Adtalem Global Education Inc.
Q3 2018 Earnings Call Transcript

Published: 5 May 2018

[Operator:]

Greetings, and welcome to the Adtalem Global Education Fiscal 2018 Third Quarter Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Beth Coronelli. Thank you.

[Beth Coronelli:]

Thank you, and good afternoon. With me today from Adtalem leadership team are Lisa Wardell, President and Chief Executive Officer; and Patrick Unzicker, our Chief Financial Officer and Treasurer. I’d like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Adtalem Global Education that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied. These factors are discussed under Risk Factors and elsewhere in our quarterly reports and Form 10-K for fiscal 2017 filed with the SEC and available on our website at www.adtalem.com. Adtalem disclaims any obligation to update any forward-looking statements made during the call. During today’s call, we may refer to non-GAAP financial measures, which are intended to supplement, though not substitute, for our most directly comparable GAAP measures. Our press release, which contains the financial and other quantitative information to be discussed today as well as the reconciliation of non-GAAP to GAAP measures, is also available on our website. And with that, I will now turn the call over to Lisa.

[Lisa Wardell:]

Thank you, Beth. Good afternoon, and thank you for joining us for today’s call. As we change the profile of Adtalem’s Global Education, we are focused on diversifying and growing within our 3 core verticals

[Patrick Unzicker:]

Thank you, Lisa, and good afternoon, everyone. Our third quarter report highlights our ongoing progress in improving our operating results, driving efficiencies and positioning our organization for long-term profitable growth. As a reminder, the results of DeVry University are presented as discontinued operations. During the third quarter, the Adtalem revenue of $342.2 million grew nearly 3% over the prior year. Growth in our Medical and Healthcare and Professional Education segments was partially offset by declines in Technology and Business and U.S. Traditional Postsecondary. Operating costs, excluding special items for the third quarter, were $288 million, an increase of 0.7% compared to last year. Operating income from continuing operations for the third quarter, excluding special items, was $54.4 million, an increase of 16.3% over the prior year period. Net income from continuing operations and excluding special items was $44.9 million during the third quarter compared to $37.9 million in the prior year. Earnings per share from continuing operations, excluding special items, increased 22% to $0.72. Now to review our segment performance. Medical and Healthcare revenue increased 5.7% to $220.1 million. Segment operating income, excluding special items, increased 19.7% over the prior year to $60.8 million. Chamberlain University revenue increased 2.9% in the quarter, with a 4.3% increase in new students and a 4.5% increase in total student enrollment in the March session. Revenue at our Medical and Veterinary Schools increased 10% during the quarter, driven by increases in student enrollment as well as tuition price increases instituted in September 2017. There was also a shift in revenue from the first half of the fiscal year to the third quarter as a result of the delayed September semester start due to disruption caused by the hurricanes. Turning to our Professional Education segment. Revenue increased 5.7% to $31.5 million in the quarter. Growth coming from ACAMS, which was up 58.5%, was partially offset by lower revenue at Becker compared to the prior year. This segment’s operating income was $2.4 million for the quarter compared to $2.6 million in the prior year. In the Technology and Business segment, revenue was $59 million, a decrease of 4.5% and 0.4% decrease on a constant-currency basis, driven by decline in the total student enrollment, given prior economic conditions and changes to the Brazilian student loan program. The segment operating loss for the third quarter was $103,000 compared to income of $5.4 million in the prior year. We are encouraged by Adtalem Brazil’s return to new student enrollment growth for this current semester. Finally, in our U.S. Traditional Postsecondary segment, revenue of $32.1 million, was down 4.2% in the quarter as a result of declining enrollments at Carrington. New student enrollment in the quarter was down 5.2% from the prior year, while total students decreased 8%. The segment operating loss was narrowed to $251,000 in this quarter compared to a loss of $3.1 million in the prior year. Turning to our outlook. For the fourth quarter of fiscal 2018, we expect revenue to increase 1% to 2% compared to the prior year. Revenue growth within Medical and Healthcare and Professional Education segments is expected to be partially offset by revenue declines in U.S. Traditional Postsecondary and Technology and Business segments. Fourth quarter fiscal 2018 operating costs before special items are expected to be flat to up 1% compared to the prior year. We continue to focus on identifying efficiencies and realigning our cost structure. Fourth quarter expenses may be impacted by the timing of the receipt of insurance proceeds for the reimbursement of hurricane-related expenses. For the full 2018 fiscal year, revenue is expected to increase 1% to 2% compared to the prior year, and earnings growth from continuing operations before special items is expected to be in the 10% to 12% range. Our effective income tax rate from continuing operations, excluding special items, was 15.1% for the quarter, and we expect our full year tax rate to be in the 14% to 16% range. Now turning to our balance sheet and financial position. Cash flow from operations year-to-date was $183.3 million compared to $169.8 million in the prior year. Our cash and cash equivalents were $265 million at March 31, 2018, while outstanding bank borrowings were $120 million. In April, we successfully refinanced our credit facility replacing our $400 million revolving line of credit with a $600 million facility comprised of a $300 million revolving credit facility and a $300 million term loan facility. We used the net proceeds to pay down our existing debt, while further strengthening our financial position. Pro forma for the refinancing, we have a modest leverage profile of 1.2x. In association with the new facility, Adtalem received long-term credit ratings of Ba3 from Moody’s and BB+ from Standard & Poor’s. The new credit facilities allow us to access long-term capital with a deep investor base and extend our debt maturity profile, while enhancing our operational and strategic flexibility as we evaluate accretive growth opportunities. We are committed to maintaining a healthy balance sheet and ensuring we have ample resources to support our growth strategy. Our net accounts receivable was $169 million, an increase of 27% from the prior year, primarily related to Brazilian government changes in approving and distributing fee as loans as well as the timing of financial aid receipts at the medical schools due to hurricane-related processing delays. Year-to-date, bad debt as a percentage of revenue at 1.9% was compared to 2.3% last year. Our capital expenditures in the first 9 months of 2018 were $53 million compared to $30 million in the prior year. We’re targeting capital spending for fiscal 2018 to be in the $60 million to $65 million range, excluding hurricane-related spending, primarily driven by investments within our Medical and Healthcare and Technology and Business segments, including our new Chamberlain campus opening and our Ross Vet Research Building as well as facility improvement to enhance academic quality. During the quarter, we repurchased approximately 393,000 shares. For the first 9 months of the year, we repurchased approximately 3 million shares for $112 million, reflecting our confidence to execute our plan and continuing to create value for our fellow owners. Now, I’ll ask the operator to open the call for the question-and-answer session.

