Laureate Education, Inc. (LAUR) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2017 Laureate Education, Inc. Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Adam Morse, Senior Vice President of Corporate Finance and Treasurer.

Thank you, operator. Hello, everyone and thank you for joining us on today’s call to discuss Laureate Education’s third quarter 2017 results. Joining me on the call today are Doug Becker, Chairman and Chief Executive Officer; Eilif Serck-Hanssen, President and serving as Interim Chief Financial Officer until a replacement is named; and Ricardo Berckemeyer, Chief Operating Officer. Our earnings press release is available on the Investor Relations section of our Web site at laureate.net. We have also posted a supplementary presentation to the Web site, which we will be referring to during today’s call. The call is being webcast and a complete recording will be available after the call. I would like to remind you that some of the information we are providing today, including but not limited to our financial and operational guidance, constitutes forward-looking statements within the meaning of applicable U.S. securities laws. Forward-looking statements are subject to risks and uncertainties that may change at any time and therefore, our actual results may differ materially from those we expected. Important factors that could cause actual results to differ materially from our expectations are disclosed in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 29, 2017, our quarterly reports on Form 10-Q filed with the SEC, as well as other filings made with the SEC. In addition, all forward-looking statements are based on current expectations as of the date of this conference call and we undertake no obligation to update any forward-looking statements. Additionally, non-GAAP measures that we discuss are also detailed and reconciled to their GAAP counterparts in our press release and are included in our Form 10-Q filed with the SEC. With that, let me turn the call over to Doug for opening remarks.

Thank you, Adam, and thanks to everyone in the line for joining us on today’s earnings call. Before running through the highlight for the quarter, I wanted to discuss a very important management transition which we announced during the quarter but which was the culmination of a multiyear succession planning initiative by myself and our board of directors. Effective January 1, 2018, Eilif, my very good friend and colleague for the past decade will become the next CEO of Laureate, and my other very good friend and colleague for the past 15 years, Ricardo Berckemeyer, our Chief Operating Officer, will assume the title of President of Laureate in addition to his COO role. These are two of the most impressive and experienced executives that I know. I have the utmost confidence in them and I am so proud to see them take on these highest roles in the company. One of the most important duties of a board of directors is to plan for succession and for me as a founder, to think about how to ensure that this company which means so much to me and that I have run for 28 years, would end up with a sustainability to last and thrive for many more years. And this required a really thoughtful and serious approach to succession planning. We are a public company now but the fact is, for the past ten years we were a private company. Before that for 13 years we were a public company. These decisions don’t have anything to do with being public or private. The company has to have its own set of long-term priorities of which leadership succession and talent planned must be paramount. Approximately four years ago, we started a process that included exploring external candidates and I am very happy that in September of this year the board agreed to appoint Eilif as CEO to lead this company forward. Internal succession provides for continuation of the values and culture of our company while also allowing for new ideas for how to take this company forward very successfully. For these reasons I am very confident in what the future holders for Laureate under its new leadership. For me personally, I am proud and grateful for the opportunity to have founded and led this remarkable company which is helping so many students around the world achieve their dreams. I am also honored that that board asked me to continue as its Chairman as that will give me the chance to continue to be helpful to the team as the company progresses. This company still faces challenges but we have made terrific progress in leveraging the benefits of our scale and strengthening our balance sheet. In Eilif and Ricardo we have a team that’s proven that it would take bold and aggressive action to ensure that that company is on the right track to achieve its objectives while also ensuring our commitment to quality and mission. Now let me turn the call over to Eilif for a review of the results for the quarter.

