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Edited Transcript of NAUH earnings conference call or presentation 16-Aug-18 3:00pm GMT

Q4 2018 National American University Holdings Inc Earnings Call

RAPID CITY Aug 28, 2018 (Thomson StreetEvents) -- Edited Transcript of National American University Holdings Inc earnings conference call or presentation Thursday, August 16, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Prior

The Equity Group, Inc. - SVP

* David K. Heflin

National American University Holdings, Inc. - CFO

* Lynn Priddy

National American University Holdings, Inc. - Provost & Chief Academic Officer

* Ronald L. Shape

National American University Holdings, Inc. - President, CEO & Director

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Presentation

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Operator [1]

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Greetings, and welcome to the National American University Holdings Fiscal Year 2018 Fourth Quarter and Year-End Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd like to turn the conference over to your host, Adam Prior of The Equity Group. Thank you. You may begin.

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Adam Prior, The Equity Group, Inc. - SVP [2]

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Thanks so much, and good morning, everyone. Thank you for joining us. Yesterday 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'd 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 in PDF format on the NAU website, which we will reference during this call.

Before we get started, I'd 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 risks and uncertainties that may affect the business prospects and results of operations of National American Security -- excuse me, National American University Holdings. Such risks are detailed in the company's filings with the Securities and Exchange Commission.

Regarding the disclaimer language, I'd like to refer you to Slide 2 of the presentation for additional information. Specifically, the company expects to file its fiscal 2018 fourth quarter and full 12 months results tomorrow and encourages all investors to read the company's filings with the SEC for a thorough review of NAU's business and financial results.

Let me note a brief disclaimer that the company operates in 2 business segments: the academic segment, which consists of the undergraduate, graduate and doctoral education programs; and ownership in and the development of multiple apartments and condominium complexes from which it derives sale and revenue and rental income. The academic segment is where the company derives the largest portion of its business revenues. For the company's fiscal 2018 fourth quarter, the company's -- the academic segment generated revenue of $17.9 million and the company's apartment and condominium segment generated $349,000 in revenues.

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

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Ronald L. Shape, National American University Holdings, Inc. - President, CEO & Director [3]

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Thank you, Adam, and welcome, everyone. I would like to take a moment and recognize some of the executive leadership team, many of whom are on the call this morning. Dr. David Heflin, our Chief Financial Officer; Dr. Lynn Priddy, Provost and Chief Academic Officer; Mr. Paul Sedlacek, Chief Compliance Officer and General Counsel; Mr. John Woolsey, Vice President of Human Resources and Development; Mr. David Castle, Vice President of Marketing and Enrollment Management. I would also like to welcome Ms. Joan Meyer and Mr. Jerrad Tausz, who will be leading our ground efforts and online efforts, respectively, to the call. Both these individuals come to the -- come to us with extensive experience in postsecondary education and a wealth of knowledge in building enrollments and supporting successful student outcomes.

We also have several other leadership individuals across our system.

During this morning's call, I will discuss the performance and focus on our 5 operational drivers and provide an update on our business strategies. Dr. Priddy will provide an update on our academic initiatives, and then Dr. Heflin will give an overview on our financial performance and focus. We will then conclude with a question-and-answer session.

For those of you following along on the slide deck, Slide 3 outlines the key areas of focus on enrollment growth, which we introduced to you on our last earnings call. We are calling these areas of focus our operational drivers. Over the past year, we have worked to better focus our resources on the parts of our operation that support enrollment efforts and successful student outcomes and have similarly eliminated those aspects of our operation that distract from those efforts. As such, and as Dr. Heflin will discuss shortly, we have seen a marked improvement in our financial performance for the fourth quarter, which is a direct result of our consolidation efforts in Q3 and the focus we have put in place around those aspects of the operation that supports successful student outcomes.

The 5 operational drivers for the University are online, on-ground, military, Canada and graduate. In addition to the 5 operational drivers, we have the teach-out initiatives, but since these do not allow for continuous enrollment opportunity and by design are intended to go to 0, they are not identified as a driver.

As noted on Slides 4 and 5, 4 out of the 5 operational drivers continue to realize year-over-year enrollment growth for the spring term when compared to the past 2 years. We believe that by focusing our resources on each driver as a separate and distinct unit, we are better positioned to support the unique characteristics of each student population, provide more targeted marketing campaigns and build a support system designed to serve the unique characteristics of that group of students.

