IDP Education Limited (IEL) Earnings Call Transcript

Thank you for standing by, and welcome to the IDP Education Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Tennealle O'Shannessy, Chief Executive Officer. Please go ahead.

Thanks, operator. Good morning, everyone, and thanks for joining the call today. I'm joined today by Craig Mackey who, as you all know, is our Director of Corp Dev and Head of Investor Relations. Today, we launched an announcement with the ASX, which provides investors with an update on market conditions and how IDP is navigating the current environment. We'll take you through the key elements of this announcement, after which we'll be happy to take questions. When we last spoke in February at our half 1 results, we acknowledge the various changes that were occurring in the global regulatory environment for international education. It was difficult to predict at that time how these changes would play out and what the impact would be on the industry and on our business performance. We're now at a point where we believe the majority of the policy changes have been implemented or announced, and therefore, we have a clear view of the likely short-term impact on the market and on our business. Let's start first with an overview of the policy environment we're currently operating in. At the outset, it's important to note that it's our view that these changes are focused on more restrictive policy settings linked to election cycles and are targeting a short-term reduction in immigration growth rates. Now let's be clear, IDP has navigated these mini cycles many times before. What is unique in the current environment, however, is the synchronization of these cycles, with policy settings tightening across IDP's key destinations, Australia, the U.K. and Canada at the same time. While these changes are creating near-term constraints on the supply side, we continue to strongly believe that the powerful demographic and economic macro drivers remain in place for long-term growth. So I'd like to move now to provide an update on IDP's current trading. Now everyone on this call will be aware of the range of global policy changes announced over the last 6 months. The impact of these changes is clearly evident in recent government meter approval stats. Australia, Canada and the U.K. were all down between 20% and 30% in Q1 this calendar year versus the same time last year. While IDP continues to strongly outperform these broader market trends, the various policy changes have impacted the performance of our student placement and testing businesses in the current half. So let's go into this in a little bit more detail, and I'll start with student placement. Our student placement volumes for FY '24 are expected to be up 15% to 20% versus FY '23. Now this obviously implies a slowdown in growth in half 2 as a result of the market environment. I'd like to just pause and provide a little bit more color on what we're seeing here. This flatter profile in the second half reflects a couple of things. Firstly, the May intake for Canada was lower than planned given the disruptions caused by the new cap and the new visa documentation process, which was only finalized at the end of March. As we flagged in February, what we actually saw in the first part of half 2 was that visa processing was effectively paused while provinces created and implemented the required new processes. Secondly, enrollments for the next U.K. intake have also been impacted by the ongoing uncertainty regarding the graduate route in addition to the announced changes to dependent visas. And finally, for Australia, while IDP's visa approval rates remain well above industry averages, we have had lower conversion for the July intake. Now this is primarily booked in the current half. So whilst these numbers are below our historical growth rates, we are very proud of the expected outcome for FY '24. These will be strong evidence of IDP's outperformance relative to a market that is expected to show a decline for the period. So if we move now to IELTS, IELTS volumes in the second half have also been impacted by the regulatory uncertainty. We're expecting FY '24 IELTS volumes to be down 15% to 20% versus FY '23. Whilst we've seen a softening in market conditions across all markets, the biggest impact has been in markets that are most sensitive to policy changes and visa settings. This is classically the markets in South Asia and, in particular, India. So just to provide a little bit more detail in terms of what we're seeing in the conditions in India, the Indian testing industry has been materially impacted by the regulatory uncertainty and increased fees of rejection rates across each of the commonwealth countries. Thinking about it from a test-taker perspective facing disruption in Canada, uncertainty regarding the U.K. post-study work rights regime and higher visa rejection rates for Australia, what we're seeing is prospective test-takers have been deferring their international journey until a more certain environment returns. We are, of course, also managing a more competitive environment for Canadian-bound test-takers, which has contributed to the performance in the period but to a much lesser extent than the movement in the market. Outside of India, we continue to see growth in the current half. While the other markets aren't immune to the regulatory changes, the diversified nature of our country portfolio and the variety of use cases for IELTS provide some offset for volumes. And just to round out, whilst much smaller contributors, our other business lines being English language teaching and our other student placement support services continue to perform well. In response to these conditions, we've been working hard to offset the softer volume environment by managing the levers that are within our control. This is demonstrated by our continued strong student placement market share growth and our ongoing efforts on price. In that regard, we continue to record very good average fee growth across both student placements and IELTS. This fee growth is being supported by inflationary dynamics for testing and tuition fees as well as ongoing increases in our terms of trade with university clients. We've also been very disciplined on cost and taking out discretionary spend during the half, which will ensure that second half overheads are below those recorded in half 1. When we bring all of these various drivers together, our current expectation for earnings is that adjusted EBIT for FY '24 will be broadly in line with the number we reported in FY '23. I'd like to move now to outlook. Looking forward, we expect that the size of the aggregate international education market will contract over the next 12 months due to the various supply-side constraints that have been implemented by governments in our key markets and as we have summarized in the appendix of our announcement. If the current trends continue, and importantly, assuming no further change in key immigration and visa policy settings, we currently estimate that the total number of new international students commencing study in our 6 key destination markets will decline by 20% to 25% in FY '25 relative to