Adtalem Global Education Inc (ATGE) 2023 Q3 法說會逐字稿

Greetings, and welcome to the Third Quarter Fiscal Year 2023 Earnings Call for Adtalem Global Education. (Operator Instructions) As a reminder, this conference is being recorded.

And it is now my pleasure to introduce to you, Jay Spitzer, Vice President of Investor Relations. Thank you, Jay. You may begin.

Good afternoon, ladies and gentlemen, and welcome to our earnings call for the third quarter of fiscal year 2023. On the call with me today are Steve Beard, President and Chief Executive Officer; of Adtalem Global Education; and Bob Phelan, Chief Financial Officer.

Before I hand the call over to Steve, I will, as usual, take you through the legal, safe harbor and cautionary declarations. Certain statements and projections of future results made in this presentation constitute forward-looking statements that are based on current market, competitive regulatory expectations and are subject to risks and uncertainties that may cause actual results to vary materially.

We undertake no obligation to update publicly any forward-looking statement after this presentation, whether as result of new information, future events, changes in assumptions or otherwise. Please see our latest Form 10-K and Form 10-Q for a discussion of risk factors as it relates to forward-looking statements. In today's presentation, we'll use certain non-GAAP financial measures.

We refer you to the appendix in the presentation materials available on our Investor Relations website for reconciliations to the most directly comparable GAAP financial measures and related information.

You will find a link to the webcast on our Investor Relations website at investor.adtalem.com. After this call, the presentation webcast will be archived on the website for 30 days.

I will now hand the call over to Steve.

Thanks, Jay. Good afternoon, everyone, and thank you for taking the time to join our third quarter fiscal year 2023 earnings conference call. Third quarter was another solid quarter. Revenue returned to growth up 1.3% to $369 million with adjusted earnings per share coming in at $1.13, up 34.5% versus the prior year. We maintained a position of financial strength, returning $48 million in capital to our owners in the quarter against our Board authorized $300 million share repurchase program. This is in addition to the already executed $150 million ASR program initiated in fiscal '22 as well as the reduction of $151 million in long-term debt year-to-date.

Before I go into the progress that we made in the quarter, I want to take a step back and discuss the philosophy that underpins our strategic transformation. The U.S. health care system is under a midstream. In a survey conducted by the American College of Healthcare Executives in February, hospital CEOs ranked workforce challenges, including personnel shortages and burnout as their #1 concern. And there's broad consensus across the health care industry that critical shortages and clinical talent will only grow in coming years.

The adverse impact of these shortages is even more acute in under-resourced communities, both urban and rural. Health care spend as a percentage of GDP, remains at all-time highs. The cost of care is rising, patient out-of-pocket expenses are increasing and provider scarcity is leading to alarming delays in care.

As we at Adtalem rationalized our portfolio of assets, we recognized an attractive opportunity to be a scaled solution in the effort to address the critical workforce challenges facing the industry. And to integrate and grow a family of institutions that taken together, are systematically important to the U.S. health care infrastructure.

Our acquisition of Walden University was an important component in our effort to address this opportunity. It increased our scale in nursing, it gave us access to highly attractive and in-demand programs in the social and behavioral sciences, and it brought us enhanced capabilities in distance learning and student support. At the same time, it served another equally important role as the catalyst for a wholesale reimagining of how we enhance and take to market our legacy Adtalem institutions.

In the wake of that catalyst, we initiated programs to create stronger connectivity across our institutions, making it easier for them to share best practices and learn from one another. This includes cross curating and codeveloping curricula. We made an enterprise-wide commitment to operational excellence, optimizing our cost structure and creating centers of excellence with economies of scale and our critical value-driving capabilities, specifically marketing and customer experience.

We also recognized that we have to get the base right in order to grow sustainably into the future. to invest at scale in new innovative student learning tools, expand existing programs and create new programs for in-demand professions requires disciplined cost management and the creation of real and durable operating leverage in the model. And at each stage of the journey, we've retained an unwavering focus on our students and the need to enhance their academic experience and help them realize their professional ambitions.

I'm encouraged with the progress that we've made over the last 1.5 years. The entire organization is executing against our strategic transformation initiatives, and we fully expect to deliver our 2-year $60 million cost synergy target by the end of this fiscal year. But the work doesn't end with integration and cost synergy capture. As we move to the next phase of driving operational excellence across the organization, we're unlocking opportunities for sustained profitable growth.

We're improving execution across critical value drivers making sustainable investments in the value proposition of our institutions through in-demand programs and enhanced academic outcomes, which are just a few of the underpinnings of our growth with purpose program.

In the third quarter, we made significant progress against initiatives focused on sharpening our brand promise and expanding our brand awareness. We continue to scale our marketing capabilities, optimizing and deploying our media spend against those channels that we believe will yield the highest long-term returns.

We launched a new brand campaign for Chamberlain in January and have seen positive leading indicators, including increased inquiries for that institution. We also recently launched a new campaign for Walden at the beginning of April that highlights its unique value proposition.

Many of our students are balancing competing time commitments in their daily lives from family obligations to full-time jobs. We're committed to creating a seamless student experience meeting our students where they are and providing innovative tools, which we believe maximize their ability to achieve academic success and realize the professional ambitions.