The next few slides break down each driver and highlight our specific efforts for each one, beginning with online on Slides 5 and 6. As noted on Slide 5, we have consolidated all online functions under a single leadership focus. With his extensive online experience, Mr. Jerrad Tausz will be leading the online focus for our undergraduate, graduate, Canada and military operations. This specific focus is designed to ensure enrollment efforts, student support services and academic engagement to address the particular needs of this group of students.

As indicated on Slide 4, we continue to see solid enrollment growth in the online operation with spring 2018 enrollments up 47.9% over the same period last year.

Shifting to Slides 7 through 12, we are pleased with the continued growth of the military, Canada and graduate operations. With the asset purchase of Henley-Putnam University now complete, we remain focused on the program integration and migration of NAU systems as well as increasing the marketing exposure and enrollment potential of these new high-demand programs and certificates that will be offered through NAU's Henley-Putnam School of Strategic Security.

For the spring 2018 term, we continue to see strong growth in our military operations, with enrollments increasing 188% over the same period last year.

Likewise, as noted on Slides 9 and 10, we continue to focus on building our Canada operation through strategic relationships and targeted marketing. For the spring 2018 term, we saw an enrollment increase of 121% over the same period last year. We continue to believe that the Canadian market provides a unique and timely opportunity for the university to expand our international reach; and the benefit of being approved for Canadian aid and provincial aid has been very helpful in this effort. As with our online military and Canadian divisions, we continue to see enrollment growth in our graduate operations.

Highlighted on Slides 11 and 12, for the spring 2018 term, the enrollment in our graduate division was up 17.3% over the same period last year.

Moving to Slides 13 and 14, we will discuss on-ground operations. As we have shared in previous calls, we continue to consolidate our ground-based operations to reflect the changing needs and preferences of our students. As we have made this shift, there has been a number of unique outcomes worth noting. First, we have been able to focus our resources to those divisions with growing student populations and ensuring we are providing the support infrastructure needed for these students to be successful, which has driven the marked improvement in enrollment trends in these other divisions. Second, through the consolidation efforts, we have been able to realize substantial efficiencies, which resulted in tangible improvement in our fourth quarter financial performance. Finally, although we have seen an overall total decline in our ground-based student population, we are seeing enrollment increases at individual ground-based operations. We believe these individual campus increases are driven by the unique academic programs designed and offered in a very focused space to support that specific market.

Finally, as noted on Slide 15, we continue to support the small and shrinking population of students for whom we are providing teach-outs, following the closure of their postsecondary institutions. For the spring 2018 term, we had fewer than 350 students remaining in the teach-out programs. In addition, as we move into fiscal year 2019, we anticipate the remaining teach-out students will complete their programs by the end of the winter term 2019. Unless another situation should present itself, we will be near or at 0 teach-out students.

Before closing this discussion, I would like to reiterate that what I have said in previous calls and thinking about how these students must have felt when faced with the potential of needing to start their degrees from scratch, it has been our honor and pleasure to support these students and provide them with the opportunity to complete their degrees with as little disruption as possible following the closure of the institution in which they originally enrolled.

Dr. Heflin will provide greater insight on our results for the fourth quarter and full fiscal year 2018 shortly. But I wanted to highlight a few of the items on Slide 16. While revenues for the quarter did decrease as a result of lower enrollment, the impact is less severe when considering the impact of the monthly start revenue and the future unearned revenue yet to be recognized. In Q4, we not only achieved positive cash flow from operating activities, but also realized the decrease in operating expenditures of just over 16% in Q4, nearly 6% for the year through our efforts to consolidate on-ground operations and focused resources to those divisions with enrollment growth. It is also worth noting that we continue to have approximately $4 million per year in ongoing lease expenditures from consolidated ground operations that we are working aggressively to reduce. As mentioned in the earnings release, we have successfully liquidated 2 locations through buy-outs -- through cash buy-outs; are in the process of liquidating an additional 4 locations through lease termination; we have signed a sublease agreement on 1 additional location; and we anticipate continued decreases in operating lease obligations in the future.