the volumes expected to be reported for FY '24. Given this market environment, we expect to record a decline in IDP's volumes for both student placement and IELTS in FY '25. But very importantly, we believe that both of these business lines will outperform the broader market decline that I've just outlined. Also, there still obviously remains several uncertainties in the outlook. For example, as you all know, the Australian government is still only in the earlier stages of consultation with the sector on their cap proposal, and the Canadian government has not yet communicated its calendar year '25 cap numbers. It was important to us, and we wanted to give the market our current best estimate of the year ahead for the industry. So next, how is IDP positioned in the current environment and what are we doing to respond? As I said at the start, and I really want to reinforce this, it is important to note that we believe the current dynamics are short term and cyclical driven by election cycles. We have seen these mini cycles before, and we remain very confident in the long-term trajectory of the industry and in our strategy. As we navigate this period, we are focused on three key areas. Firstly, we're focused on increasing student placement market share. We spent some time at the half 1 results explaining that these policy changes will increase the sector's focus on quality and conversion. As the leading quality player, IDP is well placed to help our students and clients navigate the changing market conditions. This was evident in IDP's strong gains in market share in student placement in the half 1 results. These trends have continued, and we expect that IDP's volume growth for FY '24 will provide further evidence of this outperformance. The question that may be asked is why is IDP growing market share and why are we confident about taking further share in FY '25 and beyond. Really, it comes down to three things. Firstly, it's our client portfolio. We're over-indexed to higher-quality universities in each of our key markets. These providers always show less cyclicality and IDP, through the cycle performance, often reflects the strength and quality of this client portfolio. Secondly, it's our source market share. In current conditions, we will see a flight to quality in source markets where students and parents will want advice from quality agents that can demonstrate they are best placed to support students through what is a complex visa environment. This again is evidenced in IDP's strong relative performance in visa acceptance rates versus the market that we shared with you in the first half results. And thirdly, our service offering. Our source country market share is also being driven by our increasingly unique services, superior lead generation and higher conversion rates. The second area we're focused on is our strategy and digital product innovation. We remain focused on our long-term strategy, which will position us well when the industry rebounds. As you know, this strategy is based in part on building unmatched global scale and an increasingly unique service offering. We are not stepping back from our core strategic programs of work, and we will fund these through an ongoing CapEx program that supports digital product innovation, leveraging our unique data assets, and software development linked to a deep understanding of our customer and client needs. We continue to execute strongly against key initiatives like FastLane and peer community and student placement and One Skill Retake in IELTS. And we look forward to providing an update on progress with our full year results communication in August. The third area that we're focused on is cost reduction. During the current half, we have been very disciplined on cost. And as we committed to in February, we have taken actions to reduce overheads versus what we've recorded in half 1. In addition to this, we have completed a review of the expected cost base for FY '25, and we are implementing a cost reduction program that is designed to broadly align total expenses to the near-term revenue outlook. Now I want to spend a little bit of time taking you through the principles we are applying here. In sizing the cost base, we have been very careful to find the right balance between short-term and long-term objectives. We are fundamentally a long-term growth company with a large global footprint and exposure to high-growth emerging markets. We, therefore, need to factor in incremental expenditure to further our strategy and to appropriately reward and retain our highly sought-after global staff. Organic accretion in this cost base over time is, therefore, natural and should be expected. To free up capital to fund this natural accretion in a more challenging year, we are implementing a range of cost reduction measures. These cost savings are focused on the following areas. Under non-staff, we have trimmed discretionary expenditure across a number of areas, including travel, consultancy, IT and marketing to reflect the market conditions. And on the staff, we are reducing our staff base by approximately 6% with targeted reductions in 9 countries where efficiencies were identified. It's important to note that changes to our global office and testing footprint are minimal, and we are focused on minimizing impact on revenue-generating roles. As I mentioned, we will also continue to fund an expansionary CapEx program, which will likely include some additional offices in high-growth markets where profitability can be achieved in year 1. So bringing this all together in summary, the experienced management team are responding to these short-term conditions to ensure that we minimize, where possible, impact on margins for shareholders. At the same time, however, we are mindful, as we saw after COVID, that once policy settings are neutralized, underlying intrinsic demand will flow. We are managing this business for long-term shareholder value creation, and therefore, we're mindful that we need to continue to invest for the inevitable recovery and to not cut into the strategic muscle of the firm. Now this is a delicate balance, and we will continue to monitor this as the year progresses. We will obviously be watching volumes and revenue, but we will also be working with governments and the sector to enhance our view on the timing and shape of the inevitable recovery. So to close today's call and before I open it up to Q&A, despite the near-term policy-driven cyclical dynamics, we remain very confident in the structural growth drivers for the international education market. We believe that the economic and social importance of the international education industry and immigration more broadly will underpin the market's long-term growth trajectory. As the leading quality player in the sector, IDP remains very well placed to help students and clients navigate these challenging market conditions. We're very confident in our ability to continue to increase market share in student placement as the sector focuses on quality and the value of our increasingly unique services expands. Thank you all. Craig and I will now be very happy to take your questions. I'll pass you back to the operator.

