Element Solutions Inc
Q4 2014 Earnings Call Transcript

Published: 2 Jun 2015

[Operator:]

Greetings, ladies and gentlemen, and welcome to the ITT Educational Services, Inc. Conference Call to review 2014 results. At this time, all participants are in a listen-only mode. A brief question-and-answer session of questions solicited in advance of the call will follow the formal presentation. As a reminder, this conference is being recorded. Joining us today from the management of ITT Educational Services, we have Kevin Modany, Chief Executive Officer; and Dan Fitzpatrick, Executive Vice President and Chief Financial Officer. Before we begin, ITT Educational Services, Inc. wishes to remind you that this conference call may include forward-looking information. Actual results may differ from the information presented during this call. For additional information, please review the section on forward-looking information contained in the news release dated May 29, 2015 or in the company's public filings with the U.S. Securities and Exchange Commission. Thank you. Mr. Modany, you may begin.

[Kevin Modany:]

Thank you, Operator. Good morning, ladies and gentlemen. Thank you for joining us on this conference call to review our 2014 financial results and other corporate matters. Joining me on the call this morning is our Executive VP and Chief Financial Officer, Dan Fitzpatrick. On the call today, we will discuss the financial results we released on Friday, our projected future payments under our guarantees and our business outlook for 2015. In addition, we will provide a quick update on estimated timing of the filing of our first quarter 2015 Form 10-Q, with the Securities and Exchange Commission We will also briefly discuss a few legal and regulatory matters and a few other business matters. At the conclusion of our prepared remarks, we will answer a few questions that we received from analysts in advance of the call. Let's start right into the main purpose for the call and provide a review of the financial results released last Friday. To do that, I am going to turn the call right back over to Dan Fitzpatrick, our Executive VP and Chief Financial Officer.

[Dan Fitzpatrick:]

