National American University Holdings' (NAUH) CEO Ronald Shape on Q3 2016 Results - Earnings Call Transcript

| About: National American (NAUH)

National American University Holdings Inc (NASDAQ:NAUH)

Q3 2016 Results Earnings Conference Call

March 30, 2016, 11 AM ET

Executives

Carolyne Sohn - IR, The Equity Group, Inc.

Ronald Shape - Chief Executive Officer

Lynn Priddy - Provost, Chief Academic Officer

David Heflin - Chief Financial Officer

Analysts

Operator

Greetings and welcome to the National American University Holdings’ Third Quarter and Nine-Month Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host, Ms. Carolyne Sohn. Thank you. You may begin.

Carolyne Sohn

Thank you, operator, and good morning, everyone. Thank you for joining us.

Yesterday’s earnings release is available at the Investor Relations section of National American University’s or NAU’s website at www.national.edu. You’re also welcome to contact our office at 212-836-9600 and we would be happy to send you a copy.

In addition, a recording of this call will be made available at NAU’s website for the next 30 days. National American University Holdings, Inc., the company, also has an accompanying slide presentation available in PDF format on the NAU website, which we will reference during this call.

Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve certain risks and uncertainties that may affect the business prospects and results of operations of National American University Holdings, Inc. Such risks are detailed in the company’s filings with the Securities and Exchange Commission.

Regarding the disclaimer language, I would also like to refer you to Slide 2 of the presentation for more information.

Specifically, the company expects to file its fiscal 2016 third quarter results on Form 10-Q tomorrow and encourages all investors to read all the company’s filings with the Securities and Exchange Commission for a thorough review of NAU’s business and financial results.

Let me note a brief disclaimer that the company operates in two business segments: one, the academic segment, which consists of the undergraduate, graduate and doctoral education programs; and two, ownership in and development of multiple apartments and condominium complexes from which it derives sales and rental income.

The academic segment is where the company derives the largest portion of its business revenues. For the company’s fiscal 2016 third quarter, the academic segment generated revenue of $22.4 million and the company’s apartment and condominium segment generated $275,000 in revenues.

With that, I’d now like to turn the call over to Dr. Ronald Shape, CEO of National American University Holdings, Inc. Please go ahead, Dr. Shape.

Ronald Shape

Thank you, Carolyne, and welcome, everyone.

I would like to take a moment to recognize several of our leadership on the call this morning. Dr. Jerry Gallentine, Chair of the University’s Board of Governors and Vice Chair of the company’s Board of Directors; Dr. Lynn Priddy, Provost and Chief Academic Officer; Dr. David Heflin, Chief Financial Officer; Dr. Bob Paxton, President of Strategic Initiatives and External Relations; Mr. Anthony DeAngelis, Chief Information Officer; Mr. Joe Sallustio, Vice President of Marketing and Enrollment Management; Mr. Paul Sedlacek, Chief Compliance Officer and General Counsel; and Mr. John Roueche, Vice President of our Human Resources and Human Development; and other leadership from across our system.

During this morning’s call, I will provide an update on our key business strategies; Dr. Priddy will provide an update on our academic initiatives; and Dr. Heflin will provide an update on our financial performance and focus. We will then conclude with a Q&A session.

Beginning on slide 3, we highlighted a few key points that we feel are important for our investors. First, when looking at the enrollment trends as noted on Slide 5, we are projecting a credit hour increase from winter to spring terms. The last time we had an increase in credit hours from the winter to spring terms was during the spring term of 2012. We believe this increase is a function of several strategies we have executed to help improve our enrollment trends over the past several years. I will discuss these in more detail later during the call.

Second, we entered into a teach-out agreement with Westwood College to assist their online students as well as students enrolled in their Denver North and Denver Aurora locations. We have been working diligently with the students to ensure they experience as little disruption as possible and to ensure they stay on track to complete their degrees.

In addition, we had and continue to work with the appropriate regulatory bodies to timely obtain the approvals needed for this teach-out. In this regard, I would share that the State of Colorado, the Higher Learning Commission, and the Department of Education had been extremely responsive in facilitating our objective to assist those students through the teach-out.

Third, we continue to focus on cost alignment and making sure our expense structure aligns with our revenue projections. As such, we continue to monitor our total workforce numbers to ensure they are in line with the current student enrollment levels. In this regard, we maintain several key operating metrics around staff-to-student and faculty-to-student ratios to ensure the proper level of support aligns with our student volumes.