Thank you, Doug, and good afternoon everyone. Just add to what Doug said, I am honored to have been selected as Laureate's next CEO and I am very excited for what the future holds for this great company. We are a mission driven organization committed to expanding access to high quality education worldwide and I look forward to further advancing our goals through accelerated investments in technology and innovation. Thank you, Doug, for all your support over the years and for everything you have done for Laureate and your vision, passion and commitment to building a truly one of a kind company that has seen enduring and lasting impact on the students and the communities that we serve. Now let me move to the results for the quarter. As we discussed during last call, we are reorganized in a manner to streamline and improve the efficiency of our operating model allowing for faster decision making and more cost effective operations. As a result, now we have six reporting segments, Brazil, Mexico, Andean & Iberian region which includes Spain and Portugal, Central America and U.S. campuses, EMEAA and online and partnerships. The new reporting segments became effective during the third quarter and are now reflected in our earnings release and third quarter 10-Q. Additionally, to help our investors better understand the historical trends in each of these segments, we filed an 8-K last week with historical results by segment back to 2015. To give some context on the segments themselves. Most of our largest segments represents developing markets which are experiencing growing demand for higher education based on favorable demographics and increasing participation rates, resulting in continued growth of students in higher education. Traditional higher education students have historically been served by public universities which have limited capacity and often under-funded, resulting in the inability to meet growing student demand and employer requirements. This supply and demand imbalance has created a marked opportunity for private sector participants, including Laureate, which helps explain the track record of growth that we have experienced throughout these segments. Despite strong secular macro trends, our business is subject to near-term economic and regulatory conditions and where relevant, we will provide appropriate context at the segment level during this call. As I run through the results for the quarter, I will provide a context for the key drivers for growth and variances for each of the key performance indicators for each segment. However, before doing so, I just want to remind everyone of the seasonality in our business which is referenced and illustrated with additional slides in the appendix. For Laureate, the first and third quarters represent our two largest intake periods which account for approximately 80% of total new enrollment activity for the year but are seasonally low from a P&L perspective. Thus the financial results we are reporting today are for a seasonally low period. Conversely, the second and fourth quarter generate the majority of revenue and EBITDA for the year but are not large enrollment intake periods. With that context, let me run through the highlights starting on Slide no. 4. Revenue in the third quarter of 2017 was $983 million, a 6% increase compared to the third quarter of 2016 on a reported basis. Adjusted EBITDA was $87 million in the third quarter of 2017, a 12% decrease compared to the third quarter of 2016 on a reported basis. Year-over-year results for the third quarter were impacted by the Mexican earthquake on September 19, which resulted in many scheduled classes and related $12 million in revenues being pushed into the fourth quarter from the third quarter along with approximately $3 million of onetime expenses relating to repair works needed on our facilities. Foreign currency continued to trend in our favor during the third quarter and benefited revenues and adjusted EBITDA by $23 million and $5 million respectively during the quarter versus last year. On a timing adjusted organic constant currency basis, revenue increased 5% but adjusted EBITDA was down 5% compared to third quarter of 2016 as the latte due primarily to seasonality and expense timing variances. Operating loss for the third quarter of 2017 of nearly $6 million represented a deterioration of $18 million versus the third quarter of 2016, due in part to the impact from the earthquake in Mexico discussed earlier as well as timing and seasonality. Net loss for the third quarter was $103.5 million compared to net income of $81 million in the third quarter of prior year. With prior year results favorably impacted by $155 million gain on the sale of our French institutions. Basic and diluted loss per share was $1.02 per share for the third quarter of 2017, including the effect of an $84 million charge to earnings per share related mainly to the accretion on series A preferred equity instrument. For year-to-date results, on an organic constant currency basis, revenue increased 5% and adjusted EBITDA was up 12% as compared to the results for year-to-date 2016. These results reflect strong performance against what has been a year of significant natural disasters in key markets for us including the flooding in Peru back in March of this year and the recent earthquake in Mexico. New enrollments through year-to-date September 2017 excluding asset dispositions, increased 3% compared to our new enrollment activity through year-to-date September 2016. Total enrollments at September 30, 2017 grew 3% compared to same period in prior year. Let me now spend a few minutes discussing results by segment for 2017 on Slide 8 through 16, touching on key highlights. As I go through the results, I am going to be discussing our performance and growth rates on an organic constant currency basis which is how the slides are prepared as we believe it's the best indicator of the operating trends in the business. The detailed reported results for each segment as well as year-over-year bridges, can be found in the appendix. Additionally, in our business there are often timing impacts effecting year-over-year comparability related to items such as academic calendar and timing of expenses. We also have extreme natural events like what we have seen this year with natural disasters such as floods and earthquakes. For timing items that are material, we try to call those out so you can understand some of the trends on a more normalized basis. The most significant timing items impacting year-over-year results are shown on Slide no. 9. And those items have been adjusted for the following slides as noted in pro forma adjustments in the segment reporting. Moving on first to Brazil. Results for Brazil remain strong building on the recovery and momentum we saw in the market during the first half of the year when during the large intake new enrollment growth was high single digit. Brazil just completed during the third quarter their smaller secondary intake representing approximately 35% of Brazil's annual new enrollments. The results are very robust for new enrollments increasing 22% versus third quarter of prior year, with strong growth of 12% in face to face learning while our distance learning business was up 90% year-over-year. Financial performance through September year-to-date includes some timing impacts which are skewing the EBITDA results as well as additional marketing expenses that helped drive our strong secondary intake. For the full year, we expect to see growth on margins and EBITDA commensurate with the revenue performance trends to date as the Brazil market is performing very well for us. Moving on to Mexico. Results for Mexico were impacted by the earthquake and related shifting of revenues and classes from third quarter into the fourth quarter as well as the onetime expenses related to repairing our facilities after the earthquake. The earthquake had a significant impact on the people of Mexico and unfortunately there are families and students that no longer can afford or are able to attend universities. We estimate there were approximately 4000 to 5000 total students that didn’t enroll with us due to the earthquake. Half of those were realized during the third quarter and the remaining in the early part of the fourth quarter. This will result in lower than expected new and total enrollments for this segment as well as reduced fourth quarter revenue run rates, versus our prior expectations for the Mexican market. In addition, as discussed on prior calls, there is significant fatigue among consumers that adversely effects the consumer sentiment in Mexico due to the uncertainties related to NAFTA and U.S. trade policies. This is starting to make its way into the macro trends in the Mexican market with flat GDP growth and relatively high inflation. And these factors are also weighing on enrollment trends in that segment. Despite the earthquake and macro impacts, both revenue