Thanks Kevin. I would like to review a few of the financial statement highlights for 2014. Our consolidated financial statements as of and for the fiscal year ended December 31, 2014 include the results of operations, financial condition and cash flow of the CUSO and PEAKS Trust to variable interest entities that we were required to consolidate in our consolidated financial statements. Beginning on February 28 2013, our consolidated financial statements include the PEAKS Trust and beginning on September 30, 2014, our consolidated financial statements include the CUSO. The information that I will review regarding our financial condition, results of operations is on a consolidated basis, including the CUSO and PEAKS Trust, as of and following the applicable consolidation dates. However, the management discussion and analysis section of our 2014 Form 10-K that we filed last Friday contains certain information regarding our results of operations, financial condition and cash flows on a basis that excludes the impact of the CUSO and PEAKS Trust or what we refer to as core operations. We believe that core operations information to assist investors in comparing current period information against prior periods during which the CUSO and PEAKS Trust were not consolidated. In addition, we believe that the core operation information provides useful information to investors because it allows more meaningful information about our ongoing operating results, financial condition and cash flows. Thompson performing trend analyses and identifying trends that may not that may otherwise be masked or distorted by items that are not part of our core operations and provides a higher degree of transparency of our operation results and financial condition and cash flows. We encourage you to review the core operations data contained in MD&A section of our Form 10-K, which also includes the reconciliation of the core operations' data to our GAAP consolidated financial measures. With that being noted, let us move on to a quick review of some of the key financial metrics from 2014. In the year ended December 31, 2014, revenue decreased by approximately $110.5 million or 10.3% to $961.8 million compared t o $1,072.3 million in the year ended December 31, 2013. The primary factors that contributed to this decrease were an increase in institutional scholarships and awards provided to our students, which reduced revenue by approximately $90.6 million in the year ended December 31, 2014 compared to the prior year and an average 6.2% decrease in total student enrollment in education programs as of the end of each fiscal quarter in 2014 compared to 2013. Cost of educational services decreased $25.6 million or 5.3% to $460.8 million in the year ended December 31, 2014 compared to $486.4 million in the year ended December 31, 2013. The primary factors that contributed to this decrease included decreases in compensation costs and benefit costs resulting from fewer employees and a decrease in occupancy cost as a result of fewer physical locations and our proactive efforts to right-size our campus facilities, be a reduced square footage. To add a little more color on our rightsizing efforts, we should note that as of May 29, 2015, our comprehensive facility network, inclusive of our headquarters facility, consisted of approximately 3.8 million square feet of space as compared to approximate 3.9 million square feet as of December 31, 2013. The previously noted decreases and the factors that contributed to the decline in our cost of educational services were partially offset by an increase in the cost of electronic devices issued to our students as part of a transition from physical to electronic books. Student services and administrative expenses decreased by $8.4 million or 2.1% to $389.1 million in the year ended December 31, 2014 compared to $397 million in the year ended December 31, 2013. The principal causes of this decrease were decreases in compensation costs, benefit cost and bad debt expense. Of note, legal and professional fees related to certain lawsuits, investigations and accounting matters, increased $25.1 million or 362.3% to $32 million in the year ended December 31, 2014, compared to $6.9 million in the year ended December 31, 2013. Additionally, we recorded a provision for private education losses, loan losses of approximately $14.2 million in the year ended December 31, 2014 compared to $29.3 million in the year ended December 31, 2013. The loan loss provision recorded in 2014 represented an increase in the allowance for loan losses on the PEAKS Trust student loans that occurred from January 1, 2014 through December 31, 2014, and an increase in the allowance for loan losses on the CUSO student loans that occurred from September 30, 2014 through December 31, 2014. Operating income increased $0.1 or 0.1% to $61.3 million in the year ended December 31, 2014 compared to $61.2 million in the year ended December 31, 2013, primarily as a result of the impact of the change in revenue, cost of educational services, student services, administrative expenses, as previously discussed, as well as material increase in the legal and professional fees related to certain lawsuits, investigations and accounting matters and the decrease in the provision for private education loan losses. Diluted earnings per share for the full-year ended December 31, 2014 