Bright Scholar Education Holdings Ltd

NYSE:BEDU

Earnings Call Transcript 2021-Q2

[Operator]

Good morning and thank you for standing by for Bright Scholar's FY 2021 Second 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.

[Ruby Yim, IR Counsel]

Thank you, Operator. Good morning and good evening. Welcome to Bright Scholar's second fiscal quarter ended February 28, 2021, earnings call.

Joining me today are Mr. Jerry He, our Executive Vice Chairman; Mr. Andy Chen, and Ms. Wanmei Li, our Co-CEOs; 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 April 21, 2021, 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 U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, the company's business plans and developments which can be identified by terminologies such as may, will, expect, anticipate, aim, estimate, intend, plan, believe, potential, continue is or are likely to or other similar expressions.

Such statements are based upon management's current expectations in 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 filing with the U.S. 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 of comprehensive income data prepared in accordance with U.S. GAAP.

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

And for those who are new to our company, we have included in our earnings presentation a brief corporate introduction in Section 1 from Slide 5 to 11 of which you can download from our IR webpage.

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

[Jerry He, Executive VC]

Thanks, Ruby. Good morning and good evening. Thank you for joining us our second fiscal quarter 2021 conference call.

We appreciate your continued interest in following Bright Scholar. On today's call, and on behalf of the senior management team, the prepared remarks will cover our second fiscal quarter performance and the key trends in our business. So I will then provide details on our respective business and the financial performance. I will have a brief conclusion before we open the call for questions.

Let me begin by saying that we're pleased that our performance in first half of fiscal year 2021 continued to demonstrate our strength, resilience and the capacity to evolve, adapt and the progress amid the threats from ongoing pandemic and the emerging variants. Through the years, we have built our networks, drive the operations and the culture around staying focused on students needs. And this principle have carried us through the years of set up growth and the motto, a testament of our strength and the resilience in times of pandemic crisis. We have all the building blocks in place to be a global premier education service provider. Now, having taken these challenging times to build what we believe is more effective organization for the future.

Through optimization to maximize the return for existing assets, integrate to capture synergies from global network, and the enhancement of a competitive global cost structure will continue our investment in strategic areas. These actions, which we believe are going to lead our outstanding performance post COVID and are critical to our long-term success.

Let’s turn to our earnings and start with Slide 13 of Section 2 for the highlights of our second fiscal quarter and the first half with detailed breakdown by respective business in Slide 14 and 15. In the quarter, ongoing COVID-19 pandemic have continued to have adverse impact our overseas business. Total revenues for the quarter was RMB809 million, down by 7.8% with gross profit and operating income down by 46.5% and 152.9% respectively.

All of our domestic-related business recorded a strong recovery, while the pandemic adversely impacted our overseas schools.

Let's look more closely at our respective businesses. Please refer to Slide 16 for the performance of our Domestic K-12 business. Our Domestic K-12 business continues to show further recovery trajectory across all segments in second fiscal quarter, revenue up 12% in the quarter and 11.3% in the first half. The strong recovery was attributed to the substantial increase in enrolment which exceeded our internal expectations. International schools, bilingual schools and kindergartens grew by 7.6%, 8.1%, and 19.7% respectively for the fiscal quarter.

Our consistently industry-leading academic performance reflects the strength of our brand. The key catalysts driving our enrollment growth, as you can see in Slide 16 -- 17.

As of April 6, 2021, 94% of students in 2021 graduating class of our International schools in China have received offers from Global Top 60 institutions, including top offers for Oxbridge, three from the University of Chicago, two from Cornell University, two from Vanderbilt University, two from UC Berkeley, and seven from New York University. Furthermore, our deep collaboration with Country Garden and other partners continue to drive the expansion of our domestic school networks and capacity. As of the release date, we have entered into agreements with Country Garden and other partners to operate a total of 10 schools and 65 kindergartens with a total capacity of approximately 40,000 students.