and margins are trending very well year-to-date due to solid pricing and strong cost management. Now let's move to the Andean and Iberian segment. As a reminder, the Andean and Iberian regions include our institutions in Chile and Peru in addition to Spain and Portugal. Our Spanish institution is a nice complement to the premium brands we operate in Chile and Peru with very similar characteristics and potential product and revenue synergies. Results in this segment were strong with solid enrollment growth in all markets expect for Chile which was down slightly year-over-year due to the regulatory challenges that occurred in the country during 2016 and which we discussed on the second quarter earnings call. Excluding Chile, year-to-date new enrollment grew by 4%. Year-to-date revenue and margins are also showing very strong results as we have traded lower yielding students for higher priced programs as well as exercising very tight expense management. Then moving on to Central America and our U.S. campuses. In Central America which encompasses Costa Rica, Panama and Honduras, and U.S. campuses of which University of St. Augustine is the primary institution, we experienced low to mid-single digit volume and growth which resulted in mid to high single digit revenue growth due to increases in revenue per student from both pricing and mix. Double digit EBITDA gains resulted from rapid scaling of some of the smaller assets in the segment combined with tight expense management. Then moving to the EMEAA segment. New enrollment in the EMEAA segment for Q3 and year-to-date are up 7% and up 2% respectively, due mainly to timing of certain intakes in that region. Adjusted for timing, new enrollments were essentially flat year-over-year consistent with prior quarters as we continued our planned strategic shift in certain markets away from lower priced and lower contribution programs, to longer length of stay and more profitable programs, most notably in Australia. You will note that the revenue performance is very strong in the region in part reflecting the favorable mix shift benefit of this strategic decision and the margin growth is robust due to more profitable programs and tight expense management. Moving on to online and partnerships. New enrollment results for online and partnerships is down 22% during third quarter and can be explained by two different drivers. First, as previously discussed, we made a strategic decision last year at Walden and the University of Liverpool to rebalance the mix of certain international markets to improve overall margin contributions. This has resulted in lower volumes but higher revenue per student and has proven to be an accretive decision for us although it resulted in approximately 6 percentage point in decline in new enrollments for the third quarter. Secondly and more significantly, the weak enrollment results for the third quarter was due to a 17% decline in domestic intake for Walden University. We made a decision that in hindsight didn’t work out for us, to prioritize marketing efficiencies to improve conversion rates but over-estimated the effectiveness of these tools which have worked for us in these past couple of years. And while enrollment conversion rates are up versus prior year, this efficiency trade-off wasn’t large enough to deliver volumes in line with our internal plans as well as prior year. Further, given the lead time required to ramp up lead generation pipeline, we expect negative trend for online new enrollments to continue during the fourth quarter, albeit the rate of decline is likely to diminish as we have increased our marketing investment for online leads since we experienced significant declines in the third quarter. Despite this disappointing volume reduction in our online segment, strong cost controls have kept EBITDA relatively flat versus prior year to date. Let me now spend a few minutes on guidance. On Slide number 18, we are providing updated guidance for the full year and have highlighted for you the items that have changed versus our prior guidance expectations. Based on the current spot FX rate, our expectation for full year 2017 are now as follows. Starting with total enrollments. We are lowering guidance to 1.5% to 2% organic growth in total enrollments reflecting the estimated 4000 to 5000 student loss in Mexico from the earthquake and the enrollment declines experienced in the U.S. online segment for the most recent intake. Although foreign currency has been moving in our favor for much of the year, recently the dollar has strengthened again for many of the key currencies and is now creating a slight drag on adjusted EBITDA for the year as the fourth quarter is seasonally a high earnings period for us. Revenues are now expected to be approximately $4,345 million for full year 2017, which is the bottom end of the previous range, also reflecting the impact of the Mexico earthquake and the weakness in the recent U.S. online intake. No change is expected, I should say no material change is expected in the EBITDA guidance on a constant currency basis due to tighter cost control and increased efficiencies from our accelerated plan is offsetting any revenue deterioration. We are however, adjusting our guidance down by $6 million from previous guidance due to the FX impact from the recent strengthening of the U.S. dollar. We anticipate adjusted EBITDA in the range of $780 million to $789 million inclusive of the $23 million in charges for the corporate debt refinancing that impacted us during the second quarter. Excluding this onetime impact, adjusted EBITDA is expected to be in the range of $803 million to $812 million for full year 2017. We expect CapEx to be approximately 6% to 7% of our revenues for the year, which is about 1% point reduction from previous guidance due partially to timing with some of our CapEx spend for the fourth quarter is being pushed into 2018 but we are also seeing improved results and effectiveness of our hybridity initiative which is making our business model more capital efficient. On Slide 21, we also wanted to remind you of the specific information previously disclosed regarding capital structure and share count and I will leave this for you to review on your own. While we are still on the topic of guidance, I also wanted to comment on potential run rate implications for our business based on trends through September year-to-date. First, our accelerated plan is working. We are on track to deliver on our commitments for 1.5% to 2% point margin expansion from cost efficiencies by the end of 2018 on a run rate basis. And the divestitures for the five to seven markets are also on track with the original schedule and we expect to have SBA signed for most markets by the end of the fourth quarter. Second, we expect our campus-based operations to deliver growth and scale benefits consist with prior expectations. The earthquake in Mexico may cause our growth rate in this segment to temporarily slow down for the next few quarters but we have exceptionally strong brands in Mexico that have proven in the past to be very resilient and we expect this performance to continue in 2018 and beyond. However, given the magnitude of new enrollment shortfall in our online business, even if corrected by first quarter of 2018, it will cause a reduction in our growth rates for 2018 versus what we otherwise would have expected. During our earnings call for fourth quarter and the full year 2017, we will provide more detailed guidance for both the first quarter of 2018, as well as the full year of 2018's outlook. In the meantime, we will be laser focused on improving the performance in our online segment as well as continuing to deliver on our growth and margin commitments as for our international university businesses and implement our technology initiatives and deliver on the accelerator plan. Today, we also announce the appointment of our new Chief Financial Officer, he is going to be Jean-Jacques, he goes by JJ Charhon. And he will join the company on the first of January of 2018. He brings a wealth of experience including in corporate finance, financial planning and analysis, internal control for risk management, and strategic planning. He has also extensive backgrounds in international business, change management and technology enabled business transformation initiatives, which of course are key to the next chapter in Laureate's development. JJ will be a member of the executive management and I am thrilled to have him on my team. He will be responsible for overall financial strategy, financial reporting, controllership, financial planning and analysis, tax, treasury and investor relations. JJ brings nearly 30 years of experience in corporate finance and operations largely from Fortune 100 companies including GE, HP and Novartis. Most recently JJ joins us from Purdue Pharma where he was the CFO. With that, I will hand over to Doug for a couple of comments before we start with the Q&A.

