Bright Scholar Education : BEDU F3Q21 Earnings Transcript

Bright Scholar (BEDU)

Third Quarter 2021 Earnings Conference Call

Thursday, July 22, 2021 8:00AM ET

Company Representatives:

Ruby Yim, Investor Relations Counsel

Jerry He, Executive Vice Chairman

Dora Li, Chief Financial Officer

Analysts:

Len Lau, Lucror Analytics

Presentation

Operator: Good morning, and thank you for standing by for Bright Scholar's 2021 Third Fiscal Quarter Earnings Conference Call. (Operator Instructions). After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded.

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

Ruby Yim: Thank you, operator. Good morning and good evening. Welcome to Bright Scholar's third fiscal quarter ended May 31, 2021 earnings call.

Joining me today are Mr. Jerry He, our Executive Vice Chairman; Mr. Andy Chen; and Ms. Wanmei Li, our Co-Chief Executive Officers; 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 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 terminology 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 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 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'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 statements or comprehensive income data prepared in accordance with U.S. GAAP.

Please note all numbers in our management 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, 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: Thanks, Ruby. Good morning and good evening. Thank you for joining us on our third fiscal quarter 2021 conference call. We appreciate your continued interest in Bright Scholar.

On today's call, on behalf of the senior management team, the prepared remarks will cover our quarterly performance, business progress and updates. Dora will then provide details on our respective business and financial performance. I'll wrap up with a brief conclusion before opening the call for questions.

I would like to start with a quick note on the massive and widespread flooding in Zhengzhou and other places in Henan province. A dozen cities with hundreds and thousands of people are affected. Our heart goes out to those who have been affected by the record-breaking rainfall, and we express the utmost gratitude for the rescuers saving and pulling people to safety.

As for global pandemic, while vaccinations rolling out and case rates are declining in most developed countries, the situation in many other places has not been as good.

Turning to our business, let's start with the overall financial performance in Slide 13 of Section 2 for the highlights of our third fiscal quarter and 9 months as well as detailed breakdown by respective business in Slide 14 and 15.

We are pleased to report strong third fiscal quarter results, driven primarily by a stronger-than- expected recovery in our domestic businesses. We believe this demonstrates the strength and agility of our value proposition and our sustainable growth business model.

In the third quarter, we focused on engines of growth and continued to employ cost discipline across all of our businesses, resulting in 42.5% revenue growth and 141.0% net income growth compared to same quarter last year. On the 9-month basis, top line grew 7.4% year-over-year and net income was RMB312.4 million despite the material impact the pandemic had on our overseas business.

The strong recovery in earnings also reflects the continuation and acceleration of our key strategic initiatives we've discussed in the past few quarters, and which continued in this quarter.

Looking more closely at our respective businesses, please refer to Slide 16.

Revenues from domestic K-12 schools, especially kindergartens, have experienced a sharp decline when pandemic situation was in its worst in China in fiscal 2020. We are very encouraged that the domestic K-12 business recorded the strongest recovery in the third fiscal quarter 2021 with enrolment of international schools, bilingual schools and kindergartens grew by 11.6%, 8.4% and 29.4%, respectively. In the quarter, revenues and average fees per student were also back to pre-COVID level.

Underpinning the strong rebound is the remarkable academic results which our students continued to achieve year after year. Shown in Slide 17, as of May 31, 2021, 94% of students in the 2021 graduating class of our international schools in China have received offers from the global top 50 institutions, including 12 offers from Oxbridge, 3 from the University of Chicago, 2 offers from Cornell University, 2 offers from Vanderbilt University, 2 offers from UC Berkeley, and 7 offers from New York University.

Shown in Slide 18 is our extensive school network and expansive capacity. It is our foundation for scaling up our business sustainably over long term.

Moving onto Slide 19, complementary business remains a significant growth driver for Bright Scholar, and we have been very pleased with the strong recovery and the progress our teams have made in increasing the Company's reach and brand awareness as well as enriching our service offerings and generating diversifying revenues sources.

In the quarter, revenue grew by 78.5% year-over-year to RMB130.2 million. The growth was primarily driven by the moderate recovery of camps and domestic tour business and after school all-round education services as compared to last year, which was relatively low due to the COVID-19 impact.

Overseas-related complementary business continued to be impacted by the ongoing pandemic and travel restrictions. However, with the speedy COVID-19 vaccine rollout in the UK and the U.S., campus re-open and lifting of travel restriction is in sight, we continue to see expanding opportunities spurred by the needs of parents to accelerate the growth of reading and all-around education for their children. These trends support our confidence in a very strong recovery to be continued for complementary businesses in our coming quarters and fiscal years. The synergy with our overseas network offers tremendous opportunities. We expect growth will resume and accelerate once the vaccination programs begin to take effect and the subsequent travel restrictions are lifted.