On Slide 19, our complementary education services business returns to profitable growth fueled by significant improvement in income from domestic market, inaugurating training camps, study tours, and others. In the quarter, revenue grew by 14.4%. Our margins have also started to recover with gross margins increased from 5.8% to 22%. And the operating margin improved from minus 19.8% to 3.5%. At the same time, we're continuing to experience the impact of the pandemic in our overseas-related complementary business and are adjusting and adapting accordingly.

While the operating environment remains challenging, we’re happy to see positive developments and the trend continued through second quarter and most likely to accelerate through the second half of the year, including favorable government policies in education for all around development for students responding to these opportunities, we plan to expand our offerings through investments in Golden Ballet Dance; broaden the scope of our camp business to offer more extra-curriculum activities and accelerate collaboration with our global network. The synergy with our overseas network offers tremendous opportunities in overseas counselling, camp and study tour businesses. The strategies and the plans to capture these opportunities are already in place. We expect growth will resume and accelerate once the vaccination programs begin to take effect and the subsequent travel restrictions are lifted.

Moving out to our oversea K-12 business performance in Slide 20. As anticipated, we experienced significantly lower revenue and a substantial year-over-year decline this quarter due to the pandemic. In addition to fewer students on campus, our schools and the language of business were impacted by lockdowns for local students. Travel restrictions for overseas students as well cancellation of study tools and camp events. In this quarter, we continue to focus on continuing the transition of overseas schools into the Group through centralizing the support functions, streamlining our operations through consolidation of resources, enhancing academic performance and the improving cost structure to partially offset the bottom line impact of the pandemic related to disruptions. These initiatives should provide operating leverage going forward as we review our oversea revenue and enable us to reemerge stronger and more efficient, leveraging on the competitive advantage of our global network of schools.

At the same time, we're encouraged by the positive upward trends in our students' academic performance, and our other operational progress. As of the release date, our 2021 graduating class have received 145 offers from top 10 universities with four from Oxbridge, 540 offers for Russell Group. In addition 179 students in our Boston School are accepted into Top 100 U.S. colleges. New student intake for September 2021 term is expected to increase by 44%. With the vaccine program progress in the UK and the U.S., schools are either reopened or expect to be opened soon. We expect our overseas schools to return profitability and capture more market shares when life returns to normal.

Finally, the performance of our Education Technology business we're pleased with the progress across multiple fronts as shown in Slide 21. Revenue continues to grow up by 35.6% in the quarter, and 48.2% on the six months basis. 3i Global Academy which offers online international classes and the English tutoring has been well received in China. Once the pandemic recedes, we plan to integrate 3i Global Academy into our global network of schools. In addition, we see numerous opportunities for our offerings in domestic market. Our strategy is to help local governments to promote educational equity and improve teaching efficiency at school by sharing and offering high quality educational resources, including online video classes, and the teaching material through collaboration with top schools, each city across China.

Looking ahead to the second half of fiscal 2021, we are increasingly optimistic. We are confident that our business will have a strong longer-term recovery. Our major opportunities and the priorities over the next years lie in the following areas. First, continue to organically grow our domestic K-12 business by improving utilization and efficiency. Second, rebuild our fair revenue and return to profitability for overseas business post-COVID. Third, expand the breadth and the depth of our complementary service offerings. Fourth, accelerate the growth and application of our EdTech business. We will continue our focus on steady revenue and operating profit growth in K-12 business, while building growth momentum in complimentary education and EdTech.

With these priorities and the containment of the pandemic in sight, we expect our revenue and profitability growth in the next few years will return to pre-COVID level. Our solid balance sheet and market positioning have enabled us to navigate through this challenging period, and, at the same time, strengthening our capacities for greater success in the long-term

With this note, I'll turn the call over to Dora.

[Dora Li, CFO]

Thank you, Jerry.

Let's turn back to our financials. Please be reminded that all numbers are 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 24, top-line results for the quarter was down 7.8% to RMB809 million for the quarter and is down 5.8% to RMB1,860.6 million on a six-month basis, primarily due to the impact of COVID-19 on our overseas schools and overseas-related complementary business.