In addition, as we mentioned in the previous call, we did an extensive review of our operations and discontinued the ground operations at Tigard, Oregon and Weldon Spring, Missouri as of the end of the winter term. The students associated with these locations were transitioned into our online operation with no interruptions to their ability to complete their education. As Dr. Heflin will share later, the cost associated with these moves are recorded in Q3.

Next, as indicated on Slide 4, we have launched a new marketing campaign that focuses on student motivation and success. We launched this campaign earlier this year and are seeing some improved metrics around lead flow. To celebrate National American University and our 75th anniversary, a specific marketing campaign centered on the 75-year history of National American University and our heritage of serving students will be launched later in 2016.

In addition, we launched a marketing campaign in Canada in late March and anticipate enrollments from this effort will be realized in Q4. We have also completed the training for the new enrollment process to support and guide our enrollment counselors. The training was completed ahead of schedule and we anticipate results from this effort to materialize over the next several months as we reinforce the new processes and counselors adjust.

Finally, we continue to see strong interest in our doctoral program and are working with several institutions to further expand our offerings. This spring, we will be celebrating the success of the first students who have completed the doctoral program and will be graduating.

In addition, I’m pleased to report that several members of the Roueche Graduate Center, Dr. John Roueche, Dr. Terry O’Banion, and Dr. George Boggs have received national recognition. Dr. Roueche is scheduled to receive the Harry Truman Award, the highest award given by the American Association of Community Colleges; Dr. O’Banion is scheduled to receive the Diverse Champion’s Award; and Dr. Boggs is scheduled to receive the National Leadership Award.

Slides 5 and 6 highlights the metrics surrounding our enrollment. For the winter 2015/2016 term, we saw continued pressure on our undergraduate enrollment efforts. In the winter term, students enrolled in 66,287 credit hours compared to 83,933 credit hours in the winter term of last year, which is in line with the expectations we shared on our last earnings call.

As I mentioned in the last call, we experienced some challenges in our financial service operations earlier this year, which impacted our ability to meet and exceed the expectations of our students. However, over the past several months, Dr. Heflin and his team have done an outstanding job in improving our processes, staff training, and alignment of resources to provide better, timelier service in support of our students’ needs. These improvements will help ensure our students are well positioned to start and pay for their educational commitments.

Although our year-over-year undergraduate enrollments are not where we would like them to be, we are pleased with our projected total enrollments for the spring term. Also, we are pleased with the continued growth of our non-credit enrollment efforts along with our doctoral student enrollments, both showing approximately a 70% increase over the previous year. Likewise, we are seeing some increased demand in our master degree programming and anticipate our enrollments in the masters’ program will be positive in the spring term.

Finally, as I mentioned earlier, we anticipate that our spring term total enrollments will be up from our winter term enrollments, which will be the first time this has occurred since spring 2012. Based on current enrollment data, we estimate that spring term credit hours will be down approximately 16% over the previous spring term to 67,400 credit hours.

We remain focused on improving our enrollment results and anticipate that our marketing efforts, the new enrollment counselor training, along with the potential of additional degree completion arrangements we are working on will positively impact enrollments for future terms.

Slide 7 illustrates the geographic footprint we have developed over the past several years. Although we remain committed to our geographic footprint model, we continue to closely analyze the sustainability of each of our physical locations. At this time, we don’t foresee any significant changes to our existing footprint.

As we have mentioned in previous calls, NAUH remains committed to maintaining a strong cash balance, remaining debt free, and continuing our dividend payment to our shareholders.

With that, I’ll turn it over to Dr. Lynn Priddy, our Chief Academic Officer, to provide his update on our academic operations.

Lynn Priddy

Thank you, Dr. Shape. Turning to academic programming, on slide 9 is a breakdown of the university students by academic area and by degree offering for the winter 2015/2016 term. As with the previous report, we’ve provided additional breakdown on the makeup of the academic programs and have removed the other categories.

We continued to see stability in the distribution of academic programming during this term with a 14% increase in our doctoral enrollment. Within the degree offerings, we saw slight increases in our bachelors, masters, and of course the doctoral degree seeking students with the associate degree seeking students declining slightly.

Last spring, we developed 17 new programs at different degree levels that we feel are competitive, meet market need, and will assist us in achieving our enrollment goals. We plan to launch these programs beginning summer 2016, pending appropriate state notifications and approvals where needed. Notably, these new programs include high-demand associate and baccalaureate IT programs with embedded certifications.

Effective this past fall term, we implemented across the majority of current undergraduate and graduate programs new transfer, higher learning assessment and residency requirement practices that maximize credit for previous college work, relevant military and other training, international transfer, articulated credit, and prior learning from work experience.

