Laureate Education (NASDAQ:LAUR) Q4 2017 Earnings Conference Call March 20, 2018 5:00 PM ET
Adam Morse – Senior Vice President, Corporate Finance and Treasurer
Eilif Serck-Hanssen – President and Interim Chief Financial Officer
JJ Charhon – CFO
Marcelo Santos – JPMorgan
Ryan Leonard – Barclays
Chris How – Barrington Research
Shlomo Rosenbaum – Stifel
Peter Appert – Piper Jaffray
Welcome to the Fourth Quarter 2017 Laureate Education Earnings Conference Call. My name is Victoria, and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode. And please note, that this conference call is being recorded.
I would now turn the call over to Mr. Adam Morse. Adam, you may begin.
Thank you, Victoria. Hello, everyone and thank you for joining us on today’s call to discuss Laureate Education’s fourth quarter and year-end 2017 results. This is Adam Morse, I’m the Senior Vice President of Finance and Head of Investor Relations for Laureate. Joining me on the call today are Eilif Serck-Hanssen, Chief Executive Officer: Ricardo Berckemeyer, Chief Operating Officer; JJ Charon, Chief Financial Officer and Victoria Silbey, Chief Legal 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 webcasted and a complete recording will be available for you 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 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-K filed with the SEC.
With that, let me turn the call over to Eilif for opening remarks.
Thank you, Adam, and thanks to everyone on the line for joining us on today’s earnings call. 2017 was a transformational year for Laureate. We made some very important changes in management team including the CEO transition from Founder Doug Becker to myself, promoting Ricardo Berckmeyer to add the title of President to his COO responsibilities and bringing in JJ Charon as our new CFO and Victoria Silbey as Chief Legal Officer. I also want to note some important internal news including Paula Singer taking tee role of CEO for our Online & Partnership Segment and Rick Patro taking the important role as Chief Information Officer for the network. Both Paula and Rick are long time Laureate veterans with proven track records of execution and building scale platforms.
Other important milestones for 2017 include our reentry to the public market and total revamping of our balance sheet. We’ve reduced the net debt-to-EBITDA leverage ratio by 1.7 turns to 3.1 times leverage at the end of 2017 when pro forma adjusting for the announced divestitures.
We refined the strategic direction of Laureate and launched a set of actions, decide to drive increase levels of free cash flow conversion, while also working to create a more scalable enterprise. These initiatives were incorporated under our accelerator plan, which we announced in May of last year and we accomplished our stated goals of simplifying business, streamlining our operations, improving margins and driving greater innovation through better use of technology.
Let me highlight some of the specific accomplishments that the new leadership team actioned during 2017. In terms of costs actions, we launched what we call EIP, excess in process wave II which is expected to drive 75 to 100 million in annual cost savings by the end of 2019.
2017 run rate cost savings from this program, reached over $50 million. Additionally, we have rationalized our organization structure and generated significant cost efficiencies from these actions.
For portfolio rationalization, we signed and announced the divestiture of six non-core markets at very attractive valuations of approximately 14 times trailing EBITDA in aggregate, generating approximately $650 million in gross proceeds.
These transactions will result in [Technical Difficulty] when it close during the first half of 2018, showing further progress on our financial goals while also allowing us to focus our resources on our more strategic markets.
We made great progress on our balance sheet in 2017. In addition to the pay down of debt from asset sales post to date and a complete refinancing of our corporate debt obligation at lower costs, we also executed over $200 million US dollar equivalent of local financings in the fourth quarter as part of our liability management strategy of better matching debt with our cash flows.
Pro forma for the announced asset sales net debt as of 2017 was 3.1 time, our hybridity initiative continues to be doing very well, with 20% of our campus credit hours being taught online during 2017, positioning us very well to meet and possibly exceed our goal of 25% hybridity by end of 2019. This along with deleveraging and cost saving initiative are driving improved free cash flow conversion, which is a key strategic priority for us as we look out to 2018 and beyond.
The business continues to perform very well organically. On an organic constant current basis, we delivered strong results in 2107 with revenues reaching $4.4 billion an increase of 5% versus prior year. Adjusted EBITDA for 2017, was $832 million US dollars, growing 11% as compared to 2016 resulting in adjusted EBITDA margin gains of 100 basis points.