was $1.23 compared a loss of a $1.15 per diluted share for the year ended December 31, 2013. Cash and cash equivalents were approximate $135.9 million as of December 31, 2014 compared to $215.8 million as of December 31, 2013. The approximate $79.8 million decrease in cash and cash equivalents as of December 31, 2014 compared to December 31, 2013 was primarily due to payments totaling approximately $170.3 million related to our obligations under the PEAKS guaranty and CUSO RSA providing cash collateral of approximately $89.3 million which is principally related to the outstanding letters of credit issued to the Department of Ed, and the repayment $50 million of outstanding borrowings under our prior credit agreement. The reduction in cash and cash equivalents as of December 31, 2014 compared to the same day in 2013 was partially offset by the proceeds from borrowings under our new financing agreement of approximately $100 million, excluding $3 million of commitment fees paid to the lender and net cash flows from operating activities of approximately $136.8 million. Based upon various assumptions, including historical and projected performance and collection of the PEAKS Trust and CUSO student loans, we believe that we will make payments under the PEAKS and CUSO guarantees of approximately $44.2 million in 2015, $20.2 million in 2016, $17.6 million in 2017 and $94.1 in 2018 and beyond. The amount estimated to be paid in 2018 and beyond of approximate $15.3 million related to the PEAKS guarantee and approximate $78.7 million related to the CUSO RSA. We believe that the $15.3 million related to the PEAKS guarantee will be paid in 2020. We believe that the vast majority of the $78.7 million of estimated payments to be projected to be paid after 2017 under the CUSO RSA will be made by us in 2018. The estimated future payment amounts and timing related to the CUSO RSA assume among other factors that we do not make discharge payments in 2015, 2016 or 2017 other than the $2.7 million discharge payment that we made in March 2015, pursuant to the terms of the Fifth Amendment of the CUSO RSA and we do makes discharge payments to the fullest extent possible 2018 and later years. If we do not make discharge payments under the CUSO RSA assumed in 2018 and later years, we estimate that we would make approximately $100.3 million of regular payments under the CUSO RSA in 2018 through approximately 2026. We are economically advantageous. We may look for opportunities to make CUSO discharge payments. They may increase the total RSA payments noted above in certain years. However, only so as not to exceed the maximum allowable annual amount of all RSA payments for our financing agreement which is $35 million for each 2016, and 2017. We also had debt service and principal repayment obligations under our financing agreement. We estimate that in 2015 the amount of those cash payments obligations will be approximately $19.3 million. Moving on to some Department of Education or ED metric, based upon our 2014 fiscal year consolidated financial statements, we believe our institutions' composite score was above 2.0 in 2014. An institutions' composite score is a significant financial responsibility measurement of the ED, and must be at least 1.5 for an institution to be deemed financially responsible by the ED, without the need for further oversight. Taking a look at 90/10 compliance, we projected that in the aggregate, we derived approximately 80% of our revenue in 2014 and 82% of our revenue in 2013 and Title IV programs under the ED's 90/10 Rule calculation. In addition, based upon the current status of our efforts to complete the 2014 compliance audit of our institutions administration of the Title IV programs in which they participate we believe that the 2014 compliance audits should be completed prior to the ED's June 30, 2015 deadline. We also noted in our release on Friday, that we have entered into a consent agreement with our lenders under our financing agreement which extends to June 15, 2015, the deadline by which we are required to deliver to the lenders the financial statements and related information for our fiscal quarter ended March 31, 2015. Based upon our current estimates, we believe that we will file our first quarter 2015 Form 10-Q with the Securities and Exchange Commission on or before June 15, 2015. Having said that, due to the uncertainty around the timing of completion of the necessary reviews and analyses, we cannot and do not provide assurances that the filing will be completed on the estimated timeframe. Now, before I turn the call back to Kevin, I would like to note that our focus remains two-fold. First and foremost, maintaining our priority focused on the needs of our students. As they progress through all phases of the program of study and the demands of the employer who hire them, second, managing the cost of our business and rightsizing it in a very measured and methodical way in an effort to remain efficient through the new student enrollment headwinds. I believe that you will see this two-tiered focus evidenced in our 2015 business outlook that we summarized in this past Friday's press release and that Kevin will review with you in a moment. At this point, I would like to hand the call back over to Kevin, who will provide a quick look at the business outlook for 2015 as well as a review of other matters.