[Operator Instructions] Your first question comes from Chris Gawler with Goldman Sachs.

Tennealle and Craig, can you hear me okay?

We can, Chris.

Excellent. First question, just on the student placement outlook. You noted this in your opening remarks that historically, you've tried to outperform the market by around 20%. Is that the level that you would hope to outperform in FY '25? Is there any reason to think it could be greater than that given the flight to quality?

Thanks, Chris. I'll take this one. So if we have a look at our FY '24 performance, which I think is what you're referring to, our relative performance this year is exceptional. So I'm really proud of the resilience of our teams. And I think this really highlights the quality of our counselors and the quality of the students and clients we work with. So when we are reporting the details in the full year, the delta between our FY '24 results and the market outcomes, what we expect to see is that the delta in the visa data will be stark. Market share gains will continue into FY '25, as we have stated. We wouldn't expect this delta to be as significant as what we will see in FY '24, but it will be material.

Okay. Sure. And then just on the cost base, given you feel like you have a bit more visibility into what's going to happen into FY '25 now. Just interested in how we should think about costs into '25 on the second half base given that you noted that overheads are declining in the second half versus the first half. What's the base we should think about for costs into '25?

Yes, certainly. So I'll kick off here, and then I'll pass over to Craig to provide a little bit more color. So as we touched on in terms of FY '24 overheads and how we're going into FY '25, as I said in the current period, we've reduced discretionary cost items to reflect the different market conditions. So this will result in a decline versus half 1 in our underlying expenses on things like marketing, consultancy, travel and some IT costs. Important to say, too, that 2/3 of our overheads are staff costs. Some of these have a variable component, which will provide a little flex. But as we've touched on, changes to the staff base require a more considered approach, which is what we're doing for the FY '25 year. So that's some broad color. Craig, is there anything you can add there?

Yes. Look, the point, Chris, is we won't guide at this early stage for the year on specific margins for '25. It is, as Tennealle mentioned, a delicate balance. We are balancing the near-term needs to protect margins for shareholders but also with a mind to the longer-term opportunity. So that will evolve as we see the markets perform over the next 6 months. Fair to say, though, we've started the year with the actions that we've taken to reduce structurally the cost base across certain parts of the business to allow that cost envelope to naturally accrete, as Tennealle said. So we are leaning into growth we're seeing in certain areas, and what we've done is freed up capital or cost and OpEx in the business to accommodate for that investment in the 2025 year. The net impact on margins and the outlook for the aggregate cost base for '25 will be a dynamic assessment through the year as we see the green shoots emerge in early markets elsewhere and as we sort of get a better view of how '26 will shape up.

