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Edited Transcript of ATGE earnings conference call or presentation 29-Oct-19 9:00pm GMT

Q1 2020 Adtalem Global Education Inc Earnings Call

OAKBROOK TERRACE Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Adtalem Global Education Inc earnings conference call or presentation Tuesday, October 29, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John D. Kristoff

Adtalem Global Education Inc. - VP of IR

* Lisa W. Wardell

Adtalem Global Education Inc. - Chairman of the Board, President & CEO

* Michael O. Randolfi

Adtalem Global Education Inc. - Senior VP, CFO & Treasurer

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Conference Call Participants

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* Corey Adam Greendale

First Analysis Securities Corporation, Research Division - MD

* Gregory R. Pendy

Sidoti & Company, LLC - Consumer Analyst

* Huang Howe

Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst

* Jeffrey P. Meuler

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Sou Chien

BMO Capital Markets Equity Research - Senior Associate

* Stephen Lawrence Farley

Farley Capital L.P. - General Partner

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Presentation

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Operator [1]

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Greetings, 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.

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John D. Kristoff, Adtalem Global Education Inc. - VP of IR [2]

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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 risk 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 statement, 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 direct 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.

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Lisa W. Wardell, Adtalem Global Education Inc. - Chairman of the Board, President & CEO [3]

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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 10x EBITDA compared with Adtalem's current valuation of approximately 7.5x 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 health care and Financial Services verticals.

On that note, during the first quarter, we capitalized on healthy demand in our medical and health care 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're also diligently working on developing new educational partnerships with health-care 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 continue 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 Saint 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 7 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're 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 employer 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.

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [4]

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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 repositioned 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 1/4 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 of 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, an 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 3 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 on to 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 towards the rest of the year, we're 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 towards these ends to ultimately grow shareholder value.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) You first question comes from Corey Greendale with First Analysis.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [2]

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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?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [3]

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Yes. Those are in the slides, in the appendix in the slides for Brazil. You have -- you do have the additional results from discontinued operations that are provided, and they're also in our 10-Q.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [4]

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Okay. I'm sorry, what I am asking is like, will we get all the quarters of fiscal '19 restated?

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John D. Kristoff, Adtalem Global Education Inc. - VP of IR [5]

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Yes, it's at Slide 20, Corey, in the supplemental slide deck that we've posted.

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [6]

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That's right.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [7]

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Yes. Okay. I was hoping for more information because we don't have a 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 x Brazil that the growth rate for the other segments is potentially lower than it would have been. So can you just comment on that like your expectation for the other segments isn't changed from what it was when you gave the initial guidance?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [8]

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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 looked at our overall -- when you look at our overall plan 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.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [9]

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Okay. 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?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [10]

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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.

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Lisa W. Wardell, Adtalem Global Education Inc. - Chairman of the Board, President & CEO [11]

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Corey, the only -- this is Lisa. The only thing I would add to that is, if we say why on the timing is, we had a lot of things we needed to fix, so as an example, Becker and the branding and the website, I mentioned that in the last call. If you look at it, now completely different user experience for our students and customers coming through there. Chamberlain RN to BSN, we talked about pricing and how we were communicating to the market. Now that we, frankly, have fixed that and are rolling that out across the state, we can put in those digital marketing SEO dollars because it's not putting money under -- after something where the messaging is isn't correct, as 2 examples. And I would say something similar on the ACAMS side. We really have the ability to give a good user experience on those sites, and therefore, we can ramp up the marketing.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [12]

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Great. That's very helpful detail. And if I can just ask one quick numbers question, then I'll turn it over. The -- in ACAMS, the shift in timing of the conference, can you give some sense of what the year-over-year impact was of that on the segment revenue?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [13]

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Sure. The impact in the quarter was approximately $6 million. And so basically, we had $6 million of revenue from the conference this quarter that we wouldn't have had in the first quarter last year. And similarly, as you think about the second quarter, in the second quarter that's coming up, we won't have the ACAMS conference, obviously, and we will be lapping the ACAMS conference. So overall, when you look at our revenue trends in the second quarter for global Adtalem, you should expect lower revenue growth in the second quarter than you saw in the first quarter because of the timing of the conference.