By way of example, we recently implemented SMS texting between our enrollment specialists and our students. Since the launch in December, we're averaging about 27,000 texts per month. Further, we're investing in additional training for a student-facing specialists to better guide our students on the next steps in their academic journey.

Looking at our segments. We saw increases in year-over-year total enrollment at Chamberlain and Med/Vet, offset by declines at Walden. Beginning with Chamberlain, we believe that our strategic efforts are beginning to bear fruit.

Our credited pre-licensure BSN program is now being offered online in 22 states. And this online version, which launched 2.5 years ago, currently has over 500 students enrolled in the program today.

This is an example of our unique ability to scale quickly at a multistate level through our trusted institutional brand, our expertise, curriculum and accreditation standing. Taken together, these assets and differentiators form critical elements of Chamberlain's competitive moat, one that we believe is difficult to replicate.

Our campus-based pre-licensure BSN program continues to resonate with total enrollment up in the quarter. In addition, we're seeing early indications of demand normalization in our RN to BSN program as we exited the quarter, seeing year-over-year growth in new enrollment. As the nation grapples with the growing middle health challenge, many working professionals are experiencing the call to action, turning to our Mental Health Specialty MSN program. This program is also driving growth in our post-licensure offerings.

Turning to Walden. We continue to focus on our integration efforts and expect to fully realize the benefit of Walden's unique capabilities, breadth of programs, and synergy opportunities. Back in December, we began to eliminate off-cycle student start dates to create a more consistent student experience and reduce administrative complexity. This operational shift adversely impacted our year-over-year total enrollment growth by 2.2% in the third quarter and is expected to have a de minimis impact over the medium-term. But in the long term, we believe the change sets us up for sustained growth at Walden.

As discussed last quarter, we remain confident in our plans and our ability to deliver improved enrollment trends at Walden. In Walden's College of Nursing, we're seeing very promising signs that we're starting to round the quarter as new enrollments are very close to returning to growth for the full year. We still have work to do at Walden, but our conviction in its prospects for growth and impact remain as strong as ever. and we look forward to updating you as we hit key performance milestones.

Now let's move to our Med/Vet segment. We're curating programs that continue to break down traditional barriers to medical education. Historically, USMLE Step 1 has served as a challenging stage gate for medical students on the path to achieving the residency attainment goals. We recognized an opportunity to create a solution that could make that stage gate more manageable for our students. Our 16-week pathways to Step 1 program, targets opportunities for academic, social and wellness interventions on behalf of our students. The program gives our faculty actionable data and tools enhancing their ability to keep our students on track. Since the program launch in 2022, RUSM has enrolled more than 1,000 students with an impressive 13% increase to the step 1 pass rate, and that's helped more than 400 students pass and progress into clinical rotations thus far.

Finally, the Ross University School of Veterinary Medicine continues to operate near capacity as we remain a leading provider of veterinarians to the U.S. market. Our solid results and strategic momentum give me confidence in achieving our fiscal year 2023 revenue and adjusted earnings per share outlook. As we approach the end of our fiscal year in the next few months, we are narrowing the range to reflect our year-to-date performance.

We expect revenue to be in the range of $1.4 billion to $1.45 billion and adjusted earnings per share of $4.05 to $4.20. We're focused on consistent, stable performance against our long-term objective to position Adtalem as a national leader in post-secondary higher education and a leading provider of professional talent to the health care industry.

As we exit our Medical Schools [Match] Week, I'm very proud of the fact that our first-time residency attainment rates for AUC and Ross are at 97%. Our students are going into residency programs at well-known and highly regarded health systems spanning local communities in 45 states and territories. And the Ross University School of Veterinary Medicine continues to rank as a top vet school.

Chamberlain, continues to be a premier nursing school as well as the nation's largest. Commencement season at Chamberlain is upon us, and I'm pleased to note that over 50% of Chamberlain's graduates have diverse backgrounds.

Walden ranks as the third largest nursing educator in the country and just as importantly, as a leading provider of mental health professionals. And as a pioneer in distance learning and adult education, Walden continues to provide working professionals the flexibility they need to advance their personal and professional ambitions.

Cultivating and understanding of health and equities and a commitment to addressing them is core to the curricula we deploy across all of our institutions. We arm our students with the knowledge and tools to address health and equities and many of our graduates go back to serve with genuine pride and compassion, the underrepresented communities from which they came. The fact that our graduates are driving real and measurable (inaudible) outcomes, for some of the most at-risk patient populations and communities across the country is a source of tremendous pride to the Adtalem family.

Before I turn the call over to Bob to take you through the financials in greater detail, I want to mention that I look forward to hosting you at Chamberlain Chicago campus on June 20 for our Investor Day. At that time, we'll take a deeper dive into our long-term strategic priorities, growth strategy and financial outlook.

And with that, I'll hand the call over to Bob.

Thanks, Steve, and hello, everyone. Our third quarter reflects strong financial performance, continued momentum in our strategic initiatives, robust cash flow generation and adjusted earnings per share growth positioning us to narrow our full year guidance range. Later in my remarks, I will discuss our expectations and themes for the balance of fiscal year 2023.