Yes. Sure. And then last question on average fees. Curious how we should think about that into FY '25 versus the 4% to 5% you've done historically. Is there anything in terms of mix? You mentioned in terms of trade with universities, could you see it be greater than that in '25?

Yes. I'll take this, if you like, Tennealle. Yes. Look, we're pretty confident about fees. There's a number of things going on. As Tennealle mentioned in the call, there's natural inflationary pressures on testing, which remains rational and profit-orientated in all the markets we operate. And in SP land, student placement, we've got, again, natural inflation in tuition fees. We are seeing a flight to quality from clients wanting to work with preferred and quality providers. And in that environment, there has been a good opportunity to sort of increase our sort of average fees. To your point also, there is a natural tailwind here in terms of mix. In IELTS, clearly, our Indian business, which is at a lower average fee, is underperforming the global industry given the sensitivity in that market to regulatory and visa changes. So we'll get a natural mix benefit in '25 from that. And probably similarly, there'll be a little bit of that in SP where a flight to quality, higher average tuition fees at higher-quality courses will prevail. So our sense would be our '25 outcome will be, on average fees, higher than the sort of historical run rates, probably not to the extent that we saw in the first half, they were driven by some amazing outcomes, but still good momentum in that area.

Your next question comes from Josh Kannourakis with Barrenjoey.

First one, just a follow-up with regard to, I guess, your ability to offset some of the declines in 2025. So I assume in '24, as you mentioned, the market will probably end the year down year-on-year, and you guys have got placements up 15% to 20%. If we look to '25, so in terms of that share, like should we be thinking that you should be able to offset half of that decline, 3/4? Have you got any figure in your mind today? And maybe is there any sort of deltas or data points you have in terms of pipeline or funnel that gives us an indication of that?

Yes. Look, thanks for the question. And really it stood to reinforce the points that we've made earlier. Really proud of the team and the performance that will be delivered in FY '24. As you touched on, the delta between IDP's FY '24 result and the market outcome will be stark. We expect to see the market share gains continuing into FY '25. We wouldn't expect the delta to be as significant, but it will be material, and it absolutely remains a focus for us. And as I touched on in the call, the reasons that we're confident that we can continue to drive market share over the next 12 months and indeed moving forward really centers around three factors. It's the strength of our client portfolio and this over-indexing that we have to these higher-quality universities in each of our key markets. What we tend to see is, with the focus on quality, with the focus on conversion, these universities tend to not demonstrate some of the same levels of cyclicality that we see in the broader market. It's the focus on source market share, and we're seeing this already. There is this flight to quality in source markets where students and parents will want to buy from quality agents that can demonstrate they are able to navigate complex visa conditions. And clearly, our superior visa acceptance rates indicate IDP is the leading player here. And it's the work that we're doing around product innovation to create these increasingly unique services to work on superior lead generation with the work we're doing at the top of the funnel and driving conversion through the funnel to lead to higher conversion rates. So it very much remains an anchor and a focus on our strategy. And I think that the investments that we've made over a number of years strongly position IDP as the trusted player for both students and clients in this complex environment.

Got it. And Tennealle, just in terms of that 15% to 20% in '24, what your expectation is for the market, is it minus 5%, minus 10%, minus 15%, minus 20%, like just broad numbers?

Yes, Josh, I can take that one. So at the half, you might recall, we reported numbers, which were up 33%. That was exceptional performance underpinned by Australia at that level and multi-destination indeed in aggregate at that level as well. We were benchmarking ourselves in that first half presentation. If you remember, the market was down 3% at that time using the latest data. The quarter 3, if you like, or the March quarter data, you will have seen Australia, U.K. and Canada are all down sort of 20% to 30%. U.S. is up 7%. So we need to see how the fourth quarter of the financial year, the visa data pans out, but clearly, it will be a decline of greater than 3% relative to what was posted in the first half. But that's the sort of dynamics and the stats that you should be looking at.

Yes. No, that's very good. And final one for me, just on the industry side. Like obviously, there's a lot of players that are probably not in a financially strong position as you guys. How should we think about the change in industry dynamics and maybe the competitive environment once the dust settles on some of the policy restrictions? And maybe if you could make some particular reference to some of the aggregator channels and the like as well, it would be helpful.