Thanks very much, Eilif and also I am sure all of us will want to extend our welcome to JJ. Very excited for him to join us and to free you up to do all the other things that we know you need to do. I wanted to make a couple of comments about the situation in Chile. I know there will be always be questions for that. It's a very important market for us and we have just tremendously institutions in Chile that are affiliated with Laureate. So just some facts on the current elections in Chile that I think will be helpful for all of you. On November 19, which is very close, the elections will be held for the president and congress. It's important to note that they will reelecting the entire lower chamber, which they call the chamber of deputies, and half of the senate. And that is the way they do their periodic re-elections of their congress and they will also be voting for president. The first round for presidential elections will take place on November 19. There are eight candidates running but there are two with very substantial leads. If no single candidate obtains 50% of the votes, which is often the case, then there would be a runoff, a second round presidential elections for the two candidates with the highest number of votes. This would take place on December 17. And then the inauguration for the new government and the elected congress will be on March 11 of 2018. So at the moment the center right candidate, the former President, Sebastián Piñera is leading very strongly in the polls with I would say nearly double the preference of the next biggest candidate. But that may not be enough to win in the first round in which case we would look at the second round where again the polls do predict his win. Of course, sitting here in the U.S. we realize polls are not always right. So we follow this very closely. I think it would be fair to say that we believe that Piñera's policies would be very good for Chile, very good for the education field and good for our company. So we are hopeful for this election and I wanted to just give you the insight into that because I am sure many of you would be asking about it soon. I think with that, operator, maybe we could open up for questions, please.