[Operator:]

[Operator Instructions] Our first question comes from the line of Peter Appert from Piper Jaffray.

[Kevin Estok:]

Hey, everyone. This is actually Kevin Estok in for Peter Appert. How are you doing?

[Lisa Wardell:]

Great.

[Patrick Unzicker:]

Well, Kevin. Thank you.

[Kevin Estok:]

So I guess, my first question has to do with margin leverage. I guess, I’m wondering how we should look at margin levels in 2018, and I guess, on a longer term? And I guess, where do you think the biggest opportunities are to drive that improvement?

[Patrick Unzicker:]

Sure. So maybe we speak from the opportunities first. We see very nice opportunity to drive improvement within our medical and veterinary schools, as we return to consistent and stable new student enrollment growth following the hurricanes. Increasingly, we see nice continued margin expansion at Chamberlain, as that university continues to meet very solid market demand for its programs and really leveraging its nice well-rounded campus structure of 21 and a very nice growth in the post-licensure structures are driving some nice flow there. And then, increasingly, as ACAMS continues to grow very asset-light nice margin business. So those from a qualitative perspective will be positive influences on our margin. And then with respect to kind of our longer-term perspective, we’ll be sharing those with our investors as well as the next week during our Investor Day on Wednesday in our 5-year outlook.

[Kevin Estok:]

Okay, great. Thank you. And my second question has to do with nursing enrollment. So congratulations on opening up the new site. And I guess, with that mind, how should we look at enrollments growth going forward in 2018 and so on?

[Patrick Unzicker:]

Sure. So – we based on our own analysis as well as on a mark-by-market basis, we feel very confident and consistent with our prior perspectives that we feel that new student enrollment growth at Chamberlain in the mid-single digits is very achievable.

[Kevin Estok:]

Okay. Thank you.

[Operator:]

Our next question comes from the line of Jeff Meuler from Robert W. Baird. Please proceed with your question.

[Nick Nikitas:]

Guys, you have Nick Nikitas on for Jeff. Thanks for taking the questions. Just first on the full year guidance. It looks like the EPS growth has maintained, the tax rate’s slightly lower. I know it’s not a big difference, but any additional color on the drivers or segments relative to where you were at previously?

[Patrick Unzicker:]

No. We’re pretty much intact. In fact, Medical and Healthcare are doing a little bit better than we had anticipated. And then, in Professional, I just have little bit of weakness in Becker, but net-net, we’re pretty much in line with where we wanted to be.

[Nick Nikitas:]

Okay. And then DVU, pretty impressive starts trends for now, I think, the second consecutive quarter. So anything you can say there? And I know the plan is to still get rid of it, but just what was going on in the end market and where you’re seeing some stronger trends?

[Lisa Wardell:]

Yes. So Nick, obviously, for us, as we said, transferring ownership to an owner that can really continue to drive. The turnaround is our goal there and obviously, focusing on those students, but I think this really goes to the questions we have for a couple quarters now and what we continue to say is we own it until we don’t own it. And it’s really impressive for us to see both the team driving this turnaround and getting this program differentiation right. And I think it helps us with all of you as we talk about our portfolio management that we’re really serious about when students are hour students, obviously, from the financial perspective there and just go now, but we take this seriously. And for us, that positions well for the new owners or faculty or colleagues and our students. So we are pleased to see it to.

[Nick Nikitas:]

Okay. Great. And then just last one on the Brazil processing delays. How much of an impact was that to starts in the quarter? And from conversations, and what you guys are hearing, would you expect that to no longer be an issue when you get to the fall enrollment cycle?

[Patrick Unzicker:]

Right. It did have an adverse impact on our very proud of the team for returning Adtalem Brazilian new student enrollment growth. But quite, frankly, we could have done better, but just given the lateness of when the contracts were announced and given the fact that the term had already started, we saw many students just saying, we’ll pick back up in the next session here or semester rather in late summer. And I’ve tried to kind of jam everything in such a compressed time period.

[Nick Nikitas:]

Okay. Yes, I thought that was a good number to see, given the underline. Okay, thanks for taking the questions.

[Lisa Wardell:]

Yes. Thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Lisa Wardell for closing remarks.

[Lisa Wardell:]

Yes, we’d like to thank you for your questions, and remind you that our next results call is scheduled for August 16 when we announce our fiscal 2018 fourth quarter and full year results. Thank you for your continued support of Adtalem Global Education.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.