Q3 2022 Adtalem Global Education Inc Earnings Call

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Greetings and welcome to the third quarter of fiscal year 2022 earnings call for US all of them Global education.

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note that this conference is being recorded I will now turn the conference over to your host <unk> undergone senior director of Investor Relations you may begin.

Thank you.

I'd like to remind you that this conference call will contain forward looking statements within the meaning of Safe Harbor provision private Securities Litigation Reform Act of 1995 with respect to the future performance and financial condition of Vince Adam Global education that involve risks and uncertainties.

Actual results may differ materially from those projected or implied by these forward looking statements.

Potential risks uncertainties and other factors that could cause results to differ are described more fully in item one a risk factors of our most recent annual report on Form 10-K filed with the SEC and other filings with the SEC.

Any forward looking statements made by US is based only on information currently available to us.

Speak only as of the date on which it was made.

We undertake no obligation to publicly update any forward looking statement, whether written or verbal that may be made from time to time, whether as a result of new information future developments or otherwise except as required by law.

During today's call our commentary will reference to non-GAAP financial measures, which are intended to supplement though not substitute for our most direct comparable GAAP measures. Our press release, which contains the GAAP financial and other quantitative information to be discussed today as well as the reconciliation of GAAP to non-GAAP measures.

It is available on our website.

Please note that all financial results and comparisons made during today's call are a continuing operations basis exclude special items and are in comparison to the prior year period, unless otherwise stated.

Dennis phone and web cast replay of today's call are available for 30 days to access the replay please refer to today's press release.

We will begin today's presentation with prepared remarks from Steve.

President and Chief Executive Officer, and then tier from Bob Failla, Senior Vice President and Chief Financial Officer.

Following the prepared remarks, we will have a question and answer session.

With that I'll now turn the call over to Steve.

Thank you <unk> good afternoon, everyone and thank you for taking the time to join our third quarter fiscal year 2022 earnings call today.

On our second quarter call back in February I highlighted several key action items for the third quarter.

I am pleased to report that we successfully delivered on each of them.

Specifically.

We completed the divestiture of our financial services segment for $1 billion.

We deployed $770 million of the net proceeds to repay debt.

<unk> reduced net leverage of one seven times.

But building on our commitment to delever to less than two times within 24 months of Walden close and in fact, we did at 18 months earlier than promised.

Simultaneously, we initiated a $150 million accelerated share repurchase program using existing cash.

The company's board of directors authorized open market share repurchases.

Up to $300 million over the next 36 months.

Finally, we continued progress on the integration of Walton with a focus on realizing cost synergies and implementing a new more efficient operating model to support future growth.

These actions taken together allow us to sharpen our focus on the attractive healthcare education space.

With the goal of becoming the leading provider of professional talent to the healthcare industry.

We now have appealing opportunities for market segmentation across our five leading brands.

And the ability to engage leading healthcare systems and other employer partners.

Through our market, leading breadth depth and scale.

With our sharpened focused strengthened balance sheet and clarity of purpose.

We are well positioned to deliver substantial value to all of our stakeholders.

Now, let's take a closer look at highlights for the third quarter.

Our performance in the quarter was within our expectations as we recorded total enrollments up 82174 students.

Resulting in revenue of 365 million $365 $6 million.

And expanding operating margins by 320 basis points year over year, despite lingering macroeconomic headwinds.

We also reported adjusted EPS of <unk> 87.

Which was 45% higher than the third quarter in the prior year.

During the quarter, we continued to successfully rationalized our cost structure, while making targeted investments and enhanced capabilities.

We remain on track to meet or exceed our target of delivering $30 million from cost synergies by the end of fiscal 2022.

All while positioning the portfolio for sustainable momentum going into fiscal 'twenty three.

We continue to make progress in deploying the new operating model that I discussed in my comments during the second quarter call.

Among other attributes this model focuses on the strategic use of shared services.

Our redesigned marketing function.

And enhanced customer experience capabilities.