[Operator Instructions] Our first question comes from the line of Peter Appert with Piper Jaffray. Your line is now open.

So the performance in Brazil is obviously very impressive. Can you just add some color in terms of specific drivers that you see there?

Peter, this is Eilif. I think the biggest driver is the fact that the economy has turned around. 2015 and 2016, brutally difficult years for the Brazilian economy. It was a deep recession. There was political turmoil and the consumer was fatigued. That combined with the government having to significantly cut back and shrink its [fees] [ph] program made the operating environment in Brazil very difficult in '15 and '16. Laureate has much lower reliance on the government-student loan program. So that part is now virtually irrelevant for us. And we had great brands and we are seeing a recovery in the consumer confidence. Seeing positive GDP growth and that is translating into very robust enrollment numbers for us. So we are very very pleased with the performance.

Great. Thank you. And then on weakness at Walden, Eilif, you have highlighted obviously the marketing issue but talk about the competitive environment because the overall market does seem to be shrinking. You feel that’s part of the issue as well.

So, Peter, it's Doug. I think this is still more of finding the right balance of efficiency and volume in marketing. It is a competitive market. As a result, we certainly don’t expect to see a lot of growth in Walden but we also haven't experienced significant declines. It's been pretty infrequent, and I think certainly personally I still feel that we have the tools necessary to hold our own and post stable or modest growth in the future for Walden. But it didn’t happen this last quarter. And I think the color I would give you -- you have followed the industry for a long time, I would just say in general. Five, six years ago, we needed a million leads a year to support the volume that we wanted at Walden at a time when Walden was smaller than it is today. So today we can accomplish bigger volume with maybe a quarter of that number of leads. So the good news is we do -- we are able to convert much more efficiently. We and many others in the industry then used to be the case. The downside is, we have had to do that because the cost of leads has grown so much that it was necessity and survival for everyone to improve the efficiency. So I just want to make sure that the stakes are very clear to everybody. Why would we experiment so aggressively with pushing for efficiency. We actually planned this year that we would have a slight, a modest amount of growth in Walden with a fairly meaningful decline in marketing spend. That’s an aggressive assumption. We really felt we needed to push the envelope and not just accept the ever rising costs of marketing. And that attitude has worked for us for several years. In this most recent quarter though, it just didn’t work for us. And I won't go into a lot of the details of exactly where in the marketing channels it didn’t work, but I would say the bottom line is to find the right balance we needed to spend a little more and we needed to spend it better. So we are now pivoting to adapt to that and have already increased our spend in the fourth quarter and while it will take a couple of quarters, I am sure for this two improve, we do expect -- I do expect that this will improve. It's tough. I think you make the point. This is a very very competitive market. But I also want to point that the place in the market where Walden competes, which is mostly masters and doctoral programs, it is a competitive space but the majority of universities in the U.S. can't offer those credentials. And those who can offer those credentials that have prestigious brands, typically are expecting a much higher tuition price then our student would typically pay. So we think there is a niche in the price value equation for Walden and we will continue to defend that. And I think it's very rare that we have had a stumble like this. I remember in the first quarter 2016 we had a stumble like this and we were able to quickly recover from it. In the prior years before that, I think we generally didn’t have that kind of volatility and I think the team is on it and is going to get this improved and we will all notice improvement soon. But that doesn’t mean it will go from a negative to a positive overnight. Does that answer your question?

Thank you. And our next question comes from the line of Manav Patnaik with Barclays. Your line is now open.

Yes, this is [Brian] for Manav. I guess just to jump in on that point. Can you maybe give us a sense of how much there was a reduction in ad spends and is there any correlation with just a really strong job market, particularly in the U.S., making that level of higher ed less attractive to prospective students.

I think what we are really trying to do is to go the primary driver. I would tell you I think there are many drivers and one of our jobs, both in explaining to you and in managing the business is to not confuse everyone with many drivers. I think you are right. I think that that certainly sets some of the demand for some, some not all, of the professions where people are seeking these degrees. I don’t really believe that that would account for that much of the impact. I would tell you by the way, I actually think that the natural disasters in the U.S., the hurricanes actually took place during a key part of the enrollment process and we believe that some hundreds of students were impacted by that. There are lots of factors. What we are just trying to do is drive to the biggest factor. And the biggest factor for us was really marketing execution and that balance of efficiency and volume. I don’t think we want to give any specifics about the marketing reduction but it was a meaningful marketing reduction and for the first couple of quarters, it was working for us. We were getting enough leads and we were getting a good enough conversion rate to make it a decent bet in the third quarter that all really just stopped working, and the volume of leads was less. The volume was less in the specific channels where we tend to have higher conversion. So that was an impact for us as well. There are other factors to. We closed down a program that is really the only program that Walden had that wasn’t -- didn’t have a good score under the gainful employment that would have accounted for several hundred students. But, again, I just don’t want to pepper you with 11 different reasons. The main reason, marketing execution and efficiency. If we need to accept a very modest level of growth or no growth in Walden in order to keep marketing spend under control, I think that’s a trade we have been willing to make in the past. But when we see it go negative, this negative, we realize it's basically been overdone and our plan is to increase the marketing spend and to correct this issue.

Got it. And then just a follow up. You mentioned on Chile just some of the hesitation maybe from new enrollments with some of the regulatory overhand. What exactly was the feedback you get from the prospective students? Do you think that regulatory natures wouldn’t effect there college decision making, any color you could give us there.

I think in Chile, it's a little bit like in the U.S. When the U.S. was under seize in the press, the for profit education in the U.S. and gainful employment, it was harder to attract students. And I think in last couple of years there's been a very deliberate campaign against some of the private educators in Chile and Laureate has been at the center of that storm. It's very interesting and very encouraging to note that that sentiment is now turning on a little bit. If you are following the news articles in Chile, there are not much more people that are recognizing that Laureate has withstand -- has been able to withstand enormous pressure and we have been focused on outcome, we are focused on quality and we have adhered to all relevant laws in the country. So a number of investigations has been shut down and now we are seeing people coming up in the public, in the press, to our defense. And I think that is also then giving more reasons for students to select the Laureate institutions. So we are seeing, although there has been a decline due to free education, there will be -- you know when it's free that’s going to be first priority and then we are competing for a shrinking pool of students that are paying. But we are competing incredibly well in that pool and we have been able to get pricing power, we have been able to get preferences. We have some wonderful rankings and quality seals recently including entry of the [Shanghai 800] [ph] rating by our Andrés Bello, UNAB University, which is our largest university in Chile. So, again, we are doing well because of quality, focus and outcome, extreme adherence to compliance.