Domestic K-12 schools that includes International schools, bilingual schools, and the kindergarten show strong recovery. Revenue was up 12% for the quarter and 11.3% on a six-month basis.

For international schools, revenue for the quarter up 10.6% primarily due to 7.6% increase of students enrollment. On a six-month basis, revenue was up 10.9% due to 8.6% increase in students enrollment.

Bilingual schools, revenue for the quarter up 17.2%, due to 8.1% increase in students enrollment. On a six-month basis, revenue up 15% mainly attributable to 8% increase in students enrollment.

Kindergartens, revenue for the quarter was up 6.7% due to 19.7% increase in students numbers. On a six-month basis, revenue was up 6.8% due to 18.5% increase in students number.

Revenue from overseas schools was down 49.3% for the quarter and 48.8% on a six-month basis, primarily due to the impact of pandemic.

Revenue from Education Technology was up 35.6% for the quarter, and 48.2% on a six-month basis, primarily due to the acquisition of online Academic Olympiad training business.

Revenue from complementary education was up 14.4% and 2.6% on six-months basis, primarily due to increase and strong recovery in language training, domestic camps and other training business.

On Slide 25, cost of revenue. Our top priority is to continuously enhance our cost competitiveness. For the second fiscal quarter, total cost of revenue was RMB645 million, increase of 13% and accounted for 79.7% of total revenue compared to 65% last year. On a six-month basis, total cost of revenue increased only 4.9% to RMB1,253.6 million and accounted for 67.4% of revenues compared to 16.5% last year.

Teaching staff cost the primary cost contributor accounted for 45.8% of total revenue, up from 35.6% for the quarter. On a six-month basis, teaching staff cost was 38.3% of total revenue, up from 32.2%.

Our Domestic K-12 school average student teacher ratio for the first half of fiscal year 2021 was 9.2 compared to 8.9 in the same period last fiscal year.

On Slide 26, our gross profit and margins. Gross profit was down 46.5% for quarter and a 22.2% on a six-month basis. Gross margin was down 14.7 percentage points to 20.3% for the quarter and on a six-months basis, gross margin was down 6.9 percentage points to 32.6%. The decrease in gross profit and gross margin was mainly due to first revenue decrease in Overseas segment as a result of COVID-19 pandemic impact; second, loss from new open school and the kindergartens, which are still in the ramp-up stage.

Continuing on Slide 27, adjusted SG&A expenses was RMB210.3 million, down 5.3% for the second quarter, and accounted for 25.8% of total revenue compared to 25.3% in the same quarter last fiscal year. On six-months basis, adjusted SG&A expenses was RMB431.6 million only up 2.3% and accounted for 23.1% of total revenue compared to 21.4% last fiscal year. The overall expenses reduction in adjusted SG&A was primarily due to the effective cost structure improvement in Overseas segment to partially offset the bottom line impact. To elaborate more on the adjusted SG&A expenses, please refer to our Slide 28.

Continue on Slide 29, adjusted EBITDA for the quarter was RMB48.3 million compared to RMB152.5 million. Adjusted EBIT margin was 6% compared to 17.4%. On a six-months basis, adjusted EBITDA was RMB369 million compared to RMB505 million and adjusted EBIT margin was 19.8% compared to 25.6%.

Adjusted net loss in the quarter was RMB36 million as compared to adjusted net income of RMB59.4 million. Adjusted net margin was negative 4.4% compared to 6.8%. Adjusted net income was RMB161.2 million compared to RMB282.4 million. Adjusted net margin was 8.7% compared to 14.3%.

On Slide 30, shows our cash and bank balance. As of February 28, 2021, our cash and cash equivalent and restricted cash totaled RMB2,098.4 million or US$324.2 million as compared to RMB1,697.2 million as of November 30, 2020. We also have short-term investment of RMB2,182 million as of February 28, 2021.

