tutoring, we already moved online. Most of the students are taking class online during the -- during the close of the learning centers. But the platform we are developing are more sophisticated than the tutors center would require because the learning management is interactive. So they actually can keep track of the student learning records across the entire school year or over the number of school years.

That's for the OMO.

And also, you are absolutely right. This pandemic presents a lot of opportunities for acquisition, because many of the other businesses are suffering, many of them actually in the brink of closing down. So, we have been contacted by a number of the organizations that are experiencing financial difficulties. Without help, they're probably going to go to some kind of closure or bankruptcy process. We are actively looking into some of those opportunities, but we believe the best opportunity to take action would be the next fiscal year, not right now. And their valuation would come down significantly, of course.

Sheng Zhong -- Morgan Stanley -- Analyst

Understand. Thank you very much. So just a follow-up about the M&A opportunity. Do you see more opportunity in the supplementary education service side or you mean the schools?

Junli He -- Executive Vice Chairman

Actually both. I'll give you some -- maybe some color. If you look at what's overseas business in the UK and the US, for example. Many of the private schools, because of the closure, they don't have a strong balance sheet as we do. As Dora mentioned, that was cash and cash equivalent or also next to cash is a short-term investment. We have almost RMB4 billion, which is somewhere about $570 million or $580 million, so we're going to be fine for -- to go through the pandemic without any problem, but many of them don't have a balance sheet like that, they are literally without income they're going to go down.

So, they are asking for help. Those schools, K-12 schools can be bought at, obviously, compared to last year, maybe half of the price in some cases or even less. So we -- once we are on a fair footing because our overseas business is also impacted, we are taking the opportunity to make it a more efficient and screen our business. But once we go through this, because it was -- we are in the pandemic right now, but once we go through this, we are on very strong footing. Then I think that's the time to take up some opportunities overseas.

On China, particularly for K-12 schools, there are also some opportunities. The valuation, as you mentioned, came down significantly compared to, let's say, the same time last year. But China, as you know, has reasonably controlled the pandemic. So I think most likely, other than maybe some particular areas or cities, most of the country has come 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 and meals, but they continue to enroll either online or offline for schools.

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 Complementary part of it, because many of the -- if I have to estimate, I don't -- we don't have the specifics, but we have seen business, a lot of them are of potentially, I would say, maybe like half of them really experiencing problems. And we, of course, have seen some opportunities came to us at a very attractive valuation relative to the normal situation without pandemic.

Sheng Zhong -- Morgan Stanley -- Analyst

Thank you very much. That's very helpful.

Operator

Thank you. The next question is from the line of Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho -- Goldman Sachs -- Analyst

Thank you, Jerry and Dora. Two quick questions. So one is, I know the situation remains quite fluid, but do you have a sense of kind of what you're expecting for the overseas schools in the next few quarters? And secondly, I know you're 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.

Junli He -- Executive Vice Chairman

Sure. Again this is Jerry. For overseas schools we have seven schools in the UK and one school in the US. The seven schools that are in UK, there are two buckets, three of them are independent schools. Most of the students are local students. When I say local, I mean students that are from UK. So there are less impacts just like any local schools, in most -- they may be stay at home, but still taking classes, OK, out of the school. Of course, just like the school we have in China, you would not be able to charge them on boarding and the meals, but the tuition is still there.

And I think relative to the US, UK has done a better job in terms of controlling the pandemic, we are looking at -- I just got an update last week. We're looking at the entire country has maybe 300 to 499 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 -- be opened in the fall for the schools. So the independent schools, again, our schools take most students from U.K. I think they are going to be fine. But there are four schools that takes -- take most students, actually, international students. Depends on where the students are. It's hard to say that's going to come back. I think a 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 coming from China. If they are not going back to the UK, they can remain registered and continue the study in one of our campus in China. So we will not lose those students, but if somebody come from, let's say, Brazil or Russia or Vietnam, we don't have exact information whether or not they would come back or not.

Of course, we have some commitment already, but given the situation in UK, it's still unclear, we don't know for sure yet. But we would expect there would be signed losses of students for the coming quarter. But relative to other -- for our competitors, many of them actually are shutting down, we are in a much better position, because: one, we have our China campus to support the students from China; and two, we have virtual schools to support the students. And we will also have other programs for the students as well.

The schools in the US is a little bit the troubling, let's say, in Massachusetts [Indecipherable] doing a better job than other states in the US, but it really depends on what are the actions they are going to take the from the US government and local government, whether or not that school is going to open or not? Or the students from other country go back to the US remain, again, uncertain at this point of time. We do expect our students would come back depending on where they are.

For example, maybe in Brazil is actually the situation is situations is even worse than what it is the Massachusetts, maybe they would come back. So most of the Chinese students may decide to go to schools, to our China campus or do that online, but I would think -- I would -- regardless, I would think most of the student will continue the study, maybe more than half, at least the half of them will do it online, but some of the students may be lost. But I would think, as the situation become more clear we would have a better idea of where students are going.

But either way we are prepared for resurgence of the COVID-19 and prefer to take again all the students when they come to our campus. So we have sent our -- kept our parents posted as to how we take actions to protect our students. We sent out more than 50 pages of kind of our procedure outlined everything from the point that students get off airplane and students on what happens if -- what are the kind of tests they have to go through to make sure that we take care of students. We have launched a campaign called "We Care" that's specifically for that.

For Fettes College Guangzhou, we are slated to open that in September, for sure. We are in the final inning of recruiting the students and, of course, push for the opening. That's a definitive opening in September.

Christine Cho -- Goldman Sachs -- Analyst

Okay. Thank you. That's clear.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Jerry He for any closing remarks. Thank you.

Junli He -- Executive Vice Chairman

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.

Operator

[Operator Closing Remarks]

Duration: 41 minutes

Call participants:

Ruby Yim -- Investor Relations Counsel

Junli He -- Executive Vice Chairman

Dora Li -- Chief Financial Officer

Sheng Zhong -- Morgan Stanley -- Analyst

Christine Cho -- Goldman Sachs -- Analyst

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