I'm pleased to report that during the quarter, we introduced an enhanced marketing function poised to better serve the entirety of our portfolio through.

Through a dynamic and data driven allocation of investment a renewed focused on brand.

And better connectivity to conversion and enrolling.

Our customer experience team also made good progress in the quarter on harmonizing the data we use to track student engagement across our institutions.

With the goal of delivering predictive insights that our faculty can leverage to drive improved persistence.

In addition to executing on our operating model. We also made a critical leadership higher during the quarter with the appointment of Cheryl James Senior Vice President and Chief Human Resources Officer.

The unprecedented challenges faced by companies today to attract retain and engage talent have elevated the role of human resources and creating thriving organizational cultures.

Sheryl is a proven executive and talent strategies with a track record of enhancing competitive advantage in attracting and retaining talent. While also driving the change management and cultural shifts necessary for the full scale operating model rollout that we're currently undertaking.

Cheryl also has considerable experience in enhancing the impacted diversity equity and inclusion programs.

Look forward to her elevating our already robust dei profile.

I am confident that our family of institutions will benefit immensely from the years of leadership experience Cheryl break store teams and.

In addition to our affinity for our mission and a commitment to performance excellence.

Will benefit all of our stakeholders.

With respect Commission.

The third quarter saw more evidence of our commitment to academic quality and strong student outcomes.

The combined first time residency attainment rates at our medical schools were among the highest we've enjoyed in the time we've operated these institutions.

The American University of the Caribbean School of Medicine achieved 96%.

While the Ross University School of Medicine achieved 95%.

In addition, our institutions helped more than 700 current and former graduates in our U S residency programs in 2022.

I'm extremely proud of these accomplishments and our leadership team's continued focus on maintaining high academic quality.

And strong student outcomes.

Taken together our outcomes in the quarter bolster my confidence in our ability over the long term.

To expand the value we create for students to.

To make an outsized impact on addressing the product workforce shortages in health care.

And in doing so closing the gap between our market capitalization and intrinsic value.

We will be providing guidance for fiscal 'twenty, three and to our next earnings call.

Let me offer some preliminary observations on key factors for the next fiscal year.

First as I noted above.

When the negative effects of the pandemic on our industry begin to wane.

And we returned to a more normalized demand environment.

We anticipate improved enrollments across our institutions.

From a profitability perspective, we will begin fiscal 'twenty three with run rate cost synergies from the integration of world in which remain on track.

Would he remains an instrumental catalyst in the transformation we're undertaking.

As we look to realize the benefits of its unique capabilities its breadth of programs and an attractive set of cost and revenue synergy opportunities.

In addition.

We will have a full year of benefit from the savings on interest expense as a result of deleveraging our balance sheet.

We remain committed to our capital deployment priorities of repaying debt.

Returning capital to shareholders.

And continuing to invest in the core business as the demand environment recovers.

And finally as it relates to the regulatory environment.

Our entire strategy over the past six years has been to shift our focus to programs.

With national standards and outcomes validated by third parties.

Where the return on investment for the students and the taxpayer is most attractively tangible.

While we expect the administration to continue its focus on greater accountability for the for profit sector.

We believe we are well served by our positioning and our outcomes.

Our student commitments adopted in 2016 are independently reviewed on an annual basis.

We're proud of our student outcomes as measured by the same objective measurable standards, it's not perfect not for profit institutions.

Such as the U S and the Lee and clicks and Natalie pass rates.

And our cohort default rates are among the lowest in all of higher education.

And then I'll discuss our expectations and assumptions for the balance of our fiscal year.

Let's begin with the summary of our financial performance during the quarter, starting with the top line.

Revenue in the third quarter increased 58, 8% to $365 $6 million compared with the prior year driven by the acquisition of Walton.

Consolidated operating income excluding special items in the third quarter was $76 $5 million, an increase of 87, 4% compared with the prior year due to the addition of Walden and operating efficiencies.

We continued to expand our operating margin, 29%, an increase of 320 basis points compared to last year, driven by the operational efficiency and realization of cost synergies associated with the Walter and integration.