These strong results were driven by robust growth in our Campus-based businesses, as illustrated on slide number six. With all Campus-based segments increasing organic constant currency adjusted EBITDA by double-digits except for Mexico which was impacted by the earthquake in September of last year.
In Brazil our business is performing very well, and we’re now aggressively expanding in high quality distance learning. We currently have over 400 licenses for distance learning centers know as polos and expect that to be a growth driver for us in the future.
In the second half of 2017 we piloted the implementation of all common operating model in Brazil and Peru. And it’s already paying significant dividends, with strong margin expansion during the second half of the year in Brazil.
The Iberian segment continues to benefit from double-digit growth in Peru, along with stable top line performance in Iberia combined with solar margin progression. Our Chilean operations in spite of challenging regulatory environment had a very good year. The volume was slightly down, our business in that market continues to drive efficiencies.
Mexico was of course impacted by the earthquake that stopped that country in September of 2017. This resulted in 45,000 as a student reduction in that country and that combined with decreased consumer sentiment weighed on our performance that we were still able to deliver revenue and earnings growth in the market albeit in the mid-single-digits.
Central America and U.S compasses performance was strong and driven by double-digit growth in the U.S. health sciences platform at the University of St. Augustine. The EMEA region experienced significant expansion in 2017, driven by scale benefit as well as favorable mix shifts in certain markets. Fiscal performance drove a record year for the company in terms of revenue and adjusted EBITDA generation.
As we look forward our objectives for the next few years will be continuation of the strong progress he made during 2017 to improve the financial attributes of our company. We began 2018 with our priorities well defined, with a focus on further simplified operating model, strong execution and operational excellence all of which we believe will create a more scalable organization with significantly improved free cash budget in generation.
In addition, we’re making very good progress on developing robust technology platforms that will further increase our benefits from scale economics as well as improved innovation pipeline. So, with the strong 2017 a clear strategy for the next few years I’m extremely excited for what the future holds for this great organization.
Now let me turn the call over to JJ for the financial overview of the quarter.
Thanks, you, Eilif. Before running through the financial results, I want to remind everyone of the seasonality in our business, which for reference, is illustrated on a couple of slides in the appendix. For Laureate lower that, 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.
Conversely the second and fourth quarters generates the majority of the revenue and adjusted EBITDA for the year, there are not large enrollment intake periods. More specifically the fourth quarter we are reporting to date represents typically about 40% of our full year earnings during any given year. In 2017 that contribution was 43%. With that context, let me run through the highlights starting on slide number 9.
Revenue in the fourth quarter of 2017 was $1.3 billion a 7% increase compared to the fourth quarter of 2016. Adjusted EBITDA was $355 million in the fourth quarter of 2017 a 25% increase compared to the fourth quarter of 2016. Year-over-year results for the fourth quarter were impacted by certain timing and non-recurring items. Foreign currency has continued to trend in our favor and benefit revenue and adjusted EBITDA by $30 million and $6 million respectively during the quarter versus the same period last year.
On an organic constant currency basis, excluding certain onetime gains, revenue increased 5% and adjusted EBITDA was ahead by 9% as compared to the fourth quarter of 2016. So, by all measures, Laureate had a very strong quarter to close out the year.
Now let me spend a few minutes discussing in more detail our key operating metrics for the quarter starting on slide number 10. Given the new enrollment activity for the fourth quarter is as material. I’m going to focus on full year results to this metric. So, for the full year of 2017, new enrollments on a comparable basis Increased 2% year-over-year. These results reflect strong performance in Brazil which was up 11% versus 2016 and all the Central America and U.S. campus which increased 4%. In the Indian and Nigerian segments, new enrollments grew in Peru, Spain and Portugal. That growth was partially offset by new enrollment in Chile as a result of the regulatory changes in that market.
In Mexico, new enrollments were essentially flat versus prior year, due to our estimated loss of 4000 to 5000 enrollments associated with the earthquake which occurs during the month of September in 2017. Online and partnerships experienced enrollment declines year-over-year reflecting a planned shift for our international fully online enrollments to a longer length of state students with higher revenue and contribution margins.
Although results were also impacted by the softness in Walden third quarter intake, we are very encouraged by the improvements in new enrollment trends we experienced in the fourth quarter at Walden. Total enrollment for the full year grew 2% compared to 2016. Growth was led by strong performance in our Kansas Bay segments notably Brazil and Indian and Nigerian.
