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Adtalem Global Education Inc. (NYSE:ATGE)Q1 2020 Earnings CallOct 29, 2019, 5:00 p.m. ETContents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks: OperatorGreetings, and welcome to the Adtalem first-quarter 2020 earnings call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. John Kristoff, vice president of investor relations. Thank you.John Kristoff — President of Investor Relations Thank you, and good afternoon. With me today from Adtalem’s leadership team are Lisa Wardell, chairman and CEO; and Mike Randolfi, senior vice president and CFO. I’d like to remind you that this conference call will contain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 with respect to the future performance and financial condition of Adtalem 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 1A, Risk Factors, in the most recent annual report on Form 10-K for the fiscal year ended June 30, 2019, filed with the SEC on August 28, 2019. Any forward-looking statement made by us is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. During today’s call, our commentary will refer to non-GAAP financial measures, which are intended to supplement, though not substitute for our most directly comparable GAAP measures.Our press release, which contains the GAAP financial and other quantitative information to be discussed today, as well as a reconciliation of non-GAAP to GAAP measures, is available on our website. It is also important to note that our first-quarter results and guidance reflect the application of discontinued operations for our business & law segment as a result of the recently announced divestiture of Adtalem Brazil, which made up the entire segment. Telephone and webcast replays of today’s call are available for 30 days. To access the replays, please refer to today’s press release. And with that, I’ll now turn the call over to Lisa. Lisa Wardell — Chairman and Chief Executive Officer Good afternoon, and thank you for joining us. On today’s call, I will discuss the highlights from our first quarter before turning to our strategic focus for fiscal-year 2020. I will then turn the call over to Mike to discuss our financial results before we open the line up to your questions. Let me first begin by welcoming Mike. Mike is an accomplished CFO with significant leadership experience in the consumer services industry, and we are delighted that he has joined our team as we continue to execute on our workforce solutions strategy to serve our students and employer partners. We had a busy start to fiscal-year 2020. Last week, we announced the strategic divestiture of our Brazil assets, which include Ibmec, Damàsio and Wyden. We reached an agreement to sell the assets to YDUQS, the second largest education company in Brazil, which operates various universities, colleges and distance learning centers. As a highly capable education provider, YDUQS has both the scale and resources to take these institutions to the next level and continue the highest academic quality for our students and partners. This transaction, valued at roughly $465 million, unlocks significant shareholder value, as we were able to sell the business for 10 times EBITDA, compared with Adtalem’s current valuation of approximately 7.5 times EBITDA. Strategically, it better aligns our portfolio, allows us to address the global workforce skills gap to serve our markets in a more competitive and comprehensive way and provides another meaningful milestone in our transformation into a leading workforce solutions provider. This divestiture also streamlines our enterprise, significantly reduces portfolio risk and advances exciting opportunities for growth and innovation in both our medical and healthcare and financial services verticals. On that note, during the first quarter, we capitalized on healthy demand in our medical and healthcare and financial services verticals to deliver 7.5% revenue growth. However, we experienced declines in operating income and EPS in the quarter as we continued to increase our investments in marketing and student recruitment to drive future growth in enrollments and revenue. In addition, we encountered some onetime transitory cost in the quarter, which negatively impacted year-over-year comparisons. Mike will walk through these costs in more detail during his comments. Overall, we’re pleased with our top-line growth in the quarter, and we believe our stepped-up investments in marketing, along with increased corporate cost discipline position us well to deliver on our expectations for the full year. As such, we are reaffirming our revenue and earnings guidance for fiscal 2020. Now let me walk you through the highlights of each of our segments. We posted another solid quarter overall in medical and healthcare, driven by growth in our Chamberlain on-site BSN and graduate programs, as well as a year-over-year increase in housing revenue from our Ross University School of Medicine campus in Barbados. Chamberlain saw increases of both revenue and enrollments for the quarter. The on-campus BSN Program experienced high single-digit enrollment growth as we enrolled our highest September class ever with nearly 2,200 students. We also generated double-digit enrollment growth in some of our graduate programs, including the Doctor of Nursing Practice and the Master of Public Health. In addition, in September, we accepted our first class in Master of Social Work. The Nevada Board of Nursing recently approved an increase in the enrollment cap for Chamberlain’s Las Vegas campus from 400 students to 600 students. And Chamberlain’s new San Antonio campus opened and began teaching students just yesterday. As mentioned during our fourth-quarter call, we are focused on keeping up the pace of new enrollments with a record number of graduations for our RN to BSN Program in a