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Lisa W. Wardell, Adtalem Global Education Inc. - Chairman of the Board, President & CEO [14]

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Yes. And again, one quick addition, which is, on that conference, if you were just to take conference to conference, it grew about 15% to 20% based on a higher sponsor and sponsorship of the Las Vegas conference. So we're feeling confident about that.

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Operator [15]

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Your next question comes from Jeff Meuler with Baird.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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So on the initial dilution -- and congrats on the transaction, like the divestiture, but on the initial dilution, I guess, 2 pieces maybe if we could hit them. On stranded cost, is the $3.4 million in the year ago, annualized $14 million, is that the right annual number to use? And then related to that, how much does guidance assume that you'll reduce the stranded costs this year? And long term, how much opportunity is there to reduce it?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [17]

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Yes, to answer your first question, the full amount for the year last year was around $13 million, so you're about in the ballpark. And the way I would think about the costs that are -- that were previously allocated to the Business & Law and are now being allocated to Medical and Healthcare and Financial Services is, the portion that was unique to Brazil, that's already in discontinued operations. The rest of the costs are kind of central costs that aren't necessarily unique to Brazil, and basically, each of the individual parts of our business basically leverage the benefit off of.

Now with that being said, what I would say is just more broadly on costs overall is, we will continue, as we have had in the past, to have a very strong focus on efficiency and continuing to enhance our overall cost structure. And the way we think about it and the way we will think about it over time is, I would put it in a few buckets. First, post-Brazil, we have approximately 4,500 employees throughout Adtalem. And over time, we're going to continue to work to -- continue to improve the tools and the processes and do what we can to help improve the overall efficiency and productivity of our team members, and that will, ultimately, over time, increase our overall productivity level.

Secondly, we spent today around $50 million to $60 million, all in, with regards to our cost of real estate. We will continually be looking at real estate and how to optimize the efficiency of our real estate portfolio. And then thirdly, what I would say is, we need -- separate from our employee costs, separate from our real estate costs, we spend over $200 million in various other cost categories, and that really is an opportunity for our procurement team over time to identify how to create additional efficiencies through contract negotiations. So looking at more broadly than just the $13 million, I would say, I think there's a lot of opportunity overall from a cost structure standpoint.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18]

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Okay. And then I guess the other point hitting the dilution just not getting the proceeds until about a year from now, I guess, what's the ultimate plan for those? Like how much do you expect to return to shareholders via repurchase or I don't know if you'd consider a onetime dividend? Or just say would it be open-market repurchase or some sort of like modified Dutch tender or something like that an option?

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Lisa W. Wardell, Adtalem Global Education Inc. - Chairman of the Board, President & CEO [19]

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Jeff, thank you for thinking of all those for us. So the answer is, absolutely, we look at that as part of the overall capital allocation. As you know, share repurchase, we've been pretty aggressive in the market because of where we are. We'll continue to do that. And obviously, with that cash coming in, it's really going to be between -- this is the 3 things it always is, which is returning to shareholders. I can't -- we want to close the deal. I can't say we've thought about the actual process or procedure for that, but certainly, that is -- we are stewards of that capital for our shareholders, no question.

And then as we said before, investing in our core, you see us doing it a bit now, which is putting pressure on the bottom line, but it's going to really bear dividends and fruits with this new streamlined, focused portfolio going forward. And then potentially, if there are acquisitions that are core to driving growth and synergies and scale for our remaining 2 areas of focus, Medical Healthcare and Financial Services, where we believe we got the right to win, then absolutely, we take a look at that. So it's going to be in those 3 buckets as it always is, but we recognize that we need to have something very compelling to do within the current verticals in order to spend that money of investors.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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Okay. And then gross profit was only up 1%, which I'm guessing puts it down organically year-over-year, even more so if I would normalize for ACAMS conference timing. So when you talk about the expenses, a lot of the focus was on marketing and student recruitment. Other than higher bad debt reserve, I'm not sure I understand like why is gross profit down organically.

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [21]

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So I think you have a few things going in this quarter. One is, as I highlighted, you do have about $5.5 million in quarter of higher marketing expense that is higher than the first quarter...

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [22]

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But wouldn't that hit EBIT but not gross margin? I'm focusing on gross profit.