In addition, we have streamlined entry testing, consolidated entry courses, as well as added additional embedded certifications in current graduate and undergraduate IT, healthcare, and business programs. Finally, we continue to explore transfer and teach-out agreements that offer students from closing institutions a competitive reason to complete their degree at NAU.

On Slide 10, we outlined two benchmarks the university uses to track student progress and more broadly the value of our academic programs: course completion and student persistence. We continue to report strong course completion by our students. In the fiscal 2016 third quarter, our undergraduate course completion percentage showed improvement over the fiscal 2015 period from 88.0% to 89.5%. Likewise, our term-to-term student persistence range remained above 80%.

From winter to spring 2015/2016, 83.17% of our students continued taking courses, down from 85.55% for the same period last year. We continue to pay close attention to these metrics and are dedicated to working towards further improvement, particularly as an institution participating in the Higher Learning Commission’s student persistence and completion academy.

As part of the Commission’s academy, we implemented effective this past winter term a comprehensive student persistence, career, and academic support system that uses predictive analytics to flag and report on four levels of student risk tied to seven factors. The analytics and weekly data indicators on new, re-entry, and continuing student engagement; attendance, and academic success; campus and central teams respond with interventions designed to impact student course term and degree persistence, learning and completion.

Although we continue to focus on enrollment, we balance those efforts with an equally important focus on working with our current students and guiding them to ultimate completion. In essence, we place an equal emphasis on enrollments as we do persistence rates.

Having a prospective individual student not enrolled is no less damaging than having a current student not complete their program of study. We’ll continue to collect and analyze relevant data to ensure that we are encouraging and assessing our students to persist in their program of study which will ultimately allow them to achieve their educational goals.

Now, I’d like to turn it over to Dr. David Heflin who will provide an overview of our Q3 and year-to-date financial performance.

David Heflin

Thank you, Dr. Priddy.

On the next slide, we address a key measure within higher education and institutions cohort default rate for Title IV student loans. At the end of September, we received the Department of Education’s notice that NAU’s final three-year CDR for 2012 is 20.6%, which is lower than the preliminary draft rate of 20.8% we received earlier this year and an improvement from our three-year CDR from 2011 of 21.4%.

Our loan repayment personnel continued to be focused on providing financial counseling and support to our students and we always encourage our students to borrow responsibly. In addition, we have engaged a new provider, Loan Science, to assist in working with our withdrawn students during their grace period to provide additional financial information, counseling, and support services.

Since we have engaged with the new provider, we have been very pleased with the efforts to assist our students and anticipate that these efforts will continue to have a positive impact on future CDRs.

Moving to financials, I’m going to touch on a few highlights that I believe are worth noting, but avoid the process of going line by line through our financial statements. I would encourage each of you to review our press release, the 10-Q, and our investor deck for any specific details, and of course, I’d be happy to take any questions in this regard.

With that, our revenues decreased to $22.7 million in the fiscal 2016 third quarter from $29.1 million for the same period last year, with our academic segment’s total revenue decreasing to $22.4 million from $28.8 million in the prior-year period. This decrease was primarily due to decreased credit hours and lower book sales, due to lower enrollments.

Also, as referenced earlier, we continue to work on improving our operating efficiencies and making sure our costs are aligned with our current enrollment numbers. As such, we have made additional expenditure reductions during this fiscal year to realize savings that are beginning to have an impact on financial results.

As Dr. Shape mentioned earlier, in the third quarter, we recorded one-time losses from the discontinuation of the Weldon Spring, Missouri and Tigard, Oregon campus operations that increased SG&A in the third quarter by approximately $700,000. Despite this one-time adjustment, higher bad debt expense and additional expenditures related to the strategic initiative mentioned earlier, we realized a decrease in our SG&A expenditures for the period.

Moving to Slide 14, the net loss attributable to the company for the fiscal 2016 third quarter was – the net loss was $1.9 million, or $0.08 per diluted share based on 24.2 million shares outstanding. That’s compared to net income of $1.5 million or $0.06 per diluted share based on 25.2 million shares outstanding in the prior-year period.

The company’s LBITDA for the third quarter of fiscal year 2016 was $1.4 million, compared to EBITDA of $4.1 million in the prior-year period. A table reconciling EBITDA/LBITDA to our net income and loss can be found in yesterday’s press release.

Slide 15 and 16 show financial highlights for the first nine months of fiscal year 2016 compared to the first nine months of fiscal year 2015. NAUH’s revenue for the nine months ended February 29, 2016, decreased to $73.1 million from $89 million for the same period last year. Again, this decrease was primarily driven by lower enrollments.