Net income from continuing operations, excluding special items was $42 $8 million and 39, 5% increase compared with the prior year driven primarily by higher operating income from Walden.

Diluted earnings per share excluding special items for the quarter was 87 and.

An increase of 45% compared with the same period in the prior year.

Next I will discuss the highlights of the third quarter by segment.

The Chamberlain segment reported third quarter revenue of $142 $6 million, a decrease of two 6% when compared with the prior year.

And operating income of $37 million up 2.4% from $36 1 million in the prior year.

The increase in operating income was primarily the result of lower labor and other operating expenses.

Total student enrollment during the quarter decreased four 3% compared with the prior year, which was primarily attributable to COVID-19 related headwinds in our post licensure programs.

A crime surge coincided with the January intake leading to fewer new starts.

Total pre licensure enrollment continues to grow driven by improved persistence.

Turning to wall than revenue in the third quarter was $139 $1 million the.

Segment operating loss was $2 $9 million, driven primarily by an intangible amortization expense.

Segment operating income, excluding special items was $26 $2 million.

Total student enrollment during the quarter decreased eight 4% compared with the prior year due to COVID-19 related headwinds in our post licensure programs as a recent surge further burdened nurses leading to fewer new starts.

Post licensure nursing and non health care focused programs experienced the most significant headwinds, while social and behavioral science programs continued to perform relatively well.

We expect the COVID-19 headwinds to subside over time and believe that demand for nurses will continue to outpace supply over the long term representing strong growth opportunities for us in the future.

In our medical and veterinary segment, both revenue and operating income were relatively flat year over here at $84 million and $14 $9 million respectively.

Segment operating income excluding special items was $19 $5 million, an increase of 31% compared with the prior year driven by overall cost reduction efforts.

Total student enrollment decreased one 2% compared with the prior year, which was primarily attributable to COVID-19 related headwinds.

But the ongoing abatement of COVID-19, we're expecting a more favorable environment for enrollment in this segment, while we continue to focus on our cost savings initiatives to improve the profitability of the schools.

And as Steve has mentioned in his remarks, we are incredibly proud of the strong first time residency attainment rates at both medical schools.

Now, let's turn our focus to cash flow balance sheet and capital structure.

Net cash provided by continuing operations was $77 $4 million.

Our capital expenditures for the quarter totaled $7 $5 million as a result free cash flow in the third quarter was $69 $9 million.

As a reminder, we define free cash flow as cash provided by continuing operations less capital expenditures.

During the quarter, we accomplished significant milestones in our financial strategy. We completed the divestiture of the financial services segment for $1 billion with the goal of maintaining our focus on our core assets and we have already used the net proceeds from the sale towards repayment of debt.

While $397 million of our term loan B was paid down third quarter. In April we also purchased $373 million of our senior secured notes.

As a result total debt was one point to $5 billion as of March 31, reflecting a significant reduction of 24% or $397 million during the quarter and a further reductions from our purchase of senior notes will be included in our Q4 results, which will then reflect the reduction in.

Debt of approximately 47% or $770 million.

These actions provide additional liquidity and reduced our interest costs, thereby enhancing operational and strategic flexibility.

We expect annualized interest expense savings of approximately $40 million as a result of paying down the $770 million in debt.

Our balance sheet is strong and our leverage is significantly lower at the end of our third quarter.

Focusing on our commitment to reducing a significant gap between the intrinsic value of our assets and our equity market capitalization.

We repurchased $4 7 million shares of the company's common stock for $150 million and an accelerated share repurchase agreement using existing cash.

In addition, our board of Directors also authorized open market share repurchases of up to $300 million of the company's common stock over the next 36 months.

Which would be funded by existing cash and future free cash flow.

In summary, with a strong balance sheet and free cash flow.

We're very well positioned financially to continue to pay down debt and return capital to shareholders, while investing in growth and productivity initiatives across our businesses.

Turning to our outlook for the balance of fiscal 2022.

We reaffirmed our guidance for revenue and raised our guidance for adjusted diluted earnings per share for the full year.