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [23]

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Yes. You would have had -- yes, you're right, that would have hit EBIT. In terms of on gross profit, you have a couple things, obviously, going on there. You do, obviously, as you mentioned, have timing with regards to ACAMS. We have growth in particularly on our on-campus businesses. Obviously, that has somewhat little bit of a lower margin than the rest of our business. We also have growth in our housing revenue line, which also tends to be a little bit -- tends to be lower margin than some of our online offerings as well as Becker and ACAMS.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [24]

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Okay. And then last one from me. On medical international, what are you seeing in terms of new enrollment leading indicators, inquiry rates and whatnot, just given that the new enrollment turn remains weak, but you're obviously leaning in on marketing spend, and we now have a decent amount of time removed from the campus relocation?

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Lisa W. Wardell, Adtalem Global Education Inc. - Chairman of the Board, President & CEO [25]

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Yes. Sure. Thanks, Jeff. So a couple things. While we do still have a slight decline in new and a bit of decline in total, obviously, that's coming from the newers being lower. It's -- we're certainly closing the gap there. So if you look at a little less than 2% across the 3 schools, that's less than 20 students across those 3 schools. Obviously, the one being most affected is Ross Med. And as a reminder, I know you all know this, but the permanent home will not be 12 months until January. So as I indicated in the last call, we knew we'd continue to see some pressure. We're seeing the right application and inquiry models across med/vet, which gives us confidence that, as we look at that 300-or-so-day cycle, if you will, for students and prospective students making that decision that we're on the right track and have confidence for the January and May enrollments.

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Operator [26]

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Your next question comes from Greg Pendy with Sidoti.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [27]

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Just wanted to, I guess, understand the cadence on how we should think about the marketing spend. If I'm not mistaken, it seemed like, in 4Q, that we should have been expecting it to be maybe front-half loaded. Is that still the same as we think about the remaining 3 quarters? Because I know you're not giving quarterly guidance, but I'm just thinking, I mean, by the fourth quarter, should we anniversary just the Ross spend? And is Chamberlain kind of going to be front-loaded in the first half?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [28]

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Yes. I mean I think the way you're thinking about it is about right that we have made active decisions to essentially front-load our marketing throughout the year, and a disproportionate amount of our spend is focused at both Chamberlain and then secondly at Ross Med, and then we'll get to the back part of the year, you both don't have the same quantum necessarily of spend, but you also start to lap next year's spend level -- I mean last year's spend level.

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Operator [29]

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The next question comes from Alex Paris with Barrington.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [30]

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This is Chris Howe sitting in for Alex Paris. Going through my list of questions here. I have a few left. You've talked a lot about Brazil and the proceeds that could come in upon the closing. When it comes to share repurchases, are you still remaining with your initial expectations for the year? And as far as these proceeds, how would you evaluate the pricing environment when it comes to inorganic growth and kind of areas of interest that you may see that are under evaluation for build versus buy decisions?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [31]

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Sure. A couple things. I'll take the first part of that, and then Lisa could take the second part. With regards to what our initial assumptions are with regards to share repurchases, what our original plans have been and what our guidance is predicated upon is approximately $100 million of share repurchases. And the other thing I would also just highlight just to give you a little bit of color just -- as you're modeling EPS is particularly around the second quarter relative to the trending in the back part of the year is, looking at the trending of EPS through the year in the second quarter, I wouldn't expect that we would have EPS growth in the second quarter, as we have -- we continue to have a higher level of marketing spend in the second quarter, and our initiatives ramp up in the back part of the year.

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Lisa W. Wardell, Adtalem Global Education Inc. - Chairman of the Board, President & CEO [32]

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Yes. In terms of the acquisition question and pricing, from our perspective, we have the platforms in the 2 verticals where we wish to play and feel like we have the right to win, particularly med health, where we've got the right both on-site and online platform as well as, in Financial Services, we're able to be global. And so for us, we -- that allows us the ability to be really disciplined in how we pursue acquisitions to ensure that we're maintaining the IRR and the ROIC for the vertical in this segment.