very competitive environment. We’re taking strategic actions to increase Chamberlain’s level of competitiveness by better aligning our advertised pricing with what students actually pay in order to capture new students and bolster top-line growth. To date, these pricing initiatives have been rolled out across 21 states, and we’re beginning to see some early positive traction in this initiative in its early stages. We are also diligently working on developing new educational partnerships with healthcare institutions, as well as further expanding the ones we’ve already established. One partnership we’ve recently expanded is with the Cleveland Clinic in Florida. Our existing partnership, which include some of Chamberlain’s MSN and DNP clinical rotations, was recently expanded to include Ross University School of Medicine. All Ross students will now complete their first clinical clerkship, internal medicine foundations at the Cleveland Clinic. Through hands-on education, the physician-supervised clinical clerkship prepares RUSM students for their subsequent clinical rotation in a small group learning environment that lays the foundation for them to be residence-ready. At Ross University School of Medicine, we continued to drive quality student outcomes at high benchmarks, achieving a first-time USMLE test pass rate, average of 94% and a 92% first-time residency achievement rate. In addition, we have further expanded our institutional partnership with Ross University School of Medicine with the recent addition of CSU Dominguez Hills and St. Peter’s University, both notable Hispanic-serving institutions as a part of our continued effort to address physician diversity in the U.S. These mark the fifth and sixth partnerships with either an HBCU or HSI, respectively, that we have announced this year, and we saw our first enrolled students from these partnerships in the September class. Ross University School of Veterinary Medicine enrolled its largest fall class in more than seven years in September and further strengthened student outcomes during the first quarter with the average NAVLE score achieved by our students having now reached 88%, a school record. We also began a new partnership with Ross Vet and Lincoln Memorial University, giving students a broader range of clinical options across a variety of locations, and we’re expanding our partnerships into campuses in the U.K., including Glasgow and Bristol, to provide new opportunities for students seeking global experience. At the American University of the Caribbean School of Medicine, we further developed relationships with key partners, including the University of Central Lancashire, or UCLAN, in the U.K., as we enrolled our first class in a new partnership where students can pursue a degree in international medical sciences from UCLAN’s Preston, England campus, followed by pursuing an M.D. degree from AUC in St. Maarten. In addition, AUC received approval for an affiliation with the World Association for Disaster and Emergency Medicine. We also expanded our relationship with the Caribbean Disaster Emergency Management Agency, which was agreed to participate in our upcoming 11th annual Caribbean conference in March. We are also excited to share that Dr. Heidi Chumley, Executive Dean of AUC, was recently honored with a seat on the hospital supervisory council in St. Maarten. The financial services segment delivered strong double-digit growth in the first quarter, driven by robust growth in ACAMS and the addition of OnCourse Learning. Becker saw the successful launch of its new website, an e-commerce platform, during the first quarter, which has begun to gain significant traction, better aligning academic support with learning needs and improving the overall student experience. Traffic to the Becker website is up nicely and, more importantly, our paid media conversion rate is up 36%, and our social media conversion rate increased 117%. Additionally, Becker has renewed over 70% of its large enterprise contract and expects to renew the remainder prior to calendar year end. ACAMS had a particularly strong quarter with a 15% year-over-year increase in membership to more than 75,000 globally. Revenue growth was even stronger, driven by the successful Las Vegas conference, which shifted to the first quarter this year versus the second quarter last year. In addition to record attendance at the event, we experienced a sizable increase in sponsors for the conference this year, reflecting the strong demand for the content delivered at our conferences. Earlier this month, ACAMS also launched training packages for its first new certification in 16 years, the Certified Global Sanctions Specialist, and we’re excited about the growth potential for this new offering. Finally, the strategic partnership between Becker, ACAMS and Northeastern University launched its first offering, a certificate course in AI for financial services, bringing on several major corporate customers, which have adopted the course offerings internally. As we advance into the new fiscal year, we are highly focused on driving growth across the business, which includes increased investments in our strategic initiatives while maintaining a disciplined approach to managing our costs. And better aligning our portfolio with our strategy, we believe, will drive substantial long-term shareholder value. Evolving our workforce solution provider offerings allows us to expand our payer base beyond federal funding and ensures continued excellence in our cohort default rates, all of which are well below comparable rates before profit and nonprofit institutions alike. Our strategy also demonstrates the return on investment of our education offerings as we gain greater share of wallet from our employers and customers. I’m encouraged by the progress we made in the first quarter and believe we have a