[Kevin Modany:]

Thanks Dan. Noting that we are already close to halfway through the current year, I would like to review our business outlook for 2015 at a macro level. We should note that we continue to experience volatility in new student enrollment and a lack of transparency in the front end of our business. These factors make it very difficult to predict with a high degree of accuracy our new student enrollment for future periods. We have been generally pleased with the volume of student inquiries we are receiving in comparison to our marketing plan. However, we have experienced a decline in the rate of conversion of prospective new student inquiries to new student enrollments as compared to your expectations included in our marketing plans and our historical results. With that in mind, factoring in the currently available data, we believe that student enrollment for the June 2015 intake period to range between down 14% to down 18% compared to the same period in the prior year. As of May 30, 2015, new student applications, net of cancellations for students beginning their studies with us starting with the upcoming June 2015 academic period or down 14% compared to the same point in the prior year for students who applied to [ph] begin their program of study in the June '14 academic period. We regularly evaluate the size and sustainability of our campus facilities and related operations as necessary and appropriate given changing student events. As of May 29, 2015 135 of our campus locations were actively enrolling new students for the academic period that begins in June 2015 compared to 140 campus locations that were actively enrolling students as of the same day in 2014 for the academic period that began in '14, and 145 campus locations that were active enrolling new students as of the same date in 2013 for the academic period that began in June 2013. Based on our analysis of prospective student demand by market as well as other considerations, we voluntarily discontinued enrolling new students at these impacted campus locations. Keeping in mind the lack of visibility in student enrollment trends, we estimate new student enrollment for the full-year 2015 to be down 10% to 15% compared to the full year 2014. Assuming our student enrollment estimates are realized and there no material changes in our student retention metrics for the remainder of '15 as compared to '14, we would project earnings before interest, taxes, depreciation and amortization or EBITDA for the 12 months ended December 31, 2015 to be in the range of $90 million to $110 million. Please note that projected EBITDA is a non-GAAP financial measure and that the reconciliation for the projected net income is included in the press release that we issued on May 29, 2015 and is also on our website at www.ittesi.com. At this point, we would like to move on to talk a little bit about a few other legal and regulatory matters. Specifically, I would like to touch briefly on the SEC complaint that was filed against the company and two of its executives on May 12, 2015. The organization very much looks forward to presenting the actual facts of this case in front of a neutral party for the very first time. Aside from the company's previously disclosed comments on this matter, we have nothing further to add today. In addition, we have nothing material to report on the ongoing AG investigation and/or the CFPB litigation. We continue to cooperate with the AGs involved and intend to continue doing so going forward. For information on the legal regulatory matters, please refer to the 2014 Form 10-K that we filed on Friday, May 29, 2015. At this point, I would like to provide you with a brief update on our graduate employment metrics as of May 29, 2015, the graduate employment rate of our 2015 ITT Technical Institute employable graduates was approximately 30 basis points higher than the graduate employment rate for our 2014 ITT Technical Institute employable graduates as of the same day in 2014. As of May 29, 2015, the average annual salary reported by our 2015 ITT Technical Institute employee graduates increased approximately 7% compared to the average annual salary reported by our 2014 ITT Technical Institute employee graduates as of the same day in 2014. We continue to see solid trends in employer engagement with our national and campus career services professionals and the total number of job orders that we are receiving from the employers in our network. We are very pleased with the recent improvement in the outcome metrics in our graduates. While we continue to experience volatility in our new student recruitment efforts, the volume and frequency of the interactions with our national employer network is an encouraging sign regarding the market applicability of our institutional offerings. We are focusing our efforts on our communications to prospective students to inform them of these changing employer trends and to help address any misperceptions regarding employer demands, particularly in technology and healthcare related disciplines. Moving on, we recently received our preliminary cohort default rate data for the 2012 cohort. We are very pleased to report that for the third year in a row, there was year-over-year improvement in the average combined CDR for institutions. Our preliminary average combined institutional rate for the 2012 cohort was 18.8% compared to the final average combined CDR for the 2011 cohort of 22.1%. Our preliminary average 2012 cohort CDR of 18.8% compares very favorably to the preliminary average three-year CDR for the 2012 cohort reported for community college, which serve a very similar demographic as ITT Technical Institute of approximately 21%. We believe the continued improvement in our CDR rate is reflective of the various measures that we have implemented over the past several years, including those intended to increase the student value proposition of an investment and an ITT Technical Institute education. Specifically related to these efforts, we have materially increased the amount of institutional scholarships awarded over the past several years, with more than $260 million in institutional scholarships awarded in 2014 alone. As a result, virtually none of our students rely on private student loans to finance their education based on available information, our commitment to helping students reduce their debt and increase their return on their educational investment does not stop that. After four years of no tuition increases, we instituted a tuition rate freeze in 2014 that remains in place today. Through these actions, the average total debt of an associate to re-graduate has been reduced by approximately 25% from just five years earlier. Student pursing an associate degree make up approximately 85% of our population. We expect to continue to maintain and enhance our focus on student outcomes and their overall return on their investment in an education with ITT Technical Institute. However, we are very pleased with the progress we have made on this front over the past several years and we believe it is beginning to show on various metrics such as our consolidated CDR. Lastly, as anyone [ph] the company knows, we have been through a couple of tough years managing the ever-changing legal and regulatory environment, the implementation of an extremely complex accounting standard, the unpredictable enrollment environment and other economic variables. I am extremely proud of the work of our team in managing through these difficult times and I would just like to take this opportunity to thank each of them for their hard work and their dedication to their students and employers who hire them. We believe the institution is making solid progress in managing through these experiences and remain very excited about the future prospects for the company. As you can tell from our 2015 business outlook, we are projecting a strong year of EBITDA generation as a result of our continued efforts on maintaining an efficient operation, rightly sized with our students demand incentives and we believe we are well positioned to address the volatility in the postsecondary education market given our focus on program disciplines that remain in strong demand, by the employers who hire our graduates. At this point in the call, we will address questions that we have received in advance from the investment analysts that cover our company. Our first question relates to the recent deceleration in a new students starts and whether or not given easier year-over-year comps starting in Q2 '15, if we believe the first quarter '15 enrollment trends will represent the trough for new starts declines in fiscal year '15 and considering our 2015 internal goals. While the second half of the year does present an opportunity to see an improvement in the year-over-year comparison for new student enrollment given easier comps, that is why we have so much uncertainty and volatility in the market and other impactful variables, we are stopping shorter predicting improving trends in the second half of '15 versus the first half the year when comparing each quarters new student enrollments results for the same prior year results.