Moving to Slides 17 through 19. Total student headcount was down 15.7%, primarily due to the discontinuing of continuing ed divisions and the consolidation of on-ground operations. As we noted in previous calls, we expect to see the student headcount numbers continue to decline in our continuing education division as we have shifted our focus from this area to the operational drivers mentioned earlier.

Slide 18 provides a chart of historical student enrollment by credit hour as well as the current projected credit hour enrollment for summer 2018. For the spring term, students enrolled in 53,227 credit hours, which was below our projection of 55,782 credit hours. The decline was driven predominantly by the lower-than-expected ground-based student population. We are projecting 46,700 credit hours for the summer term, which is down approximately 15% over the summer term last year. The decrease in our ground-based student population and the continued successful student completion of the teach-out programs will translate into additional year-over-year pressures on these enrollments over the next several terms, which we expect will be partially offset by the addition of a monthly start calendar and the continued growth in our online, military, Canada and graduate divisions.

As shown on Slide 19, we expect to see continued growth within online, military, Canada and graduate student enrollments for the summer 2018 term. We continue to focus on stabilizing enrollments in our on-ground operations, ensuring the expense structure is in line with the revenue expectations and allocating resources to other divisions with stronger enrollment growth opportunities.

Looking forward, we remain focused on our key operational drivers to support our enrollment and strategic goals. We will continue to provide additional insights as to the development of these initiatives as we move forward.

Next, Dr. Priddy will provide an update on our academic operations.

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Lynn Priddy, National American University Holdings, Inc. - Provost & Chief Academic Officer [4]

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Good morning. In spring 2018, National American University significantly expanded its academic offerings for the military; for public and private agencies focused on security, nuclear studies and protection management; and for students interested in careers in intelligence, strategic security, cybersecurity and counterterrorism studies. More than 30 certificates offer an undergraduate jump start and expanded graduate expertise avenue or a needed career update in more than a dozen niche strategic security topics and regional languages found at 2 other institutions.

With the integration of Henley-Putnam University's highly specialized curricula and the hire of both the full-time academic leadership and the majority of the distinctively qualified faculty from Henley-Putnam University, NAU assures a strong brand and robust launch to its Henley-Putnam School of Strategic Security at National American University.

In fall 2018, we anticipate continued growth in the Baccalaureate, Master's, and Doctoral programs and certificates, which will increase NAU's graduate enrollment and undergraduate enrollment, accordingly. In 2019, the Henley-Putnam School of Strategic Security will add advanced nuclear studies and cybersecurity offerings as well as additional doctoral offerings to solidify itself as a key operational and educational driver at National American University. Academic strength extends into several other arenas at NAU.

Slides 21 and 22 cite key initiatives grounded in applied research that create the learning environments and support systems for NAU students and the skill sets in demand by employers. The initiatives build off the academic accomplishments completed in fiscal years 2016 through 2018, all of them launched and reflect the focus on growth, sustainability, quality and compliance.

More than 95% of online courses now provide an online course experience that demands faculty-student engagement, personalized communications, peer-to-peer projects, customized workplace case assignments and proficiency-based evaluations. These evaluations are aligned with industry certifications and standards in business, technology, health care, aviation management, human resources, paralegal and legal studies, and of course, now security.

Innovative cross-career seminar courses provide multi-term team-based interactions that combine legal studies and human resources with intelligence management and counterterrorism. These cross-career seminar courses bring diverse perspectives on health care and business ethics, technology and finance to community problems. And these require extended dialogue on criminal justice and health information issues.

With the reimagined curricula and revamped learning management system, NAU will complete the real-time data systems that allow both management and strategic advancement of institutional and educational effectiveness as well as immediate intervention into and correction of student and faculty behaviors so as better to assure retention, full-time enrollment, academic achievement and lower debt on completion.

NAU prides itself on providing a caring and supportive environment that serves student who've not succeeded at other institutions. The data systems push the information and communication that is needed if these working adults are to achieve their career goals.

TEAMS 3 is the proprietary system that delivers real-time data on individual students, faculty and advisers from overall persistence to actual daily engagement within the online and blended course room. Based on the original predictive indicators, TEAMS 3 is now building on data analytics and intelligence through deployment across the system.

The system shows the status and risk level of every student, flagging those students who receive a C, fail to attend, fall below a certain GPA or are unengaged in a discussion. TEAMS 3 also documents faculty and adviser engagement with students, alerting deans and others on lack of support, lack of timely assessment or lack of responsiveness to students, supporting an entirely new online high-contact, high-engagement course and program experience.

