National American University's (NAUH) CEO Ronald Shape on Q4 2016 Results - Earnings Call Transcript

| About: National American (NAUH)

National American University Holdings, Inc. (NASDAQ:NAUH)

Q4 2016 Earnings Conference Call

August 4, 2016 11:00 ET

Executives

Carolyne Sohn - Investor Relations

Ronald Shape - Chief Executive Officer

Lynn Priddy - Chief Academic Officer, Provost

David Heflin - Chief Financial Office

Operator

Greetings and welcome to the National American University Holdings’ Fiscal Year 2016 Fourth Quarter and Year End Financial Results. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation.[Operator Instructions] As a reminder, this conference is being recorded.

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

Carolyne Sohn

Thanks 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 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 like to also refer you to Slide 2 of the presentation for more information. Specifically, the company expects to file its fiscal 2016 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 four quarter, the academic segment generated revenue of $22.8 million and the company’s apartment and condominium segment generated $279,000 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 executive leadership on the call this morning. We have 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; Mr. John Roueche, Vice President of Human Resources and Human Development; and Mr. Michael Johnson overseeing our military efforts. In addition we have several other leadership individuals 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 question and answer session.

Beginning on Slide 3, we highlight a few key points that we feel are important for our investors. Although we continue to see year-over-year pressure on her total student enrollment during fiscal 2016, enrollment by headcount for this most recent spring term increased 7% from the preceding winter term to 8,185 students. While this is a 14% decrease over the spring term last year, we continue to remain focused on our various strategic initiatives for long-term growth and remain confident that our university is well-positioned in this challenging environment.

Enrollment pressures in the spring term were a function of fewer continuing students on a term to term basis and year-over-year basis from enrollment declines that started in 2013. In addition, we realize pressure from lower new student starts on a year-over-year basis as student seem more reluctant to commit to their educational goals even after they had completed an application. In response, we have placed greater emphasis on student engagement by aligning our student service staff to focus on student issues and concerns developing better early warning systems driven by predictive analytics, revamping courses with high failure and/or withdrawal rates and finally by retooling our enrollment process and retraining our enrollment staff.

As we continue to realize enrollment pressures this past year, we took several steps to make sure our operating cost were better aligned with our projected revenues, the most significant of which was closing three campus locations and further reducing our variable expenses across the system. We transition students being served by these locations to make sure they could complete their programs and receive support services through NA use online operations. As a result of these efforts, the company maintains cash of $25.8 million and income cash receivable of $3.4 million and we continue to have no long-term debt as of the fiscal 2016 year end. The company’s financial responsibility composite score for fiscal year 2016 was 1.8 and our 90/10 percentage improved to 86.85% which is down from 89.18% in fiscal year 2015 as shown on Slide 4.

On Slide 5, we have highlighted some of the work we have completed on our marketing, branding and enrollment efforts as well as the enrollment turnaround we are seeing in our graduate programs. For the spring term we had a 28.1% increase year-over-year in our graduate student enrollments. In addition, Joe Sallustio our Vice President of Marketing Enrollment and Greg Peterson, our Directory of Marketing have done an outstanding job in updating the creative and our marketing spots to highlight NAU our academic programs are 75 year history and the commitment we have to our student success. We have included a few links to our new marketing spots on this slide where you can also see some video footage from one of our most recent graduation ceremonies in Colorado.

Moving to Slide 6, we continue to assist students impacted by schools that have closed or announced that they are discontinuing enrollments. In this regard, we continue to teach-out students of Westwood Colleges to Denver, Colorado ground campuses and its online campus. In the spring quarter, we created a special term with a later start and end date to accommodate students who were completing the winter term at Westwood. With the completion of the spring term we have aligned the academic calendar of the Westwood teach out are on the term as NAU students. In addition, given the abrupt closure of Wright Career College during the spring quarter, we created a special bridge course at no cost to the student to allow that institution students to gather their transcripts and evaluate how they may best proceed either at NAU or elsewhere to complete their education.