Now moving to our revenue and adjusted EBITDA results which you will find on Page number 11. On a comparable basis, fourth quarter revenue increased 5% versus the same period a year ago. Earnings grew at two times the pace of revenue with adjusted EBITDA up 9% on an organic constant currency basis, reflecting 100 basis point improvements in margin.
Turning now to slide number 12 and net income results for the quarter. Net income results for the quarter and for the year were impacted primarily by three factors. First, strong operating results, as we discussed earlier. Second, a 22% reduction in interest expense resulting from our lower debt levels and reduced costs to debt. And lastly, a $138 million tax benefit attributable to the change in U.S. tax regulations.
Also included in these results, was a $49 million increase in our EIT investments versus prior year due to the implementation of our EIT rates through initiative that is already generating significant run rate savings as noted earlier by Eilif.
Now, let me go briefly on our 2017 full year performance, which you will find starting on slide number 13. As Eilif noted in his opening remarks, 2017 was a strong year for Laureate. We achieve a record levels of revenue and adjusted EBITDA, thanks to our productivity initiative and the continued margin accretion associated with our top line growth. As you can see illustrated on the slide, our adjusted EBITDA margins improved year-over-year by 100 basis points for the second year in a row.
Our Campus-based operations including G&A, performed particularly well. They grew revenue 9% and adjusted EBITDA 18%. Our online and partnership segment contracted slightly in both revenue and profitability due to the enrollment softness experienced in the third quarter of 2017 and increased marketing expenses in fourth quarter while supporting the improvements of our student enrollment for 2018.
Let me now turn our focus to the improvement of our capital structure illustrated on slide number 17, which as Eilif indicated was another significant highlight of our performance in 2017. Our strong operating results combined with a benefit of our recapitalization activities completed in the early part of 2017 yielded a more than 20% reduction in our net leverage.
Even more impressive, on a pro forma basis, including the benefits of our announced asset divestitures the net debt leverage reduction year-over-year was 1.7 times or 35% reduction versus our position at the end of 2016. As a result, we expect at least a 30% year-over-year reduction of our net cash interest expenses in 2018.
Moving now to free cash flow, on slide number 18, unlevered free cash flow in 2017 increased 18% versus 2016 and is now at 8% of revenue, a 100-basis point improvement versus 2016 and as indicated during our Investor Day, we expect to continue to improve that metric over the next few years as a result of margin accretion and our capital intensity reduction initiatives.
Now let me cover guidance which you will find on slide number 20. Given our fourth quarter results, we are reaffirming the guidance for the full year of 2018 we provided during our Investor Day earlier this year. Let me remind you that the guidance communicated that time was on the pro forma basis and adjusted for the full year effect from asset disposal and the potential deconsolidation of our noncore profit operations in Chile. Total enrollments are expected to end 2018 between 955,000 and 959,000 students. This would represent a year-over-year organic growth of 2% to 2.5%.
Revenue based on current spot rates is expected to be between $3.885 billion and $3.920 billion. This would represent a year-over-year organic constant currency growth of 3% to 4%. Adjusted EBITDA based on current spot FX rate is expected to be between $763 million and $770 million. this would represent a year-over-year organic constant currency growth of 7% to 8%. We also expect CapEx to be approximately 7% of our revenue in 2018.
As we alluded to earlier, cash interest expense will be approximately $250 million reflecting the improvement in our capital structure.
Cash taxes are estimated at approximately 22% of EBIT. Historically this is an area where we express this metric as a percentage of EBITDA, building the new U.S. tax code and the number of changes to our funds flow we believe it makes more sense to express it now as a percentage of our earnings before interest and taxes.
Free cash flow defined as operating cash flow less CapEx is expected to be around $100 million for 2018, which would be a significant improving year-over-year or more than $260 million.
Finally, let me remind you that reported earnings per share in 2018 will be affected by approximately $57 million non-cash charge to earnings per share in the first quarter of 2018 related to the accounting for the non-cash beneficial redemption and conversion features due to the term of our Series A preferred stock. By the end of the first quarter, the accretion impact form that instrument will be fully recognized.
For the first quarter of 2018, we are providing guidance at current spot FX rate and on a as reported basis, which includes all of our Chilean operations for the first quarter as well as the stub period for the asset divestitures we closed in January which includes Cyprus, Italy and China. Revenue is expected to be between $855 million and $880 million, this would translate into a 2% to 3% growth rate on an organic constant currency basis versus the first quarter in 2017.