Finally, the fall 2017 launch of NAU's credit review processes for work-based learning, life learning, previous training and alternative education completes the changes in academic policies and processes that assure flexibility and intentionality in direct degree path. NAU is committed to accepting and applying every credit a student earns from all sources to the degree requirements up to the federal and creditor limit of 75% of the degree or a program.

NAU is a completion and advancement institution. Our progressive faculty and academic administration has made -- has remade educational offerings that don't just allow, but are designed such that students intentionally receive maximum credit for learning and complete with minimal loss of credit. Add on an embedded certificate along with credit for documented corporate education allow adults seeking promotion to advance professional expertise in niche areas aligned with industry and profession-declared competencies and proficiencies. The fiscal years 2019 and 2020 academic strategic -- strategies and deliverables not only build on, but demand academic policies and processes as well as a faculty and academic dean culture built for agility, intentionality and innovation.

Slide 23 provides the breakdown of the university students by academic area and by degree offering for the spring 2018 term. Academic offerings and degrees are consistent with previous quarters, with a trend in increased enrollments in Baccalaureate and Master's programs. As noted earlier, the launch of NAU's Henley-Putnam School of Strategic Security, as a result of the recent asset purchase, will impact the program area and degree offering balance at NAU in fall 2018.

Slides 24 and 25 show the results being gained from increased focus on student persistence and learning success. Course completion remains stronger than it has been the previous 3 years. Year-over-year persistence continues to trend consistently upwards since 2015. Some data fluctuations remain in the transition to monthly starts. However, the strong and improving course completion by our students is clear. Year-over-year undergraduate course completion rates show a modest declines in 91%, with graduate improving to 96% in the spring 2018 term. However, both exceeded their benchmarks of 85% for undergraduates and 90% for graduates, respectively.

Our strong course completion rates are a reflection of our continued efforts to integrate faculty-student mentoring and other engagement strategies into all online courses. We believe the revisions to remedial entry-level courses and math offerings have impacted new and continuing students, significantly improving successful completion of gateway courses, major core entry courses and math- and writing-intensive courses.

Now I'd like to turn it over to Dr. David Heflin, who will provide an overview of our financial performance.

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David K. Heflin, National American University Holdings, Inc. - CFO [5]

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Thank you, Dr. Priddy. I will begin by sharing highlights from the fourth quarter. I would encourage each of you to review our press release, the Form 10-K that we expect to file in the next several days and our investor deck for specific details and, of course, I'd be happy to take questions during the Q&A.

As shown on Slide 27, revenue decreased to $19.1 million in the fiscal year 2018 fourth quarter from $22.1 million for the same period last year, representing a 14% decrease. Our academic segment's total revenue decreased to $18.2 million from $21.9 million in the prior year period, primarily due to decreased credit hours, resulting from lower enrollment. Cost of educational services is down from $7.1 million to $6.6 million, and SG&A is down from $14.4 million to $11.6 million. Cost of educational services is down due to lower enrollment and lower teach-out instructional cost. Our SG&A is lower due to the cumulative effect of headcount reductions and previous consolidation of physical locations. Overall expenses are lower in spite of an increase in expenses for the strategic priorities mentioned by Dr. Shape and expenses related to consolidation of locations. The expense for these strategic priorities was $2.3 million in the fourth quarter of this fiscal year compared to $500,000 in the fourth quarter of the previous fiscal year.

Total expense is $3.7 million or 16% lower for the fourth quarter this year compared to the prior year. This overall expense reduction is the result of our previous work to consolidate locations and reduce headcount. We continue to work on improving our operating efficiencies to make sure our costs align with our current enrollment numbers. As such, we will continue to review the possibility of consolidating additional physical locations in the coming quarters.

Moving to Slide 28. Net loss attributable to the company for the fiscal year 2018 fourth quarter was $800,000 or $0.04 per diluted share based on 24.3 million shares outstanding compared to a net loss of $900,000 or $0.04 per diluted share based on 24.2 million shares outstanding in the prior year period. The net loss in the fourth quarter was impacted by a $500,000 asset impairment related primarily to leasehold improvements at 2 locations, (inaudible) and Indianapolis.