Yes. Look, I'll kick off and Craig definitely has some opinions there, so I'm sure he'd love to jump in, too. Look, I think that what we have said is the purpose and the intent of these policy changes that you're seeing across all destinations is to really bring an increasing focus on quality and sustainable growth into the industry. And so we have seen governments explicitly call out a focus on less scrupulous players and players that are operating in the lower-quality segments. And so from an industry structure perspective, if the policy changes have the desired impact, we think that it creates a stronger industry structure and gives opportunity for quality players like IDP to really be operating in a structure that is more consolidated and more sustainable if you look out 2 to 3 years. So I think from an industry structure perspective, the policy changes are good because they will move the entire industry focus more towards quality, which indexes very strongly to where we play. Specifically on aggregate, just Craig, is there anything you'd like to add there?

Look, just to add that strategically, we remain steadfast over the last 5 or 6 years, despite the emergence of aggregator and other sort of platform models, to remain close to the student and have a direct connectivity to the prospective student with counselors that are fully trained on the destinations and have consistent experience across the counseling model. That transparency to that model and the connectivity to the student will keep us in good stead as the governments and universities look to tighten the screws on models, which don't provide that transparency or have lower and poorer quality outcomes. So again, we feel comfortable that the consolidation of the industry structure will move in a way that will further support our market share gains.

Your next question comes from Entcho Raykovski with E&P.

My first question is on IELTS. And it looks like IELTS volumes were down about 25% or thereabouts in the second half, which looks to be pretty consistent with the underlying market trends. Now you've mentioned, Tennealle, in your prepared remarks that you expect to outperform the market in IELTS in '25. Can you talk about what you expect to be the key drivers of that outperformance?

Yes. Certainly. So look, to provide a little bit more color there, IELTS does benefit from a very diversified exposure. And we expect that, that will become more evident in the coming year. So as you know, IELTS is used by students seeking to study abroad, but it also has a wide range of other use cases. This can include use cases like for onshore purposes such as permanent residency applications, migration and skilled labor. We also have increasing volumes for domestic and intra-regional purposes in Asia and other parts of the network. And so the comments that I was making there is this diverse range of use cases as well as the diverse spread of country should provide some offset to the declines in testing for students looking to study in the main Commonwealth countries that we've spoken about in terms of the broader market trends.

Okay. Great. And I mean, do you expect competition, I guess, not to be as intense given more recently, the recognition changes in Canada have had some impact on your market share?

Yes. Entcho, look, the competition really only has changed, as you know, in relation to that Canadian student flow and onshore permanent residency. The dynamics, as we flagged, was that over the first 12 months of that changed environment, we thought that the market share would equalize over that sort of 12-month period to kind of what we would see as the equilibrium for our IELTS position. So we're 3/4 of the way through that. We are navigating a dynamic market as it relates to Canada because not only have we a competitive market share dynamic but that market has been significantly disrupted due to the regulatory and cap changes announced. So it's a little bit tricky to bifurcate between share and the market, but we feel as if that's trending as we had originally modeled and that, through to the course of this calendar year, that should be sort of reaching that equilibrium as we indicated earlier.

Okay. Great. And final one for me, how do you see the trajectory for each of the destination markets for '25 that feeds into your expectations of a 20% to 25% volume decline? And I'm particularly interested perhaps what you're assuming around the Australian market and the impact of the proposed caps. I know there's a lot of uncertainty there. But do you think Australia will be weaker than some of the other markets? Or do you see fairly consistent declines across all markets?

Yes. Certainly. So I can give a go at this one. And look, as you flagged, there are still some things to be worked through both in terms of the consultation process that the Australian government is going through with universities to finalize the details of how that cap will work and similarly, in Canada, we are yet to hear what the calendar year '25 cap levels will be in that market. So putting aside those uncertainties, in terms of what we know today, we would expect each of Australia, U.K. and Canada to be down 20% to 30% at a market level. We expect that if we have a look at some of our smaller markets like U.S.A., New Zealand, Ireland, we believe these in aggregate will show growth at an industry level next year. So I think at this point, that's the breakdown and the comments that we have by destination.