Thank you. And our next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open.

I just want to make sure I have a little bit more clarity on the impact of the earthquake in Mexico. So the roughly $12 million in revenues, do you expect to recoup all of that? Are the students in essence, you know, lost, so to speak? And what time period do you think you will get that back?

So I did a chart, I think it was page no. 9, where we are showing that this is a timing item. We do expect the $12 million to be recovered. That was just shifted from third quarter to fourth quarter because many of our campuses, particularly in Mexico City, were shut down for the last two weeks of September because of the earthquake. So those classes couldn’t start, they got pushed. However, in addition to that, we have lost about 4000 to 5000 students which are going to impact our 2018 run rate and our fourth quarter performance in Mexico because those students were, you know the family lost their house, they lost their job because of the earthquake and simple couldn’t be in a position to start university this year. And that may -- these students may come back next year but we do expect revenue and earnings implications for 2018 and a smaller impact for fourth quarter.

All right. I appreciate you clarifying that for me Eilif. And I know you are not giving official guidance for 2018, are there any timing or seasonality related issues that you want to call out now, that we should compare it when we are comparing '18 to '17?

No, the good news, there are a lot of timing items intra-quarter because most universities shut down for the December holidays and new year's, so very unusual that there any spillover and seasonality from fourth quarter to first quarter. And we will be sure to note those in the future if there are but as a guiding rule, the seasonality is within the quarters of the calendar year.

Okay. Great. Let me just sneak one more in. I haven't had a chance to go through the 10-Q in detail. Is there any update on Turkey that you would like to tell us about?

It's Doug. I am happy to answer that. There really hasn’t been any action there as everybody knows we are in the process of pursuing our rights through the administrative court system to argue over the decision of the regulator to raise questions about whether we can charge the fees that we have charged for so many years in Turkey. And we continue to feel confident in our legal case and we also continue to really seek a fair settlement of this matter with the regulator and continue to have an active dialogue with them to that effect as well. So really no news right now. We just continue to work through this. We believe in the correctness of our position on this but we also realize we have an important regulator who we need to help them get to a point where they are as confident in our position as we are.

And of course the Turkish U.S. bilateral relations are not making anything easier.

You actually until recently wouldn't even be able to go because of the lack of visas. So that certainly hasn’t helped very much. But we will get past that.

Thank you. And our next question come from the line of Jeff Mueller with R. W. Baird. Your line is now open.

You got Nick Nikitas on for Jeff. One more, I guess on the Mexico impact and the guide. So Q3 even with the push out in revenue and EBITDA, still has some nice upside and then just looking at the Q4, it looks like it's a little bit below where consensus was. So that’s mostly just taking into account the 4K to 5K in students that were not in the Q3 number and they won't be impacting Q4. Or is there anything else that we should think about?

There are two things impacting fourth quarter. It is the Mexican earthquake of 4000 to 5000 students, and related revenues and contributions. And then it is a significant shortfall in enrollment at Walden. The close to 20% reduction in volume at Walden for third quarter, that’s a couple of thousand students and you compound that with a smaller impact for the fourth quarter, is going to have some impact for the fourth quarter and of course for next year. Those two events were the driver for us to take out enrollment guidance and the revenue guidance to the lower end or the bottom of the range. However, from an earnings perspective and EBITDA perspective, given tight cost control and that the accelerated plan is really working for us, we are still very comfortable with the guidance they have given on EBITDA.

Okay. Great. Thanks. And then thanks for the update on the accelerator plan and still kind of on track with the asset disposals. Given that you are kind of further along in the negotiation process, is there anything you guys can say as far as like potential range of multiples you would expect for the business and then as across, or the expectation the proceeds will still be used for deleveraging.

This is Doug. I think the only comment I would make is, we have generally said on this topic that we do believe that these entities will be more -- will trade at a better multiple than we do. That’s about as much guidance as we have provided. So we do think it will be accretive to the company but we don’t have -- we don’t want to give any more specific guidance then that. We are really pushing hard to maintain this timeline that the transaction should all be under contract by the end of this year and closed by the end of the first quarter. Obviously, if one or two smaller entities go more slowly than that, it's not that big of a deal. But so far it seems like it's going very well. And then in terms of use for proceeds, Eilif, what would you say?

As guided earlier this is to delever the balance sheet.

Okay. Great. And then just one last one from me. On the CapEx revision to the '17, how much of that is timing and I guess in '18 should we be thinking more in kind of the 8% to 9% range, and then just longer term any change to your thoughts on the CapEx profile.

I think you should maintain your -- the numbers for 2018. There is some that is being pushed from '17 to '18 but on the other hand our hybridity program is working better than we had expected. So I do think in 2018, the benefits from our hybridity initiative is going to be able to offset the timing impact as we are pushing some CapEx from Q4 to Q1. So I am still confident with the guidance on run rate CapEx spend of about 7.5%.