Adjusted EBITDA is expected to be between $30 million and $40 million we are selecting the revenues seasonality in our business bring a largely out of second quarter in the southern hemisphere. As a reminder our first quarter typically delivers a low single digit share of full-year earnings due to the out of special ups we expect our first quarter in 2018 to be typical in that regard.
Let me now turn it over to Eilif for the Wrap up.
Thank you J.J. 2017 laid a foundation for the future direction of our company. We refined our strategy and have a new management team fully on boarded and ready to execute. The next few years would be a continuation on our focus on being operationally excellent. We are committed to deliver strong financial attributes including being very focused on further improving free cash flow conversions with our goal for unlevered free cash flow margin to be 11% by the end of year 2020.
In addition, we have positioned ourselves for the future through technology leadership. The same platform we developed to harvest synergies and network benefits will also enable us to deliver industry leading digitalized student experiences that we expect will be the new standard in the global education industry. As the newly appointed CEO of this company, I’m committed to deliver value for all the stakeholders including our investors. We will do so by focusing on our core markets where we have clear competitive advantageous. Leveraging technology for improved efficiency and enhanced student experiences and our continued unwavering commitment to academic quality and superior student outcomes.
Victoria that concludes our prepared remarks and we are now happy to take questions from the participants.
[Operator Instructions] And it looks like our first question comes from Jeff Silber from BMO Capital Markets. Please go ahead.
So, I was wondering if you could talk a little bit more about that the margin improvement this quarter it seems like there is a quite a jump in EBITDA over what you are previously guiding just should you be get anymore color on some of the drivers of that?
Well there are number of factors that are driving our EBITDA improvement as the first thing is all the products you see initiatives that we are realizing as you may remember we have implemented a new country operating model in Brazil, some of those actions were taken between the end of the second quarter and the end of the third quarter so obviously we have the full core impact of those actions. And then I think in general we had tight cost management across all of the markets and that contributed to really the strong margin that you saw in the fourth quarter.
The other question I had is on [Walden]. I know you guys were putting some more focus on marketing there. I was wondering if you could share any color on whether you’ve seen any improvement and marketing there?
We are very pleased with the progress that we are making in Walden, on the online segment, we gave a robust update at the Investor Day at end of January. The sense [ph] that we shared with you there, in the guidance that we are going to give you, we’re very curious [ph] about where we are, we are very confident in the outlook and the recovery of the business performance of Walden and of course we will be giving more information during our first quarter earnings call in April, but from where we are sitting today we are very encouraged by where we are in the fourth and first quarter enrollment cycle in that business.
And our next question comes from [Jeff Miller] from Baird. Please go ahead.
I appreciate the comment on Walden, it sounds like sustaining in the Q1 new enrollment, can you also just given how late we are in the quarter, give any sense of has the strong growth in Brazil sustained from new enrollment growth perspective in the Q1, and then in Mexico, does it feel steady state after the earthquake or does there seem to be a hangover from the earthquake impact on new enrollment that’s continuing beyond Q4?
We are very encouraged about where we are, and during this very important first quarter enrollment cycle for the southern hemisphere, in addition to online as I just mentioned, we would be providing comprehensive update for Q1 and guidance for the full cycle that’s continue to April during our Q1 earnings call in early May. but I just want to underscore we are very pleased with where we are, at this moment in the enrollment cycle.
As for Mexico, the large enrollment cycle in the northern hemisphere, environmental country, and we have a small intake in the first cycle, and the aftermath of the earthquake, it’s largely behind us, we have done the structural work, that needs to be done on the building, we have done the repair work, and we already [indiscernible] as students into our network in Mexico in the large enrollment cycle in the fall.
And then is there any I guess further update on Chile, couple of months post passage and I guess what I am wondering is as you negotiate exactly what services you’re going to be providing at what rates for the ongoing operations in Chile, just are you feeling better about things, is there any change in your thinking?
Well first and foremost, our contractual arrangements are in place, and there no immediate changes to those as those are grandfathered in. As the law has not been implemented yet, we are waiting for the outcome of the review of the new higher education law by the constitutional courts. And beyond that we don’t really anything more to update you on.
And then just I guess a comment on, but it would be very helpful if you guys could give us the quarterly historical by segment performance for the divestitures?
Sure. We’ll provide it.