SG&A expenses for the nine months ending February 29, 2016 were $55.5 million compared to $53.8 million for the first nine months ending February 28, 2015. There were a number of one-time transactions both this year and last that more than explain this $1.7 million increase.

In addition to the losses resulting from disposition of the campuses I previously mentioned, the reversal in the first nine months of last year of stock compensation and 401(NYSE:K) expenses and the gain on sale of the Rapid City campus all explain $4.5 million of increase in the SG&A line item. Offsetting these increases are lower salaries resulting from targeted headcount reductions.

During the first nine months of fiscal year 2016, the company reported a net loss attributable to NAUH of $4.4 million or $0.18 per diluted share based on 24.8 million shares outstanding. That’s compared to net income attributable to National American University Holdings of $6.5 million or $0.26 per diluted share based on 25.2 million shares outstanding in a prior year period.

National American University Holdings’ LBITDA for the first nine months of fiscal year 2016 was $1.7 million compared to EBITDA of $15.6 million in the prior year period. Again, a table reconciling LBITDA/EBITDA to our net income and loss can be found in yesterday’s press release.

Moving to the balance sheet highlights as shown on Slide 17, as of February 29, 2016, the company had cash, cash equivalents and investments of $26.7 million; working capital of $27.8 million; and stockholders’ equity of $42.3 million, and that is compared to cash and cash equivalents and investments of $27.4 million, working capital of $34.6 million and stockholders’ equity of $52.5 million at May 31, 2015.

During the first nine months of fiscal year 2016, the company paid out $3.3 million in dividends and repurchased 3 million of common stock. The company has no outstanding lending debt of any kind.

In addition, we announced in yesterday’s earnings release that the company’s Board of Directors authorized a stock repurchase plan authorizing a repurchase of up to $500,000 of common stock in open market or privately negotiated transactions. The timing and actual number of shares purchased will depend on a variety of factors such as price, corporate and regulatory requirements and other prevailing market conditions. The plan is authorized for a period of one year, but may be limited or terminated without prior notice.

We continue to believe in the strength of our business and our ability to deliver on our growth strategies over the long term. And we believe this stock repurchase program is a reflection of our confidence. We will provide an update on the status of the repurchase program during our quarterly earnings calls going forward.

In conclusion, NAU remains committed to its promise on providing quality academic programming and supporting positive student outcomes. We are excited about the initiatives we launched in fiscal year 2016 and we believe these opportunities will serve to strengthen the long term foundation upon which NAU was built 75 years ago.

With that, I will turn it back to Dr. Shape.

Ronald Shape

Thanks, Dr. Heflin and Dr. Priddy. Operator, we would be happy to take questions at this time.

Question-and-Answer Session

[Operator Instructions] And with no further questions, I would like to turn the floor back over to management for any closing remarks.

Ronald Shape

Thanks for that operator. A couple of comments, ladies and gentlemen, to share. I think one of our investors not able to be on the line, but have shared some questions earlier that I would like to address here for everyone. I think they’re relevant for all investors.

One of the questions was around the student volumes relative to the Westwood teach-out agreement that we’re working on and I would share with folks that currently we are assisting roughly about 500 to 600 students and assisting them through their degree completion opportunity at Westwood and we will continue to work with many students who dropped and stopped out in attempting to help them complete their degree opportunities through the teach-out agreement that we have with Westwood and will continue to update our shareholders overtime as that continues progress.

Also, one of the other comments that I would share, we articulated it, or at least referenced it as part of the earlier discussion, but again would share it, and that is the commitment of National American University Holdings with regard to our dividend payment and the Board continues to remain and the institution continues to remain committed to paying the dividend that we have been paying.

The last item that I would share that came up in a question was the overall size of the stock buyback at $500,000, there was some question about that being smaller, given the current prices, but would share with folks that that’s something we and the Board will continue to review over time and as opportunity finances of the organization indicate we will revisit opportunities in that arena.

But for right now, the $500,000 is the commitment that the institution is willing to make. So sharing those updates because I believe the investor could not be on the call, but did want to share them because I’m sure their comments that are pertinent to questions that may be on other’s minds.

With that, we would like to thank everyone for joining us. We are available to answer any additional questions you may have. You’re also welcome to contact our Investor Relations, The Equity Group. We look forward to speaking with you again during the fiscal 2016 fourth quarter and year-end financial results conference call. Thank you everyone for joining us.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!