And finally, we have signed a memorandum of understanding with Brown Mackie College to facilitate the transfer of Brown Mackie College students who will not be able to complete their educational program before that institutions expect to close and to assist their graduates who may wish to process the higher-level degrees. On June 16, the Department of Education issued proposed regulations regarding borrower defense to repayment to assess both standards and processes for discharges of student loans based on institutional acts and potential recoupment of such discharged amounts from institutions. The proposed regulations also include amendments to the department’s financial responsibility regulations and sets forth multiple new triggering events that would necessitate an institution providing the department with the letter or letters of credit further the proposed regulations include a new loan repayment rate calculation and related disclosure requirements applicable only to proprietary institution. We are reviewing these proposed regulations closely.

The department is expected to issue its final regulation on these matters no later than November 1 with an effective date of July 1, 2017. We also are reviewing the department's latest proposed regulations regarding state authorization of distance education programs and foreign institutional locations. Over the past several years NAU has sought and received applicable authorizations supports distance education activities in many states. Earlier this year, the university was approved by South Dakota to participate in the State Authorization Reciprocity Agreement or SARA regime for distance education programs which simplifies the process offer online programs to students residing in other states under SARA rather than seeking separate authorization to offer distance education on a state-by-state basis NAU only needs a SARA authorization from South Dakota it’ home state to offer distance education and other SARA member states. Over 35 states are currently participating in SARA. As always, we will monitor closely any proposed or final regulations to ensure the university’s commitment to compliance and quality.

On Slide 7, we provide an update on our real estate holdings, we are moving forward with the development of Arrowhead View Apartments which we believe will further enhance the value of the real estate holdings of the company and allows us to capitalize on some land holdings the company has had for over 50 years. The development is currently plan to take place over a three year period and consists of a total of 96 units and three separate buildings. We provide a timeline of these plans on Slide 23 of the presentation. The phased development will allow us to build and lease the apartments in stages so we can ensure the market remain soft. Lastly, we committed to two stock repurchase programs during fiscal year 2016. For the first we purchased plan, we company purchased approximately 1.2 million shares of common stock at an average price of $2.39 per share. Dr. Heflin will provide a more detailed update on our stock – current stock repurchase program momentarily.

Slides 8 and 9 highlights the metrics surrounding our enrollment. For the spring 2016 term as a shared earlier, we saw continued pressure on our undergraduate enrollment efforts driven by a lower continuing student population and fewer starts. In the spring term students enrolled in 66,008 credit hours compared to 80,396 credit hours in spring term of last year which is in line with the expectations we shared in our last earnings call. Although year-over-year undergraduate enrollments continue to present a challenge, we are pleased with the steady growth of our continuing education enrollment along with our doctoral and graduate student enrollments. Our continuing education enrollments were up 87.3% for the term while doctoral enrollments were up 11.5% and graduate enrollments were up 28.1%. Based on current enrollment data, we estimate that summer term credit hours will be down approximately 16% over the previous summer term to 59,000 credit hours.

Slide 10 illustrates the geographic footprint that we have developed over the past several years, although we remain committed to our geographic program model, we continue to closely analyze the sustainability of each of our physical locations. During FY 2016, we closed three campus locations and will monitor closely the performance of our existing operations including areas where our physical presence may enhance our efforts to support students in achieving their educational goals. As we have mentioned in previous calls, NAUH remains committed to providing excellent service to our students, maintaining a strong cash reserve and remaining debt free. With that I will turn the call over to Dr. Lynn Priddy, our chief academic officer to provide an update on our academic operations.