Our next question comes from Hamzah Mazari, please go ahead.
Hi this is Kayvon for Hamza. Could you give us a sense of how to think about commission increases in 2018 and beyond?
Commission increases is done market by market and really program by program. What we have said in the past that I think generally is true for the network is that we price at or above inflation in most market. However, in markets where there are disruptions such as in 2015 and 2016 and may be into 2017 in Brazil given the very deeper sessions they were facing was the same time dismantling the student loan program. In that period, we were portion with pricing and we priced probably couple of points below inflation. And absence of those very specific events the situations are typically at or above inflation.
Our next question comes from Marcelo Santos from JPMorgan. Please go ahead.
I have two actually, the first I’ll make this quite a little bit matter better $17 million gain that you had in Brazil, when you explained the variance components EBITDA be you single that out as in order, I just wanted to understand what order was.
And the second question is regarding distance learning online, I mean you have substantial experience in the U.S, now you’re growing substantially also in Brazil. Based on the experience you’re accumulated, when you look to the other markets that you see, where do you see the biggest opportunities. What are the main hurdles for distance learning or online to develop there, I mean what are the opportunities that you could exploit in the future.
So, hi Marcelo, so as you may remember as part of our acquisitions we always evaluate the contingent liabilities and we have in most of our share purchase agreement actually indemnification mechanisms just in case there are some tax liabilities associated to the period ownership of the private owners. In this case we evaluate both the liabilities as well as the indemnification mechanism every quarter. In the fourth quarter of 2017, we have to readjust those liabilities and the way it works mechanically is that you have to break down that liability into the individual components. There is a big interest and inflation components that we report in an interest were the identification asset is above the line, we create little bit of a miss match at adjusted EBITDA level but its complete wash at the net income level. And that’s the reason for the unusual item in Brazil in fourth quarter.
This is Eilif on the expansion and online and business learning, we shared with our shareholders and investors in general in general investor meeting. How focused we’re and what we call capitalized expansion, online is a part of that, these smart campuses that we have prior to the Australia and Mexico, part of that DL in Brazil, our distance learning in Brazil is an important part of that.
And just to give you a quick reminder the world in technology and the world know how for digital learning has been instrumental in Laureate’s rolling out what we call our hybridity approach where it was 20% of our credit hours delivered online in the Campus environment. So having had that history and so having had that history and legacy with Walden has enabled us to, in a very cost efficient manner, in a very confident manner been able to rollout high quality digital learning, through open [ph] network.
We have in addition to the hybrid teaching we have rolled out fully online products in Mexico, in Spain and several other markets in various states of rolling fully online out and in Brazil, it is really the distance learning through these learning centers [indiscernible] that enable us to really provide digital low cost products throughout Brazil, and we are leveraging our strong brands as an use an important brand we have been using for distance learning and we have 400 products and growing aggressively from relatively small basis that we are seeing growth somewhere between 35% and 55% momentum in distance learning in Brazil.
Our next question comes from [Chad Margosi] from Morgan Stanley. Please go ahead.
Yes, hi, good evening everyone, thanks Eilif for the presentation and for taking the questions. I have two follow-up questions, the first one is on Brazil prices, I would like to get some color on your intake pricing strategy for 2018 and on the nature of the discounts you are offering, so we can have somewhat visibility on this [indiscernible] region. This is a first question.
And I also have a question on Chile. Your outlook for 2018 continue to show some consolidation of the three units you have there, with information you have so far, would you say is it reasonable to assume you could get some residual value from those assets, or a reasonable base case would be just there full write-off. These are the questions. Thank you very much.
Thank you for the questions. In terms of the pricing in Brazil, we are not going to give any specific guidance on that. During our third quarter earnings well one this intake is behind us, we will give much more color and insight.
The only status I want to give you is very consistent with what I said earlier, we tend to price very close to inflation or slightly above and as Brazil economy is recovering that statement becomes generally true for that market as well. But more guidance specificity on the Brazil intake during our first quarter report in May of this year.
In terms of Chile outlook, there is something really more to say, than what we have shared with you during the investor day, its law, its implemented that would trigger a deconsolidation and we gave you pretty specific guidance around what that would mean to us in terms of a non-cash write-off as well as degradation in our revenues and EBITDA performance going forward. And there is no change in estimates and I refer you back to the January 31 Investor Presentation as well as of course the 10-K.