Thank you. And our next question comes from the line of Marcelo Santos with JPMorgan. Your line is now open.

My question is, the first one is about Laureate expansion plans for Brazil. So the economy is improving, you are posting very good results even compared to the local peers. And most of the peers planning to launch several new campuses, distance learning units. So I just wanted to know what you have planned, if you think expanding would be an interesting option. And the second question is about the Central America, just wanted to get a better idea of which markets are kind of working better there to help the results in that division.

Great. So on Brazil, we are going to certainly continue to expand in Brazil. We have some fabulous brands and we are going to focus on organic growth in the near term. We are going to optimize the utilization of existing facilities. We are going to selectively expand existing campuses, new campuses and new zip codes under the same brand and management. So that’s going to be priority for 2018. In terms of Central America, the three countries in Central America, Costa Rica is the largest one for us. Then we have a very strong operations in both Panama and in Honduras. And those businesses are doing really well for us, all organic growth, largely efficiency through expanding the classrooms on existing campuses. So that for us is really good flow through margin. Also in that segment, we have our U.S. campuses that’s part of the re-segmentation so it's really four countries in that segment and the most important and significant U.S. asset is a university called University of St. Augustine. It's a health sciences school. It's growing really really rapidly. A high quality and has nice quality standards, incredibly low default rate and really popular institution in the United States.

Thank you. And our next question comes from the line of Shlomo Rosenbaum with Stifel. Your line is now open.

Hey, Doug, is there is a similarity between the stumble in 1Q '16 on enrollments and what you saw in the third quarter that gives you confidence that spending more money will make this turnaround. Did you have the similar type thing that all of a sudden what you were doing just didn’t work and it wasn’t exact same thing that’s happening right now.

No, it's a really good question. Actually what happened in that first quarter was more to sales execution than marketing execution. In that case, we are implementing a new CRM and that to some extent unavoidable for an institution that has an intake every quarter. You can't pick a quarter to implement your CRM when you don’t have an intake, unlike our other institutions which usually have several quarters where they don’t have an intake. So that was more the issue there. And plus I think we could have just done it better and didn’t. But, no, I will say we have had many smaller instances, much smaller in just the constant effort to accomplish the yield that we are looking for. And there is no doubt about it that these are levers that can be pulled. And that we were very aggressive in how much we hoped to reduce the marketing spend, again to just sort of stave off what seems to be this sort of just accepted constant inflation in the cost of marketing. And I still think we can do that. I think we have been very attentive to this efficiency area and I encourage us not to be spooked by this. I think it still is the right overall approach but we over did it. But I am very confident that this will get better. The exact amount of how much money it will cost and the exact amount of timeframe before we get to a much lesser decline or positive numbers, obviously I don’t want to speculate on that. But to your question, does prior experience give us the sense that if you spend more in certain channels, that you can stimulate the results, no doubt, for sure it does. So that’s kind of the best I think I can do with that question.

And as a follow up, just what does a few thousand less students mean in revenue because these are much higher paying students than kind of equivalent students in Brazil and elsewhere.

It has a significant impact and that’s why I am -- in my earlier remarks, I cautioned the impact for fourth quarter and for next year. Because of this the average tuition at Walden is about three times the average of the system, and of course these are modern students, so the incremental cost of delivery is not so great. So there is going to be a run rate implication and hence we are cautioning 2018 growth rate from the drag -- from missing a couple of thousand students this quarter at Walden.

Yes. I think the approximately average is about roughly $12,000 in revenue per Walden student, more or less.

Thank you. And our next question comes from the line of [indiscernible] with Credit Suisse. Your line is now open.

This is [Katie Trihan] [ph]. In light of the segmentation changes, we are just hoping that maybe you could give us some high level guidance on how we should be thinking about the growth, retention rates, maybe pricing trends over the different segments. We really appreciated the historical data but some forward looking guidance will also be helpful. Thanks.

So during our guidance for 2018, which we were going to give to you in March of next year as well first quarter guidance. We would consider being a little bit more specific segment by segment. But given where we are today, I think what you should just look at our historical trend and that pricing power by segment before, there is more visibility by giving a segmented [indiscernible] than 15. I think a good starting point is to just assume what you have seen in the past is a good proxy with more important footnote. And that’s of course the recovery in Brazil. That is helping us both from a volume and from a pricing power perspective.

And our next question comes from the line of Hamzah Mazari with Macquarie. Your line is now open.

This is [Kane Oburn] [ph] filling in for Hamzah. Forgive me if I missed it, but I think you guys mentioned in the past that you had 20% EBITDA margins. I think when the company was private. Can you maybe walk us through how realistic it might be to get back at the 20% EBITDA run rate, especially with regards to some of the M&A scaling and the back office consolidation as a part of all the accelerated plan.