number of opportunities ahead of us as we progress our transformation into a leading workforce solution provider. With that, let me turn the call over to Mike for a deeper look at our financials.Mike Randolfi — Senior Vice President and Chief Financial Officer Thank you, Lisa, and good afternoon, everyone. I’m thrilled to be a part of the Adtalem team, and I’m very excited about the strength of our reposition portfolio and the long-term potential for growth. I’d also like to quickly note that I’m a big believer in transparency and clear and simplified disclosure. Along those lines, you’ll note that we are now including slides to accompany our commentary on the earnings call, and we will continue to refine and improve our quarterly disclosure going forward. We ended the first quarter of fiscal 2020 with strong revenue growth that was in line with our expectations. With a focus on unlocking future growth, we continued our step-up in the first-quarter marketing and student recruitment investment. While that negatively impacted our operating income and contributed to a decline in earnings per share, we believe these investments will enhance enrollment and membership trends in the back half of fiscal-year 2020 and set the stage for increased long-term revenue growth. During the quarter, Adtalem revenue increased 7.5% to $254.6 million from the prior year. This increase was driven by growth in both our medical and healthcare and financial services segments. Operating costs, excluding special items, were $227.1 million in the first quarter, compared with $200.7 million in the prior year, a 13.2% increase. Approximately half of the increase was attributable to costs directly associated with the revenue growth in the quarter. About one-quarter of the increase was due to investments in marketing and student recruiting to support enrollment and revenue growth in future periods. The remaining increase was the result of severance associated with our CFO transition and a higher bad debt reserve. Operating income from continuing operations, excluding special items, was $27.5 million, compared with $36.2 million in the prior year. Net income from continuing operations, excluding special items, was $18.9 million, compared with $26.7 million in the prior year. Diluted earnings per share from continuing operations, excluding special items, was $0.34, compared with $0.44 in the prior year. Turning to our segment results. Starting with medical and healthcare, revenue increased 2.7% to $207.5 million compared with the prior year. Chamberlain first-quarter revenue increased 2.5%. In the September 2019 session, new student enrollment at Chamberlain increased 2.9%, and total student enrollment grew 1.4% compared with the prior year, driven by growth in the on-campus Bachelor of Science in Nursing Program, as well as the graduate programs, including the Master of Social Work, which just launched in September. Revenue in the first quarter for the medical and veterinary schools increased 2.9%. In the September 2019 session, new student enrollment declined 1.9%, while total student enrollment declined 4.7% compared with the prior year, primarily reflecting lingering effects of the permanent campus relocation of Ross University School of Medicine to Barbados in the third quarter of 2019. Operating income for the medical and healthcare segment in the first quarter was $28.5 million, compared with $1.7 million in the prior year due to a $39 million charge in the prior year related to the closing of the Ross Med Campus in Dominica. Excluding special items, segment operating income in the first quarter declined 29.6% to $28.6 million, compared with $40.7 million in the prior year. The decrease in segment operating income is the result of increased marketing expenses to drive future enrollment growth, cost of expansion and growth in campus and online programs and increase in our bad debt reserve and corporate costs that were previously allocated to our business & law segment in the first quarter of 2019 that are now allocated to medical and healthcare and financial services in the first quarter of 2020. To aid comparability, see Slide 13, where we adjusted the first-quarter 2019 operating income and margin to similarly allocate corporate costs on a comparable year-over-year basis from business & law to medical and healthcare and financial services segments. Turning now to our financial services segment. First-quarter segment revenue increased 32.2% to $47.1 million compared with the prior year. First-quarter segment revenue included $7.6 million of revenue from the acquisition of OnCourse Learning. Excluding special items, segment operating income in the first quarter declined 13.5% to $4.1 million, compared with $4.8 million in the prior year. As previously noted, corporate costs that were previously allocated to our business & law segment in the first quarter of 2019 are now allocated to financial services in the first quarter of 2020. You’ll note on Slide 13 when the corporate allocation is adjusted on a like-for-like basis for both periods, operating income was roughly flat. Now turning to our balance sheet and financial position. Cash flow from continuing operations for the first quarter totaled $33.3 million, compared with $53.5 million in the prior year. Our capital expenditures for the first quarter totaled $10.4 million, compared with $13.3 million in the prior year. With regard to free cash flow from continuing operations, we generated $22.9 million in the first quarter. On a trailing 12-month basis, we generated $110.6 million. We closed the first quarter with cash and cash equivalents of $121 million. However, that does not include $89 million in cash contained within discontinued operations that is available to Adtalem at closing of the Brazil transaction. Including this cash, which will be available to us, our