Lynn Priddy

Thank you, Dr. Shape. Turning to academic programming, on Slide 12 is a breakdown of the university students by academic area and by degree offering for the spring 2016 term. As with the previous report, we’ve provided additional breakdown on the makeup of our academic programs and by removing the other category. We continue to see stability in the distribution of the academic programming during this term and as you heard we experienced increases in graduate enrollment. Within our degree offerings, we saw slight increases in bachelors, masters, and 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. Having now received the necessary state approvals the majority of these programs were launched this summer term. The remaining programs were launched in the fall and winter terms. Notably, these programs include high-demand associate and baccalaureate IT programs with embedded certifications. Effective this past fall term, we implemented across a majority of current undergraduate and graduate programs, new transfer 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 streamlined entry testing and consolidated entry courses as well as added additional embedded certifications in current graduate and undergraduate IT, health care and business programs. In FY 2017 and fiscal year 2018 all undergraduate and master courses will be updated with the next iteration of learning management tools including the rollout of comprehensive mobile phone functionality. and we continue to explore transfer and teach-out agreements to our students from closing institutions are reason to complete their degrees at NAU.

On Slide 13, we outlined two benchmarks the university uses to track student progress and more broadly the value of our academic program, course completion and student persistence. We continue to report strong course completion by our students. In the fiscal 2016 fourth quarter, our undergraduate course completion percentage showed improvement over fiscal 2015 period from 90% to 91.4%. Graduate numbers are preliminary and with final numbers are expected to show near even results or a slight decrease over 2015. Likewise, our term-to-term student persistent rates remain above 80%. From spring to summer 2016, 80.24% of our students continue taking courses down slightly from 82.77% for the same period last year. We continue to pay close attention to these metrics are dedicated to working towards further improvement particularly as an institution participating in higher learning commission student persistence and completion academy.

As part of that academy, we implemented 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 applied to seven factors. The analytics and weekly data indicators are new reentry 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. We will continue to collect and analyze relevant data to ensure that we are encouraging and assisting our students to persist in their study which will ultimately allow them to achieve their educational goals.

Slide 14 depicts the key metric of success, the number of NAU graduates in FY 2016 by degree. Each year NAU hold seven or more graduation ceremonies to celebrate more than 1200 graduates. In fiscal year 2016, 71 students under diploma, 606 are under an associative applied science degree, 489 are under baccalaureate degree. Finally, 93 students are under masters degree and the doctoral program honored its first two graduates with an EDD in community college leadership. This fall the remaining students in the inaugural cohort of the doctoral program are expected to graduate. Now, I would like to turn it over to Dr. David Heflin who will provide an overview of our Q4 and full fiscal year financial performance.

David Heflin

Thank you Dr. Priddy. On the next slide, we address a key measure within higher education, an institution’s cohort default rate for Title IV student loans. At the end of September, we received the Department of Education's notice that in a use final three-year cohort default rate of 2012 is 20.6% which is an improvement from a three-year rate from 2011 of 21.4% in 2010 of 24.6%. The company's draft CDR for the federal fiscal year 2013 is 23.7% with final rates to be issued by the Department of Health. We believe it is of the utmost importance that we provide financial counseling and support to our students. We always encourage our students to borrow responsibly and have trained well repayment personnel on staff to support this effort.

We continue working with long science to assist our withdrawing students during their grace period with additional financial information, counseling and support services. We believe these combined efforts will continue to have a positive impact on future cohort default rate. Moving to financials, I am going to touch on a few highlights that I believable are worth noting but avoid the process of going line by line to our financial statement. I will encourage each of you to review our press release, the Form 10-K and our investor deck for any specific details and of course I will be happy to take questions during Q&A. With that our revenues decreased to $23 million in the fiscal 2016 fourth-quarter from $28.9 million from the same period last year within our academic segments, total revenue decreasing to $22.8 million from $28.6 million in the prior year. This decrease is 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 align with our current enrollment numbers.

As such we made additional expenditure reductions during this fiscal year to realize savings that are beginning to have an impact on financial results. The three previously mentioned cap disclosures created SG&A expense reductions in the fourth quarter of $1.1 million compared to the spring quarter of the previous year. Since the fourth quarter National American University has operated two additional sites in Aurora, in Westwood Colorado solely for purposes of the teach-out of the Westwood College students. These locations will not continue as in new locations following completion of the teach-out. Revenue from the teach-out activities at these sites totaled over 1.3 million and the impact on net income approached 600,000 in the fourth quarter. I would note that the investment associated with the Westwood College teach-out and the additional cost associated with transitioning students that transferred from from Wright Career College offset some of cost reduction efforts that we have made for the fourth quarter. Additional salaries of these efforts, reduce salary savings associated with closed campuses enroll as a regional management realignment earlier in fiscal year 2016. Additional investment associated with bridge courses to transition Wright students into NAU and cost associated with developing the surgical technician degree program also cut into overall expense reduction efforts.