Absolutely. Happy to do so. I think what I have said in the past that when we went private in 2007, we had EBITDA margin of 22% and we were a third of the size of where we are today. And today our margins are in the zip code of 18%. So we have a four point shortfall. Just the accelerating plan in itself should add 1.5% to 2% point and get us close to 20% and then we believe that there are almost 50 basis point or so in margin expansion per year just from scaling the business and harvesting the benefit from the EIP Wave 1 program. So that should take us to 21% or so by the end of 2019 into 2020, and I think it could be potential upside in margin beyond that from portfolio pruning some of these assets that we are selling have a lower margin then the rest of the network, exiting those on a pro forma basis will yield about another point or so in margin expansion. So all of that blended together, I can see a very clear roadmap to a margin profile in the low 20s.

Thank you. And our next question comes from the line of Brandon Dobell with William Blair. Your line is now open.

Maybe some color on how sustainable you think the momentum in Brazil is right now. If there is anything, especially in the next couple of quarters that we should think about relative to the sustainability.

I think the fact is that we are growing robustly in both face to face and in the distant learning segment. We are underpenetrated in distant learning and we have a lot of wide space to grow there. We have more [indiscernible] that can be opened and will be opened to meet the demand in that market. So I think that is sustainable. I think there is a little bit of pent up demand in the face to face environment just from a couple of years of very difficult economic conditions. Students and in consultants with their parents have decided to defer university and that is benefitting us. But the fact that the Brazil as a market is going to continue to grow and participation rates are going to increase, if you take a decade view, I am confident about it. There will be bumps in the road but we are very bullish on Brazil. We are positioned incredibly well. We have, in my opinion, some of the best brands and a very very robust portfolio. We are in geographies that are attractive. So very positive on Brazil.

Okay. You kind of touched on it but maybe a little bit of a different angle on hybridity. In terms of your enthusiasm relative to the progress you are making. Is that because of how well Brazil or is that a broader comment. And maybe you could put some metrics around that relative to some of the metrics you shared initially when you guys went public about where your targets for 2018 and '19 in terms of percentage of courses delivered or percentage of population that was accessing a hybrid program.

Absolutely. So we are very very much on track with our plans. I think they are yielding maybe a little bit more benefit as evidenced by the fact that we are spending a little less in CapEx. But overall, I would just say, we are very much on track. 2016, we had 15% or 16% of our taught hours being delivered on line within the campus based environment. So at this point we are excluding the fully online offerings. And we are -- we set a goal to be at 25% of 2019 and we are on track to meet our exceed that goal.

Thank you. And our final question comes from the line of Alex Paris with Barrington Research. Your line is now open

This is Chris Howe sitting in for Alex Paris. Most of my questions have been answered to this point but I did have a question surrounding the partnership model. Could you provide some update on where it's going and the potential for new partnerships moving forward into 2018 and beyond.

So the partnership model for us has really been a couple of deep relationships with fewer brands. We have very deep relationship with Liverpool and that was really the start of that partnership business. Liverpool is the online we are running the online activities for Liverpool and there is lot of demand for that all over the emerging markets as well as both the developed European markets. We then expanded into another partnership with a value brand, a much lower cost brand in the U.K., known as Roehampton. And that was addition that was hard to get, the retention rate at that price point. So that’s been one of the items we are talking about. We have been scaling back some of our online, or publishing volume that’s been more in with that brand or in markets where the Liverpool brand went but where the consumer couldn’t really afford the offering. So but the core Liverpool business is to -- and then of course we have more recently a couple of years ago, developed a very interesting partnership with University of Miami, and although it's a relatively early stages, we are very pleased with that partnership.

Thank you. That’s very helpful. And just to make sure I am on the right track, all of the cost saves, all of the onetime costs and savings opportunities that you mentioned on the last quarter call, those still remain in place with regard to EIP Wave 2. Correct?

Yes. So it is kind of a broad question. I want to make sure that I am recalling it correct. Let me just make a couple of statement and see if this does for you. EIP Wave 1, which was really the back office, that was $180 million investment to get $100 million in cash savings. A vast majority of that cash savings was operating expenses and EBITDA and we are, I would say, 85% to 90% complete for the value realization or maybe 95% complete by the end of this year in terms of the investment. The high success rate of that program gave us confidence to rollout what we call EIP Wave 2. EIP Wave 2 is also -- that’s part of the accelerator umbrella and it has about four different buckets of activities, the most significant savings are related to either further technology deployments for the mid office and also a flattening of the organization taking layers out of the management because we have better information technology systems and dashboards that facilitate faster decision making and better oversight with less management. And that was a $75 million to $100 million in savings. We said we were going to deliver that by end of 2018 on a run rate basis. We gave some very specific guidance on last quarter. How much is going to be the run rate by the end of this year, how much is going to be realized this year, and we are very much on track to deliver that. We feel that those savings from that $75 million to $100 million are very much within our control we have already implemented and taken actions to realize those savings with one footnote that some of them, particularly those that are technology enabled, relating to changes in operating processes. It's going to take a little longer. But the majority are related to organization design and in process right now to be realized.

Thank you. And this does conclude today's Q&A session. Ladies and gentlemen, thank you for participating in today's call. This does conclude the program and you may all disconnect. Everyone have a great day.