total balance would be $210 million. Our outstanding bank borrowings at September 30 were $336.3 million. We remain committed to maintaining a healthy balance sheet and ensuring we have ample resources to support our growth strategy. Share repurchases remain an integral part of our capital allocation strategy, and our strong balance sheet continues to allow us to pursue this. Over the last three years, we have returned nearly $0.5 billion to shareholders through share repurchases or dividends. During the quarter, we repurchased approximately 900,000 shares at an average price of $43.81 for a total of $40.3 million. Moving onto our full-year 2020 outlook. We’re reiterating our guidance with the exception of our effective income tax rate for the year, which we now expect to be in the 19% to 20% range due to divesting Adtalem Brazil, which was subject to a lower tax rate. As we look toward the rest of the year, we are continuing to focus our capital around investing in our core institutions and companies, making disciplined strategic acquisitions and returning capital to shareholders, all while maintaining our financial strength and flexibility. We plan on continually allocating our capital toward these ends to ultimately grow shareholder value. With that, I will now turn the call over to the operator for Q&A. Questions & Answers: Operator[Operator instructions] You first question comes from Corey Greendale, First Analysis. Your line is open.Corey Greendale — First Analysis — Analyst Hey, good afternoon. I appreciate all the detail. I have a little bit of fear. I’m going to ask questions that are in one of the slides somewhere, so forgive me if I do that. But I guess my first question is, are we going to be getting full financials kind of restated for discontinued operations to model off of?Mike Randolfi — Senior Vice President and Chief Financial Officer Yes. Those are in the slides, in the appendix in the slides for Brazil. You have — you do have the additional results from the discontinued operations that are provided, and they’re also in our 10-Q.Corey Greendale — First Analysis — Analyst OK. I’m sorry, what I am asking is like, will we get all the quarters of fiscal ’19 restated?John Kristoff — President of Investor Relations Yes. So Slide 20, Corey, in the supplemental slide deck that we’ve posted.Mike Randolfi — Senior Vice President and Chief Financial Officer That’s right.Corey Greendale — First Analysis — Analyst Yes. OK. I was hoping for more information. You’ve given all the split between the different line items, but maybe we can follow up on that. So you referred to the guidance as unchanged. At least I was expecting sort of lower growth from Brazil, which suggests that if you maintain the same growth rate ex Brazil that the growth rate for the other segments is potentially lower than it would have been. So can you just comment on that — your expectation for the other segments. Has it changed from what it was when you gave the initial guidance?Mike Randolfi — Senior Vice President and Chief Financial Officer Sure. I mean this is our thought around that. When we built our plans for the fiscal-year 2020, we took into account where Brazil was trending last year, and we had initiatives that would ultimately drive a resumption of growth within Brazil and also recognizing that the comps, particularly in the back half of 2019, were quite a bit easier. And so when we look at our overall — when you look at our overall planned levels of growth, Brazil was contributing similar to the level of the rest of the business. So when we take that out, it doesn’t have a meaningful impact on our guidance.Corey Greendale — First Analysis — Analyst OK. And in terms of the additional spend on marketing, could you comment on kind of what’s driving that, like, are you seeing a tougher demand environment? You mentioned the conversion rates on some pieces, but I don’t think on the medical and healthcare piece. So what’s driving the decision to increase the marketing spend?Mike Randolfi — Senior Vice President and Chief Financial Officer Sure. So what I would say what’s driving our underlying decision is, we see ourselves having part of a business that just has tremendous opportunity and tremendous potential for growth. And marketing is one of the ways and one of the tools to help us drive that growth and reach our fullest potential. And to give you a little bit more context on marketing and just how we’re investing and how we think about marketing overall, first, as we invest marketing dollars, the way we think about that and the way we’ll be thinking about that is really in terms of what’s the long-term value we’re going to generate from those marketing dollars applied relative to the investment. Now that also means we may make marketing investments in period with the payback being in subsequent periods, and that’s the case in this instance. And what I would say is just to give you a little bit more context on the marketing, we’re spending — our overall increase for the year in this quarter is about $5.5 million, about $3.5 million of that is on the marketing side, about $2 million is on the recruiting side. On the marketing side, we’re spending a fair amount in medical and healthcare, particularly to support Chamberlain, their new programs, in particular, and also on supporting Ross Med, which is still recovering from the lingering impacts of the relocation. And then also spending money on the financial services side to support ACAMS, to support the new global certified sanctions specialist certification and also the overall Becker brand and 2.0. So those are the big initiatives that we are supporting, and we feel really good about the investments we’re making.Lisa Wardell — Chairman and Chief Executive Officer Corey, the only — it’s Lisa. The only thing I would add to that is, if we say why on the