Moving to Slide 18, net loss attributable to the company for fiscal 2016 fourth quarter was a loss of $1 million or $0.04 per diluted share based on 24.1 million shares outstanding compared with net income of 300,000 or $0.01 per diluted share based on 25.2 million shares outstanding in the prior year period. The company loss before income tax, depreciation and amortization of the fourth quarter of fiscal year 2016 was 76,000 compared to even up 2.5 million in the prior year period. A table reconciling of EBITDA and EBITDA to net loss or net income can be found in yesterday’s press release.

Slides 19 and 20 show financial highlights from fiscal year 2016 compared to fiscal year 2015. National American University Holdings revenue for the same ended May 31, 2016 decreased to $96.1 million from $117.9 million for the same period last year. Again this decrease was primarily driven by lower enrollments. SG&A expenses for the year ended May 31, 2016 decreased to $72.2 million from $73.3 million for the year ended May 31, 2016. In addition to operating expense savings associated with closed campuses, fiscal year 2016 results include lower salaries resulting from targeted headcount reductions. There were one-time expense reductions of $2.2 million in the previous fiscal year related to reversals of 401(k) expenses and stock compensation that makes the year-over-year comparison less favorable. The impairment losses related to three campus closures $700,000 and the gain reported in the previous fiscal year related to the sale of the Rapid City campus 1.7 million also creates an unfavorable one-time expense comparison of $2.4 million year-over-year.

You can see this detail in the income statement provided in yesterday’s earnings release. For fiscal year 2016, the company reported a net loss attributable to National American University Holdings of $5.3 million or $.22 per diluted share based on 24.7 million shares outstanding. This compares to net income attributable to National American University Holdings of $6.7 million or $0.27 per diluted share based on 25.2 million shares outstanding in the prior fiscal year. EBITDA for 2016 for the fiscal year was $1.8 million compared to EBITDA of $18.1 million in fiscal year 2015 again a table reconciling EBITDA and EBITDA to net loss and net income can be found in yesterday's press release.

On Slides 21 and 22 moving to the balance sheet, our balance sheet highlights are shown on Slide 21 as of May 31, 2016 the company had cash and cash equivalents in investments of $25.8 million, working capital of $25.5 million and stockholders’ equity of $40.4 million. This compares to cash and cash equivalents, investments of $27.4 million, working capital of $34.6 million and stockholders’ equity of $52.5 million as of May 31, 2015. During fiscal year 2016 the company paid out $4.4 million in dividends and repurchased $3 million of common stock. The company has no outstanding lending debt of any kind.

Finally, as we announced during our previous call, the company's Board of Directors authorized a stock repurchase plan authorized in the repurchase of up to $500,000 of common stock in open market or privately negotiated transactions. As of May 31, 2016 we had repurchased 30,440 shares of common stock for a total of approximately $52,000 as part of the currently open plan. 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 from the date of April 4, 2016 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 the 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. You can see the details of the company’s stock repurchases in fiscal 2016 on Slide 22. In conclusion, NAU remain committed to its promise on providing quality academic programming and supporting positive student outcomes. We are excited about the initiatives we continue to work on in fiscal year 2017 and we believe these opportunities will serve to strengthen the long term foundation upon which NAU was built nearly 75 years ago. With that, I will turn the call back to Dr. Shape.

Ronald Shape

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

Question-and-Answer Session

Operator

Ronald Shape

Thank you, operator. We would like to thank everyone for joining us. We are available to answer any additional questions you may have. You are also welcome to contact our Investor Relations firm, The Equity Group. We look forward to speaking with you again during the fiscal 2017 first-quarter results conference call. Thank you.

Operator

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

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