[Dan Fitzpatrick:]

Our next question related to tuition pricing noted that pricing headwinds appear to be moderating over the last couple of quarters, what is the outlook for pricing both, near-term and longer-term. At this point, we do not have any plans to increase tuition pricing and as we noted, we have currently have a tuition freeze in place. We believe that we have make positive strides to help the efforts of our graduates to manage their debt levels and their opportunity to experience a strong return on their educational investment at least in the near-term you would not want to model any expectation for a tuition increase.

[Kevin Modany:]

The next question related to our 2015 internal goals for EBITDA and noted that the target suggest meaningful cost reduction in the face of enrollment headwinds. Where at the greatest points of cost savings within the model and how much room remains for additional cost reduction if revenue continues to be pressured. Is the current margin profile approximately 10% EBITDA margin sustainable near-term? Well, as we noted in our earlier remarks, we remain focused on student needs and outcomes as well as managing our institutional costs. You see the focus clearly reflected in the 2015 EBITDA estimate. There are few areas that create some opportunities for cost reduction versus the prior year related to legal and regulatory costs from rightsizing costs that we incurred in the prior year related to our facilities and few other expenditures. As far as the sustainability to EBITDA margins, we are not providing any guidance or forward-looking estimates beyond what we discussed for our 2015 internal goals at this time.

[Dan Fitzpatrick:]

Next question, revenue per student has been around down 1% year-over-year in the second half of 2014. What are we to expect for modeling purposes in 2015, more the same? Low single-digit declines year-over-year? Well, we are projecting a little bit of a movement in each quarter for the remainder of 2015. However, for the full-year '15, we believe that the revenue per student may be fairly consistent with the prior year.

[Kevin Modany:]

We received another question regarding 2015 internal EBITDA. I noted that our goal suggest a fairly wide range of possible outcomes between up 2% to up 25%, what must occur to reach the high end. Well, there are several variables that impact the range, at least which is the volatility in our enrollment. As we noted, we estimate new student enrollments for the full-year of 2015 to be down 10% to down 15% compared to the prior year. Obviously, the closer we land towards the better end of our new student enrollment range, the more likely we are to land closer to the high range of the EBITDA range. Additionally, where we related in the range of projected 2015 EBITDA will be further impacted by the somewhat unpredictable nature of the legal and regulatory environments and the related costs.

[Dan Fitzpatrick:]

Last question, as it relates to the income tax assumptions included in your range in estimated 2015 EBITDA, can you advise as to what tax rate you are utilizing in those estimates? We are estimating a 40% effective tax rate in the model that generated the estimated 2015 EBITDA raise that we disclosed on Friday and have discussed here today. You can see that the reconciliation of the EBITDA that we provided in our release on Friday and it is also included on our website at www.ittesi.com.

[Operator:]

A -

[Kevin Modany:]

At this point, we have concluded our prepared comments and the Q&A portion of the call. We would like to thank all of you for participating in the call today and we look forward to talking with you again soon. Operator, you can now disconnect the lines.

[Operator:]

Thank you, sir. Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.