And what I mean by that is, as we look at -- OCL being a perfect example. As we look at acquisitions, we can really build in the synergy case and the cross-selling case, et cetera, et cetera, because we're not looking for the start-up platform, if you will. So it will be disciplined, and we always have the ability to invest in the core Chamberlain campuses, online programs, new offerings, partnerships. You're seeing that in our script today, and you will continue to see that through fiscal '20 and beyond. So there is no must-do acquisition, which allows us to be disciplined.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [33]

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That's great and also very helpful. My last question is just in regard -- you had talked about it at a recent conference. You've talked about it more than once about the 300-day sort of cycle between when a student goes online until they actually enroll in regard to med health. Can you share some of the refinements that you're making or the conversion processes in place that are going to drive higher conversion of leads going forward? And just following up on that note, can you also comment on what you're seeing as far as lead volumes and retention within med health?

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Lisa W. Wardell, Adtalem Global Education Inc. - Chairman of the Board, President & CEO [34]

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Yes. Sure. And so the 300 that I mentioned a bit is a sort of first click to enrollments. So there's a couple things we're doing. First is just, in general, across our actual site, so if you go to our websites today as it relates to the med schools and the vet school, very different experience in terms of ease of use and sort of click-through, if you will, to get the inquiry and get those inquiry sort of open and get the information we need from those students. So certainly a better experience and then just more touch points through that funnel and through conversion.

So if you'll recall, using Ross Med as an example but also AUC has gone through this too, this time last year, we couldn't have even told folks where that school and location was going to be or give them all of the things that go into that decision around housing and family and finance and all of those things because we were in flux. And so now we're much better able to have those touch points with the students as they go through the process.

The second is making sure that our inquiry volume is coming from those places where folks really do have the intent to enroll. And so that we're working through our data analytics and digital marketing side and SEO to make sure that we're pursuing (inaudible) when we obviously have the large funnel but pursuing those inquiries that just have the higher intent. So that's what we're doing on the actual sort of business of marketing and student experience to convert -- to increase those conversions.

On the other side, we're also, as I mentioned today, and it's been a couple of calls now we've talked about it, but it's starting to really gain traction, is partnerships with those places that we know have these undergrad students, in this case, the HBCUs and the HSIs, Hispanic Service Institutions, who have students who want to enroll and just did not have the awareness. And in the September class, we have students from all 6 of the partnerships that we have enrolled in either our MERP or our schools. So we know that that's a funnel that makes sense and that those students can be successful within that first semester. So I think between those 2 things and the way that we're tracking the data around the students who are coming to the sites and starting inquiries, we're seeing really good traction.

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Operator [35]

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Your next question comes from Henry Chien with BMO.

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Sou Chien, BMO Capital Markets Equity Research - Senior Associate [36]

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Just a follow-up question on the Medical and Healthcare side, I guess, specifically, Medical. The new enrollments, just if you could comment on some of the volatility in new enrollments. I know that there is some delays last quarter and I guess this quarter is to do with the relocation. I mean just, I guess, If you could comment on excluding maybe some of these onetime things, what sort of like the underlying growth you would be targeting for that -- for those schools.

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Lisa W. Wardell, Adtalem Global Education Inc. - Chairman of the Board, President & CEO [37]

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Yes. So I would say in terms of where we are, the traction, what we're looking at, again, as we mentioned, it's Ross Med where we're really working to drive the marketing spend. Now that we have a permanent home, AUC, obviously, now has its satellite campus and the first class there or something like that, but UK Track and the first class in the U.K. and so we're expecting to see some positive growth there.

And the vet school actually sat its largest class, I guess ever in September. And so there, we remain vigilant in concert with the January and May classes that tend not to fill as fast just because obviously, the traditional school entrance time is September. So we're very confident that we will be able to get to a sort of mid- to high single-digit growth across med/vet as we work through both the marketing challenges and the sort of aftermath of the relocations with AUC and with Ross Med.

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Sou Chien, BMO Capital Markets Equity Research - Senior Associate [38]

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Okay. Got it. That's helpful. And on the marketing side, I know you kind of walked through some of how you're thinking about the strategy. Just in terms of the market or the competition out there, what happened? Like was there a change in sort of their marketing environment? Are you seeing more competitors? I guess, is it -- sort of what's going on out there?