Thanks. And then if I may just a follow up on Brazil prices. Qualitatively speaking, would say we’re seeing competition catching up in general in Brazil?
Well, I am not sure how the competition is doing, I am in the middle of reporting and I don’t think anyone has reported first quarter yet. So, I’m going to just stay with my prior answer and we will provide you robust update during our first quarter results that we will be delivering in Early May.
Our next question comes from Manav Patnaik from Barclays. Please go ahead.
Hi this is Ryan Leonard filling in for Manav. Just want to make sure I understand the ’18 guidance growth rates. At the investor day you have revenue growth of 4.5% to 5.5%. I just want to make sure I understand if the organic constant currency kind of the tweak there, or how should I think about that?
So, with respect to the guidance I’ll let JJ comment more. The guidance that we provided to you as of January in terms of absolute dollar numbers on a constant currency basis has not changed. We have reaffirmed those numbers. Since our 2017 numbers came out slightly above guidance that [indiscernible] took the growth rate done by Smidge [ph] but we are reaffirming the dollar guidance as percentage end of January.
Well, so even though it was at the end of January I mean I guess it’s semantic, but I just want to make sure the growth rates in the business looking up 2018 are consistent just up higher starting point is that what you are saying?
What we said into the guidance for 2018 in dollar terms in constant currency, are unchanged from what we gave you about 5 weeks ago.
Okay fair enough. And Chile is included in the first quarter?
That is correct. Given that the [indiscernible] not been enacted. Most of the core actions will be reflected in our financials. Obviously, we can’t speculate what’s going to happen between now and in the end of quarter. But we thought we would reflect what how the numbers are going to be actually report at the end of first quarter?
Okay fair. And then I guess just on I mean is that something that could linger a little bit. I mean are you kind of waiting for things to happen? And as a quick follow up, do you guys have still the same access to capital from Chile or is there any changes from the deconsolidation. And then if I could just tag one more on there? Is there any update on Turkey?
So, in terms of at Chile we are required to consolidate as long as we control the entity and have our contractual rates in place which is currently the case. If and when this law gets implemented post the constitutional review, then that that could trigger an event for the deconsolidation. But consolidation is not an option, we have to follow the accounting rules in that regard. so just regard to stay tuned as things develop in that market but clearly our guidance used and we expect to deconsolidate so the guidance that JJ gave you for the year is assuming a deconsolidation of the not for profit universities in Chile. I think your second point was Turkey [ph] but there was anything else on Chile Ryan.
No, I guess more from a I guess the P&L aspect more from a cash flow I mean that eventually flows through it’s just at the how we are going to come through during the consolidated statement?
Yes, what we gave was very specific guidance and was the implications to EBITDA and I think that gives you the ability to model as a CapEx as a percentage of revenue for the total company excluding Chile would be about 7% and the EBITDA that we are losing from deconsolidation events is approximately $55 million and that’s baked in to the guidance of and also JJ gave you very specific guidance on the free cash flow and taxes. So, I think you just have the components there from a modeling perspective, it’s not, I suggest you reach out to Adam offline.
I think your second question was what’s the status on the regulatory discussions in Turkey and we continue to engage in productive discussions with the Turkish higher education regulator and in parallel if you may recall and to protect our rights we have also an appeal pending in administrative court that were re-objectives to the regulators initial interpretation of the areas engaged in with our affiliate university in turkey. From a legal respective this process is a relatively slow process and we have nothing new to report at this time but we continue to engage productively with the regulator and we will update if and when we have any news to report in that regard.
Our next question comes from Alex Paris from Barrington Research. Please go ahead.
This is Chris Howe sitting in for Alex Paris. Most of my questions have been taken at this point but I did have two left. One was in regard to the net leverage ratio and perhaps your expectations to end of Europe 2018 what would be a healthy target level for you? And the second question is in regard to the double-digit growth seen in Peru. What type of market dynamics are you seeing in Peru and do you expect this growth to continue in 2018?
As we are presented during Investor Day the ending leverage for 2018 is going to be 3.1 you have to restate our ending levels at the end of ‘17 for the deconsolidation of Chile so that gets us back up to 3.5 but when you make the adjustments for the divestitures and the Chile deconsolidation it will be basically a reduction of 40 base of a point of the turn of our net leverage, so going really from 3.5 to 3.1.