The company's EBITDA for the fourth quarter of fiscal year 2018 increased to $500,000 from EBITDA of $200,000 in the prior year period. This is notable as the last time the company achieved positive EBITDA was a year ago in the fiscal year 2017 fourth quarter. A table reconciling EBITDA to net loss can be found in yesterday's press release.

Slides 29 and 30 show financial highlights from fiscal year 2018 compared to fiscal year 2017. The company's revenue for the year ended May 31, 2018, decreased to $77.2 million from $86.6 million last fiscal year. Again, this decrease was primarily driven by lower enrollments.

SG&A expenses for the year-ended May 31, 2018, was $56.2 million compared to $61.6 million for the full year-ended May 31, 2017.

Cost of educational services decreased to $27.7 million -- from $27.7 million to $26.1 million for the current year. The impact on expenses from the strategic initiatives we discussed earlier, in fiscal year 2018 was $6.3 million compared to $1.7 million for these same initiatives in the prior year. Normalizing for these growth investments indicates expense savings in other university expenses of greater than $11.6 million in cost of educational services and SG&A year-over-year. The impact of our ongoing expense-reduction initiatives, the impact is clear in the overall expense results.

During fiscal year 2018, the company reported a net loss attributable to the company of $12.2 million or $0.50 per diluted share based on 24.2 million shares outstanding compared to net loss attributable to the company of $6.3 million or $0.26 per diluted share based on 24.2 million shares outstanding in the prior fiscal year.

The company's LBITDA for fiscal year 2018 was negative $6.9 million compared to LBITDA of $1.9 million in the prior year period. A table reconciling LBITDA to net loss can be found in yesterday's press release.

The balance sheet highlights at May 31, 2018, can be found on Slide 31. Cash and cash equivalents at the end of the year totaled $5.3 million. During the fourth quarter of this fiscal year, cash reported on the balance sheet increased by $700,000 from the prior sequential quarter. Of this increase, the university achieved positive operating cash flow from operations of $2.5 million. This positive cash flow from operations was partially offset by cash used for the acquisition of certain assets of Henley-Putnam University of $1.3 million. The primary driver behind the improvement in our cash position was the previously discussed consolidation of locations and resulting expense reductions.

Current liabilities decreased by $1.1 million year-over-year. This reduction was offset by a $13 million decrease in current assets, resulting in negative working capital of $700,000. The drivers behind this decrease in current assets includes $3.8 million cash used in operation for the year, $1.3 million of cash used in purchasing the asset of Henley-Putnam University, $2 million for investment and capital expenditures, $2.2 million related to a reduction in tax and receivables, $1 million restriction of cash due to bonding requirements in New Mexico and $2.2 million for dividends paid.

During the quarter, the company issued to Black Hills Community Bank a promissory note in the principal amount of $8 million, which is secured by a mortgage on certain real property in our Fairway Hills operations. The company received restricted certificates of deposit earning 1.5%, totaling $8 million at that time.

The loan agreements provide for an $8 million 5-year term loan. The loan carries a fixed interest rate of 4% and is payable as follows: beginning June 17, 2018, 59 monthly consecutive interest-only payments based on the unpaid principal balance; beginning May 17, 2019, 4 consecutive annual principal payment of $800,000 each; and on May 17, 2023, 1 payment of the remaining principal balance and 1 month of accrued interest in the amount of $4,816,000. The proceeds of this loan will be available to provide strategic financing to the initiatives we have discussed during this call.

As we continue working to better align our expenses with our current enrollment and income levels, we are excited about the strategic initiatives we discussed this morning, and we believe these efforts will serve to strengthen the finances and future of our university.

With that, I will turn the call back to Dr. Shape.

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Ronald L. Shape, National American University Holdings, Inc. - President, CEO & Director [6]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And if there are no further questions, I'd like to turn the floor back over to management for any closing comments.

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Ronald L. Shape, National American University Holdings, Inc. - President, CEO & Director [2]

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Thank you, Matt. We'd like to thank everyone for joining us this morning. We are available to answer any additional questions you may have. You're also welcome to contact our Investor Relations firm, The Equity Group. We look forward to speaking with you again during the fiscal 2019 first quarter results conference call. Thanks, everyone.

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Operator [3]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you, again, for your participation.