Now let me share a few highlights from the quarter. Starting with the top line. Revenue in the third quarter increased 1.3% compared with the prior year to $369.1 million from growth at Chamberlain and Med/Vet, partially offset by Walden. Consolidated adjusted operating income for the quarter was $73 million with adjusted EBITDA coming in at $85.9 million, a decrease of 6.8% compared with the prior year.

Adjusted EBITDA margin was 23.3% or 200 basis points lower than prior year, primarily as a result of the prior mentioned shift in the timing of marketing expenses from the second quarter to the third quarter associated with the launch of our new brand campaigns and our ongoing strategic investments. On a year-to-date basis, we grew adjusted EBITDA margins by over 200 basis points to 24% as we continue to deliver operational efficiencies across our business.

Adjusted net income for the quarter was $51.6 million and adjusted earnings per share was $1.13 and or 34.5% higher than the prior year, primarily due to lower interest expense as we reduced our long-term debt by $545 million versus the prior year third quarter.

Further, diluted shares outstanding is approximately 3.6 million lower this year to 45.8 million shares as we returned a total of approximately $200 million to shareholders through our ASR and Board authorized share repurchase program. Investments we believe have increased the long-term intrinsic value for the benefit of our owners.

Next, I will discuss financial highlights by segment. Our Chamberlain segment reported third quarter revenue growth of 5% compared with the prior year to $149.7 million. Total student enrollment during the quarter increased 2% compared with the prior year, driven by growth in pre-licensure as well as post-licensure nursing programs and higher persistence across the segment, which was a direct result of our ongoing focus on the student experience.

Growth in our pre-licensure programs was driven by BSN online and on-campus programs, MSN growth led our post-licensure programs. Adjusted EBITDA decreased by 1.3% to $44.9 million as our underlying operational leverage was more than offset by incremental investments that we made to enhance our brand awareness through our new campaign that launched within the quarter as well as other operational expenses.

Turning to Walden. Revenue in he third quarter decreased 4.5% compared with the prior year to $132.9 million. Total student enrollment decreased 7.9% compared with the prior year due to non-health care programs and a lesser extent due to health care programs. This was partially offset by higher persistence across the segment. And as Steve mentioned in his remarks, Walden's total enrollment was negatively impacted by 2.2% as a result of operational initiatives to eliminate certain off-cycle start dates. Adjusted EBITDA decreased by 4.9% to $27.8 million, which is primarily due to the lower revenue and investments in Walden's brand campaign, which was largely offset by ongoing operational efficiencies.

For the Med/Vet segment, Revenue in the third quarter increased 4.6% compared with the prior year to $86.5 million. Total student enrollment increased 1.6% compared with the prior year which was driven by growth in both medical and veterinary programs and continued high persistence levels throughout the segment. The revenue increase was also aided by our updated tuition rates. Adjusted EBITDA decreased by 8.4% to $20.7 million compared with the prior year, primarily as a result of marketing and other operational costs partially offset by higher revenue.

Now let me discuss our cash flow, balance sheet and capital structure. We continue to drive significant improvements in free cash flow, which was $98 million in the third quarter representing a significant increase over the prior year. On a trailing 12-month basis, free cash flow was $227 million. During the quarter, we continued to execute against our capital allocation framework as we invest back into our business for sustainable long-term growth while also reducing debt and returning excess capital to owners. We continue to strengthen our balance sheet.

Gross debt at the end of the quarter was $708 million, a reduction of $545 million or 43% compared with the prior year. resulting in a net leverage of 1.1x as of March 31, 2023. As a direct result of our healthy financial position, S&P upgraded us to BB rating and Moody's to Ba3.

We continue to return excess capital to shareholders. During the quarter, we returned $48 million of capital through our $300 million open market share repurchase program repurchasing over 1.2 million shares.

Moving on to our outlook. Over the last several quarters, we have demonstrated our ability to consistently deliver financial results and enhance our financial position while navigating macro market dynamics. We are narrowing our guidance range of revenue to be within the range of $1.4 billion to $1.45 billion and adjusted diluted earnings per share of $4.05 to $4.20.

Let me conclude by saying we are executing against our strategic transformation which we believe has created the foundation for long-term sustainable growth and profitability. We continue to expect our enterprise total enrollment trends to improve, driven by our ongoing initiatives and persistence.

We remain on track to deliver $30 million in cost synergies during the fiscal year 2023 for a total of $60 million over the course of 2 years, and we are committed to continuing to deliver against our capital deployment priorities, reinvesting back into our institutions, which we believe will drive the highest long-term return, strengthening our balance sheet, and returning excess capital to owners in a thoughtful manner.

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

(Operator Instructions) At this point, I'm not seeing any questions coming in. I'd like to pass the floor back over to Steve Beard for any closing comments.

Thank you. I'd just like to take a moment to thank all of our colleagues across the family of Adtalem institutions for another solid quarter, all the incredible work they're doing in service of our students. And thank them for everything they're doing to create the momentum that we're experiencing in the business and that we expect to carry through the balance of the year.

Thank you. And I look forward to talking to you next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.