Turning to our overseas business in Slide 20, as anticipated, recovery was slower than domestic business due to significant impacts of COVID. The challenging operating environment has continued to put pressure on the financial position of our overseas business. While we are managing expenses prudently in response to this anticipated and significant decline, we have also taken this opportunity to rebrand and consolidate our overseas businesses.

CATS Global School caters to 3,500 full-time students and 14,500 students from our English language training institutions. Our students represent over 100 nationalities from 16 locations in the UK, U.S., Canada and China. And our portfolio includes independent and international boarding schools, an Arts University, English language training institutions and a variety of summer programs. We offer students the opportunity to study at different campuses to benefit from learning with different cultures to prepare for today's increasingly globalized society and economy. We are setting our businesses up to capture market opportunities when operating environments return to normal.

Looking ahead, we are also very mindful of the continued risks related to economic, political, regulatory and global health issues that affect our businesses. However, with the multiple engines of growth, the Company is confident that it is well-positioned to drive a continued recovery as pandemic recedes and market dynamics support it.

We will continue to focus on our strategic initiatives as recapped in Slide 21, mainly to improve utilization and enhance efficiency of our domestic K-12 business; rebuild our revenue growth for overseas business post-COVID; and expand the breadth and depth of our complementary service offerings. We expect these initiatives will also bolster our brand awareness, build an effective global organization, expand our emblematic offerings, and enrich learning experience of our students and to generate new business growth over mid to long term.

Our solid balance sheet and market-leading position have enabled us to navigate through this challenging period, while strengthening our capacities for greater success long term in China and internationally.

We are excited by the magnitude of opportunities in front of us. Underpinning our confidence in the Company's financial future, the Board of Directors has recently declared a cash dividend of US$0.12 per ADS to our shareholders. We remain committed to executing our growth strategy, evolving our business, strengthening our market position and delivering for our students as we invest for future to deliver value for all of our stakeholders.

With this note, I will turn the call to Dora.

Dora Li: 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 comparative financial performance on a year-over-year basis.

Please turn to Slide 23. Our domestic businesses continued a strong recovery traction, mainly attributed to the strength of domestic K-12 and complementary education serv ice businesses. Top line for the quarter was up 42.5% to RMB1,053.8 million for the quarter and up 7.4% to RMB2,914.4 million on a 9-month basis.

Domestic K-12 schools that includes international schools, bilingual schools, and kindergartens showed a stronger-than-expected recovery. Revenue was up 72.5% for the quarter and 28.4% on a 9-month basis.

International schools' revenue for the quarter up 23.6%, primarily due to 11.6% increase of student enrolment. On a 9-month basis, revenue was up 15.4% due to 9.6% increase in student enrolment.

Bilingual schools' revenue for the quarter up 40.3%, due to 8.4% increase in student enrolment. On a 9-month basis, revenue was up 23.2% mainly attributed to 8.2% increase in student enrolments.

Kindergartens. As Jerry mentioned earlier, kindergartens have experienced a sharp decline in third quarter fiscal 2020 when pandemic situation was at its worst in China. Kindergarten had the strongest recovery for the quarter with a 29.4% increase in student enrolment. On a 9-month basis, revenue was up 71.3% and student enrolment was up 22.3%.

Revenue from overseas schools was down 32.4% for the quarter and 44.3% on a 9-month basis, primarily due to the continued impact of the pandemic.

Revenue from education technology was up 47.1% for the quarter and up 47.9% on a 9-month basis primarily due to the acquisition of online academic Olympiad training business.

Revenue from complementary education was up 78.5% primarily due to the moderate recovery of camps and domestic tour business and after school all-around education services as compared to last year, which was relatively low due to the COVID-19 impact. On a 9-month basis, revenue increased 19.7%.

On Slide 24, cost of revenue, our focus remains on effectively managing the changing business environment through balancing cost control measures with initiatives to drive immersive business growth. For the third fiscal quarter, total cost of revenue was RMB635.6 million, an increase of 42.1% and accounted for 60.3% of total revenue, compared to 60.5%. On a 9-month basis, total cost of revenue increased by 15.1% to RMB1,889.3 million and accounted for 64.8% of total revenue, compared to 60.5%.

Teaching staff cost, the primary cost contributor, accounted for 34.3% of total revenue in the third fiscal quarter, which is the same percentage as same quarter last fiscal year. On a 9-month basis, teaching staff cost was 36.9% of total revenue, up from 32.8%.

Our domestic K-12 schools' average student-teacher ratio for the first 9 months of fiscal year 2021 was 9.3, compared to 9.0 in the same period last fiscal year.

On Slide 25, our gross profit and margins. While overseas business continues to be impacted by ongoing pandemic, we are encouraged by the significant gross margin improvements of our domestic K-12 business in the third fiscal quarter. Gross profit was up 43.2% for the quarter and down 4.4% on a 9-month basis. Gross margin was up 0.2 percentage points to 39.7%, for the quarter. And on a 9-month basis, gross margin was down 4.3 percentage points to 35.2%. The