Alex, I think your second question was on Peru and Peru just is a classic Laureates market we operate in, with three brands, in three segments, we have our — what we call the premium segments, the value segments, and the type of segment, today we are largely a Lima company, where we have big brand and got the footprint and these strong brands that we have built over the years, and ready to be “export it” to the secondary cities, and we have over large cities with over a 1 million population where we are getting ready to start operations for these brands, so we believe that as Peru is going to continue to be attractive market for us, for several years to come.
Our next question comes from Shlomo Rosenbaum from Stifel. Please go ahead.
A couple of questions on Chile, and then I have one on Turkey, in terms of Chile, do you guys at this time, have access to the cash that might be in that business in Chile and is that meaningful at all, and then can you also help us with a just modeling for the first Q of ’18 what the revenue and EBITDA contribution do you expect from both Chile and the divested regions, so we’d be able to model out the rest of the year and then kind of get a year-over-year for ’19?
So, I think on Chile we have covered that, it’s really hard to speculate at this time, what’s going to be final version of the law that’s going to be enacted, we did provide during Investor Day some adjustments to our debt leverage that reflect the impact this could have on our net debt position should the deconsolidation be completed, and I did indicate that the impact would be basically a net increase of $110 million of debt, and that’s a function of and the cash that we have in those entities plus the proportion of the debt associated with the some of the affiliates that own the real estate assets for those non-profit institutions, so we don’t really have more clarity at this stage, what we’ve already provided, and we’ll wait for the loss we have and to fully digest the implications for Laureate.
If you want to go back to page 14 of the investor day presentation from end of January, I think that has a pretty good summary of the impact on revenue EBITDA as well as the cash impact of the business and when J.J. in a moment gave you guidance, on leverage end of 2018, at 3.1 churn of leverage, that is after taking into effect the loss of the EBITDA and loss of the cash that is in those non-profit additives.
And then what are the Turkey quarter cuts on Slide 10?
So, you may recall that back in April of last year when we announced that the Turkish regulator is challenging somewhat from our operating arrangement in Turkey, they put a number of sanctions on us including a 30% reduction in quota which meant we needed to reduce our new enrollment intake by 30% average prior year. And while we’re going through our mitigation and discussion and prudentially lead the process with the Turkish regulator that quota limitation is staying in place and that next time quotas are being issued for the September intake will be in second half May, I believe. So, we will know if that would be lifted for 2018, right now we’re assuming that that’s quota restriction is not lifted. If lifted that would be good news.
Our last question comes from Peter Appert from Piper Jaffray. Please go ahead.
So Eilif at the industrially you talked a bit about the opportunity for margin improvement in Brazil, just hoping you could give us a little more color in terms of your confidence in the drivers and the ability to deliver on that, I’m wondering if the distance learning initiative is the main factor or is it contingent on a better macro environment in Brazil.
Peter thanks for that question. There are several factors that have been helping our margin momentum in Brazil. One is just an overall economic environment. The contraction in the market related to the dismantling of fees, caused enormous pricing pressure in the market and we believe that is largely cycled through and behind us. So that makes normalize environment.
Secondly is, we have them implemented, what we call the new operating model, which is an integrated back office, mid office and front office where we have an integrated technology platform between demands and accounting and receivables and payables to the student information system self-service to a delivery model, the whole way into the front-office of having common CRM system across all of our 9 institutions in Brazil. We’re rolling this out over waves, this takes time, we started in the second half of last year, you already seen significant gains in efficiency from both academic cost structure as well as back office, cost structure and G&A and from that initiatives, and more to come.
Then the third lever, is going to be distance learning but in the near-term distance learning is a drag because we are in the thought of growing rapidly, which means that their startup cost are opening up at few new centers. So right now, that is not accretive to story but it will be helping the overall margin profile in Brazil, when these centers are reaching maturity over the next coming quarters and years. Peter, does that answer your question.
Do you think, that the margins there could approach what you do in Mexico say over the next several years.
There are no reasons – why — we are already had scaled in Brazil, we have a very clear roadmap to get our Brazil and that’s what off to system average.
There are no further questions.
If there are no further question Victoria, then I just wanted to thank everyone for participating, thank you for your interest in Laureate and this report of Laureate over the years and please feel free to reach out to Adam, JJ, or myself for if there are any follow-up questions. Thank you.
Thank you, ladies and gentlemen, this concludes today’s call, thank you for participating, you may now disconnect.
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