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Lisa W. Wardell, Adtalem Global Education Inc. - Chairman of the Board, President & CEO [39]

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Yes. I would say, in Chamberlain, certainly, it depends on the area, obviously. We've talked about RN to BSN and just online there's more competition for sure. But the Chamberlain brand certainly carries weight, and we're able to drive that through the market and sort of cut through some of the noise of the low-cost provider. And we talked about just our pricing strategy. We've rolled that out to more than 20 states now. We're seeing really good traction on that side.

On the on-site BSN, we're growing quite nicely, and we don't see -- I mean, obviously there's more barriers to entry there in terms of state boards, et cetera, and we don't see competition changing the way that we're marketing there with just sort of best practices and getting better.

On the med/vet side, I think it really does have a lot to do with the flow-through of just all of the disruption, again, over the last -- it's been a 1.5 years now, but we're seeing sort of steady-state and increased inquiries and application interest across that segment. So feeling pretty confident about the next couple of sessions as we go into the back half of the fiscal year.

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [40]

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Yes. The only thing I would add there is, there is a good piece of our marketing that's supporting our new initiatives. We've launched new degree programs at Chamberlain. We -- at Becker, we had a relaunch of our website and the brand, and we're really leaning heavily into the CPE space. At ACAMS, we launched our first new certification in 16 years, and we also at ACAMS had a 15% increase in membership to over 75,000. And so our marketing dollars and our initiatives are targeted towards those growth levers.

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Operator [41]

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Your next question comes from Corey Greendale with First Analysis.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [42]

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Just a couple of follow-ups. So maybe I'll start with a big-picture question which -- for Lisa, since it's been a little bit of time now since you have publicly discussed the workforce solutions positioning, just interested in feedback and as you're talking to large employers, how they're thinking about working with you?

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Lisa W. Wardell, Adtalem Global Education Inc. - Chairman of the Board, President & CEO [43]

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Yes. Thanks for the question. Actually, really good feedback. And I think it will come far more sort of credible and confidence building as we've really been able to streamline the portfolio and say we are focused on solving really big problem for folks in Financial Services and employers in Medical and Healthcare. So as an example, this AI for financial services program that we launched with Northeastern University getting a lot of traction, not just in financial services but also multinationals and other corporate to have folks coming in who are day-one ready in domain expertise, in fin services but just need that extra certification and up-skilling. That's exactly the kind of proof point that we're looking for across the portfolio and really well received.

On the hospital system side, we are starting to gain the traction across our institutions, which is always something that was aspirational earlier but now that we can really focus on. So if you think about the Cleveland Clinic in Florida that I mentioned on the script, to be able to have that cover Chamberlain as well as Ross and be able to go to these hospital systems and talk to them, not just about physicians, which is important, but also about Masters of Social Work and Masters of Public Health as well as BSNs as well as up-skilling their RN to BSN, it starts to paint a broader picture for them that we're a solution provider that they can come to. So really good traction on both places, and now we have the ability to be clear about our focus in these areas. In the supply and demand, these are the right places for us to be. And so the noise has come out of the portfolio in a way that I can really reach out and drag some of these relationships at the CEO and Board level.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [44]

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Okay. That's good to hear. And then I just had a real quick numbers question, which is I think, looking at the revenue growth in med and vet, it implies a pretty significant increase in revenue per student. Is that the housing impact you've been talking about? Or what's driving that?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [45]

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Yes. So what you're seeing there is the -- an increase in housing revenue, particularly at Ross Med in Barbados.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [46]

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And is that like some -- are we going to see that all year?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [47]

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Yes. No, we will see that all year. We have significant number of student residences there, and we have -- that will be something that's -- those are students that are living right by our campus in Barbados, and we will be generating that revenue for the foreseeable future.

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Operator [48]

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Your next question comes from Stephen Farley with Farley Capital.

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Stephen Lawrence Farley, Farley Capital L.P. - General Partner [49]

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Two questions. On the statement of cash flow, amortization of -- and adjustments to operating lease assets was $12.8 million. Can you tell us about that?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [50]

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Sure. That is essentially the adoption of ASC 842. That's basically where you're putting the -- you're basically -- you're putting your leases on your balance sheet. And essentially, when you put your leases on the balance sheet, you basically amortize the lease asset, and that you see -- so you have the expense associated with that, and then you have that go through your -- you have the offset in your cash flow.