We expect adjusted revenue to be within the range of 1.35 billion and $1 three 9 billion and adjusted diluted earnings per share of $3 15 to.

The $3 35.

From continuing operations, excluding special items.

Our full year guidance was raised due to the lower interest expense as a result of paying down debt and reduced share count from the execution of our accelerated share repurchase program.

In conclusion, our energies are focused on accelerating our growth improving our execution and allocating our capital wisely well.

We are moving forward with sustainable operational and financial improvements that will yield benefits for years to come.

With that I will now turn the call over to the operator for Q&A.

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One moment, please while we poll for questions.

Our first question is from Jeff Mueller with Baird. Please proceed with your question yes.

Yeah. Thank you good afternoon.

So I know new enrollments nowadays.

<unk> metric from a quantified perspective anymore, but.

I guess there were some references to the environment and I heard you expect a more favorable environment Army card was a headwind obviously, we're past that.

And hopefully we don't have more ways, but we've heard from some others in the space that do report new enrollment that they've seen some improved trends or we've heard from others or better demand. Just can you kind of like shape up the current state of the environment. The last month or two after the army Crown headwind subsided are you seeing any improvement.

Yes.

Kind of a current environmental update please.

Sure.

Thanks for the question.

I don't think were seeing anything that we would be prepared to call a trend.

But we're cautiously optimistic that what we're seeing by way.

Inquiries and interest in our programs, what we're hearing anecdotally from our employer partners at hospitals and health systems are suggesting that we may.

Yeah on the cusp of.

Wayne in sort of the lagging a tailwind related to COVID-19.

But nothing.

We're ready to call. This a trend just yet, but we're optimistic that the worst of it is behind us.

And on capital allocation just.

I understand kind of the categories of business investment debt repayment repurchases I want to ask about the debt repayment versus repurchases as you said you.

Hit your deleveraging target with the sale proceeds ahead of the original plan and I get that you find your stock attractive so.

Is there a steady state leverage target or.

How are you thinking about debt repayment I would've thought there would have been more focus on repurchases now that you've de levered.

Yeah, I'll start and I'll, let Bob jump in.

Our first priority was meeting our commitment to get below two times net leverage which we've done.

Obviously, we think there's opportunities for additional debt repayment down the road, we're obviously in the middle of.

Wrapping up hopefully soon the accelerated share repurchase.

And I think how we strike the balance of capital allocation between debt repayment and share repurchases is really going to be a reflection.

The market conditions around the equity and the cash needs of the business, but I'll, let Bob elaborate on that.

So the only thing I would add to that Steve I agree with what you said is just that over the near term.

Still in the market in terms of the accelerated share repurchase program. So I would expect near term that it would be more of an allocation towards repayment of debt.

Okay.

And then just last from me on the marketing program I get that it's relatively recently rolled out. So this might be a better question in a quarter or two but any anecdotes you can provide on the effectiveness of the the new approach.

So it starts with having a world class Chief marketing officer on board and in the form of <unk>.

Who I think is doing a fantastic job to bring a more customer centric outcomes focused and data driven approach to marketing I think one of the more important elements of that is that we've sort of broken down the wall between marketing and enrollment.

So that we've got.

No leakage, if you will going forward in what happens between the time leads come into the system and all of the mechanisms around conversion so too early to call. It but the early indications are really really positive and I as the company's CEO and really go.

Ratified to have much more data.

Gtt's where costs modify the return on investment we have with marketing spend so more to come on that but I am excited about it.

Okay. Thank you.

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It looks like we have reached the end of the question and answer session and I will now turn the call over.

So Stephen Barrett for closing remarks.

Great I just want to take a moment to thank all of our colleagues across the talent portfolio.

It's been a fantastic eight months for me in the seed I've been really really impressed.

By the way folks have a galvanized around this new corporate identity focused on health care.

And I think are the best days for the company are ahead of us. So I'm, just really grateful for the support I've gotten internally so.

Thank you to everyone have that talent.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

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