Moving to Slide 32. Our third share repurchase program amounted announced in November 2020; the company has bought back 236,973 shares for US$1.5 million as of April 19, 2021.

Continuing to Slide 33. We're affirming our revised guidance for the fiscal year ending August 31, 2021. We expect our total revenue in the range of RMB3.59 billion and RMB3.69 billion representing a growth of 7% to 10% based on existing business and without potential acquisitions.

We also expected average student enrollment in our domestic and overseas schools to be between approximately 56,000 and 57,000 representing an increase of 8% to 10%.

We also expect to open 19 kindergartens for fiscal 2021, and beyond fiscal 2021, we have 10 schools and 65 kindergartens contracted for operations.

Please refer to the table in Slide 35 and the 36 for the condensed income statement.

Slide 37 shows the reconciliation of SG&A, EBITDA, and the net income on a GAAP to non-GAAP basis.

Slide 38, shows our balance sheet and cash flow statement. For the six-months ended February 28, 2021, the company's capital expenditure was approximately RMB91.9 million, up 12.5% compared to last fiscal year.

And on Slide 39, shows our average student enrollment and the average tuition fee across our network.

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

[Jerry He, Executive VC]

Thank you, Dora.

We're very proud of our teams around the world in addressing the challenges amid the ongoing pandemic and the emergence of virus. We work tirelessly to protect the health and the safety of our students, staff and each other by setting and maintaining strict safety protocols across all our campus and kept our students on their academic tracks.

We intend to pay careful attention to integration planning, and implementation in order to unlock new revenue and cost synergies and accelerate these shared growth initiatives. At the same time, we remain focused on maintaining our organic enrollment momentum and delivering our strategic priorities and various initiatives to enhance our offerings rebuild and accelerate revenue growth and expand our operating margins for long-term value creation.

This concludes our prepared remarks. And we'd like to open the call for questions. Operator, please.

[Operator]

We’ll now begin the question-and-answer session. [Operator Instructions].

Our first question today will come from Jiun Im [ph] with Goldman Sachs. Please go ahead.

[Unidentified Analyst]

Thank you, management. I've got two quick questions. First one is regard to the overseas business. Could you please elaborate more on the progress in terms of the cost control on the overseas schools? And also just on the actually low gross profit margin this quarter. And second question is about the M&A. I think you had mentioned previously that the quarter might bring M&A opportunities. Also can you share some updates on the M&A and what's your plan going forward? Thank you.

[Jerry He, Executive VC]

I'll take the questions, this is Jerry. In terms of cost control for overseas business, you can see one of our slides if you look at the Slide -- is Slide 27. If you look at Overseas, the SG&A expenses, it came down significantly year-over-year. I think it was --

[Dora Li, CFO]

Yes, Dora. I can give some detailed numbers on the cost reduction for the Overseas. In overall, our Overseas segment for the first half, combined cost of goods sold and the sales and marketing there is about RMB124 million cost reduction versus last year. So that's the result of our operating streamline or our functional team including sales team centralize our some admin function in Overseas segment. So that's the number we have presented in our first half in Overseas cost reductions.

[Jerry He, Executive VC]

Okay. I can start with the Slide talking about specifically breaking down by segments and I think it was 27 anyway. So Overseas business is specifically about SG&A came down more than half, more than 50%.

Talk about the M&A opportunities, we're still because of the pandemic there, many of the assets price came down significantly. But we're still on the stage at looking into it, but have not pulled the trigger yet because there are travel restrictions and many of these are still in place that we cannot effectively doing due diligence and we're still looking into some of the deals presented to us. So there are not anything we can present at this point in time.

[Operator]

[Operator Instructions].

There being no further questions this will conclude our question-and-answer session. I'd like to turn the conference back over to Jerry He for any closing remarks.

[Jerry He, Executive VC]

Thank you very much for joining this conference call. Please feel free to contact us if you have any further questions. We wish everybody a great day.

[Operator]

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