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Stephen Lawrence Farley, Farley Capital L.P. - General Partner [51]

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Okay. So that -- you're saying it's not a write -- you're not writing something down? Or are you writing it down?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [52]

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No, no, no. We're not writing anything down. Under the new lease accounting standard that became adopted as of the first quarter of this year, this is ASC 842. You can actually look at our 10-Q, and it elaborates it in detail. You basically essentially put your operating leases -- they essentially are capitalized on the balance sheet, and then there's the amortization of those leases, which flows through your financial statements.

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Stephen Lawrence Farley, Farley Capital L.P. - General Partner [53]

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Okay. Okay. Then also tell us about the provision for bad debt went from -- up from $1.2 million to $5.6 million. Can you tell us about that?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [54]

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Sure. So what I would say is, every month, every quarter, we evaluate our loan portfolio to make the best estimate based on the data we have at the time with regards to collections. Over this quarter, we saw some increase in the aging of some of our loan receivables in the med/vet area. And so our reserve simply indicates and simply reflects the new data points from this quarter. And so our reserve was adjusted based on the increased aging of some of our receivables.

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Stephen Lawrence Farley, Farley Capital L.P. - General Partner [55]

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And so just can you kind of give us a picture of the people that you thought were good credits that now aren't good credits or the people that were -- had been out for long time or people that dropped out in the middle of the way? What caused the -- what assumptions turned out not to be true?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [56]

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Yes. Well, I don't know that it's an assumption that turned out not to be true. These are unique to the individual. So I don't know that I can call out specific circumstances. This is -- we look at, like I said, every quarter, we look at the overall portfolio. No person who loans money to someone -- virtually no one has a 100% collectability. And so you're always making an assessment with regards to the reserve. And so we assess that on a regular basis based on the data we have.

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Lisa W. Wardell, Adtalem Global Education Inc. - Chairman of the Board, President & CEO [57]

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I think just to add to that. So if you look at med/vet and you look at our cohort default rates, right, they're less than 1%. So these folks -- these are not folks who have dropped out or anything like that. These are just aging receivables for the private loan part, which is a much smaller part, and they're paying their federal loans. So a part of this is just making sure that we're doing the collections piece to ask them to pay their loans. I'm sure Uncle Sam asks them every month, and so we're just going through that process. It's been great having Mike onboard to take a look at that. So we don't expect this to be an ongoing or sort of shifting up with number. These are folks who are employed, and they're paying loans because they're paying federal loans.

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Stephen Lawrence Farley, Farley Capital L.P. - General Partner [58]

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And can you give us a sense of the size of the portfolio? If the provision for bad debt was $5.6 million in the quarter, how large is the -- are the receivables from people at the med/vet?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [59]

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Yes. We actually have that specifically disclosed in our 10-Q, so I'd just refer you to our 10-Q.

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Stephen Lawrence Farley, Farley Capital L.P. - General Partner [60]

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Okay. And then also in the press release, you talk about there were $3.2 million in charges that related to DeVry University and Carrington, which has been ownership had transferred in the second quarter 2019 and then Brazil. Tell us about -- how much of that was the DeVry and Carrington? And why is it that we're now seeing a charge for something that got divested 6 months ago?

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [61]

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Well, even though something may be divested, there are certain things where we still have obligations associated with that. And so any obligation associated with that, where we may have a charge particularly tied to facilities or some other instance, where we still have an obligation, that goes through discontinued operations.

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Stephen Lawrence Farley, Farley Capital L.P. - General Partner [62]

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Well, I follow that, but can you just tell us what it was? What...

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Michael O. Randolfi, Adtalem Global Education Inc. - Senior VP, CFO & Treasurer [63]

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Yes. I'd have to refer you to our 10-Q on that specifically.

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Operator [64]

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There are no further questions at this time. I would now turn the call back over to John Kristoff.

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John D. Kristoff, Adtalem Global Education Inc. - VP of IR [65]

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Thank you. And thank you, everyone, for joining us today. And as always, if you have follow-up questions, please contact me directly.

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Operator [66]

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This concludes today's conference call. You may now disconnect.